I chanced across this book in the library, and given its modest length and my current concerns around the stock market I thought it might be of interest as a topical read. Upon opening it I quickly found it to be a very well written and enjoyable read; as Galbraith himself notes in the foreword, he greatly enjoyed writing this book, and this is clear from reading it. The most enjoyable sections of the book concern his descriptions of his own congressional testimony, and his description of the actions and comments of various notable people during the period before and after the crash.
His purpose in writing the book, which he did in 1954, was to preserve the memory of the 1929 stock market crash. He thought that while it was burned in the memory of those who had lived through the crash, he wanted to this book to be a safeguard against it happening again. Given that I studied economics upto the age of 21 and never covered this topic, it is clear that as well as being in need of this book, we are also in need of encouragement to study it!
While writing with this purpose, he also thought it was very likely we would see another similar stock market crash. The specific factors causing the 1929 crash may have been addressed, but he sees the stock market boom which will precede any crash as hard to avoid given first our desire to get rich without making effort, and secondly our enjoyment of a speculative fever. Although was more optimistic in seeing any future similar crash as being less likely to cause a similar economic depression as was seen in the 1930s, given structural changes made since then.
The book starts out discussing the stock market rally through the 1920s, when the US economy was performing well. He thinks it’s difficult to identify exactly when the boom started, but notes that from 1928 stock prices started to out-pace corporate earnings. During this period many public figures, including industry leaders, were particularly talking-up stock prices, and with the election of President Hoover, a Republican, more buying was triggered. One feature during 1928 which contributed to the boom and crash was the significant increase in trading on margin, which was appealing both for investors to access the stock market, and for corporates to lend their too, given the good interest rate.
He thinks that by 1929 it was clear the market was in a boom but by then the only choice would be to wait and let it collapse or to intervene and make it crash sooner. Given that it would be career ending for whoever engineered a stop to it, and given that a lot of those in high places were most likely involved themselves in speculation, there was very little incentive for anyone to intervene. One action he thinks would have helped, would be for the Fed to have asked Congress for authority to set margin requirements, or given a strong warning that stock too high; but these actions would likely have been effective and so brought on a crash.
Another feature of the late 1920s which contributed to the boom and crash was the growth of investment trusts. These trusts would buy a portfolio of shares, and then sell shares in the trust which given the speculative mood would generally get valued far above the value of the stock the trust owned. These trusts would also use leverage to significantly increase their upside, but this would of course lead to disaster when a crash began.
He then moves onto the actual crash, and focuses on the few months from 3 Sep 1929 which is taken as the end of the bull market. 24 October was the first day of panic in the market, but banks quickly bought stock and restored confidence for a few days, before
Monday 28 October saw more selling and Tuesday 29 October was the worst day in history of the NY stock market. The next couple of years then saw continuing periods of stable months followed by another crash.
He then moves onto the aftermath, and consequences, picking up a number of key companies, politicians and economists; and then some of the regulation changes implemented.
He ends the book with a short discussion of the great depression which followed the crash. He notes that since June 1929 the industrial production indices had peaked and the economy started recession, most likely due to industrial production having out-paced consumer demand. He then discusses five key structural weaknesses which he thinks meat the crash led to a depression rather than recession. These included first a bad distribution of wealth, with the rich, who were most affected by the stock crash having too great a share of income, and so the stock crash having an out-sized impact on the economy. It is interesting that he estimates only 1 million people were active speculators, out of a country of 120 million people. He also blames poor economic intelligence, with the decision in the 1930s to maintain a balanced budget as a very poor one.
While I don’t have any other knowledge of the 1929 crash, I feel Galbraith’s book has provided a very good introduction to this topic, and with a convincing explanation of what happened and what we can learn from it. I would highly recommend it to any interested students of economics or the stock market.