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 current consensus view is that Galbraith's assumtion about the cause of the crash was mistaken McGrattan and Prescott estimated the fundamental value of US corporate equity in 1929 using data on stocks of productive capital and tax, and compared it with actual stock valuations at the time. They found that, on conservative estimates, the market value of U.S. corporations was no greater than 19 times corporate earnings (or 1.67 times GNP), and the fundamental value of U.S. corporations was no smaller than 20 times corporate earnings (or 1.78 times GNP), and they concluded that find that the stock market did not crash in 1929 because the market was overvalued, but that the evidence strongly suggested that stocks were undervalued, even at their 1929 peak. .