The American Economy in the 1920s: Was this a good time for all?

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For an overview, see John D Clare and BBC Bitesize

PLEASE NOTE – the Memory words on this page are from John D. Claire’s website, which you can find by clicking the link above. I’ve reproduced his text here as part of this page to integrate the materials better and because the examples he has provided are excellent.

Key concepts:

  • The American Dream
  • ‘Rugged Individualism’
  • Corporations
  • Model-T Ford
  • Mass market
  • Wall Street
  • Federal Reserve
  • Suburbs
  • Skyscrapers
  • Consumer goods
  • HP
  • Stock market boom
  • Share Prices
  • Buying ‘on the margin’
  • Brokers’ loans
  • National Income
  • Laissez-Faire
  • The MacNarey-Haugen Bill

 

Key issues:

  • Reasons for economic boom of 1920s.
  • Henry Ford and mass production.
  • Hire purchase, consumerism and the popularity of the stock market.
  • Problems in farming, including over-production and mechanisation.
  • The decline of older industries.

 
Key individuals:

  • Henry Ford
  • Calvin Coolidge – ‘the business of America is business’
  • Herbert Hoover – ‘rugged individualism’

 
 
Key Questions:

In what ways did the American economy ‘boom’?

Read:
Walsh, pp. 183-5;
SHP, pp.22-25;
Edexcel pp. 172-173.

 

Answer: CI SUCCESS

  • Consumer confidence – debt was no longer considered a bad thing and people wanted to buy the new products;
  • Innovation in production methods – especially in the motor industry (by 1925 Ford were producing a car every 10 seconds); this pushed down prices and made goods more accessible for ordinary people (the ‘Tin Lizzie’ cost $850 in 1908, only $295 in 1925). Such cars could be sold on the mass market partly because of the cheapness of production; but also because of new selling methods – see later.
  • Synthetics – the invention of bakelite (the first plastic), cellophane and nylon – and chemicals.
  • Upsurge in car ownership – esp. the Ford Model T; 15 million had been produced by 1927, and the number of Americans owning cars rose from 8 to 23 million.
  • Consumer durables newly available – fridges, washing machines, dishwashers, vacuum cleaners, record players.
  • Communications revolution – number of telephone doubled/ number of radios increased from 60,000 to 10 million.
  • Entertainment revolution – Hollywood, Charlie Chaplin, the ‘talkies’ and cinemas, jazz clubs and speakeasies
  • Stock market – Wall Street boomed (a ‘bull’ market) with many people buying shares to make a profit. So great was over-confidence that people were even buying shares in imaginary companies. Many were buying shares ‘at the margin’ (a person could get a loan of up to 90% to buy shares) expecting to make enough profit to repay the loan when the shares were resold – brokers’ loans almost trebled 1926-9. All this threatened disaster if share prices ever stopped rising.
  • Skyscrapers, highways and urban development

 

Why was there an economic boom in the 1920s?
Read:
Walsh, pp. 186-190;
SHP, pp. 26-28;
Edexcel, pp.176-177.

Answer: PAT GOT CASH

  • Population increase – (despite decline in population growth rate because of QUOTAS) meant more customers and workers;
  • Abundant raw materials for new products – especially iron (steel for cars), oil (fuel, plastics) – which had become the key commodity during WWI;
  • Tariffs (e.g Fordney-McCumber Tariff, 1924), protected American industry from competition by encouraging Americans to buy American products.
  • Government – The Republican governments were prepared to give business its head. As Calvin Coolidge said: ‘the business of America is business’. There were few attempts to regulate business. Instead, taxes were cut, which encouraged people to spend more. In 1922 the government imposed the Fordney-McCumber Tariffs on imports. These made foreign goods very expensive, so people bought American. The creation of a ‘Federal Reserve System’ in 1913 with three objectives: maximum employment, stable prices and moderate long-term interest rates. This contributed to consumer confidence by keeping interest rates low, thereby encouraging people to borrow. Meanwhile the Republican presidency encouraged ambition – Herbert Hoover lauded ‘rugged individualism’ rather than dependency upon the state;
  • Opportunities for New Technology – Ford’s assembly line based on Frederick Taylor’s Time and Motion study (Taylorism).
  • Cycle of Prosperity – this simply meant that more sales = more jobs = more wages = more spending = more sales;
  • Advertising – thanks to cars and roads there were more billboards; thanks to radio and cinema there were new ways of reaching the public.
  • Sales Methods – thanks to new technology, communication and easy access to credit – new ways of selling products emerged. For example, commercial travellers could sell products door-to-door (no need to go to the city), mail order (weekly payment schedules), chain stores such as Woolworths etc.;
  • Hire Purchase – instalments allowed people to buy now, pay later – which was another reason why car ownership became so common and the purchase of automobiles literally ‘drove’ the economy.

