Crash of 1929/Tutorials

Stock exchange performance

(End-year Standard and Poor Composite series 1941-43 = 100, and annual earnings)

(Averages of monthly Cowles series 1926=100 , and annual earnings)

Price indexes

	1927	1928	1929	1930	1931	1932
Standard & Poor	17.7	24.4	21.5	15.3	8.1	6.9
Cowles	118	150	190	150	95	49

Source: Temin (1976)

Price/earnings ratios

	1927	1928	1929	1930	1931	1932
Standard & Poor	15.9	17.6	13.3	15.8	13.3	16.8
Cowles	13.2	13.7	16.1	21.1	33.7	138.9

Source: Temin (1976)

Economists on the crash

Galbraith

Galbraith's best-seller "The Great Crash 1929 was probably responsible for the popular belief that the crash was the consequence of the bursting of a speculative bubble; and (although it did not say so) the belief that it had caused the Great Depression. He argued that the stock exchange boom had been due to misplaced confidence in the prospect of perpetually and increasing prices - confidence that had been bound to weaken at some stage - and that when that happened and some people began to sell, the illusion had been destroyed, provoking a rush to unload. His account of immense bursts of buying, mostly on the margin, give a convincing impression of furious speculation, and he makes it clear that was the view of the authorities at the time - who come in for criticism for not taking convincing action to curb it. The chapter on "causes and consequences" is devoted mainly to Galbraith's views on the causes of the great depression. He attributed the principal influence upon the subsequent severity of the economic downturn to the stock exchange crash, but he also assigned important rōles to weaknesses in the economy and in its banking system.

McGrattan and Prescott

The consensus view nowadays is that Galbraith's assumption about the cause of the crash was mistaken. That view is based upon an analysis of the records by two economists at the Federal Reserve Bank of Minneapolis. Using data on stocks of productive capital and tax, McGrattan and Prescott estimated the fundamental value of US corporate equity in 1929 and compared it with quoted stock valuations at the time. They found that, on conservative estimates, the value of the corporations was no smaller than 20 times corporate earnings (or 1.78 times GNP), and that their market price was no greater than 19 times corporate earnings (or 1.67 times GNP), and they concluded that the stock market had not crashed because the market was overvalued, but that, on the contrary, the evidence strongly suggested that stocks had been undervalued, even at their 1929 peak .

Friedman

Most economists now accept that Galbraith had also been mistaken in his contention that the crash had been the principal cause of the severity of the subsequent development of the great depression. An authoritative study by Milton Friedman and Anna Schwartz found the major factor to have been the Federal Reserve Bank's conduct of monetary policy .

(An account of the evidence concerning the causes of the great depression presented by Friedman and Schwartz, and others is available on the tutorials page of the article on that subject [3])