Stock Market Crash Stirs Memories : Harvard Economist Not Surprised by October Collapse

John Kenneth Galbraith has been down this road before.

Almost exactly 33 years ago, the Harvard economist was called down from Cambridge to testify on Capitol Hill about the stock market. As the author of a just-published book called “The Great Crash: 1929,” Galbraith in 1955 had reason to worry that the “modest boom in the market” was cause for concern. “The fundamental problem of containing a speculative orgy, once it is well launched, remains essentially unsolved,” he told the senators.

“The next four or five days were about the most interesting of my life,” the 80-year-old Galbraith recalled over lunch at the Jefferson Hotel recently. Even as he testified, the stock market began to tumble, and tumbled all week. Republican Sen. Homer Capehart of Indiana demanded publicly that Galbraith explain his “dislike of the Eisenhower Administration and the American economic system.”

The heartland responded. Back at the Galbraith manse in Cambridge, the hate mail began to arrive. Sitting across the table from her husband, Kitty Galbraith remembered a missive addressed to “Mr. Stock Market Expert U.S.A.,” and day after day, ominous messages from a man in Palm Beach threatening the good professor’s immediate extinction.

Went Skiing

“It was the only time in my life when I felt I had done something for religion,” Galbraith said. “A large number of the letters said they were praying that something adverse would happen to me . . . Finally Kitty and I decided we’d had about enough. We went skiing--and I broke my leg. . . . Then we got letters from people saying their prayers had been answered.”

Galbraith is uncharacteristically modest about his predictive powers. “It requires neither courage nor prescience to predict disaster,” he writes on the first page of “The Great Crash: 1929,” which Houghton Mifflin is reissuing this month. Still, in a clairvoyant article in the Atlantic last winter, nine months before the crash of 1987, Galbraith set out what he saw to be alarming parallels to 1929.

One, he wrote, is speculative frenzy “by institutions and people who are attracted by the thought that they can take an upward ride with the prices and get out before the eventual fall.” Another is a belief in “seemingly imaginative, currently lucrative, and eventually disastrous innovations in financial structures”--leveraged buyouts and junk bonds, to name two--whose “common feature . . . is the creation of debt.”

There is, Galbraith said at the lunch table, “300 years of history on the side of this, going back to the tulip mania in Holland in 1637.”

What intrigues and amuses Galbraith about crashes is the spectacle of human greed, the suspension of logic. “There is a compelling vested interest in euphoria, even, or perhaps especially, when it verges, as in 1929, on insanity,” he wrote in the Atlantic article. “Nothing so gives the illusion of intelligence as personal association with large sums of money.”

Personally Involved

Did the market crash last October catch this distinguished prognosticator long in the market? Galbraith pondered this rather personal question, his eyes flashing across the table to Kitty.

“I’ve been a consistent source of conservative advice to the company that handles our affairs,” he replied, conveying the unmistakable impression that that was that.

Thanks to this good handling and royalties from 25 books (“The Affluent Society” and “The New Industrial State” are among the best known), the Galbraiths are able to winter in Gstaad, Switzerland, and summer in Newfane, Vt.

Gstaad is where the professor writes his books, but “I wasn’t writing a book this winter, much to everyone’s delight,” he said, so they stayed only four weeks this time. Even so, Houghton Mifflin has two Galbraith titles on its list this spring, the “Great Crash” re-issue and “Capitalism, Communism and Coexistence,” the unusual product of 10 days of structured dialogue in Newfane last summer between Galbraith and Soviet economist Stanislav Menshikov, all taken down by a Brattleboro court reporter and edited for coherence and clarity.

Supports Dukakis

The Galbraiths are back from Switzerland just in time to witness the presidential campaign in progress. John Kenneth Galbraith said he is supporting Michael Dukakis, “an old friend.” But “Jesse Jackson is articulating more effectively than anybody else . . . such things as equality, decency, participation and ‘freedom from want,’ to use the old Roosevelt phrase. The Reagan Administration has made it evident . . . that there is an unacknowledged problem of suffering and deprivation of which we’re ashamed.

“This sense of concern, this sense of guilt Jesse Jackson has discovered and is exploiting to his great advantage--and to his great credit. . . . The Democratic Party is going to have to move in to pre-empt the concern that Jesse has exploited.”

Political Strategist

Galbraith worked as a political strategist for Adlai Stevenson, and later for Eugene McCarthy and George McGovern. “I have the scars of years of conventions on my brow,” he added, “and the notion that they can be brokered around is absolute nonsense.”

As an opponent for the Democrats, Galbraith said, turning to more comfortable matters, “George Bush is ideal--not because he’s stupid, particularly. But he has this wonderful capacity to make people react, and he gives them the opportunity. . . . While Mike (Dukakis) isn’t the most exciting figure in the world, he doesn’t provide this opportunity for the deeper enjoyment of the press.”

The following story, Galbraith said, was related to him by a Bush speech writer. “They decided to give George Bush a stronger intellectual orientation” by giving him a speech with a quote from Thucydides. When he delivered the speech the first time, Bush couldn’t pronounce Thucydides. So the next night, when he gave the same speech again, “they attributed the quote to Plato and he did much better.”

Galbraith doesn’t miss the chance to make predictions about politics--”It’s too late for Mario Cuomo,” for instance--but he keeps coming back to the stock market crashes that have bracketed his professional life. More dramatically even than any presidential campaign, these events represent “recurrent periods of insanity,” he said, “in which nothing is being lost but money.” Of “The Great Crash,” which is dedicated to his wife, he said, “No book gave me so much pleasure.”

With that pleasure, of course, comes a story. After “The Great Crash” penetrated the best-seller list in 1955, Galbraith once found himself in transit between Cambridge and Washington. Sauntering into the bookstore at La Guardia Airport, he casually asked the clerk if she had a book by--oh, he couldn’t remember the author’s name, but he could remember the title. It was “The Great Crash.”

“With a look of extreme sympathy,” Galbraith recalled, the clerk replied, “Not an easy book to sell in an airport.”