Ramirez on Beaudreau, _How the Republicans Caused the Stock Market Crash of 1929: GPT's, Failed Transitions and Commercial Policy_

[eh.net-review at eh.net]

Published by EH.NET (August 2007)

Bernard C. Beaudreau, _How the Republicans Caused the Stock Market 
Crash of 1929: GPT's, Failed Transitions, and Commercial Policy_. 
Lincoln, NE: iUniverse, 2005. xx + 200 pp. $19 (paperback), ISBN: 
0-595-37908-7.

Reviewed for EH.NET by Carlos D. Ramirez, Department of Economics, 
George Mason University.


In his book, Bernard C. Beaudreau (Professor of Economics at 
Universite Laval, Quebec City, Canada) "presents an alternative view 
of the Stock Market Boom and Crash of 1929 as having resulted from 
government intervention, specifically from a case of flawed 
government policy in the form of the Republican Party's 1928 election 
promise of an upward tariff revision -- the Smooth-Hawley Tariff 
Bill" (p. xi). He claims that the tariff aggravated the problem of 
"underincome" (which he defines as the failure of aggregate income 
and expenditures to rise commensurately with productive capacity), 
thereby amplifying the extent of the Depression.

The logic of his argument is as follows: The technological progress 
of the 1910s and 1920s, manifested by the increasing adoption of 
electricity-based, mass production processes (coined in the book as 
"extremely-high-throughput, continuous-flow mass production 
techniques," or EHTCFPT), resulted in a phenomenal increase in 
industrial productive capacity throughout the 1920s. But this 
increase in capacity was not accompanied by an increase in wages, and 
thus expenditures did not increase commensurately. Beaudreau argues 
that the government's first response to resolve the problem of 
"underincome" was to resort to tariff protection (e.g. the 
Smooth-Hawley Act). By protecting domestic markets, the tariff would 
increase sales, employment, and earnings. In fact, Beaudreau argues 
that initially the stock market reacted positively to the tariff as 
investors were anticipating future higher sales. He even points out 
that the stock market crashed in October of 1929 as a result of bad 
news regarding the implementation of the tariff -- by October of 1929 
it was presumably apparent that the tariff bill would not be enacted 
as a coalition of "Insurgent Republicans" and Democrats called for 
lower tariffs on manufactures. By December of that year, he 
continues, the tariff was no longer being perceived as being "good 
news" as investors this time were anticipating retaliatory tariffs 
from trading partners. Thus, when the tariff finally made it into law 
in 1930, the stock market reaction was largely negative. According to 
the logic of the argument, then, before December of 1929, the tariff 
bill was perceived to be "good news" by investors. After December, 
however, it was perceived to be "bad." Besides, he argues, the tariff 
aggravated the problem of "underincome" because it further stimulated 
firms to adopt EHTCFPT, as they wanted to increase their production 
capacity in anticipation of future higher demand.

After realizing the failure of the tariff to resolve the problem of 
"underincome," Beaudreau argues, the government resorted to the 
National Industrial Recovery Act of 1933 as a second response. 
However, this response also ultimately failed to completely resolve 
the "underincome" problem. In the end, Beaudreau returns to the 
tariff issue and argues that it was an ill-conceived policy idea 
since according to his estimates the output gap was too large to be 
resolved by the tariff alone.

The argument is laid out in eight chapters. Chapter 1 presents an 
overview of the history of U.S. tariff policy (and even tariff 
theory) from the antebellum period to the early twentieth century, 
all in ten pages. Chapter 2 presents the "Theory of Underincome," 
which is presented as an exchange game between two players: producers 
and merchants. Because of a coordination failure, it is possible that 
"income inertia" or "underincome" arises in equilibrium. Chapter 3 
provides an account of the innovation process in American 
manufacturing, based on the electrification of the production 
process. It uses Ford Motor Company as an illustrative case of how 
the U.S. became industrialized by relying on EHTCFPT. This chapter 
also provides an account of the spread of electric power across 
several industries. Chapter 4 then moves to the core of his thesis 
arguing that the U.S. was suffering from "underincome" and that 
Congress's first response was to increase protection. Chapter 5 
extends this argument, and provides "a blow-by-blow account of the 
demise of the Smoot-Hawley Tariff Bill of 1929" and how the stock 
market reacted. Chapter 6 provides some details on the "Second Policy 
Response" -- the implementation of the National Industrial Recovery 
Act of 1933. In chapter 7, Beaudreau returns to the tariff issue, 
providing quantitative estimates of the amount of output gap. 
Beaudreau argues that the tariff was doomed to fail from the very 
beginning, as it was a policy response that was too weak, given the 
size of the output gap. Chapter 8 provides a brief summary and some 
concluding remarks.

In all honesty, it is very unlikely that readers will find 
Beaudreau's argument to be persuasive. To begin with, the theory of 
"underincome" appears not to be all that different from a textbook 
description of a Keynesian-style slump in aggregate demand. Viewed 
from this perspective, Beaudreau's "underincome" hypothesis is, at 
best, not new, at worst, very convoluted and hard to follow. Equally 
unconvincing is the suggestion that Republicans were responsible for 
the stock market crash of 1929 (as the title implies) because by 
October of that year, investors thought that the tariff bill was "as 
good as dead." To make such a connection, at the very least, 
Beaudreau should have performed a formal event study, studying the 
behavior of stocks that were most exposed to the tariff bill, and 
compare it to the behavior of stocks immune to the implementation of 
the tariff.

This isn't the first time that Beaudreau has made the claim that 
Republicans were somehow responsible for the stock market crash, or 
that too much technology was bad for the economy. A very similar 
argument is presented in his earlier book published in 1996. In fact, 
William Hausman reviewed Beaudreau's 1996 book (Mass Production, the 
Stock Market Crash, and the Great Depression: The Macroeconomics of 
Electrification_, Westport, CT: Greenwood Press) for EH.NET in 1998 
(see http://eh.net/bookreviews/library/0071). Unsurprisingly, it did 
not leave a very positive impression on him either.


Carlos D. Ramirez is Associate Professor of Economics at George Mason 
University. His major fields of research are banking and financial 
economic history. He has published banking and financial history 
articles in the _Journal of Finance_, _Journal of Money, Credit, and 
Banking_, _Journal of Economic History_, and _Public Choice_.

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