History

The rise and fall of the American economy, 1910-29

Key questions

What were the causes of the economic boom?

How did this prosperity affect American society?

Why did this prosperity come to a sudden end in 1929?

What were the causes of the economic boom?

Why did a boom happen in America during the 1920s?

Why did a boom happen in America during the 1920s?

America's assets and development

The United States of America had an essential supply of natural resources such as timber, iron, coal, minerals, oil and land. This enabled America to become a huge economic power at the beginning of the twentieth century. These resources were an important foundation for the economy.

In order to help American people to purchase the new goods that were available, systems of hire-purchase and credit [Hire-purchase and credit : A way of borrowing money. The ability to get the goods and pay back over a period of time. ] were introduced. This meant that a person could buy something by paying for it on a monthly basis. As a result, the majority of Americans could afford expensive goods. In order to encourage Americans to take advantage of the scheme, advertisments [Adverts: Use of posters etc to inform people about the new goods. ] were placed on roadsides, on the radio, in newspapers and in cinemas.

During the same period, chain stores appeared for the first time, eg J P Penney. Catalogue shopping also became fashionable as it was a convenient way of buying goods.

Electricity developed slowly before the war but during the 1920s the electricity industry experienced a huge boom [Boom: A period of prosperity in the economy. The economy was doing well and many people benefited. ]. By 1929 the majority of houses in America had electricity and 70 per cent of them used it for lighting purposes. As a result of the development of factories to produce consumer goods for the American people, the demand for electricity doubled. Electrical power was introduced in factories to drive machinery, and thus it became possible to introduce mass-production [Mass-production: Method of producing goods on a large scale and quickly. ] to a number of factories, eg refrigerators, washing machines, vacuum cleaners and radio sets.

Henry Ford and his son

Henry Ford and his son posing in the model F Ford car in 1905

The car industry is the best example of mass-production during the period. Henry Ford was a pioneer with his idea of producing affordable cars for the people of America. He set about realising his dream by producing his early cars in small workshops. He had groups of men working for him and gradually the cars were built.

Henry Ford’s hard work bore fruit. As he produced more and more cars, he could reduce his prices. By 1925 the price of a car was around $290, which was much cheaper than the price of $850 in 1908. Henry Ford was of the opinion that it was better to sell more cars for a small profit, as that meant employing more workers.

By 1929 Americans owned 23 million cars. The workers earnt good wages ($5 per day), thousands of jobs were created, roads were built, petrol stations were built, as were hotels and restaurants. Therefore the entire economy was given a substantial boost due to the car industry.

Remember:

  • You should learn the terms that explain the boom.
  • Can you remember the eight things that caused to the boom? Give reasons why they contributed to the boom.

What were the causes of the economic boom?

The attitude and policies of the Republican Presidents

The United States was led by three Republican Presidents during the 1920s, namely Warren Harding, Calvin Coolidge and Herbert Hoover.

The policy of these Republican Presidents was that government should leave the economy alone – they adopted a laissez-faire [Laissez-Faire - Free Market: Freedom for the economy. ] (free market) policy. This meant that big businesses were free to expand without being held back by the government.

Warren Harding (1921-23)

Warren Harding

Warren Harding

His promise was a "return to normality". He reduced taxes to give businesses more money to grow and to put more money in the pockets of ordinary Americans. In 1922, he introduced the Fordney-McCumber Tariff Act [Fordney-McCumber Tariff Act: Taxes were imposed on goods from abroad in order to encourage people to buy American goods. ] which imposed a tax on goods from foreign countries. This made foreign goods more expensive than domestic goods, and so this encouraged Americans to buy American goods only. The name for this policy was protectionism.

Calvin Coolidge (1923-29)

Calvin Coolidge

Calvin Coolidge

"Business is America's business," said Calvin Coolidge. He stuck to the same policy as Harding. Although he didn’t do much (his nickname was 'Silent Cal'), Americans believed he was a good President because of the strength of the economy. He had a huge respect for businessmen and adhered to the laissez-faire policy. He gave businessmen the freedom to make a profit and become rich. Even the Wall Street Journal praised this policy: "No government ever before, either here nor in any other country, has succeeded in uniting so thoroughly with the business world."

Herbert Hoover (1929-32)

Herbert Hoover

Herbert Hoover

He became President in 1929 following his promise to "put a chicken in every cooking pot, and a car in every garage". Hoover believed in laissez-faire, but also in rugged individualism [Rugged individualism: Freedom to succeed, namely that people should be responsible for themselves. ]. This meant that people should not depend on the government for help - they should solve their own problems by working harder. Hoover lost the next Presidential election in 1932 because of this viewpoint - it was too severe.

