Index

9   A JOURNEY TO THE LAND OF DEJA-VU

Frank Taylor

The Great Crash; 1929; J. K. Galbraith

I am lucky to own a copy of this book. Sadly it is now out of print. Recent events compelled me to dust it off its shelf and re-read it. I did so with little disappointment as to the echoes it now evokes.

This book was written by a confessed conservative, but one disposed to ‘find antidotes to the suicidal tendencies of the economic system’. However in 1929 these ‘suicidal tendencies’ did not originate from any undue availability of credit. Indeed with call rates for margin trading in stocks at 7-12% and sometimes higher, rates were on the high side by historic standards. Credit had been much lower in previous eras but had triggered no speculative bubbles.

However such rates can only be relative to the anticipated gain. In 1929 these were very high indeed. Who worries about an annual interest rate of 12 or even 20% when a profit of 100% or more is on offer?

So what triggers such speculative bubbles? Galbraith puts this down to an excess of savings following a long period of prosperity coinciding both with an insufficiency of profitable investments available as new outlets for these savings, and ... so apposite in our current circumstances ... with the fading of the collective memory of previous booms and busts ... ‘the length of time that it takes for men to forget what happened before’. All of which must be added to a general mood of optimism ... of a ‘tide of prosperity which would continue unabated’.

Not that the boom of the late 1920’s spawned many of the sort of wild and fanciful schemes that characterised the South Sea Bubble, so infamous for prospectuses such as ‘To Make Salt Water Fresh’; ‘For importing A Number of Large Jack Asses from Spain’; and even ‘For an Undertaking which shall in due time be revealed’.

Rather the impetus was towards the investment trust or company. And what investment trusts they were! The money wizards of the time soon worked out that the differentials between ordinary and preferred stock provided the ideal means of leverage by which further acquisitions could be made or further stocks issued. Soon chains of holding companies and trusts were forming into classic Ponzi pyramids. The credibility of these trusts was only enhanced by the large scale promotion of trusts by such venerable names as JP Morgan and Goldman Sachs, the latter with its fabulous Shenandoah and Blue Ridge Trusts.

In reality all this was feeding the self-re-enforcing, incestuous, parthenogenic process by which asset values bid each other up, all of which was being fed by ever burgeoning amounts of brokers’ call credit to trade stocks on margin. Galbraith comments acidly on how the events of these years induced an extraordinary tendency by apparently sane men to swindle themselves.

All this was thus a ‘mass escape into make believe’ by those ‘impelled ... by the seminal lunacy which has always seized people who are seized in turn with the notion that they can become very rich.’ And not only rich but ‘rich without work’, having discovered the ‘unbeatable system’.

So we enter the gates of the land of deja-vu. We learn that manufacturing companies turned from financing production to financing speculation, adding still further to the hurricane of money descending on Wall Street. At the height of the fever call credit for brokers was growing by $600 billion per month. Attracted by call rates of 12% or above an influx of foreign money spun this vortex even faster until it seemed that Wall Street might ‘devour all the money in the world’.

One of the enduring myths of the Wall Street Crash is that it happened on a single day. Rather events followed the course of a typical coronary infarction. There were a few bouts of breathlessness in 1928 and 1929, followed by strong rallies. These warnings went unheeded. In September and early October there were bouts of severe pain which might be put down to economic colic. In October there were several days which might each claim the seminal title of a ‘black’ day where the patient appeared to collapse gasping to the floor, only to rally and then to collapse again. This was but the beginning of a long, halting slide lasting well into the 1930’s.

During this initial phase there was no shortage of eminent commentators from Harvard professors through senior bankers to President Hoover himself, rebuking the prophets of doom and declaring ... where do we hear these virtually identical words now? ... that ‘stocks are not overvalued’; that stocks have achieved a ‘permanently high plateau’; that ‘the fundaments are sound’; and that market events were due to ‘technicalities’. At least we can console ourselves with the thought that the clichés remain as timeless as the ignorance which spawns them.

At first there were attempts by banks and individuals to intervene. When it became apparent than the force of this elastic band unwinding was beyond them they subsided into helplessness. Galbraith parodies the White House meetings of the Great and the Good as ‘no-business meetings’, designed to appear important rather than to achieve anything.

Of course there were swindles in abundance, from the technically legal pyramid schemes of Shenandoah and Blue Ridge to the outright fraud of Mitchell, Whitney and Kreuger. Many more chose to bury their misgivings in silence; ‘ ... the capacity of the financial community for ignoring evidence of accumulating trouble, even of wishing devoutly that it would go unmentioned ...’ Such words should be etched on the boardroom walls of every bank in the world today. Amnesia during the subsequent Congressional hearings grew to epidemic proportions.

Now we have amnesia of a more classical form as the Wall Street Crash and the 30’s depression move towards the edge of living memory. As one of the reasons why the crash was so severe and enduring Galbraith cites lack of regulation and bad corporate structure. That deficiency was repaired in the regulatory acts of the 1930’s but this has since been undone by neoliberal de-regulation. The reasons why these regulatory firewalls were inserted have now been forgotten.

Galbraith also cites the poor distribution of wealth, whereby the economy becomes excessively dependent on the spending and investment patterns of the very rich. The New Deal closed that wealth gap, but again it has re-opened with a vengeance in recent decades.

The slide was a long one. The world was introduced to the dead cat bounce, which Galbraith characterises as ‘a process of climax and anti-climax ad infinitum’. So it may be now with the ‘credit crunch’. The current collapse will, given all the clever wheezes dreamed up by the new generation of corporate bosses and money men, be almost certainly a far more complex, messy and protracted affair than that presaged in 1929. Far from Gordon Brown’s oft repeated declaration that he has suspended the laws of economic gravity, we may be seeing a good deal of the dead cat bounce in the next few years, as one huge public commitment after the other to shore up a bankrupt and collapsing system is absorbed and dissipated.

Galbraith finds the depth of the 1930’s recession a puzzle given the ‘eupeptic mood’ of entrepreneurs and workers in the 1920’s. How could such innate dynamism be brought so low? How could so much human and productive potential be wasted? Of course here is the usual Achilles heel of the conventional economist ... only a nod in the direction of Keynesian demand management and not a word on the vital role of money supply and money creation.

Be that as it may, deja view might serve as at least a partial therapy for amnesia. If you find a copy of this book secondhand, then buy it. If your local library has not been entirely submerged beneath the current tsunami of pulp fiction, you may still find it there. Get it if you can. This book is brief, it is eloquent and free-flowing, it is perceptive, it is wise and it is every bit as deeply and richly ironic and deliciously caustic as its subject deserves.

Frank Taylor

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