Hydrocarbon Man: Real estate cycle 1930 - 1974

"The free land had been for a hundred years the outlet for restlessness, the field of ambition. When that came to an end, restlessness turned in upon itself and fermented into something a little bitter…so long as there was free land, every man had the opportunity to create new wealth for himself by the simplest and oldest means known to mankind. With the end of free land, American men for the first time had occasion to look with envy upon the wealth of others, or with jealous scrutiny upon how they had acquired it. The end of free land was the beginning of those political issues which had to do, in one way or another with 'dividing up', or with curbing those who had much…"
Mark Sullivan, Our Times, 1926
"Never try to sell a man a larger lot than his wife can mow."
Bible talk for Real Estate Salesmen of the 1950's.

So the Fed had not solved the riddle of the business cycle after all. That periodic, land-induced slump was back again, worse than ever. By mid 1932, July 8 in fact, the Dow was back at 41.22, down 90 percent from the '29 peak, and only marginally above its all time low of 28.48 set on August 8, 1896, 36 years prior. (The Dow averages, then 12 stocks, was first introduced May 26 1896, calculated each day by Charles Dow and appeared in the paper he edited, The Wall Street Journal.) Psychologically, things must have indeed been grim at this time, no matter where in the world one was; a lot of wealth was created between 1896 and 1932, with but little to show for it at least as far as the Dow averages was concerned.

The market crash of 1929 was large, but not at the time catastrophic. Indeed, there had been falls of similar magnitude before (like in 1926 for example), with most market players expecting another one to repeat again at sometime in the future. Early 1930 saw quite a rally; back by half from the previous oversold conditions. Stock markets have a distinct habit of doing this of course; of retracing by half - often exactly - the prior move in the opposite direction. There were good reasons why the market should have done this in early 1930, with the Hoover administration doing several things after the crash in an attempt to maintain economic order and stability. The president urged business leaders not to cut wages so that demand would not fall; he suggested firms might bring forward any construction plans on the books, and Treasury secretary Mellon even announced a further (small) tax cut.

Dow '30s Crash

Several listed companies, US Steel and General Motors amongst them, announced dividend increases. Several corporations announced they would guarantee employee margin accounts if necessary. And of most importance, history books reveal the banking authorities to have acted reasonably, if not predictably, (at least initially) by reducing interest rates. The fed lowered the discount rate to 5 percent on October 31 (1929) and then again to 4 and a half percent several weeks later. As corporations withdrew funds from the previously (prior to the panic) profitable call loan business, banks stepped in to stabilize the situation by placing funds in this area. In 1929, very different to prior panics, interest rates did not spike upwards as was expected. And there were very few bank failures immediately after that fateful October day either, although one, in Michigan, The Industrial Bank, failed when it was discovered that several employees had 'created' 3 million dollars to play the market and lost.

Said Sobel, in describing conditions just after the panic (page 387): "The Federal Reserve Bank of New York…immediately contracted for an additional $160 million worth of short-term notes, followed by more purchases in the next few weeks. By the end of November, the Bank had accumulated some $370 million of such securities. These funds were used to maintain interest rates which, in previous panics, had risen sharply and then led to further difficulties…as many expected they would. Instead the New York Federal Reserve lowered its discount rate so as to make for an easy money policy. The rate went to 4 and a half percent on November 14, and to 4 percent on January 20, 1930; by mid-march it reached 3 and a half percent. The easy money policy was instrumental in restoring a measure of confidence and helped lead to the correction of December 1929-April 1930." The banking structure had been thus preserved with the usual bag of tricks we have come to expect from the Fed, in this instance inflating the money supply and lowering the cost of credit. And so the stock market rallied back by half.

But alas, Sobel, like nearly all other writers and historians of this period, goes on to a sadly superficial account of what happened next, either ignoring or not investigating further the events which did bring on the eventual depression: the continued collapse of land values putting further pressure on bank loans. It went like this:

As already noted, US farmers had been having a tough time since well before the 1929 stock market crash. In fact the boom for farmers ended in mid 1920 when, post war, commodity prices began a sharp down-wards revision in price. An illuminating study of Kansas and the bank failures in this state throughout the 1920's, published by the Federal Reserve Bank of St Louis (Regulation and Bank Failures: New Evidence from the Agricultural Collapse of the 1920's) illustrates this picture. Citing US Bureau of the census figures, the study notes, (page 2): "Like most agricultural states, Kansas prospered from increased demand for farm output during World War I and immediately thereafter. The increase in output prices was accompanied by higher land prices and the expansion of agriculture into new areas. In Kansas, land value per acre increased 54% between 1910 and 1920, while in some states the increase was over 100 %." The study continued (page 3): "much of the increase in land value…was financed with borrowed money from banks, and from 1910 to 1920 the number of banks operating in Kansas rose 30%."

Therein lies the issue of course: banks doing what they do best; supplying much needed credit to help business expand and grow. But under the system we have inherited, it is, as history is teaching those who study it carefully, a cyclical system built on sand. As the farmers terms of trade worsened the longer the decade progressed, with the decline in farm income: "farmers found it increasingly difficult to repay their debts, and the consequent increase in farm loan defaults resulted in bank failures. Across the United States, areas which had enjoyed the greatest agricultural boom seemed to suffer the worst downturn, having the highest rates of farm and bank failure." (Regulation and Bank Failures, Page 3) Other studies have confirmed this observation. (Alston 1983, for example, and also Alston, Grove and Wheelock, 1991.) Real net farm income declined some 60 percent between 1929 and 1932. (Rockoff, 2001.)

farm comm prices 1920's 30's

The bank failures themselves however, came about in part because of a different (though related) reason; the profoundly poor structure of the US banking system itself at this time, due mainly to a seemingly silly government regulation; the total prohibition of branch banking, often within states and in particular across state lines. Banks at this time (and indeed for many years after) were not permitted to establish branch operations in the way say an Australian or Canadian depositor would be used to. Such restrictions definitely meant individual US banks were more vulnerable than they otherwise would have been, to local economic shocks such as a land price collapse. For our purposes though, if one might be selfish for an instant, this is incredibly fortunate; for it highlights in the most obvious way possible the inherent flaw in the capitalist system that guarantees the real estate cycle.

Anyway, agricultural distress because of land price declines and reduced farmer ability to repay their mortgage due to commodity price declines, were the most important causes of the bank suspensions and failures throughout the 1920's whilst at the same time urban areas enjoyed the boom of a lifetime. Things got really serious when urban real estate declines brought on similar difficult conditions in the city centres. This became evident late in 1930.

In early November of 1930, the banking empire of Rogers Caldwell, centered in and around Nashville, Tennessee, collapsed. Rogers Caldwell controlled the largest network of banks in the Southern regions of the US and was, as it happens, heavily invested in real estate. Then, on December 11, 1930, The New York based Bank of the United States (in some ways a misleading name since it was not connected with the government in any way) went bust. This, it was said, was due not only to the bank's stock market losses of its affiliates, but also to an over exposure to declining property prices. (Chancellor, page 223.) It would appear too that some degree of mis-management and director fraud was also involved in the downfall of this bank. (Kennedy, 1973, pages 1 to 5) Describing the scene as the Bank of the United States closed its doors, James D Horan (The Desperate Hours) wrote: "It was one of the most disastrous failures in the banking history of the country…men wept as they tried to rush past the police guards and pounded on the closed doors; women screamed as they held up their bank books. Crowds refused to disperse and stayed outside the doors for days, hoping that their savings were not lost." Curiously, the Fed did very little and literally stood by and watched, allowing the bank to fail. It was at this point and not before that real concern about the safety of the banking system appeared. (Rockoff, 2001, citing evidence using the deposit - currency ratio, a measure of the confidence of the public in its banking system.)

The Bank of the United States had some 60 offices in New York and depositors had been withdrawing money extensively over the preceding eight weeks - 25 percent of its deposits in fact. Notably, reports of the bank's weakness had been hushed up since November of 1929 (futurecasts.com/Depression_descent-end-'30.html) though it seems word was now trickling out. Although the bank went bust, it did eventually, over time, pay out a fraction more than 80 percent of its liabilities after closing, indicating that the bank was probably solvent at the time of its collapse, just short of cash. Although this bank's failure did not touch off a further liquidity crisis within New York - no other banks went down with it - the psychological effect of its closing proved immense. Noted banking historian Elmus Wicker about this bank (Banking Panics of the Great Depression, page 36): "Compared with other New York City banks, its investment in real estate was excessive, and its management practices left much to be desired."