PresidentTermMain statements and key terms
Warren Harding1921-23
  • Return to normality
  • Fordney-McCumber Act
  • Protectionism
Calvin Coolidge1923-29
  • Business is America's business
  • Laissez-faire
Herbert Hoover1929-32
  • Rugged individualism

Document

The Republican presidents (PDF file 301 kb)

Remember:

  • Can you give an accurate fact about each one of the three Presidents?
  • Can you find new facts? It's important that you make your own notes.

How did this prosperity affect American society?

The new consumer society

The industrial growth of the USA doubled in the 1920s. The biggest increase was in new industries such as chemicals, electrical goods and cars. The introduction of electricity in the home triggered a huge expansion in the household electrical goods industry. In 1919, 60,000 radio sets had been sold, but in 1929 10 million were sold. There was a similar growth in sales of telephone equipment, from 10 million in 1915 to 20 million in 1930.

America's building industry was busier than it had ever been during the 1920s. This was partly due to the demand for new factories and new office buidlings for banking, insurance and advertising companies. This was the age of the skyscraper – companies wanted to demonstrate their power and importance by building the tallest and grandest offices.

The influence of the car industry

It was Ford's idea to build a car an electrical assembly line [Assembly line: The goods moving towards the worker in the factory. ]. The car would move slowly along the line with each worker only doing one specific task. In this way, it would be possible to build a Ford Model T car in an hour and a half instead of 13.5 hours. By the mid 1920s, 7,500 cars were being produced daily - one car every 10 seconds!

The car changed America in every way. It led to the construction of new roads and suburbs. People's way of life was changing in a big way. The development of the car industry sparked a growth in other industries, eg cars used 90 per cent of America's petrol, as well as 80 per cent of the country's rubber and 75 per cent of its glass.

Remember:

At the end of this unit, it is important that you can:

  • Explain how the boom changed the lives of Americans.

How did this prosperity affect American society?

Who did not share in the boom of the 1920s and why?

Who did not share in the boom of the 1920s and why?

Groups and sectors that did not prosper

Farmers

Farmers were producing too many crops and couldn’t sell them. So prices fell and farmers had to borrow money from the banks to be able to survive. More and more of them got into debt until they eventually had to sell their farms and leave. Many left to go wandering around America looking for any kind of work – these wanderers were called hobos [Hoboes: Workers who travelled around the country looking for work. ].

Go to the the Erroluys website and make notes of all the factual information you can find there about hobos.

By 1928 half of all USA farmers were living in poverty. Since prices were so low, 600,000 farmers lost their farms in 1924 alone.

Black people

Black people suffered economically, especially in the southern states, where segregation [Segregation: Laws separating black and white people in public places in society. ] was in effect. The ancestors of the black people in the south had been slaves. The majority worked on small farms owned by white landlords. The black people were labourers or sharecroppers [Sharecroppers: Black farmers who had to pay for the land by giving a proportion of their produce to the owner. ] and they lived in immense poverty.

The segregation that was happening in the southern states (Alabama, Louisiana and Mississippi) made the situation of black people even worse. White and black people lived separately – they had different education, transport and housing facilities. They were not allowed to use the same toilets and water wells. Anyone who tried to improve the rights of African Americans were challenged and threatened by the Ku Klux Klan. As a result, thousands of black people moved to northern cities like New York, Detroit and Chicago to look for work, but when they got there they had to live in ghettoes.

Immigrants

Many immigrants had not been educated and were willing to work in any kind of job for very low wages. Because of this, they endured more and more prejudice.

Old traditional industries

The traditional industries failed to respond to the new mass-production methods of the 1920s, unlike the Ford company that was making a good profit and could pay impressive wages. Also, following a reduction in the powers of Labor Unions [Trade Unions: Workers joining a union to protect their working rights. ] (Trade Unions), the workers were not in a position to be able to claim better wages and working conditions in the old industries.

  • Coal - Coal prices fell and thousands had to be made redundant because the industry was producing too much coal and not enough people and countries wanted to buy it.
  • Ship building - Another major industry that had to make thousands redundant due to a reduction in the demand for new ships.
  • Cotton - New synthetic fibres were being developed, such as rayon. This became a very popular substitute to cotton. It was possible to produce rayon in factories where fewer workers were needed.

Remember:

Not everyone was rich in America during the 1920s. Can you name five groups of people who were not rich?

