The Great Crash: 1929

First published in 1954, this book is understandably piquing interest because of the current financial issues facing the United States and world. The causes of the 1929 crash do seem similar in many ways to the current issues of today in 2008. However, many circumstances are similar, as many are different. But also similar, there seems to be a rule about the phenomenon of Karma in individual human behavior. And this rule of Karma seems to apply to investing behavior. Author John Galbraith provides evidence for his argument that cheap and easy credit wasn't the major reason for the bubble-like conditions that led to the crash, but that the real factor was "speculation for the sake of speculating." Speculation for the sake of speculation caused prices to artificially rise to extremely high levels simply because investors were buying with the intent to sell for a profit ---> and the next buyer would do the same, and so on. <br /> <br />During the 1920s many conditions inside and outside of the US financial markets provided a sense of false prosperity which was actually based on greed and speculation for the pure sake of speculation. These strong aspects of human mind and behavior that propel steep rising bubbles and steep downward slides. It's interesting how human psychology plays such a large role when markets rise in bubbles and then sharply decline. Mania involves greed on the way up, and fear on the way down. <br /> <br />From this 50+ year-old book (with an update in the late 1990s), a reader will immediately realize some of the parallels of 1929 that exist in 2008: This does not mean the same results will happen, however. But they could happen.... <br /> <br />Gailbrath notes the significant inequality in income distribution that existed in 1929, deregulation of the banking industry, poor leadership, and bad policy and decision-making by the government because of economic ignorance and myopia. This ignorance is referred to by the author as a lack of "economic intelligence." Today, look at the current cast of characters in their *appointed* economic-power positions, and the criticism they're receiving for not only what they did *not* do, but what they *did* do once the financial downward spiral started unraveling. <br /> <br />As a historian, the author also noted another concept from then that reminds us of current times: the Florida real-estate bubble of the 1920s. In addition to buying land, people could by the "option to buy land" on a piece of paper. They could then re-sell it, where the option would be re-sold and re-sold again, and so on, and so on. Again, speculation for the sake of speculation. These buy-options and other means, were creative financing, and over-extended lending, and excessive leveraging. Just like today, and just like then, the result was a hard fall. <br /> <br />Housing bubbles have happened before. A disturbing concept of until recently was people treating their owner-occupied home - th

Recall the talk before the bust of the "New Economy," in which distended P/E ratios and lack of profits were to be irrelevant. Recall Enron's public proclamations of its stability and projected earnings increases. Keep these in mind as you read The Great Crash, and you will be very, very skeptical of analysts, to say nothing of executives. Galbraith's theme is that market stability and corporate interests are fundamentally at odds. After pumping up prices by gambling with borrowed money, the financiers and executives simply hope to cash in and make it out alive. In the ensuing crisis, CEOs will never speak evil about their own companies or the condition of the market, so their speech is about as useful to an investor as a pre-game pep talk is to a bettor. Analysts, as well as executives, are salesmen of their own stock, and their primary objective is to get you to buy high. Galbraith is a talented storyteller, and he highlights themes that are likely to accompany future bubbles so that the reader knows what to be skeptical about. This is a very entertaining read, and if you actively compare what Galbraith tells you of the 20's to what you know about the 90's, you'll likely not be swept away by future investing mania. * * * 2008 Update: Having learned a thing or two since I wrote that, I can think of no book better suited to explain our current predicament to the layman. Excessive leverage, housing bubble, financial deregulation, and crony capitalism -- sound familiar? You'll read about this stuff happening back in the '20s and shake your head in disbelief.

Having just lived through the crash of the dot-com stocks, I thought it was a particularly appropriate moment to reread John Kenneth Galbraith's famous history of the stock market crash of 1929 in the United States. Professor Galbraith's final words prove to be prophetic as he suggests that as soon as the lessons of 1929 are forgotten, the speculative excesses that led to that debacle will recur. I am sure that when the dot-bomb experience is forgotten, it will be repeated with some new class of speculation in some future generation. With the recent experience of seeing a market mania, I came away more impressed with this book than before. Professor Galbraith does a fine job of capturing the psychology that builds into and sustains a mania. He also writes like a novelist rather than like an economist. That talent makes the message easy to grasp and appreciate. I was also impressed by how our popular perceptions of 1929 are so often wrong. For example, most people believe that many "broken" speculators committed suicide. Although some did, there was no significant rise in the suicide rate compared to a general trend in that direction. Economists often like to fault the Federal Reserve for the crash. That blame seems somewhat misplaced when you learn that there was very little government debt that the Fed could repurchase to create liquidity. Had the Fed acted differently, the crash might have come a little sooner and not been quite so severe . . . but the fundamentals would probably not have changed too much.Another misperception is that everyone was speculating. By even the most generous measures, the speculators probably never numbered over a million people. Although this is a history, Professor Galbraith takes on the economic question of how the crash contributed to the Depression. Although we know very little about the economic details of 1929, I was impressed by the point about how much consumer spending was concentrated in the wealthiest people. As they lost vast sums, both spending for consumer goods and savings for capital were decimated. With the broader income distribution of today, such a cataclysm would not be so harmful (as we saw in the aftermath of the dot-com crash). There is an excellent parallel discussion of the land boom in Florida earlier in the 1920's that is very rewarding. I was intrigued by the ways that ever increasing ways of extending leverage were created so that both bubbles could climb higher. In Florida, people didn't actually buy the land. They bought options to buy the land, and traded those. In the stock market, holding companies sold stock and then floated new holding companies. These were capitalized with common stock, preferred and debt so that all of the appreciation would accrue to the common holders. Naturally, the opposite occurred on the way down. Many stocks fell by over 99 percent, as a result. Everyone who is tempted to buy any item primarily because it is thought to represent

You want to know how irrational and unpredictable the stock market can be? Read this book. Written in easy-to-read language, it is digested almost as easily as a mystery novel, and yet provides a deep insight into the dramatic events of 1929, and gives an invaluable historic lesson. You can clearly see the parallels between events preceding market collapse in 1929 and today high-tech stock market boom - "...there is here a basic and recurrent process. It comes with rising prices, whether of stocks, real estate, works of art or anything else. This increase attracts attention and buyers, which produces the further effect of even higher prices. Expectations are thus justified by the very action that sends prices up. The process continues; optimism with its market effect is the order of the day. Prices go up even more. Then, for reasons that will endlessly be debated, comes the end. The descent is always more sudden than the increase; a balloon that has been punctured does not deflate in an orderly way." Book goes on to describe the inaction of the Federal Reserve, trade on margin, mergers, Florida real estate boom, investment trusts, leverage, short selling, and so on. Yet, you do not need to be a financial whiz to understand it. This is definitely a 5-star book.

I'm a junior in high school doing a research paper on the stock market crash of 1929. Without reading this book I would be left in the dark. Reading 6 other books, Galbraith is the only author who writes in a language that is easily understandable to someone who does not know how to calculate a beta ranking for a stock.