The Skyscraper Curse: And How Austrian Economists Predicted Every Major Economic Crisis of the Last Century

You could probably go back in history and find examples of the skyscraper curse in structures such as the Egyptian pyramids and medieval cathedrals. Here the review is confined to modern buildings, but we will expand our time horizon to examine records prior to and after the original Skyscraper Index (1907–99). We will also reexamine the one record-setting building, the Woolworth Building, that Andrew Lawrence considered a failure of the index because no curse occurred. As a result of this reexamination, the Skyscraper Index appears more reliable than previously thought.

This reexamination will consider modern buildings with steel-frame construction. The primary criteria for record-breaking projects are the number of floors of livable space and building height, not counting features such as antennas and spires. Those types of adornments are not costly or technologically challenging, compared to difficulties of building taller buildings with more livable space, which have requirements for such things as elevators, plumbing, and temperature control.

The two important inventions that made skyscraper construction feasible were the elevator and the steel-frame construction technique. Prior to the introduction of elevators in the 1850s, construction was typically limited to four-story buildings. Before the introduction of elevators, the lower floors were more highly valued and the higher floors were less highly valued because of the added time and effort of climbing more stairs. This limited the demand to build higher. With elevators, the higher floors became more highly valued, with the exception of first-floor retail space. The introduction of steel-frame construction in the late nineteenth century made it much more cost effective to build taller structures. Steel-beam construction bears the load or weight of taller buildings, and construction can proceed at a faster pace. In contrast, masonry construction requires an ever-larger base to carry the load of taller buildings.

The Equitable Life Assurance Building in New York City is considered by many to be the first skyscraper. Construction was completed in early 1870 and the building opened on May 1. It served as the home of the Equitable Life Assurance Society and was the first office building to feature hydraulic passenger elevators. It had seven floors and set a new record height at 130 feet.

Prior to its opening and approximately when it set the record height, the first Black Friday occurred on September 24, 1869. Jay Gould and James Fisk were attempting to corner the gold market in New York City, but US Treasury officials broke up their plot by selling large amounts of gold. Nevertheless, the economy was adversely affected as the price of gold first skyrocketed and then collapsed. In the aftermath, stocks fell by 20 percent and agricultural exports, the key output of the US economy, declined by 50 percent. According to Robert Kennedy,1 there were several bankruptcies of brokerage firms “and a severe disruption to the national economy for months.” The aftermath has been labeled both a panic and a depression, but not a significant one.

The Home Insurance Building was completed in 1884 in Chicago. It rose to a height of ten floors and 138 feet. Interestingly, two more floors were added in 1890. This building is connected to the panic of 1884 and the depression of 1882–85. While the financial panic was real, the depression that occurred was mostly about deflation and the railroad bubble. According to Victor Zarnowitz,2 his measure of economic activity indicates that the depression was less severe than the panics of 1873 and 1893 and the depression of 1920–21.

The Auditorium Building in Chicago set a new record of seventeen floors and 222 feet to the top floor in late 1889. Meanwhile the New York World Building, also known as the Pulitzer Building, was completed in 1890 with sixteen to twenty floors (depending on how it is measured) and was 309 feet high, setting a new height record.

This cluster of new-record skyscrapers can be linked to the panic of 1890. Also known as the Baring crisis, it involved the near insolvency of Barings Bank in London. The crisis was international in scope, but the most severe impact did not involve the US economy. It should be kept in mind that the United States was becoming the world economic powerhouse, transforming itself from a largely agricultural economy into a manufacturing and service economy. As farmers went to the cities they often took jobs not only in manufacturing, but also in service sectors, such as insurance and sewing machine salespersons. The service industries were a significant component of the demand for office space and hence skyscrapers.

The Manhattan Life Insurance Building was completed in 1894 with eighteen floors and 348 feet in height, setting a new record. Also completed at this time were the American Surety Building with twenty floors and 303 feet in 1895 and the Masonic Temple with nineteen floors and 302 feet in 1892, but they are not widely considered clear record-breaking skyscrapers. Nevertheless, this cluster of skyscraper construction coincided with the largest contraction in US history, culminating in the largest quarterly decline in real GNP in US history and included the panic of 1893, which is thought to have begun six years of double-digit unemployment, although those statistics are still open to debate among economic historians.

The Park Row Building was completed in 1899. It was twenty-six full floors and is at least 309 feet in height: if the three-story cupolas are included its height is 390 feet, which would make it the world’s then-tallest skyscraper. The opening of the building was preceded by the fourth-largest quarterly decline in real GNP over the period of 1875–1918.

