The Great Crash, 1929 by John Kenneth Galbraith - Book Report/Review Example

Book report: “The Great Crash, 1929” by John Kenneth Galbraith 1.0 Introduction “The Great Crash, 1929” is a book by John Kenneth Galbraith originally published in 1955. The current copy, however, is the 1997 edition published by Houghton Mifflin Harcourt, located at 215 Park Avenue South, New York. The 206 pages long book falls under the genre of economics and business, considering that it evaluates the causes of the 1929 stock market crash and its effects on the United States. The fact since the first edition in 1955 the book has been published five more times; it is evident that this is an exemplary work. 2.0 The author John Kenneth Galbraith (now deceased) was one of the most famous economists in American history. Galbraith was a witty author with a number of bestselling books including “The Affluent Society”, “The New Industrial State”, and the recent work on, “The Great Crash, 1929” (Galbraith xi). Galbraith became such an important figure that in 1955, there was a small boom in the stock market and Galbraith was called to testify at a senate hearing to share lessons from the 1929 experience (Galbraith xi). Ironically, on the morning of the testimony, the stock market collapsed, and a good number of players in the market blamed Galbraith for the downfall. During his time, Galbraith held a number of important political positions in the American government, such as American Farm Bureau Federation’s chief economist, ambassador to India, and chairman of a movement for Democrats (Brue & Grant 407). As an economist, Galbraith was a professor of economics at Harvard University. Galbraith made vital contributions to economic thought by, for example, coming up with the theory of dependence effect. According to Brue & Grant, Galbraith introduced the notion that modern capitalism is all about big enterprises engaging in a lot of corporate planning and vigorous advertising in order to meet the abundance of artificial wants in the market (416-417). In this case, it is the producers rather than the consumers who decide what the consumers want then mold consumers’ tastes to fit these products. 3.0 Main concepts Galbraith’s “The Great Crash, 1929” has a number of fascinating and informative concepts detailing the events leading up to the 1929 financial meltdown, the reaction by different stakeholders to remedy the situation, the consequences of the crash, and future implications. The main concepts in Galbraith’s book focus on the crash itself in terms of the characteristics of the stock market before and in 1929. Moreover, Galbraith focuses on the role of the financiers and the government in the occurrence of the crash. The Great Depression is also discussed although not in great detail. The crash itself is the main concept in the book, as Galbraith discusses the state of affairs at the time and the consequences of the crash in relation to Wall Street. 4.0 The major text subjects and arguments The 1929 crash, according to Galbraith was caused by conspiracy theories between Wall Street, huge corporations, banks, the government, and the filthy rich who all contributed to an unsound economy. The unsoundness in the economy was explicated by inequality in income distribution, poor corporate structure, poor banking structure, foreign imbalance, and unreliable economic intelligence (Galbraith 185). In practice, banks supplied funds to the rich who became the brokers in the stock market and sold securities to customers, with the collateral collected going back to the banks (Galbraith 20). In terms of economic intelligence, the people charged with offering financial advice were either completely incompetent, or had vested interests in the boom. Of the two probabilities, it is most likely that the advisors were also duped by the boom and by years of waiting for the crash such that they concluded that the recession would not take place. Galbraith writes that although the forecasters at the Harvard Economic Society had predicted a crash, many years of waiting and immediate recovery from setbacks led them to admit they had been wrong, just before the crash hit (71). In a humorous way, Galbraith states that those who offered economic guidance in the late 20s and the early 30s were sort of “uniquely perverse” in their own way (182). 5. 0 Supporting arguments for the occurrence of the crash 5.1 Stock market bubble By 1928, there was a staggering income gap between the top and bottom quintiles of income earners, as a result of a financial boom that had made the rich richer and enabled them to manipulate the stock market. In line with this, more than a third of all personal income in the United States went to about 5 percent of the richest in the country. In the early 20s, stock prices were at an acceptable level but by 1927, there were fluctuations in the stock market, leading to exorbitant pricing of goods (Galbraith 10). Consumers were unable to afford most goods which made the United States a good place to sell but a bad place to buy goods, thus leading to a crisis in the exchange market (Galbraith 10). Accordingly, the rich saw an opportunity to invest more in the stock market thus increasing stock prices. People were buying stocks and selling them at higher prices. The business was so lucrative that people were taking loans from the Federal Reserves at a rate of 3.5 per cent, and then lending the same money at a much higher rate, thus raking enormous profits (Galbraith 2). Galbraith writes that between 1925 and 1929, manufacturing establishments had increased to around 206,700 from 183, 900 increasing their output by 8 billion dollars (2). However, by 1929, the stock market was saturated and everybody was trying to sell and nobody was willing to buy. Consequently, there was an imbalance in the demand and supply chain and the market started plummeting fast. The problem originated from the tendency by buyers to buy assets so that they could sell them in a day or two at much higher prices; rather than buying these assets as investments. 5.2 The politics of non-interference from the government In 1928, Galbraith writes that President Coolidge called for the congress to reconvene stating that America was enjoying a state of economic prosperity and peace with other countries (1). Coolidge predicted that the future was full of promise and thanked the American people for their efforts in steering the country in the right direction. However, when the stock market crashed, the government could not come up with answers as to what had caused the crash; neither could they offer credible solutions. According to Galbraith, President Coolidge introduced the “no-business conferences” where committees, business representatives and industrialists, among other important stakeholders in the economy meet and pretend to be discussing business while in actuality no business is conducted (139). Usually, such meetings are a public relations stunt aimed at showing the public that the government is busy looking for a solution to a pertinent issue. Galbraith gives the reason for government non-interference in the crash as being related to the politics of popularity and elections. Is essence, governments usually have control measures for such occurrences at their disposal but choose not to use them in order to preserve popularity. In the case of the 1929 crash, President Coolidge’s government chose not to break up the boom because doing so would mean mass unemployment and that would deal a serious blow to the president’s political ambitions (Galbraith 190). 