Monday, May 7, 2007

US Economy of the 1920s

The 1920s was often referred to as the "Roaring Twenties", or the "Jazz age". This related to the booming period of rapid economic expansion, but also changing social attitudes. Society was becoming less regimented and discovering new found freedoms; suddenly people's expectations were changing, and this was fuelled by new technologies and a booming economy. However, hidden behind the optimistic views and a booming economy, there were significant structural problems, which led to the notorious stock market crash of 1929 and the Great Depression of the 1930s.

US Economy in the 1920s

  • Booming Economy
Economic Growth was high, with significant increases in living standards for many.

Reasons for booming Economy:
  1. Growth in Automobile industry
  2. High levels of Consumer confidence, increased by new attitudes to consumerism.
  3. Improvements in technology, partly as a result of WWI
  4. Improvements in Labour Productivity - e.g. technology and new management techniques
  5. Scientific Management - Taylorism
  6. Mass Production - Assembly line e.g. Ford's Car Factory
  • Laissez-Faire.
During the 1920s the Republican governments favoured a laissez-faire approach. Income tax was cut, especially the higher rate (from 73-25%)

  • Anti trust laws were weakened.
This allowed the growth of monopoly power in industries like banking.
  • Trade Union membership declined
The government offered little statutory support for unions. This is best exemplified by Henry Ford, whose revolutionary production methods for the production of cars, included banning trades unions. However, it is worth noting Ford paid wages much higher than elsewhere, therefore, most of his workers didn't seem to mind the absence of unions.
  • Growth in Debt.
The booming economy and widespread advertising, led to a shift in consumer attitudes. This encouraged greater spending through credit. This also extended to the stock market.
  • Boom in Stock Market.
The performance of the stock market, seemed to create an easy way to make money. This encouraged more speculators to enter. However, share prices became divorced from reality. It was a classic boom and bust in market sentiment. In October 1929, a few companies reported lower profits than expected, this proved to be a trigger for a dramatic change in market sentiment.
  • Recession in Agriculture.
The boom in the US economy did not extend to all areas of the economy. It was mainly confided to construction and car manufacture. During most of the 1920s the agricultural sector struggled with declining prices and orders. This led to a record number of farmers going bankrupt. It also led to shifts in the population from rural to urban areas.
  • Fragmented nature of banking system
A structural weakness in the US economy was the limited reserves of small and medium sized regional banking companies. This meant that when the Great Depression came, the banking sector was not prepared to meet the extraordinary circumstances. Even before the Great Depression of the 1930s many regional banks faced problems. They often failed to secure sufficient funds in the case of bad debts. Therefore, when farmers when bankrupt, they didn't have sufficient reserves to meet credit demand.

There was also no system of lender of last resort. This meant that if the banks were short of money, they couldn't borrow from a Central Bank. When the Great Depression struck, people wanted to withdraw their money, but the banks didn't have enough reserves to meet this demand. This caused a fall in confidence in the banking system and many banks went under.

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Anonymous said...

Thanks, helped alot with a presentation in our U.S. History class.

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