• Rapid expansion appears to generate regional low rates [Landon-Lane and Rockoff (2006) identify two regional interest rate shocks in 1920s] – (1) Surge of rates in all regions except the South in 1921 – (2) Southern rates unexpectedly drop in 1925 and then unexpectedly jump in 1926. Creates abnormal swings in bank debits of the Atlanta Federal Reserve District

Boom Becomes a Flood 1924-1925

• Demand: A Flood of People---interest rate declines, easy credit, and expectations of appreciation drive up demand • Demand: Marketing of developments as “unique” opportunities appeals to the “uniqueness bias” (Shiller 2007) or excessive optimism of investors.

• Supply: Drop in interest rates help spur construction. A Flood of construction materials pours in by rail and by ship. • Supply of land might appear constrained but it is much more elastic than public would imagine because of ability to drain vast new acreage.

850

The Boom:1925 Miami is ranked 9 th among America cities in building with $60 million in new construction . (not in top 100 cities in size 1920)

Florida East Coast Railway 750 650 550 450 350 250 150 50

1919 1920 1921 1922

Freight Ton Miles

1923 1924 1925

Passenger Miles

1926

Building Permits —Miami and Tampa

Speculative Activity?

Bank Debits to Deposit Accounts 400 350 300 250 200 150 100 50 0 1919 1920 1921 1922 1923 1924 1925 1926 1927 1928 1929 U.S.

Atlanta FR District Jacksonville Tam pa

How to Speculate

• Walter C. Hill VP of Retail Credit Company of Atlanta:

“Lots are bought from blue-prints. They look better that way.….most of the lots are sold predevelopment.’ “When a subdivision opens, it was often sold out the first day. Reservations were accepted but the buyer must pay 10% of the announced price of the lot.

“

The reservations are numbered consecutively. As the reservations were called, the buyer steps up and gets a “binder” describing the lot and “sold” is stamped on the blue print. Within the next 30 days, the buyer is obliged to pay 25% of the purchase price. “The balance was payable with one, two or three year notes.”

Binders —options

• Many buyers expected to sell their binder for a profit. Almost all lots immediately for resale and many listed at real estate offices. Titles don’t clear without a long delay.

•

“Binder boys worked right on the street, holding the receipt books and the pencil in hand, calling off the acreage and the amount of ‘binder required,’ obtaining the deposits from people, who bought lots without having any idea how far in the woods of Florida they might be.”

• A Miami resident, recalled that "

everything went kind of crazy. . . . I'd leave home in the morning and tell my wife, `How much money do you want me to bring home. . . . I'd come up town, and it wasn't so long for [ sic ] I'd have a deposit on a piece of property. Maybe a few hundred dollars. In forty-eight hours you'd sell it and make several thousand dollars."

Pure Fraud: Charles Ponzi arrives

• Ponzi raised money from investors by issuing notes that promised a 200% return in 3 months. • His Charpon Land Syndicate bought land at $40 an acre. He each acre into 23 lots offered at $10 each to the public. ($230 per acre) • The holders of the certificates would get $30 for each $10 certificate or 3 $10 lots.

• Land was “near” Jacksonville---65 miles west. Unimproved palmetto and scrub oak.

The Peak —Fall 1925

• In the summer of 1925, Carl Fisher was wary of the ever spiraling price of real estate. – Begins to investigate creditworthiness of buyers – Raises down payment to 20%----suspicion of a substantial drop in price.

• Passenger traffic peaks September 1925 • 1925 Winter Rush does not materialize.

• Estimated that if all the acres sold in the Miami area were developed, there would be lots for 2 million houses.

$100 $90 $80 $70 $60 $50 $40 $30 $20 Land Company of Florida Stock Price New York Curb Market Weekly High Weekly Low

Pricking the Bubble —no single smoking gun

1. Transportation congestion —prices of construction materials soar: a. End of 1925 jammed Miami Harbor docking delays of 10 days to 3 weeks. b. The East Coast Railway overwhelmed by construction materials shipped and tourists. In August 1925 it declares an embargo for freight except for fuel, livestock and perishable foods.

