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The 1920s is the decade when America's economy grew 42%. Mass production spread new consumer goods into every household. The modern auto and airline industries were born. The U.S. victory in World War I gave the country its first experience of being a global power. Soldiers returning home from Europe brought with them a new perspective, energy, and skills. Everyone became an investor thanks to easy access to credit. That hidden weakness helped cause the Great Depression.

Key Takeaways

Economic Growth and Output

The economy grew 42% during the 1920s, and the United States produced almost half the world's output because World War I devastated large parts of Europe. New construction almost doubled, from $6.7 billion in 1920 to $12 billion in 1926. Aside from the economic recession of 1920 and 1921, when by some estimates unemployment rose to 11.7%, for the most part, unemployment in the 1920s never rose above the natural rate of around 4%.

Per-capita GDP rose from $6,460 to $8,016 per person, but this prosperity was not distributed evenly. In 1922, the top 1% of the population received 13.4% of total income. By 1929, it earned 14.5%.

The United States transformed from a traditional to a free market economy. Between 1920 and 1929, farming declined from 13% of the economy to 10.3%, and the portion of the population living on farms fell from 30.1% to 25.2%. At the same time, new inventions sent the manufacturing of consumer goods soaring. According to a presentation by the California State University, Northridge, real gross domestic product was as follows:

1920: $687.7 billion

1921: $671.9 billion

1922: $709.3 billion

1923: $802.6 billion

1924: $827.4 billion

1925: $846.8 billion

1926: $902.1 billion

1927: $910.8 billion

1928: $921.3 billion

1929: $977.0 billion

Stock Market

After dropping by more than 32% in 1920, the Dow Jones Industrial Average jumped from a value of 63.9 points in August 1921 to a high of more than 381 points before the market crashed in October 1929.

One reason for the boom was because of financial innovations. Stockbrokers began allowing customers to buy stocks " on margin." Investors only needed to put down 10-20% of the price of a stock and brokers would lend them the remaining 80-90%. Buying on margin enabled investors to purchase more stock than they could previously afford and, subsequently, realize higher gains if the stock price went up. This same innovation became a weakness when stock prices fell during the 1929 stock market crash.

Only one-third of the nation's 24,000 banks belonged to the Federal Reserve System. Non-members relied on each other to hold reserves. That was a significant weakness. It meant they were vulnerable to the bank runs that occurred in the 1930s.

Another weakness was that banks held fictitious reserves. Checks were counted as reserves before they cleared. As a result, these checks were double-counted by the sending bank and the receiving bank.

Timeline of Events

1920: A recession began in January. The highest marginal tax rate was 73% for those earning more than $1 million. Almost 70% of federal revenue came from income taxes.

1921: Warren Harding became president. The recession ended in July without any intervention. Congress increased the corporate tax rate from 10% to 12.5%. The Emergency Immigration Act restricted the number of immigrants to 3% of the 1910 U.S. population.

1922: Harding reduced the top income tax rate from 73% to 58%.

1923: Vice President Calvin Coolidge became president after Harding died from a heart attack while on a speaking tour in San Francisco. His motto was "The business of America is business." The Supreme Court revoked the minimum wage for women in Washington, D.C. A recession began in May. The stock market began a six-year bull run.

1924: The recession ended in July. The Revenue Act of 1924 lowered the top rate to 46%, according to the Tax Foundation.

1925: Top tax rate lowered to 25%. The corporate tax rate increased to 13%. Secretary of Commerce Herbert Hoover warns Coolidge about stock market speculation. Most countries returned to the gold standard. More than 25% of families owned a car.

1926: A mild recession began in October. The corporate tax rate increased to 13.5%. Robert Goddard invented the liquid propulsion rocket, creating a U.S. advantage in defense. More than 2 million farmers moved to the cities, but only 1 million city folk moved to rural areas.

1927: The recession ended in November after the Fed lowered the discount rate from 4% to 3.5% in September. Charles Lindbergh flew solo from New York to Paris on May 20-21.

