With all the talk about a bubble in investment in so-called ‘AI’*, I have taken a moment to reread the classic on the 1929 Wall Street bubble bursting, US economist John Kenneth Galbraith’s The Great Crash 1929, first published in the 1950s.
Speculative market bubbles do come and go. As Galbraith notes, the reason that 1929 is most remembered is not so much that the speculative bubble had grown so large before bursting (though it was unusually large) but that there were such broad real economy impacts from the bursting of the bubble – the lost years known as the Great Depression. A pair of Galbraith datapoints start to capture the scale of the Great Depression in the US and its searing impact on ordinary people: unemployment in 1933 was 13 million, one in four of the labour force; and even in 1938 still one in five were out of work.
So trying to understand why the Great Crash sparked the Great Depression is of real interest and seems like a timely thing to consider. Galbraith has no patience for the Wall Street apologists who argue there was no connection between Crash and Depression, but he does see that there were vulnerabilities in the economy that made it particularly susceptible to the crisis.
The first of these is of most interest to this blog, and Galbraith headlines it ‘The bad distribution of income’, noting that in 1929 the top 5% received around 35% of all personal income, and that interest, dividends and rental income (the almost exclusive preserve of the wealthy) represented fully 22% of total family income.
“This highly unequal income distribution meant that the economy was dependent on a high level of investment or a high level of luxury consumer spending or both. The rich cannot buy great quantities of bread. If they are to dispose of what they receive it must be on luxuries or by way of investment in new plants and new projects. Both investment and luxury spending are subject, inevitably, to more erratic influences and to wider fluctuations than the bread and rent outlays of the $25-week workman. This high-bracket spending and investment was especially susceptible, one may assume, to the crushing news from the stock market in October 1929.”
Readers will recognise some of our current distortions in these reports of the imbalances of pre-crash 1929 (also see Is enough enough? Addressing the problem of the super-rich, and The centre cannot hold). Significant inequalities – especially unfair ones – make economies less robust, more risky and more prone to crisis.
That is the first of Galbraith’s linkages between Great Crash and Great Depression. The others are as follows (deploying my brief characterisations of his comments):
- Bad corporate structure. A business sector including many swindlers and fraudsters.
- Bad lending. Profligate lending to unsound businesses and investments.
- Imbalanced trade positions. Long-term trading imbalances, sometimes exacerbated through the application of tariffs, with the resulting deficits sometimes filled by corrupt, or at least grey, payments.
- Poor economic insight. Shonky economic data riddled with holes.
So clearly, we’ve nothing to worry about now.
I will leave Galbraith with the last words of this blogpost, without comment from me. In the last pages of the book, he writes: “during the next boom some newly rediscovered virtuosity of the free enterprise system will be cited. It will be pointed out that people are justified in paying the present prices – indeed, almost any price – to have an equity position in the system. Among the first to accept these rationalizations will be some of those responsible for invoking the controls. The newspapers, some of them, will agree and speak harshly of those who think action might be in order. They will be called men of little faith.”
* Seasoned readers may remember that I am an ‘AI’ sceptic – see A just AI Transition, for example
See also: Is enough enough? Addressing the problem of the super-rich
The centre cannot hold
I am happy to confirm as ever that the Sense of Fairness blog is a purely personal endeavour – and also that I do not give, and am not authorised to give, personal financial advice. This blogpost should not be construed as such advice.
John Kenneth Galbraith, The Great Crash 1929. Hamish Hamilton 1955
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