Book Review: The Great Crash of 1929

The Great Crash of 1929 - John Kenneth Galbraith

After finishing A Short History of Financial Euphoria, I decided to go ahead and read this one, particularly since I was somewhat disappointed with the treatment of 1929 in the short history.  While this one does provide many more details and descriptions of the period leading up to and just after the crash, I found myself again disappointed.

In particular, Galbraith repeats almost ad naseum the mantra that 1928 and 1929 were a "speculative orgy", but fails to back up this assertion with any real evidence that the valuations of the stock market were out of line.  For the most part, Galbraith simply gives the prices of various stocks without ever providing any underlying earnings or asset values for those stocks, rendering the prices meaningless to a reader.  The one time valuation is discussed is in regard to GM on March 24, 1928, when the CEO said that "G.M. stock should be selling at not less than twelve times earnings", which implied a price of 225, whereas it was trading at 187.  Thus, at this time, GM was selling for 10 times earnings, which I have trouble characterizing as a "speculative orgy".  Most investors would call this multiple cheap in current markets.

From Shiller's website ( and from other sources, the valuation of the overall market was not exorbitantly high, somewhere around 20, which has been reached many times over the last century without resulting in a large crash.  It seems that the major reason the stock market ended up being overvalued was based on underlying productivity decreasing rapidly and Galbraith actually emphasizes that this depression could not have been easily forecast.  The only metric I'm aware of that indicates a large overvaluation is the CAPE; however, this high value is largely the result of huge increases of productivity in the 20's from the last recession.

Thus, based on my current understanding, it does not seem clear to me that the market was obviously overvalued or speculative using the data at the time.  Instead, most commentaries appear to judge the data using hindsight bias.

That being said, the book did reveal quite a few weaknesses present in the system at the time, which certainly destabilized once the stock market began to crash, including the high degree of margin amongst investors, huge leverage in the investment trusts at the time, and a weak banking system without insurance.

As usual, here are a few quotes from the book that I enjoyed:
But there is here a basic and recurrent process.  It comes with rising prices, whether of stocks, real estate, works of art or anything else.  This increase attracts attention and buyers, which produces the further effect of even higher prices.  Expectations are thus justified by the very action that sends prices up.  The process continues; optimism with its market effect is the order of the day.  Prices go up even more.  Then, for reasons that will endlessly be debated, comes the end.  The descent is always more sudden than the increase; a balloon that has been punctured does not deflate in an ordinary way.
A whole generation of historians has assailed Coolidge for the superficial optimism which kept him from seeing that a great storm was brewing at home and also more distantly abroad.  This is grossly unfair.  It requires neither courage nor prescience to predict disaster.  Courage is required of the man who, when things are good, says so.  Historians rejoice in crucifying the false prophet of the millennium.  They never dwell on the mistake of the man who wrongly predicted Armageddon.
In Montreal, London, Shanghai, and Hong Kong there was talk of these rates.  Everywhere men of means told themselves that 12 per cent was 12 per cent.  A great river of gold began to converge on Wall Street, all of it to help Americans hold common stock on margin.  Corporations also found these rates attractive.  At 12 per cent Wall Street might even provide a more profitable use for working capital of a company than additional production.  A few firms made this decision: instead of trying to produce goods with its manifold headaches and inconveniences, they confined themselves to financing speculation.  Many more companies started lending their surplus funds to Wall Street.
The member firms of twenty-nine exchanges in that year reported themselves as having accounts with a total of 1,548,707 customers.  (Of these, 1,371,920 were customers of member firms of the New York Stock Exchange.)  Thus only one and a half million people, out of a population of approximately 120 million and of between 29 and 30 million families, had an active association of any sort with the stock market.  And not all of these were speculators.  Brokerage firms estimated fro the Senate committee that only about 600,000 of the accounts just mentioned were for margin trading, as compared with roughly 950,000 in which trading was for cash.
As already so often emphasized, the collapse in the stock market in the autumn of 1929 was implicit in the speculation that went before.  The only question concerning that speculation was how long it would last.  Sometime, sooner or later, confidence in the short-run reality of increasing common stock values would weaken.  When this happened, some people would sell, and this would destroy the reality of increasing values.  Holding for an increase would not become meaningless; the new reality would be falling prices.  There would be a rush, pellmell, to unload.  This was the way past speculative orgies had ended.  It was the way the end came in 1929.  It is the way speculation will end in the future.
Speculation, accordingly, is most likely to break out after a substantial period of prosperity, rather than in the early phases of recovery from a depression. 


