GALBRAITH, J.K. "THE GREAT CRASH".   Term Paper ID:18326 Click to get this paper

Essay Subject: Analysis of causes & consequences of the 1929 financial crash in Amer.... More...

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Paper Abstract: Analysis of causes & consequences of the 1929 financial crash in Amer. Paper Introduction: The stock-market crash of 1929 was the single most dramatic event in the economic history of the United States, perhaps of the world. In a few days, not only did the New York Stock Exchange suffer a crash not to be matched for nearly six decades, but an era of economic expansion and prosperity came to an end, as the American and world economy slid slowly but steadily into the Great Depression. John Kenneth Galbraith, the dean of American liberal economists, originally wrote The Great Crash in 1955, less than halfway between the time of the crash itself and the present day. A classic narrative account of the process that led to the Crash, and of the events of the Crash itself, it was re-issued in 1988, almost unchanged in its text save for a new introduction by the author, in which he relates his account of 1929 to the events surrounding the stock crash of October, 1987. Text of the Paper: The entire text of the paper is shown below. However, the text is somewhat scrambled. We want to give you as much information as we possibly can about our papers and essays, but we cannot give them away for free. In the text below you will find that while disordered, many of the phrases are essentially intact. From this text you will be able to get a solid sense of the writing style, the concepts addressed, and the sources used in the research paper. Clearly thatend of finance was grossly mismanaged, even apart from theft, while doubtshave also been raised about the real solvency of commercial banks,insurance companies, and pension funds. In a fewdays, not only did the New York Stock Exchange suffer a crash not to bematched for nearly six decades, but an era of economic expansion andprosperity came to an end, as the American and world economy slid slowlybut steadily into the Great Depression. A special characteristic of the 1929 Crash was its steady drumbeat orcascade effect: A common feature of all [earlier market panics] was that having happened they were over. John Kenneth Galbraith, the deanof American liberal economists, originally wrote The Great Crash in 1955,less than halfway between the time of the crash itself and the present day. The leveragedseller pays back the 5 dollars loaned on each share, and realizes 1 dollars per share--a doubling of the 5 originally invested, though thestock itself only appreciated by 5 percent. Leverage also operates in the other direction: if the stock drops to5 , the investor in our example is wiped out. 99). only in our economic understanding arewe not clearly out of kilter--which is not to say that our understanding isclearly sound. The pages that follow outline Galbraith's view of 1929, and comparethe circumstances of that time to those at the end of the 198 s. The stock-market crash of 1929 was the single most dramatic event inthe economic history of the United States, perhaps of the world. The market of 1929 reached its high point on September 3 (84). By 1928, three crucial elements had come together. By implication,the same could be said of the stock market boom which began to develop infull force in 1928. The prospects for the 199 s seem farsoberer than they did during the late 198 s. Wealth has been concentrated in the hands of the rich to anextent not seen in the postwar era. What looked one day like the end proved on the next day to have been only the beginning (1 8). Wages increased only slowly, but jobs wereplentiful. . Nor would anyone tell her that she did not know that she did not know (75-76). The basic form of stock market leverage is the "margin." In the192 s, leverage was amplified, and investment made more convenient by thedevelopment of the investment trust, roughly an ancestor of the mutual fund(46-65). The balance of trade is badly outof order, though in the opposite direction from that of the 192 s.Leveraged buyouts have been greatly disruptive to corporate management,substitutions short-term financial considerations for businessfundamentals. Then, on October 24, 1929, the marketplunged. On Monday it dove again. Huge amounts ofcash were made available both by growing overall prosperity and by theupward concentration of wealth, which placed a greater proportion of allwealth in the hands of those who could easily meet all consumption needs,and thus look for investments for the surplus. And imaginativenew financial instruments had been developed to make investments easier,and in particular to provide additional leverage to investors. However, this aspect of leveragewas not highly visible before the Crash called it brutally to investors'attention. If moneywas embezzled to play the stock market, and the market went up, theembezzler could often indefinitely postpone detection of his embezzlement,in the absence of close audits. The market rose sharply in 1928. . She [the typical woman investor] spoke of Steel with the familiarity of an old friend, when in fact she knew nothing of it whatever. An atmosphere of boundlessoptimism was not only widespread, but almost mandatory. Galbraith suggests that the Crash itselfrequires relatively little explanation: speculative bubbles always end so.But the Crash need not have brought the whole economy low; the 1987 crashwas just as steep, but had no such effect. Manywere desperately naive about the market. When a workman appeared high on a nearby building to do somemaintenance job, the rumor instantly spread that he was a speculator aboutto leap to his death (p. As Galbraith argues, boom times are good forembezzlers: money is plentiful, and suspicion levels are low. In modern times, the term "leverage" has become most familiar in theform of the leveraged buyout, in which raiders borrow the money to buy acontrolling share of a firm's stock. Hadthere instead been a period of a few weeks with mini-recoveries andrepeated hundred-point drops, the rolling drumbeat of setbacks might havebeen worse. One of the enduring popular images of 1929 is that ruined investorscommitted suicide by leaping out of windows. It actually rallied towards the end of that day, and did not fallas far as in some previous sessions. The worst was reasonably recognizable as such. Automobile sales--then and for long after--a fair index ofmiddle-class prosperity, approached the levels of the 195 s. Yet the 1987 crash immediately raised the frightened question: isthis 1929 all over . This is the primary present-day contribution ofGalbraith's Great Crash. In the wake of the Crash, a great deal of corporate and bankembezzlement