Lessons from
The Great American Real Estate Bubble:
Florida 1926
Eugene N. White
Rutgers University and NBER
Venastul, Norway
February 13-15, 2008
First Double Bubble
The Florida Land Boom, 1925-1926
& the Stock Market Boom, 1928-1929
• Boom
– Fundamentals
– Bubble Formation
– Fraud
• Bust
– Precipitating Factors
– Financial Consequences
– Real Consequences
• Policy Lessons
– Monetary Policy
– Banking Supervision
WARNING: WITH DIGRESSION FOR COLORFUL DETAIL
Why Florida?
• Florida realtor W.E. Bolles (1922).
– “In Florida we have climate with a capital C.
Elsewhere they have weather. If the
historians did not insist otherwise, I would feel
inclined to believe the Garden of Eden might
have been somewhere in this land of flowers.
I was born in Michigan and developed enough
sense to move to Florida.”
– “Florida’s future is before her. She is a
sleeping giant just beginning to stir. Her
population will double in five years and will
treble in ten years.”
• Not quite, but
– Population 1920:
968,470
– Population 1930: 1,468,211
Florida Fundamentals 1880-2007
Percentage of U.S. Population
Population Density
7
400
6
350
300
P e r s o n s p e r S q u a r e M ile
5
250
P ercen t
4
200
3
150
2
100
1
50
0
0
1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2007
1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2007
United States
Florida
Some Basic “Original” Geography
• North: rolling hills
of the old Cotton
Belt
• Middle: land
flattens with
numerous lakes,
Gainesville to Lake
Okeechobee
• South: the
Everglades, a sea
of grass and
swamp
A pre-World War I Frontier
• Post-Civil War discovery of the winter
climate of the South
• The wealthy built winter homes
• Arrival of promoters and developers---in
1880 there are no railroads and minimal
roads.
• Problem of coordinated investment in
swampy region
• Henry Flagler, formerly of
Standard Oil Company.
• His Florida East Coast Railway
brings tourists to hotels operated
by his Florida East Coast Hotel
Company and sells them land
from his Model Land Company.
Also a steamship line, utilities and
newspapers.
• Railway links Jacksonville with
West Palm Beach (1884) Miami
(1896) Key West (1912).
• Centerpiece is Palm Beach---the
exclusive preserve of the wealthy
• Builds Royal Ponciana Hotel
(gambling!) and his own home.
The Flagler
System
The Big Problem of South Florida--The Everglades
Solution: Drainage
Drainage Canal
Everglades, 1912
• 1905 State creates the Everglades Drainage District.
• Some real estate development but most of South
Florida’s activity are citrus & phosphate mining
• World War I halts development
Post World War I Return to Stable
Price Level and Interest Rates
Inflation and Interest Rates
20
15
Percent
10
5
0
1900
1905
1910
1915
1920
-5
-10
Inflation--CPI
Commercial Paper Rate
1925
Post-World War I Innovations
• Prohibition: 18th Amendment to Constitution
(1918) & Volstead Act (1920) prohibit
manufacture, sale or transportation of alcohol.
– Florida’s long coastline is smuggler’s paradise for
alcohol from Cuba and Bahamas.
– Dry governors and mayors turn a blind eye---Tourists
drink & gamble.
• Transportation Innovations: the Automobile
– The Model T
– Federal Highway Act of 1921 promotes harmonization
of state road systems. Designation of U.S. Highway
1---runs from Maine to Key West.
– Florida passes a gasoline tax in 1923, 2/3 of revenue
to State Road Department.
Widespread Adoption of the Flagler System
to Solve the Problem of Coordination
• Large-scale projects that require huge
investments to drain whole areas
• Purchase of a “water lot” was rational---need
initial joint/public investment.
• Ventures combine:
–
–
–
–
–
Drainage
Transportation
Land Companies
Finance
Marketing
• Problem: Little transparency and not an armslength deal in sight (conflicts of interest)
“[The dredges] are all
busy on the Florida coast, Dredging & Reclamation:
digging ditches and crossA 1920s Canal Boom
ditches that appear on
subdivision plats as canals
with romantic names.
You see the sandsuckers dumping excavated
material upon submerged
land until it rises to the point
where it may optimistically
be called dry.
