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.