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The Great Crash 1929 by John K. Galbraith (Review and Summary)

The Great Crash 1929 by John Kenneth Galbraith, The Great Crash 1929. Book Review and Summary
Introduction of The Great Crash 1929 by John Kenneth Galbraith.

The Great Crash 1929 was written by the famous economist Galbraith, this concise but insightful historical work has been reprinted since its first edition. Some chapters of the book also vividly describe the prosperity before the Great Depression. The content of this book is graceful and witty and humorously lashes out at the mistakes made by some wise men and policies in the US financial sector.

Written by the famous economist Galbraith. Since its first edition in 1954, it has been continuously republished in 1955, 1961, 1972, 1979, 1988, and 1997. It is a model work frequently cited by academia and securities investment circles. 

"The Atlantic Monthly Review" believes: "Economic literature is rarely known for its entertainment value, but this book does it. Galbraith's article is graceful and witty and humorously lashes out at some of the country’s financial sages and sages. Policy mistakes."

About the Author John Kenneth Galbraith (1908-2006)

A representative of American economics in the twentieth century, he was the honorary professor of economics at Harvard University's Paul M. Warburg lecture, and he served as the American Academy of Arts and Letters and the American Economic Association (American Economic Association) Chairman.

  • From 1941 to 1943: served as deputy director of the United States Price Administration.
  • 1946: President Truman awarded the Medal of Freedom
  • From 1961 to 1963: served as the US ambassador to India.
  • In 1972, he was elected chairman of the American Economic Association.
  • In 1997, he won the Robert Kennedy Book Award for Lifetime Achievement in Canada.
  • August 2000: President Clinton was awarded the Medal of Freedom.
  • 2001: Received the Padma Vibhushan Award (India's second-highest honorary citizenship award) in recognition of its contribution to economic cooperation between India and the United States.
The Great Crash 1929 by John Kenneth Galbraith 

Excerpts from the original text:

Every time the book is reprinted and sold in bookstores, it illustrates another speculative event—another bubble or ensuing disaster.

There is a basic cyclical process: it will repeat itself as the price of an item rises, whether it is stocks real estate, artwork, or any other item.

Whenever the market is in chaos, we can always hear the same words: "The economic situation is basically healthy." Or simply "the basic situation is good." Whenever we hear such words, we should understand that something is not going well.—— Quoted from page 16 

Another characteristic of speculative psychology is that, over time, people use value-added facts to explore the tendency to find out the cause is greatly weakened. As long as the number of people who buy for sale is provided for profit.

If the increase is sufficient to maintain the rate of price increase, people have no reason not to do so.

By the spring of 1926, the "supply" of new buyers absolutely necessary to maintain price increases began to lack stamina.

Even after the collapse of Florida's prosperity, Americans still have a growing belief that they can quickly get rich through the stock market effortlessly.

The funds made available by the Federal Reserve System to lose money are either invested in common stocks or helping others to finance the purchase of common stocks (and this is even more important).

The view that the actions taken by the Federal Reserve authorities in 1927 were the chief culprit in the subsequent speculation and stock market crash has never been truly shaken. The reason why this view is attractive is that it is easy to understand and excuses the American people and the American economy from all major guilt.

At the beginning of 1928, the nature of prosperity changed. People have become fanciful in order to escape reality, and uncontrolled speculation has really emerged in large numbers. As in all periods of speculation, people are not trying to believe the facts but looking for reasons to escape to a new dream world.

Wall Street's mechanism of separating speculative opportunities from unnecessary ownership returns and fees is original, precise, and attractive. Their purpose is to help speculators and facilitate speculation.

A securities broker loan, is, a loan that uses securities purchased by margin trading as collateral, and its scale is a good indicator of the scale of speculation.

One of the paradoxes of securities speculation is that loans used for securities speculation are the safest investments. They are secured by stocks and margins that can be liquidated at any time under any normal circumstances.

A few companies have made the decision: Instead of engaging in product production, to endure various troubles and inconveniences, it is better to release funds for speculation. More and more companies are beginning to lend their excess funds to Wall Street.—— Quoted from page 16

Book Summary 

What does 1929 mean?

People of different countries, different backgrounds, and different mentalities have different answers.

The economist Galbraith, after carefully describing the various events that occurred in the United States and New York around 1929, categorized the unequal distribution of income, irrational corporate structure, irrational bank structure, problems with external revenue and expenditure, and poor economic knowledge. This is an explanation of the main reason for the New York stock market crash in 1929.

Regarding Galbraith’s explanation, I have to admit that I don’t have enough knowledge and information to make proper judgments. Perhaps, the analysis of the causes of the 1929 New York stock market crash and the Great Depression in the United States in the following decade should be based on a large number of studies of economic history and political history, and researchers should have relatively strong analytical capabilities. Moreover, you have to have a good sense and even a little luck.

