The U.S. economy slips into recession. The stock market takes a tumble as heady expectations for future growth cool. Interest rates fall as the Federal Reserve quickly trims the discount rate in hope of cushioning the business cycle.Here are some snips from Frederick Lewis Allen's Only Yesterday.(1931):
The low interest rate environment sets off a massive wave of home construction and an asset bubble in real estate. By the time the Federal Reserve takes action, the boom is completely out of control. Bank balance sheets and household savings have become dependent on the profound mispricing of real estate and other equity holdings.
The heedless extent of leverage makes the financial system extremely vulnerable to capital losses. As the housing bubble implodes, it pushes the economy into a long, deep recession.
This is the economic story of the last decade -- and of the 1920s.
After a sharp deflationary recession at the end of World War I, the newly created Federal Reserve slashed interest rates, setting off a housing bubble of such an incredible scale that it dwarfs its recent counterpart. When the bubble ended, what seemed to be a calm and contained contraction turned violent, culminating in the macroeconomic implosion of the Great Depression.
Milton Friedman and Anna Schwartz famously pinned the Great Depression on passive tightening of monetary policy, and Fed Chairman Ben Bernanke and other scholars highlighted the role of the gold standard and the collapse of international monetary order. But economists and commentators have largely overlooked the role of housing in the causation and intensification of the Great Depression.
After an encore performance of macroeconomic calamity, this long-standing oversight deserves correction.
A graph of the interest rates of the 1920s shows a U-shape. After curbing the inflationary excesses of World War I with a discount rate of 7 percent at the Federal Reserve Bank of New York, the Fed brought interest rates to 3 percent and below by the middle of the decade.
As expectations of growth returned, the persistence of low interest rates directed investment into real estate. Facilitated by a massive boom in mortgage financing, prices soared. In New York City, the value of real estate rose 80 percent in real terms, with even larger increases for higher-end speculative properties, according to one study.
The magnitude of the 1920s bubble was even more impressive in terms of construction. Housing starts more than doubled, as did the real value of residential construction. That is four times as large as the housing boom of the 2000s.
The culture of the 1920s also emphasized home ownership and home improvement, a grim precursor to sentiment in the last decade. Following a surge of interest, the magazine Better Homes and Gardens was founded in 1922, taking its name from a now-forgotten public policy initiative, the "Better Homes Movement." No fewer than three presidents -- Warren Harding, Calvin Coolidge and Herbert Hoover -- encouraged home ownership and investment through public campaigns....MORE
“There was nothing languorous about the atmosphere of tropical Miami during that memorable summer and autumn of 1925. The whole city had become one frenzied real-estate exchange. There were said to be 2,000 real-estate offices and 25,000 agents marketing house-lots or acreage. The shirt-sleeved crowds hurrying to and fro under the widely advertised Florida sun talked of binders and options and water-frontages and hundred thousand-dollar profits; the city fathers had been forced to pass an ordinance forbidding the sale of property in the street, or even the showing of a map, to prevent inordinate traffic congestion....
...“For this amazing boom, which had gradually been gathering headway for several years but had not become sensational until 1924, there were a number of causes. Let us list them categorically....
...A lot in the business center of Miami Beach had sold for $800 in the early days of the development and had resold for $150,000 in 1924. For a strip of land in Palm Beach a New York lawyer had been offered $240,000 some eight or ten years before the boom; in 1923 he finally accepted $800,000 for it; the next year the strip of land was broken up into building lots and disposed of at an aggregate price of $1,500,000; and in 1925 there were those who claimed that its value had risen to $4,000,000. A poor woman who had bought a piece of land near Miami in 1896 for $25 was able to sell it in 1925 for $150,000. Such tales were legion; every visitor to the Gold Coast could pick them up by the dozen; and many if not most of them were quite true-though the profits were largely on paper. No wonder the rush for Florida land justified the current anecdote of a native saying to a visitor, "Want to buy a lot?" and the visitor at once replying, "Sold."