The next skyscraper cluster took place between 1904 and 1909. This is the cycle where Lawrence begins his documentation of the Skyscraper Index. It included the Singer Building, which, at forty-seven floors and 612 total feet in height, became the world’s tallest skyscraper when completed in 1908. The Metropolitan Life Insurance Company Tower set another new record in 1909 with fifty floors and 700 total feet in height. Both projects were begun prior to the panic of 1907 and were reaching record heights when the panic occurred. The panic occurred at a time when seasonal factors relating to fall harvests coincided with cyclical factors in credit markets. It ignited in October when a bank regulated under the National Banking Act refused to clear funds for the Knickerbocker Trust Company, an unregulated bank. The result was widespread runs on banks and one of the sharpest downturns in US history. This episode is historically important and of continuing relevance because it is widely considered to be the key event that led to the passage of the Federal Reserve Act in 1913.

It is worth noting that the panic of 1907, like many nineteenth-century panics, is now widely considered to have been caused by the regulatory structure imposed by the National Banking Acts (1863 and 1864). According to Howden,3 the financial instability during this period was not the result of a lack of regulation or unfettered capitalism. According to Michael Bordo, Peter Rappoport, and Anna J. Schwartz,4 the National Banking Acts created a system that was “characterized by monetary and cyclical instability, four banking panics, frequent stock market crashes, and other financial disturbances.” The poor performance of the subsequently adopted Federal Reserve has led many economists to call into question the suitability of a central bank for solving the problems caused by the National Banking Acts.

The Woolworth Building was the world’s next record-breaking skyscraper in 1913. When completed, it stood fifty-seven floors and 792 feet tall. Lawrence saw the Woolworth Building as an exception to, or error in, his Skyscraper Index because there was no curse in the sense that there was no major economic crisis that coincided with the building. There is no famous panic or depression in the history textbooks. Therefore it seems like the Skyscraper Index failed in this case.

However, it would be wrong to consider the Woolworth Building as evidence against the Skyscraper Index. The Woolworth Building project was announced in March of 1910, but at first it was planned to be a modestly tall building. In November 1910 its projected height was increased, but it was still only slated to become the third-tallest building in the world. In January of 1911 the building was re-planned to become one of the tallest buildings in the world at 750 feet, but this figure was later raised still higher to more than 792 feet high.5 The opening ceremonies for the Woolworth Building were held on April 24, 1913, although it was not fully completed until later.6

In fact, the US economy peaked and began to contract in the first quarter of 1913, ahead of opening ceremonies. The economy continued to contract until the fourth quarter of 1914. This contraction included the third-worst quarterly decline in real GNP between 1875 and 1918, and was worse than any quarterly performance between 1946 and 1983. Kaza7 reports that the building’s opening ceremony occurred during a twenty-three-month-long contraction between January 1913 and December 1914. This would clearly qualify this period as a severe recession.

The only reason that American history textbooks do not refer to the depression of 1913 or something else was that World War I was already brewing in Europe and hostilities would break out in mid-1914. WWI was the largest conflagration in human history, resulting in over twenty million casualties of all types. However, in the United States the war created a tremendous increase in demand from Europe for US agricultural products, metal production, and armaments, as well as labor. This event singlehandedly provided stabilization for the American economy and pulled it into an expansion, not an ordinary recovery. While economic historians now know that World War II did not get America out of the Great Depression,8 WWI appears to have prevented the United States from falling into one.

Therefore, it would seem that the Woolworth Building should not be viewed as an exception to or error in the Skyscraper Index. It was simply that World War I in Europe did not provide enough time for the economic slump in the United States to deepen and to justify a historical label such as the depression of 1913.

A reexamination pre-Index of the evidence suggests that the Skyscraper Index is an even better forecasting tool than first presented by Lawrence. First, we have shown that the skyscraper curse occurred several times in the late nineteenth century. Second, the only example of an error of the original Skyscraper Index, when the curse did not happen, has a simple explanation. Our examination of this early period also makes clear that the causes behind both skyscrapers reaching new heights and economic crises emerging are related to government intervention in credit markets.

The next cluster of the world’s tallest buildings occurred at the onset of the Great Depression. Three record-breaking skyscrapers were announced during the late 1920s, when the stock market boom was being matched by booms in residential and commercial construction, as well as in manufacturing. In May 1930, the skyscraper at 40 Wall Street (now the Trump Building) was completed at a height of seventy floors and 927 feet. This was followed by the Chrysler Building in 1930 at seventy-seven floors and a height of 899 feet (925 feet to the roof and 1,046 to the top of the spire). The Empire State Building was completed a year later in May 1931 at 102 floors and 1,224 feet. Clearly, there was a capital-oriented boom in the construction of ever-taller buildings before the Great Depression.

