Galbraith’s The Great Crash — Bill McIntyreThe Great Crash 1929, John Kenneth Galbraith’s economic history of events leading up to the Depression, can easily be read as the first draft of the history of the great crash of 2008. He describes the manic and crooked activities of the men of the market in a way that would make watertiger proud. Speaking of one Charles Grissinger, head of the Fed, he tells us

He had been trained for his task by serving as General Counsel for the Marion Steam Shovel Company of Marion, Ohio. There is nothing to suggest that he was an apt pupil.

P. 54 (references are to the Penguin Books 1992 ed.). It’s fun to identify the figures of 1929 with their equivalents of 2008.

President Coolidge neither knew nor cared what was going on.

P. 53. OK, that one was too easy. Who are these guys?

These men do not issue orders; at most they suggest. Chiefly they move interest rates, buy or sell securities and, in doing so, nudge the economy here or restrain it there. Because the meanings of their actions are not understood by the great majority of the people, they can reasonably be assumed to have superior wisdom. Their actions will occasionally be criticized. More often they will be scrutinized for hidden meanings.

P. 54. Grissinger might not have been much, but the statements of the head of the New York Federal Reserve Bank, Benjamin Strong, “were regarded throughout the System with only a little less awe than the gold standard.” P. 55. Alan Greenspan and the Fed have doppelgangers.

The Fed took minimal steps to deal with speculation in March, 1929, but the banksters, led by Charles Mitchell of National City Bank (a precursor of Citigroup) rejected their leadership. The board of governors of the Fed resigned themselves to futility: one of them said that nothing could be done but brace themselves for the inevitable collapse. More Greenspan.

Here’s Richard Whitney, who in addition to being vice-president of the NYSE, owned his own brokerage firm. He ran low on funds, due to some pointless and failed efforts to support the prices of stock he owned. When his loans came due, he posted securities owned by his customers as collateral for his renewal loans. That wasn’t legal, even in the Roaring Twenties. P. 180. This guy is a dead ringer for Bernie Madoff.

As investment trusts, the mutual funds of that era, proliferated, they began to look for promotional edges. Many hired economists from prominent universities. These are the quants of our day. Many of the investment trusts were leveraged, which multiplied losses when the market collapsed. There isn’t any obvious equivalent for that: regulation works sometimes.

In the aftermath of the disaster, Congress tried to do its own investigation, with Senators and Representatives asking questions all by themselves. Galbraith thinks that Wall Street reached a silent consensus that it would be best if the cheatin’ and lyin’ that led to the great crash were not seen as an actual cause of the depression but whether or not an actual conspiracy existed, the participants suffered a disastrous failure of memory.

Whitney admitted to no serious fault in the past operations of the [NYSE] or even to the possibility of error. He supplied the information that was requested, but he was not unduly helpful to the senators who sought to penetrate the mysteries of short sales, selling against the box, options, pools and syndicates. He seemed to feel these things were beyond the Senator’s intelligence…. The government, not Wall Street, was responsible for the current bad times, Whitney averred, and the government, he believed, could make its greatest contribution to recovery by balancing the budget and thus restoring confidence. To balance the budget he recommended cutting pensions and benefits of veterans who had no service-connected disability and also all government salaries. When pressed about cutting his own pay he said no – it was very little.

Prior to the crash Whitney had heard generally of syndicates and pools, but he could give no details.

P. 175-6 AIG, anyone? Congressional blathering for five minutes, anyone? And when do we get the 2009 version of the Pecora Commission?

(illustration courtesy of Bill McIntyre)