Book Review: The Great Crash 1929 by J.K.Galbraith

For those that want to understand the stock market crash of 1929 that lead to the depression of the 1930s in the United States, there is one book that stands out above all others. The Great Crash 1929 by J.K.Galbraith is the book. In fact, I would suggest that it is the book to read if you want to understand the way that human nature works in both good and bad market conditions.

Galbraith's reputation was in large part created by this book. I can recall an interview with him, where he said that the best thing he had ever done was write this book, because every time the stock market fell, it would sell many more copies and another reprinting would be ordered! Needless to say, the legendary wit and humour of Galbraith is very evident here.

While much of the book looks at the days of the stock market crash and how and why prices collapsed, the early segments of the book explain the preceeding boom. Every big bust had a preceeding boom! Some things in finance and investment will never change...

These early sections are interesting for many reasons. The main one however, is just how precisely his descriptive words can be used again. The book was first published in 1954 and my second-hand bookstore copy has an introduction written in 1961. Yet despite this, there are many descriptions of the expansion and boom that could have been written about the 'tech bubble' of the late 1990s or the 'property bubble' of 2002-2006.

Why is this? How can Galbraith be so knowing? Simply, he describes human nature and greed will always be greed. The types of assets change, but the words stay the same. When times are good and any fool can invest in an asset and make 15-25% per year as a return, every fool does invest in it.

This might sound harsh, but at the start of the growth are sensible long-term investors. But towards the end, the sensible folk have made their money and many will have sold up and moved on. Those investing at the heights are often those least able to do so - and to do so they use borrowed money. As a downturn comes, all that borrowed money must be repaid and interest payments force sales at unappealing prices. This starts a downward trend and then increases it's force. Well, we know the rest...

As an example, here is a quote from the end of the book, Cause and Consequence:

"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 now 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."

A the end of the book Galbraith lists 5 factors that he believed helped to create the problems. He offers much greater explanations, but they are:

(i) The bad distribution of income.

(ii) The bad corporate structure.

(iii) The bad banking structure.

(iv) The dubious state of the foreign balance.

(v) The poor state of economic intelligence.

Do any of those things sound familiar to us now after the 2008 credit crisis?

Without doubt, this is a book that every investor and trader should read - preferably more than once! Reading this book will not enable human nature to be overcome, but it may cause enough pause for thought that some of the additional risks that wipe people out are avoided. If nothing else, this book will offer an insight into how the 'mob' of investors are likely to act - on the way up and down.

Honestly, I loved this book and could write reams about it. But, I recognise that I could never do it the justice it deserves, I might stop you from reading it - which would be a disaster - or you may feel that you have learned all there is from my description. These things should not stop you from buying and reading this book. It is entertaining, informative and sobering.

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