Early Chicago’s Real Estate Bubble

In the 1830s, Chicago was a small town whose future as a logistical and commercial center would have seemed doubtful. It was not even the largest city in its region and the local geography was, without improvement, not particularly remarkable. Yet, the town captured the interest of settlers and speculators as transformative waterway improvements and an urban street grid were devised just as financial conditions became conducive to real estate purchases on credit. The result was a bubble that sent the price of lots purchased for $100 in the early 30s to tens of thousands of dollars in value by 1836.

Frontier Settlement

Completion of the Erie Canal in 1825 brought more settlement to the Great Lakes region. The economic character of the area also evolved; the vicinity of Chicago was previously connected to the world economy through the fur trade. As the 19th century went on, Chicago became a larger commercial center for a broader array of goods. Further improvements to transport, even before the arrival of the railways, were crucial to making this happen. Improvements to the harbor at the mouth of the Chicago River began in the 1820s with the cutting of a channel through a sandbar. Further, the breakup of shipping monopolies and the advent of steamboats made the distant location of Chicago less of a hinderance.

Though there were still hurdles for the town; Lake Michigan froze over for a third of the year and there were alternative entrepots between the east and west of the continent. St Louis was a more established existing city and even Milwaukee was a larger town in the 1830s. There would, of course, be plenty of room for more than one large midwestern city; even more so when the government was keen on investing in improvements in the Western territories of the United States, then including Illinois. The federal government stood to gain from land sales at a minimum price of $1.25 an acre.

Credit

Real estate bubbles are virtually always accompanied by a surge in credit availability. The credit environment swung wildly in the 1830s. In a bid to fight speculation, President Andrew Jackson stripped the Bank of the United States of privileges that, when liberalized so that other banks could take advantage of them, led to a credit boom, despite the President’s opposite intention. Further, he moved federal government deposits to numerous private banks around the country and these deposits fueled new lending. In turn, western banks doled out credit liberally. The President, realizing that financial speculation was increasing rather than decreasing as the Bank of the United States withdrew, would change course and restrict credit, but not until 1836.

Before that happened, an expanding money supply kept interest rates low. Providing loans secured by real estate were numerous banks. During the bubble years, the state of Illinois chartered a bank, the State Bank of Illinois, that lent to land buyers. It was capitalized with $1.5 million, and its own activities were complemented by those of other banks.

Canal

Just as the Erie Canal fostered settlement of the Great Lakes, other canal projects were greeted with much excitement. Plans to build the Illinois and Michigan Canal, a ninety-six mile waterway linking the Illinois River with the Chicago River, were devised. This canal would connect the Great Lakes, and with it the Erie Canal and the Atlantic Ocean, to the Mississippi River. It would connect cities as far apart as New York and New Orleans by internal waterways. The canal was funded by a federal land grant, giving the canal developers land they could sell off to fund the project. The new canal was accompanied by improvements to the Chicago River including the cutting of a new channel into Lake Michigan, which would be funded in 1833 and completed in 1837.

At the start of the decade, James Thompson, a surveyor, set out a street plan and a division of the town into building lots on behalf of the Illinois and Michigan Canal Commissioners. His grid is the foundation of the Chicago Loop to this day. The town’s population was still just 3,820 people in 1836, the year work began on the Illinois and Michigan Canal. However, lots along the Chicago River were already receiving interest from investors; by contrast, lakefront real estate was comparatively less desirable because of rough lake conditions.

Real Estate Boom

In the end, lots all over the city would garner buyer demand. The canal project was fuel for massive interest in Chicago real estate. Investors saw how the Erie Canal had transformed upstate New York as towns developed around the canal and Buffalo was transformed into a fairly major city. In the area around Chicago, settlers bought land from the government. At this time, sales of land meaningfully supplemented taxes as a source of federal government revenues. Public lands were offered relatively cheaply; for reference, at the going rate for federal lands, all the land in Chicago was worth just $168,800 in 1830. Of course, urban land near the settled part of town would sell at premiums to the $1.25 per acre minimum price on federal lands but in a sale of lots in September 1830, the highest price paid for any 80-by-180 foot lot on the Chicago River was still just $100.

