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30-11-2017 | Issue 4/2018

Journal of Economics and Finance 4/2018

Electrification, the Smoot-Hawley tariff bill and the stock market boom and crash of 1929: evidence from longitudinal data

Journal:
Journal of Economics and Finance > Issue 4/2018
Author:
Bernard C. Beaudreau

Abstract

Electrification and the introduction of high-throughput, continuous-flow production tech- niques in the 1920s vastly increased America’s capacity to produce wealth. Getting in the way, according to many, were weak product markets, prompting ranking Republicans Reed Smoot and Ellis Hawley, in the Party’s 1928 presidential platform, to advocate yet another generalized upward tariff revision—the Smoot-Hawley Tariff Bill (SHTB). The stock market responded favorably, as prices increased throughout 1928 and most of 1929. They crashed, however, in October 1929 when it became evident that the proposed Smoot-Hawley Tariff Bill which called for across-the-board tariff would be defeated by an Insurgent-Republican Democrat coalition and replaced with substantially lower tariffs on manufactures. Using longitudinal analysis, this paper shows how stock prices of firms in industries most affected by electrification tracked these developments, rising in response to good tariff news, and falling in response to bad tariff news. Operationally, a tariff news proxy variable is developed and included in the three-factor Fama-French model of stock prices. Our hypothesis is then tested using daily stock returns for a subsample of nineteen DJIA firms. The results show a positive and significant effect of tariff news on all nineteen stock prices. Lastly, we show that good tariff news explains up to 76% of stock price appreciation in the 1928–1929 period of firms in industries most affected by electrification. These results suggest that the stock market boom and crash of 1929 can be understood in terms of political developments set against a background of improved fundamentals.

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