Electrification, the Smoot-Hawley Tariff Act and the Decline in Investment Expenditure in 1931-1932: Testing the Excess-Capacity Hypothesis

摘要

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.