[Could the excess long-term credit have been sufficient to
cause the boom?
Another potentially important critique concerns the sufficiency of the
estimated excess credit created in 1927 to cause the presumably
unsustainable investment boom. It may well be argued that the amount of
formation over 1928 ($2,82 bln.).
The first response is that we are not implying that the whole increase
in net capital formation in 1929 over 1928 constituted ABCT-predicted
excessively long projects.
More importantly, nothing in the version of ABCT that we are applying in
this paper requires money taken on credit to be the only source of
investment into the excessively long projects. Before the round of
credit expansion that makes them illusorily profitable, the originators
of such projects may possess part of the funds required for their
implementation (from the non-distributed profits, for instance) but not
the whole amounts, thus requiring borrowing.
Finally, one of the biggest potential problems with our case for copper
being a contested good during the Roaring Twenties is that projects
involving construction of new plants or expansion of older ones would
involve the bulk of the copper in their later stages when electrical
equipment is installed. Thus, the excessively long projects taken
separately could not have misallocated copper in the way we described in
section [ ] because they could not involve significant utilization
of copper in their early stages.
However, the problem may be solved if we take into account that the bulk
of borrowing in the late 1920s was not in the form of financing tied to
particular investment projects but the one of bonds and preferred stock
with fixed dividend. The funds obtained in this way can be used for many
projects which do not have to be simultaneous. If such projects
constitute a program of expansion than miscalculation can happen at the
level of the whole such program rather than all the individual
investment projects constituting it. The essence of the potential
problem does not change even though some of the projects which are part
of the expansion program may start contributing to the production of
finished consumer goods before the miscalculation becomes apparent.
Therefore, the pattern of copper shipments and average price in Fig. [
] may reflect expansion programs having been undertaken which involved
some projects which were much closer to the electrical equipment
installation stage than the others at the start of the implementation of
expansion programs.]