Taken from: Wikipedia - The Great Crash,
1929
Introduction
The Great Crash, 1929 is a book written by John Kenneth Galbraith and published in 1954; it is an economic history of the
lead-up to the Wall Street Crash of 1929. The book argues that the 1929 stock market crash was precipitated by rampant
speculation in the stock market, that the common denominator of all speculative episodes is the belief of participants that
they can become rich without work and that the tendency towards recurrent speculative orgy serves no useful purpose, but
rather is deeply damaging to an economy. It was Galbraith's belief that a good knowledge of what happened in 1929 was the
best safeguard against its recurrence.
The idea for the book
Galbraith wrote the book during a break from working on the manuscript of what would become The Affluent Society. Galbraith
was asked by Arthur M. Schlesinger Jr. if he would write the definitive work on the Great Depression that he would then use
as a reference source for his own intended work on Roosevelt. Galbraith chose to concentrate on the days that ushered in
the depression. "I never enjoyed writing a book more; indeed, it is the only one I remember in no sense as a labor but as a
joy." Galbraith received much praise for his work, including his humorous observations of human behavior during the
speculative stock market bubble and subsequent crash. The publication of the book, which was one of Galbraith's first
bestsellers, coincided with the 25th anniversary of the crash, at a time when it and the Great Depression that followed
were still raw memories - and stock price levels were only then recovering to pre-crash levels. Galbraith considered it
the useful task of the historian to keep fresh the memory of such crashes, the fading of which he correlates with their
re-occurrence.
The speculative bubble
The Florida property bubble of the 1920s established the mood "and the conviction that God intended the American middle
classes to be rich," a sentiment so strong that it survived the ensuing crash of property prices. In the early twenties
yields of common stocks were favourable and prices low. In the final six months of 1924 prices began to rise and continued
through 1925. From 106 in May 1924 stock prices rose to 181 by December 1925. After a couple of short downturns during
1926 prices began to increase in earnest throughout 1927, the year in which conventional wisdom saw the seeds of what
became the Great Crash sown. Following Britain's return to the Gold Standard, and subsequent foreign exchange crises,
there followed an exodus of gold from Europe to the United States. In the spring of 1927 Montagu Norman and other governors
of European Banks asked the Federal Reserve to ease their monetary policy and they agreed, reducing the rediscount rate
from 4 to 3.5%, a move that Lional Robbins described as resulting “in one of the most costly errors committed by it or any other banking system in the last 75 years”. The funds released by the Fed became available to invest in the stock market
and “from that date, according to all the evidence, the situation got completely out of control.”
Galbraith disagreed with this simplistic analysis by arguing that the availability of money in the past was no sure recipe
for a bubble in common stocks and that prices could still be regarded as a true valuation of the stock at the end of 1927.
It is early in 1928 that the “escape into make believe” started in earnest, when the market began to rise by large vaulting
leaps rather than steady increments. Prominent investors were described by Professor Dice as “having vision for the future
and boundless hope and optimism” and not “hampered by the heavy armour of tradition”. On 12 March the volume of trading
had reached 3,875,910 shares, an all time high. By 20 June 5,052,790 shares were traded in a falling market that many
prematurely thought signalled the end of the bull market. Prices rose once more and after the election of Hoover, with
a “victory boom” resulting in an all-time record trading of 6,641,250 shares in a rising market (16 November).
Overall the market rose during the year from 245 to 331 which was accompanied by a phenomenal increase in trading on margin,
which relieved the buyer from putting up the full purchase price of the stock by using the securities as collateral for a
loan. The buyer obtained full benefit of ownership in rising stock valuation, but the loan amount remained the same. People
swarmed to buy stock on margin. In the early twenties brokers' loans used to finance purchases on margin averaged 1–1.5 billion but by November 1928 had reached six billion. By the end of 1928 the interest on such loans was yielding 12% to
lenders which led to a flood of gold converging on Wall St. from all over the world to fuel the purchase of stocks on
margin.
Aftermath of the crash
In the wake of Black Thursday London newspapers reported that ruined speculators were throwing themselves from windows but
Galbraith asserts there was no substance to these claims of widespread suicides. Embezzlement now came to the fore.
During the bubble there was a net increase of what Galbraith calls “psychic wealth”; the person being robbed was unaware of
their loss whilst the embezzler was materially improved. With the bursting of the bubble accounts were now more closely
scrutinized and reports of defaulting employees became a daily occurrence after the first week of the crash. The looting of
the Union Industrial Bank became the most spectacular embezzlement of the period. Unknown to each other several of the
bank's officers began making away with funds for speculation. Over a period of time they became aware of each other's
activities and unable to expose each other entered into a cooperative venture which in time came to include all of the
principal officers of the bank. They took a short position just as the market “soared into the blue yonder of the summer
sky”; so costly was this to the group that they took a long position just before the crash and this was to prove a mortal
blow.
The influence of the Wall St crash on the Great Depression
Contrary to what had been Wall Street's perceived tendency in playing down its influence, Galbraith asserted the important
contribution of the 1929 crash on the Great Depression which followed: causing a contraction of demand for goods,
destroying for a time the normal means of investment and lending, arresting economic growth and causing financial hardship
which alienated many from the economic system.
Prospects for recurrence
Galbraith was of the opinion that the Great Crash had burned itself so deeply into the national consciousness that America
had been spared another bubble up to the present time (1954); however he thought the chances of another speculative orgy
which characterized the 1929 crash as rather good as he felt the American people remained susceptible to the conviction that
unlimited rewards were to be had and that they individually were meant to share in it. He considered the sense of
responsibility in the financial community for the wider community as whole as not being small but "nearly nil". Even though
government powers were available to prevent a recurrence of a bubble their use was not attractive or politically expedient
since an election is in the offing even on the day after an election.
Reception and popular culture
In 2008 and 2009, Jim Cramer took to waving John Kenneth Galbraith's book, and praising it on his show Mad Money. He
has been struck by the similarities between the crash described by Galbraith and the crash occurring in the late 2000s
recession.