Name: The great crash, 1929
Rating: 4 (5 reviews)
ISBN: 0395859999

John Kenneth Galbraith

The great crash, 1929

Tim Pendry

J. K. Galbraith produced his short book on the Great Stock Market Crash of 1929 in late 1954 in an atmosphere that still recalled recent witch hunts over communism (a fact that will help an early twenty-first century reader with some of the few obscure political references). The current Penguin edition adds the short Foreword to the 1975 edition that urged 'memory' as a necessary corrective to over-enthusiasm within the financial system. One can only guess what this grand old man of liberal economics would have written in 2008. Galbraith's book is not the last word on the subject of the causes and consequences of 1929 - how could it be: it was written over 50 years ago within only 25 years of the events in question and largely from contemporary newspaper reports and available official documentation? But it is succinct on the facts, very witty (albeit in that dry professorial way affected by an older generation of intellectuals) but oddly conservative in its overall message. Galbraith does not judge capitalism - he could scarcely do so in the middle of the most conservative phase of the Cold War. He is also far more sympathetic to the bankers of the late 1920s than we might feel minded to be of our bankers in 2008/2009. His model is of a crisis in the equity markets built on the greedy and deluded behaviour of a surprisingly small number of Americans, exploited and managed by a yet-smaller group in positions of financial power and influence. A stand-offish government allowed a burst bubble to hit a downturn in the wider business cycle and so triggered something that was much worse than it need have been. Whether he is right or not is not for me to judge. This book is interesting not because of its ability to tell us the 'truth' but because it helps us to understand our own predicament through contrasts as much as similarities. I do not accept the implicit moralism of either Galbraith or today's commentators - people do bad or silly things but it is our responsibility as much as theirs if we have not constructed the political or regulatory framework that will set limits to political or economic collective hysteria. His defence of bankers has to be seen in the context of his dislike of William Jennings Bryan's country populism with its roots in creationist Christianity and its ascription of all the nation's ills to East Coast elites. He clearly enjoys pointing out that Bryan was complicit in the promotion of inflated land values in Florida that, in retrospect, should have indicated that American popular interest in a 'fast buck' was getting out of hand. The Florida land speculation of the mid-twenties brought us the original Ponzi scheme. Perhaps a million or so Americans out of a population many, many times as large were speculators on the stock market - either with enough money to burn or enough credit to burn other people's money. In some ways, the consequent economic crisis is the story of the loss of an upper middle class surplus available to purchases the good and services that would have kept the rest of America working. And this is where we see the similarities and differences from today. Our crisis also starts in the US but it does not derive from the upper middle classes getting over-excited by speculation in industrial growth. It starts with bankers getting over-excited by what can be done in packaging or securitising massive debt both for wealthier investors and themselves. The collusion between bankers and investors in 'sure thing' economics is what marks out the latest crisis as similar to the collusion between trust promoters and investors in the earlier case. The first crisis involved a disconnect from the fundamentals of American industrial strength and the international trading economy. Our current crisis derives from a lack of due diligence on the returns that could reasonably be expected from a whole range of instruments. The ultimate recipients and intermediate sponsors understood less about these instruments than Wall Street brokers understood their own investment trusts in 1928/1929. Similarly, the 1929 crisis was a domestic national crisis which spread around the world because of other instabilities in the trading system. Our crisis is a global one arising to the degree that financial activity is integrated into Wall Street and the City of London. The UK, for example, is being hit as hard and probably harder than the US not because of a collapse of trade (yet) but because its entire polity is based on the privileging of a financial sector that is now going into as sharp a decline as any inter-war steelmaker. There are coincidences in the tale - some amusing. Goldman Sachs is the broker behind two of the most egregiously speculative (and ultimately failed) investment trusts - Shenandoah Corporation and Blue Ridge. Its humiliation was to turn it into one of the most conservative broking houses by the time Galbraith was putting pen to paper. The rest is history. Lehmann