“You have to remember that the New Deal and a World War intervened after the Great Crash to keep everyone’s attention occupied. I could imagine that a good book on current events could be written within two to three years,” says James K. Galbraith, son of the legendary economist John Kenneth Galbraith.
Talking on the eve of the launch of a new edition of his father’s work,
, he adds, “But there is no way that a book on 2007/2008 is going to be as fun.” The Great Crash 1929
“My father had the narrative luck of being able to draw on the speculative euphoria of an era when everyone expected to get rich. That joyous delusion is well captured in his work.
“Nothing similar happened in our recent financial lives. Our happy period was over in 2000 with the dot.com bubble. What came afterwards was nasty. It was rotten. It involved the exploitation of millions of relatively lower middle class people. That will make grim reading,” says Galbraith, who has followed his father and has become a noted and outspoken economist.
The Great Crash 1929 was released in 1954 and traced the rampant speculation that preceded the stock market crash. From the property bubble in Florida, which gave the “first indication of the mood of the twenties and the conviction that God intended the middle class to be rich,” to the hubris that surrounded the boundless rise of the stock markets, the book traces a wild financial ride that ended in economic disaster.
It is like running a nuclear reactor without a cooling system: it will blow upYet, it is more than a financial history. What has kept it moving off bookshelves and assured its status as the first reference reached for by journalists in every economic crisis is its style. Written in a lively and fast-paced manner and imbued with Galbraith’s erudition and grim humor, it provides a highly entertaining account of greed and folly.
“It is a superb and impeccably drafted account,” says James Galbraith, who holds the Lloyd M. Bentsen Jr. Chair in Government/Business Relations at the
LBJ School of Public Affairs. “But I think that is only part of its appeal. It has sold particularly well over the last year not only because of this, but also because it’s a work of art created by the beauty of its writing.”
When reread in light of recent events, the parallels are uncomfortable. In the 1920s, the US was on a national credit binge, while income disparities widened dramatically. Bernard Madoff has his counterpart in Richard Whitney, the president of the New York Stock Exchange convicted for embezzling, in that he was the one big name sent to jail.
And there’s an entire chapter describing “large-scale corporate thimblerigging” of dodgy vehicles, such as investment trusts. These exotic pyramids of leverage failed spectacularly plunging companies and markets into freefall. “What six months before had been a brilliant financial maneuver was now a form of fiscal self-immolation,” concluded John Galbraith.
“There are obvious amusing parallels,” comments James Galbraith, who wrote the forward in the new edition, “if one can be amused by these things.”
Yet, Galbraith cautions about overstating them. “
The Great Crash is the preeminent book on events most similar to the current crisis in financial history, but there are also significant differences,” he notes.
A man of learning
“It was the book that inspired me to become an economist,” says noted scholar Dr. Olivia S. Mitchell of
The Great Crash 1929. “I read it when I was about 16. It is short and wonderfully written. Later I got to study at the foot of the great man.”
Mitchell, the professor of insurance and risk management at the University of Pennsylvania’s Wharton School, is only one of a generation inspired by Galbraith and his work.
“My father had that effect on a lot of people,” commented James K. Galbraith and added wryly. “One of his least forgivable traits was that he managed to persuade a lot of people that economics is a lot more interesting than it actually is.”
Today, the US is richer and has a larger government. In 1929, there was no social net, no unemployment insurance or Social Security. In addition, rural America, then 48% of the population, was devastated. Now, the rural population is 21% and better insulated by subsidies and price-setting mechanisms.
“You don’t see the same forced migration, the same homelessness, the same lack of food as in the 1930s. This is not to say that things aren’t desperate. There are thousands being displaced from their property and homeless shelters and food kitchens are in heavy demand. All of that is true. But in terms of the broad population, this is not yet the dominant experience.”
Another difference, he notes, was that while a lot of activity in the 1920s was certainly fraudulent, it didn’t necessarily violate the law. The Securities & Exchange Commission (SEC) had not yet been established and it was a caveat emptor (buyer beware) environment.
“The big difference now is we have laws and regulations. In this crisis, it was a question of underwriting standards in the housing sector and enforcing anti-fraud laws. The government made a systematic decision not to do those things and so turned the industry over to the most aggressive and predatory actors.”
Galbraith argues that the consequences of dismantling regulations, such as Glass-Steagall (which separated investment and business banking) were predictable. “It is like running a nuclear reactor without a cooling system – it will blow up. And there is no mystery as to why.”