Table of Contents Title Page Table of Contents Dedication Copyright Foreword Introduction A Note on Sources CHAPTER I CHAPTER II CHAPTER III CHAPTER IV CHAPTER V CHAPTER VI CHAPTER VII CHAPTER VIII CHAPTER IX Index Footnotes TO CATHERINE ATWATER GALBRAITH Copyright © 1954, 1955, 1961, 1972, 1979, 1988, 1997, 2009 by John Kenneth Galbraith Foreword Copyright © 2009 by James K. Galbraith ALL RIGHTS RESERVED For information about permission to reproduce selections from this book, write to Permissions, Houghton Mifflin Harcourt Publishing Company, 215 Park Avenue South, New York, New York 10003. www.hmhbooks.com Library of Congress Cataloging-in-Publication Data Galbraith, John Kenneth. The great crash, 1929 / John Kenneth Galbraith ; with a new introduction by the author. p. cm. Includes index. ISBN 978-0-395-85999-5 1. Depression — 1929 — United States. 2. Stock Market Crash, 1929. I. Title. HB3717 1929.G32 1997 97-22051 338.5'4'097309043—dc21 CIP ISBN 978-0-547-24816-5 Printed in the United States of America DOC 10 9 8 7 6 5 4 3 2 1 Grateful acknowledgment is made to the publishers for permission to quote from the following works: Only Yesterday by Frederick Lewis Allen, published by Harper & Brothers, 1931. Fluctuations in Income by Thomas Wilson, published by the Pitman Publishing Corporation, 1948. Foreword BY JAMES K. GALBRAITH TOWARD THE END of this account, my father brought himself, with a show of reluctance that he knew would not be taken too seriously, to comment on whether another crash would come. There were many reasons, including memory and new regulation, why not. But then: No one can doubt that the American people remain susceptible to the speculative mood—to the conviction that enterprise can be attended by unlimited rewards in which they, individually, were meant to share. A rising market can still bring the reality of riches. This, in turn, can draw more and more people to participate. The government preventatives and controls are ready. In the hands of a determined government their efficacy cannot be doubted. There are, however, a hundred reasons why a government will determine not to use them. The main relevance of The Great Crash, 1929 to the Great Crisis of 2008 is surely here. In both cases, the government knew what it should do. Both times, it declined to do it. In the summer of 1929 a few stern words from on high, a rise in the discount rate, a tough investigation into the pyramid schemes of the day, and the house of cards on Wall Street would have tumbled before its fall destroyed the whole economy. In 2004 the FBI warned publicly of "an epidemic of mortgage fraud." But the government did nothing, and less than nothing, delivering instead low interest rates, deregulation, and clear signals that laws would not he enforced. This was fuel for fires. The Greenspan Doctrine held that bubbles cannot be prevented, that the governments task is merely to clean up afterward. The Greenspan practice was to create one bubble after another, until finally one came along so vast that it destroyed the system on the way by. At its source, our crisis is a housing crisis, and not one of too little housing but of too much. It springs from a predatory attack on the safeguards that had for decades kept housing finance safe and stable. In the early 2000s the Bush administration sent clear signals that regulations on mortgages would not be enforced. The signals were not subtle: on one occasion the director of the Office of Thrift Supervision came to a press conference with copies of the Federal Register and a chain saw. There followed every manner of scheme to fleece the unsuspecting—"liars' loans," "no-doc loans," and "neutron loans" were terms of art in the business—bundled together, rated and securitized, then spread through the world and left to fester until rising interest rates and crashing prices wrecked the system. Richard Cohen of the Washington Post penned a memorable account of one case, a Marvene Halterman of Avondale, Arizona: At age 61, after 13 years of uninterrupted unemployment and at least as many years of living on welfare, she got a mortgage ... She got it even though at one time she had 23 people living in the house (576 square feet, one bath) and some ramshackle outbuildings. She got it for $103,000, an amount that far exceeded the value of the house. The place has since been condemned ... Halterman's house was never exactly a showcase—the city had since cited her for all the junk (clothes, tires, etc.) on her lawn. Nonetheless, a local financial institution with the cover-your-wallet name of Integrity Funding LLC gave her a mortgage, valuing the house at about twice what a nearby and comparable property sold for ... Integrity Funding then sold the loan to Wells Fargo & Co., which sold it to HSBC Holdings PLC, which then packaged it with thousands of other risky mortgages and offered the indigestible porridge to investors. Standard & Poor's and Moody's Investors Service took a look at it all, as they are supposed to do, and pronounced it "triple-A." This was fraud, perpetrated in the first instance by the government on the population, and by the rich on the poor. The borrowers were, of course, complicit in some cases, taking out mortgages they never had a hope of paying down. In many more, they were simply naive, gullible, open to pressure, credulous, and hopeful—something might turn up. They took the assurances of lenders that housing prices always rise, that bad loans can always be refinanced. They were attractive to lenders for all of these reasons, and because they had nothing to lose. A borrower with nothing to lose will sign papers that another will not. A government that permits this to happen is complicit in a vast crime. As in 1929, the architects of disaster will form a rich rogues gallery to go shooting in. The Old Objectivist, Alan Greenspan, was intermittently aware of impending disaster and resolutely unwilling to stop it. The Liberal's Banker, Robert Rubin, had a reputation for fiscal probity eclipsed by catastrophic complacency at Citigroup, where he was paid SI 15 million and maintained