Despite the turbulence of the immediate postwar period and the persistence of underlying social and racial tensions, the 1920s were a time of vigorous economic growth. Between 1922 and 1927, the economy grew by 7 percent a year, the largest peacetime rate up to that point. Over the decade, the gross domestic product (then called the gross national product), per capita income, and the average purchasing power of wage earners all soared. At the same time, unemployment rates remained low, as producers added new workers in an effort to keep up with increasing consumer demand. Aligning themselves with big business, government officials took an active role in stimulating economic growth. Their efforts shaped and accelerated economic developments that amounted to a second industrial revolution.
Government Promotion of the Economy
The general prosperity of the 1920s owed a great deal to backing by the federal government. Republicans controlled the presidency and Congress, and though they claimed to stand for principles of laissez-faire and opposed various economic and social reforms, they were willing to use governmental power to support large corporations and the wealthy.
Senator Warren G. Harding of Ohio, who was elected president in 1920, pledged to restore “normalcy” after World War I and the tumult of the Red scare. Summing up the Republican philosophy, Harding declared that he and his party wanted “less government in business and more business in government.” Harding’s cabinet appointments reflected this goal. Treasury Secretary Andrew Mellon, a banker and an aluminum company titan, believed that the government should stimulate economic growth by reducing taxes on the rich, raising tariffs to protect manufacturers from foreign competition, and trimming the budget. The Republican Congress enacted much of this agenda, reducing spending and lowering inheritance and corporate taxes. During the Harding administration, tax rates for the wealthy, which had skyrocketed during World War I, plummeted from 66 percent to 20 percent. Mellon believed that those on the lower rungs of the economic ladder would prosper once business people invested the extra money they received from tax breaks into expanding production. Supposedly, the wealth would trickle down through increased jobs and purchasing power. At the same time, Republicans turned Progressive Era regulatory agencies such as the Federal Trade Commission and the Federal Reserve Board into boosters for major corporations and financial institutions by weakening regulatory enforcement.
Secretary of Commerce Herbert Hoover had an even greater impact than Mellon in cementing the government-business partnership during the 1920s. A progressive who ably headed the Food Administration during World War I, Hoover believed that the federal government had a role to play in the economy and in lessening economic suffering. Rejecting government control of business activities, however, he insisted on voluntary cooperation between the public and private sectors. The secretary of commerce favored the creation of trade associations in which businesses would collaborate to stabilize production levels, prices, and wages. In turn, the Commerce Department would provide helpful data and information to improve productivity and trade.
Hoover’s vision fit into a larger Republican effort to weaken unions by promoting voluntary business-sponsored worker welfare initiatives. For example, under the American Plan (the name itself implied that unions were “un-American”), some firms established health insurance and pension plans for their workers. As early as 1914, Henry Ford provided his autoworkers over twenty-two years old “a share in the profits of the house” equal to a minimum wage of $5 a day, and he cut the workday from nine hours to eight hours. Already under pressure from such tactics, unions were further damaged by a series of Supreme Court rulings that restricted strikes and overturned hard-won union victories such as child labor legislation and minimum wage laws. By 1929 union membership had dropped from approximately five million to three million, or about 10 percent of the industrial labor market.
Scandals during the presidency of Warren G. Harding diminished its luster but did not tarnish the shine of Republican economic policy. The Teapot Dome scandal grabbed the most headlines. In 1921 Interior Secretary Albert Fall collaborated with Navy Secretary Edwin Denby to transfer naval oil reserves to the Interior Department. Fall then parceled out these properties to private companies. As a result, Harry F. Sinclair’s Mammoth Oil Company received a lease to develop the Teapot Dome section in Wyoming. In return for this handout, Sinclair delivered more than $300,000, much of it in cash, to Fall. In the wake of congressional hearings launched by Senator Thomas J. Walsh of Montana, one of the few progressives remaining in Congress, Fall and Sinclair were convicted on a number of criminal charges and sent to jail.
Harding’s sudden death from a heart attack in August 1923 brought Vice President Calvin Coolidge to the presidency. The former Massachusetts governor, who had sent state troops to quell the Boston police strike in 1919, distanced himself from the scandals of his predecessor’s administration but reaffirmed Harding’s economic policies. “The chief business of the American people is business,” President Coolidge remarked succinctly.
Americans Become Consumers
The 1920s marked a period of economic expansion and general prosperity. National income rose from approximately $63 billion to $88 billion and per capita income jumped from $641 to $847, an increase of 32 percent. The purchasing power of wage earners climbed approximately 20 percent.
