Abstract
Electrification and the introduction of high-throughput, continuous-flow production tech- niques in the 1920s vastly increased America’s capacity to produce wealth. Getting in the way, according to many, were weak product markets, prompting ranking Republicans Reed Smoot and Ellis Hawley, in the Party’s 1928 presidential platform, to advocate yet another generalized upward tariff revision—the Smoot-Hawley Tariff Bill (SHTB). The stock market responded favorably, as prices increased throughout 1928 and most of 1929. They crashed, however, in October 1929 when it became evident that the proposed Smoot-Hawley Tariff Bill which called for across-the-board tariff would be defeated by an Insurgent-Republican Democrat coalition and replaced with substantially lower tariffs on manufactures. Using longitudinal analysis, this paper shows how stock prices of firms in industries most affected by electrification tracked these developments, rising in response to good tariff news, and falling in response to bad tariff news. Operationally, a tariff news proxy variable is developed and included in the three-factor Fama-French model of stock prices. Our hypothesis is then tested using daily stock returns for a subsample of nineteen DJIA firms. The results show a positive and significant effect of tariff news on all nineteen stock prices. Lastly, we show that good tariff news explains up to 76% of stock price appreciation in the 1928–1929 period of firms in industries most affected by electrification. These results suggest that the stock market boom and crash of 1929 can be understood in terms of political developments set against a background of improved fundamentals.
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Notes
Longitudinal event studies are mostly used in epidemiology and psychology to track subjects over time, identifying various causal events.
Our analysis extends Fisher’s original argument and McGrattan and Prescott’s 2004 results by (i) providing a testable theory of the technology shock that prompted the stock market boom and (ii) a theory of stock-price appreciation and depreciation. McGrattan and Prescott were unable to address the question of why the market crashed.
Of the twelve Insurgent Republicans that had voted in favor of the McMaster Resolution on January 15, 1928 (Senators Blain, Borah, Broookhart, Capper, Frazier, Howell, La Pollette, McMaster, Norbeck, Norris, Nye and Pine), six voted against the Thomas Recommital Plan (Borah, Brookhart, Capper, La Follette, Norbeck and Norris), while five voted in favor (Frazier, Howell, McMaster, Nye, and Pine).
The choice of DJIA firms was based on Rappoport and White (1994). Retailing firms, Sears and Woolworths, as well as Paramount and Wright Aeronautical were excluded for lack of data on industry electrification.
The New York Times and the Wall Street Journal are two of the most-used information sources in event studies, be they economic, financial, environmental, etc. See for example, Binder (1985). The choice of the New York Times was based on its representativeness, and its status as the premier source of information in the North-East—and New York City. It bears noting that none of the new events involved either newspaper or
contributor editorials.
The data as well as the coded news events are available from the author.
The DJIA rebounded on October 31, only to return to the 230 point level three days later, where it stood for a few days before hitting its all-time low of 198 on November 13th.
Specifically, the rate of growth of electricity consumption per wage earner was computed using U.S. Bureau of the Census, Annual Survey of Manufactures data on electric horsepower (installed and purchased) by industry as well as the corresponding number of wage earners. For example, electricity use per worker in the tobacco industry (American Tobacco) increased by 14%, while it increased by 392% in the oil refining industry (Texas Corporation).
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Beaudreau, B.C. Electrification, the Smoot-Hawley tariff bill and the stock market boom and crash of 1929: evidence from longitudinal data. J Econ Finan 42, 631–650 (2018). https://doi.org/10.1007/s12197-017-9418-6
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DOI: https://doi.org/10.1007/s12197-017-9418-6