It was not only settlers buying Chicago land; foreigners and investors in the eastern United States also bought land via agents. The city’s grid pattern with numbered lots made long-distance land deals easier to broker and execute. Lot sales totaled $2.4 million in 1832, quite a lot for such a small town. Still, though they had risen, prices in 1832 were not much higher than in 1830. However, rather curiously perhaps, a lot of money was sunk into idle land outside the town itself, in the periphery where there was no one interested in developing or renting property as Chicago was yet to grow into its grid.

Overall though, prior to 1834, land was usually bought by legitimate developers or those who had at least some vision of developing the land they purchased. Thereafter, speculative buyers became dominant. With the profits involved as land appreciation accelerated, it’s easy to see why. One speculator said that flipping lots for only a 100% gain was considered a poor outcome. A lot on South Water Street that sold for $42 in 1830 was re-sold in November 1833 for $800 and prices would rise still further from here. The next year, a corner lot on South Water and Clark Street sold for $3,500, ten times the sale price for this same lot in 1832.

Prices were still to peak. Dixwell Lathrop, sent to buy land on behalf of an investor, found the going rate of $155 per frontage foot for water-facing lots extreme and told his investor in June 1835 that he was likely going to refrain from buying and would simply return his money to him. The mania did not peak until the following year. In fact, things were just getting started for some in 1835. William B. Ogden, later elected Chicago’s first mayor in 1837, was speculating in land in the city he had only arrived in in 1835.

That $3,500 corner lot on South Water and Clark Street resold for $15,000 in 1835. In 1836, a fur trader who had bought two lots in 1831 for $80 sold them for $80,000. Lots on Lake Street that sold for $300 in 1834 sold for $60,000 two years later. In 1836, land sales in Chicago came to $24.9 million, ten times the volume from just four years earlier. As values rose and credit was plentiful, people lived on money borrowed by means of loans secured by land. This no doubt supported a high standard of living, momentarily at least, as Chicago was a net importer of merchandise financed by borrowing.

Crash

Just as the beginning of the land bubble was a product of President Andrew Jackson’s financial policies, so was its end. The ‘Specie Circular’, issued by Washington in 1836, required purchases of public lands be made in gold or silver rather than in banknotes and required banks to withdraw money from circulation. The credit previously extended by western banks could no longer fuel the Chicago bubble. Interest rates rose and land sales tumbled. Just as demand shrank, infrastructure improvements increased developable land, increasing supply. By 1836, there was enough subdivided land in Chicago to house 50,000 people when the population was not even one-tenth that. The city’s grid fanned out six to ten miles in parts, yet it lacked the population for such a large breadth.

As the bubble began to deflate, demand dropped but asking prices remained high. In part, this was because sales of government land could only be done at a fixed price. However, the number of closed sales fell sharply. Then national financial panic ensued in 1837 partly the result of the abrupt change in the government’s policies. That year, sales of federal government land fell more than 95%. Illinois banks suspended specie payments like the withdrawal of deposits or the redemption of banknotes for precious metals.

Land values in Chicago fell below their levels from 1833, before the bubble really swung into high gear. By 1840, there were many empty buildings in the town. Still, the bubble had burst just as canal construction got firmly underway; spending on the canal would keep the local economy afloat and other new improvements came despite the depression. The town saw a theater and hospital open in 1837 and even a medical college in 1839.

The Illinois and Michigan Canal finally opened in 1848. In the meantime, the city’s population grew despite the crash. Delivering an 1836 speech at the opening of the new canal, a judge on the Illinois Supreme Court projected that Chicago could have 20,000 inhabitants in twenty years, 50,000 inhabitants within fifty years, and 100,000 within a century. In reality, the population exceeded that pace; its population reached the first of those milestones, 20,000 people, in just twelve years.

Lesson

From shortly after its founding to 2008, real estate bubbles and real estate crashes have been fairly commonplace in the United States. Internal migration to the west or south, often accompanied by infrastructure improvements, sparked much of the frenzy each time. Each of them, from the 1790s frontiers to 1920s Florida, was also fueled by a phase of abundant credit, particularly credit secured by the appreciating real estate itself.

More from the Tontine Coffee-House

Read about land bubbles in 1920s Florida and 1980s Tokyo. Consider subscribing to this blog’s newsletter or checking out book recommendations, which include many of the sources often referenced in my posts.