Source: BBC ‘Bitesize’ History

Boom!

During the 1920s there was a prolonged boom in the American economy. Industrial production doubled, the economy grew rapidly and fortunes were made. Life had never seemed better for the majority of the American people. The boom developed for a number of reasons.

World War I

The European economies were exhausted by the cost of waging a long war. In comparison, the USA grew rich during the war years. Its late arrival to the war, and the fact that its cities and industries were not bombed or destroyed during the conflict, meant that at the end of the war it was able to capitalise on the perilous state of European industry and dominate their markets.

New technologies

The first 20 years of the twentieth century saw huge technological advances in industry. Factories became automated. Machines and other improved manufacturing techniques meant that huge amounts of goods could be made at a fraction of the cost. The age of mass production had arrived. In the decade of the 1920s economic output increased by a staggering 50%.

Consumer boom

Because goods could be produced in greater numbers and at much lower prices, more people were able to afford them. This led to huge increases in the sales of products such as cars, refrigerators, radios and cookers.

Buying on credit

This consumer boom was greatly aided by the availability of hire purchase – the ability to buy goods on credit. Because times were good, people were not worried about having to keep up payments.

Government policies

Republican Presidents were in office from 1921 to 1933. They followed a policy of laissez faire, meaning that the government interfered as little as possible in the running of the economy. Instead, they believed that business should get on with the process of creating wealth. The government helped in this by keeping taxes as low as possible. This had the dual purpose of allowing businesses to invest more money to expand their operations and giving consumers more money in their pockets to keep spending.

Confidence

Above all, the 1920s was a time of Confidence. America had never been so wealthy and most Americans saw no reason why the boom should not continue for a long time to come.

Problems

There were, however, early signs that all was not well in the newly prosperous America.

Farming

American farmers faced growing problems during the 1920s. Thanks to new technologies, machines and techniques, farm production increased dramatically. This resulted in lower prices for their goods. At the same time, after the war, agricultural output in Europe recovered and the demand for American exports fell steeply. As a result, American farmers’ incomes were drastically reduced and they fell into debt.

Heavy industry

Industries such as coal and shipbuilding found themselves in a similar predicament to farming. Due to new mass production methods, these industries were producing a huge amount of goods. Combined with a fall in overseas demand for their goods, this led to over-production, lower prices and, as a result, a fall in wages for workers.

Racial minorities

• For the most part, black and immigrant workers missed out on the prosperity that had benefited other Americans. In industry and business, these ethnic minorities tended to be paid lower wages, live in the worst conditions and were usually the last to be hired for jobs and the first to be fired.
• In agriculture, black sharecroppers faced terrible problems. Usually working comparatively small plots of land, they did not have access to new technology to make their farms productive. Combined with the low prices paid for agricultural produce, black farmers often fell heavily into debt.

Bust!

The nation that drove to the poorhouse in an automobile

Will Rogers

This comment by Will Rogers, the great American humorist and wit, summed up the situation of the American people during the Great Depression of the 1930s. Mass unemployment, bankruptcy, poverty, despair, shantytowns, people uprooted from their homes – this was the state of America at the time.

The Wall Street Crash

The massive collapse of share prices on Wall Street in October 1929 has often been seen as one of the main causes of the Depression. It certainly had an impact on the crisis which followed. The terrifying fall in share prices dealt a massive blow to American business confidence. Thousands of shareholders were ruined, businesses collapsed and bankruptcies reached record levels. It would be years before investors recovered confidence in American economic growth.

However, it can also be argued that the Crash on Wall Street was more of a symptom, than an actual cause of the Depression. Other factors also contributed to the Depression.

Credit

The boom of the 1920s was based on credit. People borrowed huge sums of money, expecting to repay it easily, because they would continue to earn good wages. When the Stock Exchange collapse came, they were unable to pay their debts and the consumer boom came to a dramatic end. The fall in demand for goods led to huge lay-offs from factories. The number of people unemployed and without incomes increased rapidly.

Banking crisis

During the 1920s huge numbers of banks had opened in response to the demand for hire purchase credit. Because of the laissez faire policies of the government, the reliability of these banks was never checked. The banks happily loaned out huge amounts of their investors’ cash, expecting to make big profits. When the crash occurred, panic-stricken investors demanded their money back. Many banks lacked resources to fulfil these obligations and as a result large numbers of banks collapsed, adding to the economic crisis.

Saturation of the market

Towards the end of the 1920s the boom times were coming to an end anyway. People had bought what they needed. The American market had become saturated with consumer goods. As confidence slipped and consumers began to try and save money, sales figures went down. The economic crisis worsened.

Protection

Foreign countries had set up tariff barriers against imports from the USA, in response to similar policies from the US government. As a result, it was virtually impossible for the USA to increase exports overseas, leading to further falls in production and increased unemployment.