Summary of the effects of the boom

People who felt the benefits of the boomPeople who didn't benefit from the boom
Owners of consumer goods factoriesFarmers
Assembly line workersSharecroppers
White people in the citiesBlack people
Speculators on the stock marketPeople in rural areas
Early immigrantsCoal miners
Middle class womenTextile workers
BuildersNew immigrants

Why did this prosperity come to a sudden end in 1929?

Longer term reasons for the end of prosperity

  1. Overproduction in industry - By the end of the 1920s there were too many consumer goods [Consumer goods: Goods used on a daily basis in the home eg vacuum cleaner, fridge and radio. ] unsold in the USA. The supply was bigger than the demand.
  2. Overproduction in agriculture - As farming techniques improved, farmers started producing too much food. There was less demand from European for food from America because they could grow their own crops. An abundance of crops led to falling prices and thousands of farmers became unemployed after having to sell their farms.
  3. Commerce - By the end of the 1920s, America tried to sell its surplus goods to European countries. But, in response to the Fordney-McCumber Tariff Act [Fordney-McCumber Tariff Act: Taxes were imposed on goods from abroad in order to encourage people to buy American goods. ], European countries had imposed a tax on American goods. So American goods were too expensive to buy in Europe and, as a result, there wasn't much trade between America and European countries.
  4. Property prices - House prices increased a great deal in the early 1920s. But after 1926, house prices fell leaving a number of Americans owning houses that were worth less money than what they had paid for them.
  5. Falling demand for goods - It should be remembered that not everyone was rich in America in the 1920s. A lot of the country's poorer people bought goods on credit and as a result, a great deal of them owed money to shops and large companies. Many of these companies subsenquently went into financial difficulties as the poor failed to pay their debts.
  6. Too many small banks - The financial sector was not very tightly regulated. There were no large banks in America, but rather an abundance of small banks. These small banks did not have the financial resources to cope with the rush for money when the Wall Street Crash [Wall Street Crash: Economic downturn on the stock market in 1929. ] happened. A number of banks had to close leaving thousands of customers with no money at all.

Short term reasons for the end of prosperity

  1. The Stock Market - Throughout the 1920s the prices of shares [Shares: Financial stakes in a company or business. ] had increased to unrealistic levels. People continued to buy shares as they were making huge profits from them. By 1929 over 20 million people had invested in shares.
  2. Over speculation - As it was easy to borrow money, some people would buy shares on the margin ['On the margin': People borrowing money in order to be able to buy shares. ] - ie, borrowing money to buy shares and then holding on to them until they were worth more than the debt. Then they would sell the shares, pay off the original debt and make a profit.
  3. Loss of confidence and a sudden fall in prices - The Wall Street Crash.
Why did the Wall Street Crash happen in 1929?

Why did the Wall Street Crash happen in 1929?

Remember:

  • Can you state six reasons for the Wall Street Crash?
  • Can you also state the reasons for the economic boom?

The Wall Street Crash and its immediate effects

A number of financial experts warned that the American economy was slowing down and in September 1929 some investors started selling shares [Shares: Financial stakes in a company or business. ] in large numbers. Many people started feeling nervous and investors went into panic and rushed to sell their shares. On 24 October, now referred to as Black Thursday [Black Thursday: It was called a 'black' day to show how bad the effect of selling shares that day was. ], 12.8 million shares were sold. Thousands of people saw their fortune, or any money they had in the bank, disappear. On 29 October 1929, 16 million shares were sold at very low prices. The Stock Market [The Stock Market: A centre where shares are bought and sold. ] New York in had collapsed.

The Roaring Twenties came to a sudden end. Investors lost their money in the Crash and could not pay their debts. Many banks closed, ordinary people lost their savings and people lost all hope for the future. People could no longer buy consumer goods like cars and clothes. As a result, workers were made redundant, other workers' wages was cut and unemployment rose to very high levels. This was the start of The Great Depression [Great Depression: A downturn in the economy for a lengthy period. This usually means the value of goods and their prices falling, unemployment, less investment, lack of credit and bankruptcies. The Wall Street Crash led to a global depression. ] of the 1930s.

People outside a closed bank during the Depression

People outside a closed bank during the Depression

Remember:

  • Can you explain what led to the Wall Street Crash? Start with 'Overproduction' as step 1 and note four other steps.
  • It is important that you can explain the immediate effects of the Crash.

Document

Boom and bust (PDF file 193 kb)

Back to Revision Bite