The Business of America: The Economy in the 1920s

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The Business of America: The Economy in the 1920s

The story of the 1920s is in large part a story about money. After a few slow years at the start of the decade, money began to flow through many, though not all, people's hands. The flow continued right up until those fateful few days near the end of 1929, when it suddenly stopped. After the seemingly endless prosperity of the previous years, the stock market crash and the onset of the Great Depression (the period of economic downturn and hardship that would last until the beginning of World War II; 1939–45) came as a great surprise to almost everybody. A few sharp observers had predicted that the good times of the Roaring Twenties were too good to last, that certain practices and attitudes popular during the decade could lead to disaster. But while the money flowed, few paid attention to the warning signs.

Ordinary people were only following the lead, after all, of the nation's most powerful figures. The federal government was now dominated by men who considered business the lifeblood of the United States. One of the most famous remarks of the 1920s was made by President Calvin Coolidge (1872–1933; served 1923–29), who declared in a


1927 speech delivered to newspaper editors that "the business of America is business." The administrations of all three presidents who served during the 1920s—Warren G. Harding (1865–1923; served 1921–23), Coolidge, and Herbert Hoover (1874–1964; served 1929–33)—followed the same laissez-faire approach. That is, they believed that if government would just stay out of business affairs, for example, by lowering taxes and loosening regulations, the economy would thrive and everyone would benefit. Up until the close of the decade, most U.S. citizens agreed.

A different United States

The first two decades of the twentieth century were dominated by a major shift not only in the work done by most people in the United States but in the very makeup of those people as well. Previously, a majority had worked either on farms or as skilled craftsmen. They toiled in small, relatively quiet settings where the emphasis was on doing a job well, not on getting it done quickly. But at the dawn of the twentieth century, more people moved out of rural areas and into cities. Factories began springing up everywhere. They were big, noisy places in which it was important to work fast. The concerns and accomplishments of individual workers took a backseat to increasing production numbers. A large number of laborers, including young children, were working long hours for low wages, often under harsh conditions. To protect themselves, workers began forming labor unions and taking part in strikes, many of which had violent outcomes.

At the same time, the population of the United States was changing. The early years of the century saw a huge surge of immigrants, many from the countries of southern and eastern Europe (such as Italy, Greece, and Poland). Grateful for the fresh start and future prosperity that the United States promised, these people were willing to work for little money. African Americans from the rural South were also migrating north in search of better jobs and an escape from prejudice, discrimination, and white terrorist groups like the Ku Klux Klan. Increasing numbers of women were also entering the workforce, though, like immigrants and blacks, most of them were working as unskilled laborers. The cities were growing and expanding past their earlier boundaries, and this growth, combined with the new mix of people, brought social, economic, and political tensions. During the Progressive Era (which lasted roughly from 1900 to 1914), reformers would try to ease some of these tensions.

Rise of big business sparks reform efforts

During the 1800s the United States became an increasingly industrialized country. As the century progressed, major advances in technology brought machines that increased productivity. At the same time, new ideas about the efficient management of that production became popular.

The railroad industry was one of the most important industries of the nineteenth century. By 1900, there were 200,000 miles of track crisscrossing the United States, compared with the 65,000 miles that had existed at the end of the American Civil War (1861–65). Not only could goods now be easily transferred from one far-flung place to another, but people could also communicate with residents of regions that had previously been far out of reach. In one way, that made the country seem smaller, but in another, it led to a new and important concern. The rapid growth of the railroad system and the great wealth and power it brought to those who controlled it, who sometimes took actions to protect their interests, like price-fixing, that did not benefit the people who used the trains, led to questions about government regulation. Many believed that only government rules would keep the big railroad companies in line.

Other kinds of companies were also forming and expanding during this period, such as those producing steel and oil and those processing and packing meat. It took a lot of money and people to run these large corporations, and proper management became a key issue. The men who sat at the top of these new corporate structures, well-known examples include J.P. Morgan (1867–1943) at U.S. Steel and John D. Rockefeller (1839–1937) at Standard Oil, inspired awe and fear for their almost unimaginable wealth and power. Working under them were networks of lesser managers, who followed the principle that productivity, efficiency, and profits were more valuable than anything else, including the rights or concerns of individual workers.