Interestingly, the Dow broke below its 1929 November low in the week of October 10, 1930; the market discounting bad news to follow. The Dow lowed in December for a two month rise after that.

In mid 1931, (April to August) a banking crisis developed in the northern Ohio and Chicago suburban regions, notably where small banks had established themselves and multiplied with the real estate boom between 1922 and 1926, which is of course why they were there. (James, The Growth of Chicago Banks, page 953.) Collapsing real estate prices, this time in the mid-west, again brought on this banking crisis, the banks made more vulnerable to this occasional inevitability by a Chicago law passed in 1923 by the Illinois legislature outlawing the operation of bank branches within the state. Such a law restricted existing banks from establishing offices – branches - in the fast growing outlying suburbs, allowing only new banks this ability and by definition therefor, making such new banks highly dependent on a narrow asset base. But during the 1920's, real estate promoters and developers loved it. "Promoters of real estate developments needed a source of funds to finance mortgages which they found in the chartering of new and independent banks. During the real estate boom land values had soared, and mortgages became valued securities in the portfolio of earning assets...By the end of 1930 many of these banks in outlying areas were in dire distress...The value of real estate assets plummeted..." (Wicker Banking Panics of the Great Depression, page 70) The Chicago banks that failed held fewer secondary reserves, had a higher percentage of real estate loans, owned more fixed assets and showed lower levels of earned capital than the Chicago banks that did not fail. (Esbitt, 1986.)

There was perhaps another banking crisis in September / October of 1931, caused possibly when Britain chose to go off the gold standard it had been on since anyone could remember, though the crisis was concentrated mostly in the cities of Chicago, Pittsburgh and Philadelphia. Britain made this announcement on September 21, 1931, though notably the Dow broke below its prior early June lows the week before this major announcement.

In June of 1932, yet another rash of bank failures occurred in Chicago, again for the reasons of declining asset values at the failed banks. "Failures during the panic reflected relative weakness in the face of common asset value shock rather than contagion." (Calomiris and Mason, Nov. 1994.) In other words, falling land values against the loans outstanding. Again, the Chicago banks in trouble initially were the small neighbourhood banks located in the outer regions. But on June 24, a Friday, depositor fear spread to two banks in the Chicago downtown area, within the loop, the Continental Illinois, and the First Union Trust. Said historian F. C. James (The Growth of Chicago Banks, page 103): “In the case of earlier runs, the crowds had been drawn from a particular locality or a special group: this time people from all parts of the city seemed to converge on the Loop in hysterical fear and anxiety.” The fear continued into Saturday. It was only after the president of the First National Bank, Melvin Taylor, successfully managed to climb up onto one of the marble pillars inside his bank and calm the fears of his depositors, that the fear began to subside – in Chicago at least. The toll however, was mounting. By the end of July 1932, Chicago had just 60 banks left out of the 225 that had been in business in 1929.

A short time later, several Detroit banks followed in quick succession for the same reason; too many (now) non-performing loans to the real estate sector. These failures then triggered a far wider and more general banking crisis, in February of 1933. The incident that precipitated the 1933 panic was a decision by the Governor of Michigan on February 14 to close all his state's banks in an effort to protect the Guardian Group (Ford Family) of Banks in Detroit. These banks were also, as it happens, heavily invested in real estate, the weakest bank in the chain being the Union Guardian Trust. “The source of its problems was an unusually heavy commitment to real estate financing,” noted Wicker. (Page 118.) In fact, more than 70 percent of this banks total assets were illiquid real estate mortgages.

Dow 1926-33 180's

(As it happens, February 14, 1933, was exactly 1260 days (180 weeks) from the September 3, 1929 top, an important time frame when emotional pressure is likely to manifest from the previous high emotion.)

So depositors maintained their distrust of banks, with good reason, revealing a marked lack of confidence in the system. Consequently, more banks just kept on going bust. "It would seem that we can safely say this much," said Historian Herbert D Simpson, “that real estate, real estate securities, and real estate affiliations in some form have been the largest single factor in the failure of the 4800 banks that have closed their doors in the last three years and in the 'frozen' conditions of a large proportion of the banks that still remain open." (Real Estate Speculation and the Depression, 1933, page 165, and quoted also by Hoyt, page 401 note 26.)

More than just real estate.

Government decisions up to the beginning of 1933 had not been helping either. The Smoot-Hawley tariff was passed by Congress in June 1930, lifting tariffs on imports even higher, prompting practically every US trading partner to do the same, exactly as the 1000 economists who signed a letter to the President against the increase in tariffs said would happen. This law was one of the greatest government policy blunders of all time. Economists got that one right, but little else. Academic opinion at the time still called for no government action to alleviate downturns since they were pretty much ordained by God, or so it was taught. Keynes proved them wrong on this point, (in a system where the rent of government granted licenses is permitted to capitalize into tradable privileges at least) though his economics has proved ultimately fallible too, as became obvious in the next land price induced downturn.

This economic belief, one of total laissez faire, may also explain the actions - or rather, in-actions - of the Fed as social conditions got worse. Basically, the Fed did nothing. Interest rates were lowered, and declined to record low levels of around 1 percent. But so did prices; in fact prices declined in some years by as much as 25 percent. This left the real rate of interest, that is the true cost of borrowing money, at extremely high levels still; a fact that seemed to escape the attention of monetary authorities. Credit conditions remained tight in other words. One doubts this would ever escape attention again. And the money supply contracted drastically too, by almost one-third. On this the Fed took no action either.

(It might be noted that the term 'laissez-faire' originated with the Physiocrats of France around 1770. Conveniently though, English-speaking economists overlook the full expression, which is 'laissez faire, laissez aller'. One could translate this loosely into English as 'a fair field with no favors'. Today, whilst we accept the 'laissez faire' bit, to let go, or allow market forces to rule (the invisible hand), we conveniently forget to level the playing field and continue to allow government to grant massive privileges and licenses, doled out gleefully to those well connected or rich enough to bribe the politicians.)

Bank Failures 1921-40

In 1931, the Kredit-Anstalt, one of Austria's biggest banks, collapsed, which badly shook confidence in Europe, adding to US bank depositor nerves: all of this happening whilst some major US corporations were collapsing, two in particular the Kreugar and Insull empires. Said historian Lawrence Sullivan (Prelude to Panic, page 4) in describing these two very unanticipated shocks to the US financial system: "The first (shock) was the suicide, in Paris, of Ivar Kreugar, which exposed an undreamed web of fantastic speculative pyramiding in international finance. The second was the collapse of the Insull empire in the Middle West. By wiping out tens of thousands of small investors in America, and by further assaulting public confidence in banks and investment, these two financial crashes carried the country once more to the very brink of a general money panic."

Overall however, it was the decline in urban US property prices (a non-monetary cause) that was the real killer: credit creation, financing poor real estate lending. Said Hoyt, page 401: "As real estate investment was one of the principle means by which the assets of the banks had become frozen and as liquidity is of extreme importance during an epidemic of bank runs, the banks that remain(ed) open (were) extremely cautious." Said Kindleberger, page 103, paraphrasing Hoyt: "Real estate loans, not failed stock broker accounts, were the largest single element in the failure of 4800 banks in the years from 1930 to 1933."

So the public just continued right on hoarding their money. Who could trust a bank when so many seemed to be closing ? Some banks though found a way through the panics and mistrust. The story goes, apparently, that the President of the Baker Boyer Bank in Washington State stopped a run on his bank by surreptitiously dividing what cash there was left in the vaults amongst several close friends and relatives. These associates were then instructed to loudly display 'their' cash within the bank itself and force a way through the hordes of depositors wanting to take out their money and (noisily) deposit the money in.

Bank Lending 1921-40

Historical studies continue to this day to argue the merits of the 1920's stock market boom and then bust. Was it a bubble ? Did it cause the subsequent depression ? Historians and market forecasters would do better to turn their attention to the concomitant real estate boom, then bust. The story goes that in 1915, a Greek physician arrived in Chicago with little else but a quickly developing nouse for the workings of the real estate and rental markets. With a small original investment, the physician acquired a number of vacant lots, strategically located on business corners. By 1928, 87 such corners had been bought, most still subject to mortgages, with an estimated total equity of $6 million. Such blocks that had sold for around $14 000 in 1905, were being sold in 1926 for more than a million, (Hoyt, page 388, note 16), the new 1926 purchaser no doubt using the banks money to buy in. Could one call that a bubble ? Historians never research nor discuss it. "Thousands of stories of sudden profits accruing to the owners of land could be cited for this period," said Hoyt in concluding note 16. Any wonder Chicago banks were in trouble after the city's land price collapsed.