Corporation, meanwhile, gets rare praise as a rarely well managed investment trust appearing in 1929 - another neat little historical irony. Just as conventional property-based retailing today is the first line of collapse (evidenced by the closure of the British Woolworths) so, in a neat mirroring of history, the belief that industrial expansion would go on forever was based, in part, on vigorous programmes of retail consolidation and expansion that created the Montgomery Ward and Woolworths' chains in the US. Investors could see new stores with lots of stock in most major towns by the late 1920s and wanted a slice of the action. The similarities do not lie in the causes or incidents of the crisis - although investment trusts built on sand perhaps have their parallel in today's hedge funds and private equity groups - as in the attitudes of those caught up in it. Galbraith has a great deal of fun at the expense of the 'boosters' of the stock market which seemed to have included just about everyone - including the almost comically wrong Harvard Economic Society. Galbraith was Paul M. Warburg Emeritus Professor of Economics at Harvard but this does not stop him from detailing proof positive that a group of experts engaged in group-think are more than likely to persist in their errors long after the rest of us are staring the facts in the face. The Harvard Economic Society should be remembered whenever any school of public intellectuals and experts purports to tell us what is right and proper in any area of public policy. Those who were seduced by the neo-conservatives before the recent round of incompetent foreign policies, take note. On the other hand, Galbraith points out that the specialist financial Press saw through the house of cards and warned investors of the risks in 1929. Unfortunately, professional investors on Wall Street who would read this material were making serious money out of the speculation, while the people providing cash on margin were not interested in research and analysis - only in profiting from the 'sure thing'. This is in marked contrast to the role of the media in the current crisis - see <a target="_blank" href="http://asithappens.tppr.info/journal/2008/12/16/the-financial-times-a-slipping-and-a-sliding-it-werent-our-f.html" rel="nofollow noopener">http://asithappens.tppr.info/journal/...</a> Sadly, the financial press, pace the important reporting of Robert Peston of the BBC and the critiques of a few individuals like Larry Elliott of The Guardian in London, signally failed to advise the public of the trajectory of bank lending and of the 'toxicity' within the financial system. The media in 1929 at least tried to educate the public and policymakers ... the twenty-first century media merely parroted the news releases and briefings of the market players. The very differences between the two crises show, paradoxically, what is wrong with the system as a whole. The common denominators are weak laissez-faire governments, the fact that the wealthiest are not necessarily the brightest and the existence of a cadre of insiders within the financial system who are expert at relieving the relatively rich of their funds in mutually profitable (in the short to medium term) adventures. If the super-rich and their middle class hangers-on are relieved of their funds by cleverer and more devious professionals, then why should the rest of us worry. But, of course, the nature of capitalism in the 1920s and at the beginning of the Twenty-First Century means that nothing is so simple or so morally satisfying. The pleasure of watching a Darwinian struggle amongst the top 5% is mitigated by the fact that the capitalist system operates on the assumption that the wealthiest re-invest their funds in productive capacity. If the wealthy are cutting back because their assets have halved in value and continue to fall or they have lost everything to some over-clever fraudster, then innovative businesses or businesses employing thousands do not get the cash they need. The ordinary Joe's money also, aggregated, fails to go back into the system to sustain the wider economy. The whole bloody thing starts to wind down and even go into reverse. Banks and the wealthy have now lost a great deal of money and want to make the rest safe and claw it back. Galbraith will not criticise the system because he cannot. But there are fundamental questions to ask about how it is that innovation and employment are allowed to depend so much on hysterical decision-making by a tiny minority of the population in a collusive herd relationship with an even smaller group of 'technical experts'. More, how can they be allowed to continue to set the agenda after they have almost brought the system to its knees? It may be time for Americans to ask a few questions about whether free markets and the American system of capitalism created by the likes of J P Morgan, centred on Wall Street, actually works for America. They won't, of course. Even Prof. Galbraith seemed unable to ask such questions.

The great crash, 1929

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