Henry L.T. Tideman
[Reprinted from the Henry George Fellowship News,
One of the hard things to understand is how land speculation destroys
the prosperity of people who are not speculating. The question came up
in a social gathering in Which a lady said; "but these home
owners were not speculating, they were buying homes, and the other
people who lost their money when the banks closed were not
speculating. Yet when the banks closed their money disappeared. How
can you say speculation ruined them?" Let us see.
Bill Whosis was a bright young man. An opportunity came to him to buy
a lot having possibility of increasing in value. He made a small
payment down and signed a contract to pay the rest in installments.
Later, the lot having increased in value, he was able to borrow enough
money on it to pay out the contract and make a down payment on another
lot which also promised to increase In value. Now there was a real
estate mortgage on a valuable lot which was known to have doubled or
tripled in value in the last few years. The man who had the mortgage
borrowed money placing the mortgage as security. There were now two
sets of debts in the community on account of that original lot
purchase. The mortgage was part of the securities in a bank. But Bill
Whosis was not alone in the land speculation business. There were
thousands more doing the same thing.
While all this was going on, legitimate business men had to borrow
occasionally to pay a bill or meet a payroll, because laborers cannot
wait for slow bill payers to settle up, or because other business men
have payrolls too. The more successful business men had investments in
"real estate" or real estate mortgages, or the bonds of
other industries or the stock of these concerns. And so, as a result
of their borrowings, a great variety of papers representing different
kinds of value piled up in the bank vaults.
While this was going on, Bill Whosis and his competitors for the
purchase of what seemed desirable investments, as cagily as possible
of course, were boosting the price of lots by their attitude as
investors, as well as by the impractical prices they were asking for
such lots as they already held.
"The assets of some of the big industrial corporations being
principally land, the value of which was seemingly increasing, caused
their stocks and their bonds to be saleable at absurdly high prices.
The people speculating in these papers did not know it, but that lack
of knowledge did not prevent them from being land speculators. Land
value was the principal value in those Investments. With the passage
of some time, the high prices that people were willing to pay for "real
estate" was taken as evidence of prosperity when it should have
beer a warning.
At this point we will leave out several paragraphs of a sad story.
There came a day when a lot of people awoke to the fact that a lot of
banks had been closed and that their depositors' money was not
available. No one could question the honesty of the bankers; they had
not run away with the money. Oh, there were individuals, yes, but in
the main, they were a fine lot of merely not so smart human beings,
like the rest of us.
So committees were appointed to examine the closed banks. What was
the verdict? The bank was loaded up with "frozen" assets.
What were "frozen" assets? They were pieces of "real
estate" which could not be quickly sold for the amount of the
loan. Was the loan excessive? It was not excessive at the time it was
made. It probably was "very conservative" and the borrower
had fairly "signed his life away" for the protection of the
bank, but as conditions were on the day after the crash, everybody
could see it was excessive then. So, too, they found a lot of
mortgages that few could and no one would buy, to say nothing of a lot
of commercial paper which might have been good except that the failure
of the bank itself prevented the commercial paper from being cleared.
So the lady was right: "those home owners were not speculating,
and the other people who lost their money when the banks closed were
not speculating". But they were the victims of speculation. Such
is the economy of nature.
If land speculation hurt only those speculating it would perhaps be
well to ignore it. But the fact is that to encourage land speculation,
as our law does, is like encouraging people to cook in an explosive