19th Century Kansas Farmland Prices

It is a bright, sunny morning here in London. What a wonderful day to blow something up!

But poor Sajida Mubarak al-Rishawi must feel terrible. The woman is a failure, an incompetent. She went to a wedding with her husband; both wore explosives. Both had pledged to blow themselves to smithereens to make a point about something-or-other. But then she couldn’t get her bombs to go off.

So you see, dear reader, things don’t always work out as you had hoped. But sometimes incompetence is rewarded and they do work out better than you deserve.

We bring that up for no particular reason. It just seemed like a cheery way to start off an article.

It also illustrates how explosive situations can be hard to control.

Occasionally and accidentally, things go well. Occasionally they go badly. Every once in a while things seem to “blow up” — even when they were thought to be under control. And often the things that were expected to keep them under control are the very things that cause them to explode.

We illustrate this point with an episode from that fair age before the invention of air-conditioning or reality TV…the late 19th century. From Grant’s Interest Rate Observer comes the story of the great bubble in real estate prices west of the Mississippi. Kansas farmland went up four to six times between 1881 and 1887, according to scholars who’ve studied the matter. The price of land rose as high as $200 an acre.

The source of the hot air was a combination of things. Nature was rarely kinder to the Great Plains than in the years following the War Between the States. It rained out on the prairies, raising crop yields to levels many thought unsustainable. And then came the railroads. Between 1880 and 1887, Kansas doubled the mileage of rail lines. In that same decade, railroad mileage quadrupled in Nebraska and rose 11 times in the Dakota Territory. Now, farmers not only had bumper crops, but also a way to get them to market. Could there be any doubt that this was not a cyclical boom, but a genuine new era?

Investors thought so. Not only did they rush to buy up the flat land in the trans-Missouri region, they also drove out to lend money to the farmers. Mortgages on these western farms were considered safer than their eastern equivalents — partly because of the expectation of good yields, but largely because a bubble mentality had set in. Western farmland looked like such a sure thing, everyone wanted a piece of the action…either a section of land, or a derivative on it, such as a mortgage.

Typical of a bubble, what begins as little, ends up as too much; it wasn’t long before investors had overbought the western lands and farmers had overproduced the grains that were supposed to support their mortgages. You could sell a bushel of corn for 63 cents in 1881. By the end of the decade, you couldn’t get half that much. Then, in 1887, the weather that had been so unusually good came to an end in a stretch that was unusually bad. A 10-year drought began, in which crops failed about every other year.

It was not a new era, after all. As the crops withered, so did the mortgage market. In the last three years of the decade, mortgage lending fell to only 10% of the previous three years’ activity. Land prices fell. Farmers went bust, handing their land over to the mortgage holders, who by then were no longer happy to get it. The farmers themselves left the plains, either west to California or back to the Mississippi Valley.

Farmers and speculators might have learned their lesson. Or they might not. Out of the experience — and falling agricultural prices generally — came a call that political authorities heard with both ears. We should not crucify debtors (farmers who had mortgaged their land) on “a cross of gold,” said William Jennings Bryan. We should not, “press down upon the brow of labor,” a crown of thorns, he went on in glorious humbug. It bothered William Jennings Bryan and the other populists, that people had to pay back loans in currency just as valuable — or even more valuable — than the stuff they borrowed. They demanded a more “flexible” legal tender. Eventually, the call was turned into action; the Federal Reserve was created to make sure that no borrower ever after, had to make good on his debts. Since the Fed was created, the paper dollar has lost about 95% of its value…with a nearly 50% loss during the time of Alan Greenspan alone.

Those who think property prices always go up may want to take note. Today, after huge population growth and nearly 35 years since a debtor was last crucified on a cross with the least trace of gold content, Kansas farmland sells for an average of $800 per acre. Adjusted to 1880 prices, that is only about $20, or barely 10% of the peak prices set 120 years ago.

• Foreign investors own half of all U.S. government debt. Unfortunately, they seem to be losing their appetite for it just as the big courses are being served. In the next quarter, the feds will borrow a record $171 billion to finance wars and hurricane reconstruction projects. U.S. debt already offers the highest yields among the G-7 nations. Even so, recent sales have shown reluctance on the part of foreigners to buy more; they are picking the stuff up at only half the rate as last year. “The Levy Institute estimates that the amount we will owe to foreigners will hit $8 trillion dollars by 2008,” Addison Wiggin told Bob Brinker of ABC news radio this weekend. “That’s 60% of current GDP.” “If we WERE paying off that debt [which we aren’t], that means 6 out of every 10 dollars made in America would go to paying off a loan overseas. That’s a mortgage nobody can afford, including the U.S. government. And that’s what’s growing every single day…and most of us just don’t know it.”

Bill Bonner [send him mail] is the author, with Addison Wiggin, of Financial Reckoning Day: Surviving the Soft Depression of The 21st Century and Empire of Debt: The Rise Of An Epic Financial Crisis.