I appreciate the attempts above to describe the quoted saying, but I don't think it is necessarily about the history of Lagos. I think the context was that some were saying they were afraid of confronting the Bridges gang. But it is true it is also about fear in general.
I think the statement means "we" (meaning the people of Lagos, but really to at least some extent all of us) fear conflict, and here is meant to really fear, to be afraid of, not merely concerned about, the conflict because we fear our ability to face it with courage, and that we will fail as a result. What he was talking about was that the people in question saw themselves as unable to face the challenge of the conflict because they felt themselves inside to be essentially cowards.
Now this does move to the general direction of the story of Lagos, in the sense that the people in town (other than Mrs. Belding and the midget) did go along with the former sheriff's murder not merely because of their venality and willingness to abide the theft of the gold. but also because they did not have the courage to stand up for a moral principle and face the consequences of doing so.
I think that is what he meant.
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