Reasons for the US Economic Boom, 1920s (AQA A-Level History): Revision Notes

Reasons for the US Economic Boom, 1920s

During the 1920s, the USA underwent rapid economic expansion. Historians debate the causes of this boom. Some emphasise long-term factors such as the economic impact of the First World War, while others focus on more immediate factors including Republican government policies, technological advances, the growth of consumerism, and the dramatic expansion of the car industry. This note examines the short-term factors that drove economic success in the USA during the 1920s.

Republican government policies and rugged individualism

Republican presidents who dominated the 1920s were greatly influenced by Treasury Secretary Andrew Mellon, a firm believer in a free economy. Their policies created an environment where business could flourish with minimal government interference.

Laissez-faire

Laissez-faire refers to the principle that government should intervene as little as possible in the economy's day-to-day operation. President Coolidge expressed the view held by many Americans that if businessmen were left alone to make their own decisions, prosperity and good wages would follow naturally. Under this approach, the government's only role was to assist business when requested.

The Republican economic policy of laissez-faire under Harding and Coolidge enabled businesses to pursue profits without fear of interference. Low taxation and minimal regulation meant entrepreneurs could operate freely. Laws concerning price fixing were often disregarded by the authorities.

Rugged individualism

Republican presidents believed in rugged individualism, a term particularly associated with Herbert Hoover. This philosophy held that people achieved success through their own hard work and determination. The concept originated with early Americans who moved westward and built new lives through their own efforts.

In 1928, Hoover articulated this philosophy clearly. He argued that during the war, Americans had turned to government to solve difficult economic problems. However, when the Republican Party came to power, it restored government to the position of umpire rather than player. Hoover contended that thrusting government into business would stifle initiative and invention. The American people, he believed, had progressed precisely because they had moved forward on their own rather than relying on government intervention.

Protectionism

Protectionism involves placing tariffs on imported goods to limit competition from foreign producers. Republican governments implemented this policy to shield American industry from overseas competition. Imports became more expensive compared with American-made goods, which encouraged the purchase of domestic products and helped US-based producers.

The Fordney-McCumber Tariff (1922) raised import duties on goods entering the USA to the highest level ever recorded, protecting American industry and encouraging Americans to buy home-produced goods. This policy directly supported domestic manufacturers by making foreign alternatives less competitive.

Additionally, income tax rate reductions left some people with more disposable income to spend on consumer goods. Mellon distributed tax reductions totalling $3.5 billion to large-scale industrialists and corporations, further stimulating business investment and growth.

Andrew Mellon

Andrew W. Mellon (1855-1937) was appointed Secretary of the Treasury by President Warren G. Harding in 1921. He continued to serve under Presidents Calvin Coolidge and Herbert Hoover. Mellon's philosophy centred on debt reduction, tax reduction and maintaining a balanced budget.

His tax reform scheme, known as the Mellon Plan, reduced taxes substantially for businesses. This approach freed up capital for investment and expansion, contributing directly to the prosperity of the period. Mellon believed that reducing the tax burden on corporations and wealthy individuals would stimulate economic activity that would ultimately benefit all Americans.

Technological change and new business methods

New business methods ensured that technological advances were fully exploited during the 1920s. The combination of innovation and efficient business practices drove productivity gains across American industry.

Technological change

The USA led the world in technological development during this period. The spread of electricity proved transformative. It provided a cheaper, more reliable and flexible form of power for factories and other industries compared with earlier energy sources. Electricity stimulated associated electrical goods industries, including refrigerators, vacuum cleaners and radios. By 1927, two-thirds of American homes had electricity, compared with only 16% in 1912. By 1927, the number had risen to 63%.

The growth of electric power encouraged widespread consumption of electrical goods. During this period, consumption of other energy sources also increased substantially. The amount of oil used doubled, and gas consumption quadrupled, reflecting the expanding industrial base and rising consumer demand.

Other developments included the conveyor belt and mass production techniques adopted by the car industry. These innovations accelerated industrial production, improved productivity and generated greater profits. These methods were already established in some industries, such as firearms, sewing machines and railroad engines. They were later extended to the production of clocks, typewriters and bicycles.

New materials transformed product design and manufacturing. Plastics like Bakelite were developed and used in household products. Other innovations included glass tubing, automatic switchboards and concrete mixers. New materials enabled the construction of new types of buildings, with skyscrapers transforming the skylines of major cities.

New business methods

The 1920s witnessed substantial growth in large corporations that employed more scientific business methods. By 1929, the largest 200 corporations possessed 20% of the nation's wealth. They dominated industry through various mechanisms.