...As a matter of fact, it was due for a good deal more than that. It began obviously to collapse in the spring and summer of 1926. People who held binders and had failed to get rid of them were defaulting right and left on their payments. One man who had sold acreage early in 1925 for twelve dollars an acre, and had cursed himself for his stupidity when it was resold later in the year for seventeen dollars, and then thirty dollars, and finally sixty dollars an acre, was surprised a year or two afterward to find that the entire series of subsequent purchases was in default, that he could not recover the money still due him, and that his only redress was to take his land back again. There were cases in which the land not only came back to the original owner, but came back burdened with taxes and assessments which amounted to more than the cash he had received for it; and furthermore he found his land blighted with a half-completed development.
Just as it began to be clear that a wholesale deflation was inevitable, two hurricanes showed what a Soothing Tropic Wind could do when it got a running start from the West Indies.
No malevolent Providence bent upon the teaching of humility could have struck with a more precise aim than the second and worst of these Florida hurricanes. It concentrated upon the exact region where the boom had been noisiest and most hysterical-the region about Miami. Hitting the Gold Coast early in the morning of September 18, 1926, it piled the waters of Biscayne Bay into the lovely Venetian developments, deposited a five-masted steel schooner high in the street at Coral Gables, tossed big steam yachts upon the avenues of Miami, picked up trees, lumber, pipes, tiles, debris, and even small automobiles and sent them crashing into the houses, ripped the roofs off thousands of jerry-built cottages and villas, almost wiped out the town of Moore Haven on Lake Okeechobee, and left behind it some four hundred dead, sixty-three hundred injured, and fifty thousand homeless.
...By the middle of 1930, after the general business depression had set in, no less than twenty-six Florida cities had gone into default of principal or interest on their bonds, the heaviest defaults being those of West Palm Beach, Miami, Sanford, and Lake Worth; and even Miami, which had a minor issue of bonds maturing in August, 1930, confessed its inability to redeem them and asked the bondholders for an extension.The cheerful custom of incorporating real-estate developments as "cities" and financing the construction of all manner of improvements with "tax-free municipal bonds," as well as the custom on the part of development corporations of issuing real-estate bonds secured by new structures located in the boom territory, were showing weaknesses unimagined by the inspired dreamers of 1925....“The final phase of the real-estate boom of the nineteen-twenties centered in the cities themselves. To picture what happened to the American skyline during those years, compare a 1920 airplane view of almost any large city with one taken in 1930. There is scarcely a city which does not show a bright new cluster of skyscrapers at its center. The tower building mania reached its climax in New York-since towers in the metropolis are a potent advertisement-and particularly in the Grand Central district of New York. Here the building boom attained immense proportions, coming to its peak of intensity in 1928. New pinnacles shot into the air forty stories, fifty stories, and more; between 1918 and 1930 the amount of space available for office use in large modern buildings in that district was multiplied approximately by ten. In a photograph of uptown New York taken from the neighborhood of the East River early in 1931, the twenty most conspicuous structures were all products of the Post-war Decade. The tallest two of all, to be sure, were not completed until after the panic of 1929; by the time the splendid shining tower of the Empire State Building stood clear of scaffolding there were apple salesmen shivering on the curbstone below. Yet it was none the less a monument to the abounding confidence of the days in which it was conceived.The confidence had been excessive. Skyscrapers had been overproduced. In the spring of 1931 it was reliably stated that some 17 per cent of the space in the big office buildings of the Grand Central district, and some 40 per cent of that in the big office buildings of the Plaza district farther uptown, were not bringing in a return; owners of new skyscrapers were inveigling business concerns into occupying vacant floors by offering them space rent-free for a period or by assuming their leases in other buildings; and financiers were shaking their heads over the precarious condition of many realty investments in New York. The metropolis, too, had a future, but speculative enthusiasm had carried it upward a little too fast.”
Here's how they marketed:
The Great Miami Hurricane was referenced in this release from the NOAA:Increased Hurricane Losses Due to More People, Wealth Along Coastlines, Not Stronger Storms, New Study Says
...The results illustrate the effects of the tremendous pace of growth in vulnerable hurricane areas. If the 1926 Great Miami Hurricane were to hit today, the study estimated it would cause the largest losses at $140 billion to $157 billion, with Hurricane Katrina second on the list at $81 billion.