A Study of the Origin of the Crash of the Stock Market in November 1929 During the Great Depression

Published: 2021-09-22 09:45:10
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In John Kenneth Galbraith’s seminal work The Great Crash 1929, Galbraith investigates the evolution of the infamous stock market crash of November 1929, in which he provides an in-depth look at the behavior of the Americans who played a pivotal role in its collapse. In a similarly rigorous exploration of this period, The Great Depression, Robert S. McElvaine confronts the complex intersection of economic theory and American history central to understanding the economic crisis that followed the collapse of the US stock market. The differences between these two texts are grounded in the events that they examine: Galbraith assembles stodgy financial, statistical, and historical data into a colorful portrait that articulates the spectrum of sociological elements that played into the popularity of stock trading. In contrast to Galbraith’s examination of numbers and factual evidence, McElvaine’s survey is done on a larger scale, highlighting the various arguments within the expansive phenomenon that followed the stock market crash. Despite these two divergent angles of academic investigation, in being addressed to a student of history, both of these retellings present little relevance for the contemporary American. In retrospect, there are a wide range of lessons which can be derived from the economic plight of the twenties that relate either to our economic sensibility or penetrate to a consideration of our fundamental humanness, but in the foreground of these theoretical considerations, there should be a feature of the American mindset that is willing to entertain the brand of critical thinking that historians such as Galbraith and McElvaine employ.
In The Great Crash 1929, historian John Kenneth Galbraith uncovers a period in American history in which the economic health of the country, along with the hope of its people, switched polarity within the matter of a day. The striking nature of this event caught countless Americans off-guard, but Galbraith intends to reveal that these factors that led to the collapse were evident earlier in American history. Truly, it was an event that was years in the making. A common theme within this account pertains to the various ways in which the American public did not see the stock market crash even when the market was at the very precipice of the cliff. Galbraith sets the tone by referencing a Congressional address by then-President Calvin Coolidge, one of unprecedented optimism for American business and industry, less than one year before Black Tuesday. By the same token, it also displays the numerous instances in which Americans skirted and rejected evidence that predicted an impending collapse. Though the extensive amount of personal records, excerpts, and statistics within the book makes for a dense account, Galbraith’s writing continually reminds the reader of the very deliberate choices made by the participants of the stock market to eschew reality and collectively descend into a fabricated world of make-believe.While the fantastic failure of the stock market, Galbraith first grounds these risky habits in the venture of the Florida real estate boom of 1925. This event exhibited the same hysteria and the same flight from reality as was displayed in the crash, yet the American public failed to see the lesson from this particular endeavor. The real estate business may have required a different skillset than the stock market, yet it shared the same aspirations of profit. But aside from being a missed message to participants at the time, the Florida real estate boom functioned to reinforce the prevailing American sentiment of how the common man had the right to be rich. The bulk of the book, which covers the development of the crash, speaks to this same pattern of progression in which there is a boom, profits are made, people gradually crowd the market, widespread speculation and denials occurs, and finally collapse.
In his analysis, McElvaine looks at the larger features that lead to economic collapse beyond the scope of the stock market crash. Though the US emerged from the war ahead economically, rising as a creditor rather than a debtor nation, the war weakened the global economy. Of international problems, McElvaine posits that the US’s stature following the war was contradictory in nature. America wanted to be an isolated participant in world affairs. It was this attitude of being the world’s producer while concurrently buying little from other countries that separated the United States from the rest of the world’s capital. Aside from sentiment, this was also manifested in high tariffs that sought to protect American industry of which Hoover was a notable champion, such as the Hawley-Smoot tariff. Within the country, however, there was great overproduction of agriculture, whose price was largely unregulated. A worldwide surplus of agriculture around 1929 prevented farmers from exporting the goods they reaped. The corporate structure of America greatly reordered the distribution of wealth within the country. Regardless of the implications of great disparity of wealth, the Great Depression reflected the social problem of inequality in the United States, an issue that only became worse as the decade progressed.
In reference to the onset of the bull market, McElvaine expressed that roughly until the recession of 1927, there were concrete reasons for such widespread optimism in the economy. In the mid twenties, American fundamentals were doing exceedingly well, which did create a legitimate boom in the market. Though rampant speculation had not yet taken place, the vibrant world of make-believe that Galbraith describes was a continuation of this attitude. Yet as Wall Street began to pick up steam, it was accumulating a great deal of capital, especially due to the increasing interest rates on brokers’ loans. Though the situation seemed bleak by 1929, they were equipped with an experienced humanitarian in Herbert Hoover. Hoover presented himself as a president that would be skilled during a period of economic decline, but his government programs simply did not have the strength to turn around this ailing financial situation. Hoover’s imposition of trickle-down economics, in which benefits would be given to the upper classes, with the notion that opportunity would “trickle down” to those at the bottom, failed to produce a substantial impact on recovery. Herbert Hoover came across as the best leader the United States had to effect meaningful change on the economic climate, but his philanthropic efforts in the past paled in comparison to the governmental measures that demanded to be taken for a collective turnaround.
