Source: Visual Capitalist
From the Archives
Very happy to say that the online financial history course I launched last November on Bubbles, Manias & Fraud has now reached almost 450 students!!
The course boasts more than six hours of content split into 37 videos across seven riveting topics like Railway Mania, the South Sea Bubble, Brewery Mania, and more. Students are taught this fascinating material by the world’s foremost investors and financial history experts.
Ever since the clock struck midnight on New Years Eve 2019 there have been predictions about whether the United States would once again experience a “Roaring Twenties” like the 1920s.
While much of these comparisons boil down to the simple fact that we are entering a “Twenties” decade, there are admittedly stark parallels to the 1920s. While we did not endure a World War, we did suffer through a pandemic like the Spanish Influenza of 1918. While contemporaries of that period endured an even worse experience by facing a pandemic and world war, the feelings today and back following such hardships are similar: “time to let loose and let the good times roll.”
In today’s post we will dive into the “Roaring Twenties” from a financial history point of view, and consider what elements may be similar to today. However, I also want to pose the idea that there is another period of American history that might better characterize the modern era: The Gilded Age.
The Gilded Age
One of the articles in today’s post describes the Gilded Age era well:
“The Gilded Age in US history spans from roughly the end of the Civil War through the very early 1900s. Mark Twain and Charles Dudley Warner popularized the term, using it as the title of their novel The Gilded Age: A Tale of Today, which satirized an era when economic progress masked social problems and when the siren of financial speculation lured sensible people into financial foolishness. In financial history, the term refers to the era between the passage of the National Banking Acts in 1863-64 and the formation of the Federal Reserve in 1913. In this period, the US monetary and banking system expanded swiftly and seemed set on solid foundations but was repeatedly beset by banking crises.
The adjective ‘gilded’ means covered with a thin gold veneer on the outside but not golden on the inside. In some ways, this definition fits the nineteenth century banking and monetary system. The gold standard and other institutions of that system promised efficiency and stability. The American economy grew rapidly. The United States experienced among the world’s fastest growth rates of income per capita. But, the growth of the nation’s wealth obscured to some extent social and financial problems, such as periodic panics and depressions.”
This was the age of Robber Barons like Jay Gould and Titans of Industry like John D. Rockefeller. During this period (1870s to early 1900s) there was unprecedented technological innovation and economic growth. It was in this era that the United States produced railroads, the telegraph, stock tickers, etc. However, it was also an era infamous for manipulation, corruption, and monopolies.
Obviously the rampant market manipulation of that era is not anywhere near the same levels in markets today, but there are some similar themes between today and the Gilded Age.
- Fears over corporate influence in politics, and elected officials being controlled by monopolies.
- Technological innovation and progress.
- Inequality stemming from technology and financialization.
- Mass consumption and consumerism.
- Strong economic growth.
- Rising tensions between labor and capital.
We will dive into some more of these later on, but I wanted to let that idea simmer in your head as you read through the rest of today’s post. Everyone is focused on the Roaring Twenties, but there are elements of the Gilded Age at play in modern society, too.
“Money Printer Go Brrr” & Inflation
While researching the Gilded Age for today’s post I stumbled upon an excellent summary from the New York Times of an 1873 illustration in Harper’s Weekly related to inflation and the Panic of 1873. I found similarities between today’s inflation fears / Fed “money printing” and this period, but read it for yourself:
“Published in the midst of the Panic of 1873, this cartoon portrays President Ulysses S. Grant as a watchdog guarding the U.S. Treasury from Wall Street speculators who are seeking a bailout from the federal government. Lawyer Reverdy Johnson (left) presents a brief for financier Cornelius Vanderbilt (right), as Uncle Sam warns the two men not to provoke the Grant bulldog.
The Panic of 1873 and the subsequent depression had several underlying causes, of which economic historians debate the relative importance. Post-war inflation, rampant speculative investments (overwhelmingly in railroads), a large trade deficit, ripples from economic dislocation in Europe resulting from the Franco-Prussian War (1870-1871), significant property losses in Chicago (1871) and Boston (1872) fires, and other factors put a massive strain on bank reserves, which plummeted in New York City during September and October 1873 from $50 million to $17 million.
