Published June 18, 2020, 2:23 p.m. by Moderator



John Kenneth Galbraith account of the Great Market Crash of 1929 is a great insight into the human mind. The principal emotion that governs stock speculation is greed. The constant need for more. Once an animal is primed for more, reality takes a back seat. According to Galbraith this is what happened in the Great Crash of 1929. Speculators were cheered on by the government, the political elite, the news media and economists (Galbraith, 1972). This false reassurance from those whom the public entrusted with giving direction especially when it came to financial matters fuelled widespread speculation that ultimately led to the stock market crash.

Galbraith cites public figures who encouraged the speculation. The then President Calvin Coolidge praised the stock markets by claiming that the economy was in great shape and the stock prices were very fair (Galbraith, 1972). Renowned bankers such as Charles. E. Mitchell helped fuel the speculation to continue benefiting from the stock markets, what is known today as ‘insider trading’. Galbraith also cites John Jakob Raskob, a finance executive who opined a 1929’s news article titled “Everybody ought to be Rich”. Herbert Hoover went on the campaign trail declaring that the United States was on course to eradicating poverty. Such “statements of confidence” in the stock markets from authority figures sparked a mad rush to get rich quickly (Denhart). 

This was the first time that average Americans were getting introduced to the stock market. It was simple, buy a stock or a share of a company with no fixed stock value. The price could go up or down depending on demand; when demand is high, stock prices go up and when demand falls, the stock prices fall.  For one to make a profit in the stock markets, a speculator has to sell when the stock prices are higher and buy when the stock prices have fallen. The stock markets had been performing well for decades and such was the optimism that the stock prices would continue rising ad infinitum.  

The Great Crash of 1929: How it happened? 

Galbraith’s account of the Great Crash of 1929 is pretty uncanny. The Great Crash of 1929 mirrors the 2008 Global Financial Crisis where widespread speculation coupled with limited government oversight led to massive losses. In the first chapter, Galbraith talks about how Coolidge’s government either encouraged speculation or refused to intervene altogether (Galbraith, 1972).

Galbraith points to lack of government oversight and requisite regulations as the main causes of the 1929 financial market crash. Galbraith summarizes that the United States government believed it was better to be “insane” (join the speculators) rather than regulate (restrict the speculators), as the latter would be highly unpopular with majority of their voters (Galbraith, 1972). It was also during this period that the term ‘permanent prosperity’ was coined. Wall Street was credited for this false ‘economic prosperity bubble’; Wall Street wealth was concentrated in the hands of a few major stockholders.

William. C. Durant, the founder of General Motors was a key figure in the 1929 stock market. It is claimed that Mr Durant backed by other venture capitalists and industrialists could singlehandedly drive up the stock prices and then reap the benefits by selling their stocks and buying the same stocks back when the prices fell. It is estimated that William Durant controlled a portfolio worth $ 5 billion.

Jesse Livermore was another big player in the 1929 stock market. It was claimed that he had a “Midas touch” for the stock markets. He always seemed to be making money off his stocks. He encouraged average Americans to invest more in the stock market. The sad truth was, Jesse Livermore had no tricks under his sleeve, and he was no math genius. He was an opportunistic speculator who did not care about dividends or the profitability of the stocks. It was a numbers game for him. Attract new speculators through false success which would drive the prices high because of increased demand. The success of big investors like William Durant and Jesse Livermore acted as a magnet that attracted smaller investors who were also looking to speculate.

Charles Mitchell, the then president of National City Bank took the idea of stock and bond markets to the average American through mass market campaigns that roped in blue collar workers, pensioners and American housewives. It was the first time that the banks were dealing with individuals, previously they had only dealt with large corporations. The National City Bank offices expanded from 4 in 1926 to over 50 offices in 1929 which made it the largest brokerage firm in the world. Stock trading had crossed into mainstream American culture.

Newspapers and magazines begun publishing daily financial news focusing on the stock market. Movies like the ‘Gasoline Alley’ had characters involved in trading stocks. Speculators were always looking for stock tips and some even went as far as to consult psychics and astrologers to predict the stock markets. Famous astrologers like Evangeline Adams had clientele that included J. P. Morgan and Charlie Chaplin.

Gone were the days when the stock market was considered a risky venture. The booming stock market had encouraged amateur speculators. The smaller investors would borrow money from the banks, family or friends to buy stocks. It was a process known as “buying on margin” where the investor would only need to put in 10% of the value of the stocks. For example to buy $10,000 worth of shares, the investor would need a $1000 investment. This acted as a lure for these smaller investors as it put them at par with some of the bigger investors.

There were no financial regulations and the big investors would manipulate a particular stock. For example, the Radio Corporation of America (RCA) stocks were split as many as twenty times because its demand was so high. The bigger investors pooled their resources to buy a particular stock and their actions would cause a sharp increase in its share price. Once the unsuspecting public got wind of the increase in share prices, they would scramble to buy the stocks. The big investors would wait until the share price had increased exponentially and then they would sell to the amateur speculators. Once sold they would drive the price down by pulling out their money to decrease demand. The smaller investors would be the eventual losers.