Book Review: A Short History of Financial Euphoria

A Short History of Financial Euphoria - John Kenneth Galbraith

Although I've enjoyed many quotes and anecdotes from Galbraith, this was my first book of his.  As usual, I enjoyed the histories of prior euphorias and of course agreed with the inevitability of manias and crashes.  At the same time, however, I was somewhat disappointed with his cursory review of each period of euphoria, particularly that of 1929, which did not discuss valuation at all.  Additionally, I found the tone to be somewhat disdainful.  Overall, I enjoyed the book, but it was a bit too conclusory for me (though this was implied by the title, so perhaps I expect too much).

Some quotes I enjoyed:
And thus the rule, supported by experience of centuries: the speculative episode always ends not with a whimper but with a bang.
In practice, the individual or individuals at the top of these institutions are often there because, as happens regularly in great organizations, theirs was mentally the most predictable and, in consequence, bureaucratically the least inimical of the contending talent.  He, she, or they are then endowed with the authority that encourages acquiescence from their subordinates and applause from their acolytes and that excludes adverse opinion or criticism.  They are thus admirably protected in what may be a serious commitment to error. 
The rush to invest engulfed the whole of Holland.  No person of minimal sensitivity of mind felt that he could be left behind.  Prices were extravagant; by 1636, a bulb of no previously apparent worth might be exchanged for "a new carriage, two grey horses and a complete harness."
In 1837 came the inevitable disenchantment and collapse.  A period of marked depression again ensued.  This episode did, however, have two new features--one of them of continuing significance today.  It clearly left behind the improvements, notably the canals, which had been the source of the speculative enthusiasm.  And it introduced a distinctly modern attitude toward the loans that were outstanding: in the somber conditions following the crash, these were viewed with indignation and simply not repaid.  Mississippi, Louisiana, Maryland, Pennsylvania, Indiana, and Michigan all repudiated their debts, although there was some mild later effort at repayment.  Anger was expressed that foreign banks and investors should now, in hard times, ask for payment of debts so foolishly granted and incurred.  A point must be repeated: only the pathological weakness of the financial memory, something that recurs so reliably in this history, or perhaps our indifference to financial history itself, allows us to believe that the modern experience of Third World debt, that now of Argentina, Brazil, Mexico, and the other Latin American countries, is in any way a new phenomenon. 
But not all of the excesses of leverage were in the West.  In these same years, in the more conservative precincts of New England, a bank was closed up with $500,000 in notes outstanding and a specie reserve of $86.48 in hand.
The only remedy, in fact, is an enhanced skepticism that would resolutely associate too evident optimism with probable foolishness and that would not associated with the acquisition, the deployment, or, for that matter, the administration of large sums of money.


Book Review: How to be Rich

How to be Rich - J. Paul Getty

In How to be Rich, which was interestingly published by Playboy, Getty covers a wide variety of topics, ranging from autobiographical stories on how he made his money (starting as a wildcatter in Oklahoma), various desirable behaviors and traits of executives, his views on non-conformity and culture, a quick guide to investing in stocks, real estate, and fine art, and his thoughts on money and values.  While many portions were fairly straight-forward and mostly common-sense, I did enjoy his anecdotes and the history involved in his stories.

