The 1920s Economy

The 1920s Economy

Government policies

High tariff rateThe government put a high tariff rate on foreign goods which made them more expensive to the ordinary American than goods that had been made in the USA (Fordney-McCumber Tariff Act 1922).The purpose of this was to ensure that Americans bought American, thus US companies would not have to compete with a foreign market.HOWEVER: other countries raised their tariffs in retaliation, meaning that those in other countries could not afford to buy American goods, which effectively ceased Americas international trade.This had a great effect on agriculture, as farmers now had to pay ridiculously high prices on imported equipment, and they could no longer rely on foreign markets to sell their surplus at all.

Tax reduction (Andrew Mellon)Low taxation fit in with the Republican idea that everyone should be able to find a way to help themselves without going to the government for aid.The Revenue Act 1925 reduced some taxes and abolished others so that people would have more money to provide for themselves.However, only the taxes of the wealthy were reduced, due to the belief that if the wealthy had more money, then the wealth would trickle down to the poorer in society.In 1920, the tax rate for those with an annual income of $1m was 65%; by 1928, it was 20%.

Fewer regulationsThe Republican government believed in a policy of laissez-faire, that the economy should be able to run itself without government intervention.Businesses were left to do what they liked, including fixing prices, in order to maximise their profits.There were two regulatory bodies set up to regulate business: the FTC and the ICC; however, these organisations did nothing, and often helped business rather than scolded it.Leaders were appointed to these organisations who had no intention of running it properly; a lawyer was appointed as leader of the FTC who had previously claimed that the organisation was nothing but a threat to business.

Technological advances

Motor vehicle industryThe motor vehicle industry was optimised by Henry Ford, who introduced new methods of manufacturing i.e. mass production, which brought down costs and time.By the mid-1920s, cars could now be made in 1 hours, whereas previously it had taken 12 hours; they now also cost less than $300.The motor industry also boosted those industries which provided the raw materials needed to make cars: the motor vehicle industry used 80% of the steel produced in the US, as well as the majority of oil.The interdependence of industries was revealed when Ford closed down his Model T factory to open his Model A factory, the US went through a brief slump.

Motor vehicle industryThe industry was also a big employer; 7% of the workforce was employed by the motor vehicle industry, and they earned 9% of all wages.Henry Ford also developed welfare capitalism which provided workers with perks such as holidays and shorter working days, as well as lunches with 800 calories.HOWEVER: the availability of cars meant that people didnt need horses as much, which affected agriculture; also, not everyone could afford a car, so despite the growth in car ownership, there was still a lot of people who went without.

ConstructionConstruction was booming in the early-mid 1920s, with the increased need for housing, offices, highways and transport links provided by the population growth and the growth in car ownership.People with cars could now go on holiday, meaning that hotels needed to be built; the Great Migration from the south to the north led to urbanisation which needed to be sustained with housing.HOWEVER: the development of property in Florida led to people making risky investments there, which led to people going bankrupt; also, after 1926 the demand for housing died down and this led to unemployment and the decline of raw materials industries.

Construction (The Florida Land Boom)With the more easy availability of cars, people found that they could get to new places, such as Florida, and property investment began.However, people were buying the land on credit based on success stories sold to them by estate agents which turned out not to be true.Many people went bankrupt as a result, and the business in Florida for the construction industry died in 1926.

Electrical consumer goodsThe development of electrical consumer goods such as hoovers and washing machines led to a growth in the number of companies using Fords methods of mass production.Mass production meant that many people could own such goods, and the labour-saving devices freed up peoples time for leisure pursuits, thus boosting the entertainment industries such as cinema and tourism.HOWEVER: electrical companies could not afford to supply the Southern states; people bought electrical goods on hire-purchase schemes, which led to a widespread acceptance of debt.

New business methods

Growth of huge corporationsBig corporations could now offer their workers welfare capitalism, which improved their working conditions and pay.800 calorie meals, holidays, $5 8-hour days, bonusesThey also implemented mass production which made products easier and cheaper to make, so that they could sell the products for cheaper; they aimed to make larger profits from lots of small sales.HOWEVER: only big corporations could afford to implement welfare capitalism, and it was not widespread; furthermore, the view that such policies made workers lives easier legitimised the use of yellow dog contracts which forbade trade union membership.

Management scienceMany large corporations adopted Taylorism, a business practice designed to standardise production and increase profits.It involved the specialisation of workers so that they could do one part of the bigger process, which meant that targets could be set (and incentives such as bonuses were offered to ensure that targets were met).These targets increased efficiency and led to more sales and more profit.Taylorism was only possible due to the development of mass production.

Advertising and salesmanshipThanks to technological advances, advertisers had new media with which to promote products, such as cinema and radio.Advertising appealed to peoples insecurities to create a consumer culture which provided companies with an almost endless demand as people began buying what the wanted rather than what they needed.HOWEVER: the increase in advertising increased the potential for false advertising and unethical practices (such as those employed during the Florida Land Boom).

Easy creditThe emergence of new products also led to the emergence of hire-purchase schemes, whereby the consumer would pay a deposit then pay the rest of the product off in instalments with interest.By 1929 almost $7b worth of goods had been sold on credit.Easy credit was first introduced by the motor vehicle industry and was later adopted by the electrical goods industry, and so it contributed to the boost in the entertainment industry through leisure time.In 1929, over 80 million cinema tickets were sold.HOWEVER: the hire-purchase schemes meant that everyone was in debt, which would be a problem during the Depression.

Stock market speculationStock market speculation was born out of the feeling that anyone could get-rich quick (this feeling also facilitated the emergence of conmen such as Charles Ponzi).Ordinary people as well as companies began buying shares on the margin, or with money borrowed from the bank.This helped the economy as banks were earning interests on their loans and companies were receiving investments with which to grow.HOWEVER: there was no guarantee that stocks would gain in value, and if they didnt, people who had bought on the margin would still owe the banks for their loans.