miners , a disproportionate number of whom were based in the western United States . The price of silver dropped , and owing to increased volatility and the goal of simplifying the monetary system the Coinage Act of 1873 essentially demonetized it . Because this took place at a time when flows of gold were diminishing , the turn away from monetary silver constituted an effective contraction of the money supply . That was followed shortly thereafter by a rapid and unanticipated bout of deflation , debt impairment and falling economic output .
3 . The Chicago Fire ( 1871 )
Aspects of the fiery conflagration in Chicago may have influenced the economic conflagration to come . The sudden emergence of local and regional uncertainty , as well as the diversion of resources , capital and labor from railroad building toward rebuilding the city may have accelerated the approaching economic contraction . A credit tightening , such as often occurs in the wake of disasters , may additionally have created financial hardship for railroads — many of which were already servicing high levels of debt and required ongoing financing .
4 . The Great Boston Fire ( 1872 )
Ten months before the September 1873 panic began , the Great Boston Fire broke out . Although a far smaller area was destroyed than in the Chicago fire ( 65 square acres versus 3.3 square miles ) and burned for a shorter period ( 12 hours versus two days ), the geographic proximity of the city to New York and Philadelphia may nevertheless have generated adverse economic conditions : credit rationing , resource scarcity and dampened risk appetites among investors .
In fact , while the Boston fire may be one of Sornette ’ s “ tiny earthquakes ” laying the foundation for the emergence of a Dragon King , it itself was a product of a “ Grey Swan ”: a low probability event that brings recognizable risks and significant consequences but is difficult to prepare for . Between September 1872 and March 1873 , the “ Great Epizootic ”— a severe horse influenza — swarmed from Toronto , Canada through New England and the rest of the United States . With great numbers of horses afflicted or dead , responses to the Boston fire were greatly delayed , allowing it to do more damage than it otherwise would have done .
5 . Media Coverage
The mortal blow to the railroad boom may have been struck by an editorial appearing in The New York Times on September 11 , 1873 . Noting the slowing progress of the Northern Pacific ’ s construction near the present-day location of Yellowstone National Park and responding to accounts of terrific fighting between US troops and Indigenous Americans , it asked :
If several thousand of our best soldiers , with all of the arms of the service , under some of the most dashing officers , can only hold the ground on their narrow line of march for 150 or 200 miles west of the Upper Missouri , [ what ] will peaceful bodies of railroad workmen be able to do , or what can emigrants accomplish , in such a dangerous region ?
Whereas in sturdier times a hypothetical such as this would have simply fostered introspection , at this juncture it added substantially to the skittishness of investors . This concern , atop the previously listed factors ( and undoubtedly others ) culminated in the historic panic less than a week later .
Was the Panic Anticipated ?
In addition to “ tiny earthquakes ,” a second element of the Dragon King formulation allows for a degree of forecastability . Did market participants see the Panic of 1873 coming ? Scott Mixon ( currently acting chief economist at the Commodity Futures Trading Commission ) provides evidence that many did in a 2008 paper entitled “ The Crisis of 1873 : Perspectives from Multiple Asset Classes .”
Option prices appropriately reflected the risks to the market … high volatility stocks had high option prices , and … low volatility stocks had lower option prices . Over time … the evolution of default risks for railroads as perceived by the bond market were consistent with the risks as perceived by the equity option market … I conclude that the possibility of a significant crash was priced into the market in
1873 … [ I ] nvestors in 1873 were actively monitoring the risks in the markets . Asset prices for riskier firms reflected worsening perceived prospects and increased likelihood of insolvency .
So the Panic of 1873 , rapidly approaching its sesquicentennial anniversary , is revealed as an early Dragon King insofar as market cataclysms are taxonomized . That certainly doesn ’ t lessen the considerable costs of the long depression that followed it . But it adds some historical contour , and perhaps a new angle for appreciating the rocky evolutionary process that ultimately resulted in the modern , 160,000-mile US railway system .
Peter C . Earle is a Research Fellow at the American Institute for Economic Research .
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Fulmer , Sean . “ United States : New York Clearing House Association , the Panic of 1873 .” Journal of Financial Crises 4 : 2 , 1258 – 1277 . 2022 .
Lubetkin , M . John . Jay Cooke ’ s Gamble : The Northern Pacific Railroad , the Sioux , and the Panic of 1873 . University of Oklahoma Press . 2006 .
Mazlish , Bruce . The railroad and the space program-An exploration in historical analogy . No . NASA-CR-116174 . 1965 .
Mixon , Scott . “ The crisis of 1873 : Perspectives from multiple asset classes .” The Journal of Economic History 68.3 : 722 – 757 . 2008 .
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