by John Kenneth Galbraith
I don't know how this book ended up on my to-read list back in 2012, but I enjoyed it tremendously in 2019.
While some of the conditions creating the environment enabling the dramatic rise and fall of the stock market in 1929 have been alleviated, I was struck more than once at how we saw the same problems and problematic responses during the 2008 financial crisis.
Always, when markets are in trouble, the phrases are the same: "The economic situation is fundamentally sound" or simply "The fundamentals are good." All who hear these words should know that something is wrong.He talks about it later as well:
Mr. Mellon was participating in a ritual which, in our society, is thought to be of great value for influencing the course of the business cycle. By affirming solemnly that prosperity will continue, it is believed, one can help insure that prosperity will in fact continue. Especially among businessmen the faith in the efficiency of such incantation is very great.Obviously in 1929 (recounted in this book) and in 2008 (when I vaguely paid attention as an adult), these "incantations" were ineffective. It would be interesting to see if anyone can point to a time when the economy was struggling and such affirmations helped steady it before there were drastic effects.
The machinery by which Wall Street separates the opportunity to speculate from the unwanted returns and burdens of ownership is ingenious, precise, and almost beautiful.He mentions a few of these methods like funding to customers through brokers and adjustments to margins and interest rates to keep funds available.
The purpose is to accommodate the speculator and facilitate speculation. But the purposes cannot be admitted. If Wall Street confessed this purpose, many thousands of moral men and women would have no choice but to condemn it for nurturing an evil thing and call for reform.Mingled with the financial record is a remarkable tone of humor.
To say that the Times, when the real crash came, reported the event with jubilation would be an exaggeration. Nevertheless, it covered it with an unmistakable absence of sorrow.One of the points Galbraith makes in the book is how most people who anticipated the 1929 crash realized there was only a little hope of avoiding it, mainly they realized it could not be stopped. The only choices, though, were to allow it to happen "naturally" as a results of the market itself imploding or taking action toward a "deliberately engineered collapse." In hindsight, it seems obvious a slow controlled collapse would be preferable to the disaster that ensued, but it's difficult to assess. Additionally, whoever took action toward a controlled collapse would bear the unmitigated blame for the entire collapse despite protestations of a potentially greater catastrophe. The system, therefore, and one which continues today, discourages any person or entity from suggesting restrictions or constraints on the financial market as a whole.
One aspect I misunderstood before reading the book was the relatively small number of people trading on the stock market. According to Galbraith, at the peak of speculative trading in 1929, there were probably less than a million. Google tells me there were 121.8 million people in the United States in 1929. Somehow less than 1% of the population wreaked havoc on the economy and ravaged the lives of millions for a decade to come. One of the explanations Galbraith proposes is that the stock market crash disproportionately devastated the very wealthy in an economy that was heavily dependent on luxury spending. When the wealthy people stopped buying luxuries, the crash spread throughout the entire economy.
Galbraith also tackles the misconception that suicides increased, people were leaping to their doom from New York City skyscrapers. Suicides in New York were substantially higher in the months before the crash than after. The rate did rise, however, over the course of the Great Depression. I can imagine how the initial shock and optimism gradually deepened to unremitting helplessness. Galbraith suggests people remembering these later suicides mentally altered their dates to the time of the crash.
The singular feature of the great crash of 1929 was that the worst continued to worsen. What looked one day like the end proved on the next day to have been only the beginning. Nothing could have been more ingeniously designed to maximize the suffering, and also to insure that as few as possible escaped the common misfortune.Those who survived early dips with intact capital were lured back to the market for the "bargains," companies now priced below their estimated value. The price of the stocks stabilized after November, but continued to decline over the next twenty-four months, dropping to a third or a fourth of their "bargain" price. So even those who bought "bargains" found their investments worthless over the course of the next few years.
My library only had this book in an anthology: The Affluent Society and Other Writings. I only read The Great Crash 1929 but I enjoyed his style so much I put the whole book on my to-read list. (At my current rate, I'll get to it in about ten years, when my youngest son graduates high school.)
This post contains my own opinions. I did not receive anything in exchange for it. Links to Amazon are affiliate links.