A land price collapse has far wider implications than a mere stock market crash. They are not in the same league.

The 1930's downturn wrought other changes too; women's hemlines for starters. Said Frederick Lewis Allen (Only yesterday): "The skirt length had come down with stock prices. Dresses for daytime wear were longer, if only by a few inches; evening dresses swept the ground…Frills, ruffles and flounces were coming in again, and the corset manufacturers were once more learning to smile…No longer was it the American woman's dearest ambition to simulate a flat breasted, spindle-legged, carefree, knowing adolescent in a long-waisted child's frock."

Books about sex and conversations about sex were out; decorum and romance were in. "Fewer young men and women bristled with hostility toward any and all religion, and there was a more widespread desire, even among the doubters, to find some ground for a positive and fruitful interpretation of life."

Woolworth's reported some of its best profits ever as people sought to buy cheap, and mini-golf was the newfound recreation. The now very prosperous mini-golf industry saw increased investment of some $125 million, with some courses earning 300 per cent a month return on investment.


The most serious of the 4 banking crises developed in mid February of 1933. One by one, states were declaring local bank holidays as the bank runs got worse. Where one state declared a 'holiday', it put pressure on neighboring states as people sought access to cash elsewhere. "The final dissolution of the banking system", said historian and writer Hugh Rockoff, "was ushered in by the holiday declared in Michigan in mid-February. Most of the larger Michigan banks belonged to one of two holding companies. The smaller, the Guardian Detroit Union Group, was teetering on the edge of bankruptcy. A desperate effort was launched to save this group through a Reconstruction Finance Corporation loan combined with aid from the Ford interests. But the plan foundered on demands that the Reconstruction Finance Corporation hold adequate collateral for its loan and the unwillingness of Henry Ford to take part."
(Rockoff, 2001)

This was just at the time of the new Democrat President, Roosevelt, who immediately upon inauguration instituted a bank 'holiday', closing all banks in the country. A re-opening date was not set. Now whatever one might think today of that unprecedented action - every single bank in the entire country shut down - in 1933 it came as quite a relief as far as the public was concerned: "That penniless springtime of 1933 revealed the people of Detroit to one another," said Barrons. "It broke down the barriers of class. It ended whatever talk there might have been of Communism, Fascism or social conflict. Folk realized that ahead of them was a long, hard pull, and quietly they made up their minds to pull together." (Barron's, describing the event three years later, quoted in Fridson, page 103.) Editor hyperbole perhaps, since there was plenty of turmoil to follow, however perhaps now, the people realized, the government was finally in the mood to act.

Beginning March 13, the Secretary of the Treasury began granting licenses to any bank should it wish to re-open for business. About 75 percent of the banks, those within the Fed system at least, re-opened after the imposed holiday and within a month had an extra $1 billion to play with as hoarded currency and gold was re-deposited with them. The immediate crisis was over. Confidence is a fickle thing.

There were other initiatives taken by the government to further economic recovery efforts, amongst them:

- The Reconstruction Finance Corporation, (RFC) set up by President Hoover, to increase economic activity by lending money. Such loans were made at first only to financial, industrial and agricultural institutions. In particular, the RFC was to help banks by lending to them to ease the pressure for cash that was forcing the banks to remain highly liquid for fear of a run on deposits. (This of course begs the question of why the government felt the need to usurp what should have been the Fed's role.) Roosevelt's New deal expanded operations even to foreign governments.

But in the beginning, the RFC lent particularly to railroads and for crop loans. Railroads were singled out since so many banks owned a good deal of their bonds, now worth far less than when originally bought since so much railroad business had disappeared. Improving the financial condition of railroads, it was believed, would ease the financial condition of their bondholders and therefor the banks. "The theory was," said Rothbard, "that railroad bonds must be protected, since many of these securities were held by savings banks and insurance companies, alleged agents of the small investor. In practice, the bulk of these RFC railroad loans went to repaying debt. About a third of these loans went to repaying railroad debts to banks. Thus, one of the first RFC loans was $5.75 million to the Missouri Pacific Railroad to repay its debt to J. P. Morgan and Company, and an $8 million loan to the B and O Railroad to repay its debt to Kuhn, Loeb and Company." (Rothbard, A History of Money and Banking in the United States, page 292.) This, of course, is a shifting of the debt from private to public interests, a bailing out of the banks at taxpayer expense. And these two banking concerns in particular were very well connected to government. As soon as the Missouri Pacific had undertaken the task of repaying its banker, noted Rothbard further, "it was gently allowed to go into bankruptcy."

Direct lending to banks was also done; the banks in return pledging part of their loans as collateral. This was another way for a bank to raise cash to pay out depositors without calling in loans to do so. (Though the chart of bank lending reveals that, for whatever reason, bank lending took a long time to recover during the 1930's.)

The RFC also loaned directly to farmers, with one RFC subsidiary, the Commodity Credit Corporation, empowered to buy certain farm products at guaranteed prices, mostly above market, thereby setting a floor price for farmers for their product. This of course has the pleasant side effect of underwriting farmland value; a value that many banks, as we have seen, had created credit against.

- The Agricultural Adjustment Act, designed to boost farm prices and provide subsidies to farmers in need. One task this Act set was the destruction of a lot of existing crops and livestock to reduce surpluses, at a time when plenty were starving - on the theory that over production is the cause of depression and in the belief that limiting production and fixing higher prices would help lift the country out of depression.

Many of these subsidies have since been vastly increased and widened one might note, distorting today's world trade to an unbelievable degree, directly resulting in unparalleled and needless third world misery, but that's another story. The subsidies, because they capitalize into land price of course, go on to create a vested interest in their maintenance. One example is the sugar industry, based mainly in Florida. The Sugar Act of 1934 was put in place to stabilize the price of sugar in the face of what was considered at the time to be ruinous overproduction. The Act is still in force and has in fact been expanded to include heavy quotas and controls on imports. To maintain its profitable protection, the sugar industry, though small by US standards compared to other agricultural industries, has become the largest agricultural donor to political campaigns, and undertakes continual efforts to ensure Americans eat vast quantities of their product, despite health and obesity warnings to the contrary. So important are the connections that run between top office and this industry that in 1996 former president Bill Clinton is said to have once interrupted an office tryst with Ms Lewinsky to receive a call from the industry's biggest political donor. (Financial Times, February 27, 1994.)

- A new Securities and Exchange Commission (SEC) to oversee banking and markets, which included a new federally controlled bank deposit insurance scheme. All bank deposits would now be insured (protected) by the government up to a value (since adjusted) of $5000. As a result, there have been few bank runs since in the fashion of those prior to 1933, though the scheme has gone on to create what some have called a situation of moral hazard for banking; if deposits are guaranteed, who cares about the risk ? (Exactly this issue helped push the banking system to the limits of its existence sixty years later in the 1980's, examined in a subsequent chapter.) The 1920's speculator Joe Kennedy (father of the future JFK) was put in charge of the new SEC in what many considered an unbelievable appointment. Speculator Joe had made his money in organized pools, insider trading rings and any other general scheme that was going at the time. Kennedy had begun his market days as a partner with Bernard Smith, a renowned bear operator, who together would secretly obtain access to highly confidential bank loan data in order to identify a heavily margined investor. Smith and Kennedy would then institute a savage bear raid on the portfolio of the unsuspecting stock owner and later, when the investor's bank had demanded further margin coverage, show up with an offer to buy all the stock - at cheaper prices naturally. (Fridson, page 128) But said the new President (Roosevelt): "It takes a thief to catch a thief." And sure enough, Kennedy set about efficiently outlawing all the practices that had made him truly filthy rich.

- The Civilian Conservation Corp to aid some of the unemployed and devise better methods to conserve scarce natural resources

- The National Industrial Recovery Act, attempting business' voluntary acceptance of a minimum wage of between 20 and 40 cents an hour, maximum work week of 40 hours, and no more child labor. (Note the lower wages - and going lower – directly as a result of the now fully enclosed land frontier.)