Large firms operated as cartels to fix prices, with the government turning a blind eye to these practices. A cartel is a group of companies agreeing to fix output and prices to reduce competition and increase profits. Some corporations, such as US Steel, were so large that they could dictate output and price levels throughout their entire industry.

Large corporations also created holding companies. A holding company occurs where one very large company obtains a controlling interest in smaller companies to control the market. Samuel Insull, for example, built up a vast empire based on electrical supply, eventually controlling as many as 111 companies.

Management science developed rapidly, leading to different management roles such as specialists in production, design, marketing and accounting. Business schools expanded dramatically, with as many as 89 operating by 1928, training 67,000 students. These institutions taught 'scientific' theories that were then implemented in practice, particularly the work of Frederick Taylor and his followers.

Frederick Taylor

Frederick Taylor (1856-1915) was a mechanical engineer and one of the first management consultants. He promoted greater efficiency in business and industry in his influential book "The Principles of Scientific Management". Taylor believed in the theory of 'time and motion', a system whereby production techniques are allocated set times for completion and production targets laid on this basis. His ideas underpinned the use of the assembly line, especially in the car industry, where they revolutionised manufacturing processes.

Consumerism and advertising

The economic boom of the 1920s was partly encouraged by the growth of consumerism, an increase in the production of consumer goods on the grounds that consumer spending is the basis of a sound economy.

Reasons for consumerism

Increased demand for consumer goods resulted from several interconnected factors. The expansion of electricity played a central role. By 1927, two-thirds of US homes had electricity. In 1912, only 16% of the American people lived in electrically-lit homes. The growth of electric power encouraged widespread consumption of electrical goods.

Rising female employment also increased the need for labour-saving devices such as washing machines and vacuum cleaners. Hire purchase schemes made it easier to buy goods on credit. Hire purchase is a system of credit whereby a person may purchase an item by making regular payments while already having the use of said item. The popularity of entertainment meant more Americans bought radios and gramophones.

For the majority of workers in industry, wages increased substantially. Between 1923 and 1929, the average wage rose by 8%. Workers therefore had more spare money to spend on consumer goods. This additional disposable income fuelled demand across multiple sectors.

Advertising

Advertising techniques developed rapidly during the 1920s. Previously, advertisements had mainly comprised printed descriptions telling customers about product attributes. However, companies needed to expand demand for their products, so they began to hire psychologists to design campaigns targeting specific groups such as young women. Lucky Strike, for example, encouraged women to smoke by marketing their cigarettes as 'torches of freedom'.

Advertising campaigns began to emphasise slogans, brand names, celebrity endorsements and consumer aspirations. A continuous need to create demand developed. Industrial production growth required a continuous market. It was no longer sufficient to sell a durable unchanging product that might last the purchaser for life, as Ford had done with his Model T. To fuel the boom, companies needed to convince people to buy new things frequently. They had to be persuaded that they could not manage without the latest model of an electrical appliance or the new design in clothing.

For many consumers, advertising techniques proved highly effective. Not only did they associate products with slogans, but they also came to believe they could not manage without the advertised product. The "Kansas City Journal-Post" observed somewhat critically that advertising and mass production were 'the twin cylinders that keep the motor of modern business in motion'. By 1929, companies were spending $3 billion annually on advertising, five times more than in 1914.

Media and advertising

The new mass media, especially cinema and radio, brought about a revolution in advertising. By 1929, there were 17,000 cinemas in the USA. These provided enormous potential for commercials being shown between the two main films. By 1929, there were 618 radio stations throughout the USA with an audience estimated at 50 million. Advertisers recognised the potential and began to sponsor programmes in return for air time for commercials.

Credit

The growth of credit made it much easier for people to buy goods even though they did not have enough cash to pay for them immediately. This expansion resulted from the development of hire purchase, whereby goods were paid for in instalments. The goods were owned once the last instalment was paid. Approximately half the goods sold in the 1920s were paid for by hire purchase, demonstrating how central credit had become to the American economy.

The car industry

The car industry played an exceptionally important role in the boom of the 1920s, often leading the way in technological change as well as stimulating the growth of other industries. It grew dramatically during the 1920s, and by the end of the decade there were 4.5 million cars on the road, making it the largest industry in the USA.