Economists have offered many different explanations for the Great Depression, and Robert Lucas9 has even claimed that it defies explanation. What is clear is that there was a significant increase in the money stock between the founding of the Federal Reserve and the stock market crash, a significant restructuring in banking and bank regulation, a significant decline in the supply of money after the crash, despite the Fed’s best efforts to stop it,10 a significant number of bank failures, and a variety of other important factors that contributed to the initiation and duration of the depression, including the Smoot-Hawley tariff and President Hoover’s and President Roosevelt’s New Deal policies.11

It is also worth noting that Ben Bernanke,12 Milton Friedman and Anna Schwartz,13 and Murray Rothbard14 all place the blame for the Great Depression on the Federal Reserve, but for different reasons. Bernanke believes the problem was that the Federal Reserve failed to bail out systemically important banks in the 1930s. Friedman and Schwartz believe the problem was that the Fed failed to prevent a drop in the stock of money in the 1930s. Rothbard, using ABCT, found the cause to be the Fed’s expansionary monetary policy in the 1920s. These three theories will be reexamined later in the book.

The next major cluster of skyscraper records occurred in the early 1970s. Once again the economy was coming off a strong and sustained boom in economic activity during the 1960s. At the peak of the 1960s boom, construction workers in New York and Chicago were busy building the next group of the world’s tallest buildings. They would break records set back in the early days of the Great Depression. The World Trade Center was completed in 1972 and opened in April 1973. Both of the Twin Towers were 110 floors, with 1 World Trade Center at 1,368 feet in height and 2 World Trade Center at 1,362 feet in height. Then in Chicago, the Sears Tower was completed in 1974, which also had 110 floors but reached a height of 1,450 feet.

The economic downturn of early 1970 marked the beginning of a slump more than a decade long with the then-rare confluences of high rates of both inflation and unemployment. The breakdown of the Bretton Woods monetary system, abandoning the last vestiges of the gold standard, wage and price controls, gasoline shortages, and several recessions occurred between 1970 and 1982. There were several straight months in the early 1980s where unemployment was double digits and interest rates exceeded 15 percent. The US stock market declined in value between 1970 and 1982 by an inflation-adjusted 50 percent. The skyscraper curse for this period is known as the stagflation of the 1970s. This indicates that there was a general depression in the US economy between 1970 and 1982. The experience thoroughly discredited the then-dominant Keynesian school of economics, at least temporarily.

The next skyscraper cycle ushered in the 1997 Asian financial crisis and the dot-com bubble. The Pacific Rim countries, such as Hong Kong, Malaysia, Singapore, Vietnam, and South Korea, experienced significant economic growth during the 1980s and 1990s. Japan was the region’s leading economy, but it was in recession for much of the 1990s. Observers named the smaller regional economies the Asian Tigers. They were considered miracle economies because they were strong and durable despite being small and volatile. The bubble in East Asia was rooted in technology and export manufacturing, but it was fueled by an expansion of money and credit, much of it foreign money seeking high returns for “investors without borders.” This influx of foreign-investment money led to large increases in domestic money supplies and bank lending.

The Petronas Towers were completed in Kuala Lumpur, the capital of Malaysia, setting a new record for the world’s tallest building. They are only eighty-eight floors, but 1,483 feet in height, which breaks the old record by 33 feet. The two Petronas Towers were completed just months before the skyscraper curse hit in mid-1997. It marked the beginning of the extreme drop in Malaysia’s stock market and those around the region, rapid depreciation of local currencies, and even widespread social unrest. Financial and economic problems spread to economies  throughout the region, a phenomenon known as the Asian contagion or, more generally, the Asian financial crisis. The ensuing credit crunch increased bankruptcies and created panic-like conditions.

At the same time, with increased US interest rates and a stronger dollar, the United States became a more attractive investment environment relative to East Asia. Starting in early 1996 this began to hurt Asian exports into the United States. These events essentially transferred the tech bubble from Asia to the United States and to a lesser extent Singapore and Taiwan, which were initially insulated from the crisis.

The next record breaker’s planning began in 1997. Construction began in 1999 on Taipei 101 in Taiwan City, the capital of the Republic of China (a.k.a. Taiwan). The 101-floor building set a new world record if you go by the height of livable space of 1,671 feet. This height surpassed the Petronas Towers, and Taipei 101 became the first skyscraper to exceed one-half of a kilometer. The roof was completed in June 2003, but we are not sure when the new record was set. However, its construction closely paralleled the dot-com ∕ tech bubble’s bursting. This was the first skyscraper cycle to occur in the developing world and the first in which one record, the Petronas Towers, was broken at the beginning of a crisis and the other, Taipei 101, was completed at the end of the crisis — that is, the dot-com ∕ tech bubble. A wild card here is the tech bubble, which was essentially transferred from the Asian-contagion countries to the United States and non-Asian-contagion countries, such as Taiwan and Korea. Taipei 101 is the first addition to the Skyscraper Index after Lawrence.15