Unable to meet payment demands, many banks and other financial institutions suspended their operations. The first sign of trouble occurred on September 8 when the New York Warehouse and Securities Company closed its doors, and a week later, financier Daniel Drew’s firm of Kenyon, Cox, and Company followed suit. It was the failure of Jay Cooke and Company on September 18 that sent Wall Street into a panic. Jay Cooke, who had been instrumental in marketing government bonds during the Civil War, had a reputation for making substantial profits honestly and cautiously. However, Cooke had also caught the railroad fever, and the failure of his Northern Pacific Railroad caused his financial house to collapse. Two other prominent firms closed the same day, and 37 more on September 19.
On a trip to Philadelphia to enroll his son, Jesse, in a private academy, President Grant was a guest at Cooke’s mansion on the night of September 17. When Cooke learned of his personal financial disaster the next day, he did not inform the president, who returned to Washington none the wiser. Once back in the nation’s capital, Grant learned of the events, and politicians began pressuring him to increase the money supply with government-printed “greenbacks” (paper currency backed by government authority, not gold or silver). On September 20, the New York Stock Exchange announced it was suspending transactions for ten days. Grant quickly set off for Manhattan, where he met the next day with a group of business and financial leaders.
The businessmen and brokers enthusiastically favored inflating the currency with more greenbacks, while the bankers were as adamantly opposed to it. As a “hard-money” man who advocated a return to the gold standard, Grant decided against printing more greenbacks. Instead, the Treasury Department put more greenbacks into circulation by redeeming several outstanding bonds, and thereby avoided undermining the value of the dollar with inflated currency. Banks also announced that they would use short-term certificates as cash until their reserves were replenished. The reaction of the national press was, like this cartoon, largely favorable to the president’s tight money policy. The New York Stock Exchange reopened on September 30, and while stock prices continued to be low, the panic was over.
At first, many thought the problem affected only Wall Street, but the panic actually marked the beginning of a long economic depression for the entire nation. Over the next five years, tens of thousands of businesses failed, hundreds of thousands of people were left unemployed, private relief programs had difficulty meeting the needs of the destitute, and numerous labor strikes erupted, most notably a violent railroad strike during the summer of 1877.
In his annual message to Congress in December 1873, President Grant proposed a national monetary clearinghouse to monitor currency movements throughout the country (similar to the Federal Reserve Board established in 1913). Congressmen, though, looking to expand the money supply with more greenbacks, introduced 60 “inflation” bills within weeks after the president’s message. On April 14, 1874, Congress passed an inflation bill that would increase the nation’s money supply by $100 million. President Grant had previously endured poverty and been adversely affected by the Panic of 1857, so he genuinely sympathized with the motivations behind the bill and those it was trying to help.
However, on April 21, Grant vetoed the bill, arguing that any short-term benefit would be far outweighed by the long-term damage done to the national economy by the inflation it would generate. The financial community and major newspapers, such as Harper’s Weekly and The New York Times, applauded the courageous decision. Grant’s veto was also important because it swung the pendulum back toward the “hard-money” politicians, who in 1875 passed the Specie Resumption Act. The law scheduled the United States to return to the gold standard (with silver as a subsidiary currency) on January 1, 1879. The economic depression continued through 1878 with more bankruptcies and high unemployment, but the overall economy, in fact, grew during those years. In 1879, with the country back on the gold standard, the United States experienced several years of unprecedented economic expansion.”
Sounds like modern debates surrounding Fed policy, stimulus checks, inflation, etc. right?
Okay, let’s dive in to today’s post!
Why This is Relevant:
The COVID-19 housing market boom has been well-documented, but recently there has been another Real Estate boom more digital in nature… Bloomberg reports:
“Investors may not be clamoring to buy offices and hotels right now, but in virtual reality, property deals are surging and attracting millions of real-life dollars. It was inevitable, then, that someone would start a fund.
Republic Real Estate, a firm that’s raising money to buy distressed condos in the physical world, is launching an invite-only fund next week aimed at investors seeking to buy virtual land. The venture plans to purchase parcels across several online “metaverses” and develop them into virtual hotels, stores and other uses, with the goal of increasing their value among cryptocurrency enthusiasts. The minimum investment in the Republic Realm Digital Real Estate Fund is $25,000…
Plots sell daily in online worlds such as Decentraland, a virtual place with its own economy, currency and social events calendar, accessible to anyone with a web browser. And values for such assets are multiplying.
