Crash! The true sound of history

The idea that history repeats itself is a flabby enough cliche by now; but everyone knows that economies move in unmysterious cycles. So amid all the gentle talk about favourite books of the year we ought to spare a thought for a 40-year-old account of a 60-year-old catastrophe. The Great Crash 1929 by JK Galbraith makes for sobering reading right now. The effect it is likely to have on a reader can be summarised in one word: sell.

The echoes are remarkable. Then, as now, the financial markets were soaring beyond all previously-known yardsticks, fuelled by a fabulous bout of speculative "investing" in instruments similar to today's derivatives - Galbraith refers to them as exploiting "the magic of leverage". Then, as now, there was an exciting but deceptive wave of highly-leveraged corporate mergers, which kept Wall Street so busy that its inhabitants believed in the boom long after it had in real life petered out. Then, as now, there were financial hailstorms overseas (Peruvian debt); there were severe distortions both in the distribution of income and in the balance between private gain and public expenditure.

If it all sounds familiar, then it is supposed to. Galbraith wrote the book with one eye firmly on the future. "As a protection against financial illusion," he wrote, "memory is better than law". This is a nice argument on behalf of historians. But it is commoner to insist that we should learn from the past than it is to consult that past. No amount of regulation - even deregulation - ought to obliterate the memory of 1929; and those memories ought to make us cautious. But Galbraith was aware that they would fade. "During the next boom," he wrote (in canny anticipation of the bull-miracle in recent years) "some newly discovered virtuosity of the free enterprise system" will be cited as proof that the party need never end. Today's papers are half full of buoyant commentaries (Phew!! Panic over!!) and half full of dire profits-warnings and redundancies (Boeing, Boeing, Bong!). One can't help but think: hmmm.

It is an eloquent reminder that things do not always change quite so profoundly as we believe. The same urges - greed, fear, love and envy - continue to shepherd us along familiar paths. And bubbles always burst. "The crash was implicit in the speculation that went before," he writes - adding that it was caused by nothing more than "the seminal lunacy which has always seized people who are seized in turn with the notion that they can become very rich".

A month ago the air was full of crash talk. The tiger economies of Asia were leaping about like scalded cats. Russia was imploding. Some weird hedge fund hybrid was collapsing in New York. Latin America teetered on a cliff-edge of debt. Hurricanes were smashing Central America. A lot of bad news, by any standards. That it has subsided in the public imagination is alarming in itself. Galbraith grows sober when he tells the story of the fateful plunge in October 1929. After some heavy falls the market had rallied. The smartest investors - those who had sold at the top - bought back in (feeling smug, no doubt). They were promptly crushed by the second stampede along with everybody else. The moment people began to believe that the worst was over was precisely the moment at which the worst was just beginning.

Is that what is happening now? Probably not. Some things may recur: some megabank dealer - a Nick Leeson wannabe - might even now be rushing to protect his Christmas bonus with a whopping punt on Brazil, or Indonesia, or oil, or gold. But a crash, by definition, comes as a surprise. If it were predictable then it would not have happened - the market would have reckoned it into the price. Galbraith is a true connoisseur and calls his crash "a technically superlative disaster", as if it were a rare wine. But even he concedes that it was obvious only in hindsight. If it had been foreseeable, it wouldn't have happened.

Still, hindsight is anything but all-seeing. One of the most telling of the lessons from history in Galbraith's excellent book concerns the sturdiness of our refusal to learn the lessons of history. Take the myth that the crash of 1929 provoked a bout of suicides: Galbraith exhumes the figures and discovers that the death rate did not climb: all that changed was the newspaper coverage. Before 1929 suicides did not rate a mention; afterwards they were "crash victims". If the image of ruined brokers leaping from windows has endured longer than Galbraith's patient refutation of it, that is partly because we love melodrama, but mainly because we do not often look back, as it were, in anger.