silence, so far as we know. There will be Phil Gramm, of whom in April 2008 the Washington Post wrote that he was "the sorcerers apprentice of financial instability and disaster." (The Post was quoting me. Reached on the phone, Gramm denied it.) There will be Lawrence Summers, impassioned advocate of the repeal of the Glass-Steagall Act in 1999, bounced from Harvard's presidency to Obama's White House—a man whose reputation remains to be rebuilt or buried by events. And Bernard Madoff. The wreckage of bloated reputations is part of the fun of a crash, at least in deep retrospect. And in the renewed prosperity of the 1950s and later years, my father and history were generally content to leave matters there. Of the figures here told of, Charles Mitchell and Samuel Insull were acquitted, Ivar Kreuger committed suicide, and only Richard Whitney entered Sing-Sing. Juries in our time, if they get the chance, will be less forgiving. Whether they will get the chance is another matter. If they don't, there is not much hope to clean up after the colossal crimes of the past decade. And so far, if the Obama presidency harbors the Roosevelt who gave us the Emergency Banking Act and the SEC, he has not yet come into the open. But there is time, and we shall see. Largely missing from a book on the Great Crisis, 2008, will be the elements of hope, credulity, and carefree optimism that were redeeming features of the 1920s boom. It made people very happy at the time. We read in these pages Frederick Lewis Allen's account of the rich man's chauffeur, his "ears laid back" for news of a movement in Bethlehem Steel, and the Wyoming cattleman who traded a thousand shares a day. In 1929, millions thought they could easily become rich, and some did. The parallel moment in modern history came in the late 1990s, in the information-technology boom under President Clinton, which dissolved at the turn of the decade. The years after Bush v. Gore —the years of 9/11, the war on terror, and the invasion of Iraq—had no element of this. The masseuse who put her life savings into Madoff's hands wasn't trying to get rich; she was hoping only for a safe and steady return. Millions of others, who took out mortgages, were asking for even less. They were not, in the main, speculators. What they wanted, most of all, was just what everyone else already had: a home of their own. The trouble for them was, there was no way to get one without making a speculative bet. Now they are losing their homes by the millions—an American tragedy, as families double up, move to rentals, crowd into motel rooms or their cars, or spill out into city parks. The victims of the bust extend across the American middle class, to millions of prime credits with half-paid loans and 401(k) plans and a little cash, whose home equity, stock holdings, and interest earnings all collapsed. What in 1930 took the dramatic form of runs on the bank—the wiping out of middle-class savings and wealth—in 2008 and 2009 took the form of a simultaneous, month-over-month collapse in asset values, followed by the bankruptcy, downsizing, and liquidation of business firms. In this there was often less immediate hardship—the country is not short of food—than the drying up of possibilities—for college, work, and retirement. This too casts a pall over our time. Just as the years before the recent crisis were not joyful, the world after it risks being less acutely desperate, and more merely dreary, than the age of Roosevelt and the New Deal. Whether the events following the crisis will track the disasters of 1930 and later years is also doubtful. In our day of big government—with what economists call automatic stabilizers and immediate fiscal stimulus—slumps are milder and recoveries come sooner than was the case almost a century back. It took four years for the United States to turn to Roosevelt, while by an accident of political timing it was able to elect and install Barack Obama within just a few months. Correspondingly, the situation facing the country today is less dire, the consensus behind radical action is weaker, and the instincts of the administration are less heroic. As this is written, the broad economy seems to have stabilized, and experts are debating whether the stock revival of early 2009 is the start of recovery or a "suckers rally." Production may resume, but with an ever larger share coming from imports. Yet things could still go very wrong. The administration seems determined to keep every toxic bank and insurance company alive and intact. No one expects an early revival of employment, and no plans are afoot that would quickly reemploy the millions who are losing their jobs. The Great Crisis has so far not produced its Harry Hopkins, Harold Ickes, Frances Perkins, Henry Wallace, and the others whose eventual emergence is implicit here. For all these reasons, it seems altogether unlikely that the books to come on the Great Crisis of 2008 will be as much fun as this one. A final word. Readers of The Great Crash, 1929 may have wondered about the investing habits of its author, and in particular whether (like Keynes) he was ever tempted by the sirens of financial speculation. I can report that so far as I know he was not. His portfolio was that of a value investor, a buy-and-holder for a retirement he never actually took, as he wrote on, happily and profitably, practically until his death, at ninety-seven, in April 2006. He was also not averse, on occasion, to even stricter precaution. I remember calling him on the night of the market break in October 1987, an event that brought this book back from a brief disappearance. It was, due to the attentions of the national press, somewhat difficult to get through on the phone. But when I did, I heard the reassuring paternal voice: "James? Is that you?" Pause. "Not to worry: I've been in cash for three weeks." But then there was another pause, and the tone changed. "But I'm sorry to say, the same cannot be said of your mother. She finds it very difficult to sell the General Electric that her family bought from Edison for a dollar." AUSTIN, TEXAS MAY 18, 2009