The Great Crash 1929

published	April 30th 1997 by Mariner Books
binding	Paperback
isbn	0395859999 (isbn13: 9780395859995)
pages	224
description	Rampant speculation. Record trading volumes. Assets bought not because of their value but because the buyer believes he can sell them for more in a da...more [close] Rampant speculation. Record trading volumes. Assets bought not because of their value but because the buyer believes he can sell them for more in a day or two, or an hour or two. Welcome to the late 1920s. There are obvious and absolute parallels to the great bull market of the late 1990s, writes Galbraith in a new introduction dated 1997. Of course, Galbraith notes, every financial bubble since 1929 has been compared to the Great Crash, which is why this book has never been out of print since it became a bestseller in 1955. Galbraith writes with great wit and erudition about the perilous actions of investors, and the curious inaction of the government. He notes that the problem wasn't a scarcity of securities to buy and sell; "the ingenuity and zeal with which companies were devised in which securities might be sold was as remarkable as anything." Those words become strikingly relevant in light of revenue-negative start-up companies coming into the market each week in the 1990s, along with fragmented pieces of established companies, like real estate and bottling plants. Of course, the 1920s were different from the 1990s. There was no safety net below citizens, no unemployment insurance or Social Security. And today we don't have the creepy investment trusts--in which shares of companies that held some stocks and bonds were sold for several times the assets' market value. But, boy, are the similarities spooky, particularly the prevailing trend at the time toward corporate mergers and industry consolidations--not to mention all the partially informed people who imagined themselves to be financial geniuses because the shares of stock they bought kept going up. --Lou Schuler [close]
date added	01-24-07 edit book

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Trevor rated it:

04/24/08

Even though he said that he would eventually get to talk about the causes of the great depression I have to admit that for much of this book I thought we would be just getting a series of increasingly horrible stories about the crash. But this turned out to be an infinitely better book than I anticipated.

There are quotable quotes – “If there must be madness something may be said for having it on a heroic scale”. Or “This is the rite of the meeting which is called not to do business ...more Even though he said that he would eventually get to talk about the causes of the great depression I have to admit that for much of this book I thought we would be just getting a series of increasingly horrible stories about the crash. But this turned out to be an infinitely better book than I anticipated.

There are quotable quotes – “If there must be madness something may be said for having it on a heroic scale”. Or “This is the rite of the meeting which is called not to do business but to do no business.” And haven’t we all been in one of those.

There is the dismantling of myths, particularly the myth of the streets of New York piled high with the crumpled corpses of financiers who had thrown themselves from the still gaping windows of the twentieth floor. In fact, Galbraith has a table of suicides and shows that there was virtually no change in the suicide rate in the US or in New York in particular in this year at all and even that the suicide rate was higher in some of the months before the crash than in October. He speculates that the myth started as people assumed that investors broken by the crash ought to have been so depressed as to have thrown themselves from windows and “One can only guess how the suicide myth became established. Like alcoholics and gamblers, broken speculators are supposed to have a propensity for self destruction. At a time when broken speculators were plentiful, the newspapers and the public may have simply supplied the corollary.” I found this idea fascinating – as I did in learning that of the few people who did suicide very few actually jumped out of windows. Urban myths like this always amaze me – but we have been raised to believe that these stories – like the Greek Myths – have somehow grown from a kernel of truth. It is nice to have confirmed once again that the human imagination is not so limited.

I only know bits and pieces about the Stock Market, but I did find his explanation for why, in times of a crash, bad stocks chaise out of the market good stocks very interesting. Say you are a prudent investor and have borrowed a thousand dollars to buy stocks. You decide that you are going to be clever and rather than spend all of your thousand on risky stocks, (because that would be just like gambolling) you will instead buy five hundred dollars worth of first rate, blue ribbon stocks and with the other five hundred dollars you will buy high risk stocks which you expect to provide huge returns. But all of a sudden things turn bad. The most likely thing to happen when things turn bad is that the price of the high risk stock you bought to fall through the floor – so much so that you won’t be able to sell this stock, even though this is precisely the rubbish you would like to off-load. Everyone knows the problem with this stock and will assiduously keep away from it. But now your creditors smell blood in the water and start circling to try to get their money back. You have to sell some shares except you can’t sell your rubbish shares, as these have suddenly lost all value – so you are forced to sell your blue ribbon stock at any price to repay your loans. This then forces down the value of blue ribbon stock.

So, bad stock, in a round about way, forces good stock to lose value.

The truly frightening thing about this book is the number of times ‘experts’, such as Hoover and others, are quoted as saying the same sorts of phrases we are a bit sick of hearing today. Things like, “the fundamentals of the economy are all essentially sound” or “this is just a minor correction from which the economy will bounce back stronger than ever.” There is a belief that the stock market and the economy generally is held together by faith and that if we do not make the correct incantations the entire thing will fall around our ears. Perhaps economics is the last bastion of mysticism.

Galbraith repeatedly makes the point that those in the know had already guessed early in the year that the bubble was set to burst. Those in government and acting as financial regulators had two (much less than optimum) choices to make – they could put a pin in the bubble and burst it immediately, or they could wait around for it to burst of its own accord. The point is that bursting the bubble might well have been the best thing to do, saving the market from further overheating. The problem with doing this, even if your intention was to stop further hardship, is that it will be clear to everyone that you were the person that caused the bubble to burst. And these bubbles aren’t any old bubble, but bubbles of prosperity are inflated by the hopes and dreams of people who will never forgive you for destroying their lives. So, the temptation is to allow the bubble to burst of its own accord, even if this makes matters a thousand times worse. That way it can seem like an act of God, rather than of the regulating bodies and therefore they might just get re-elected. It is a sobering idea.

Galbraith also goes through some of the ‘causes’ of the crash that are clearly rubbish – such as some sort of ‘divine retribution’ or cycle repaying ten good years with ten bad years. Or my favourite, that the market needed a bit of a rest after working so hard in the twenties that it needed to have the thirties off altogether.

It is clear that for capitalism to continue to grow it needs ever expanding markets. But the US at the time was actually doing everything in its power to contract its markets. It had become a creditor nation to Europe after the first world war, it increased tariffs and thereby denied other countries a means of repaying debt owed to the US in a way that might encourage them to buy more US goods and most interesting, despite a 40 odd per cent increase in productivity of labour, wages barely increased at all. If people can’t buy back what they produce and you can't sell the stuff elsewhere, there’s not much point producing it in the first place.

As Marx pointed out nearly a century before Galbraith, under capitalism, and for the first time in human history, we have crisis due to producing too much, rather than too little. The wholesale destruction of capital due to the depression that followed the crash was necessary not because there was no one who wanted what could have been produced by this capital, but because there was no profit to be made from producing it. And greed was the key determining feature that decided there would be no market – stopping pay increases for workers through a decade of growth and thereby directing the wealth of society disproportionately towards the rich only meant they would use it to further speculate on the stock market – which only made the situation worse for everyone. As Galbraith says – we do not know enough about the workings of the economy to say when a crash will happen, but as he also says, “Here, at least equally with communism, lies the threat to capitalism. It is what causes men who know that things are going quite wrong to say that things are fundamentally sound." And you know what, there are echoes today that make this book chilling to read.

This is an important book to read now and always.
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