Source: Balke and Gordon .
As we can see, it was not investment in equipment but investment into
residential structures and the consumption of durable goods that
underwent the largest absolute declines. It has to be noted that
although GDP accounting treats spending on residential structures as
investment, in fact, residential structures are not capital but highly
durable consumption goods.
The decline in the consumption of durable goods in the narrow sense in
Table [ ] seems to have almost entirely consisted in the decline in
the purchases of automobiles. The number of automobiles produced in the
fourth quarter of 1929 was lower than that in the third quarter by
around half a million. As mentioned above, the average automobile price
in 1929 was around $650. This should have reduced spending on durable
consumer goods by $325 mln. In fact, this spending category fell only
by $180 mln. which suggests that the decline in spending on passanger
cars was partially but not completely compensated for.
The fact that the bulk of the GDP contraction can be attributed to these
two types of consumption spending and that they were likely the result
of satiation of the relevant markets suggests that the GDP decline
attributable to these types of spending was caused by the absence of
production of alternative consumer goods that could have filled the
void. This realization creates a potential plausible connection of the
GDP decline attributable to consumption declines and the potential
malinvestments into industrial electrification.
It is quite plausible that such malinvestment diverted resources and
from enabling production of other consumer goods that could have
replaced the not-consumed automobiles and residential space.
This hypothesis is plausible since satiation of particular consumer good
markets normally does not tend to cause GDP declines. We can illustrate
this on the example of the automobile industry. Fig. [ ] below shows
the evolution of new passanger car registrations in the US between 1925
and 1966 (with the exception of the WW2 period).