Book Review: The Bubble in 1929, as now, Reflects an Imperfect System and Failed Policies

Book Review by Julie Fraser

The Great Crash of 1929 by John Kenneth Galbraith

Penguin 1975: ISBN-13 978-0-140-13609-8

This classic of the financial crisis of 1929 and the following depression was first published in 1954 to warn of the bubble that might build in the US Stock Market and then republished in 1975 after the oil shock crash.

The book tells the story of investment from the mid 1920s to the mid 1930s. It begins with the building of the bubble and the defeat of those who urged caution, including reserve banks. It explains the creation of innovative investment vehicles in 1928 and 1929 and the excessive use of leverage in investment. It details the beginning of the crash and the way that day by day the news became worse and worse. In the subsequent years, the failure of Wall Street firms and government policymakers neither to understand the cause of the crisis nor to shift their mindset to a new environment are documented. The book ends with the arrival of Roosevelt's New Deal.

This is still a highly relevant and most readable book. In the current environment it is almost a page turner. In case the above sounds a little familiar we should recall that, in the 1929 crash, in less than three years, the Dow Jones lost 89% of its value. Professor Galbraith does not moralize or judge, he does not find many evil or crooked men. Rather he demonstrates that when the system is imperfect, and all systems have imperfections, then greed will undermine the system.

However, many of the policy failures of the 1930's such as protectionism, letting banks go bust and cutting government expenditure to balance budgets have not been repeated since. From the top of the sixties boom to the seventies oil shock, the Dow Jones lost about half its value, more in inflation adjusted terms, about the same as the current crisis. It recovered to its peak within two years. After the policy mistakes of the thirties, the market only surpassed its 1929 peak in the mid fifties.