The popular description of the U.S. economy during the 1920s, "Prosperity Decade," was no mere slogan; it was reality. From the depths of the very severe post-war Depression of 1920 and 1921, the economy embarked upon a rapid and sustained recovery. Between 1922 and 1929, real gross national product (GNP) grew by 22 percent, with the most rapid rate of expansion evident during the opening and closing years of the decade. This economic growth was not exceptional by the standards that had been set before 1914, but it was at the least highly satisfactory.
THE PROSPEROUS TWENTIES
During the twenties, high levels of investment and productivity growth, which delivered stable prices and full employment, characterized the economy. The output of durable consumer goods, which include automobiles, radios, electric cookers, and refrigerators, grew at about 6 percent per year. Non-durables, examples of which include clothing, shoes, and foodstuffs, expanded at a more modest 3 percent annually. In fact 80 percent of the growth in GNP was in the flow of consumer goods of which the most important was the automobile.
Factory sales of all autos rose from 1.9 million in 1919 to 4.4 million in 1929, during which period U.S. manufacturers built approximately 85 percent of the world's passenger vehicles. Even more remarkable is the fact that just two companies, Ford and General Motors, accounted for 65 percent of all U.S. sales. An insignificant industry before 1914, motor vehicle production, together with the manufacture of bodies and parts, employed some 447,000 wage earners in 1929. The nation's largest manufacturing grouping, foundry and machine shop products, had 454,000 wage earners.
Although domestic sales were impressive, the instability that is the hallmark of the durable goods sector was evident. In 1921, in 1924, and in 1927 automobile output actually declined. However, 1928 and the first half of 1929 saw a boom of such magnitude that automotive products accounted for nearly 17 percent of the total value of fully and semi-manufactured goods. This growth was so vigorous that it is difficult to see how it could have been sustained. Although the auto producers were confident, the sector was highly vulnerable to adverse changes in demand at home and abroad.
The contribution of different parts of the economy to National Income is revealing. In 1929 the largest was manufacturing (25.2%), followed by trade (15.5%), finance (14.7%), services (10.1%), and agriculture (9.7%). Although manufacturing represented the largest part, it is clear that other areas of the economy made a great contribution to national wealth. This distribution was also reflected in employment patterns. In 1929 the nation's factories employed 10.7 million workers but large numbers found work outside manufacturing. The wholesale and retail trade employed 6.1 million, transport and public utilities 3.9 million, services 3.4 million, finance 1.5 million, and construction 1.5 million.
In 1929 manufacturing reached a new peak, producing a 38 percent larger physical output than in 1919 even though in 1929 factory employment was 1.8 percent less. The increase in output was the result of a large rise in productivity, which had been achieved by judicious investment in, especially, electric power and specialised machinery funded mainly by high company profits. Within manufacturing some businesses shed labor while others recruited. Employment expanded in the production of electrical machinery (including radios), bakery products, furniture, petroleum refining, and motor vehicle parts. Contraction occurred in railroad repair shops, in leather goods, in chemicals, and in cotton textile factories located in the northeast region. During the pre-Depression decade, twenty-two states experienced growth in their factory populations. The most vigorous expansion took place in South Carolina followed by Tennessee, North Carolina, Georgia, Texas, and Arizona. A variety of industries were responsible for the industrial success of these states and among them were cotton goods, knitwear including rayon, lumber, furniture, and cigarette manufacture. In contrast, manufacturing employment declined in the Mid-Atlantic, New England and West North Central regions. For example, traditional manufacturing states, such as Connecticut, Massachusetts, New York, New Jersey, and Pennsylvania, lost jobs. However, growth was not entirely confined to the less industrialized states; Indiana and Michigan also experienced gains. Nor had the absolute dominance of the traditional states been broken. In 1929 there were more manufacturing wage earners in either New York or Pennsylvania than in the entire South Atlantic region, though the fastest rates of factory job creation were evident in states where the industrial base was relatively undeveloped
Between 1920 and 1929 an additional four million jobs were created outside agriculture. Since manufacturing as a whole did not generate any additional positions, where did the expanding labor force find work? The biggest increase in employment was in the wholesale and retail trade (2.1 million additional jobs) followed by finance, insurance, and real estate (0.6 million additional jobs). Vigorous construction activity also created many new employment opportunities. From a low point of 0.85 million in 1920, the construction industry expanded to an employment peak of 1.7 million during 1927 and 1928 before declining to 1.5 million in the following year.
The construction industry played a significant role in the twenties expansion. A residential building boom reached its peak in 1926 but was already in decline by 1929. However, aggregate construction activity was still buoyant in 1929 as public construction and non-residential building expanded to fill the slack created by the reduction in home building. Residential building was strongly influenced by national prosperity and by the demands of a highly mobile population. Migration from rural to urban areas, especially to the major metropolises, combined with the flexibility of location made possible by the automobile helped create a vigorous housing market. Auto owners' demands for new or improved roads encouraged higher levels of public construction. As has been noted, the construction industry was a major employer; it was also notoriously prone to booms and slumps. A sharp fall in general economic activity would inevitably dent private and corporate confidence with serious consequences for the industry.