This great spurt of economic growth in the 1920s resulted from the application of technological innovation and scientific management techniques to industrial production (Figure 21.1). Perhaps the greatest innovation came with the introduction of the assembly line. First used in the automobile industry before World War I, the assembly line moved the product to a worker who performed a specific task before sending it along to the next worker. This deceptively simple system, perfected by Henry Ford, saved enormous time and energy by emphasizing repetition, accuracy, and standardization. As a result, a new car rolled out of one of Ford’s auto plants in less than a minute—earlier it had taken twelve and a half hours. Streamlined production lowered costs, which, in turn, allowed Ford to lower prices. The price of a new Model T dropped from $725 in 1910 to $290 in the early 1920s.
Besides the automobile, the second industrial revolution focused on the production of consumer-oriented goods previously considered luxuries. The electrification of urban homes created demand for a wealth of new laborsaving appliances; rural areas, most of which lacked electricity, did not benefit. Refrigerators, washing machines, toasters, and vacuum cleaners appealed to middle-class housewives whose husbands could afford to purchase them. Wristwatches replaced bulkier pocket watches. Radios became the chief source of home entertainment, and families gathered around the radio console to listen to music, news, and sports. Religious and political radio programs helped spread their particular faiths and ideologies, and those farmers equipped with electricity depended on the radio for weather reports and agricultural prices.
FIGURE 21.1 Production of Consumer Goods, 1921 and 1929 Rising per capita income, lower manufacturing costs, urban electrification, and advertising spurred the production of consumer goods in the 1920s.
The most popular new items—automobiles and radios—brought Americans together through better transportation and communication.
Although such household items changed the lives of many Americans, no single product had as profound an effect on American life in the 1920s as the automobile. Auto sales soared in the 1920s from 1.5 million to 5 million, making Henry Ford a multimillionaire and fueling the growth of related industries such as steel, rubber, petroleum, and glass. In 1929 Ford and his competitors at General Motors, Chevrolet, and Oldsmobile employed nearly 4 million workers, and around one in eight American workers toiled in factories connected to automobile production.
The automobile also changed day-to-day living patterns. Although most roads and highways consisted of dirt and contained rocks and ruts, enough were paved to extend the boundaries of suburbs farther from the city. By the end of the 1920s, around 17 percent of Americans lived in suburbia. Cars allowed families to travel to vacation destinations at greater distances from their homes. Even the roadside landscape changed to accommodate weary travelers, as gas stations, diners, and motels sprang up to serve them, and advertisers constructed billboards along the roads to remind them of what they needed. Each year, vacation resorts on the east and west coasts of Florida attracted thousands of tourists who drove south to enjoy the state’s balmy climate and beautiful beaches. The use of automobile technology blended the conveniences of modern America with the primitiveness of the environment. Outdoor camping became the craze.
The automobile also provided new dating opportunities for young men and women. At the turn of the twentieth century, a young man courted a woman by going to her home and sitting with her on the sofa or out on the porch under the watchful eyes of her parents and family members. When the couple left the house, they might walk to a park and listen to a bandstand concert, again in the company of others. With the arrival of the automobile, couples could move from the couch in the parlor to the backseat of a car, away from adult supervision. Driving to a “lover’s lane” in a Model T and drinking from a flask of prohibited alcohol, the young couple could explore new sexual terrain that had been denied them in the past (most likely “petting”—kissing and rubbing rather than intercourse).
Although Ford and his fellow manufacturers had succeeded in lowering prices for consumers, they still had to convince Americans to spend their hard-earned money to purchase their products. Turning for help to New York City’s Madison Avenue, the location of the fledgling advertising industry, manufacturers nearly tripled their spending on advertising over the course of the 1920s. Firms pitched their products around price and quality, but they directed their efforts more than ever to the personal psychology of the consumer. Advertisers played on consumers’ unexpressed fears, unfulfilled desires, hopes for success, and sexual fantasies. The producers of Listerine mouthwash transformed a product previously used to disinfect hospitals into one that fought the dreaded but made-up disease of halitosis (bad breath). Advertisers told people that they could measure success through consumption. Purchasing a General Electric (GE) allsteel refrigerator not only would preserve food longer but also would enhance the owners’ reputation among their neighbors. “Happy to own it . . . proud to show it” headlined one ad explaining the virtues of GE’s new product.
Although average wages and incomes rose during the 1920s, the majority of Americans did not have the disposable income to afford the bounty of new consumer goods. To resolve this problem, companies extended credit in dizzying amounts. By 1929 consumers purchased 60 percent of their cars and 80 percent of their radios and furniture on credit in the form of installment plans and owed a total of $3 billion. “Buy now and pay later” became the motto of corporate America. By putting a small amount down and making monthly payments with interest, people could obtain an assortment of consumer items they otherwise could not afford.