Reform-minded leaders and activists feared that the new corporations had become too big and powerful and that workers were in danger of being crushed by the companies that depended on their labor. These reformers, who became known as Progressives because of their belief in positive change, pushed for protections for factory workers and consumers. They considered women and children especially vulnerable and worked with particular passion on protecting these groups.

World War I brings a shift in attitude

Among the new laws enacted during the Progressive Era were public health measures, workmen's compensation, and restrictions on child labor. Through such legislation as the Sherman Antitrust Act of 1890, the Clayton Antitrust Act of 1914, and the founding of the Federal Trade Commission in 1914, reformers tried to prevent the formation of monopolies (companies with exclusive control of one product or industry). They believed that such corporations not only threatened society's weakest members but also unfairly limited competition by pushing smaller companies out of business. The pro-business atmosphere of the 1920s would, however, drain these measures of power.


It might be said that the sentiments of the Progressive Era, the idea of helping the weak and taking an active approach to improving society, led to the entry of the United States into World War I (1914–18) in 1917. This global conflict was popularly called a war to "make the world safe for democracy." Yet when the war, with its huge toll of death and destruction, was over, the mood of the vast majority of U.S. citizens had changed. The activist government of the Progressive Era gave way to the laissez-faire approach that would dominate the 1920s. Instead of being feared for his power, the businessman would now be embraced and respected by both government leaders and ordinary people for his management skills, his wisdom, and most of all his ability to make astounding quantities of money.

During World War I the federal government had tightened its control on several industries, especially the railroads, that were crucial to the production and transportation of materials and equipment needed for the war effort. When the war was over, however, government leaders favored the loosening of these controls. In the twenty-first century U.S. citizens take the safeguards guaranteed by the Environmental Protection Agency, consumer protection laws, and Social Security for granted. In the 1920s none of these existed. Instead businesses were left to their own devices, with the blessing of the federal government. Under Treasury Secretary Andrew Mellon (1855–1937), who served under all three presidents of the decade, taxes were also lowered. Mellon's idea, which has since come to be known as the "trickle-down" theory of economics, was that if wealthy companies and individuals had money to invest, the overall economy would improve, benefiting even the poorest members of society.

The economy starts to prosper

In the years immediately following the end of the war, the nation experienced something of an economic recession, or temporary decline. This occurred because the orders for materials, weapons, and equipment that had kept U.S. industry humming during the conflict were no longer being received. Similarly, U.S. farmers who had struggled to keep up with the demand for food to feed armies and ordinary people in war-torn Europe now found themselves with too few customers. In fact, the farming sector entered a slump that would continue through the 1920s. The rest of the economy, however, would soon begin to flourish. A major factor in the economic prosperity of the 1920s would be the development and popularity of new technologies used both by industry and by consumers, especially automobiles, airplanes, radios, and appliances like washing machines and vacuum cleaners.

Between 1922, when the recession ended, and 1927, the U.S. economy grew by 7 percent, which is the largest increase it has ever achieved in such a short period. Throughout the 1920s, each year saw a rise in every leading economic indicator (signs that the economy is thriving). Income levels rose (workers, for example, made 26 percent more in 1929 than they had in 1919), as did business growth, new construction, and stock market trading. Production rose by 64 percent between 1920 and 1930, while only 2 percent of workers were unemployed. Not everybody was rich, but many more people than before had more money to spend. Significantly, the old ideas about saving were no longer so popular, and people wanted to spend their money.

Frederick Taylor: A New Kind of Management

The expansion of business and industry that occurred during the Roaring Twenties had its roots in earlier decades of the late nineteenth and early twentieth centuries. A case in point is the theory of scientific management, which developed prior to 1920 but influenced many of the decade's leading business and industry leaders. The inventor of scientific management was Frederick Taylor, an industrial expert who devised more efficient and productive ways to manage workers.

Born in 1856, Frederick Taylor worked as a machinist and then as a foreman in machine shops. His work convinced him that productivity was not as high as it could be, and he spent the 1880s and 1890s publishing papers describing how industry should be run. In 1901 he left his job at Bethlehem Steel after the company's directors rejected his productivity ideas. Taylor became a management consultant and in June 1903, after a presentation made to industrial engineers, his work began to achieve recognition. He was elected president of the American Society of Mechanical Engineers in 1906.