These schemes, plus many others, came to be known collectively as the New deal, put into place often against concerted and heavy attack from professional quarters and conservative opinion. (The ruling economic ideology stated that the deflation now occurring was the natural response to the prior inflation - which in some ways it is - and must therefor be allowed to run its course. So the speculation in assets and inventories in the inflation must naturally 'liquidate' in the deflation, with prices and wages therefor set to find their 'natural' level. This was quite in order and a process not to be meddled with by government.) But the public approved and voted Roosevelt back into office, when the time came, in a re-election landslide. "The only thing to fear, was fear itself," said the president. His policies did not end the depression however. And since the power of government spending had not yet been admitted as legitimate - governments were supposed to balance budgets at all times - things were still depressed as World War II approached. Again, war is not our story.

Other plans from individuals and groups were also put forward in the 1930's as to how to get out of the economic depression. One in particular in the US that drew loads of supporters was the Townsend Plan. So named after Francis Everett Townsend, a Californian doctor, who suggested the distribution of $200 monthly to every person 60 or over, on condition that the money was spent within the month, and only within the United States. Roosevelt stole the plan as a means of frustrating Townsend's wild popularity with seniors and called it social security.


Banks are important. Therefore, if in any economy those government granted licenses, especially land value, are permitted to capitalize in price and be traded as a commodity, then the credit creation process undertaken by the banks for their profit (fractional reserve banking) will become the linchpin of the economy. Academic studies do occasionally point this out, though not in the same words. For the 1930's at least, in a study by Calomiris and Mason, (Consequences of Bank Distress during the Great Depression) the study, in seeking to examine the effects of banking distress on the economy during the Great Depression noted (page 8): "Microeconomic evidence suggests that reductions in the value of bank assets were an important source of variation for bank loan supply…adverse shocks to banks' asset values, combined with depositor preferences for liquidity and low risk, caused banks to contract the supply of loans in the 1930's. That evidence suggests that exogenous variation in loan supply was driven in large part by bank distress. Bank distress raised funding costs and reduced deposits, leading banks to reallocate assets toward cash and curtail loan supply."

I would have thought that to be rather obvious. Nevertheless it is good to have it statistically verified through some very detailed research. Their work also noted a link between bank induced contraction in credit supply and state level income growth during the Depression. In their words - depending on certain variables - a "17.9 percent decrease in loan supply (over 1931 and 1932) produced roughly a 7 percent decline in income over the same period." The effect on building permits was even more pronounced. "At the sample mean, a loan-supply shock producing a one standard deviation (23.4 percent) decline in deposits results in a 67.7 percent decline in the county-level value of building permits. The fact that the size of the loan-supply effect is so much larger for building permits likely reflects the high cyclical volatility of the construction sector and its sensitivity to conditions in local credit markets."

Clearly, the creation of credit, or indeed the contraction of credit by the banking industry is of major importance to the economy.

In this regard, the Glass-Steagall Act of 1932 allowed, finally, a substantial expansion of bank credit. The Act widened the description of the type of assets that could be re discounted by banks at the Fed, and lowered interest rates. "The Fed promptly went into an enormous binge of buying government securities, unprecedented at the time. The Fed purchased $1.1 billion of government securities from the end of February to the end of July (1932), raising its holdings to $1.8 billion. Part of the reason for these vast open market operations was to help finance the then huge federal deficit of $3 billion during fiscal year 1932." (Rothbard, A History of Money and Banking in the United States, page 294.) Perhaps markets picked up on what was happening for the Dow lowed in July of 1932, effectively anticipating, as markets will do, the likely improvement in economic activity. The public however (in 1932 at least) were yet to be convinced of the soundness of the banking system and despite the attempted credit expansion by monetary authorities, kept right on taking gold out of the banks and withdrawing deposits to hold the cash.

Markets respond to the creation of credit.

1933 proved a big year for the stock market, as it turned out, (so was 1935) though it may not have seemed at all probable at the start of the year. By the end of 1933, the market was up some 54 percent, in 1935 a further 48 percent. Though it had been a big fall from 1929 of course. Said Fridson about 1933 (page ix): "Franklin Roosevelt's inflationary measures provided the economic stimulus required to boost stocks from the low point of the Great Depression." Easier credit in other words. About 1935 Fridson wrote (page x): "The market surged on the strength of restored confidence in the banking system, abundant credit, and an economic rebound led by the automotive sector."

Both times the market correctly anticipated the (soon to be) favorable impact a credit expansion would have upon economic and industrial activity. Bank deposits grew sharply in 1934. It might be noted that the re-inflating of the economy was a deliberate policy initiative of the government. The president was determined to reduce the gold value of the dollar and even outlawed the holding of gold by US citizens. Through the RFC, gold was purchased at progressively higher prices, up from $20.67 per ounce to eventually $35, at which price it was eventually fixed. Relative to other currencies still backed by gold, the US dollar was now worth 60 percent less. Deliberate inflation. Under such a policy, the only thing to do in the absence of an ability to buy gold (and hence maintain one's purchasing power) was to buy stocks.

Notably, the speculators had in fact anticipated such action from the Roosevelt administration as early as January of 1933, (before Roosevelt had been sworn in and able to carry out any policy initiatives) and had been actively buying or hoarding gold, a fact that worsened the February / March banking panic. (The holding of gold by a US citizen had not yet been forbidden by the government.) This hoarding further drained the banks of their reserves upon which credit is expanded. So the banks, in order to re-establish their reserves, either lowered overall lending, or called in loans.

The story goes that well before March of 1933: "Men recognized as being high in the councils of the Democratic party converted large sums into gold, or purchased substantial interests in gold mines at home and abroad." (Sullivan, page 71) "Trade advices in Wall Street – which were privately confirmed in official Washington – told of large gold operations by men close to the president-elect." (Sullivan, page 77.) Such a deliberate inflation policy, however, was not what Roosevelt had been saying publicly in the lead up to his election and had in fact been calling for a steady dollar, non inflation policies and a dramatic reduction in government expenditures to balance the budget.

The general public is always the last to know.

As for the real estate market, Hoyt had noted, page 275, that: "After the bank moratorium in March 1933, there was a rapid rise in the price of wheat, corn, and securities in the united States, and a marked improvement in general business conditions. While the influence of inflation had been but faintly reflected in real estate values if at all by the summer of 1933, there was a decline in vacancy rates for apartment buildings in many sections of the city, which is usually the first step in the recovery." So the real estate cycle starts out from the bottom once more. Hoyt's study of Chicago Land values was first published shortly thereafter of course; perceptive comments in light of the Dow low the year before in 1932.

The 1930's were tough years. Said historians and prodigious business cycles analysts, Dewey and Dakin: "The 18-year rhythm, falling from 1925, reached its low around 1933, and left such a wake of foreclosures in the nation that, in the depths of the depression, incipient rebellion was abroad in the land. In parts of the Middle West, for instance, farmers actually banded together to use force against sheriffs entering with writs. Auction sales of foreclosed properties had their purpose defeated by the refusal of attending visitors to bid. Refusals to pay taxes were common. Before such rebellion could become a challenge even to federal authority, there was organized a series of credit aids to save farmers and defaulting homeowners, together with the banks and insurance companies which had invested heavily in mortgages." The upturn in building and real estate activity was kicked off, explained Dewey and Dakin further, "on the strength of large government funds made available for lending to the building of homes...and the home building activity...was largely under government control." (Cycles, page 124.)

Vast public works programs added to the activity. Government activity in these markets went even further after the outbreak of European hostilities again, 20 years and 65 days after the peace agreement signed in 1919 from the First World War. Noted the same historians about this (page 125): "As a result of such measures, government funds invested in industrial plant facilities from 1940 through 1943 amounted to a total of some 25 billion dollars. When the United States actually became involved in war at the end of 1941, building of homes and farm structures had to cease almost entirely, under government decree – the famous L41regulation of the War Production Board...But the continuing boom in industrial construction carried total American building activity steadily forward into new highs." The cycles authors reported a peak in real estate building activity in the 3rd quarter of 1942.

Somewhat presciently, these authors of the cycles book, published 1947, made some interesting observations of the real estate market, one in particular suggesting the fact that even with the sheer size of recent government activites in this sector, it does not necessrily indicate that the real estate cycle should change much. Such a comment may have been made in reference to what the economist J. M. Keynes had been going on about that government could do far more to 'iron-out' the terrible ups and downs in the cycle so recently seen at the time. The authors though, confident in their prediction, asserted (page 124): "The pattern of our recurrent building booms has been so similar for many years that its repetition seems almost routine. The entrance of government into building activity has not discernably changed the pattern." As we know now, some 60 years later, it didn't.

