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Land Booms, Capital Stretch-Out, And Banking Collapse

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3.   The amplitude of cycles was greater on the economic/geographic fringes than at the core.   This refers to cycles in population, land values, and economic activity.

a.   Chicago was at the macro fringe of settlement based on New York State's Erie Canal, opened in 1825.   Besides that canal, there was new freedom of competition in shipping, barging and steamboating on rivers and the Great Lakes: in 1824 the U.S. Supreme Court outlawed shipping monopolies (Gibbons v. Ogden).  

Chicago held what we now realize is a key macro-geographic site, a continental crossroads and a breaking point.   Its importance was not yet clear to all contemporaries, however, so it was marginal for its times.  

b.   Amplitudes were higher, percentagewise, 6-10 miles from central Chicago than at the city center.

4.   New building in Chicago depended on the flow of capital imported from the east; the U.S. depended in part on capital imported from Europe.   We were a colonial economy, with heavy foreign debts and absentee ownership.

5.   Capital import took the form of consumer goods, i.e. an import balance.   Ships returned east with sand for ballast.   What did the sellers get in exchange?   Read on!

6.   Chicago lived by exporting IOUs.   These were secured mostly by Chicago real estate.   Hence, the volume of imports varied as a function of the level of land prices, and also with their liquidity. [18]   Lord James Bryce, an English visitor, observed that "Many a place has lived upon its boom until it found something more solid to live on; ... "

7.   Market agents (buyers and sellers) knew that cities are highly interdependent and synergistic.   In a period of rapid growth, optimistic buyers acted as though complementary buildings and public facilities were already in place, or soon would be.   Lord Bryce was struck by it: "Men seem to live in the future ...   they see the country not merely as it is, but as it will be, ..."

Owners of central land and old buildings did not oppose, but supported new building, and street extensions bringing more land into the ambit of the central market.   Under boom conditions they are more sensitive to synergy than to competition.   They tolerate logrolling and cross-subsidy, anything to expand the market.   They know they are threatened by rival cities, and they race for the Number One position.   A growing city should be happy, said Bryce, "But there is often a malignant influence at work to destroy happiness in the shape of a neighbouring city, which is making progress as swift or swifter, and threatens to eclipse its competitors."   Some famous rivalries are Phila. v. New York; Chicago v. St. Louis; Seattle v. Tacoma; Charleston v. Savannah; Mobile v. New Orleans; and San Francisco v. Los Angeles.

[Later, in depressions, the reverse attitude sets in: everything competitive is opposed, and local leaders support policies to lock up land, keep it off the market.   The nation has long shown a manic-depressive collective personality.]

The prime example of a key public facility is the Illinois and Michigan Canal, designed to link Lake Michigan and the Great Lakes and St. Lawrence system and Erie Canal with the Illinois River and the entire Mississippi System. [19]   It would exploit the connection to New York opened by The Erie Canal, opened in 1825.   A Federal land grant was given in the 1820s to help finance this I&M Canal.  

Just talking about building The Canal sold lots.   From 1830 on, buyers acted as though this would soon be a fait accompli.   Chicago building and speculation boomed in anticipation.   In the event, however, The Canal was not even begun until 1836, and not usable until 1848.

The social psychology of land booms is revealed in the language used by eye-witness reporters: "mania, epidemic, fever, madness, contagion, rage," etc.   Mob psychology is not comprehended in formal mathematical models, especially those that include words like "rational" among their axioms.   Land is peculiarly subject to herd psychology because its value is based entirely on expectations of the distant future, remote from the realities of today.   Land is irreproduceable, so its value is unchecked by the ability to produce new supplies at a known, finite cost.

There is a steep gradient of land values out from the center, due to internal transportation costs.   This limits the area of land that can effectively be urbanized around the center, in spite of the vast prairies stretching endlessly to the horizon.

8.   This all occurred in a time of peace, profound peace.   The nearest thing to a war was the Black Hawk "War" of 1832, whereby local militia, with little Federal expense, drove the Sauk and Fox Indians from northern Illinois.   The U.S. in these years defended its very long border with few troops and minimal taxes, and was even preparing to distribute a surplus to the states.   The surplus came from booming sales of Federal lands.

The absence of heavy taxes, Federal debts and foreign threats, and the "peace dividend" of a boundless public domain waiting to be exploited, contributed to the optimism that became a mania of speculation.

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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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