In 1911 Taylor's book Principles of Scientific Management was published. It detailed Taylor's vision for making workers more efficient: study a particular task in detail, breaking it down into separate steps; calculate the minimum amount of time needed for each step in order to determine the most time-efficient means to perform it; if a worker could not complete the task within this time, he would be fired.

Previously, their special knowledge had given skilled workers a certain amount of power. Under Taylor's revolutionary system, managers had more knowledge of tasks and thus more control over them. Because certain tasks were assigned to individual workers, it also isolated them from one another and made them more dependent on managers. If workers recognized that their interests were closely linked to those of their managers, Taylor theorized, they would want to work more efficiently.

Industry and business leaders such as automobile manufacturer Henry Ford were not the only ones to adopt Taylor's ideas. They were also applied in areas of education, medicine, and the military. By the time of Taylor's death in 1915 scientific management was the dominant trend and it would remain so throughout much of the twentieth century.

Consumer demand spurs new approach

Consumer demand for various products led to great leaps for industry. Early in the century, an industrial engineer named Frederick Taylor (1856–1915) had created a theory called scientific management that promised to make corporations more efficient and thus allow for maximum mass production. Taylor performed studies to determine how to get men and machines to work together smoothly and quickly. His theory emphasized the importance of managers to lead the functions of sales, budgeting, research, financing new ventures and getting rid of old ones, and hiring and firing employees.

As a result of widespread public faith in these kinds of practices, business schools such as the Harvard Graduate School of Business (founded in 1924) sprang up as the study of business gained legitimacy. Business was now considered a profession, and the businessman was viewed as a well-qualified leader of society.

This attitude is reflected in one of the most popular literary works of the decade, Sinclair Lewis's 1924 novel Babbitt. Despite some self-doubts that were probably felt by few actual businessmen of the period, George Babbitt is considered the model businessman and upstanding small-town citizen of the 1920s. Even though Lewis (1885–1951) had intended the novel as a criticism of U.S. society, its widespread popularity suggests that many readers of the 1920s found something they liked in George Babbitt. Nevertheless, the character's name has since become a synonym for spiritual emptiness and complacency (being uncritically satisfied with oneself or one's society).

Henry Ford's innovations

One of the first industry leaders to employ the ideas of scientific management was Henry Ford (1863–1947), founder of the Ford Motor Company. Although he is often thought of as the inventor of the automobile, he was not. His actual achievement was to take an invention that others were already making and figure out how to produce it in large numbers, so that it could be offered at a low cost to the consumer. He did so by pioneering the use of the assembly line, which involved dividing the work of producing a car among many laborers, each of who performs one specific task repeatedly. A constantly moving belt transports the parts along until the vehicle is assembled. A passage quoted in Lynn Dumenil's Modern Temper: American Culture and Society in the 1920s from an account by Hugh Grant, an Australian who came to the United States to observe production methods, illustrates what this kind of work was like for the average laborer:

At 8 a.m., the worker takes his place at the side of a narrow platform down the centre of which runs a great chain moving at the rate of a foot a minute. His tool is an electrically-driven riveter. As he stands, riveterpoised, the half-built framework of the car passes slowly in front of him. … Once, twice, … once, twice … and so on for six, eight, or ten hours, whatever the rule of the factory may be, day after day, year after year. … There is not a job on the mass-production chain more complicated technically than that. The chain never stops. The pace never varies. The man is part of the chain, the feeder and the slave of it.

Determined to produce a small, cheap car that would be available to as many consumers as possible, Ford watched his workers carefully to constantly improve and simplify production methods. He sought to cut time and waste of both materials and human motions. His efforts paid off spectacularly, as Ford produced more than 60 percent of the cars sold during the 1920s. The Model T, which Ford had introduced in 1908, took twelve hours to make in 1912. Three years later Model Ts were being turned out at the rate of one every ninety minutes. Just as predicted, the cost of a Model T fell accordingly, from $850 in 1910 to as low as $260 by the end of the decade.