Simple observation within the Wall Street Journal article Knowledge Deficit, reveals the depth of economic matters vis-à-vis financial considerations. Though economics and finance are commonly combined, due to the fact that each disciplines shares certain concepts, they differ in terms of the scope. Economics entails a certain mindset, one which is attuned to consideration human behaviors and how we are liable to behave, and actively pursues furthers understanding of people wherever truth can be found. It is a comprehension of finance as opposed to economics, however, that occupies a greater degree of attention within the conscious of the American public. Basic finance entails concepts that are essential and appealing to any individual that has a source ¬¬of income. While knowledge of finance can give us certain skills, such as how to succeed in the stock market, comprehension of economics delivers real insights about the collective behavior of people. Without an economic rationality, as compared to a financial aptitude, people are only given the tools to pursue their own individual interests. The average American has little incentive to know the workings of a free market economy. When this framework breaks down, however, a lack of fundamental economic understanding, a grasp on the tendencies of others, is the cause. Though economics has largely become a quantitative discipline following the emergence of Keynesian theory, economics as a social science provided method to the madness of the stock market crash.
This contemporary evaluation of the American’s understanding of finance and economics bears a resemblance to the American people in the 1920s. The field of the stock market was new and captivating during this period. Though as Knowledge Deficit highlights, poverty was far more rampant during this period. With relatively less of it, and with less means of securing their money (save under their mattresses), Americans possessed a greater intimacy and, as a result, likely a better financial understanding than most citizens today. As the crash indicated, they lacked awareness of the social circumstances that had a large role in the failure of the stock market, so one could conversely argue that their understanding of economics was poorer in relation to the modern day.
The issue with the appeal of Galbraith’s book in the modern era is that it is not a how-to on achieving success in the stock market; it is a tome in which widespread folly among various constituents was scrutinized. In highlighting the foibles, and the inability for so many entities to miss what we now regard as an inevitable, Galbraith’s goal is to separate fact from fiction. The considerations that may have made The Great Crash a bestseller upon its release in the 1950s would likely be dismissed if released today. In light of the financial success of World War II, The Great Crash was delivered to Americans at an apropos time. Due to the incredible boon to the American economy that occurred during World War II, readers were looked back on this event with a better sense of stability. It could finally be looked at with some clarity and from some distance, possible in the hopes that such a cycle of prosperity and then sudden despair would not manifest itself in the same fashion. Unlike in the 50’s, very few members of the Depression era are alive to connect us with such a sentiment. As time passes, we lose personal intimacy with events, forget information, and reduce historical outcomes to the shortsighted behavior of long-lost relatives.
Despite this perception that the Americans do not have a great need to enhance their economic IQ, if we simply recognized the import of the crash—that the average American during the twenties had misguided sentiments towards the economy—we could skirt development of the same social situation that fueled our economic decline. As McElvaine remarks, in the twenties there was reverence for the free and unchecked attitude towards the marketplace. The concept of Adam Smith’s invisible hand not only provided the structure for capitalism, but also removed the need for external regulation via the government or any other entity. In a way, the interaction of supply and demand between producer and consumer was believed to only hinder the collective outcome within the American economy. In retrospect, we have learned that intervention is an essential component of checking processes such as the speculation of stock prices as well as the separation of large and unstable corporations. To generalize from specific concepts such as the invisible hand, the plight of the Great Depression warranted a fundamental change in the public’s conception of classical economics since theory was not used to predict the Depression or effectively counter its behavior. The issue with disseminating the lesson of the Great Crash and the Depression idea is that when there is no common economic literacy to begin with, distinctions within economic theory are piecemeal if there is no foundation of understanding to build these nuanced observations upon. When it is possible that the average American citizen has less of a familiarity with economic concepts, to introduce a book that seeks to revise our attitude towards the financial system would mean very little to people for whom economic matters does not inform their day-to-day. Whether through economic or social understanding, how can future incidents be avoided if we cannot crystallize a new way of thinking within the public conscious?
Galbraith and McElvaine come to a consensus on many elements of the US economy that failed during this period in American history, such as a poor distribution of income, unregulated corporate structure, and questionable foreign policy. Despite the insights that these works offer for past and present financial situations, the modern American still has a financial interest for the sake of advancing their own well-being in lieu of an understanding of economics and the social theory that illuminates the system in which they are immersed. Noting the similarities between our economic situation and that of the 1920s, both texts should serve as a powerful guide to avoiding future disaster. While the story of the crash is racked with details of personal disregard and avarice, piecing together the events of the Great Depression provides an insight into the basis of an unstable financial environment.
If any message has become apparent in the wake of such widespread financial decline, it is that any historical event, regardless of its severity or similarity, is largely forgotten. If we look to such recent events as the subprime mortgage crisis, or the failing of the Lehman Brothers, it would seem as though we are just as susceptible to these failures as ever. The reader of each of these books is given a prescription of wariness for the financial system and foresight beyond the purported experts. In the stock market crash, we see the authority’s dismissal of the portended outcome, which is certainly channeled in contemporary events. Remember Enron’s proclamations of stability right before its demise? The people who inhabit this system have a certain aptitude for being misleading with the intent of getting ahead at the expense of any other participant.
As Galbraith points out, seeing as how the Florida real estate boom immediately prefaces the crash, one would think the American people had all evidence to steer clear of tumultuous waters, but that is the very message: Their proximity to such an event did not give them sufficient awareness. To see this similarity between the stock market crash and the real estate boom in retrospect gives analysts an ability to cleanly juxtapose these two events under the banner of optimism and avarice, but when people have a tendency to be carried away with the spirit of the times, it becomes harder to select the right path. We should see this capacity to look backwards and discern our financial situation with greater acuity as a blessing, but it will only function as such provided our grounded reason exceeds that of our soaring desire for monetary gain.

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