To fuel the speculation journalists from established newspapers such as The Wall Street Journal, The New York Times and The Herald Tribune colluded with the stock brokers to write pieces that praised a particular stock option as the best deal for a ‘bribe’. The unsuspecting public would be none the wiser. Amateur speculators would flood the market driving the share prices even higher. The amateur speculators did not know that the bigger investors would sell the shares amongst themselves to indicate huge trading volumes. This would spark a ‘buyer’s stampede’ for the stocks.

An excellent example is when Michael Meehan and a group of investors drove the RCA share price 50% higher within a span of one week between March 8, 1929 and March 16, 1929. It was a game of musical chairs and the person who bought the stock last, lost. Even though smaller investors knew that the game was rigged against them, they would still come for more. It was a beggar’s belief that they could recover their initial investment with another stock that was ‘better performing’.

Galbraith illustrates how the banking and the stock markets works. The banker provides the funds to the broker who in turn gives them to the customer who then uses it to purchase shares and the collateral provided by the customer goes to the bank as security. It was a win-win situation for the banker and the stock broker (Galbraith, 1972). If the value of the ‘security’ went down then the customer had to provide additional security. This arrangement only favoured the bankers and the stock brokers not the smaller players or customers.

Galbraith is on point when he claims that the sole purpose of this financing arrangement was to facilitate speculation and if the public was explicitly told how the markets worked, they would turn against the markets and call for reforms (Galbraith, 1972). In his introduction, he summarizes the today’s financial markets. The financial markets are set up as pyramid schemes where initial investors reap huge financial rewards while the rest go home with nothing.

It was only when the stock market crashed, that people came back to their senses. Roger Babson, an economist who spoke out against the artificial nature of the stock market was condemned and vilified. Galbraith sums it up in his introduction when he refers to “fools having the field to themselves as the sane and wise are silenced”. Those who knew better were cautious to voice their opposition as they feared attacks on their reputation.

Days before the stock market came tumbling down, the Federal Reserve Bank held a meeting but none was willing to call for regulation of the stock markets. The Federal Reserve Bank had the authority to regulate borrowing but it failed to intervene. This might have been due to political pressure as the bank distrusted the ‘artificial stock market boom’ that was largely funded by borrowed money. The smaller investors who had borrowed saw their stocks lose value. Their shares were worth less money than the money they owed to the banks. They had to provide more funds to hold on to their stocks or the stocks would be sold off.

In his book, Galbraith mentions five weaknesses of the US economy that led to the stock market crash. By 1928, there was an uneven distribution of income. The top 5% in the country earned 38% of household income (Galbraith, 1972). The stock boom had made a small group of Americans extremely wealthy compared to the rest of the country. Galbraith argues that an economy that relies on a few rich individuals is more likely to collapse than one which depends on the majority of the population (Foley, 2011). However, the Great Crash of 1929 did not spare the rich unlike the 2008 Global Financial Crisis.

Prior to the stock market crash, America had emerged out of the First World War with a robust economy. It was also during this period that America experienced ‘mass consumerization’. New inventions like electricity, radios, air conditioners, refrigerators, washing machines and deodorants became mass market. Factories were churning out products and jobs were in abundance. It was also during this period that consumer credit became acceptable. Consumers could now afford goods and services that had been out of reach.  That was enough reason to speculate in the stock market. Brokers and bankers seemed to have it all.

The second weakness of the US economy was an ‘unsustainable corporate culture’ (Galbraith, 1972). The business model involved conglomerates that held vast interests in different sectors of the economy. These holding companies relied on the dividends paid by their subsidiaries to finance their debts (Foley, 2011). Any interruption in the flow of the dividends would lead to loan defaults and eventual bankruptcy. To prevent this from happening the companies would have a lock-up period where stock holders would not be able redeem or sell their shares. This action aggravated the depression and the stock losses.

The third weakness of the US economy was the banking structure. In his book, Galbraith does not blame the banks for the collapse of the financial markets (Galbraith, 1972). Rather, he puts all the blame on panicking depositors who withdrew all their money from their banks (Foley, 2011). Once the market crash begun, many people believed that the only place their money would be safe was outside the financial system. In the first half of 1929, more than 300 banks had closed shop.

The fourth weakness of the US economy was the non-payment of loans by foreign nations. The First World War had decimated the economies of many countries who could no longer service their debts. America’s Great Depression was worsened by the loan defaults (Foley, 2011).

The fifth weakness of the US economy was the lack of sound economic policies. Galbraith states that the government’s action of raising taxes and cutting spending exacerbated the depression. Galbraith’s Keynesian economics stipulates that governments should fuel demand to resuscitate an economic downturn not cut budgetary allocations and increase taxes (Galbraith, 1972).


In conclusion the Great Depression was as a result of many factors; a booming economy that had given the public a false sense of security, lack of government oversight that encouraged speculators, human greed that surpassed logic. There was no single way to stop speculation, there were no laws that could have dissuaded the public from speculating. Public figures, investors and the media misled the public into believing that speculation was good for business. President Calvin Coolidge and his predecessor Herbert Hoover believed that business was the only way for America to prosper and the best model to follow was that of a self-regulating stock market. Unfortunately it led to ordinary Americans losing all their life savings and being saddled with unmanageable debt.


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