Railroad Defaults , Land Grants , and the Panic of 1873

This paper investigates the relationship between railroad bond defaults and nancial outcomes in the National Banking System during the Panic of 1873. Contemporary accounts and anecdotal evidence indicate the importance of a boom and bust in the railroad industry to the onset of the panic. I use comprehensive balance sheet data for national banks before and after the panic, along with detailed GIS data on the location and features of the railroad network, to show that railroad defaults had a strong negative impact on the balance sheets of those banks most vulnerable to railroad failures. I also explore the factors which contribute to railroad failures in the rst place. I nd that land grant railroads were signi cantly more likely to default on their bonds, suggesting that land grand railroads might have been overbuilt relative to demand and therefore particularly vulnerable to the downturn in the bond market. ∗Contact information: [email protected]. I am grateful to Jeremy Atack for use of his GIS transportation network and for his comments on early drafts, to Peter Rousseau for his advice and comments, and to Daniel Ladley for his help obtaining part of the Comptroller data.