was revealed. In fact, there is no evidence of many"marketrelated" suicides during this period (pp. Galbraith identifies five majorfactors as contributing to the severity of the fall into the Depression: adistribution of income excessively in the hands of the rich, whose luxuryor investment spending alone could not sustain the economy; irresponsiblepatterns of corporate ownership; an irresponsible banking system; theinternational credit imbalance (the United States then had a huge surplus--so huge as to be insupportable by the rest of the world economy, andleading to much bad investing abroad, particularly in Latin America); andfinally, the poor state of economic intelligence and analysis (177-186). But the number ofdirect personal investors was still very large, perhaps a million and ahalf people, of whom 6 , were speculative margin players (78). In short, many of the same conditions which applied at the end of the192 s also applied by the end of the 198 s. On Friday and Saturday (then a half-day trading day) it stabilized. In fact, the market had only about one investor for every fifteenAmerican families--a greatly smaller proportion than in the 198 s, whencorporate pension plans made a large fraction of American workers indirectinvestors in the stock market (and in junk bonds). Essentially, it applies to any investment made with borrowedmoney. A sharp break in March seemed to augur the end of the boom, but itwas only a blip: the market picked itself up and marched onward andupward. In 1929, it went into hystericalgear. Curiously enough, this imageappeared even as the crash happened. In most of the country,housing prices are sagging (in the 192 s, they had begun to sag severalyears before the Crash). In Galbraith's account, both the boom market of the late 192 s andthe following collapse had a sort of precursor or premonition in the greatFlorida land boom, which collapsed spectacularly--with the help of a coupleof hurricanes--in 1926. Stripped of what today seem like sexist overtones, this was probablytrue of vast numbers of naive investors, of both sexes, in- the late 192 s. In 1987, the market skiddedsharply on the previous Thursday and Friday, then crashed 5 8 Dow-Jonespoints on Monday, October 19. Economists argue over whether the United Statesis in a "rolling recession." History does not simply repeat itself, but the past does not have itslessons. On Tuesday itdove again, and the investment trusts in particular were shattered (111ff). By the end of the day, it was all over. During the first-stage drop ofThursday, October 24, a crowd gathered in front of the New York StockExchange. This was, perhaps, an important difference between the Crash of 1929and the even more abrupt crash in 1987. The Great Crash: 1929. The 1988 edition of The GreatCrash retains a remarkable passage from the 1955 original edition,regarding women investors; it sounds extraordinary and embarrassing today,especially coming from a prominent liberal: Perhaps the failure to visualize the extent of one's innocence was especially true of women investors, who by now were entering the market in increasing numbers . By 1987, the Crash of 1929 was a distant memory--ancienthistory, indeed, to Wall Street yuppies born a generation after it tookplace. Works CitedGalbraith, John Kenneth. Tax rates(again, as in the 193 s, though both taxes and government spending weremuch lower in proportion) were modified heavily in favor of the well-to-do. Imagine that one puts up half the cashto buy a stock at a price of 1 , and borrows the other half. Of the Florida speculation, Galbraith says that itcontained "the indispensable element of substance" (3). An individual investorbuying on 5 percent margin might thus have 18-to-1 leverage in the actualindustrial stocks at the bottom of the leverage pyramid. But once the market crashed, theembezzlers were caught short (132-135). Embezzlement on an epicscale has brought the savings-and-loan system to its knees. When his loan is called, hewill have none of his investment left. Leverage is, however, a broaderconcept. The 192 s were, as Galbraith points out, a period of real prosperityin America, though (as in the 198 s), this prosperity was concentratedheavily at the top (2). The economy did not collapsein the wake of the 1987 market crash, yet the effortless boom of the Reaganera has clearly come to an end. For two generations after the Crash, the underlying question was"could it happen again." When Galbraith originally wrote in 1955, memoryof the original crash was still vivid, and people characterized their livesin terms of it: "in college before 1929;" "married after 1929" (1955edition 1). The Crash was dramatic and stunning. A classic narrative account of the process that led to the Crash, and ofthe events of the Crash itself, it was re-issued in 1988, almost unchangedin its text save for a new introduction by the author, in which he relateshis account of 1929 to the events surrounding the stock crash of October,1987. and would the sequel be the same? Along with material prosperity went a boom atmosphere. . If itinvested in another investment trust, which then in turn invested instocks, leverage might be increased to 9-to-1. It then investedthat capital entirely in common stocks, gaining 3-to-1 leverage. 128-29). Boston: Houghton Mifflin, 1988.----------------------- 9 The Great Depression, which itushered in, was shattering. The singular feature of the great crash of 1929 was that the worst continued to worsen. The result of leverage for the investor is to vastly increaseprofits--so long as prices go up. For eachshare's price, then, the investor has actually invested only 5 dollars.Let the share then be sold after its price has risen to 15 . All America seemed fixated on the stockmarket. Examining the American economy at the beginning of the 199 s, we findat least four of these five conditions replicated. Forthe next six weeks, it moved "sideways," and gradually down, but there waslittle sign of a coming collapse. The stock market became a fixture of popular culture, oftendominating the news; the papers were full, time after time, of news ofrecord rises on record volume. . New Ed. Reading about the Crash of 1929 in the wake of 1987, we aresoberly reminded of the reality of risks which the buoyant mood of the198 s had sought to bury. In 1929, each rally drew "smart money" back into the marketand each dive wiped out a group of investors who had managed to sidestepearlier plunges. A typical investment trust might raise its own capital throughone-third bonds, one-third "preferred" stock (which is actually somethinglike a junk bond), and one-third through common stock. If this paper is not what you are looking for, you can search again: Search for: or Click here to request an essay written just for you.