Book Review: The Great Crash of 1929

Simplicity is unexpected of economists, who are often engrossed in describing the role of each potential variable through complex regressions. John Kenneth Galbraith is the exception. In The Great Crash of 1929, Galbraith, a Harvard economist, provides a captivating and straightforward account of the 1929 stock market crash. Writing in 1954, he recounts the economic disaster from development of the stock market bubble to resulting panic and collapse. His admonishing tone warns of the disastrous consequences of buying stocks based on projected price upsurges. This practice, known as speculation, is the primary perpetrator of the 1929 economic collapse according to the author. Galbraith’s narrative provides a clear and compelling warning against over-speculation, but his staunchness in highlighting one principal cause of market failure limits the comprehensiveness of his work.

Traditional views hold that the stock market merely reflects economic strength or weakness, but Galbraith identifies Wall Street as the primary cause of the Great Depression. The first chapters of The Great Crash detail 1920s optimism. According to Galbraith, Americans of the era generally hoped to acquire wealth without having to work. Escalating ticker prices satisfied their desires. Borrowing heavily to purchase stocks on margin seemed sensible, as nearly all observers predicted continuously rising prices. The only difficulty was determining which shares could most rapidly deliver affluence. Galbraith’s narrative is an incrimination of Wall Street culture and mindsets. These fueled the essential ingredients of over-speculation: unbounded greed and optimism.

For Galbraith, this over-speculation served as the principal cause of the 1929 economic downturn. Taking a significant step in contesting a popular contemporary theory, he dismisses charges that the Federal Reserve facilitated the bubble through inflationary policy. The availability of “cheap money,” according to Galbraith, does not create speculation independently, as speculation does not occur during every period of low interest rates. Galbraith suggests that even a drastic interest rate escalation would have failed to deter speculation. The exorbitant returns to speculative trading in the late 1920s would have continued regardless of interest rate increases. According to Galbraith, however, the Fed should have increased margin requirements, a direct check on the risks associated with speculative trading. Further, he argues that the Board should have spoken out against speculative trading. Instead, it remained silent. For Galbraith, the Board’s failure to actively limit over-speculation was its worst mistake.

           

The delusion that fueled the bubble persisted despite signs of economic weakness. Industrial production peaked four months before the crash. Businessmen and investors continued to express optimism even as disaster loomed on the horizon. They quickly dismissed skeptics in their ranks, refusing to credit warnings that counteracted their desires. This fueled a further divergence between stock prices and real values of companies they represented. With characteristic condescension, Galbraith writes, “Between human beings there is a type of intercourse which proceeds not from knowledge, or even from lack of knowledge, but from failure to know what isn’t known,” (75). Encouraged by those in powerful positions in business, finance and government, investors at all levels bought into the speculative frenzy, utterly unaware that inflated prices could and would ultimately collapse.

            

The decline in prices that took hold in late October validated the claims of the disparaged skeptics. Initially, bankers attempted to contain the collapse. Through “organized support,” financial leaders stepped in and purchased shares of falling stocks above current bids. This strategy briefly succeeded in thwarting the crash and sending prices upward, yet ultimately, the reality of overvaluation induced an “overwhelming, pathological desire to sell,” (110). Once investors realized that neither bankers nor government would act to prevent the crash, all illusions of order ended.  Prices plummeted and panicked selling ensued. The bubble had finally collapsed.

            

According to Galbraith, government failed to provide support necessary to mitigate this decline. Although Hoover cut taxes, adopting an appropriate Keynesian response to an impending recession, he spent the majority of his efforts attempting to restore confidence through what Galbraith portrays as frivolous meetings. The 1932 election brought only the temporary repudiation of Hoover’s laissez-faire policies. New Deal policies subjected financial markets to new regulations, but from Galbraith’s perspective, the attitude that Wall Street required substantial regulatory oversight had largely disappeared by the end of the 1930s.

            

Galbraith sets aside his final chapter to discuss the causes of the “Great Crash.” All preceding chapters clearly pinpoint wild speculation as the central cause. The sources of this speculation are less clear. Galbraith finds that the combination of an optimistic mood with accumulation of savings most directly led to speculative trading. The optimistic mood convinced potential investors that prices would continue to rise indefinitely. With accumulated savings, individuals placed lower marginal value on the money that they held. Consequently, the potential gains of speculative trading presented an attractive option for those with excess funds.

            

Even Galbraith hesitantly admits that the stock market crash did not independently cause the Great Depression. He also blames income inequality, business leveraging, a banking system susceptible to runs, international lending and trade, and a determination in Washington to endorse the contractionary aim of balancing the budget. Galbraith contends that although each of these factors weakened the economy and helped facilitate the depression, the speculative boom served as the primary catalyst. He writes, “When a greenhouse succumbs to a rainstorm, something more than a purely passive role is normally attributed to the storm,” (188). Galbraith clearly succeeds in forcefully highlighting the storm’s role, but he leaves the task of assessing the greenhouse’s weaknesses to others.

While Galbraith’s book is a forceful reminder of the deceptive and dangerous nature of speculative trading, it is far from an all-inclusive analysis of the various contributors to the Great Depression. In focusing so heavily on the role of speculation, Galbraith neglects to give adequate attention to other factors that led to the economic downturn. While he attempts to preemptively free himself from criticism of oversimplification through acknowledging other economic variables that contributed to the depression, this occurs only briefly and superficially. His title deceptively implies a more complete assessment of the entire event. In order to satisfy that purpose, he would have needed to provide more in-depth consideration to the international context, among other factors. Ultimately, however, Galbraith’s account is a clear reflection of his disappointment with Wall Street culture, and his clarity could only be achieved through downplaying other factors that contributed to economic decline. He achieves his intended aim of calling attention to the previously underrated role of speculation in the Great Crash, sending future generations a convincing warning against “the faith of Americans in quick, effortless enrichment in the stock market,” (7).