Just Finished Reading: The Great Crash 1929 by John Kenneth Galbraith (FP: 1954) [210pp] 

The NY Stock Market crash of 1929 is undoubtedly one of the most important events of the 20th century. The worldwide ramifications of the event and the Depression that followed shaped the world we live in to a significant extent. Without an understanding of what happened and why it happened any appreciation of 20th century history can only be severely hampered. But what made the Crash of ‘29 so devastating? Afterall, we’ve had economic boom & bust for a good chunk of human history, likewise we’ve had financial ‘bubbles’ that have emerged, grown and ‘popped’ before without dragging the world into economic chaos. What was significant about this one? 

Part of the reason it seems is both the length and the height of the boom before it all fell apart. It’s not unusual for stock markets to climb and then fall back but it is unusual for the market to climb to giddy heights and then keep on climbing. For a LONG while it looked like, and was talked about by people who should have known better, as if the rise in value could indeed go on indefinitely. It’s hardly surprising then that people saw buying stocks as an easy, indeed essentially free, way to make money. Starting with the usual suspects – the financial speculators – it wasn’t long until average people started buying stocks and watched with great pleasure as their net worth grew week on week. As the market continued to grow it made sense to borrow money to buy stock and then to use that stock as collateral to extend the loan to buy more stock. It was even worth companies cutting back on investment in order to buy stock (often in their own company) which seemed like a sure way to ensure ever greater profits. As the bubble grew and grew those ‘in the know’ knew that, at some point, the bubble would burst and the market would ‘self-correct’. The trick was to sell just before this happened. The problem was, of course, knowing precisely when to do so. This decision wasn’t exactly made easy by the market reporting methods of the time. These were designed to report on market prices where a reasonably moderate number of shares exchanged hands each day. As the number of shares bought and sold ballooned in the late 20’s information regarding these sales started to lag behind reality. In this state of uncertainty, it was all too possible to jump too soon or, even worse, too late without even knowing it.  

Of course, the US government could also see the risk of a burst bubble but what to do about it, that was the question. It was certain that the bubble would burst eventually but would intervention make things better in the long run or worse in the short term and, most importantly to the political mind, who would be blamed for either action (or inaction). In an attempt to ‘cool things down’ the bank borrowing rate was increased. This, by and large, achieved little to nothing. The interest on any loan paled in comparison to the interest on bought shares. In any case, the prevailing theories of the time confidently said, after the burst would come the market self-correct and after a short period of pain, the market would start increasing again. Afterall, the fundamentals of the real economy were sound. Unfortunately, the politicians, the economic theories, and the experts were wrong. Dead wrong. 

After a few minor falls and recoveries, the market dropped a LOT. The next day it was expected to recover, at least in part, but the delayed transactions from the day before put paid to that. The market dropped again, and kept on dropping. It wasn’t long before the panic set in. Stock prices plummeted with even so-called guilt stock losing 20, 30, 50% of its price within days. Those who didn’t cash out quickly lost everything. Those who managed to sell in the early days still lost a great deal. But, no matter how bad the Crash itself was it was assumed that, once things hit bottom, a recovery could begin. Unfortunately, that ‘bottom’ failed to materialise in days, weeks or months after the initial precipitous fall. Many assurances were made, both in the financial and political realm that the ‘real’ economy was fine and that whatever happened in New York really didn’t influence things ‘out there’ too much. Stocks were ephemeral things but bricks and mortar, land, and acres of wheat were the real wealth of the country, right? The problem, however, was twofold: firstly, the underlying economy was NOT fundamentally sound and second even those who had money (and only a small percentage of people had actually speculated in the market) where reluctant to spend it during a period of growing uncertainty. It wasn’t long before the fantasy world of the stock market started to infect the real-world decisions of whether to buy or not or whether to keep your money in the local bank (if you had it) rather than under your mattress. The Great Depression was about to begin. 

Although, I’m sure along with most other people, I had an appreciation of the events of 1929 I wasn’t fully aware of the details of that disaster. This classic work of Economic history has filled in a lot of blanks in that regard. Written within living memory of the events and by an economist of note this was a quite fascinating look at the logical, almost rational, madness that gripped the US and the world in the late 1920’s. If you’ve ever wondered about the Crash and where it fits into 20th century history but didn’t know where to start, I think this is definitely the place. Written in an easily digestible language format you won’t need a background in Economics to witness the financial trainwreck unfold before your eyes. Recommended for all those interested in 20th century history and economics.