Observer Review: Rainbow’s End By Maury Klein Essay, Research Paper
The old and the newRainbow’s End: The Crash of 1929Maury KleinOxford ?27.50, pp345It was the ‘New Era’. Like the origins of Jay Gatsby, ‘the lineage of the phrase remains elusive’. But it was certainly used in a speech by President Calvin Coolidge in November 1927 proclaiming that America was ‘entering upon a new era of prosperity’. As with ‘New Economy’ 70 years later, ‘it lauded a new economic condition grounded in continuing prosperity and freed from the old cycle of boom and bust.’As I approached Rainbow’s End I wondered how it could possibly compare with JK Galbraith’s classic The Great Crash 1929. In a sense it cannot. Nobody can better Galbraith’s sardonic chapter heading ‘In Goldman, Sachs We Trust.’ Klein quotes the 90-year-old John D Rockefeller Sr saying ‘Believing that fundamental conditions are sound and that there is nothing… to warrant the destruction of values that has taken place… my son and I have for some days been purchasing sound common stocks.’What Galbraith added was: ‘The statement was widely applauded, although Eddie Cantor, describing himself as Comedian, Author, Statistician and Victim, said later, “Sure, who else had any money left?” ‘But Galbraith’s book – well worth a 2002 detour – appeared in 1955, and focused primarily on the Crash and its immediate environs. Almost 50 years later, Klein has the advantage of being able to emphasise how uncannily the ‘boom’ psychology repeated itself in the 1990s. He also spends much more time putting the 1929 Crash in the context of 1920s America, and developing the cast of characters – the bankers, the industrialists, the Presidents, whose fortunes (mainly but not entirely financial) were in many cases irreparably damaged by the Crash and subsequent Depression.Indeed, Maury has produced a history of 1920s America which reminds us, in these days of Enron, that there is nothing new about the dubious links between corporate America, US administrations and financial shenanigans on Wall Street. ‘Old timers… knew from hard experience that even in the best of times the market could not escape the law of gravity. But the younger men interpreted that law in a very different way.’ In the 1920s it was not ‘information technology’ but the railways, automobile and electricity boom that unleashed ‘irrational expectations’.By August 1929 ‘the stock market had moved to the centre of American culture’. When Joseph Kennedy was given a tip to buy ‘oils and rails’ by his shoeshine man, he knew it was time to get out. Groucho Marx was up to his neck in ‘margin trading’ (buying stocks with a small deposit and a large reckoning when they crashed).Klein says: ‘In past economic crises, overproduction in industry had often been a problem; the New Era created a variation on the theme with overproduction of securities… Put simply, too many people held too much stock on borrowed money.’But this is not to say that overproduction, or an excessive boom was not also the problem. From 1922 to 1929 gross national product grew by a frenetic 5.5 per cent a year. As Christopher Dow noted in his magisterial Major Recessions (Oxford, 1998): ‘The rapid expansion was bound to be checked some time.’When the Crash came in October 1929 the volume of trading set a record that stood until 1965. On 31 October 1929 the Dow index stood 33.5 per cent below its opening level in January. We see the beginning of the business concept of ‘planned obsolescence’ as, with US output about to plunge by a third in 1930-32, Charles F Kettering of General Motors desperately states: ‘Our chief job in research is to keep the customer reasonably dissatisfied with what he has.’There is an uncanny pointer to the 1990s in the way ‘Nothing had gladdened businessmen and economists alike more than the fact that the great expansion of the 1920s had been accomplished with virtually no inflation except in security prices.’There were evangelists in the 1920s saying the stock market would ‘rise to Heaven’. The peak of the New Era stock market was reached a month before the Crash. As Klein notes: ‘Although no one suspected it at the time, these figures represented a peak that would not be reached again until November 1954.’Klein paints a fascinating picture of the get-rich-quick atmosphere of the 1920s, best captured by the two Greats – Fitzgerald’s Gatsby and Galbraith’s Crash; but when it comes to the causes of the Depression it is difficult to beat the succinctness of Dow who concludes that ‘basically, it was a bubble situation, arising from excessive confidence earlier on the part of both consumers and firms’. It was then greatly aggravated by the fragility of the banking system.These days banking systems, except in Japan, are supposed to be in better shape, and better regulated. Policymakers are also supposed to be more enlightened. Nevertheless, the parallels between the New Era and the putative ‘New Economy’ are disturbing.