The assembly line

In 1913, Ford introduced a much more efficient method of producing cars: the assembly line or 'magic belt'. He had observed how efficiently this method was used in meat-packing plants and slaughterhouses. An electric conveyor belt carried the partly assembled car at the same speed past workers who stood at the same spot and performed one specific job, such as fitting on the wheels or doors. This approach saved time as the tools and equipment were brought to the worker rather than requiring him to waste time walking about for these items.

In 1913, the Ford factory in Detroit was producing one car every three minutes. By 1920, the same factory was producing the same car every ten seconds. This dramatic increase in productivity reduced costs and made cars affordable to ordinary Americans.

Workforce

Ford believed in hard work and would walk round his factory each day encouraging his workers to perform their jobs properly. However, he experienced quite a high turnover of workers who found the assembly line boring and monotonous.

Therefore, in 1914 Ford announced that he would double wages to $5 a day, which was far more than anyone else paid for equivalent work. Workers rushed to Detroit to work for him. He also reduced the length of the working day to eight hours and introduced a third shift, so the factory operated a three-shift system and worked 24 hours each day.

Ford's business methods and new technology brought down the price of cars dramatically, making them affordable to many Americans. In 1914, a Model T cost $850. By 1926, the price had dropped to $295. Ford also led the way in introducing hire purchase as a method of credit, making car ownership accessible to average families.

Benefits of the car industry

The car industry revolutionised American industry and society. It consumed vast quantities of raw materials, creating employment across multiple sectors. The industry used so much steel, wood, petrol, rubber and leather that it provided jobs for more than five million people. Approximately 90% of petrol, 80% of rubber and 75% of plate glass produced in the USA was consumed by the car industry by the late 1920s.

The car industry transformed buying habits, making hire purchase a way of life for most Americans because it enabled an average family to buy a car. It promoted road building and travel, which led to motels and restaurants being built in places that had been considered remote. The production of automobiles rose dramatically from 1.9 million in 1920 to 4.5 million in 1929. The three main manufacturers were the giant firms of Ford, Chrysler and General Motors.

American journalist Frederick Lewis Allen observed in 1931 that the automobile was something which people genuinely wanted with desire that amounted to a passion. The effect proved two-fold. It stimulated business directly, and it suffused the country with the visible appearance of a prosperity in which everybody seemed to share. Allen noted that this particular period was stimulated by a large, active, noisy, and inescapable presence visible on every road. The automobile sent the credit structure spiralling upward and certainly made the USA look prosperous.

Road building

Breaking with the policy of laissez-faire, the federal government expended substantial energy on road building in the 1920s. The Federal Highway Act of 1921 gave responsibility for road building to central government, and highways were being constructed at the rate of 10,000 miles per year by 1929. However, this proved insufficient. New roads could not keep pace with the growth of traffic. Congestion was common, particularly in the approaches to large urban centres. In 1936, the Chief Designer in the Bureau of Public Roads reported that between 25% and 50% of modern roads built over the previous twenty years were unfit for use because of the volume of traffic that was quite simply wearing them out.

Motor vehicles also created the growth of new service industries such as garages, motels, petrol stations and used car salerooms. They gradually changed the landscape alongside the highways of the USA. Improved transportation also afforded new opportunities for industry. Goods could be moved much more easily from factories to their markets. The number of truck registrations increased from less than 1 million in 1919 to 3.5 million by 1929, when 15 billion gallons of petrol were used and 4.5 million new cars were sold.

The stock market boom

In the 1920s, the stock market seemed to be the link to the prosperity of the USA. The values of stocks and shares (certificates of ownership in a company) rose steadily throughout the decade until they rose dramatically in 1928 and 1929. Moreover, the amount of buying and selling of shares grew substantially until it became a common occurrence for ordinary working people to become involved. The accepted image of the 1920s is that 'even the shoeshine boy' was dealing in shares.

A bull market (a time when share prices are rising) prevailed throughout the decade. Most companies' shares seemed to rise consistently, and so people were prepared to risk their money on buying shares. After all, share values would rise. The USA began to speculate heavily. Even if people did not have enough money to pay the full amount, they would make a deposit, borrow to pay the rest and then sell the shares in a couple of weeks when their value had risen and a profit had been made. The speculator would then pay off his debt and still have made money on the deal. This practice was called 'buying on the margin'.

Share trading expanded dramatically. The number of shares traded in 1926 was approximately 451 million, increasing to 577 million the following year. By 1928, with share prices rising rapidly, there was a bull market on the Wall Street Stock Exchange. In 1929, there were more than 1.1 billion shares sold. Up to 25 million Americans became involved in the frenzy of share dealing in the last years of the decade.