At the beginning of the 1920s, a number of automobile companies had competed for customers' business. By the end of the decade, however, many of these smaller operations had been pushed out of the market by the success of Ford, the Chrysler Corporation (headed by Walter P. Chrysler; 1875–1940), and General Motors (headed first by William C. Durant and then by the more modern-thinking Alfred P. Sloan [1875–1966]). These companies, which came to be known as the "Big Three," would dominate the automobile industry for the remainder of the century.

A new approach to spending

Automobile ownership was now within the reach of many ordinary U.S. people, and they embraced it with gratitude and joy. A car gave a person or family the freedom not only to travel between work and home but from region to region as well. Cars provided more opportunities to pursue leisure activities, even if that just meant a drive in the countryside. For young people, cars were a way to escape from parents' watchful eyes.

Owning a car was now practically a necessity, but not everybody had the ready cash to buy one. As previously


mentioned, the majority of U.S. residents had traditionally saved their money, buying only what they really needed. If they did not have the cash for something, they did not buy it. With the 1920s, though, came another major societal shift: people started purchasing things on credit. Their eagerness to own radios, electrical appliances, and especially automobiles (60 percent of which were bought on credit during the 1920s) led them to sign up on installment plans, by which consumers made regular payments, including interest, until they had purchased the item. This was commonly known as the "buy now, pay later" mentality, part of the general consumerism (the preoccupation with acquiring goods) that many people feel has continued to dominate U.S. society.

A passion for the stock market

The newfound comfort that the average U.S. resident displayed toward buying on credit also extended to the stock market. A stock represents a share in a company. When a person buys stock in a company, he or she offers it money with which to operate. In exchange the buyer receives a share in any profits the company makes. A rise in the price of a stock means that more people want to buy it, often because the company has gained a reputation as a successful moneymaking operation, which makes it more valuable. If the price goes down, the stock has lost value, and investors may lose money if they choose to sell the stock. Instead they may decide to hold on to it in the hope that the value will rise again.

Before the 1920s, most ordinary people had been unfamiliar with the buying and selling of stocks, but now a wide variety of individuals invested with enthusiasm. Some used their own savings, while others borrowed the money to buy stocks. Still others purchased stocks "on the margin," which meant that they paid a small amount of the price of the stock while the stockbroker (an individual authorized to conduct stock sales) paid the rest. If prices rose, they could pay back their debt while also making a profit. The problem with this method was that if prices fell, investors would have to pay the full amount back to the stockbroker right away.

Across the nation, people believed in the prospect of instant wealth. By the late 1920s the New York Stock Exchange was trading six to seven million shares, or stocks, per day, compared to a more normal rate of three to four million. The prices of stocks had risen so high that they often far surpassed the stocks' real value or the amount of profit the companies could possibly earn. Yet people kept up their frantic pace of investment, convinced that this boom could go on forever.

It could not, however, and in the fall of 1929 came a rude awakening. The stock market started taking big dips downward until, on two fateful October days known as Black Thursday and Black Tuesday, it crashed. The result was devastating financial losses that left individuals penniless, caused banks to fail, and forced companies to close their doors. The long period of hardship and suffering known as the Great Depression had begun (see Chapter 9 for more details).

The new art of advertising

Also closely linked to the advent of consumerism and credit buying was the rising importance of advertising. With so many people eager to spend their money, companies were in hot competition with one another. Advertising had existed in earlier days, but its main purpose had been to deliver the straight facts about products to consumers. In the 1920s the focus of advertising shifted. Advertisements became a kind of art form, with the purpose of persuading people to buy things. This was done by convincing them that these things were necessary through appeals to people's emotions, personal goals, or dreams.

Today's consumers are accustomed to slick, often entertaining ads on television or in print, but it was in the 1920s that this kind of approach was first practiced. Advertisers tried to show how much better people's lives could be if they owned certain products. A homemaker's burden, for example, would be lightened if she could use a Hoover electrically powered vacuum cleaner instead of using a broom to beat the dust out of her carpets. A young man who owned a Playboy car from the Jordan Motor Car company would enjoy the freedom of the open road as well as, the ads implied, the admiration and company of equally adventurous young women.