2. Negative press in the North---weather, transport, sanitation, disease, high prices and the boom. 3. Internal Revenue ruled that the entire amount of the purchase price for real estate had to be reported as income----a problem for speculators.

Pricking the Bubble —no single smoking gun 4

.

Out-of-State Banks React to Deposit Outflows:

Example: Ohio banks publish advertisements: "

You are going to Florida to do what? To sell lots to the other fellow who is going to Florida to sell lots to you

.“

5. State Governments React:

Example: Ohio law that prohibited firms from selling Florida real estate.

6. The Lady Doth Protest Too Much:

Florida Governor and legislators gave a “Truth about Florida” press conference (10/1925) at the Waldorf-Astoria Hotel in NYC

It is not the September 1926 Hurricane

(Shiller’s 2007 Claim) • 400 deaths. Thousands of homes were destroyed. Unfinished subdivisions were leveled.

• Too late to prick bubble.

It is not the turn in the business cycle NBER Business Cycles

Peak Trough

January 1920(I) July 1921 (III) May 1923(II) October 1926(III) August 1929(III) July 1924 (III) November 1927 (IV) March 1933 (I)

The Collapse 1925-1926

• Collapse Triggered by – Bad press – Construction delays – Fraud – Expected new buyers don’t appear Fall 1925 • Land prices fall • Holders of Binders default on their obligation to make payments to developers • Developers default on their loans to banks • Forbearance by corrupted regulators protecting insiders • Bank Failures and a Panic

Excessive Forbearance

• Federal Bank Regulators – OCC: February 1926 national bank examiner finds PBNB insolvent, but it is not closed.

– Federal Reserve Bank of Atlanta loan to PBNB (=87% of capital) by Federal Reserve Bank of Atlanta. Governor M.B. Wellborn of the bank is a friend of Manley and Anthony. • State Bank Regulators – State Controller’s 1926 report conceals condition of Palm Beach Bank and Trust Company. Insolvent but propose to reorganize with depositors taking a “haircut.” Appoint lawyers who work for borrowers.

Panic

• June 21, 1926, a stockholder charges in court that MDC is insolvent. • Triggers run on Commercial Bank of West Palm Beach (president, a Mizner partner). • State bank examiner closes bank on June 28. • Next day runs on Manley-Anthony banks. • In Georgia 83 banks failed in next few days, yielding second wave of runs in Florida.

What was the impact on the Florida/US economy?

• Shock from financial system’s collapse: Unexpected jump in Southern bank rates in 1926. Defaults and bank failures raise cost of funds---higher user cost of capital. Fall in construction. • Shock from housing price collapse: Expectations of future house-prices drop, producing fall in demand for construction and aggregate demand.

• Shock to consumption from fall in wealth: Current mpc out of wealth est. 4 ¢ for $1. But is mpc out of housing alone greater? Uncertain today.

• Credit-channel effects on consumer spending: Lower house prices may increase the credit constraints on households as equity declines. Today important if lose access to home equity. 1920s problem of short-term loans. S&Ls 50% of market offer 10-12 year amortizable loans; banks 40% of market offer 2-4 year loans partly or not amortized.

Total Effect on Florida?

• • No measures of decline of state GDP • But, would a regional crisis matter?

Or

was it a national problem?

Florida part of a National Boom

U.S. Nominal Housing Prices

100 95 90 85 80 75 70

1919 1920 1921 1922 1923 1924 1925 1926 1927 1928 1929 1930 1931 1932 1933

Florida partly answers the U.S. Investment Puzzle

• Why does 1926 represent the peak of U.S. aggregate investment. • Largest component in decline is construction. 1926-1929 falls 19% • Peter Temin (1976) no evidence of demographic from immigration restrictions or other factors.

• No rise in interest rates • Only increase in 1929-- business investment, reflecting higher stock prices.

