BOOK REVIEW: The Great Crash 1929, John Kenneth Galbraith; first published in 1954; reprinted in 1992; £9.99 (€11)
KARL MARX said, in 1852, that history repeats itself, first as tragedy and secondly as farce. Is the crash of 1929 repeating itself today? If so, it is truly a farce, as our understanding of economics should be so much better. But many influential economists and politicians forgot, or chose to forget, that the world is a different place today than it was when free markets actually operated, back in the 19th century.
John Maynard Keynes proposed that laissez-faire economics ended in 1914 with the outbreak of the first World War and that, from then on, state intervention in markets was both inevitable and essential.
The current deep, synchronised international recession was largely caused by those who set aside “state interference” in the financial markets in regulation.
The real question is how to intervene in markets effectively. Is the Government’s blanket guarantee for all Irish banks’ liabilities a better use of potentially zillions of tax euro than nationalisation or other action?
A reading of this book, which has not been out of print since it was published in 1954, might have helped avoid this recession.
JK Galbraith was the most popular economist of the 20th century and his books sold widely. Some economists did not rate him, perhaps because he was popular, but also because he was critical of the abuse of power by corporations and because he was sceptical of the workings of the market.
The Age of Uncertaintyand The Affluent Societywere hugely popular, as was The Great Crash 1929.
In The Great Crash, Galbraith tells of how, in the 1920s, it was widely believed that the crazy days of optimism would continue forever. In 1928, one writer distinguished the difference between a gambler and an investor, saying that, in gambling, one wins and one loses but, with investing, all gain – shades of "must get on the property ladder" in Ireland a short year ago. According to the cheerleaders of the boom, the property ladder and the prices only went upwards, and they were widely believed.
Some of the descriptions of the roaring 1920s sound eerily like recent times. “Illusion, boundless hope and optimism” ruled.
The crash in autumn 1929 followed massive speculation in 1928 and 1929, when everyone was “not going about their business” but were in the broker houses buying shares, he says.
We know what led to the Irish property boom, but few anticipated how bad the bust would be. Our boom was due to very low interest rates, far lower than the Central Bank would have tolerated had we our own currency. Yet the bank and the Irish Financial Services Regulatory Authority (a wonderful example of the failure of “state interference” in the marketplace) did nothing to curb excessive lending by the banks of 110 per cent in 30-year mortgages to anyone with self-certified earnings of big bucks.
The Department of Finance did not stand idly by: it exacerbated the boom (and the bust). The then minister for finance, Charlie McCreevy, poured tankerloads of petrol on the fire to help the builders and speculators. He pursued vigorous pro-cyclical, tax-cutting policies, “putting money back in people’s pockets”, as he put it, at a time when that money should have been taken out of the boom and put aside for today’s crisis.
To cap it all, McCreevy gave away hundreds of millions of euro in subsidies or “tax incentives” to builders, speculators and investors in all kinds of shoddy, ill-conceived, property-based tax schemes, many of which remain.
Had the boom been less inflated, the bust would have been smaller and many more builders might survive. The collapse was greatly accentuated by the US financial crisis, which has spread over here, but Ireland could have done a lot more to ease it had we been more prudent.
Galbraith quotes a 1929 commentator: “The common folk believe in their leaders. We no longer look upon the captains of industry as magnified crooks. Have we not heard their voices over the radio?” There are shades here of Anglo Irish Bank and the financial economists.
Galbraith warns that there is no inevitable biblical cycle of seven years of boom followed by seven years of bust. This is correct and it is also comforting because Ireland’s boom lasted 20 years. The thought of waiting until 2029 for recovery to 2007 levels of economic growth is too much. But US output did not recover to its 1929 levels until 1941. It had fallen by one-third by 1933. Unemployment rose to 25 per cent in that year and stayed at about 20 per cent for many years.
Galbraith cites the reasons for the 10-year depression that followed the crash, some of which are relevant today.
He highlights the bad distribution of income, where wealthy people were not inclined to spend; a bad corporate structure or culture; a bad banking structure with bad practices; and poor economic intelligence, when conservative economists ruled with balanced budgets and monetary policy was restrictive.
This book should be read today, if we are not to exacerbate the farce we are in.
Paul Sweeney is economic adviser to the Irish Congress of Trade Unions and author of
Ireland’s Economic Success
