COURSEWORK ASSIGNMENT (30 marks in total)
a) Write a book review of J.K. Galbraith’s The Great Crash 1929.
Note: A book review should explain the issues that the book addresses. It should set out the main conclusions of the book and how these conclusions have been reached. More importantly, you should offer a critical review. This doesn’t mean that you necessarily have to disagree with Galbraith but you should show an awareness of his views that might be contentious. (70 marks)
b) Discuss the similarities between the Crash of 1929 in the USA and the split capital investment trust crisis of 2001-03 in the UK. (30 marks)
Suggested References for Assignment
Adams, A T (Editor) (2004) The Split Capital Investment Trust Crisis, Wiley, Chapters 1 and 4.
Adams and Angus (2001) For Whom the Barbell Tolls…, Professional Investor, 11(3), April, 14-17.
Galbraith, J K (1975) The Great Crash 1929, Penguin Books. Answers to the coursework must be typed and be no more than 2,000 words in total. YOU MUST LABEL THE TWO PARTS OF YOUR ANSWER a) AND b) IN LINE WITH THE QUESTION. A word count must be included at the end.
Solution
The Review of J. K. Galbraith’s The Great Crash, 1929
Written by John Kenneth Galbraith in 1955, The Great Crash, 1929 outlines the economic history leading to the development and crash of the Wall Street in 1929. According to the book, the crash experienced in the stock market was triggered by the rampant speculation in the market, the poor income distribution, and the bad banking and corporate structures. Central in the speculations was the belief that participants in the stock market could become rich without putting in effort or working and that the inclination towards the recurrent speculations serves an insignificant purpose that only damages the economy. According to Galbraith, a deeper understanding of the economic viewpoint and events that led to the development of the 1929 crash is critical for the development of strategies for preventing the recurrence of the crash or a similar economic issue. In the book, Galbraith observes human behavior in the speculative stock market bubble and the successive 1929 crash. This review is a critical analysis and explanation of the issues addressed in the book.
J. K. Galbraith is a renowned economist with expansive expertise and knowledge of economic analysis and interpretation. The author reveals the broadness of his expertise in the presentation of his ideas in the book in, which he achieves significant success in the identification of the economic concerns that led to the development of the financial crisis of 1929. The critical analysis of the ideas and conclusions made in the book and a general review proves the extensive knowledge the author has on economics. Galbraith wrote multiple economic bestsellers and was a long-time Harvard faculty member where he served as a professor of economics for half a century. Moreover, as an institutional economist, the author has a broad institutionalist perspective on economic power. Therefore, that the book offers critical insight and arguments on the Wall Street Crash of 1929, the events that led to its development and the possibility of other similar occurrences is undeniable (Greider, 2005).
The author addresses the speculative stock market bubble in the quest to outline the major causes of the crash. In the discussion of the issue, the author highlights the Florida property bubble that developed in the 1920s and which triggered the development of the middle-class as key in the process. The major percentage of the middle-class in the society focused on the creation of wealth and rising to the upper-class. According to Klingaman (1989), the Florida property bubble played a significant role in influencing the economy and the development of the crisis. Galbraith offers an articulate historical development towards the crisis through a critical analysis of the events that occurred pre-crisis. According to the author, yields of the common stocks in the 1920s were favorable mainly due to the low market prices. Additionally, as prices rose throughout 1924 and 1925, there was a direct impact on the economy. There was a recorded downturns in 1926 and a subsequent increase in prices in 1927. The development of the speculative bubble served a critical part in the development of the 1929 crisis (Galbraith, 2009).
Galbraith asserts that the Florida boom contained the elements of a classic speculative bubble and thus an indispensable element of substance. The boom was triggered by the better winter climate experienced in Florida in comparison to the New York, Minneapolis, and Chicago. Further, it developed from the higher incomes and better transportation that made Florida accessible to the front-bound North. The Great Crash, 1929 outlines the speculative society in a clear way making it possible to develop knowledge of the possibility of recurrence of such a crisis. As the author states, “on that indispensable element of fact men and women had proceeded to build a world of speculative make-believe”. People did not need to be persuaded to believe but only needed an excuse to believe. The economic and environmental climate of Florida made it possible for the people to believe the speculations that led to the rise of the property prices and triggered the development of the crash (Galbraith, 2009).
The spread of the speculation northward, the increasing population in Florida, the rapidly rising prices, and the fact that assets were gaining value by day led to the development of the crisis. According to Galbraith, the speculative mood posited that as time passed, the tendency to analyze the concept of increasing asset value and the reasons for such speculation diminishes. Such a speculative mood in Florida ensured that people saw no reason to look beyond the simple fact of the increasing values since there was sufficient supply of buyers who expected to buy and sell property at higher prices. This contributed directly towards the development of the financial disaster of 1929 and the consequent economic impacts thereafter. According to Galbraith (2009), the speculative mood was critical in the development of the disaster as it contributed towards increasing prices throughout the years from 1925. The speculation led to increased congestion in Florida and consequently, a decreasing pool of the supplier of new buyers.
The bad corporate structure and the poor banking system structures played a significant role in the development of the financial disaster of 1929. Galbraith discusses the influence of corporations and their control of the large segments of the railroad, the utility, and entertainment business. The corporations greatly interrupted dividends since all the dividends received from the subsidiary businesses passed up the corporate holding entities and depended on them for the clearance of interests on the massive debts. As the corporations demanded the lock-down on investment in the corporation structures, the impact enhanced the crisis. Moreover, the author asserts that the poor banking system structure elevated the development of the crisis through inefficient lending practices. Also, the collapse of banks due to bad structures and practices caused panic among depositors enhanced the developing crisis, causing the major financial disaster (Galbraith, 2009).
