The Great Chicago Fire and the Wheat Market Disaster of 1872

A city burns down. Warehouses full of wheat turn to ash. Storage capacity drops overnight. And a group of traders looks at this disaster and thinks: “We can make money off this.”

Chapter 6 of “From Tulips to Bitcoins” by Torsten Dennin takes us to Chicago in 1871. It is a story about a fire, a wheat shortage, and a bet that looked like a sure thing until it was not.

The Fire

Summer of 1871 was brutal for the Midwest. From July to October, only about 3 centimeters of rain fell. Everything was dry. The city of Chicago at that time was mostly built from wood.

On October 8, a fire broke out in a barn. Winds from the southwest grabbed it and pushed it through the city. It took two full days before anyone could bring it under control. By then, over 8 square kilometers were gone. 17,000 buildings destroyed. Every third person in Chicago lost their home. Total damage was over 200 million dollars. In 1871 money. That is a staggering number.

The Opportunity

Among the things destroyed were 6 of the 17 warehouses approved by the Chicago Board of Trade for grain storage. Before the fire, Chicago could store about 8 million bushels of wheat. After the fire, capacity dropped to 5.5 million bushels.

A large wheat trader named John Lyon looked at this situation and saw a classic supply squeeze setup. Less storage means less wheat available in the market. Less wheat available means higher prices. Simple math.

Lyon teamed up with Hugh Maher and a CBOT broker named P.J. Diamond. Their plan was straightforward. Buy wheat on the spot market. Buy wheat futures. Lock up as much supply as possible. Wait for prices to rise. Cash out.

The Squeeze Works (At First)

In the spring of 1872, the group started buying. And it worked. Prices climbed steadily through the early summer. By the time August futures contracts were trading, wheat was at $1.16 to $1.18 per bushel.

In early July, about 14,000 bushels of wheat per day were arriving in Chicago. Not enough to break the squeeze. By the end of July, wheat hit $1.35. Then another warehouse burned down, knocking out 300,000 more bushels of storage capacity. Rumors about bad weather in farming regions started circulating.

August 10: wheat hit $1.50 per bushel. August 15: above $1.60. Lyon and his partners must have felt like geniuses.

Then the Farmers Showed Up

Here is the thing about high prices. They send a signal. When wheat is at $1.60, every farmer within shipping distance hears that signal loud and clear.

Farmers started harvesting around the clock. Picking wheat into the night by lantern light. During the second week of August, 75,000 bushels per day started arriving in Chicago. A week later, 172,000 bushels per day. By the end of August, nearly 200,000 bushels were rolling into the city every single day.

It gets worse. Wheat that had already been shipped to Buffalo started coming back to Chicago because the prices were better there. And new warehouses opened up. Storage capacity jumped to over 10 million bushels. That is more capacity than Chicago had before the fire even happened.

The shortage that Lyon’s entire strategy depended on just vanished.

The Collapse

To hold prices up, Lyon’s group now had to buy every single bushel that arrived. All of it. Because if they stopped buying, supply would overwhelm demand and prices would crash. They were already stretched thin, leveraged to the limit with bank loans.

On August 19, John Lyon admitted defeat. He stopped buying.

Wheat dropped 25 cents that day. It fell another 17 cents the next day. Lyon could not meet his margin calls. He went bankrupt.

The whole scheme, from fire to fortune to failure, played out in about a year.

What I Take From This

This chapter is a textbook example of why market corners almost always fail. The basic logic sounds reasonable: supply is limited, buy it all, prices go up, profit. But markets are not static. High prices create their own response.

Farmers harvested faster. Traders rerouted shipments. Entrepreneurs built new warehouses. The market adapted. It found a way to produce supply that Lyon did not plan for.

Dennin tells this story right after chapters about much bigger players like Rockefeller. And that is the interesting contrast. Rockefeller built a monopoly that lasted decades. Lyon tried to corner a commodity market and it fell apart in weeks. The difference is that Rockefeller controlled infrastructure and distribution. Lyon only controlled some warehouse receipts and futures contracts. When the physical wheat started flooding in, his paper positions meant nothing.

Every time someone tries to corner a commodity market, this pattern repeats. The Hunt brothers with silver in 1980. The same basic mistake. You can buy all the contracts you want, but if the real world produces more supply, you lose.

Previous: Chapter 5: Rockefeller

Next: Chapter 7: Onassis Oil

This is part of my From Tulips to Bitcoins book retelling series.