How the American Economy Grew in the 1920s: a Study of the Origin, Economic and Business Perspective

The economic prosperity of 1920s America cannot be explained by one single argument. No doubt the dramatic growth of the motor manufacturing industry was a major contributor to the US economic boom, but it was by no means the only one. Other factors such as technological advancements, new business methods and government policies, as well as varying historical interpretations, must also be taken into consideration in order to decide which contributed most to the growth of the American economy during the 1920s.

Arguably one of the largest industries at the time, motor manufacturing became a significant source of wealth in post-First World War America. Perhaps the most dominant company during this period, the Ford Motor Company revolutionised American industrial production. Ford’s ‘Model T’, for example, was relatively inexpensive and was the first car most working-class people could afford. The company mass produced its cars using assembly lines and specialisation, meaning that supply was quick and efficient, and by the end of the 1920s there were 23 million cars on American roads. Likewise, the company employed over 60,000 workers and by 1929, the motor industry as a whole employed 7% of all American workers and paid 9% of all wages. This made the overall population wealthier, thus boosting the US economy. The industry also created many social benefits, as people could easily travel long distances, therefore encouraging consumer spending in restaurants, cinemas, shops etc. According to Robert and Helen Lynd, “the readily available leisure-time options of even the working-class have been multiplied many-fold.” Published in 1929, this demonstrates the social or ‘leisurely’ benefits of car-ownership, in addition to its economic advantages.

However, it can be argued that this increase in consumer expenditure, which can, to an extent, be attributed to the growth of the motor manufacturing industry, encouraged consumer confidence and therefore risk-taking, potentially worsening the impact of the 1929 Crash. Despite this, however, the motor sector also aided other industries, providing the largest market for steal, rubber, petrol, plate glass, nickel, tin, hardwood, copper and road construction (under the Federal Highway Act of 1921, highways were built at a rate of 10,000 miles per year), benefitting the long-term economy. In turn, this also encouraged the growth of new service industries such as garages, motels, petrol stations and used car salerooms. Transport of goods between factories and markets was also made easier by the development of the motor manufacturing industry, as demonstrated by the increase in truck registrations from approximately 1 million in 1919 to 3.5 million by 1929. Thus, motor manufacturing did have significant impacts on other industries, perhaps suggesting that it was the major contributor to the US economic boom of the 1920s. It may, however, have also influenced the downfall of this prosperous period by the end of the decade.

Conversely, it may be said that other industries and the development of new technology had the most influence on American prosperity in the 1920s. Charles Lindbergh brought significant progress in aviation for instance, flying from New York to Paris in just 33.5 hours without stopping. This promoted the development of transcontinental air services, where the Post Office fleet began flying 2.5 million miles and delivering 14 million letters annually, thus improving business communication, consumer confidence and social ties. However, it may be perceived that this later advancement was influenced by the motor manufacturing business, as the 1925 Contract Air Mail Act meant that “Henry Ford’s airline was the first airline to transport US mail.” Furthermore, there was also large-scale development of labour-saving devices such as vacuum cleaners and washing machines, and by 1929 160 million electrical goods had been sold in comparison to just 2.4 million in 1912. However, many parts of rural America were still without electricity in the 1920s, suggesting that the impact of this industry was not as substantial as that of the motor companies.

In contrast, new business methods were being developed at the time, arguably influencing the US economy independently from the motor industry. The concept of easy credit was particularly impactful, as it encouraged consumers to spend more and take greater economic risks. By 1929, approximately $7 billion worth of goods were sold on credit, along with 75% of cars and 50% of household appliances. This could indicate the impact this method had on the motor manufacturing industry, as without it people would not have felt so inclined to buy cars and other vehicles. Companies such as Ford, Chrysler and General Motors also used credit facilities to finance their operations, further supporting the idea that the motor industry was dependent on this new economic phenomenon. In addition, business corporations also bought oil concessions in Canada, Venezuela, Iraq and the Dutch East Indies, whilst dominating Canadian car and electrical markets. American companies also invested in the development of public health and the construction of schools in developing countries, highlighting how the USA was determined to expand and maintain its global workforce. Management science and Taylorism also contributed to the growth of American businesses and specialist schools, in order to boost the US economy in the long-term. In 1928 there were 89 management science schools in America with a total of 67,000 students, demonstrating the nation’s desire to constantly improve the efficiency of businesses and thus the structure of the economy. Moreover, advertising methods improved with the growth of cinemas and radio-ownership (in 1928 there were 17,000 cinemas in the country), accentuating how these factors may have facilitated the consumer boom and impacted all industries, including that of motor manufacturing.

Finally, it may be perceived that government policies also aided the motor sector and thus were of greater significance concerning the growth of the American economy. Under the Fordney-McCumber Act of 1922, tariffs were raised to cover the difference between domestic and foreign production costs. As a result, tariffs increased during the 1920s whilst the level of foreign trade fell, thus maintaining the high demand for goods. The government also reduced federal taxes in 1924, 1926 and 1928, giving the American populace more confidence regarding their daily expenditure. During his inaugural address in March 1925, President Coolidge stated that “the policy that stands out with the greatest clearness is that of economy in public expenditure with reduction and reform of taxation…every dollar…we prudently save means that [the people’s lives] will be so much more abundant…” Whilst the tax reductions did contribute to economic growth, they mainly benefitted the wealthy. Thus, the claim that the lives of individuals would become “so much more abundant” following these reductions was perhaps less true for the lower working-classes, as it was for the very rich. Nonetheless, consumer confidence would have risen in all ranks of society to an extent, and so these government policies potentially increased the popularity of the motor manufacturing business. This was also aided by the lack of regulation, which allowed big businesses to flourish and contribute more to the economy. However, without consumer confidence a considerably smaller amount of vehicles would have been sold, meaning the motor industry would not have had such a powerful image regarding its economic influence. Similarly, President Coolidge avoided intervention in foreign affairs wherever possible and embarked on a policy of protectionism, meaning that little money was spent or invested abroad and thus maintaining America’s new-found domestic wealth.

It is evident that the US economic boom of the 1920s comprised of many different factors, and that to an extent the motor manufacturing industry provided the largest contribution to the American economy. The sector provided better transport methods for commodities and freight, whilst also improving the socio-economic prosperity of the American people. However, the motor manufacturing business did not achieve such successes alone. Whilst improvements in technology and business methods played a lesser role in the growth of the US economy, greater consumer confidence, encouraged by easy credit and government policies undoubtedly fuelled the success of the industry. As a result, it was these factors which were most responsible for the US economic boom of the 1920s.