John Kenneth Galbraith: The Causes of the Great Depression
The debate over the causes of the Great Depression of 1929-1940 has been not only technically difficult but also highly charged with political feeling. There is as yet no full agreement on the subject, but unquestionably the clearest and wittiest treatment has been offered by Harvard economist John Kenneth Galbraith. In this excerpt from his book, The Great Crash, 1929 ( 1955), Galbraith makes the important distinction between the causes of the stock market crash and the sources of the depression. A market collapse does not necessarily reflect serious flaws in a nation's economy, as President Hoover insisted. Such a collapse is chiefly a matter of investor psychology. The crash of October-November, 1929, involved a devastating drop in market values, since the speculative mania that preceded it had reached astounding proportions and was virtually unchecked by the responsible officials. But market slumps are not invariably followed by depressions, as witness the dramatic collapse of May, 1962. The depression that followed the crash of 1929, in Galbraith's view, was caused principally by structural flaws much more substantial than the greed that produced the stock market's problems. In contrast to Hoover's contemporary view, Galbraith believes that the economy of the 1920s was not sound, and he isolates five major structural weaknesses which turned the stock market debacle into an eleven-year depression of unprecedented severity.
Galbraith's argument, for those who accept it, points toward social reform. In particular, his analysis suggests the vital necessity to redistribute income from the wealthy to the consuming masses, to rationalize pyramided corporate structures, to discipline investment banks, to strengthen public confidence in commercial banks, to reduce tariffs in order to revive foreign trade, and to improve the economic advice available to public officials. If this sounds something like the New Deal, it is because Galbraith's general analysis of the depression was held by many New Dealers as early as 1932. For many reasons, among them political difficulties and intellectual vacillations, the New Deal did not repair all the flaws Galbraith saw in the economy of the 1920s. But, writing in the 1950s, Galbraith seemed well satisfied with the corrective action taken by the administrations of Roosevelt and Truman. He was impressed by an apparent income redistribution, federal attacks on the market power of huge oligopolies, bank deposit insurance, stabilization of foreign trade through the Export-Import Bank and foreign aid, income stabilizers for farmer and laborer, as well as the acceptance by both political parties of a positive responsibility for economic health.
Today, Galbraith, along with most other observers of the American economy, is less sanguine. For while the stock market seems reasonably
From John Kenneth Galbraith, The Great Crash, pp. 173-201. Copyright © 1954, 1955, 1961 by John Kenneth Galbraith. Reprinted by permission of Houghton Mifflin Company.