Speculation

Henry L.T. Tideman

[Reprinted from the Henry George Fellowship News, September, 1936]

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 plant.