Continuing the usual patterns, the world's largest building, though this time not in height – The Pentagon – was completed and opened for business in very early 1943, right at the peak of construction activity, built, of course, by government to house the developing US military machine.

In another prescient publication, Roy Wenzlick's 1936 book The coming boom in Real Estate and What to do About it, the author showed clearly the historical relationships of the real estate cycle, and that based on a simple repetition of that relationship, construction could be expected to peak around 1943, with a likely recession to follow in 1955.

One final point requires highlighting before moving on; that of the Bretton Woods agreement and the dollar reserve system. Towards the end of World War II, the Allied powers and their best economists assembled at the Mount Washington hotel in the New Hampshire resort town of Bretton Woods, to find a way forward after the destruction of the war and wars end. The US, as one of the few countries not internally materially affected by the war and being also the world's largest creditor, with most of the world's gold supply in its vaults to prove it, maintained a US dollar that by default, as much as anything else, was considered 'as good as gold'. The Allied powers agreed to give the US dollar official status as the only currency to be convertible into gold at international level; the Bretton Woods agreement, signed in July of 1944. For future inter-governmental transactions and as a reserve asset for nations to hold, the dollar would, for the future, take precedence. Signing nations therefor agreed to maintain the exchange rate of its currency to a fixed value (plus or minus one percent) in terms of gold. This agreement unraveled in 1971, to which we will return soon.


It is here that we must bid farewell to Hoyt's great study of Chicago land values. (Remarkably, Hoyt went on to claim that the 18 year rhythm which he had so assiduously studied in the Chicago market was not likely to repeat; a pattern he thought might only ever be found in young and vibrant cities, not older and more developed ones.) Fortunately we have an even better study to move onto, that of Fred Harrison. (The Power in the Land.) In a most helpful piece of economic detective work, Harrison shows from the relevant data that after the 1930's depression, land price in the US (as distinct from building construction) bottomed out in 1955. Reported Harrison: "On March 28, 1978, Emanuel Melichar, an economist on the staff of the Board of Governors of the Federal Reserve System, presented the results of his analysis of the income received by the agricultural industry. From the aggregate data, he deducted the returns to labor, management and the imputed income derived from the investment in dwellings, to disclose the residual return to production assets. This showed a downward movement which terminated in 1955-56…" (Page 122.)

Farm resid return 1950-77

Although these returns were to capital assets as well as land, as Harrison pointed out, a little further empirical evidence showed that "the residual return to agricultural production assets was declining until 1954. So it would have paid investors to sink their funds into other investments - capital equipment - rather than land. From the mid 1950's however, once the economy had shaken off the distorting influences of the Second World War and the Korean War, and begun to pick up its growth rhythm, it became increasingly prudent to switch from investment in capital to the hoarding of land." (Harrison page 124.) Easy in hindsight of course, though for our studies, we can clearly establish a general land price low after the 1930's depression at 1955. Prior to this year, higher profits were to be had manufacturing consumer items to meet pent up demand after the war. Few were developing land. In Chicago at this time, real estate men were despondent, particularly regarding development within the city itself. Things appeared so bad, it was said, that the loop "might as well be returned to the Indians." (Condit, Chicago 1930 - 1970, quoted also by Harrison, page 120.)

1955 was also the year Al Gore Sr. challenged Congress to build a nationwide highway system to connect one side of the country to the other, and in doing so lift the development potential of the country. Echoes of the rail men. Increasing the speculative potential of the land and its value is what this does. China is currently in the process of doing the same; a highway building effort China says will be more extensive than that of the existing US system itself, by 2015. It remains to be seen however, by how much the next real estate downturn will affect this goal.

Highway building

It was around this time too - 1955 - that American and Australian banks pioneered the principle of a bank personal loan, in which "lending was related to an individual's ability to pay, rather than to the security which he or she could offer." (Green, Banking: An Illustrated History, page 124.) This was a marked change in the credit creation practices banks had previously adhered to and developed into an important factor that has helped maintain the sustained increases in credit growth in the years following the 1950's.

Loan maturities changed also. In the 1920's, a house buyer faced a loan repayment date of about five years, with the lender normally requiring at least a third of the property value as a down-payment. Indeed, in some cases, limited repayment was required over the period and at the expiry of the period, it was necessary to renew the mortgage. If at this time money happened to be tight, renewal could prove difficult and the borrower was in trouble as a result. (This fact may have made downturns worse than they already were.) Longer maturities on smaller down payments became the norm. By the end of 1955, real estate loans at commercial banks represented about 10 per cent of total assets and 16 per cent of total mortgage debt. (Rabinowitz, page 91.)

Increases in federal taxes caused a change after the war also. For the first time, tax avoidance started to become an important dynamic in real estate investment. (Rabinowitz, page 167.)


On November 17, 1954, the Dow, after a wait of 302 months - 25 years - regained its former 1929 peak. Depression-era thinking had not been forgotten however and the government announced an enquiry into the market's rise. Significantly, in June of '54, the Fed had responded to the pleas of business and manufacturing interests and retreated from their hard money policy. "A feeling set in," reported Martin Fridson (page 150), "that thanks to wise monetary and fiscal policies, periodic depressions were no longer inevitable."

Dow 1950's

The 1950's were not all plain sailing for stocks however. October 4, 1957, (30 years prior to 1987) saw the start of a sharp fall in prices as the Russians launched Sputnik I, an event that caught the US by surprise. The month's low on October 21 saw the Dow down 10 percent. 1958 was better though, one of the very good years according to Fridson, as 'the biggest public works project of all time' - the interstate, 41000 mile highway system and associated federal roads network, expected to cost $27 billion over the next 13 years got underway. Paving materials, dynamite and bridge steel, amongst other things, were thought likely to add $2 billion to 1958 demand. Added to this was an easing of credit conditions in the November of 1957. Then, in July of 1958, the US sent its marines into Lebanon, a development thought expansionary for the market. A stock buying panic resulted. (Fridson, page 160.)


If there is one commodity that could be said to have changed the world, it would be oil. Daniel Yergin put it this way: "The inexorable flow of oil transformed anything in its path. Nowhere was that transformation more dramatic than in the American landscape. The abundance of oil begat the proliferation of the automobile, which begat a completely new way of life. This was indeed the era of Hydrocarbon Man. The bands of public transportation, primarily rail, which had bound Americans to the relatively high-density central city, snapped in the face of the automotive onslaught, and a great wave of suburbanization spread across the land." (Yergin, The prize, page 550.) The starting point for the suburbanization, says Yergin, may well have been in 1946, when a family of builders named Levitt built a whole row of houses at exactly sixty-foot intervals, on a former patch of potato farms in Hempstead, Long Island - the prototype of the postwar suburb. "No man who owns his own house and lot can be a Communist", explained William Levitt. "He has too much to do." By 1950, housing starts were running at 1.7 million a year. Within ten years from the end of the war, 9 million Americans had moved to 'the suburbs'. The auto - and oil - was vital to this new way of life.

And to service the needs of these new suburbs, a lot of new styles of industry grew up around and in them: shopping centres and malls, the first one built in Raleigh, North Carolina in 1949; Motels, originally starting as clusters of cabins that assembled together usually around or near gasoline stations; motels were refined a bit when a couple of entrepreneurs put up a sign in green outside their motel with the words 'Holiday Inn' in Memphis in 1952; followed by drive in restaurants, drive in Churches, and of course drive in theatres. Exactly what this was worth, the gain for society – the economic value - has manifest in the price of land. Which is why we still have to work a 40 hour week to buy into it.

The 1960's.

Attempts to boost the growth of manufacturing returns were taken up by the Kennedy administration with calls for cuts to corporate taxation levels. This was all part and parcel of the now entrenched economic philosophy of John Meynard Keynes, who believed he had shown how government, through better use of the economic levers at its disposal, could smooth out the ups and downs of economic boom and bust. Keynes also thought that government could quite deliberately choose growth policies, like tax cuts, to promote full employment levels. The tax cuts, at a cost of some $14 billion in government revenues, were enacted in 1964. But not before the stock market underwent a fast and substantial correction in May of 1962, on fears the 1960 elected Democratic Party administration might be anti-business after all. Sobel called it the Kennedy slide. Stocks fell on very heavy volume May 21 and 22. Noted one broker: "People have been sitting around praying all day." (Sobel, page 414.) Stocks then tanked on the 28th, recovered slightly, then lowed in June (25th and 27th). The May emotion, the sharpest market drop since the Crash of '29, was 18 months (360 + 180) before the events of November 23 1963.

