Category Archives: Economic History

The Controversy Over the 1920’s Housing Cycle

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Michael Brocker and Christopher Hanes write (NBER, $)

We find that cities which had experienced the biggest house construction booms in the mid-1920s, and the highest increases in house values and homeownership rates across the 1920s, saw the greatest declines in house values and homeownership rates after 1930. They also experienced the highest rates of mortgage foreclosure in the early 1930s. These patterns look very much like those around 2006, despite the gap between the house-market peak in 1925 and the businesscycle downturn in 1929. They are consistent with a bubble. They show that the effects of the mid-1920s boom on house markets were still present as of 1929. They suggest that in the downturn of the Great Depression house values fell further, and there were more foreclosures, because the 1920s boom had taken place.

This appears to be part of a conference volume. The introduction to the volume, ungated and recommended, is by Kenneth Snowden.

The conference volume also includes Gjerstad and Smith, who view the housing cycle as important in the Great Depression. But we saw that Alexander Field, another author in the conference volume, disputes the view that housing leverage was important in the 1920s and 1930s.

So confusing! I think that all of these economic historians agree that the 1920s boom peaked in 1925. All seem to agree that the economy survived the ending of the boom quite well until 1930. Apparently, the big decline in house prices took place in the 1930s, although the authors note that good data on house prices for this period is lacking. Note also that there was general deflation, so that the decline in real house prices was much less than in our recent financial crisis. Of course, that is of little comfort to someone who borrows at a positive nominal interest rate.

Based on this, I am reluctant to assign housing a major causal role in the Depression. If the big decline in house prices took place in the 1930s, then that could be an effect of, or a part of, the overall Depression. Note, however, that the authors write,

This [the cross-sectional correlation between severity of house price declines in the 1930s and the extent of the construction boom in the 1920s] remains true when we control for measures of the local severity of the depression – changes in family income, changes in retail sales – or for changes in average rents.

The Snowden piece is filled with interesting background information, such as

The home mortgage market of the 1920s grew even more rapidly than the nonfarm housing stock, with nonfarm residential debt tripling (from $9 to $30 billion) in less than a decade, while the ratio of debt to residential wealth doubled from 14 to nearly 30 percent

He summarizes other papers in the volume, including one by Eugene White.

He argues that the double liability rule faced by bank shareholders and the restrictions on mortgage lending meant that both national and state-chartered banks were well-capitalized relative to the modest risks that they carried on real estate loans.

White argues that although there were some common factors that affected the banks during the building booms of the 1920s and the 2000s…the important difference between the two episodes is that banks were induced in the modern period to participate in risky real estate finance by a set of policies that were missing in the 1920s—deposit insurance, the “Too Big to Fail” doctrine, and federal subsidization of risky mortgage lending and securitization.

The Narrative of American Public Education

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On p. 153 of Why Philanthropy Matters, Zoltan J. Acs writes,

Early Americans in New England and the Chesapeake region, and later throughout the West, established schools in the majority of towns and villages. There was no legal requirement to do this, nor any norm adapted from other countries. Among white Americans, the literacy rate was arguably the highest in the world by 1800.

This contrasts with the Goldin-Katz narrative of American exceptionalism in education, which is that universal public schooling was our unique contribution. This made me wonder whether universal public schooling was a sui generis innovation or a government take-over of a system that already was working well. Searching around, I found an article from The Freeman in 1983, by Robert A. Peterson.

for two hundred years in American history, from the mid-1600s to the mid-1800s, public schools as we know them to day were virtually non-existent, and the educational needs of America were met by the free market. In these two centuries, America produced several generations of highly skilled and literate men and women who laid the foundation for a nation dedicated to the principles of freedom and self-government.

…A study conducted in 1800 by DuPont de Nemours revealed that only four in a thousand Americans were unable to read and write legibly.

David Warsh on The Chosen Few

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He writes,

it is the Jews themselves who are seen to have done the choosing, having begun two thousand years ago, after their war with the Romans, when the hawks perished and the doves chose to require everyone in their community to learn to read. If the story of the Jews is to be rethought – beginning with the invention of primary education and universal literacy – then the history of humankind must be rethought as well including, for instance, the central role the Islamic Empire played as well.

This may be the first you have heard about The Chosen Few, but I pretty much guarantee you that it will not be the last.

So, should my next online course be something on the Jews and the economy? It could include selections from The Chosen Few, Jerry Muller’s The Mind and the Market and Capitalism and the Jews, and Brian Doherty’s Radicals for Capitalism, Jonathan Entine’s Abraham’s Children, George Gilder’s The Israel Test, Thomas Sowell, …

Possible issues:

1. How and why have Jews differed occupationally from the general population?
2. What other minority groups have played comparable economic roles?
3. What accounts for Jewish economic success?
4. How has Jewish economic behavior influenced anti-semitism, and how has anti-semitism influenced Jewish economic behavior?
5. How have Jewish thinkers influenced political economy, and how has economics influenced Jewish thinkers?
6. Relative to other Americans, are Jews more capitalist or more anti-capitalist–or both?
7. Does the economy of the modern state of Israel validate or invalidate Jewish stereotypes?
8. Does Israel exemplify Jewish capitalism or Jewish anti-capitalism–or both?

