Oil discovery, energy transition, and the decline in wholesale prices during the Great Depression

Abstract

Statistical tests are used to examine the role of prices for petroleum, coal, and farm products in the Great Depression. A new empirical mapping of relationships between monthly energy and farm product prices and key macroeconomic variables shows how biophysical factors intersected with the price system in the 1930s US economy. Deflation was a critical feature of the Depression, with the US aggregate wholesale price index falling by 37 percentage points between October 1929 and February 1933. Petroleum product prices and farm product prices can explain 89% of changes to the aggregate wholesale price index over the 1930s. Granger causality tests show that petroleum product prices led changes to money supply in the 1930s, by 8 months, while farm product and all-commodities prices Granger caused changes to industrial production. Changes in prices from October 1929 to February 1933 varied substantially between commodities, with prices of coal, metals, and building materials—the essential ingredients for capital formation—all increasing in real terms. Real bituminous coal prices are found to Granger cause changes to money supply, personal income, and industrial production over the 1930s. Overall, the results add further support to the hypothesis that the Great Depression was caused by an energy transition, following discovery of large quantities of petroleum in the US Southwest.