Major changes had been taking place in the socio-economic composition of the labor force since the beginning of the twentieth century. One of the most significant was an increase in both male and, especially, female clerical workers, a trend that continued into the twenties. This trend reflects a general movement of the native born white workforce away from heavy, unpleasant, and unskilled tasks towards the more professionally rewarding and secure white-collar work.
In 1929, 25.2 percent of the U.S. population lived on 6.5 million farms. The farm sector was the source of 40 percent of U.S. exports, measured by value, and also responsible for the provision of a vast range of foodstuffs, feedstuffs, and raw materials for the domestic market. However, over 2.4 million farms were less than 50 acres, over 700,000 farmers worked for more than one hundred days away from farms that could not support their families, and about half the nation's farms produced no appreciable surplus for market. Over 2.6 million tenants farmed only rented land and tenancy was on the increase. Although some small enterprises were profitable, the vast majority were hopelessly uneconomic, and the families living on them were mired in debt, poverty, poor health, and low levels of education. There was a marked difference between the major commercial operators, who invested in the most up-to-date farm machinery and who belonged to effective farm pressure groups and inefficient operators trying to eke out a miserable existence on infertile soil. Indeed, in 1929 about one million farm families had a net annual income of between $100 and $300, far below the sum required to avoid poverty.
Given the sharp disparity that existed between rural and urban incomes it is not surprising that so many Americans migrated to cities. During the twenties there was a net movement of approximately six million people from the countryside to urban centers, in particular to New York, Los Angeles, Chicago, and Detroit where building activity was stimulated. The states that lost most residents were Georgia, Pennsylvania, South Carolina, and Kentucky. Many African Americans left the racially oppressive, low-income South and headed for Chicago, Cleveland, New York, Philadelphia, Detroit, Washington D.C., and Baltimore. The migration of so many Americans during the twenties was beneficial to the economy, which could no longer depend on a substantial flow of European immigrants as permanent controls on entry were introduced in 1924.
1929–1933: THE GREAT SLUMP
The Depression, which began in the middle of 1929, hit a booming economy with savage intensity. By the time a trough was reached in March 1933, manufacturing output had fallen by almost half, unemployment, estimated at just over 3 percent in 1929, had risen to over 25 percent, business profits were negative, and investment had fallen to a historic low. At the same time wholesale prices fell by 38 percent, bank crises paralysed the financial system and farm income plummeted. This Depression embraced industrial and rural America.
By 1933, some 3.4 million manufacturing jobs disappeared, as had 1.4 million in the wholesale and retail trades, 688,000 in construction, 567,000 in services, and 214,000 in finance insurance and real estate. Within manufacturing, the durable goods sector was most seriously affected and output declined by 70 to 80 percent and employment by 55 percent. Among the industries most seriously hit were machinery manufacture, cement, automobiles, bricks, and locomotives. On the other hand, the manufacture of shoes, tobacco, foodstuffs, textiles, and other non-durables fell by a more modest 10 to 20 percent and employment by 30 percent. Industrial structure accounts for the significant regional variations in unemployment. Factory employment was most Depression resistant in the South Atlantic states where, unfortunately, there were few wage earners. However, the East North Central region, which includes the highly industrialized states of Illinois, Indiana, and Ohio, was very badly affected.
The problems facing the consumer durable sector can be illustrated by an examination of automobile manufacture, which had produced a record output of 4.5 million passenger vehicles in 1929. In 1932, production had collapsed to a mere 1.1 million. Employment had fallen by approximately 45 percent, but pay cuts and short time working had decreased the sector's wage bill by 75 percent. With consumer confidence low and the stock of vehicles both high and relatively new, further consolidation took place in the industry. General Motors, Ford, and Chrysler were better able to produce cheap cars than small independent producers, many of which failed. Of the big three, General Motors was by far the most successful, controlling 41 percent of the market by 1933 compared to Chrysler's 25 percent and the ailing Ford Motor Company, 21 percent. Even General Motors suffered a loss in 1932; Ford losses were substantial. The decline in auto production had adverse repercussions on a range of industries including steel, safety glass, nickel, tin, upholstery, and wrought iron. However, the manufacture and sale of petroleum products held up well; Americans bought few new autos, but they continued to drive.
Together with automobile production, construction had been a mainstay of the twenties economy, but the industry now experienced a staggering decline. In 1929 there were 509,000 housing starts; in 1933 there were 93,000. Low company profits and surplus office accommodation led to a contraction in commercial construction. Cutbacks in state and local spending reduced the road building and maintenance program. The collapse in the construction industry had dire consequences for structural steel, plate glass, brick making, and the furniture industry. Railroads responded to the lack of freight business by cutting orders for locomotives and cars and, of course, by firing employees.
When farm prices fell even more steeply than those in manufacturing, farm income collapsed. The average net farm income fell from $945 in 1929 to a mere $304 in 1932. In spite of growing farm misery, however, the migratory flow from the countryside to the town was reversed. With jobs scarce, fewer rural people left for the city and at the same time many urban unemployed took part in a "back to the land" movement. Returning to family farms, or even occupying abandoned farms in order to practice subsistence agriculture, was a preferable option for many. Some politicians mistakenly saw the farm as a sensible solution to mounting unemployment. However, the lack of urban job opportunities and a growing rural population ensured that underemployment was a persistent feature of life in the countryside throughout the thirties.