1928: Stock prices rose 39%. To stop speculation, the Fed raised the discount rate from 3.5% to 5%. It also sold securities to banks as part of its open market operations. That removed cash from their reserves. Other countries responded by raising rates, even though they were still rebuilding from World War I.

1929: Herbert Hoover became president. He lowered the top income tax rate to 24% and the top corporate tax rate to 12%. The Great Depression began in August, as the economy started shrinking. In September, the stock market reached its peak. The stock market crashed on Oct. 24. During those same months, the Graf Zeppelin completed the first around-the-world flight.

Why Are the 1920s Known as the "Roaring Twenties"?

U.S. prosperity soared as the manufacturing of consumer goods increased. Washing machines, vacuum cleaners, and refrigerators became everyday household items. By 1934, 60% percent of households owned radios. By 1922, 60 radio stations broadcast everything from news to music to weather reports. Most of them used expanded credit offered by a booming banking industry.

The airline industry literally took off. In 1925, the Kelly Act authorized the Post Office to contract out airmail delivery. In 1926, the Air Commerce Act authorized commercial airlines. From 1926 to 1929, the number of people flying in planes increased from 6,000 to 173,000. World War I had hastened the development of the airplane. Many returning veterans were pilots eager to show off their flying skills with nationwide "barnstorming."

The auto industry also greatly expanded due to Henry Ford's mastery of the assembly line. A Model T only cost $300. Also, more families could buy on credit. By the end of the decade, 23 million cars were registered. For the first time, women got behind the wheel.

The expansion of the auto industry created an economic benefit for all. Governments spent billions of dollars to build new roads, bridges, and traffic lights. Gas stations, motels, and restaurants sprang up to service drivers who now covered longer distances. The insurance industry added expensive protection for the vehicles and their owners. Banks also profited by lending to new car owners.

What Else Happened?

On January 16, 1920, the Volstead Act prohibited the sale, manufacture, or transport of any alcoholic beverages. That led to an underground economy dominated by gangsters like Chicago's Al Capone.

On August 18, 1920, women won the right to vote in America. That's when the states ratified the 19th Amendment to the Constitution. That empowerment trickled down to many levels of society. So-called flappers cut their hair, dressed in less constrictive clothing, and became financially independent.

Frequently Asked Questions (FAQs)

What investment decisions destabilized the economy during the 1920s?

How did the overproduction of goods in the 1920s affect consumer prices and the economy?

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The Economy in the 1920s and What Caused the Great Depression

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The 1920s is the decade when America's economy grew 42%. Mass production spread new consumer goods into every household. The modern auto and airline industries were born. The U.S. victory in World War I gave the country its first experience of being a global power.

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There are many possible characteristics of the 1920's economy that could possibly lead to trouble in the United States. One economic characteristic of the 1920's that will lead to trouble in the united states is the fact that the top 1% of the population received over 14.5% of the income made before the end of the 1920's. This is bad because this percentage will continue to increase over time, and the poor will have a harder and harder time making money. It will continue to increase because the average salary will continue to increase, and since they are so far above the average income, they are paid the same bonus percentage as any other economic group, and as a result they are given much more money.

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The 1920's were a time of change, not only for politics, but also for society. During this age, it was the first time that there were less Americans living on farms than in cities. The united states became more of a consumer society during this time. The 1920's was often considered the "roaring 1920's". This was due to all of the changes and progress that was made for the country, such as the popular culture and traditional standards being rejected.

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The 1920's was a decade of republican leadership. There were 3 presidents during this time; Warren Harding, Calvin Coolidge, and Herbert Hoover. All 3 were republicans, and they were all, at the least, mediocre. One of the main acts during the 1920's was the immigration act. This act limited the amount of immigrants that could enter the country, and it was the first widely restrictive immigration law.

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The 1920's was a time of tremendous prosperity. During the 1920's, the U.S economy grew 42%. The amount of construction that was done in the United States as a whole also doubled. The average amount of income that a citizen made rose over 1500$ from the original amount before the 1920's, and the unemployment rate never rose over 4%. It was a booming time for the economy, and it influenced many things, such as the 20% value rise in the stock market in the 10 year period.