If you don’t build too
soon, the houses won’t
crack calamitously. Should
your canals connect with a
little river or the coastal
waterway, your own little
motor boat can ride to your
Everglades Dredging 1920s
landing,”
---Gertrude Shelby (1926)
Examples: Three Grand Promoters
• Addison Mizner:
Boca Raton
• Carl Fisher:
Miami Beach
• George Merrick:
Coral Gables
…and many more
large and small
Carl Fisher & Miami Beach
•
•
•
•
•
•
Millionaire headlight manufacturer.
Established first automobile dealership in U.S.
Organized the Indianapolis Motor Speedway.
Transportation---Miami for the Middle Class
In 1913, he conceived of the first East-West U.S.
paved highway, the “Lincoln Highway”.
• In 1914 he promoted the “Dixie Highway” from
Indianapolis to Florida. He leads the first
caravan to Miami in 1916.
• He refinanced an incomplete 2.5 mile bridge to
Miami Beach. Opens 1913 to the unpopulated
barrier island.
The Dixie Highway 1924
Carl Fisher & Miami Beach
• Drainage: Fisher filled in the mangrove swamps of
Miami Beach by dredging sand from the Biscayne Bay.
• Will Rogers: “Fisher was the first man to discover that
there was sand under the water…that could hold up a
real estate sign. He made the dredge the national
emblem of Florida.”
• Built the Flamingo Hotel and a casino with a “Roman”
swimming pool and a “Dutch” Windmill. He promoted
the Biscayne Beach Speed Boat Regattas.
Promotion of Miami Beach
• Marketing: Huge lighted winter billboard in New
York's Times Square proclaiming "It's June In Miami.”
• 1919 First lots sold on Miami Beach—3 day auction.
Event complete with carnival, music, bathing beauties--and Carl and Rosie the elephants. Homes and
Hotels in Mediterranean-revival style.
George Merrick & Coral Gables
• Transportation: As a
County commissioner pushed
U.S. Highway 1 and the
Tamiami trail to connect the
future Coral Gables.
• Land Company: Obtains
10,000 acres of pine and
citrus forms the Coral Gables
Corporation (CGC) to create a
Mediterranean “City Beautiful”
Coral Gables—of boulevards,
golf courses. Establishes
University of Miami. 1925
contracts with American
Building Corporation to build
1,000 homes.
Biltmore Hotel, 1926
• Merrick’s Marketing: By 1923, a nationwide network of 35
real estate offices
• Paid William Jennings Bryan $100,000 a year to promote
Coral Gables---half in cash and half in real estate.
• Bryan, a fixture of Miami’s winter season with his Tourist
Bible Class, become an active civic promoter.
• Hailed Miami as having “what the people must have…God’s
sunshine.”
• He also declared that Miami “was the only city in the world
where you can tell a lie at breakfast that will come true by
evening.”
George Merrick & Coral Gables
• Finance: Coral Gabel Corporation (CGC) is
financed by the system of Florida and Georgia
“chain” banks controlled by W.D. Manley and
J.R. Anthony.
• The vice-president and general manager of the
CGC was president of the Bank of Coral Gables,
a chain member.
• The CGC received loans from chain members---in Florida, Georgia and New Jersey
Formation of the Anthony-Manley bank chain:
• Wesley D. Manley operated the Bankers Trust
Company of Atlanta, a holding company, that
controlled 108 banks in Georgia and Florida.
• Facing resistance from Florida bankers, Manley
formed an alliance with James R. Anthony, Jr.
who had political connections
• They form the Bankers Finance Company of
Jacksonville, owned by Anthony, Manley and his
holding company.
• No national charters had been approved by the
OCC between 1907 and 1921 until Florida
Senator Fletcher intervened with Comptroller of
the Currency for Manley & Anthony.
The Growth of Banking in Florida
Loans and Discounts
400.0
400.0
350.0
350.0
300.0
300.0
250.0
250.0
1921 = 100
1921 = 100
Demand Deposits
200.0
200.0
150.0
150.0
100.0
100.0
50.0
50.0
1921
1922
Florida National Bank s
1923
1924
1925
Florida State Banks
1926
1927
1928
1929
U.S. Com m ercial Bank s
1921
1922
Florida National Bank s
1923
1924
1925
Florida State Bank s
1926
1927
1928
1929
All US Com m ercial Bank s
Corrupt Regulators and Insider Loans
• Corruption:
– State Regulators: Anthony had close ties to Florida Comptroller
Ernest Amos who exercised patronage, by offering charters,
favorable supervision and receiverships in exchange for
campaign funds. Amos received unsecured loans from the
Manley-Anthony banks that he used in real estate speculation.
