Little Known Works of Famous Authors

John R Taylor

HIS. 252     18:00

Author:  John Kenneth Galbraith 

Title: The Causes of the Great Crash

In his essay Mr. Galbraith tells of four flaws in the economy of the 1920's that brought on the boom, and then turned the boom into bust.  At least three of these flaws were highly visible and widely talked about, thus at least some people did or should have known that the prosperity of the 1920's was built on a  very fragile system that could not withstand even a minor negative impact.  He lists these flaws as, the inequality of the distribution of income, the nation going from a debtor nation to a creditor nation, the large-scale corporate thimblerigging, and the stock market boom.  He then expounds on the causes and effects of these flaws, giving credit and or blame to the leaders of the time.  Herbert Hoover stands out as the main player that had the knowledge and personal power to do what needed to be done, however his polices were weak because he depended on volunteerism rather than implement strong compulsory programs.  One act, the Hawley-Smoot tariff, was in itself a major cause of the depression.  The tariff, which Mr. Hoover signed, was seen by the major economist of the time as very bad.  They felt, "that no step could have been more directly designed to make things worse.  Countries would have even more trouble earning the dollars of which they were so desperately short."  Without the dollars they could not pay their debts to the U.S. 


There were many others who added fuel to the fire of collapse, the Secretary of the Treasury during the Harding-Coolidge-Hoover era Andrew W. Mellon was a prominent one.  Galbraith gives Andrew Mellon a large share of the blame for the severity of the depression, that doing nothing, which is what Mellon wanted to do, was the worst thing of all.  Galbraith exonerates Warren G. Harding, but of Calvin Coolidge he gives the quotation, his "masterly inactivity for which he was so splendidly equipped," to illustrate that presidents greatest shortcoming.


Mr. Galbraith's thesis is that the stock market crash, and the Great Depression itself may very well have not been inescapable,that the Great Depression might have been avoided or made less severe if the leaders of the country had used effective and timely criticism and action.


Galbraith argues that the lopsided income distribution was the least visible defect in the economy, with the notable exception of the American farmer.  And though they were making themselves heard, there was not much comment or alarm over the disproportion in income distribution.  He implies, though he does not come out and say, that the people did not have enough money to buy the goods made by American industry. That with so much of the income going to so few people, and so little going to so many, the well being of the economy was in the hands of that few, and when they stopped buying the economy stopped, because the bulk of the people had no money to buy with.


The U.S. becoming a creditor nation does not look like a bad thing at first sight.  But Galbraith contends that under closer examination the detrimental side of the position comes into view.  A debtor nation could export a greater value of goods than it imported and use the difference to pay interest and debts.  But a creditor must import a greater value than it exports if those who owe it money are to have the funds to pay the debts.


According to the author, the pyramiding of corporations that took place in the first part of this century, made the stock market more akin to casino gambling than actual business investments.  Many corporations were nothing more that paper companies that conducted no operations but the churning of it's stock.  The investors of such a company could make money, but only as long as new money was coming in to drive up the stocks price, when investors stopped buying the stock the company would collapse because it had no way to produce profit or income.  Other corporation were pyramided together in such a way that an investment of a few hundred thousand dollars controlled corporations worth hundreds of millions of dollars.


The stock market boom, like the paper corporations, were self-liquidating.  Because it was built on capital gains earned,(perhaps won would be a more fitting word), through stock speculation rather than true operating profit, it could last only so long as new money poured in.  When the supply of new investors dried up the stock prices would cease to rise.  When this happened the investors would sell their stock, collecting their profit.   And since there was little profit from production relative to the inflated market, which was brought about by thimblerigging, margin buying, and the like, the investors that did not get out lost everything when the companies stock became worthless.


John Kenneth Galbraith masterfully uses the facts to make a strong and powerful argument for his point of view.  He is at least somewhat broad minded in his assessment of guilt.  However, he does go a little beyond the facts in making his argument.  (In this we can not fault him.  We all have our own perspectives, and use the facts to support those views as best we can.  It is left to each of us to form opinions based on the facts as we see them; and at times some truth may have an intercourse with our opinions.  We mortals, left to ourselves, can hope for little more.) 


One aspect of economy of the 1920's that Galbraith does not address, is the relationship between the reason why there was    such a gross inequality in the distribution of income, and the monopolies, oligopolies, and cartels that were common in the roaring twenties.  With many industries controlled by these means, and restriction of international trade imposed by high tariffs and isolationist philosophies, true competition was a rarity.  Without true competition, businesses in many industries could set their prices.  When they did, these prices were almost always much higher than the laws of supply and demand would have dictated.  This was good for the businesses in the short term.  They earned huge profits and thought everything was great.  But because the prices were much higher than they should have been, and not based on demand, producers over-produced.  Consumers did not have the money to buy the products.  The producers, not knowing that the high prices were the root cause, did not lower prices but cut back on production.  This caused lost jobs, which reduced the consumers buying power still further.  If the depression had been in an isolated industry these contracting polices would have worked, as they had before and have sense.   But because the depression was broad based it only added to the problem.  Had the producers lowered prices, (and they could have, profits were high in the beginning,) the consumers could have bought the products.  By the time prices started coming down wages were already out-pacing prices in their downward race.  The lack of true competition indirectly, and producers pricing themselves out of the market directly, was a major cause of the crash. 


Mr. Galbraith also over-simplifies the disadvantages of being a creditor nation.  His analysis would only be true if there were only two nations in the world.  This is not to say that the U.S. transforming from a debtor state to a creditor state had no impact.  It most certainly had an enormous effect.  But the value of goods imported versus the value of goods exported would have, in a free market, a favorable ratio.  That is the prices of exports would be high compared to the prices of imports.

            All in all Mr. Galbraith's essay is informative, and enjoyable,  a very good work on the subject.

Home | uCan | Southern Storage Solutions | | |  Copyright 1992 - 2013 John R. Taylor