”The Great Crash of 1929” by John Kenneth Galbraith

The great Crash of 1929, after several years of retrospective aided by hindsight and the violent upheavals of global economy many times over, is still shrouded in airs similar to a romantic tragedy. Yesterday’s millionaires flinging themselves out of high rises is a myth propagated by many reports, documentaries and movies symbolically representing the thud and the bloodiness of the crash which sent the American economy into a deep depression ( though it is arguable whether the crash had a causal relationship with the depression or was merely a manifestation of the impending doom).

Of the many scholarly works available to evaluate and enumerate the happenings in and around the crash, The Great Crash of 1929 by John Kenneth Galbraith (who missed his own centenary by just 2 years in 2006) is considered to be a masterly work and a reference point for various conclusions drawn that have influenced world and U.S. economy in particular in the coming years.

John Kenneth Galbraith was blissfully ensconced in academic pursuits when the Crash happened and perhaps that is the best seat available to view the upheavals, which were as exciting as they were painful. Though the crash and seeming fury at the vagaries of the Stock market led economy led to the rise of sympathy for Communist or Socialistic movements, Galbraith escaped becoming influenced. This was purely because of his fundamental belief in the primacy of the Capitalism and its inevitability in the world order. Though Galbraith is prone to his own idiosyncrasies in propagating his forms of control on the market, basically his arguments are pro-market.

In his acclaimed work Galbraith accords a ring side view of the happenings of the Period around the Crash.

The general mood just before the period of crash was a sustained period of optimism which swatted away any attempts at caution. In fact there were indications that the bubble was a not a balloon in full flight that could carry its occupants upwards but more of a bubble which could drench all the supporters squirting misery all over, were evident in brief periods of adjustment that happened in the first and second quarter of 1929 and once before in 1927. However, the recovery only made the optimists more brazen in their speculation.

As Galbraith explains in the scheme of things, the essential reason for loss was Greed  on the part of the speculators and apathy on the part of the banks, administrators and general consensus not to exercise caution in any which form. The concept of margin money comes out as one of the major manifestations of evil. Speculators borrowed nine times the value of the stock (ironical in hindsight, they had the stocks placed as the collateral). Any increase in the share prices resulted in earnings nine times the original investment. The obvious corollary that the loss would be nine times as high and if the share price actually took a down turn the collateral would decline in value as well was conveniently overlooked. It is sad to note that even banks fully colluded in fuelling the frenzy of margin money based speculation and invested their deposits in similar deals. The causes for the enormity of the crash (which warranted this article on the book and several other books apart form movies, documentaries and assorted works) are listed in Chapter 10.

“There seems little question that in 1929, modifying a famous cliché, the economy was fundamentally unsound. This is a circumstance of first-rate importance. Many things were wrong, but five weaknesses seem to have had an especially intimate bearing on the ensuing disaster. They are:

1. Bad distribution of income
2. the Bad corporate structure
3. The bad banking structure
4. The dubious state of the foreign balance
5. The poor state of economic intelligence”(p.197 -202)

As Galbraith explains in the book, the crash did not essentially happen because there were drastic indicators of economic downturn. It actually had its genesis in the very reasons that took Stock market to its unprecedented heights. A cascading effect that greed had on the market on its rise was very similar to the avalanche effect of the panic selling on its crash. As subsequent studies of the crash and the market in general have discovered, a sufficient sentiment of fear over the fundamental or even perceived weakness of an investment is sufficient to initiate a selling spree which would automatically bring the prices of the share increasing sellers and cutting off buyers. When this happens in a concerted manner as on the fateful Tuesday in 1929, it results in the widespread panic and the ensuing bankruptcy of people or institutions whose wealth was a result entirely of perceived value of their investments.

On a smaller scale but on similar grounds of willful delusion, Galbraith gives an apt example in the very beginning of his book in his comparison to the Chicago Real estate boom. According to Galbraith (1955)

“The Florida boom contained all of the elements of the classic speculative bubble. There was the indispensable element of substance….On that indispensable element of fact men and women had proceeded to build a speculative world of make-believe. This is a world inhabited not by people who have to be persuaded to believe but by people who want an excuse to believe” (p.3)

“When prices stopped rising – when the supply of people who were buying for an increase was exhausted – then ownership on margin would become meaningless and every one would want to sell. The market wouldn’t level out; it would fall precipitately.” (P.24)

As in the causes section, Galbraith also argues that the people who had the responsibility of restoring sanity were afraid that the consequences of successful action seemed almost as terrible as the consequences of inaction, and they could be more horrible for those who took the action (p.25)

It is almost unnecessary to explain in detail the disastrous aftermath of the Crash with many millionaires reduced to selling hot dogs and news papers on the side walk. The folding of several banks, several companies who only a couple of months ago seemed to be the champions of the free economy under the weight of their false market capitalization as all these have been scars clinically examined in the psyche of the American economy.

The greatest strength of Galbraith’s work is the study he had undertaken in understanding the various causes in the cascade and the avalanche both upward and subsequent collapse of the American Economy. The insight he brings not only to the human traits of false optimism, greed and a pathological desire for easy wealth generation but also into the pre-occupation of the authorities and the people in the position to shape and mould economy and history with the public perception are commendable. In fact the indecision of the “once bitten twice shy” Federal bank (which was reduced to indignant explanations regarding its corrective measures or deflation of 1920-21) and the Treasury or the office of the President who let the market to take its own course are brought out in vivid detail at the same time he provides plausible reasoning for the inaction.

The weakness of the book is not very obvious. It in fact becomes visible only when read in conjunction with other works of Galbraith. His proposal of an economy dominated by responsible corporate has found fond attackers in the subsequent years.

Galbraith’s objection to the rule of free market though very convincing in the context of this book, does not seem to resonate with universal acceptability in highly sophisticated markets of today. Free market viewed as an irritant to reformists like Galbraith has come to survive the testing times and seems destined to continue in the same vein, though the corrections along the way seem to claim their share of personal wealth and always reward unbridled or baseless optimism with penury.

Though not very obvious in this great work of study, Galbraith promoted a collectivist religion which believed coercive government action against the individual would be in the best interests of the collective whole, of society. Even at the cost of sounding scandalous to the legacy of Galbraith, it is pertinent to point out that market is simply another word for freedom. As Herbert Spencer said “Liberty of each, limited by the like liberties of all, is the rule of conformity with which society must be organized”

Now pointing out to the sources of the author in this scholarly work, he went to great pains to explain the importance of his sources and the need to cite them (“everyone, professional and lay reader alike, needs to know the credentials of a fact” p.xv)

Galbraith had undertaken an extensive research on the contemporary news reports from New York Times and other scholarly works dealing with the individual aspects of the crash in great detail and thus provides utmost credibility to his research, presentation and conclusions.

The Great crash of 1929 has a great impact on the reading of one of the most defining period in the American economy and the world economy in general. It in fact can help as a tempering influence on any economy that is experiencing its highest boom so that it can introspect on the fundamental strength of the upward movement and avoid any painful and drastic downturn.

As a famous oriental proverb goes, progress consists in always making new mistakes. To this end this book is a recommended reading to all stakeholders involved in any economy – the regulators, the investors, the invested and the media.

Galbraith has earned the eternal gratitude of the world for coining the term “Conventional wisdom” and for this work which is a clinical scrutiny of the biggest economic carnage, the capitalist world has ever witnessed.

Reference

Galbraith, John Kenneth. (1997, originally published in 1955). The Great Crash 1929.

New York: Houghton Mifflin Books