The Great Crash

Dabbling in economics, it lately came to my attention that the late John Kenneth Galbraith wrote a book on the stock market crash of 1929. It was recently my pleasure to read his “The Great Crash,” which has been in print continuously since first published in 1954.

In the forward to the more recent edition that I borrowed, Galbraith told how he judged the success of his books by whether he saw them show up on the shelves of airport bookstores as he travelled. Missing this book, he finally asked a shopkeeper about it and was told that airport bookstores don’t like to stock books that have the word “crash” in the title.

This bit of humor was a good introduction to this author, who made this excursion into the dismal science entertaining as well as informative.

He notes that Winston Churchill was on the floor of the exchange on Black Thursday, and notes that he had been the British Chancellor of the Eschequer who returned Britain to the gold standard in 1925. This move caused a credit crunch in the US that year. The subsequent moves here to ease credit made possible the speculative buying on margin that brought about the crash. Small world even then.

Galbraith details the unraveling of the stock bubble that would eventually bring the national economy to a grinding halt. He introduces the personalities, runs the numbers, and exposes some long held myths. He is an economist writing as an historian..

“In the first week the slaughter had been of the innocents. During this second week there is some evidence that it was the well-to-do and the wealthy who were being subjected to a leveling process comparable in magnitude and suddenness to that presided over a decade before by Lenin.”

“On the whole, the great stock market crash can be much more readily explained than the depression that followed it.

“Economics still does not allow final answers on these matters. But, as usual, something can be said.”

What I’m doing reading this stuff; I look to history to inform myself about current events. Galbraith says something of the causes of the depression, listing..

-Trade imbalance; back then the US used to manufacture goods and depend on foreigners to buy them.

-Bad banking structure; bankers and businessmen mostly hate regulation, needed or not. One key reform, federal deposit insurance, was not passed until 1933.

-Corporate larceny.

-Top heavy income distribution; in 1928 one third of all income went to the top 5% of the population. When those folks took a bath, there wasn’t all that much other spending to keep the economy afloat.

-Finally, we come to what Galbraith calls economic intelligence. When this crisis hit, many experts and authorities stepped up to do exactly the wrong things. Treasury Secretary Mellon wanted to “liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate.” Franklin Roosevelt ran on a platform of balancing the budget. At least he proved to be flexible when confronted with reality.

Then, as now, people saw the trouble as a sign that it was time to let the market forces do their magic, to cut spending, balance the budget. This is what the dead-end Republicans and the blue dog democrats seem to be saying these days. Lucky for us we have cooler heads in charge now. The safety nets have not been all dismantled or sold off. We now have Social Security, Unemployment, farm programs, and other measures to stop this recession from becoming a depression.

That is, if we muster enough economic intelligence to see our own self-interest, and make sure we don’t let the yahoos take over the Congress next year.