Great Crash

Wise words from the preface of The Great Crash of 1929 by John Kenneth Galbraith (1997 edition):

That we are having a major speculative splurge as this is written is obvious to anyone not captured by vacuous optimism. There is now far more money flowing into the stock markets than there is intelligence to guide it. There are many more mutual funds than there are financially acute, historically aware men and women to manage them. I am not given to prediction; one's foresight is forgotten, only one's errors are well remembered. But there is here a basic and recurrent process. It comes with rising prices, whether of stocks, real estate, works of art or anything else. This increase attracts attention and buyers, which produces the further effect of even higher prices. Expectations are thus justified by the very action that sends prices up. The process continues; optimism with its market effect is the order of the day. Prices go up even more. Then, for reasons that will endlessly be debated, comes the end. The descent is always more sudden than the increase; a balloon that has been punctured does not deflate in an orderly way.

To repeat, I make no prediction; I only observe that this phenomenon has manifested itself many times since 1637, when Dutch speculators saw tulip bulbs as their magic road to wealth, and 1720, when John Law brought presumptive wealth and then sudden poverty to Paris through the pursuit of gold, to this day undiscovered, in Louisiana. In these years also the great South Sea Bubble spread financial devastation in Britain.

Later there was more. ...


If we do now have a downturn – what is called a day of reckoning – some things can, indeed, be foreseen. By some estimates a quarter of all Americans, directly or indirectly, are in the stock market. Were there a bad slump, it would limit their expenditures, especially of durable goods, and put pressure on their very large credit card debt. The result would be a generally adverse effect on the economy. This would not be as painful as the aftereffects of 1929; then banks were fragile and without deposit insurance, farm markets were important and especially vulnerable, there was no cushioning effect from unemployment compensation, welfare payments and Social Security. All this is better now. But there could be a recession; that would be normal. There would also be, we may be certain, the traditional reassuring words from Washington. Always when markets are in trouble, the phrases are the same: "The economic situation is fundamentally sound" or simply "The fundamentals are good." All who hear these words should know that something is wrong.

Once more I do not predict and tell only what the past so vividly tells us. ...

(cf Cancer Ideology (1999-05-19), Money Wisdom (2001-05-20), Pop Goes (2001-06-19), Bubble Busteres (2002-02-06), Dow Theory (2002-07-27), Next Economy (2005-01-31), Back to Normal (2008-11-13), Big Short (2011-04-24), Boom Times Loom Soon (2012-08-30), Shiller Price Earnings Ratio (2021-03-29), ...) - ^z - 2021-06-01