The Great Crash of 1929 and Galbraith's analysis

Galbraith's Great Crash

The Great Crash of 1929 and the ensuing Great Depression is an event that many comparisons are drawn against. Certainly in a time of global economic recession, bank bailouts, and political meanderings about the future of social safety nets like Social Security and Medicare, the topics in Galbraith's book represent interesting anecdotes and lessons we can learn from the event. Galbraith uses both his sharp wit and his background in finance and economics to pinpoint the causes of the crash and make some assertions as to the true roots of the Great Depression. Interestingly enough, Galbraith does not attribute the crash to an abundance of credit, as was the case in 2000's, and which caused some of the panic and financial markets damage in 2008. This is a point of contention with some economists, and I believe that Galbraith's assessment of the situation in 1929 is correct and true.

Galbraith makes the assertion that the crash that occurred in 1929 was the result of many factors. These factors, when added up, seem to also reflect many of the causes of the 2008 crash and recession as well. However, in 2008 the availability of credit was similar to that of 1929, in fact probably even more so just a few years ago. But given the history of asset and credit bubbles, one might think that the crash of 1929 was due to one of these bubbles as well. Author Galbraith argues that the factors that contributed to the 1929 crash were a combination of unequal income distribution, incomplete and ineffective corporate structures, foreign imbalances, and a corrupt and often inadequate banking structure. These factors, coupled with the fact that during the 1920's, the body of economic knowledge was relatively small and not much research into market behavior had been done, made for a very volatile concoction.

Certainly there was easy access to credit and much speculation going on, but given that there have been many other instances in U.S. history when easy access to credit existed, and given the fact that during these instances, there was not always the amount of speculation going on as there was in the 1920's, Galbraith's assertion that easy credit did not cause the Great Crash proves to be true. This does not mean, however, that this type of speculative environment partially fueled by easy access to credit did not fan the flames or act as a catalyst or trigger to ignite the crash. Galbraith makes no such assumptions.

Some economists, even recently have argued that easy credit is a major economic problem for the markets. Within his book, Galbraith points out that in certain conditions, easy credit can be a negative pull on the economy. However, he is also quick to point out that it has been this easy access to credit that has allowed many of the biggest, most successful economic booms in the U.S. To take shape. From Galbraith's post Keynesian perspective, the Great Crash, and many subsequent recessions, was more about regulatory framework or lack thereof, than easy credit and asset bubbles. Since the book was written in the 1950's, in a time when economic understanding and research was still in its relative infancy, it is tough to view Galbraith's assertions under the same light from a post 2008 global recession perspective. His astute observations and the way in which he is able to draw convincing connections between events like the lack of bank regulation and the rampant speculation that helped drive asset prices ever higher in the 1920's does shed much light on the actual conditions that preceded the crash.