Here are a couple that I particularly enjoyed, the first one habit:
There was a time when I was a fairly heavy cigarette smoker.  Then, several years ago, I was on a vacation and motoring through France.  One day, after driving for hours through some particularly foul rainy weather, I stopped for the night at a hotel in a small town in the Auvergne.  Tired after the long and difficult drive, I had dinner and went up to my room.  I undressed, got into bed and quickly fell asleep.

For some reason, I awoke about two A.M., acutely aware that I wanted a cigarette. Switching on the light, I reached for the cigarette package I'd placed on the nightstand before retiring. It proved to be empty. Annoyed--but still wanting a cigarette--I got out of bed and searched the pockets of the clothes I had been wearing. The search proved fruitless, and I went on to group through my luggage in hopes that I might have accidentally left a pack of cigarettes in one of my suitcases. Again I was disappointed. I knew the hotel bar and restaurant had closed long before and guessed that it would be worse than useless to summon the crotchety night porter at such an hour. The only way I could hope to obtain any cigarettes was by dressing and then going to the railroad station, which was located at least six blocks away.

The prospect was not very pleasant. The rain still pelted down outside. My car was garaged a considerable distance from the hotel and, in any event, I had been warned the garage closed at midnight and did not reopen until six o'clock in the morning. The chances of getting a taxi were nil.

All in all, it was clear that if I was to have the cigarette I wanted so badly, I would have to walk to the railroad station--and back--through the pouring rain. But the desire to smoke gnawed at me and, perversely, the more I contemplated the difficulties entailed in getting a cigarette, the more desperately I wanted to have one. And so I took off my pajamas and started putting on my clothes. I was completely dressed and reaching for my raincoat when I abruptly stopped and began to laugh--at myself. It had suddenly struck me that my actions were illogical, even ludicrous.

There I stood, a supposedly intelligent human being, a supposedly responsible and fairly successful businessman who considered himself sensible enough to give other people orders. Yet I was ready to leave my comfortable hotel room in the middle of the night and slosh a dozen blocks through a driving rainstorm for no other reason than that I wanted a cigarette--because I felt that I "had" to have one.

For the first time in my life, I was brought face to face with the realization that I had developed a habit so strong that I was willing--automatically and unthinkingly--to let myself in for a very great deal of personal discomfort merely to satisfy it. Instead of simply enjoying the pleasure of an occasional smoke, I'd allowed myself to form a habit that had grown completely out of hand and was obviously operating contrary to my best interests, producing no commensurately beneficial results. Suddenly sharply aware of this, I rebelled mentally. I needed only a moment to arrive at a decision. I considered it an excellent idea--and an ideal time and place--to rid myself of a habit that was certainly doing me no good.

Having made up my mind, I took the empty cigarette packet that still lay on the nightstand, crumpled it up and tossed it into the wastebasket. Then I undressed, once more put on my pajamas and got back into bed. It was with some sense of relief--even triumph--that I switched off the light, closed my eyes and listened to the rain beating against the windows of the room. In a few minutes, I drifted off into a sound and contented sleep. I haven't smoked a cigarette--nor have I felt any desire to smoke one--since that night.
And another on labor negotiations:
Some years ago, for example, representatives of a labor union sought to negotiate a new contract with a company I owned and I met with them at the bargaining table. Their demands centered around an hourly wage increase which I knew the company could not afford to grant in full. I did, however, believe we could meet the demands halfway and felt that such an increase was justified.

Before the negotiations began, my labor-relations "experts" urged me to give no hint of this in the early bargaining sessions. "Play it close to the vest," they advised. "Offer nothing at all until the last possible moment, when the talks reach an apparent impasse--as they doubtless will. Then start low and edge the offer up slowly, raising it only as much as is absolutely necessary."