This year through March 15, the average price paid per parcel in Decentraland was $2,703 — more than triple what it was in 2020, according to NonFungible.com, which tracks the sales. Land prices quadrupled in the metaverse called Cryptovoxels, from $821 a parcel last year to $3,895 in the first two and half months of 2021.
While NFTs may be spurring the digital real estate boom, this paper covers another novel investment vehicle that fuels real estate booms: securitized instruments. Author William Goetzmann writes that:
“Early commercial real estate securities brought economies of scale to small real estate investors, exposed the public to poorly supported assertions of asset value, depended on the financial strength of a few large intermediaries, and ultimately buckled under the top-heavy burden of greater demand for financial assets than for their underlying real properties.”
“This paper quantifies the scale and scope of the commercial real estate mortgage bond market in the period surrounding the 1920s in an attempt to better understand the role of retail mortgage debt in early urban development. In particular, this paper quantifies the size of the market, identifies risk factors affecting the coupon yield spread over Treasuries and utilizes a unique data set to construct a commercial mortgage price index over the period 1926-1935.
A substantial retail appetite for real estate securities during this period may have significantly contributed to a real construction boom, but overly optimistic speculation in these securities may have led to overbuilding. The rapid deterioration of these securities and a near complete drop in issuance show, ex post, that investors were overconfident in building fundamentals during the boom years. The breakdown in the value of real estate securities as collateral assets preceded the crash of 1929 and may have contributed to the fall of asset prices more generally.”
“While real estate bond issuance accounted for nearly 23% of all corporate debt issuance in 1925, it dropped to just 0.14% by 1934. The market vanished, and the bond houses, some of which held the most trusted names on Wall Street, quickly followed. By nearly every measure, real estate securities were as toxic in the 1930s as they are now…
Optimism in financial markets has the power to raise steel, but it does not make a building pay.”
Why This is Relevant:
While the Federal Reserve is an ever-popular target for investor’s ire, this paper reflects back on the myriad of banking panics that occurred before the Fed’s founding in 1913. The authors dive into what commonalities were shared across most of these panics, and why, for example, most of them occurred in the Fall.
“The Gilded Age in US history spans from roughly the end of the Civil War through the very early 1900s. Mark Twain and Charles Dudley Warner popularized the term, using it as the title of their novel The Gilded Age: A Tale of Today, which satirized an era when economic progress masked social problems and when the siren of financial speculation lured sensible people into financial foolishness. In financial history, the term refers to the era between the passage of the National Banking Acts in 1863-64 and the formation of the Federal Reserve in 1913. In this period, the US monetary and banking system expanded swiftly and seemed set on solid foundations but was repeatedly beset by banking crises.“
“The adjective “gilded” means covered with a thin gold veneer on the outside but not golden on the inside. In some ways, this definition fits the nineteenth century banking and monetary system. The gold standard and other institutions of that system promised efficiency and stability. The American economy grew rapidly. The United States experienced among the world’s fastest growth rates of income per capita. But, the growth of the nation’s wealth obscured to some extent social and financial problems, such as periodic panics and depressions.”
Why This is Relevant:
This week my conversation with Jack Farley on Real Vision was released, and in our discussion we cover everything from NFTs to 17th century short-selling. This 68 minute interview is available to Real Vision subscribers, but I believe there is a $1 trial that you can sign up for if you’re not currently a RV subscriber.
Why This is Relevant:
Investors have always enjoyed the added thrill of investing in “new frontiers”. Today there are hundreds of billions of dollars chasing investments in space exploration, but in the first few decades of the 20th century there was a different but very exciting “new frontier”: Florida. As the New York Times stated:
“In 1925, some 7,000 people seeking a new life and perhaps a new fortune entered Florida each day. In Massachusetts alone, owners of more than 100,000 bank accounts used their savings to invest in Florida land. Deposits in Florida banks increased 400 percent in three years. Ohio politicians were so shocked by the size of the wave of cash flowing southward that they banned Florida real estate firms from doing business in their state.”