Already existing advertising agencies expanded and new ones sprang up, all of them making healthy profits from the public's new interest in sales, marketing, and public relations. One such company was the J. Walter Thompson agency, which saw profits rise from $10.7 million in 1922 to $37.5 million in 1929. Selling ad space in print publications also became increasingly profitable, which spurred the growth of mass circulation magazines (such as Time and Life) that were printed on the kind of slick paper that showed off advertisements to best advantage.

The Florida land boom

One of the most notable uses of advertising to appeal to people's dreams, and to cash in on their new willingness to buy on credit, led to a phenomenon known as the Florida land boom. Before the 1920s Florida was sparsely populated and mostly undeveloped, with few industries and a weak economy. Suddenly the state's image changed as advertisers hired by real estate agents and developers began to lure consumers with images of Florida's sunshine, palm trees, and fragrant, colorful flowers. Entranced by the promise of a warm climate and inviting beaches, thousands of residents of colder, drearier parts of the United States, especially the Northeast, rushed to buy land in Florida.


Often these purchases were made on the installment plan without the buyer ever seeing the property. Many bought with the intention of immediately selling the land and gaining the kind of instant wealth that seemed, during the 1920s, to be within everybody's reach. Prices for plots of land in Florida rose dramatically as people caught what Gertrude Matthews Shelby, in an article in Harper's Monthly Magazine, called "the smell of money in Florida."

Success stories abounded, right up until November 1926. That is when a devastating hurricane hit Miami, Florida's largest city. The storm left 100 people dead and 40,000 homeless, and it alerted many new property owners to the reality of the sunny realm they had imagined. A considerable number of buyers now found that the land they owned was worthless, much of it located in swampy areas or far inland, away from Florida's fabled beaches and palm trees. Houses said to have been built had never existed, and promised golf courses and harbors were never constructed. The Florida land boom was over.

Labor unions struggle

Although most working people in the United States—especially those in the skilled trades, such as printers, carpenters, and shoemakers—shared in the general prosperity of the 1920s, the labor unions did not. These organizations had been formed during the last quarter of the nineteenth century and first years of the twentieth century, with the goal of protecting workers from the dangers of big business. Many of them had focused on organizing skilled craftsmen or railroad employees. But U.S. industry had changed, with mass production dominated by unskilled workers, many of them immigrants or migrants from the rural South, who were not familiar with the benefits of union membership.

Labor unions needed to adjust to a new kind of workforce. Before, the majority of young people usually chose either to work on family farms or to learn skilled trades. But now they could work in factories where they made relatively high pay (Henry Ford caused a sensation by offering workers the incredible wage of five dollars a day) despite little education or training. Of course, factory work was boring and sometimes unpleasant, and there were frequent layoffs and few chances for advancement.

For African Americans, many of whom had migrated to the northern cities during World War I, when there was a labor shortage, racial discrimination was still a fact of life, even in the North. Women's opportunities were also limited. For the most part they were kept out of the professions, such as doctors and lawyers, and higher-level jobs, and hardly anybody considered it unfair if they received less pay for the same work performed by men. Women did, however, find factory work as well as jobs as office workers, teachers, nurses, social workers, and telephone operators.

Following a brief period of labor unrest and strikes resulting from the unemployment that followed World War I, public attitudes toward labor unions changed. During the 1920s union leaders were no longer viewed as heroic protectors of people's rights. They were seen as holding radical political views and anti-American ideas that they had imported from overseas. The suspicion and distrust that many U.S. citizens felt for labor unions was highlighted during the famous trial of Nicola Sacco and Bartolomeo Vanzetti, Italian immigrants and union organizers who were found guilty of robbery and murder (see Chapter 6). Despite a lack of evidence and the undeniable influence of prejudice on the court proceedings, the two men were executed for the crime in 1927.

The scientific management technique called for good relations between employers and workers, but this cooperation did not extend to labor unions. Instead, some large corporations, such as General Electric and Bethlehem Steel, began to employ a system called welfare capitalism. This meant that the company itself was supposed to take a protective role in workers' lives, thus eliminating the need for labor unions. They were to provide benefits like dental and health care and life insurance while ensuring better wages and working conditions. In the end, though, this system involved only about 5 percent of U.S. workers. The rest would have to wait until the 1930s, when the harsher circumstances of the Great Depression brought about another shift, for the newly strengthened labor unions to come to their aid.