18 16 14 12 10 8 6 4 2 0 1919 1920 1921 1922 1923 1924 1925 1926 1927 1928 1929 1930 1931 Gross Investment Construction

End of Housing Boom a Key: Number of New Building Permits

300 250 200 150 1925 100 50 0 19 19 19 20 19 21 19 22 19 23 19 24 19 25 Total 19 26 19 27 19 28 19 29 Residential 19 30 19 31 19 32 19 33

Non-Farm Residential Share of Total Construction Value 1919 1925 1929 23.6% 45.1% 33.3%

The Double Bubble 1925-1929

• Collapse of the First Bubble – Florida (US?) land boom does not derail the economy 1926-1929 – But it lowers investment and weakens balance sheets of banks and households.

• Continued low interest rate, low volatility environment 1926-1929. Hot money moves to?

• Second Bubble: Wall Street: 1928-1929 • Fed switches its policy 1929 – Excessively tight monetary policy to “pop” the stock market bubble – October 1929 Crash, Bank Failures Rise 1930 – Multiple Shocks Deepen Contraction

Similarities 1920s 2000s

• Real Estate Bubble  Stock • Stock Market Bubble  Real Market Bubble Estate Bubble • Post-Bubble 1: low interest rates maintain consumption • Failure of Regulation to control exposure to risk and Supervisors to identify exposed banks • Post-Bubble 1: low interest rates maintain consumption • Failure of Regulation to control exposure to risk and Supervisors to identify exposed banks • 1 st Crash weakened balance sheets of banks. • 1 st Crash little effect on banks. • Increased susceptibility to 2 nd Crash  Bank Failures • 2 nd Crash weakens bank balance sheets  Restructure?

• Wealth effects & Higher interest rates  Consumption • Wealth effects & Higher? interest rates  ????????

& Investment Drop

Differences: Unanswered Questions

• Stock market and Real Estate Booms of late 1990s/2000s appear larger? Why?

• Is it Integrated Markets? Higher Wealth? Credit more Fungible?

• Is consumption and investment more or less susceptible to crashes?

• BUT…even if 1926-1929 was smaller, it packed a wallop.

Monetary Policy Lessons from 1926-1929

• Did the Fed precipitate the bubbles?

– No Taylor Rule test. But, Fed moved back to prewar interest rate levels.

– Expansionary monetary policy begun in the spring of 1927 to ease pressure on the British balance of payments. – Fed Board member Platt: “Lower [the discount rate] and to hell with the stock market.” – But Fed tightens policy in 1928 and there is little increase in total money or credit for 1928-1929.

– Yet, conditions better: Miron (1986) suggests that Fed reduced danger of panics by reducing seasonality in interest rates compared to pre-Fed era. – May have induced optimism------a “Greenspan” put?

Monetary Policy Lessons from 1926-1929

• Should the Fed have intervened to deflate bubble?

– Ignored Real Estate Boom. – Obsessed about Stock Market Boom 1929.

– Tries Moral Suasion then Tightens Policy 1928 1929 – Standard lesson of 1929 is that Fed mistakenly focused on the stock market bubble, tightening credit at the outset of a recession

Supervision Lessons from 1926-1929

• Did Bank Regulators identify the risk exposure?

– Examiners supposed to use market values to determine quality of assets and bank solvency. – Disclosure: OCC Elimination of surprise call reports 1916 (though surprise examinations continue) – Practices largely known: Examination records are secret---information treated as proprietary not public.

– It is clear ex post, that many banks balance sheets had deteriorated in the late 1920s.

Supervision Lessons from 1926-1929

• Did Bank Regulators act correctly?

– Multiple supervisors—OCC, Federal Reserve, States---squabbling, overlap and competition (race to the bottom?) – At state level, greater insulation and discretion for bank supervisors increased number of failures. – Some evidence of forbearance contrary to established policy. – Is increased transparency required?

– Quis Custodiet Ipsos Custodes?