Did Henry Ford Cause the Recession of 1926–1927? A Test of the Granular Hypothesis

ABSTRACT In May 1927, Henry Ford shut down all new automobile production at the Ford Motor Corporation to retool for the transition from the Model T to the Model A. This shutdown has been connected to the coincident 1926–1927 recession. The granular hypothesis of Gabaix argues that large shocks to major firms can generate recessions, and this episode provides a quasi‐experiment, as Ford was one of the largest American firms in 1927. We examine the granular hypothesis in this context and find that shutdown dates do not correspond to structural breaks. Moreover, the implied granular shock is much larger than the actual economic decline. Other car companies, especially General Motors' Chevrolet, took advantage of the shutdown to take market share from Ford, offsetting any decline in automobile production. The recession was well underway by that time, and we detect little change in economic activity corresponding to the Ford shutdown.