Prosperity in the 1920s was real enough, but behind the impressive financial indicators flashed warnings that profound danger loomed ahead. Perhaps most important, the boom was accompanied by growing income inequality. A majority of workers lived below the poverty line, and farmers plunged deeper into hard times. Corporate profits increased much faster than wages, resulting in a disproportionate share of the wealth going to the rich. The combined income of the top 1 percent of families was greater than that of the 42 percent at the bottom (Figure 21.2); 66 percent lived below the income level ($1,800 to $2,000 annually) necessary to maintain an adequate standard of living. In addition, less than 1 percent of families accumulated 34 percent of the nation’s savings, while around 78 percent of families had no savings at all.
Income inequality was a critical problem because America’s new mass-production economy depended on ever-increasing consumption, and higher income groups could consume only so much, no matter how much of the nation’s wealth they controlled. While the expansion of consumer credit helped hide this fundamental weakness, the low wages earned by most Americans drove down demand over time. Cutbacks in demand forced manufacturers to reduce production, thereby reducing jobs and increasing unemployment. In the days before unemployment insurance, this placed an increased burden on families to make ends meet and dragged down the demand for consumer goods even further. By 1926, as a result of lagging purchasing power, the growth of automobile sales had begun to slow, as did new housing construction—signs of an economy heading for trouble.
FIGURE 21.2 Income Inequality,
1923-1929 Although the U.S. economy expanded rapidly in the early 1920s, the accumulation of vast wealth among a small percentage of Americans created growing inequality. Although most Americans could purchase new consumer goods only by buying on credit, the richest 1 percent engaged in risky stock and real estate ventures to further enhance their wealth.
At the same time, the wealthy few used their disproportionate savings to speculate in the stock market and risky real estate ventures. To encourage investments, brokers promoted buying stocks on margin (credit) and required down payments of only a fraction of the market price. Without vigilant governmental oversight, banks and lending agencies extended credit without taking into account what would happen if a financial panic occurred and they were suddenly required to call in all of their loans. To make matters worse, the banking system operated on shaky financial grounds, combining savings facilities with speculative lending operations. With minimal interference from the Federal Trade Commission, business people frequently managed firms in a reckless way that created a high level of interdependence among them. For example, Samuel Insull, who owned a gas and electric utilities empire, was the chairman of the board of sixty-five companies, a director of eighty-five others, and the president of an additional seven corporations. This interlocking system of corporate ownership and control meant that the collapse of one company could bring down many others, while also imperiling the banking houses that had generously financed them.
Rampant real estate speculation in Florida foreshadowed these dangers, as private developers and the state government promoted tourism and land purchases. In many cases, investors bought properties sight unseen, as speculators and unscrupulous agents worked under the assumption that land values would continue to increase forever. However, severe storms in 1926 and 1928 abruptly halted the increase in land values. Land prices spiraled downward, speculators defaulted on bank loans, and financial institutions tottered.
Throughout the 1920s, fortunes plummeted for farmers as well. Despite the growing urbanization of the nation, farmers still made up one-third of the population. Declining world demand following the end of World War I, together with increased productivity because of the mechanization of agriculture, drove down farm prices and income. Between 1925 and 1929, falling wheat and cotton prices cut farm income in half. The collapse of farm prices had the most devastating effects on tenants and sharecroppers who were forced off their lands through mortgage foreclosures. Around three million displaced farmers migrated to cities, where they had to compete with unskilled laborers for factory jobs and often found themselves among the ranks of the unemployed.
Internationally, the United States encountered serious economic obstacles. World War I had destroyed European economies, leaving them ill equipped to repay the $11 billion they had borrowed from the United States. Much of the Allied recovery, and hence the ability to repay debts, depended on obtaining the reparations imposed on Germany at the conclusion of World War I (see chapter 20). Germany, however, was in even worse shape than France and Britain and could not meet its obligations. Without a prosperous Europe, the American economy suffered. In 1924 the U.S. government sent Charles G. Dawes, a banker and soon to become Coolidge’s vice president, to negotiate with Britain, France, and Germany to find a solution to their mutual problem. Under the terms of the eventual agreement, the United States provided loans to Germany to pay its reparations. In turn, Britain and France reduced the size of Germany’s payments. The result was a series of circular payments. American banks loaned money to Germany, which used the money to pay reparations to Britain and France, which, in turn, used Germany’s reparations payments to repay debts owed to American banks. What appeared a satisfactory resolution at the time ultimately proved a calamity. In undertaking this revolving-door solution, American bankers added to the cycle of spiraling credit and placed themselves at the mercy of unstable European economies. Compounding the problem, Republican administrations in the 1920s supported high tariffs on imports, reducing foreign manufacturers’ revenues and therefore their nations’ tax receipts, making it more difficult for these countries to pay off their debts.
REVIEW & RELATE
• Describe the relationship between business and government in the 1920s.
• Why was a high level of consumer spending so critical to 1920s prosperity, and why was the economic expansion of the 1920s ultimately unsustainable?