The Great Crash
I’ve just finished reading the ‘The Great Crash of 1929’ by John Kenneth Galbraith. I discovered this book at our local book-store, and I was motivated to read it when I noted that it was written in 1954. Currently there are many books being promoted in book-stores that are attempting to explain the cause of the 1930s depression and trying to forecast the current recession, but the analysis is biased by modern finance theory and what is occurring today. So I figured it would be really interesting to read a book about the 1930s depression written over half a century ago.
The book is easy and entertaining to read. It essentially discusses three different events: the Florida real estate boom and crash of 1926, the stock market crash of 1929, and the 1930’s depression. The author’s viewpoint was that these were separate events. The cause of the Florida real estate crash and the 1929 stock market crash were the same as any other historical speculative bubble: a belief that there can be effortless and free wealth. He then concluded that the cause of the 1930’s depression was a separate event, mainly due to poor government policy.
As I read the book and read about previous speculative bubbles such as the South Sea bubble, the Florida real estate boom, or the 1929 stock market crash, I found myself drawing many parallels to recent bubbles. In particular, parallels between the 1929 stock market bubble and the dot-com bubble, and between the Florida real estate boom and the recent housing market bubble.
I was working as a software engineer during the build-up and subsequent crash of the dot-com bubble. Basically, any company associated with the Internet was suddenly worth billions of dollars. So Pets.com, a company to sell pet food over the Internet, had a market cap of over a billion dollars. And any traditional company that could somehow associate themselves with the Internet were able to propel their stock-price. This seemed similar to the stories of the 1929 bubble. In one, the company ‘Seaboard Air Lines’ which was a railroad company, enjoyed speculative gains due to the belief that with the name ‘Air Lines’ it would enjoy high growth.
The stories about the Florida real-estate boom that crashed in 1926 didn’t seem dissimilar to the recent real estate boom. Vast real estate developments started in Florida and people purchased sections purely for speculative purposes. This didn’t seem too different to the recent period in New Zealand where every second person saw themselves as a property magnate. On holidays in the Far North, it appeared that every small depressed town had suddenly realised they had sea views and therefore their properties were obviously worth a million dollars each. And the adjacent fields where the horses used to graze were being turned into sections with “million dollar views”. Like Florida in late 1920s, these places in the Far North sold a lot of sections that no one ever built on, and like Florida they are speculative purchases with no intention to build. I wonder if this too will follow the Florida real-estate boom of 1926; a number of years after the real-estate collapse farmers were often able to buy the properties back for grazing, and the animals would navigate around the paved streets and lamp-posts of the previous sub-division.
I think the important viewpoint of the author was that despite these two periods of folly, the depression was a separate event that was caused by government policy. In the early 1930s, both political parties in the US were promoting a balanced budget as a solution to the contracting economy. A balanced budget involved slashing spending so that tax-receipts matched spending, and they did this year after year to try to balance the budget. The Federal Reserve also failed to provide liquidity to the money supply despite the continuing chain of bank collapses. Essentially, the author agreed with the current Federal Reserve chairman Ben Bernanke that the depression was caused by monetary contraction.
In summary, the book is easy to read and interesting to have a perspective written prior to modern finance theory and the events of the past half century. And reassuring that the author concludes the two bubbles and subsequent depression were separate events. There is currently a concerted effort around the globe to increase money supply, so I don’t think the current contraction in global GDP will be anywhere near as severe as the great depression.