 

Henry Ford and the invention of the Modern World
Read SHP, pp. 29-32;

In the 1920s the motorcar came to represent the American dream and drove the economic boom of period. It offered people independence, freedom and adventure. Henry Ford was the man who made this possible because of his application of assembly line methods – based on Frederick Taylor’s time and motion studies. Instead of a car being made from start to finish by the same highly skilled mechanics and engineers, cars were now produced one part at a time and assembled on a production line. Since no one needed to know more than one skill, labour was cheap and the process much quicker. As a result, between 1908 and 1925 the price of a motorcar fell by 60 per cent because of the introduction of the assembly line. By 1925 Ford was producing a car every ten seconds. In 1920 9 million cars were registered in the US; by 1929 the figure had risen to 26 million. Almost 500,000 workers were employed in the automobile industry at any one time during the 1920s.

But that was not all. During the 1920s about $1,000,000,000 was spent on building national highways. Other industries grew because they were needed to support the car industry – glass, metal, leather, rubber, bakelite. Cars required a tremendous range of different parts that needed to be produced by subsidiary industries, so jobs were create everywhere and as a result of job creation, more people could afford to buy cars. The desire for cars also fuelled the growth of new methods of payment such as Hire Purchase which meant that car ownership was no longer the preserve of the few.

Henry Ford’s ideas were copied by other industries and there was in effect a second industrial revolution in consumer goods, like radios, fridges, telephones and vacuum cleaners. Such goods had been the preserve of the rich until production methods made them cheap enough to be sold in their millions, to a mass market. More jobs were created and prices remained the same or even fell. By 1927 sixty three per cent of the population lived in homes lit by electricity! Between 1921 and 1930 refrigerator production increased from 5000 to a million units a year. As the new industries boomed, cities got bigger; suburbs developed and higher skyscrapers were built.

The new industries also helped create a new city-based culture. The great benefit of consumer durables made life easier. Less time had to be spent on routine household work, so people had more time for leisure. What were people going to do with all that time? Spectator sports like boxing and baseball became mass spectator events with major contests broadcast on the radio. Another great beneficiary was the film industry. By 1930, 95 million cinema tickets a week were being sold. Not only were people now able to buy labour saving devices, but they could also enjoy better entertainment and idolise stars of the screen like Clara Bow, Mary Pickford and Rudolf Valentino. They could listen to jazz on their radio sets, or visit venues like the Cotton Club in Harlem to dance the night away.

New methods of buying and selling and advertising were developed. Chain stores, hire purchase, mail order, travelling salesmen, the radio and the cinema were all exploited. This meant that it became much easier to order and pay for new purchases. New roads meant more billboards. Radio and Cinema provided new platforms for reaching the public.

Edward Bernays, nephew of Sigmund Freud invented another new revolutionary technology which contributed to this new culture – public relations.
Bernays led the way when he began applying crowd psychology principles to advertising. His most famous campaign – the ‘Torches of Freedom’ involved using Suffragettes to sell cigarettes which had previously been taboo for women. Smoking the ‘torches of freedom’ was therefore a statement about equality and freedom. Bernays wasn’t interested in equality or freedom, he was only interested in selling more cigarettes (on this occasion) but he knew that the essence of good advertising was that it wasn’t about selling a product but about selling a lifestyle. The product was desirable because of the message it was made to contain (there was nothing inherently equal or free about cigarettes, that message was put there by the advertiser). Before Bernays, adverts focussed on the product itself – one brand of car was better than another because it was cheaper or more durable not because it made its owner look ‘cool’. Bernays described the masses as irrational and subject to herd instinct—and outlined how skilled practitioners could use crowd psychology and psychoanalysis to control them in desirable ways. Not only big industry, but government got interested in such methods: Calvin Coolidge, President of the USA 1923-29, said “Advertising makes new thoughts, new desires, new actions. It is the most powerful influence in adapting and changing the habits and way of life, affecting what we eat, what we wear and the work and play of a whole nation.”