'62 correction

Just prior to these events though, 1961, saw the introduction of the Real Estate Investment Trust Act. Under this act, an investor could exempt themselves from federal taxes on income derived from real estate at the corporate level. Quite a new incentive to channel one's money, through the REIT's, into property. Initially, the REIT's just bought into existing property for a steady income flow.

1963 saw the Fed celebrate its 50th birthday and the republication of a booklet outlining its purposes, which the bankers bank outlined as: "to foster growth at high levels of employment, with a stable dollar…". The economy celebrated of course by going on to record it highest ever inflation levels, then serving up higher unemployment for desert. As for a stable dollar, the dollar's purchasing power has declined by more than 90 percent since 1913.

A little later, Sherman J Maisel, in his book Managing the Dollar, (1973), noted (Preface, page ix.): "Before my appointment to the Board of Governors of the Federal Reserve System in 1965, I had spent nearly 20 years studying and teaching monetary economics. I thought I understood what the Fed did and how it affected the economy. I soon discovered how little I knew. I also found that the Fed itself, while it had a definite philosophy, had no clear concept of how monetary policy worked. I searched for an official statement of doctrine or an outline of operating procedures. None existed, except at the most general level." Yes it's true.

1964 was the year of the now infamous Tonkin Gulf incident that effectively up-scaled the Vietnam conflict into much wider warfare. (The Tonkin Gulf lies off the East Coast of North Vietnam.) In early August of that year, the US destroyer Maddox, in the Gulf on an espionage mission, reported she was under attack and returned fire. Screamed the newspapers next day: "American Planes Hit North Vietnam After Second Attack on our Destroyers." Trouble was, as it was revealed much later, the attack on the Maddox didn't actually happen. The ships captain, John Herrick, had, some hours later, reported by cable that the prior reports of attack perhaps could be attributed to "freak weather effects and an over-eager sonar-man" and recommended no further action be taken until a complete evaluation in daylight. (Ellsberg, International Herald Tribune, February 27, 2004.) This, however, was not what Congress got to hear over coming days, and instead, after some top secret testimony from Secretary of Defence McNamara and Secretary of State Dean Rusk, went on to pass the Tonkin Gulf Resolution (two dissenters only) authorizing the President, Lynden B Johnson, to take "all necessary measures to repel armed attack against the forces of the United States and to prevent further aggression."

Based on a lie, (some claim a pretext certain persons in the military may actually have been looking for) the US increased its commitment to South Vietnam - events to be repeated somewhat, in Iraq, forty years later - to stall the spread of the communist hydra. The president announced air strikes against North Vietnam, (using plans that were already drawn up) thereby dramatically escalating the war. At its peak, around 1969, some 543,000 troops were committed, dropping 400 tons of bombs per day, contributing markedly to the later inflation, (not to mention the de-foliage of Vietnam) as the US printed money to pay for the war, and contributed to the substantial rises in commodity prices in the early 1970's. On average, one US soldier was using one ton of copper per year in Vietnam. (Counterpunch, October 20, 2003.) 44 million litres of Agent Orange was dumped on the forests to deny the enemy cover.

Into the peak:

"I can feel it coming, S.E.C. or not, a whole new round of disastrous speculation, with all the familiar stages in order; blue-chip boom, then a fad for secondary issues, then an over-the-counter play, then another garbage market in new issues, and finally the inevitable crash. I don't know when it will come, but I can feel it coming, and damn it, I don't know what to do about it." Bernard J. Lasker, Chairman, New York Stock Exchange, 1970.
(Quoted in John Brooks, The Go-Go Years, page xv.)
US growth rates halved in 1967 - 68, as the economy went into minor recession in the last quarter of 1966. (The tax cuts had pushed up land values.) This was something a bit new, or so it seemed. Since the end of the Second World War, economic growth had remained unbroken. Said Galbraith of these years: "The twenty years from 1948 through 1967 may well be celebrated by historians as the most benign era in the history of the industrial economy. The two decades were without panic, crisis, depression or more than minor recession." (Money: Whence it Came, Where it Went, page 253.) Unemployment was low and there was no appreciable inflation to speak of, although prices did increase from time to time. All of this appeared to confirm what the new generation of economists, converted to Keynesian style thinking, had been saying all along; government, with its fiscal policies, really could be proactive in the economy and affect the level of output and growth, so that these things were no longer subject to the vagaries and whims of the dreaded business cycle. Added to this the better quantitative measurements of all things growth related, calculations of national income, gross domestic product etc. and the boom and bust scenario was now considered to have been mastered. Said the president's economists in 1968: "During these last years of achievement, it was far more than a coincidence that fiscal and monetary policy have been actively and consciously employed to promote prosperity…no longer does Federal economic policy…wait for a recession or serious inflation to occur before measures are taken." (Economic Report of the President, 1968, page 7, quoted also by Galbraith, page 269.)

Circumstances had confirmed too, the inability of simple monetary policy to extricate the economy quickly out of depression, as was revealed by the 1930's depression. Noted Keynes and his followers: Yes, in a slump, money could be made available and indeed interest rates could be aggressively lowered, but this did not ensure that the money would actually be borrowed, or would actually be spent. Trying to enforce that happening would be like pushing at a piece of string to move it forward. Hence government and its budgetary policy initiatives were a necessary addition to the economic tool kit.

As it happened, such an economic policy did not much affect the status quo. The owners of the means of production and the owners of the ground upon which that means stood, would not be disturbed by the new economics. In fact, things proved positively delightful when it could be shown through the new theoretical modelling that government tax cuts, a Keynesian initiative, could be used to further improve growth rates and that if such cuts were slanted slightly to the favor of those paying higher taxes, the effect would 'trickle down' to those underneath and make everybody richer. Almost, a free lunch. Who could deny the effectiveness of such a policy ?

Dow '60's mid points

Now all of this did not infer that stock markets would remain stable of course, and neither did it make redundant the Fed and its use of monetary policy. The Dow in 1966 retraced half its prior run up, falling back to past tops. The economic growth continued though and then picked up pace; with land prices reported to have doubled between 1970 to 1974 (Harrison page 130). Following past cycles, where land prices have mostly increased the fastest towards the end of the 18 years, the 1974 cycle was not proving to be exceptional in this regard. Finance for buying the land was not proving difficult. Developers and builders were having money thrown at them by the REIT's, who by this time had discovered the joys of short-term bank loans at rates sufficiently below their lending rate to provide them with attractive profit margins. The assets of these REIT's went from $1 billion in 1969 to $20 billion by 1974. Soon more than a few banks were launching trusts, with an IPO for the public in which to invest, with extensive lines of credit available to make the necessary real estate investments. An innovative new financing method had been found, outside the previous older regulatory regimes, in which to finance the continual growth.

Though the continual growth saw a few bumps along the way. The strongly rising prices into the early 1970's - something no one could directly remember having experienced before - were worrying economists and the establishment generally. In mid 1970, the long boom in the stock market came to an end, caused by the sharply increasing interest rates of 1969 undertaken by the incoming Nixon administration in preference to other forms of economic control, like price controls, to put an end to the increasing prices and wages at this time. In the stock market, Penn Central Transportation Company collapsed in the June of 1970, (21st), pretty much marking the lows for the stock market for that year. Penn central was at the time the world's largest privately owned railroad, with assets of more than $6 billion, ranking it as an American institution "just behind hot dogs". (Lechner, Street Games, page 156.) For more on the Penn Central collapse, click here.

Dow '52-75

By July of 1971 however, with a looming presidential election just one and a half years away, political expediency put in place price controls (subsequently not effectively administered), a relaxation of monetary policy, a request for tax cuts and a more liberal budget. The much easier credit conditions rallied the markets one more time, to a final high in January of 1973. (After that saw a two year bear market.) The rally was helped along by the Fed who obligingly eased monetary policy considerably in the Spring of 1970 to shore up the collapse of the stock market that had been in free fall since very early in 1969. The early 1970's also saw a most unlikely bubble develop in the stock market around a group of stocks called the Nifty Fifty, "a glamorous group that promised eternal growth during an unusually erratic period (of US) economic history." (Insana, Trendwatching, page 139.) Born in a period of rapid technological advancement, companies like IBM, Polaroid, and Xerox were at the forefront of the 1960's technological innovations. The bubble soon went the way of all others though and deflated.

