Electrification, the Smoot-Hawley Tariff Act and the decline in investment expenditure in 1931-1932

In his book, Mass Production, the Stock Market Boom and Crash and the Great Depression: The Macroeconomics of Electrification, Bernard Beaudreau 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 Act, 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 significant excess capacity which prompted Senator Reed Smoot and the Republican Party to propose another upward revision of the tariff schedule (a mere six years after the Fordney-McCumber Tariff Act of 1922). The failure to deliver on this promise according to Beaudreau, led to the Crash and the ensuing decline in investment expenditure, the cumulative effect of which led to the Great Depression. This paper attempts to test this hypothesis using two-digit industry electrification and plant and equipment investment data. As electrification varied considerably across industries it stands to reason that sectors that electrified the most would have witnessed the largest decreases in investment (plant and equipment) in the post-Crash period, owing to the presence of excess capacity. The linear regression results confirm this hypothesis, leading us to conclude that electrification-based excess capacity may have been an important cause of the decrease in investment expenditure and thus a key factor in the downturn.