Crash of 1929/Tutorials

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 that was the view of the authorities at the time - who come in for criticism for not taking convincing action to curb it.

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 .