How the Republicans Caused the Stock Market Crash of 1929: GPT’s, Failed Transitions, and Commercial Policy

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 Smoot-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 Smoot-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.