To my way of thinking, this approach smacked strongly of bazaar haggling. It seemed to me that such a strategy was beneath the dignity of the company and an affront to the union representatives' intelligence and could only serve to cause lasting bitterness on both sides. As I owned the company outright and thus would not be taking risks with the interests of other stockholders, I had no compunction about following my own, and in my opinion, wiser, counsel. I decided to try an experiment.

I went to the initial bargaining session armed with a few simple--but accurate, informative--reports. These showed the company's production costs and output, its profit-and-loss statement for the previous year, and reviewed its over-all financial situation and the outlook for the immediate future. I listened patiently while labor stated its position and demands. Then I handed the documents I'd brought with me to the union spokesman and took the floor.

"I suppose we could be here for days, arguing back and forth," I said. "But, as far as I'm concerned, it's more sensible to start off where we'd have to end up in any case. The company is unable to give you all you're asking--the reports I just handed you will prove that. You can have half the wage boost--and that's the absolute limit at present time. If production and profits rise in the next year, I'll be glad to talk seriously with you about the other half."

Having said my piece, I glanced around the table, noting with considerable amusement that my aides looked horrified, and the union representative appeared astounded. I thereupon suggested a recess--a suggestion the labor side seized upon gratefully. We adjourned the meeting, agreeing to resume it in the late afternoon.

My assistants were glum. They were certain I had taken the first steps toward giving away not only my company, but my shirt and theirs as well. They were convinced I'd handed the union the proverbial inch--and that it would consequently insist on taking its mile. At best, they expected the union to double its demands; at worst, they feared a long, costly strike.

When the meeting resumed, my aides filed into the conference room with the air of men being led to the tumbrel.s I said nothing, but grinned inwardly at their discomfiture. I still believed I had assessed the situation correctly and had followed the right course, a belief soon verified by the union spokesman's opening remarks.

"To tell you the truth, we thought we were in for a long, tough fight," he declared. "But you laid everything on the line and gave us all the facts at the beginning--so there's really nothing to argue about." He paused and reached across the table to shake my hand.

"Mr. Getty, you've just gotten yourself a new contract," he announced with a broad smile. The remaining details were quickly agreed upon and the contract duly signed. My "experiment" proved to be a success that had long-lasting and beneficial aftereffects.

Within the next 12 months, production and profits rose sufficiently to justify granting an additional wage increase. A lasting bond of mutual respect was established between management and labor. To this day, any disputes are still discussed and settled in the same sort of atmosphere, and the company has been singularly free of labor strife. The straightforward approach backed by facts worked--just as it has in most similar situations I've encountered during my years as a businessman and employer.

Book Review: The Female Brain

The Female Brain - Louann Brizendine

At the recommendation of my partner, I read this in one four-hour sitting while on the plane.  The book provides an overview of the hormone changes that occur over the lifetime of a woman (spoiler alert, there's quite a few more than for the males).  I found it to be quite informative and a great wealth of knowledge to have available, particularly when dealing with the opposite sex.  

The stages include: Fetal, Girlhood, Puberty, Sexual Maturity, Pregnancy, Breast Feeding, Child Rearing, Perimenopause, Menopause, Post Menopause.  In addition, hormone levels change constantly throughout the menstrual cycle.  Overall, I'm pretty sure I'd have a lot of problems with that many hormones changing all the time.

Since I was reading it in printed form, I didn't mark down as many quotes, but here are the few I did:
During times of physical separation, when touching and caressing is impossible, a deep longing, almost a hunger, for the beloved can set in.  Some people don't even realize how bonded or in love they are until they feel this tugging at their heartstrings when the beloved is absent.  We are used to thinking of this longing as only psychological, but it's actually physical.  The brain is virtually in a drug-withdrawal state.
Louise was hurting--literally--from the loss of love.  Until recently, we thought that phrases like "hurt feeligns" and "broken heart" were simply poetic.  New brain-imaging studies, however, have revealed their accuracy.  Rejection, it turns out, actually hurts like physical pain because it triggers the same circuits in the brain.