We can now return to the Bretton Woods agreement and the dollar reserve system put into operation after it. That agreement, at the time, really was quite historic, for it helped avoid a repeat of history as happened after the First World War. Following World War II, the defeated nations of Germany and Japan recovered - strongly - assisted without prejudice by the Allied powers, the US in particular. This was, by historical standards, a generous concession from Allied forces who could have, had they wished, inflicted heavy repayment terms on the losers for the war damage. They didn't. As the fifties and sixties wore on, both Germany and Japan, not permitted to re-arm, invested their growing surpluses in modern plant and equipment and went on to produce their goods and services at much lower cost relative to the rest of the world.

Before long it had become obvious; buy in Germany and Japan, sell in the US. Says Galbraith (Money: Whence it came, Where it Went, page 295): "…foreign corporations, beginning in the late 1950's, accumulated dollars from their flush sales in the United States. These were not absorbed by the much smaller purchases from the United States. In the hands of the recipient firms or deposited with them in European banks, the dollars became the newest mystery of the monetary cognoscenti - the Eurodollars. And when borrowed or loaned they became the Euro-dollar market…numerous of the dollars so assembled, not surprisingly, were turned into gold." The huge stockpile of gold built up by the US after 1914 (by selling weaponry to the Europeans mainly) began to disappear. And what was the US doing ? She was bogged down in Vietnam and running a large trade deficit because of it. Rivers of gold were now leaving the US for the (deemed) safer haven of Switzerland.

By the late 1960's, the US had stopped supplying gold to those holders of dollars so asking and confined itself to providing the gold only to central banks in the settlement of their claims. (Galbraith, page 296.) By August of 1971 the game was up and in this month the US ceased its dollar convertibility into gold. The US currency was now - and remains - fiat, the ramifications of which will be returned to in the next cycle and the one following that. But by 1971/72, the dollar had become way overvalued. In expectation of the dollar being devalued, a movement out of dollars and into other currencies ensued. Currency instability became the accepted order of the day, approved eventually by the established order as a currency 'float'. Exchange rates were no longer fixed.

Whilst all this was going on, an oil crisis developed, slow in the beginning, but had everybody worried by late 1972. For it was believed that the world was running out of oil - or so said the Club of Rome at least. To protect reserves (and profits) in a newly inflationist world, OPEC, in October of 1973 (16th), lifted prices by 70 percent to $5.11 a barrel, thereby bringing prices into line with the oil spot market. (Yergin, page 606.) OPEC saw a huge windfall of dollars that could not immediately be spent and so accumulated in rather large Arab bank balances. The Petro-dollars, as the oil windfall came to be called, now added to the already large Euro-dollar balances. After the 1971 Nixon gold decision, banks went international, competing vigorously for these Euro-dollar and Petro-dollar accounts. New York banks were now "chock-a-block with liquidity" (Kindleberger, page 32) and, looking around for profitable outlets and inspired by the idea that nation states were safe from bankruptcy, the banks promptly recycled these dollars into the credit-hungry developing countries, especially those in Latin America. (Green, Banking: An Illustrated History, page 137 and 145.) But such a recycling ignored one of the most obvious themes of banking history of course, and the almost totally unregulated lending (and further extensive credit creation) returned to haunt the banks later, as one third-world nation after the other eventually defaulted on their debts as had always happened in the past. (And in rough 60-year cycles noted author Christian Suter)

In the midst of all this, on November 15th, 1971, the world changed, forever, though no one noticed on the day. Intel, a small start-up two and a bit years old, released its Intel 4004, a microprocessor. Its technical description read: 4 bit microprocessor, operating speed 0.1 MHz, for sale at $US 200, with 2300 transistors to process (an astounding) sixty thousand instructions per second. This invention kicked off the digital age and went on to radically re-shape the world, in particular the world of finance, a topic to be taken up next cycle. It would also add to the price of land.

None of this was affecting the REIT's though. Said Harrison (page 115) in describing the new REIT's and their effect: "During the 1969-70 period of tight money, which affected the orthodox financial institutions - commercial banks and savings and loans associations - the REIT's forged ahead: loans for construction and development rose from $260million to $2.5 billion, a staggering increase of 890%. (Developers) agreed to pay hugely inflated prices for land because the trusts were pouring funds into their pockets. Money was no obstacle to any deal which appeared - on paper - to offer bonanza profits. The easy money period which followed in 1971 aggravated the speculative fever which gripped the economy. Commercial banks increased their construction loans by nearly $3 billion in that year alone. Prestigious banks, like Chase Manhattan, set up REIT's, using their names to sell stocks and debentures to the public."

Into the peak continued: a word on the real estate market.

As to real estate in general, a few noted what was happening, but not many. The autumn, 1974, Real Estate Review reported: "In many suburban areas, speculators are outbidding developers. Outlying land of dubious use potential is trading briskly. The professionals are applauding this activity and proclaiming their faith in its eternal life. Most alarming is the obvious effort made to bring outsiders into the land market. Vigorous syndication efforts and even the current popularity of obvious land development purchases are hailed as innovative and exciting applications of marketing 'technology' to the 'backward' field of real estate marketing…". (Lindeman, J. B., Is the Real Estate Market Coming to an End ?) Shades of Chicago there.

Actually though, the full real estate story goes back to the 1950's, when lots began to be marketed by a couple of larger firms, mainly for areas in Florida and the more remote desert areas of California. Soon, these promoters had created a nation-wide market for real estate sold by installment, often sight unseen. (Allan, Kuder and Oakes, 1976, page 4.) "This type of land development soon became a national phenomenon; raw or partially developed acreage was subdivided into small parcels and offered for sale on liberal terms." (Stroud, 1998, page 3.) "By the late 1960's", said Stroud further, "rural land was being subdivided at an unprecedented rate. Widespread growth continued until 1973..."

Land hustling was fast becoming as much a part of contemporary America as superhighways and rock concerts. (Paulson, The Great Land Hustle.)

The turn.

Only a major bank collapse would remain to hasten the economic turn, the first of which occurred in October 1973 with the collapse of the US National Bank of San Diego, the biggest in 40 years. The bank collapsed "because of the activities of its major shareholder, C. Arnholt Smith," noted Fred Harrison (Power in the Land, page 131), "a close friend of Richard Nixon and a major real estate speculator in Southern California. The bank had loaned heavily to one of Smith's conglomerates, the Westgate-California Corporation, which between 1967 and 1971 had relied on its property deals for most of its reported pre-tax profits." In 1979 Smith received three years for tax evasion, fraud and theft; within the nature of the company he was keeping perhaps, though the president managed to avoid jail. For more on Arnholt Smith click here.

An even bigger bank failure followed twelve months later, in October 1974, the Franklin National Bank of New York. This was despite a rescue package from the Fed of an unprecedented $1.7 billion. Once again, property loans were a feature of this failure as well, though not the only factor. The owner of the bank, Michele Sindona was charged with 65 counts of fraud, and got 25 years.

The first major difficulty for the REIT's was in December of 1974, with the failure of Walter J Kassuba Realty, a Florida building corporation, which had $550 million invested in nearly 120 properties. A few REIT's now found themselves with bad loans. The cycle had turned. It was later found that more than a few trusts had been using a couple of accounting tricks to hide a few shenanigans.

At this time, the early 1970's, commodity prices ran wild. Steep increases in price, especially in that of our now most central commodity, oil, ended up taking the blame for pushing the US economy into recession. Though everything plays its part, the commotion over oil conveniently disguised the real cause; deflating land prices after having been permitted to inflate in the first place. Oil prices later collapsed of course (as higher prices brought forth better technology to recover more oil), just as much as land prices later recovered, though supply and demand does not operate the same way in the land market. Speculation at the peak of this cycle ran rampant and included not only the usual suspects of stocks, office buildings and land, but also tankers and other shipping vessels, and even Boeing 747's.

To the scams and cons:

Scams and cons are not events peculiar to the peak of the real estate or business decade cycle, they go on all the time, as evidenced by the huge 'salad-oil' swindle of 1963, or Bernie Cornfields Investors Overseas Services scam of 1970. Generally however, the scams will tend to reveal themselves to the public mostly when the cost of money is placing undue pressure on corporations to continue maximizing their performance. Hence, as land prices soften with rising interest rates, the poorly managed or indeed fraudulently managed banks or similar financial concerns will come under great pressure.