5.3 The role of the banks and Wall Street Wall Street has been accused of having employed a self-preservation mode by deciding to not act on the imminent crash simply because things were going right at the time (194). Essentially, the people at Wall Street chose to let the American population enjoy the boom knowing well that the bubble would burst leading to tough economic times in the future. As Galbraith writes, the role of Wall Street was, and has always been to accommodate, facilitate, and encourage the speculator (20). In a witty way, Galbraith likens the people at Wall Street to a beautiful and proficient woman who despite her competence is reduced to wearing provocatively and masquerading as a cook (20). The woman does this because she is best known for being a harlot rather than because of her talents. As such, Wall Street bears the greatest responsibility for the crash by allowing the speculation to continue. In this case, the actions or inaction by Wall Street led to the contraction in the demand for goods, changed the established methods of borrowing, and lending and alienated the poor from the economic system. In addition, Wall Street allowed newly formed investment bodies to operate on leverage meaning that if the dividends used to pay interest were affected, then these entities collapsed the economy suffered (Galbraith 179). Bankers forwent their traditional role of safeguarding the pessimism of the national fiscal state and instead became more optimistic and shared this optimism with borrowers (Galbraith 71). 6.0 The results and effects of the crash The 1929 crash had adverse effects on the political, communal, and economic lives of the American population. The most adverse of these impacts have to do with the Great Depression and the embezzlement of funds. 6.1 The Great Depression Following the rampant financial speculation and subsequent stock market crash, the economy of the United States hit an all-time low and inevitably led to the Great Depression during the 1930s. However, Galbraith argues that the stock bubble was not solely to blame for the Great Depression but rather the fact that the economy had been very fragile and unsound (187). Nonetheless, the Great Depression according to Galbraith lasted 10 years from 1933 to 1943, a time during which the Gross National Product was at an all-time low (168). The effect of the depression was widely felt in the population. The number of unemployed Americans drastically increased such that by 1938, one in every five Americans was unemployed (Galbraith 168). 6.2 Embezzlement of public funds As a result of great losses in money and assets, many people were left bankrupt and embezzlement became commonplace. The most famous embezzlement scandal involved the looting at the Union Industrial Bank involving several of the bank’s officers (Galbraith 134). During the speculation period, each of these officers had taken money from the bank without the knowledge of the others. However, with time, they discovered what each had done and since they could not expose themselves, they decided to form a cooperative venture and invest in the stock market. As such, when the crash hit, the bank was dealt a mortal blow as it had lost a lot of money. 7.0 Conclusion “The Great Crash, 1929” contains details about the activities and optimism of the American public in economic prosperity prior to the crash. Such optimism made many people, particularly the rich, to invest heavily in the stock market leading to record highs in the numbers of securities traded. As the investors took loans from the federal reserves and bought more securities only to sell them at inflated prices, the market became oversaturated with sellers as the buyers reduced. The rich who had become richer during the crash were now bankrupt, unemployment was skyrocketing, public funds had been embezzled, and Wall Street and the government had lost their credibility. Simply put, America was in an economic turmoil which led to the Great Depression which lasted until 1943 when some reprieve and hope for a better economy was fathomable. Galbraith writes that the probability for the reoccurrence of another bubble or misfortune is always in the offing and that is the reason why this book never seems to get outdated (xi). Speculative episodes, according to Galbraith have kept this book in stores and economists and other interested readers are eager to know what to expect in case an economic boom starts to take place (xi). Galbraith’s perception is very relevant especially considering the scare caused by the 2007-2009 recession that threatened the financial steadiness of the United States and the world at large. According to Marshall, the financial crisis in the United States started in the housing industry which had been experiencing an economic boom, collapsed (7). Basically, the federation that had been giving mortgages to house owners announced that it would stop purchasing high-risk mortgages and a leading mortgage lender filed for bankruptcy (ibid). However, the government was more responsive this time and engaged federal conservatorships, liquidity measures, capital injections, and insurance schemes as recovery measures. Although the country was able to recover from the meltdown and prevent the occurrence of another depression, the fact remains that economic booms and subsequent economic crashes are an ever-present threat. In my opinion, “The Great Crash, 1929” is an outstanding piece worth analysis by any student of economics, economists, and all readers who are concerned with past, current and future trends in economic booms. In a vivid, clear, and humorous manner, Galbraith explicates the events leading up to the crash and mentions Wall Street, the government, and the rich as having been responsible. The book is written in a sequential manner that allows the reader to move from one event to another, thus making it very easy for the reader to follow and understand the concept of the crash. I agree with Galbraith that Wall Street carries the largest responsibility for the crash because they decided not to regulate the lending and borrowing practices and withholding information about a possible crash from the investors. The government is also to blame considering that it was the decision by the Federal Reserve to lower lending rates that allowed more people to participate in the stock market. If the Federal Reserve had not lowered the rates and Wall Street had warned the stakeholder of the imminent crash, then the crash might have been averted. Works Cited Brue, Stanley & Grant, Randy. The Evolution of Economic Thought. Mason: Cengage Learning. 2012. Print. Galbraith, John. The Great Crash, 1929. New York: Houghton Mifflin Harcourt. 1997. Print. Marshall, John. The Financial Crisis in the US: Key Events, Causes, and Responses. House of Commons Library. Research Paper 09/34 2009. Print. Read More