Not Golden but Copper Fetters

The graph below may contain the answer to the question that haunted the economists for more than 80 years: what sparked the crisis that shaped so much of the social history and economic science that followed it – the US Great Depression.


Source: NBER Macroeconomic History Database

The graph very vividly contains a pattern which my version of the Austrian Business Cycle Theory (see this issue of NPPE and the empirical working paper with application to the Great Recession) predicts should happen in the case of an unsustainable boom caused by a credit expansion. In brief, such a policy may cause investment projects to be started that seem artificially profitable because the prices for certain inputs (which I call the “contested goods”) do not immediately adequately reflect the changed demand for them.

Historically, the Federal Reserve embarked at a monetary easing in early 1927. At the time, the American economy was undergoing dramatic productivity improvements. The main engine of such productivity improvements, along with other factors was the process of electrification, especially of the factories, and the accompanying changes in factory organization, e.g. switching from the multi-story to the single-story pattern, and from central motors to unit motors.

The input which was and is essential in electrification is copper, and the title of this post is directly polemical in relation to the famous book by Barry Eichengreen that blamed the Great Depression on another metal, that probably wasn’t to blame after all – gold.

It is visible from the graph that shortly after the start of the credit expansion, copper shipments started taking off but the price of copper followed them only with a lag of around a year, with the final spike from 17,7 to 21,3 cents per pound happening within just one month. After that, the shipments and price fell but still stayed at a level 21% above September 1928. The unsustainable projects were probably kept afloat for some time by new credit creation which followed the relatively tight credit conditions of 1928. But in November 1929 copper shipments collapsed by staggering 33%.

The costs related to copper were also highly significant. Its price rose by 44% between September 1928 and March 1929 to reach 21,3 cents per pound.  The shipments data are in thousands of short tons, and the price for copper is in cents per pound. Thus, if we assume that at the peak consumption in March 1929 the US economy accounted for 150 thousand short tons, at the price of 21 cent per pound, this would have constituted around $63 mln. in the then current prices just in that month alone, and around $750 mln. in yearly terms. To put this in perspective, compare with the total net capital formation in 1929 of $10,49 bln, and the GDP of a bit more than $100 bln.

To the extent that copper costs were concentrated in certain investment projects, the rapid increase in copper price must have presented the entrepreneurs undertaking those projects with huge unexpected cost increases. A large part of the affected projects were probably frozen which resulted in the collapse in copper shipments whose magnitude is hardly explicable otherwise. This, perhaps, in combination with some other, less important, inputs ignited the economic crisis which was turned into a catastrophe by Hoover’s and FDR’s attempts to counteract it,