Galbraith integrates psychological and sociological perspectives in the discussion and interpretation of the crash. The author discusses the issue of wealth inequality in the society and its contribution towards the development of the speculative bubble and the subsequent crash. The massive wealth inequality of the 1920s and poor income distribution led to the development of the speculative mood and the conviction that God intended the middle-class to be rich. These issues led to increased investment in the reality-detached stock market and the Floridian real estate. The investment in the sectors, as Galbraith argues, was significantly unsustainable and led to the distortion of the economy causing the development of the crash. Kennard and Hanne (2015) support the argument by arguing that speculation bubbles are central in the development of financial crises. Knowledge about the issues of concern will make it possible for adjustment in consideration of the wealth loss and the severe effects on the real economy (Galbraith, 2009).
The analysis of the book reveals that even though the author avoids prediction, he asserts that the recurrence of a financial crisis is inevitable. The author posits that though he cannot predict, observation of the global events reveal a high possibility of recurrence. The author observes that the phenomenon of the 1929 crash continues to manifest itself thus threatening the development of a financial disaster. Uncertainties in the stock market and the real estate may likely cause a financial disaster. Moreover, Galbraith points out that regulation agencies often become ‘a branch of the industry’ and therefore render regulation ineffective, creating room for the development of a crash (Galbraith, 2009). It is evident that the author, who cares not to predict, makes an assertion of the inevitability of another boom and a subsequent financial crisis.
The positive feedback, as stipulated by Kennard and Hanne (2015), states that an economic bubble is often followed by a bubble burst or a crash. This supports the arguments presented by Galbraith, which center on the speculative mania that preceded the crash. Moreover, Galbraith identifies the income/wealth inequality, corporations’ structure problems, the bad banking structure problem, the poor state of economic intelligence, and the foreign trade imbalances as the key issues that led to the development of the crash. The weaknesses in the banking structure, inefficient investment entities, and declining exports caused a significant impact on the economy of the country. All notwithstanding, the author concentrates more on the history rather than the financial mania of 1929. However, the history is vividly and clearly outlined to enhance understanding of the different issues he covers.
- Discuss the similarities between the crash of 1929 in the USA and the split capital investment trust crisis of 2001-2003 in the UK.
The US crash of 1929 and the UK split capital investment trust crisis of 2001-2003 are similar in numerous ways. The major similarity between the two is the fact that they developed from the impact caused in the investment industries of the US and the UK. The crisis experienced in the US in 1929 developed from the growing demand in the real estate and asset investment industry. The Floridian real estate sector guaranteed a higher return on investment following the speculative mood. As such, the investment opportunity created a demand for the property causing the rise in the property value and price. The subsequent fall in the prices triggered the development of the financial crisis that came with numerous socio-economic and financial effects. Similarly, the split capital investment trust crisis in the UK was caused by the rising demand and subsequent fall of the prices. According to Adams (2004), the impact of the falling markets and the accompanying equity dividend cuts caused the collapsing of the market prices. Following the effect of the falling markets and collapsing market prices, many splits experienced dividend cuts for their income-bearing shares (Sarkar, 2012).
Dividend cuts and interruptions, therefore, played a significant role in the development of the crises. The US crisis of 1929 was partly caused by the poor corporate structures (Kitromilides, 2012). The corporations received all the dividends from the subsidiaries and passed them to the corporate holding entities for the payment of the debt interests. The process caused a significant interruption of the dividends, and as the corporations demanded the lock-down on the investment, the development of the financial crisis was inevitable. According to Adams (2004), corporations had a direct influence on the development of the 2001-2003 UK crisis. There was a significant compounding of dividends cuts across a part of the splits sector due to the considerable cross-holdings. This led to the further decrease of the share prices, thus triggering the continued development of the 2001-2003 UK split capital investment trust crisis (Adams, 2004).
The development of the Wall Street Crisis of 1929 was enhanced investor and depositor panicking following decreasing profitability and increasing bank runs. The issue led to a sudden decrease in property value and investment in the Floridian real estate. The return on investment in Florida decreased causing a further development of the crisis due to the immense impact on the stock market. Similarly, the UK investment industry suffered the same fate where the poor structures caused a fall in the share prices. The issue caused a continued collapsing of splits demanding the application of different strategies to save new splits. However, the confidence in the splits collapsed following the continued financial losses suffered by investors in the industry (Adams, 2004).
Moreover, poor lending policies in the banking sector led to the development of the crises. The US crash of 1929 developed mainly due to the influence of the banking sector, which according to Galbraith (2009) implemented a poor structure and integrated poor lending practices. The issue led to the development of the crisis, which was initiated by the speculative mood of rising property/asset value. The poor lending practices and weaknesses in the banking structure created an effective ground for the development of the 1929 financial disaster (Sarkar, 2012). The inefficient lending practices contributed significantly towards the development of the split capital investment trust crisis of 2001-2003 in the UK (Adams, 2004).
Bibliography
Adams, A. T., 2004. The split capital investment trust crisis. Chichester: Hoboken.
Gagnon, R. A. & Fox, B., 1989. The Great Crash (Book). Library Journal, 114 (13), p. 178.
Galbraith, J. K., 2009. The Great Crash 1929. Boston: Houghton Mifflin Co..
Greider, W., 2005. Galbraith: An Appreciation. Nation, 280 (10), p. 18.
Kennard, F. & Hanne, A., 2015. Boom & Bust: A Look at Economic Bubbles. New York: Lulu publishers.
Kitromilides, Y., 2012. The 1929 Crash and the Great Recession of 2008. Challenge (05775132), 55(1), pp. 5-22.
Klingaman, W. K., 1989. 1929: the year of the great crash. New York: Harper & Row.
Sarkar, S. K., 2012. The crises of capitalism: a different study of political economy. Berkeley: Counterpoint.