The next world-record-breaking skyscraper was the Burj Dubai tower, which began construction in 2004 in Dubai, in the United Arab Emirates. At this time, it was clear to me that in the United States there was what would come to be called the housing bubble. The tower set a new record in the summer of 2007 just as the housing bubble ended and a financial crisis started to become apparent. The building opened to the public in January 2010 in the depths of the financial crisis, with Dubai bankrupt and needing a multibillion-dollar bailout from a neighboring emirate. The bailout resulted in the name of the building being changed from the Burj Dubai to the Burj Khalifa tower. This is another addition to the Skyscraper Index after Lawrence.16

These skyscraper cycles reliably contain common features. A cycle begins with a long period of easy money and credit. This leads to an expansion of the economy and a boom in the stock market. In particular, the relatively easy availability of credit fuels a substantial increase in capital expenditures. Capital expenditures start to flow in the direction of new technologies, which in turn create new industries and transform existing industries. This is when the world’s tallest buildings are begun. At some point afterward there is a necessary reversal. Many things could initiate the reversal. The reversal often gives the appearance of panic and mass psychological disorder, but people are being scared by real things such as not meeting profit expectations and projections, increases in interest rates, and problems with meeting sales projections, controlling costs, and retrieving accounts receivable. Finally, unemployment increases, particularly in capital- and technology-intensive industries. While this analysis concentrates on the US economy, the impact of these crises often has international implications.

The skyscraper has many of the characteristic features that play critical roles in various business cycle theories. These features make skyscrapers an important marker of the twentieth century’s business cycles, that is, the recurring pattern of entrepreneurial errors in a boom phase that are later revealed during a bust phase to be malinvestments.

It would be very easy to dismiss the Skyscraper Index as a predictor of the business cycle, just as indicators and indexes of other major entrepreneurial advances like canals, railroads, and factories were. The twentieth century skyscraper replaced the factories and railroads, just as the information and service sectors have replaced heavy industry and manufacturing as the prominent sectors of the present US economy.

It should not be surprising that the skyscraper, an important manifestation of the twentieth-century business cycle and indicator of modern global capitalism and commerce, will itself be replaced in the same way by an unknown new capital and technologically intensive investment in the future.

This chapter has demonstrated that Lawrence’s Skyscraper Index can be extended backward and forward in time and that the one instance where the Skyscraper Index was thought to have failed because the skyscraper curse failed to materialize has a perfectly logical explanation. Next we turn our attention to the question of what makes the Skyscraper Index work.

• 1Robert C. Kennedy,  “Gold at 160, Gold at 130,” Harper’s Weekly, October 16, 1869.
• 2Victor Zarnowitz, Business Cycles: Theory, History, Indicators, and Forecasting (Chicago: University of Chicago Press, 1992), pp. 221–16.
• 3David Howden, “A Pre-History of the Federal Reserve,” in The Fed at One Hundred: A Critical Review on the Federal Reserve System, edited by David Howden and Joseph T. Salerno (New York: Springer, 2014).
• 4Michael D. Bordo, Peter Rappoport, and Anna J. Schwartz, “Money versus Credit Rationing: Evidence for the National Banking Era, 1880–1914,” in Strategic Factors in Nineteenth-Century American Economic Growth, edited by Claudia Goldin and Hugh Rockoff (Chicago: University of Chicago Press, 1992), p. 189.
• 5Sara Bradford Landau, and Carl W. Condit, Rise of the New York Skyscraper: 1865–1913 (New Haven, CT: Yale University Press, 1996), pp. 382–84.
• 6Ibid., p. 390.
• 7Greg Kaza, “Note: Wolverines, Razorbacks, and Skyscrapers,” Quarterly Journal of Austrian Economics 13, no. 4 (Winter 2010): 74–79.
• 8Robert Higgs, “Wartime Prosperity? A Reassessment of the U.S. Economy in the 1940s,” Journal of Economy History 52, no. 1 (March 1992): 41–60.
• 9Robert E. Lucas, Jr., Models of Business Cycles (New York: Basil Blackwell, 1987).
• 10Joseph T. Salerno, “Money and Gold in the 1920s and 1930s: An Austrian View,” Freeman (October 1999): 31–40. Reprinted in Joseph T. Salerno, Money Sound and Unsound (Auburn, AL: Mises Institute, 2010), pp. 431–49.
• 11Murray N. Rothbard, America’s Great Depression, 5th ed. (1963; Auburn, AL: Mises Institute, 2000).
• 12Ben S. Bernanke, Essays on the Great Depression (Princeton, NJ: Princeton University Press, 2004).
• 13Milton Friedman, and Anna J. Schwartz, The Great Contraction, 1929–1933 (Princeton, NJ: Princeton University Press, 1965).
• 14Rothbard, America’s Great Depression.
• 15Andrew Lawrence, “The Skyscraper Index: Faulty Towers!” Property Report, January 15, 1999.
• 16Ibid.