Wednesday, June 03, 2009

Learning from the Great Crash of 1929

Amidst an ocean of often-specious and superficial analysis of the Great Depression, it is wise to return to a key 1955 source book for insight. 

If you only read one book this year, make it The Great Crash of 1929 by John Kenneth Galbraith. First published in 1955 (and very modestly updated in the 90s), it is a short (194 pages) and very entertainingly written book with profound implications for the future. (Hopefully your local library has a copy.)

History may not repeat, but it sure as heck rhymes most sweetly. The reason of course is that human nature, with its permanent propensity for greed and euphoric manias, does not change.

Here are few key passages which apply quite directly to the present Depression in the making and the "green shoots" stock rally which defies reason and fact alike:

It was not hard to persuade people that the market was sound; as always in such times they asked only that the disturbing voices of doubt be muted and that there be tolerably frequent expressions of confidence. (page 70)

It seems Timmy, Ben and a robustly rabid host of SIFPs (standard-issue financial pundits) have been making rather more than frequent expressions of confidence for months.

In 1929 treason had not yet become a casual term of reproach. As a result, pessimism was not openly equated with efforts to destroy the American way of life. Yet it had such connatations. Almost without exception, those who expressed concern said subsequently that they did so with fear and trepidation.

The official optimists were many and articulate. Bernard Baruch pointed out that no Bears had houses on Fifth Avenue. Numerous college professors also exuded scientific confidence. The bankers were also a source of encouragement to those who wished to believe in the permanence of the boom.

Financial fraud was not just rampant but systemic--then as now:

In amny ways the effect of the crash on embezzlement was more significant than on suicide. To the economist embezlement is the most interesting of crimes. Alone among the various forms of larceny it has a time parameter. Weeks, months or years may elapse between the commission of the crime and its discovery.

At any given time there is an inventory of undiscovered embezzlement in--or more pricisely not in--the country's businesses and banks. This inventory--it should perhaps be called the bezzle-- amounts at any one time to millions of dollars.

In good times people are relaxed, trusting and moneyis plentiful. But even though money is plentiful, there are always many people who need more. Under these circumstances the rate of embezzlement grows, the rate of discovery falls off, and the bezzle increases rapidly.

In depression this is reversed. Money is watched with a narrow, suspicious eye. The man who handles it is assumed to be dishonest until he proves himself otherwise. Audits are penetrating and meticulous. Commercial morality is enormously improved. The bezzle shrinks.

Galbraith lists various governmental regulatory agencies which were founded to curb future speculative excesses and bezzles, but concludes thusly: (remember this was written in 1955)

Yet, in some respects, the chances for recurrence of a speculative orgy remains good. No one can doubt that the American people remain susceptible to the speculative mood--to the conviction that enterprise can be attended by unlimited rewards in which they, individually, were meant to share. A rising market can still bring the reality of riches. This is turn can draw more and more people to participate.

The government preventatives and controls are ready. In the hands of a determined government their efficacy cannot be doubted. There are, however, a hundred reasons why a government will determine not to use them. In our democracy an election is in the offing even on the day after an election. The avoidance of depression and the prevention of unemployment have become for the politician the most critical of all questions of public policy. Action to break up a boom must always be weighed against the chance that it will cause unemployment at a politically inopportune time. Booms, it must be noted, are not stopped until after they have started.

And after they have started the action will always look, as it did to the frightened men in the Federal Reserve Board in February 1929 (8 months before the crash--CHS), like a decision in favor if immediate death as against ultimate death. As we have seen, the immediate death not only has the disadvantage of being immediate but of identifying the executioner.

Here then is the explanation of Ben Bernanke and Tim Geithner's endless incantations and expressions of confidence: Lest they be identified as the executioners of the bubble boom, they are opting for a delayed but certain death of the American economy and stock market.

Tomorrow I devote to exploring Galbraith's reasons for why the stock market crash precipitated a Great Depression, and what is different about today's unfolding Depression.

Lagniappe quote of the day, courtesy of correspondent Phillip H.:

Genuine ignorance is...profitable because it is likely to be accompanied by humility, curiosity, and open-mindedness; whereas ability to repeat catch-phrases, cant terms, familiar propositions, gives the conceit of learning and coats the mind with varnish waterproof to new ideas. - John Dewey

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