The real question is not why that happened at the time, but whether similar problems would still happen? When did it happen? Where did it happen?

There is no doubt that the five questions raised by Galbraith are of different degrees. However, excess liquidity, RMB appreciation, and global economic integration have made the real economy and capital markets more complicated. The high enthusiasm of investors can almost burn everything.
We are far from understanding the deep structure, operating mechanism, and psychological process, and changing the trajectory of this society.

Book Review

According to this book, the major reasons for the market crash in 1929 were technical because margin trading (interest rate 7-12%, Fed discount rate about 6%) grew too fast, and investment trusts (different from modern closed-end funds) 

At that time, the managers of investment trusts were considered to have a significant ability to create value, so the value of investment trusts generally has a premium relative to the financial assets it invests in, rather than the usual discounts like the current closed-end funds). 

The use of investment trusts (including the use of leveraged investment trusts to invest in leveraged investment trusts, resulting in accelerated leverage growth). 

Previously, the United States was forced to cut interest rates to support the loose monetary policy brought about by the international market under international pressure, which encouraged speculation.

In the last chapter, the author further analyzed the deep-seated problems in the 1929 economy. 


The serious imbalance of income distribution (which led to the economy being highly dependent on the luxury consumption and investment of the rich, both of which were affected by the stock market crash Larger, this is similar to Keynes’s analysis of investment volatility in The General Theory), corporate structure problems (mainly the proliferation of investment trusts), and bad banking structure (many small banks with insufficient anti-risk capabilities), Double external surplus (causing domestic funds to be flooded), and lack of economic theory (policy errors, emphasis on budget balance, fear of inflation during deflation). 

Among these five factors, two, three, and four are no longer relevant to the current society, while one and five still have an impact on the 2008 financial crisis. 

The 2008 financial crisis was to a large extent also the result of the intensification of the polarization between the rich and the poor and theoretical controversy still reappeared in the prescriptions prescribed after the 2008 crisis. The debate on austerity and interest rate hikes.

The market environment has changed a lot. In the 1920s, stock market manipulation was prevalent. It is written in the book that many bank presidents were involved in manipulating stocks, and even the chairman of the New York Stock Exchange was discovered after the crash. Manipulation of stocks, misappropriation of funds, and ruin. 

After the crash, the United States made many legislative improvements in the supervision of stock markets and exchanges. Today, the U.S. stock market is one of the relatively most regulated markets in the world. How many years it will take for China to evolve to that day.

The stock market crash in 1929 did not mean that the stock market was over in one day, but that it had fallen continuously for 4 years, during which there were many rebounds, just as the stock market of a certain country can rebound from more than 1,670 points to 2,405 points. 

The environment in 1929 was very different from the present. Now the reasons for the stock market decline are more diverse, but there is one thing that feels similar: the threat that many people face is that they know the situation is very bad and will continue to deteriorate, but they say it is basic" healthy".

Similarities before the crash:

United States: There are a large number of open optimists and their opinions are clear. "The world economy seems to be trending towards great development." 

"Their unanimous judgment shows that the current stock price is not overvalued." "The stock price has reached a price with permanent high characteristics." Skeptics are a minority group, and journalists continue to receive remuneration from dealers.

A certain country: 

CITIC Securities (600030) believes that in 2008, “the United States weakened in the first half of the year, but a certain country might be better”; China Merchants Securities said that the stock index reached 10,000 points because labor productivity is high, so a certain country will have no problem, and it will open up along the bubble. 

Company era; Guosen Securities is more simply speaking, technology is progressing, so export growth is supported; Shenyin Wanguo said that no matter what, the stock market in 2008 is not worried about lack of funds, so there is support, the famous analyst "spiritual leader" Gao Shanwen Said that 2008 is still the second half of the bull market.

Economic fundamentals:

The economy in 1929 was a myth in the United States: between 1919 and 1929, 

  • the per capita output of manufacturing workers increased by about 43%; 
  • 5.34 million cars were produced (and only 5.7 million in 1953); 
  • the GDP in 1933 was less than 1/3 of that in 1929. 
It was not until 1937 that it returned to the level of 1929, and then it continued to decline. By 1941, it was still lower than the GDP of 1929.

In 2007, a country’s GOP growth rate was 11.9%, which was the fastest-growing year in more than 10 years; CPI was 4.8%; in early 2008, the Academy of Social Sciences released the Social Blue Book: The most difficult stage of employment has passed; the implementation of the new labor law.