When Franklin Roosevelt delivered his inaugural address in March 1933 the American economy was in deep crisis. Unemployment and farm misery were widespread, the financial system was in a state of paralysis, and business confidence was at an all time low.
1933–1937: THE RECOVERY
From March 1933 to July 1937 real GNP grew at an impressive 8 percent per annum. At the peak of recovery the economy had struggled back to levels of output and employment that had prevailed in 1929. However, this expansion was halted and put into reverse temporarily by a sharp recession in 1937 and 1938, after which GNP resumed its upward trajectory.
During the recovery phase the expansion of non-durable goods was much greater than that of durables. Indeed, by 1937 textiles and cigarettes, the latter an exceptionally Depression-proof industry, had improved upon their pre-Depression output figures. However, the durable sector lagged, sometimes very badly. The output of machinery and of iron and steel had only just failed to reach 1929 levels when the recession struck. The automobile sector had just exceeded its pre-Depression peak in 1937 only to fall spectacularly from it over the next year. Meanwhile, construction and related industries such as lumber, bricks and furniture continued to languish, with late 1920s levels of output a distant dream.
Even by 1937 the manufacturing labor force had not recovered to its pre-Depression position in New England and in the Mid-Atlantic states. Outside these regions, Illinois and Indiana registered modest gains while Michigan recorded a massive rise of 27 percent, which the recession of 1937 and 1938 totally erased. Indeed, the recession had an adverse effect on employment everywhere, except in the South Atlantic and East South Central regions, which remained surprisingly buoyant.
Between 1929 and 1937 the number of manufacturing wage earners expanded by 17.9 percent in the South Atlantic region; the figure for the East South Central region was 8.4 percent. On average, in Virginia and the Carolinas manufacturing wage earners grew more numerous by just less than 25 percent. North Carolina, with cigarette manufacture and low cost textiles, was the most Depression proof state in the nation. Unfortunately the industries that displayed the fastest rate of output growth during the recovery, that is, after 1933, were not major employers. New jobs were created producing refrigerators, rayon, glass bottles and jars, tin cans, canned fruit, washing machines, and radios, but these were industries in which technical progress often acted as a barrier to maximizing employment. They could not fully compensate for jobs lost since 1929 in transport and public utilities (550,000), construction (385,000), and finance real estate and insurance (100,000). The industries most seriously affected by the economic collapse were among the nation's most dominant employers. By contrast, in 1937 there were 470,000 more jobs in the retail and wholesale trade than in 1929, and an additional 300,000 people worked for the federal government.
Agricultural income revived from its desperately low position during the worst years of the Depression but not to the levels that had prevailed during the late twenties. The problem of small inefficient farms, rural poverty, and a surplus population remained. Migration to urban centers resumed as the "back to the land" movement petered out, but only on a relatively small scale as the job opportunities in cities were so limited. In 1940 virtually the same number of people (30.2 million) lived on farms as in 1929. Agriculture remained a troubled sector.
It is important to remember that many of the structural changes that have been identified as part of the Depression were evident before 1929. Manufacturing employment as a proportion of national employment had been declining since 1920. The same can be said for mining and agriculture. More people took jobs outside the factory and the farm. Clerical work and employment in the retail and wholesale trades became increasingly attractive. Note too the rise of manufacturing in the South. We can detect in the 1920s the roots of the structural revolution, which led, after 1945, to the rise of the Sun Belt.
However, unemployment remained a persistent problem. Even in 1937 unemployment stood at 14.3 percent of the labor force, significantly above the 1929 level of 3.2 percent. The plight of the jobless was made more acute by a change in the age structure of the population, which in turn led to a substantial increase in the numbers available for work. There was also a rise in the numbers of females who wanted to work. In 1937 there were as many people employed as there had been in 1929, but in the meantime an additional six million Americans had been added to the labor force. The recovery had not created sufficient additional jobs to employ all those who wanted to work. It was not until 1942 that full employment returned.
Bernstein, Michael A. The Great Depression: Delayed Recovery and Economic Change in America, 1929–1939. 1987.
Bordo, Michael D.; Goldin, Claudia; and White, Eugene N., eds. The Defining Moment: The Great Depression and the American Economy in the Twentieth Century. 1998.
Chandler, Lester V. America's Greatest Depression: 1929–1941. 1970.
Engerman, Stanley L., and Gallman, Robert E., eds. The Cambridge Economic History of the United States, Vol. 111: The Twentieth Century. 2000.
Fabricant, Solomon. The Output of Manufacturing Industries. 1940.
Fearon, Peter. War, Prosperity, and Depression: The U.S. Economy 1917–1945. 1987.
Smiley, G. The American Economy in the Twentieth Century. 1994.
"Economy, American." Encyclopedia of the Great Depression. . Encyclopedia.com. (February 19, 2019). https://www.encyclopedia.com/economics/encyclopedias-almanacs-transcripts-and-maps/economy-american
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