Ralph Raico and the Three-Axes Model

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Don Boudreaux offers an hour-long video of a talk by Ralph Raico in 1986. I found it well worth watching.

In three-axis terms, Raico begins his talk by saying that we consistently are taught to think of the role of government during the Industrial Revolution along the oppressor-oppressed axis. He ends his talk by saying that the welfare state’s origins in Germany should be viewed along the freedom-coercion axis.

In my forthcoming e-book on the three-axis model (not sure when it will appear, because I have just begun the process), I point out that every partisan blames the media for pushing the (false) narratives of the other side. Thus, it is quite typical for libertarians to complain about the false narrative of the Industrial Revolution and to try to supply the “true” narrative.

Having said that, and keep in mind that I put myself in the libertarian camp, I think that Raico makes a very good case, at least in the first half of the talk. That is, progressives tell a story in which whenever laissez-faire breaks out for a while, it has horrible consequences in terms of oppression, until government rescues the common man. A quarter-century after his talk, that is exactly how progressives tried to frame the financial crisis. Concerning the Industrial Revolution, this oppressor-oppressed narrative with government as savior is, as Raico points out, a baloney sandwich.

The Unintended Consequences of God

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In The Chosen Few, Maristella Botticini and Zvi Eckstein offer an explanation for how Jews wound up in high-skilled, urban occupations. They argue (p. 95) that between 200 and 650 AD,

world Jewry became a small population of literate individuals (“the chosen few”). The unintended consequences of the religious ruling that required Jewish fathers to invest in their sons’ literacy and education fully displayed themselves

Jews became much more literate than other populations, but at a cost of numbers, as those who could not afford to educate their sons converted to other religions. Over this time period (p. 113)

the general population decreased by about 12 percent, whereas the Jewish population collapsed by roughly two-thirds

In those days, most people were farmers, for whom literacy’s costs generally outweighed its benefits. However, in an urbanized society with skilled occupations, literacy pays off. As urbanization gradually increased in the late Middle Ages, Jews came to fill high-skilled occupations. Botticini and Eckstein argue that literacy, rather than persecution, is what led Jews into these occupations.

Urbanization is a very important process in economic development. Jane Jacobs made that argument convincingly. So has Ed Glaeser. Specialization and trade take place in cities, by necessity and by convenience. Without modern transportation, rural areas are cut off from trade. Even today, city dwellers account for a disproportionate share of wealth.

This year’s Super Bowl commercial featured Paul Harvey speaking on the theme that God created the farmer. The commercial has a lot of overtones along the civilization-barbarism axis. If Harvey is correct, then God’s gift of the bible to the Jews had some unintended consequences. Ultimately, according to Botticini and Eckstein, the first monotheists embarked on a course that ultimately led them away from farms and into the urban world of specialization and trade.

What I’ve Been Reading

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Coolidge, by Amity Shlaes. (Should she have titled it The Forgotten Man?) In the end, I found myself more interested in the times in which he lived than in the man himself. For example, immigration restriction really came to the fore during his Presidency. What were the forces that produced it? Was it part of the Progressive era (tied in with eugenics and Prohibition, perhaps), part of a general post-WWI xenophobia (Palmer raids, Ku Klux Klan), or the result of changes in political economy due to urbanization and industrialization? I found myself longing for more context on some of these issues. As it is, the book is long, but that is because she is trying to zero in on Coolidge–what he did and how he thought.

If You Could Change History

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One of Tyler Cowen’s readers asks,

Which avoidable/contingent event in history did the greatest harm? (e.g. the burning of the library of Alexandria)

As Tyler points out, you never know whether avoiding catastrophe X could mean that worse catastrophe Y is in store. But with that caveat, when I think of avoidable events that did harm, here is what comes to mind:

World War One. You can start with the direct, immediate harm, in terms of death and destruction. Then proceed to the post-war flu epidemic, the Communist Revolution in Russia, the collapse of Germany and subsequent rise of Nazism and a second world war; the retreat from globalization and the destabilized world economy, which arguably helped to cause the Great Depression; the fondness that American leaders developed for central planning during the war, which was highly influential in the way that they responded to the Depression–a lot of New Deal initiatives that ratcheted up government were inspired by World War I era government boards.

In summary, before the first world war, global trade was expanding, governments were small, and many people lived in peace. The war unleashed numerous plagues, some of which are still with us a hundred years later.