Farmers suffer through the 1920s

Farmers were another group that did not share in the general economic prosperity of the 1920s. In fact, they experienced hard times throughout the entire decade. During World War I, U.S. farmers had risen to the great demand to supply food for the Allied troops as well as hungry Europeans. They had increased their production by 15 percent or more, purchasing tractors and other equipment and cultivating 35 million more acres than before. But the new machinery meant that fewer people were needed to work the farms, and all the extra purchases either ate into farmers' profits or put them in debt.

When the war ended these problems got even worse. With the European demand gone, there was an oversupply of food in the United States, and prices dropped dramatically. For example, a bushel of wheat that had cost $2.57 in 1920 cost only $1.00 a year later. By the middle of the decade the average farmer was making only about a thousand dollars a year, compared with the three thousand dollars per year that was considered a middle-class income. As a result, many people began to move off the farms and into the urban centers, especially the northern cities, in search of better opportunities. Yet some of the northern industries were also struggling; cotton manufacturers, for example, were affected by the development of man-made fabrics like rayon.

Meanwhile, the federal government showed little interest in what was happening in the farming sector. Both Harding and Coolidge seemed much more concerned about business. In fact, Coolidge twice vetoed the McNary-Haugen Bill, which farming advocates had pushed as a way to provide government aid to farmers.

Ignoring the warning signs

Despite the continuing problems experienced by some parts of society—especially labor unions, African Americans, and farmers—the United States was generally dominated by a mood of optimism and prosperity as the end of the decade approached. Some observers, however, were concerned about the tremendous rise in stock prices, which they considered dangerous. Construction starts were also beginning to decline, as was consumer demand for some products, such as automobiles, while people maintained their carefree approach to buying on credit. These warning signs were either unnoticed or ignored by most.

Thus when President Herbert Hoover, who had served as Secretary of Commerce under both Harding and Coolidge and might be considered an economic expert, took office in 1929, he predicted a prosperous future. In his inaugural address, he declared that he had "no fears for the future of our country. It is bright with hope." Chapter 8 describes the events that proved Hoover's optimism misguided.

For More Information

Books

Allen, Frederick Lewis. Only Yesterday: An Informal History of the 1920s. New York: Perennial, 1964.

Burlingame, Roger. Henry Ford: A Great Life in Brief. New York: Knopf, 1969.

Dumenil, Lynn. The Modern Temper: American Culture and Society in the 1920s. New York: Hill and Wang, 1995.

Hanson, Erica. The 1920s. San Diego, CA: Lucent Books, 1999.

Lears, Jackson. Fables of Abundance: A Cultural History of Advertising in America. New York: HarperCollins, 1994.

Marchand, Roland. Advertising the American Dream: Making the Way for Modernity, 1920–1940. Berkeley: University of California Press, 1985.

Miller, Nathan. New World Coming: The 1920s and the Making of Modern America. New York: Scribner, 2003.

Parrish, Michael E. Anxious Decades: America in Prosperity and Depression. New York: Norton, 1992.

Perret, Geoffrey. America in the Twenties. New York: Touchstone, 1982.

Stevenson, Elizabeth. Babbitts and Bohemians: The American 1920s. New York: Macmillan, 1967.

Wilson, Joan Hoff. American Business and Foreign Policy, 1920–1933. Boston: Beacon, 1973.

Web Sites

"American Cultural History, Decade 1920–1929." Kingwood College Library. Available online at http://kclibrary.nhmccd.edu/decade20.html. Accessed on June 17, 2005.

Best of History Websites. Available online at http://www.besthistorysites.net/USHistory_Roaring20s.shtml. Accessed on June 17, 2005.

Clash of Cultures in the 1910s and 1920s. Available online at http://history.osu.edu/Projects/Clash/default.htm. Accessed on June 17, 2005.

Interpreting Primary Sources. Digital History. Available online at http://www.digitalhistory.uh.edu/historyonline/us16.cfm. Accessed on June 17, 2005.

"Prosperity and Thrift: The Coolidge Era and the Consumer Economy." Library of Congress. Available online at http://lcweb2.loc.gov/ammem/coolhtml/coolhome.html. Accessed on June 17, 2005.