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Life Arts

Land Booms, Capital Stretch-Out, And Banking Collapse

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25.   Much publicity went to Pres. Jackson's "Specie Circular" of May, 1836.   After that, the Federal Land Office would not accept bank notes for public lands, except from banks that settled their balances in specie, and except from bona fide settlers.   Apparently there were only few of those: in 1837, sales from the Federal Land Office dropped to 3.6% of those in 1836. [26]

The Land Office had been selling mainly to speculators, financed by "wildcat" banks that printed their own notes.   Jackson demanded "specie," a term of the times for gold and silver.   He was either tired or apprehensive of getting burned by "wildcat" banks.   He did continue to accept bank notes from banks that settled in specie.

Too much has been blamed on this episode, because of its dramatic and political nature.   If anything, it should have upheld the market for lands previously sold, and may have had that intent.   It meant Federal lands were held off the market.   It did undercut many wildcat banks, thus helping create a shortage of cash in frontier areas.   We will see, however, world banking was about to collapse anyway.   We will also see from the   Illinois case, banks depended heavily on the collateral value of lands already sold, more than the prospect of lending on lands not yet sold.

26.   In January 1837 Pres. Jackson began distributing the surplus to State governments, as authorized by Congress six months earlier.   This staved off crisis for a few months, causing the cycle to have a double peak.

27.   In May 1837, N.Y. banks suspended specie payments.   New York had its own problems, of a similar kind.   New York City, despite its advanced age, had never previously developed anywhere near its potential, partly due to the aristocratic landholding system that aborted development of its Hudson Valley, plus the New England orientation of settlers who developed the upstate Mohawk Valley.  

This was New York's first great boom, and it went as wild as Chicago, and fell as hard.   Perhaps it went wilder: it had the misfortune of a good credit rating.   For a few years before 1837, 90% of the cost of government in New York City was spending on new streets, financed by local improvement bonds.   After 1837, its speculative land values melted away like snow in the April sun. [27]   Buffalo, at the west end of the Erie Canal, also had a wild ride.

New York banks were also under pressure from England.   When we were discovering canals, they were discovering railroads, with similar results.   Chicago's crisis, like most crises, was a small scene of a vast worldwide drama.

Suspensions swept the south and west.   At the end of May, Illinois banks suspended specie payments.

A general liquidity crisis followed.   People scrambled to convert real goods into cash.   Converting normal provisions into cash is an everyday occurrence: loans on such collateral are "self-liquidating."   On the other hand, converting huge volumes of real estate into cash is extraordinary, and cannot be done.   There aren't buyers.   What resulted was total collapse of sales.   Demand dropped but asking prices held.   Result: sales (measured by deeds recorded) fell like a stone.   Cf. southern California, 1989-93.

28.   Subdividing land came to a complete halt, 1837-43.  

29.   Asking prices for land held until mid-1839.   Then, finally, they dropped by 75% overall, and 90% on the most speculative fringes.   1842 was the nadir, when most construction everywhere came to a complete standstill.

30.   The Illinois State Bank foreclosed on lands but could not sell them.   It failed, 1842.   Many marginal wildcat banks failed earlier.

31.   Indiana and several southern states declared bankruptcy, repudiating their state bonds, ruining their credit for years to come.   (This severely weakened the Confederate States in the Civil War.)

32.   The tide of migration ebbed back east (even as it is today from California).   Chicago's population fell; houses lay vacant.

33.   Revival began around 1844, leading to another peak and crash in 1857, following nearly the same patterns.  

"When will they ever learn?" could have been written much earlier, and probably will play again.   Make sure you, at least, learn now.   In 1987-90 I had students study this material, and asked on the final if they saw any danger of its happening again now.   Almost everyone answered "It can't happen here."   Thus, most people get caught up in the mass delusion.   Be you, rather, the rare one who learns from history!   In time!

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Mason Gaffney first read Henry George when a high school junior , and became notorious among his classmates for preaching LVT to them . H e served in the S.W. Pacific during W.W. II, where he observed the results of land monopoly in The (more...)
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