"Boom or Bust: Roger Babson's Beacon in Florida's Fanciful Land Game"
A graduate of MIT and the author of some 50 books, Roger Babson was perhaps best known for his investment newsletter, Babson Reports.
He is also known as the founder of Babson College in Boston, which bears his name.
Babson covered the Florida land boom in the Saturday Evening Post and the New York Times.
He even devoted two chapters to the Florida land boom in his autobiography Actions and Reactions(1935).
Babson argued that every generation in Florida ever since the 1880s had experienced a land boom.
Babson saw a similar story unfolding across generations of speculators.
“There has never been more than one Florida boom within one generation. It has been impossible to catch the same people twice, but it has always been possible to catch each generation.”
Every bout of speculation began with northerners who had tired of cold winters.
They came to Florida and purchased a small piece of land.
They then sold it to those who came after them and reinvested the profits in yet more Florida land.
They then told their friends up North.
Thus, the cycle of speculation began.
Ironically, at no time have native Floridians been responsible for starting one of these booms. Instead, it was greedy Northerners who propagated the boom-and-bust cycle.
Babson wrote that in Miami, corner business lots sold for $2500 in 1920 and sold for $50,000 in the spring of 1926.
Shrewd bankers and businessmen from the North would buy business lots starting at $20,000. Then, they would resell them four times a month at a profit of perhaps $5000.
Nationwide newspaper and magazine articles about the “effortless riches” generated by Florida real estate also contributed to the mania.
Wrote Babson: “The whole thing was ridiculous, and yet all the people who bought at these outrageous prices expected to sell at a profit.”
“Pandemonium reigned,” wrote Babson. “(t)here were more Rolls-Royces and Lincolns in the State of Florida in 1926 than in any other state in the country.”
Babson claims the bust might not have been so bad if buyers and sellers had speculated only with cash.
But as with all financial bubbles, speculators became greedy as the boom gathered steam. Leverage quickly entered the picture.
Florida real estate was usually sold on installment plans. This practice both multiplied the number of transactions and boosted prices.
When the collapse came, speculators remained in denial.
Wrote Babson:
“Most people did not realize until the spring of 1927 that the boom had ended; yet, land boom statistics reached their zenith in September, 1926. When the tide turned, the boom quickly collapsed.”
Bank failures came in 1931. About three-fourths of the banks in Florida closed.
The collapse of municipal bonds soon followed.
Florida communities had launched municipal bonds to pay for municipal buildings, roads, causeways, and bridges to accommodate the exploding population.
These bonds yielded a modest 6% interest and were exempt from federal income taxes.
Yet, when the bubble popped, these ‘municipals’ gradually began to default.
By the end, seven out of eight of the cities of Florida refused to pay either principal or interest.
Even Babson himself fell victim to the collapse.
“I bought largely without visiting these Florida cities and seeing for what purposes the money was being spent. If I had done this, I would have seen that most of this money was being spent, at the solicitation of irresponsible real estate promoters and contractors, for the building of asphalt roads through undeveloped property which would not be occupied for fifty years.”
Babson wrote this analysis of Florida land booms in 1935.
Yet, his analysis of Florida real estate as the object of generational boom and busts has turned out to be remarkably relevant today- most recently, through the real estate boom and bust cycle in the 2000s.