Roy Lotz's Reviews > The Great Crash 1929

Having read the official report on the 2008 financial crisis, I figured that I ought to learn something more about the greatest of all financial crises. This is an excellent place to start. Galbraith is quite a wonderful writer. His prose is witty, sardonic, and crisp—and he manages to wring a good deal of wry fun at the expense of the financial geniuses of the age:

Despite a flattering supposition to the contrary, people come readily to terms with power. There is little reason to think that the power of the great bankers, while they were assumed to have it, was much resented. But as the ghosts of numerous tyrants, from Julius Caesar to Benito Mussolini will testify, people are very hard on those who, having had power, lose it or are destroyed. Then anger at past arrogance is joined with contempt for present weakness.

For an economist, his explanation of the crisis is astonishingly straightforward. It was, in short, a comedy of all-too-human errors. Greed, cowardice, or pure stupidity blinded far too many as a speculative bubble was ceaselessly inflated, until it grew so large that its bursting sank the entire market. Regulators did not step in as investors came up with ever-more imaginative ways to make bigger and riskier bets, while gurus proclaimed the doctrine of infinitely expanding wealth.

This book is pleasing, then, not for any special insights, but from Galbraith’s shrewd narration of how a generation of financiers sowed the wind, and reaped the whirlwind. Yet the book ends on an oddly deflating note. If the Great Crash of 1929 was just an extreme example of a speculative bubble formed through reckless investing, then why did it lead to ten years of the worst economic depression that the modern world had ever seen? After all, there have been many economic crashes, but nothing comparable to the Great Depression.

This is all the more puzzling when one considers that only a small minority of the population were invested in the stock market. It was not as the situation was in, say, 2008, when a great many people had mortgages or retirement accounts tied to the market. On the contrary, the America of 1929 was still largely rural and agricultural. If anything, it would seem as though the 2008 crash should have led to a worse economic recession than the 1929 one.

Galbraith offers many possible hypotheses for this. For one, since income inequality was far greater than it was when he wrote the book in 1955, it follows that it would indeed cause a large reduction in spending if the rich took a big hit. What is more, at least during Hoover’s presidency, the government did exactly the wrong things in order to remedy the situation—raising taxes and cutting spending. Galbraith also notes the widespread corruption of the 1920s economy, in which many businesses were fraudulent or otherwise mismanaged. The Smoot-Hawley tariff exacerbated an already bad balance of trade, provoked by the First World I and the Treaty of Versailles And of course there was no deposit insurance for banks, allowing runs which led many banks to close.

However, all of these theories remind me of a remark by Bertrand Russell, that the multiplication of arguments can have the paradoxical result of weakening your point. If a colleague invited you to a birthday party, it would not strengthen your case to say that you have to give your mom a ride to the doctor’s office, and that you also have a migraine. Indeed, as I’m sure Galbraith would admit, the plethora of causes and theories is an indication that we still don’t fully understand why the Great Crash of 1929 resulted in the Great Depression.