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How Could Everyone Have Been So Wrong? Forecasting the Great Depression with the Railroads

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Author Info
John Landon-Lane
Eugene N. White
Adam Klug

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Abstract

Contemporary observers viewed the recession that began in the summer of 1929 as nothing extraordinary. Recent analyses have shown that the subsequent large deflation was econometrically forecastable, implying that a driving force in the depression was the high expected real interest rates faced by business. Using a neglected data set of forecasts by railroad shippers, we find that business was surprised by the magnitude of the great depression. We show that an ARIMA or Holt-Winters model of railroad shipments would have produced much smaller forecast errors than those indicated by the surveys. The depth and duration of the depression was beyond the experience of business, which appears to have believed that recovery would happen quickly as in previous recessions. This failure to anticipate the collapse of the economy suggests roles for both high real rates of interest and a debt deflation in the propagation of the depression.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9011.

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Date of creation: Jun 2002
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Handle: RePEc:nbr:nberwo:9011

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Find related papers by JEL classification:
E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
N12 - Economic History - - Macroeconomics and Monetary Economics; Growth and Fluctuations - - - U.S.; Canada: 1913-

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  6. Hylleberg, S. & Engle, R. F. & Granger, C. W. J. & Yoo, B. S., 1990. "Seasonal integration and cointegration," Journal of Econometrics, Elsevier, vol. 44(1-2), pages 215-238. [Downloadable!] (restricted)
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  7. Michael C. Lovell, 1962. "Inventory Investment," Cowles Foundation Discussion Papers 131, Cowles Foundation, Yale University. [Downloadable!]
  8. O'Brien, Anthony Patrick, 1989. "The ICC, freight rates, and the Great Depression," Explorations in Economic History, Elsevier, vol. 26(1), pages 73-98, January. [Downloadable!] (restricted)
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  13. Calomiris, Charles W, 1993. "Financial Factors in the Great Depression," Journal of Economic Perspectives, American Economic Association, vol. 7(2), pages 61-85, Spring. [Downloadable!] (restricted)
  14. Ehrbeck, Tilman & Waldmann, Robert, 1996. "Why Are Professional Forecasters Biased? Agency versus Behavioral Explanations," The Quarterly Journal of Economics, MIT Press, vol. 111(1), pages 21-40, February. [Downloadable!] (restricted)
  15. Bonham, Carl & Cohen, Richard, 1995. "Testing the Rationality of Price Forecasts: Comment," American Economic Review, American Economic Association, vol. 85(1), pages 284-89, March. [Downloadable!] (restricted)
  16. Temin, Peter & Wigmore, Barrie A., 1990. "The end of one big deflation," Explorations in Economic History, Elsevier, vol. 27(4), pages 483-502, October. [Downloadable!] (restricted)
  17. Karl Brunner & Allan H. Meltzer, 1968. "What Did We Learn from the Monetary Experience of the United States in the Great Depression?," Canadian Journal of Economics, Canadian Economics Association, vol. 1(2), pages 334-348, May. [Downloadable!] (restricted)
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  1. Eugene N. White, 2006. "Anticipating the Stock Market Crash of 1929: The View from the Floor of the Stock Exchange," NBER Working Papers 12661, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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