Abstract
Beaudreau (1996) argued that the decline in investment expenditure in the early 1930s was the result of two factors, namely the electrification of U.S. manufacturing in the 1910s and 1920s which had resulted in significant excess capacity, and secondly, to the failure of the Smoot-Hawley Tariff Bill in October 1929 to be passed by the Senate, resulting in (i) the Stock Market Crash in October 1929 and (ii) the ensuing precipitous decline in investment expenditure which touched off the Great Depression. In short, the manufacturing sector in the late 1920s found itself with excess capacity, prompting Senator Reed Smoot and the Republican Party to propose another upward revision of the tariff schedule. The failure to deliver on this promise led to the Crash and the ensuing decline in investment expenditure, the cumulative effect of which led to the Great Depression. This paper tests this hypothesis using two-digit industry investment data. As electrification varied considerably across industries it would stand to reason that sectors that electrified the most would have witnessed the largest decreases in investment expenditure (plant and equipment), owing to the presence of excess capacity. The results confirm this hypothesis, leading us to conclude that electrification-based excess capacity may have been an important cause of the downturn in 1930 and 1931.
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Notes
It is important to note that excess capacity does not imply overproduction.
Electrification-based investment in the case of existing capacity includes such things as “speed-ups”, which consisted of increasing machine speeds, thus increasing productivity and the rated capacity of existing machinery and equipment.
Other related work includes (i) the confidence hypothesis according to which investment decreased as the result of a shift in expectations according to Fisher (1933), Keynes (1936), Ferderer and Zalewski (1994), Greasley and Madsen (2006) (ii) the secular stagnation hypothesis Hansen (1941) (iii) the negative productivity shock hypothesis according to which the productivity of capital decreased Kehoe and Prescott (2007) and (iv) the animal spirits hypothesis Robinson (1937), Shackle (1938).
It was also an integral part of the writings of the Edward Bellamy’s Progressive Movement, the Institutionalist Movement, and the Technocracy Movement.
Archibald and Feldman (1998, p. 872) make a similar distinction: “Uncertainty surrounding the Smoot-Hawley tariff may have slowed investment spending. This uncertainty is conceivably of two types: domestic political indecision surrounding the lengthy tariff debate and uncertainty about reactions to the tariff.”
The raw data are available as Supplemental Files.
The same pattern characterizes investment in plant DPL, starting out positive at 0.068 (DPL2827) in 1928 (relative to 1927), but then turning negative in 1929 (−0.22), and becoming progressively more negative at −0.39 in 1931, −0.23 in 1932, and −0.24 in 1933.
A constant was included in preliminary regressions but was found to be statistically insignificant.
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Beaudreau, B.C. Electrification, the Smoot-Hawley Tariff Act and the Decline in Investment Expenditure in 1931–1932: Testing the Excess-Capacity Hypothesis. Int Adv Econ Res 23, 295–308 (2017). https://doi.org/10.1007/s11294-017-9642-z
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DOI: https://doi.org/10.1007/s11294-017-9642-z