Who were the losers?

    Read:
    Walsh, pp. 191-193;
    SHP, pp. 33-35;
    Edexcel, pp. 178-179.

    Not everyone did well; there was increased unemployment from 1919 and a depression in 1920-21. This effects of this was to make people demand quotas on immigration and support Tariffs. However, even during the boom years there were many who did not benefit.

    Answer: FLOP CUTS

    • Farmers – machinery and overproduction led to rapidly falling prices. Between 1920 and 1929 one in four farms were sold to pay debts and many farmers migrated to the city. In 1929 average income in of farmers was only 40% of the national average, and many farmers could not afford their mortgage. During the 1920s 600,000 farmers went bankrupt. Prohibition also hit barley producers hard (it was needed for the production of beers and spirits). Note also that rural areas did not have electricity and most farms did not have plumbing, so most country-dwellers were excluded from the consumer boom and most probably resentful of it (helping to explain some of the prejudice that was a feature of this society).
      • The McNary–Haugen Farm Relief Act, which never became law, was a controversial plan in the 1920s to subsidize American agriculture by raising the domestic prices of farm products. The plan was for the government to buy the wheat, and either store it or export it and for the Federal Government to fund the losses. Despite attempts in 1924, 1926, 1927, and 1928 to pass the bill — it was vetoed by President Calvin Coolidge, and never approved. It was supported by then-Secretary of Agriculture Henry C. Wallace and even Vice President Charles Dawes.

        According to the bill, a federal agency would be created to support and protect domestic farm prices by attempting to maintain price levels that existed before the First World War. By purchasing surpluses and selling them overseas, the federal government would take losses that would be paid for through fees against farm producers.

    • Low Wage Earners – e.g. unskilled and casual workers, or the 2 million who were unemployed – could not share in the prosperity. There were great inequalities of wealth; the top 5% of the population earned 33% of the income, while 60% of Americans earned less than $2000, and that 40% were below the poverty line (notably farmers/ Black Americans/ immigrants). Only 3% of semi-skilled works owned a car. Life was not much better for many industrial workers. Although profits rose by 80 per cent, wages rose by only 8 per cent. Recent immigrants got the worst jobs with casual work and low pay. Wages were low in the old industries facing world competition, like coal and textiles. Costs had to be kept low. Mechanisation often replaced workers, especially unskilled workers. There were always two million unemployed throughout the 1920s. Unemployed people could not buy the new consumer goods.
    • Old industries – In rural areas, or the areas of the old industries, there was very little change. The old industries, such as coal, textiles, shipbuilding and iron and steel declined because they were not able to make use of Henry Ford’s new methods. They either produced raw materials or very heavy goods like ships. They also relied on government contracts and orders from big businesses. Fewer ships were needed after the First World War. The 1921 Washington Naval Agreement also limited the number of ships being built in the 1920s. The USA imported and exported less than during the war. Coal became less important as electricity and oil replaced steam power. Cotton and wool were replaced by man-made fibres.
    • Poor black Americans – 1 million black farm workers lost their jobs in the 1920s. Black workers in the towns in the north were the lowest paid; the only work they found available were low-paying, menial jobs. New York’s black Harlem district was a severely overcrowded and segregated community, with more than 250,000 citizens crammed into an area 50 blocks long and eight blocks wide. Many of these people had to sleep in shifts, going to bed when others went off to work. ‘Rent parties’ were common on Saturday nights, to raise money to pay the landlord on Sunday.
    • Cartels, Trusts and monopolies – ‘fixed the market’ and tried to keep prices high and wages low.
    • Unemployment – new technology was throwing more and more people out of work; the number of unemployed stood at 2 million throughout 1920s.
    • Trade problems – As a result many of America’s Tariffs, her trading partners also increased their tariffs. France, for example raised the tariff on cars from 45 to 100%. High tariffs were causing other countries to retaliate, as well as reducing the purchasing power of those countries, which made it hard for American companies to export their products abroad. Farmers, who relied on exporting wheat, were especially hard-hit by this.
    • Stock Exchange – the dangers were not recognised by most during the 1920s; in the background Wall Street was ‘over-heating’.

     


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