Reading Journal

What I'm reading

Sunday, November 09, 2008

The Great Crash of 1929, by John Kenneth Galbraith

Given all the references to the Great Depression lately, I decided to read some books about it. This is the best one I've read. JK Galbraith, the author, was a Harvard economist and he was also pretty funny.

First he explains the speculative fever of the 20s.

That much of what was repeated about the market -- then as now -- bore no relation to reality is important, but not remarkable. Between human beings there is a type of intercourse which proceeds not from knowledge, or even from lack of knowledge, but from failure to know what isn't known. This was true of much of the discourse on the market. At luncheon in downtown Scranton, the knowledgeable physician spoke of the impending split-up in the stock of Western Utility Investors and the effect on prices. Neither the doctor nor his listeners knew why there should be a split-up, why it should increase values, or even why Western Utility Investors should have any value.

It was fueled by confident optimistic statements from business leaders.

Andrew W. Mellon [Treasury Secretary] said, "There is no cause for worry. The high tide of prosperity will continue."

Mr. Mellon did not know. Neither did any of the other public figures who then, as since, made similar statements. These are not forecasts; it is not to be supposed that the men who make them are privileged to look farther in to the future then the rest. ... By affirming solemnly that prosperity will continue, it is believed, one can help insure that propserity will in fact continue. Especially among businessman the faith in the efficiency of such incantation is very great.

As the Crash started, Wall Street tried to reassure the public.

When the market fell many Wall Street citizens immediately sensed the real danger, which was that income and employment -- prosperity in general -- would be adversely affected. Preventive incantation required that as many important people as possible repeat as firmly as they could that it wouldn't happen. This they did. They explained how the stock market was merely the froth and that the real substance of economic life rested in production, employment, and spending, all of which would remain unaffected. No one knew for sure that this was so. As an instrument of economic policy, incantation does not permit of minor doubts or scruples.

The Hoover White House tried to look like it was doing something, even though it had no idea what was wrong or how to fix it. Economic summits were a great way to do that.

In recent times the no-business meeting at the White House -- attended by governors, industrialists, representatives of business, labor, and agriculture -- has become an established institution of government. Some device for simulating action, when action is impossible, is indispensable in a sound and functioning democracy.

Remember McCain's "fundamentally sound" blunder?

On the whole, those who had proclaimed during the crash that business was "fundamentally sound" were not held accountable for their words. The ritualistic nature of their expression was recognized; then as now no one supposed that such spokesmen knew whether business was sound or unsound.

This is a good lesson in general.

One of the pregnant lessons of that year [1929] will by now by plain: it is that very specific and personal misfortune awaits those who presume to believe that the future is revealed to them.