The Great Crash 1929

In The Great Crash 1929, economist John Kenneth Galbraith examines the stock market crash of 1929 and its relationship to the Great Depression. First published in 1955, the book traces the origins, mechanics, and aftermath of the speculative boom, arguing that the crash exposed deep structural weaknesses in the American economy that turned a routine downturn into a decade-long catastrophe.

Galbraith opens with President Calvin Coolidge's December 1928 State of the Union address, which declared the nation prosperous and at peace. The twenties did have genuine economic substance: rising industrial production, stable prices, and growing automobile output. Yet income inequality was stark, farmers had been depressed since 1920, and poverty persisted among Black people in the South and white Appalachians. The first manifestation of the era's speculative appetite appeared in the Florida real estate boom of the mid-1920s, where land sold for 10 percent down payments on lots miles from any coastline. When the boom collapsed in 1926, Americans' desire for effortless enrichment migrated to the stock market.

The market rose gradually from 1924 through 1927, with the New York Times industrial average climbing from 106 to 245. In 1927 the Federal Reserve cut the rediscount rate, the interest rate at which commercial banks could borrow from it, from 4 to 3.5 percent. This decision was widely blamed for fueling speculation, but Galbraith argues the explanation is too simple: Easy credit alone does not cause speculation. The boom's character changed in early 1928, when the market began rising by dramatic leaps. Margin trading, in which buyers left purchased securities with brokers as collateral for the loans that financed the purchase, concentrated speculative energy. Brokers' loans, the money brokers borrowed to finance customers' stock purchases, grew from roughly one billion dollars in the early twenties to nearly six billion by the end of 1928.

Galbraith examines the paralysis of the institutions responsible for controlling the boom. Coolidge neither knew nor cared what was happening. Secretary of the Treasury Andrew Mellon advocated inaction. The Federal Reserve Board faced an impossible dilemma: Puncturing the bubble would cause an immediate collapse for which the Board would be blamed, while inaction risked a worse disaster later. Its standard tools were largely ineffective. In February 1929 the Board issued warnings against speculative lending that Galbraith calls "almost incredibly feeble," yet even these caused a brief market decline. In March, Charles E. Mitchell, chairman of the National City Bank and a director of the New York Federal Reserve Bank, rescued the boom by announcing his bank would lend to prevent liquidation, overriding the Federal Reserve's warnings. The Board thereafter abandoned the field. After June 1, free from any threat of government intervention, the market surged.

A central chapter examines the investment trust, the era's most important financial innovation. Investment trusts sold their own securities to the public and used the proceeds to buy the securities of other companies. From a few small companies before 1921, they grew to about 160 by 1927, and approximately 265 new trusts formed in 1929 alone. Their most potent attraction was leverage: By issuing bonds, preferred stock, and common stock to purchase a portfolio, a trust concentrated all gains on its own common stock. A 50 percent rise in portfolio value could produce a 150 percent rise in the trust's common stock. Trusts sponsoring trusts amplified this effect geometrically. Goldman, Sachs and Company exemplified the phenomenon, launching the Goldman Sachs Trading Corporation in December 1928, then the Shenandoah Corporation in July 1929 and Blue Ridge Corporation in August, only 25 days later. Shenandoah stock, issued at $17.50, later fell to 50 cents. At a Senate hearing, a Goldman Sachs partner confirmed that Trading Corporation stock, sold at $104, had fallen to approximately $1.75.

The summer of 1929 saw the market's final ascent. The Times industrials rose 110 points in three months. Irving Fisher of Yale declared stock prices had reached "what looks like a permanently high plateau" (70). Yet only about 1.5 million people had brokerage accounts, with roughly 600,000 trading on margin. The striking feature was not the breadth of participation but how the market became central to national culture.

On September 3, 1929, the bull market peaked, though the turn was gradual. Events accelerated in October. On Black Thursday, October 24, nearly 13 million shares changed hands, and by 11 A.M. the market had degenerated into panic. Five of the nation's most powerful financiers met at 23 Wall Street and pooled resources. Richard Whitney, the Exchange's acting president and Morgan's floor trader, strode to the Steel trading post and bid 205 for 10,000 shares. The gesture broke the chain reaction of stop-loss orders, automatic sell orders triggered when prices hit preset levels, and prices rallied. But on Monday, October 28, the Times industrials fell 49 points. Tuesday, October 29, was the most devastating day in market history: Over 16 million shares traded. Investment trusts suffered most as leverage worked in devastating reverse. The Governing Committee of the New York Stock Exchange considered closing the Exchange but decided against it.

Galbraith emphasizes the singular nature of this crash: Unlike previous panics, the worst continued to worsen. Those who answered margin calls, demands from brokers for additional cash or collateral, received further demands. Those who bought bargains watched their purchases lose most of their value. John D. Rockefeller, the oil magnate, issued a rare public statement that he and his son were buying stocks, but even this reassurance proved temporary. By mid-November, organized support and organized reassurance had both been abandoned.

Galbraith debunks the myth that a wave of suicides followed the crash, showing that statistical data reveal no spike in October or November 1929. He introduces the concept of "the bezzle," the inventory of undiscovered embezzlement that grows during prosperous times and shrinks when audits tighten. President Herbert Hoover responded with a negligible tax cut and White House meetings with industrial leaders, all of whom expressed confidence. Galbraith characterizes these gatherings as convened to create the impression of action when no action was planned.

After a partial recovery in early 1930, prices declined almost without interruption through July 1932, when the Times industrials hit 58. U.S. Steel fell to 22, General Motors to 8, and investment trusts like Blue Ridge and Shenandoah dropped below a dollar. The crash also destroyed reputations. Albert Wiggin, head of the Chase National Bank, was revealed to have sold short over 42,000 shares of his own bank's stock during the crash, profiting over $4 million. In March 1938, Richard Whitney, the former Exchange president, was arrested for grand larceny after appropriating securities to cover business losses. Whitney's arrest ended the Exchange's resistance to federal regulation. The Securities Act of 1933 and Securities Exchange Act of 1934 had already required disclosure on new issues, outlawed market manipulation, and established the Securities and Exchange Commission (SEC), but Whitney's downfall confirmed the SEC's authority.

In his final chapter, Galbraith analyzes why a modest downturn became catastrophic. Gross National Product fell nearly a third from 1929 to 1933, and unemployment reached nearly 13 million. He identifies five structural weaknesses: skewed income distribution that made the economy dependent on spending by the wealthy; a fragile corporate structure built on holding companies (corporations that control other companies through stock ownership) and investment trusts, both vulnerable to reverse leverage; a weak banking system where one failure triggered others; a precarious foreign balance sustained by loans that ceased after the crash; and poor economic intelligence, with advisers urging balanced budgets and fearing inflation during the most violent deflation in history. The crash exploited each weakness. Galbraith concludes that while key vulnerabilities have been addressed since 1929, Americans remain susceptible to speculative moods. The real danger, he argues, lies in the tendency of those who know things are going wrong to insist that things are fundamentally sound.