Another Perspective:

  1. Uneven income distribution: In 1929, the highest income group, which accounted for 5% of the U.S. population, accounted for 1/3 of the total personal income of the United States. In 2007, the income difference between the highest 20% of the population and the lowest income group in a certain country was about 18 times, family assets exceeded A certain country’s households worth 1 million US dollars reached 391,000 last year, and the total assets held reached 1.4 trillion US dollars.
  2. Unreasonable company structure: With the huge structure of holding companies and investment trusts, deflation will accelerate the collapse of the company’s pyramidal organizational structure.
  3. The bank structure is unreasonable.
  4. In 1928, the U.S. trade surplus was as high as 1 billion U.S. dollars, much higher than the 37.5 million in 1923 and 1926. The trade surplus must be balanced regardless of its size. The country’s 2008 trade surplus was 295.5 billion US dollars.
  5. The lack of economic knowledge can be seen in the NC recommendations at the two sessions.

Crashing (it is interesting to ignore it)

Harvard Economic Association:

  1. In November 1929, this recession, whether it is the stock market or the economy, was not a precursor to an economic collapse;
  2. In December, we expect the economy to recover in the spring of next year and further improve in the fall;
  3. In January 1930, there were signs that the most severe phase of this recession had passed;
  4. April and March, based on past contractions Judging from the future, the manufacturing industry must be recovering now;
  5. May and March, the outlook is still favorable;
  6. June and April, the spring recovery to May and June should be clear;
  7. July and May, this month or next In August, the economy will improve further and will recover strongly in the third quarter or at the end of the year to a much better-than-normal level; 
  8. In August and June, although there will be some repetitions in the recovery process, the economy will soon improve;
  9. In September and July, unexpected factors delayed the recovery, but there are signs that a continuous improvement will occur immediately; 
  10. In October and August, the depression is almost exhausting; 
  11. In November and November, we are now close to the depression stage. The end;
  12. In October one year later, the depression is obviously likely to stabilize;
  13. Society was forced to disband, and Harvard economists no longer predict the future.

Experts from a certain country:

  1. In December 2007, Cheng Siwei, former vice-chairman, tomorrow is a slow bull market;
  2. In January 2008, the Academy of Social Sciences released the Social Blue Book: The most difficult stage of employment has passed;
  3. January 2008, 60 economists A prediction was made on the economic situation of a country in 2008. Among them, 73.4% of scholars believe that the GDP growth rate of a country in 2008 will remain above 10%. This result reflects the confidence of most economists in a country’s economic prospects;
  4. March 2008, Ma Jun, chief economist for the Greater China region of Deutsche Bank, said that the CPI for the whole year of this year will be raised from the original 6.4% to 7.2%, and it is expected that in order to curb inflation, the government will have a more aggressive monetary policy;
  5. 2008 In May, freelancer Xie Guozhong: The worst stage has not yet passed;
  6. In May 2008, Li Jiange, deputy director of the Development Research Center of the State Council, faced six major challenges in macro-control: relative excess of capital;
  7. In October 2008, the Chinese Academy of Social Sciences predicted a GDP Increase of 10.1%, CPI was 6.5%;
  8. In November 2008, it is expected to be 8% to 9% far higher than investment bank expectations. Zhou Xiaochuan optimistically predicts next year’s GDP;
  9. In November 2008, the fiscal policy changed from “stable” to “proactive”. Monetary policy changed from “tight” to “moderately loose”;
  10. In February 2009, Ba Shusong, deputy director of the Institute of Finance of the Development Research Center of the State Council: The worst time for a country’s economy has passed.
  11. In February 2009, fund managers Unanimously issued this declaration: "The worst moment of the market has passed."

Correction after crash:

United States:

  1. Between 1929 and 1948, the highest income group, equivalent to 5% of the American population, accounted for 1/3 of personal income, and dropped to 1/5;
  2. 1929~1950 In 2015, the relative amount of income unique to the wealthy, such as dividends, interest, and rent, dropped from 22% of total household income to 12%;
  3. Investment trusts collapsed and were blocked;
  4. Destroyed large public utility holding companies Pyramid organizational structure;
  5. Americans’ economic knowledge has increased.
A certain country:? ?? Will it change the real estate industry? How big is the real estate bubble? Is the government the biggest real estate company?

It seems that the collapse is more caused by the accumulation of errors because people are lazy and unwilling to see In fact, you can only deceive yourself and others, and finally come to a breakdown and make a total correction.

After reading, the only conclusion is that the outbreak of economic crises in all countries has a common feature, that is, the polarization between the rich and the poor has reached a very serious degree. As a result, the part taken by the rich cannot support continued economic growth due to insufficient consumption. 

After the economic crisis, economic institutions will make adjustments and the distribution structure will also be adjusted until this differentiation is relieved and the economy returns to the path of growth...A new cycle begins again!

However, when Galbraith finally analyzed the causes of the Great Depression caused by the Great Crash, he found it to be in the middle distance, "very unequal income distribution", "irrational corporate structure", "irrational bank structure", and "problematic external The "revenue and expenditure status" and "inefficient economic policies caused by poor economic knowledge" are the causes of the Great Depression that lasted for nearly eight years.
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