The Great Crash 1929 by Kenneth Galbraith

The Great Crash 1929  

John Kenneth Galbraith   

Published 1955   

American Non-fiction 

The Well-Educated Mind Histories 

⭐⭐⭐⭐ 

Men have been swindled by other men on occasion, but autumn 1929 was the first time men succeeded on a large scale of swindling themselves.

The 1920s were a good time. Americans longed to get rich quick with minimal effort. The New York Stock Exchange was an agreeable way to make easy money. Up to 30 million families were invested in the Stock Market; but, by 1927, the seeds of eventual disaster were sown: internationalism, speculation, and escapism. 

The purpose of speculation was to accommodate the speculator. People were getting brokers' loans to invest and buy stocks on margin, which increased the price of stock without cost of ownership. Also companies formed trusts, which made it easier for lower incomes and single women to participate in the (get rich quick) gamble. 

The summer before the Great Crash there was heavy volume trading, and brokers' loans increased to $7 billion by the end of the summer. Some were alarmed that the NYSE seemed to be "devouring all the money of the entire world."  The Federal Reserve rebuked those who brought light to the coming storm because it was an attack on confidence. It appeared no one wanted to stop this runaway train. 

However, by the fall of 1929, there was already a slight depression in industry production. Speculators decided to get out and others had no choice but to sell. 

On October 24, disorder, fright, and confusion reigned and 12 million shares changed hands; there were no buyers. The ticker fell behind and prices fell faster. 

October 29 was the worst in history. Remember those trusts? They dropped to almost zero. I assume that means they were worth nothing. Banks suffered hardest, and people lost their whole savings! Many thought the Exchange should be closed to give it a rest, but it remained open. 

Interestingly, there was no suicide wave. Suicide was already on the rise, and the media focused on suicides more because "that was the expected response to a loss of fortune of that scale." The Crash exposed the activity of embezzlement, which was more essential than suicide. It was more common for defaults to occur. Large-scale embezzlements were organized by groups. 

By mid November 1929, the Market stopped falling, reassured by President Hoover. Prices of commodities fell. Consumer buying was obviously down. Hoover, following the Keynes economic approach, cut taxes on individuals and corporations, and while it helped business expansion and confidence, it was still too meager.

Hoover ordered meetings with industry leaders where they conveyed a labor shortage since confidence had risen and morale had improved. But for all their meetings, they were really about nothing. It gave the appearance of urgency, but no solutions were conducted. 

The laissez-faire attitude had waned; yet, Hoover was opposed to large-scale government action.

He was too optimistic about the recovery, as the economy began to rebound in 1930. Unfortunately, every time he said something encouraging, the Market dropped again.

The overall picture -- that hundreds of thousands of Americans had lost their fortunes and savings, that reputations were ruined, and that those who had said that the economy was sound before the Crash were not held accountable -- was bleak. President Hoover was targeted most because "he converted the business proper of reassurance and positive words into public policy." The people were suffering in hopelessness and looked to government leadership for solutions. Hoover lost his bid for reelection in 1932 against New York Governor Franklin Delano Roosevelt. During his Inaugural Address, FDR promised to "drive the money changers from the temple." 

The Federal Reserve Board was assigned the job of fixing the margin requirements, regulating and restricting pool opportunities, wash sales, tips, false information, rigging, and manipulating the market for profit. A Securities and Exchange Commission was established to enforce regulations, and they were aggressive in their work. 

Galbraith said the causes of the Great Depression are far from certain. He disagreed that it was because credit was easy and that people borrowed money. He said it is common for the economy to take a natural rest after seven good, healthy years. Prosperity destroys itself and then depression corrects it. In 1929, the economy could have continued, but something was amiss.

So what could have caused the Great Depression following the Great Crash? 

For one, production outran consumer investment demand. Businesses misjudged prospective demand, causing them to curtail buying and cutback production. There was an inventory recession, and investments failed to keep up with profits. 

Two, there was a deep discrepancy between incomes where 5% of the population earned 1/3 of all income. The economy was particularly dependent on the high level of investment and luxury spending by the wealthy. 

       Three, core structure of holding company dividends was weak. An interruption of dividends meant defaults on bonds, bankruptcy, and collapse.

Four, the independent bank structure caused a domino effect, and many people lost all their savings. 

Five, an unreliable state of foreign imbalance permitted other countries to purchase U.S. goods on credit. [Today, it's the other way around.] This was also a burden on farmers.

And six, poor economic intelligence policy made things worse. The budget should have been balanced first, which both political parties agreed. [Imagine both political parties agreeing on anything!] Borrowing, they determined, led to "slovenly recklessness of the public purse." AMEN!

Galbraith could not say if something like what happened in 1929 could happen again. (He published his findings in the 50s.) He did list all of the protections in place now meant to protect individual and corporate investments and savings today - provisions that came about as a result of the Great Crash. But he did also include one lesson we could draw from that historical event: 

A very specific and personal misfortune awaits those who presume to believe the future is revealed to them.