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John Kenneth Galbraith, Critical Book Review, the Great Crash of 1929

Autor:   •  November 9, 2013  •  Essay  •  1,932 Words (8 Pages)  •  1,244 Views

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John Kenneth Galbraith, Critical Book Review, The Great Crash of 1929

When this book review was first assigned at the beginning of the semester, I really did not know which way I wanted to take the project. Government intervention was a topic that was very new to me, something that I had very little knowledge of. The topic was broad, as government intervention is in every other aspect, so I wanted to pick a topic that was interesting to me. During this time, I was in the market for the perfect job in the financial service industry, making it very appropriate for me to choose a book that deals with such a topic. I decided on the older, yet still very relevant novel by John Kenneth Galbraith, The Great Crash of 1929. It made perfect sense for me to read about a stock market crash, as the economy is currently in the process of recovering from a severe, yet not as devastating recession. In his novel, John Galbraith does a fantastic job of breaking down what happened during this time period, what caused the initial crash, and what the results were of the weak economy. In this paper, I will provide a brief yet effective summary of the novel, focusing on the causes that are explained throughout the book and the main weakness that our laid out by John. Also, I will take a critical and economical look at how the government intervened (or as you will see in my summary, the government's lack of correct economics theory) and the overall effects of their intervention.

The start of a market crash begins with the bubble of opportunity. This bubble creates new opportunities for quick profit. As more money is coming in, prices rise, investors are happy and the bubble continues to grow. Like any bubble, it reaches a maximum point, leading to the inevitable bubble burst, leaving everyone scrambling. The economy has had multiple bubbles that have burst, with the housing collapse in 2007 being the most recent. This point is brought up because the stock market crash of the 1930s was very similar to those bursts in the 2000, leading us to question is why these bursts keep occurring.

The early 1920s were a great time to be an investor. Common stock prices were low, yields were high, and besides a few short downturns in 1926, stock prices were increasing. During this time there was an important change in the banking industry. The New York Federal Reserve (the Fed) began lending money not for productive uses, but for individuals and firms to speculate on the stock market. As prices for stocks increased, investors were making huge gains, causing them to want to invest more and more. With this new change in banking, they were able to borrow money from banks to do so. In order to maximize their returns, at a point in time that the potential for stock prices seemed unlimited, investors began buying stocks on margin. Buying on margin is similar to gambling money you receive as a loan. When investors bought

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