An 1897 Boom and Bust Retrospective

This retrospective came to me via Alphaville and Option ARMageddon.

Way back in in 1897, L.M. Holt wrote a paper entitled “Panics and Booms”. When Holt wrote the paper, the economy was at the tail end of a depression that had begun in 1892. Holt argued that booms always follow busts, so folks should anticipate the return of flush times. Five years later, a new boom was in full swing, and a newspaper republished Holt’s paper as a warning that the next depression was due around 1910, give or take.  Option ARMageddon writes that “the Bank Panic of 1907 arrived a bit ahead of schedule.”

Here is a snippet of the paper:

During prosperous times, there being work for all, all are supplied with the means of accumulating wealth, and thus all are enabled to provide themselves, and families with all the necessaries, and many of the luxuries, of life; and hence, during the prosperous times the demand for goods and property increases and soon the demand exceeds supply, and then prices advance.

This rule, which is applied to the laborer, is also applied to the business man. Prosperous times induce business men to branch out in their several lines of trade…. The volume of trade being large, each gets a corresponding proportion of it. Many business men find that they can do more business than is allowed by their limited capital. They then buy on credit.

Prices are continually advancing, therefore they are able to make margins of profit not only on the capital furnished by themselves, but on the capital furnished through their credit.

This rule also applies to people dealing in real estate. The country is growing; money is easy; the times are good; business is prosperous and therefore speculation is favored. A man worth $5000 can buy four times that amount of property using his credit, and sometimes he buys ten times that amount or more. While prices are advancing he not only gets the benefits of the advance in the price of the property represented by the capital furnished by himself, but also on the capital furnished by his credit.

When prices of property and goods during a period of business depression are falling, the loss does not come on the entire property, but only on that portion of it represented by the cash capital the man has invested in it. The debt never shrinks until the real investment is all gone.