– Federal Regulators: January 1926, PBNB asks Congressman
Graham (a Mizner partner) to intervene with OCC so bank can
sell more stock. Application received April 1, approval dated
March 11.
• Insider Lending:
– Anthony started the Palm Beach Bank and Trust Company and
takes loans equal to 45% of bank capital. He sells most of
holdings to the new president and vice-president who then
formed the Palm Beach National Bank. They borrow 44% of its
capital, make loans to chief state bank examiner and then sell
bank to new officers.
– By 1925 Anthony and Manley have a chain of 61 banks with
$120 million of deposits in Florida.
•
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
U.S. Inte rest Rates
8
7.5
7
6.5
6
5.5
5
4.5
4
3.5
3
1921
1922
1923
1924
1925
1926
1927
1928
Federal Reserve Discount Rate
Commercial Paper
10 Year Corporate Bond
Southern Bank Rate
Northeast Bank Rate
1929
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.
The Boom:1925 Miami is ranked 9th among America cities
in building with $60 million in new construction.
(not in top 100 cities in size 1920)
Florida East Coast Railw ay
850
750
650
millions
550
450
350
250
150
50
1919
1920
1921
1922
Fre ight Ton M ile s
1923
1924
1925
Pas s e nge r M ile s
1926
Building Permits—Miami and Tampa
Speculative Activity?
Bank De bits to De pos it Accounts
400
350
300
1919=100
250
200
150
100
50
0
1919
1920
U.S.
1921
1922
1923
1924
Atlanta FR Dis trict
1925
1926
1927
Jack s onville
1928
1929
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.
Weekly High
Weekly Low
2 /2 6 /2 6
2 /1 9 /2 6
2 /1 2 /2 6
2 /5 /2 6
1 /2 9 /2 6
1 /2 2 /2 6
1 /1 5 /2 6
1 /8 /2 6
1 /1 /2 6
1 2 /2 5 /2 5
1 2 /1 8 /2 5
1 2 /1 1 /2 5
1 2 /4 /2 5
1 1 /2 7 /2 5
1 1 /2 0 /2 5
1 1 /1 3 /2 5
1 1 /6 /2 5
1 0 /3 0 /2 5
1 0 /2 3 /2 5
1 0 /1 6 /2 5
1 0 /9 /2 5
1 0 /2 /2 5
9 /2 5 /2 5
9 /1 8 /2 5
9 /1 1 /2 5
Land Company of Florida Stock Price
New York Curb Market
$100
$90
$80
$70
$60
$50
$40
$30
$20
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)
July 1924 (III)
October 1926(III)
November 1927 (IV)
August 1929(III)
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
1925 = 100
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
18
16
14
12
1 9 2 9 $ B illio n s
• 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.
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
1925
250
Non-Farm
Residential
Share of Total
Construction
Value
150
100
Residential
33
19
32
19
31
19
30
19
29
19
28
19
19
25
19
19
19
19
19
19
19
Total
27
33.3%
26
1929
24
45.1%
23
1925
22
0
21
23.6%
20
1919
19
50
19
1919 = 100
200
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
• Real Estate BubbleÆStock
Market Bubble
• Post-Bubble 1: low interest
rates maintain consumption
• Failure of Regulation to
control exposure to risk and
Supervisors to identify
exposed banks
• 1st Crash weakened balance
sheets of banks.
• Increased susceptibility to
2nd CrashÆBank Failures
• Wealth effects & Higher
interest ratesÆConsumption
& Investment Drop
2000s
• Stock Market BubbleÆReal
Estate Bubble
• Post-Bubble 1: low interest
rates maintain consumption
• Failure of Regulation to
control exposure to risk and
Supervisors to identify
exposed banks
• 1st Crash little effect on banks.
• 2nd Crash weakens bank
balance sheetsÆRestructure?
• Wealth effects & Higher?
interest ratesÆ????????
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 19281929
– 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?