A boom generates inflationary psychology. Imported consumer goods are costly; local land values rise even more. Borrowers see the real value of their debts falling, offsetting some or all of their interest payments. Such expectations come to be the mark of the shrewd, knowing, cutting-edge, state-of-the-art inside-dopester, whose expectations come to be considered more "rational" than those of conventional old fogeys. Today, this kind of thinking is apotheosized in "rational expectations," the Chicago-School economists' answer to Divine Omniscience.
Thus inspired, people take on mountains of debt that they cannot service unless the market keeps rising.
f. The promotional wiles [25] of engineers, contractors, financiers, empire builders, materials sellers, et al.
The same kind of folks who sold the pyramids, the Tower of Babel, Angkor Vat, the Mayan-Aztec Temples, the Great Wall of China, the long canals of Peru, the Roman roads and aqueducts, Irish famine relief through road-building, the Yukon-San Diego Aqueduct, The Rancho Seco, Three Mile Island, and Chernobyl Nuclear Generating Stations, The Washington Public Power Supply System, and other sterile or abortive monuments are busily at work in all times and places. These sellers played on the fears and ambitions of public leaders, who need "experts" to intimidate the public. They got paid up front, leaving the public to clean up their messes.
The U.S. Army Engineer Corps was in there. They dredged the Chicago Harbor, using Federal dollars. They were the agent for implementing Henry Clay's "American System," a compromise whereby eastern states got tariff protection, and western states got Federal aid for internal improvements. It's been called "The Great American System of Public Works for Private Gain." This was an early way of distributing Federal surpluses to the states: "River and Harbor Improvements" became synonymous with "pork-barrel politics" early on. Thus the surpluses were turned into capital all right, but often it was capital of low productivity and long, long deferred payoff.
Chicago came off well in this Congressional bargaining. It got its Federal aid, and then the S. Carolina Nullification Crisis of 1832 forced the tariff, which was raised in 1828, back down anyway. Besides, as a potential industrial site, Chicago was positioned to gain from the tariff, too.
20. Artificial abundance of land for sale was caused by:
a. Speculative holdouts pushed prices up high, and held them there too long.
b. The market responded slowly but massively, adapting capital to this artificially high land price level.
Macro-infrastucture like The Erie Canal, and Mississippi River improvements, were justified by tapping and enhancing lands that were worth it at the higher price level.
Micro-infrastructure like streets in Chicago. Hoyt found that in 1836 there was enough subdivided land in Chicago to house and support 50,000 people, when the actual population was 4,000.
Intensification of private land is the most intuitively obvious result of high land prices.
21. Capital import inevitably was overpowered by debt service. That has to happen as debt rises, which it cannot do forever. That forces a new city back on its basic, long-term export industries and services. As it and its competitors seek to expand those, the terms of trade turn against them: more supply means lower prices.
Chicago then was like many third-world nations today, e.g. Mexico and Nigeria with their oil. As they turn to debt service, human and other resources previously used to build new capital (exporting IOUs) must be turned to exporting real goods. If they are one of many in the same position, that lowers prices of their exports and puts them on a downward price treadmill.
22. At the national level there were only blue skies and smooth sailing. In 1835 the national debt was totally extinguished, and surpluses mounted swiftly from soaring land sales and excise taxes. Pres. Jackson deposited the surpluses in private banks around the country, giving them reserves on which to expand fast. They loaned to speculators to buy more Federal lands, raising the surplus still more.
In 1836 Texas won independence from Mexico, giving spirits a lift. No powerful nation threatened our rapid westward expansion.
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