And so it was with US Financial Corporation, the real estate wonder-story of 1973. The man in charge, R. H. Walter, had loudly declared his corporation's stated objective to 'to make housing happen'. Which he did. But as his houses went up, behind the scenes, Walter was furiously creating sham transactions using a raft of subsidiaries and affiliate companies to create phony profits and inflate earnings per share and hence underwrite the stock price. Following the money however, government agencies uncovered the accounting tricks and when US Financial filed for Chapter 11-bankruptcy protection in January of 1974, it became the largest bankruptcy ever recorded up to that time.

Nor was the stock market immune from the swindlers. In March of 1973, Raymond L. Dirks, a securities analyst at Delafield Childs, took a call from a very unhappy Equity Funding employee, Ronald Secrist. Secrist complained to Dirks that his Christmas bonus was not enough and that as a result he had a bit of a story to tell about his employer. 'The story' ended up revealing a tangled web of false insurance policies that Equity Funding Corp. was repackaging to other re-insurers, pocketing the cash so received. This had been going on for ten years and had involved many hundreds of employees it was later discovered. The cash, augmenting profits, was used to help, indeed drive higher, the company share price. Of the three billion dollars in life insurance written by Equity Funding Corp., some two billion dollars worth of that insurance eventually proved completely fictitious. (For more on that story, click here.)

Conditions in Australia.

The rest of the world was not immune to the ferocious inflation of the time, the land speculation that ran wild and then the inevitable bank failures that followed it. A little of what happened in Australia is neatly summarized in a Pierpont article, from the Australian Financial Review, Dec 6th, 2002:

Start quote "The federal government, acting through the Reserve Bank, had slammed the brakes on bank lending in late 1973. Gough (Whitlam, Australian Prime Minister at this time) announced the squeeze on September 9, 1973, saying: 'Substantial increases in other rates will follow as effects of the operations [on bond rates] spread throughout other markets for funds. If, as a consequence, the higher interest rates have the effect of curbing the speculative rush into land and property, that will be all to the good.' So Gough actually announced the credit squeeze he later denied knowing about. Then the Commonwealth lifted long bond rates in the loan of February 1974. Subscriptions poured in to take advantage of historically high bond rates, draining money out of the private sector. In early April, bill rates hit 12 per cent, a rate that had not been seen in living memory. By then Pierpont was writing that civilisation could not survive double-digit interest rates. We somehow did, but your correspondent still believes he had a point.

Bill rates could not go above 12 per cent because that was their effective ceiling under the Stamps Acts of Victoria and NSW. Under pressure from the banking system, the states repealed those sections of the acts and rates soared. By mid-April, bank-bill rates had hit 17.5 per cent. The money tightness was exacerbated when capital inflow was cut off. This was a deliberate act of the federal government, which had decreed that one dollar of every three of inflow should be frozen in a Reserve Bank non-interest-bearing deposit. Inflow was also discouraged because Gough's lads revalued the $A to $l.30. For all these reasons, the banks (including the Wales) did indeed have monetary problems.

Bank negotiable certificates of deposit were bid up to the quite astronomical rate of 25 per cent by the end of April. This is the highest interest rate Pierpont has ever seen on a risk free Australian investment. All this high drama in the money markets was covered extensively by the Australian press, frequently in big, black headlines on page one. Nevertheless, according to Gough's memoirs, he and Frank (Simon's dad) knew nothing about any credit squeeze at the time. That statement has always seemed to Pierpont to be an accurate reflection of (a) Labor's economic management in those days, and (b) its grasp of reality at the time.

To be fair, Gough's book later said that in August of 1974 Sir John Phillips revised his opinion and said that the events of April had amounted to a credit squeeze. 'Soon afterwards, the measures were abandoned,' Gough wrote. To put that little sentence into perspective, September 1974 was one of the most horrible months in modern Australian financial history, when it seemed for a few weeks that civilisation as we knew it had indeed gone over the precipice. If you look at a historic chart of the All Ordinaries Index, you will see a sharp downward spike in 1974. That's September 1974, when the share market fell so far and so fast that the chartists almost ran out of graph paper.

In September 1974, there was the spectacular collapse of one of Australia's most high-profile construction groups, Mainline Corporation. Then Cambridge Credit Corporation closed its doors in one of the biggest crashes Australia had seen until then, and one that caused widespread grief among small holders of shares and notes. September 1974 was also the month when the building societies of Queensland and South Australia were hit by panic runs. If the then premier of South Australia, Don Dunstan, hadn't gone onto the footpaths of Adelaide with a loud hailer to reassure the mob who were queuing to withdraw their deposits, the run could well have continued onto the banking system."
End quote.

Of course, the then liberal Prime Minister, McMahon, began 1972 desperate to win that year's election. (Subsequently won by Whitlam.) McMahon's "pork-barrel August budget added $740 million to the economy but did not win voters." (Herald / Sun Jan 1 2003, summarizing the usual 30 year government papers release.) It did however add to the usual frenetic activity at the peak, when everybody looks so busy and economic conditions seem so buoyant.

BUS failures 1870-1979

NYSE seat price 1868-1978

Further reading:

Allan, Leslie. Beryl Kuder and Sarah L Oakes, Promised Lands, New York: Inform inc., 1976.

Alston, Lee J., Farm foreclosures in the United States During the Interwar Period, Federal Reserve Bank of St Louis, 43 Dec 1983, pages 885 - 903

Alston, Lee J., Grove, Wayne A. and Wheelock, David C., Why do Banks Fail ? Evidence from the 1920's, Federal Reserve Bank of St Louis, 1991.

Brooks, John. Once in Golconda, Harper & Row, 1969.

Calomiris, Charles W and Mason, Joseph R, Contagion and Bank Failures during the Great Depression: The June 1932 Chicago Banking Panic. NBER Working Paper No. W4934, November 1994.

Calomiris, Charles W and Mason, Joseph R, Consequences of Bank Distress during the Great Depression, American Economic Review, Vol 93, June 2003, pages 937-947

Chancellor, Edward. Devil Take the Hindmost, Papermac edition, 2000.

Esbitt, M. Bank portfolios and Bank Failures During the Great Depression: Chicago, Journal of European History 46 (June), pages 455-462. 1986.

Fridson, Martin S. It Was a Very Good Year, John Wiley and Sons Inc., 1998.

Harrison, Fred. The Power in the Land, Universe Books, 1983.

James, F. C. The Growth of Chicago Banks, Harper and Brothers, 1939.

Kennedy, Susan E. The Banking Crisis of 1933, University of Kentucky Press, 1973.

Lechner, Alan. Street Games, Harper and Row, 1980.

Maisel, Sherman J. Managing the Dollar, W. W. Norton and Company, New York, 1973.

Montgomery, David. The Monetarist Explanation of the Great Contraction: Fact of Fiction ? Available on-line at members.aol.com/profdavidmont/monetary.htm

Paulson, Morton C. The Great Land Hustle, Chicago, Henry Regnery, 1972.

Rabinowitz, Alan. The Real Estate Gamble: Lessons from 50 Years of Boom and Bust, AMACOM, 1980.

Rockoff, Hugh. Deflation, Silent Runs and the Great Contraction, Rutgers University, 2001

Shughart II, William F. A Public Choice Perceptive of the Banking Act of 1933, Cato Journal, Vol 7, No.3 Winter 1988, available at cato.org/pubs/journal/cj7n3/cj7n3-3.pdf

Simpson, Herbert D. Real Estate Speculation and the Depression, American Economic Review, XXIII no 1, March 1933.

Sobel, Robert. Panic on Wall Street: A History of America's Financial Disasters, Collier Books Edition 1972.

Stroud, Hubert B. William S. Spikowski, Planning in the Wake of Florida Land scams, 1998, Association of Collegiate Schools of Planning, Journal of Planning Education and Research, and available online at spkowski.com/landscam.htm

Sullivan, Lawrence. Prelude to Panic, Statesman Press, 1936.

Temzelides, Ted. Are Bank Runs Contagious, Federal Reserve Bank of Philadelphia, Business Review, November/ December 1997, 3-14.

Ways, M. Land: The Boom That Really Hurts, Fortune, June 1973.

Wheelock, David C. Regulation and Bank Failures: New Evidence from the Agricultural Collapse of the 1920's, Federal Reserve Bank of St. Louis, Working Paper 1991-006A available at research.stloiusfed.org/wp/1991/91-006.pdf

Wicker, Elmus. The Banking Panics of the Great Depression, Cambridge University Press paperback edition, 2000

Regulation and Bank Failures: New Evidence from the Agricultural Collapse of the 1920's, Federal Reserve Bank of St Louis, 1991.

Copyright Phil Anderson 2004

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