If you are looking to learn even more about this episode of American history, I would highly recommend this book: Bubble in the Sun
“Although long obscured by the Great Depression, the nationwide ‘bubble’ that appeared in the early 1920s and burst in 1926 was similar in magnitude to the recent real estate boom and bust. Fundamentals, including a post-war construction catch-up, low interest rates and a ‘Greenspan put,’ helped to ignite the boom in the twenties, but alternative monetary policies would have only dampened not eliminated it.
Both booms were accompanied by securitization, a reduction in lending standards, and weaker supervision. Yet, the bust in the twenties, which drove up foreclosures, did not induce a collapse of the banking system. The elements absent in the 1920s were federal deposit insurance, the ‘Too Big To Fail’ doctrine, and federal policies to increase mortgages to higher risk homeowners. This comparison suggests that these factors combined to induce increased risk-taking that was crucial to the eruption of the recent and worst financial crisis since the Great Depression.“
“What was absent in the 1920s and what, by comparison, seems to have been central to today’s far greater disaster, were policies that induced banks to take increased risks. In the twenties, there was no federal intervention in mortgage markets. Far more households rented; and the boom only increased homeownership from approximately to 50 percent of households, while the early twenty-first century boom drove up homeownership from 65 to 69 percent. Because it provided new mortgages to homeowners with significantly lower incomes and wealth, many features of the recent boom were more extreme even if these are not easily quantifiable. While contemporaries in the 1920s may have decried buildings and loan associations’ innovations that permitted mortgagors effective down payments of only 20 percent, it seems like very conservative lending compared to zero down payment loans that characterized some mortgages in the 2000s. Similarly, while securitized mortgages in the twenties obscured some of the risk present in a pool of mortgages, there was more risk to be hidden in subprime loans and hence the greater degree of complexity of more recent securitized products. This higher level of risk is apparent in the aggregate foreclosure rates of recent stable economic times that often exceeded the foreclosure rates of the post-1926 bust and the Great Depression.
Furthermore, in the twenties, bankers were not tempted by moral hazard from deposit insurance or the “Too Big to Fail” policy to take more risk on or off their balance sheets. In fact, the general imposition of double liability on bank stock may have induced bank managers, subjected to greater monitoring by shareholders, to reduce risk-taking. However, this is not to say that the regulations governing the banking system of the 1920s made it particularly resilient to shocks. The dominance of small undiversified single office banks translated shocks from the post-World War I collapse in agricultural prices and the Great Depression into waves of bank failures.
Yet, faced with incentives set by the market and policy, banks and other financial institutions in the 1920s remained prudent, modestly lowering lending standards and increasing their holdings of mortgages. When the bust came, large losses did not accrue to them; and the most risky securitized mortgages were held by investors, not leveraged financial institutions. Banks and other intermediaries survived until the Great Depression unexpectedly hammered the banking system and homeowners, causing the great housing boom and bust of the twenties to fade from memory.”
Why This is Relevant:
There are elements of the Gilded Age that appear in society today. One is the concentration of wealth in select individuals. This paper looks at the great fortunes made during the Gilded Age.
“This paper explores the origins of the great fortunes of the Gilded Age. It relies mainly on two lists of millionaires published in 1892 and 1902, similar to the Forbes magazine list of the 400 richest Americans. Manufacturing, as might be expected, was the most important source of Gilded Age fortunes. Many of the millionaires, moreover, won their fortunes by exploiting the latest technology: Alfred D. Chandler’s “continuous-flow production.” A more surprising finding is that wholesale and retail trade, real estate, and finance together produced more millionaires than manufacturing. Real estate and finance, moreover, were by far the most important secondary and tertiary sources of Gilded Age fortunes: entrepreneurs started in many sectors, but then expanded their fortunes mainly through investments in real estate and financial assets. Inheritance was also important, especially in older regions.”
“The increase in wealth inequality was produced, first, by industrialization. Many of the richest capitalists of the Gilded Age – the “Robber Barons,” as their critics knew them – gained their initial edge from the new technology of mass production; Alfred D. Chandler’s “continuous-flow production.” The Robber Baron was seldom the individual who invented a new technology, nor the first to apply it, but rather the first to use a new technology to achieve a decisive advantage in costs.”
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