The American economy in the 1920s, including Republican government policies, tariffs, taxation, the boom in consumer industries, and weaknesses in the economy

What this dot point is asking

NESA expects you to give an integrated account of the American economy in the 1920s and to assess how Republican government policy shaped its boom and its eventual collapse. Strong answers integrate the politics of Harding, Coolidge, and Hoover, the Mellon tax cuts, the tariff regime, the structural boom in automobiles and electrification, and the weaknesses (farm distress, income inequality, speculation, the weak banking system) that produced 1929.

The answer

The "return to normalcy"

The Republican party dominated the 1920s. Warren G. Harding (Republican, Ohio) won the 1920 election by 60 to 34 per cent over the Democrat James M. Cox with the slogan "a return to normalcy". His Cabinet included three figures who would define the decade: Charles Evans Hughes (State), Andrew Mellon (Treasury), and Herbert Hoover (Commerce).

Harding's administration was marred by the Teapot Dome scandal (1921 to 1922, exposed 1923), in which Interior Secretary Albert Fall leased federal oil reserves at Teapot Dome (Wyoming) and Elk Hills (California) to private operators in exchange for bribes. Fall became the first Cabinet member jailed for crimes in office. Harding died of a heart attack in San Francisco on 2 August 1923.

Calvin Coolidge ("Silent Cal") succeeded Harding and won the 1924 election by 54 to 28 per cent (against Democrat John W. Davis, with Progressive Robert La Follette taking 17). Coolidge's "the business of America is business" speech (January 1925) defined his approach: cut taxes, balance the budget, stay out of the way of industry.

Herbert Hoover, the Commerce Secretary, won the 1928 election by 58 to 41 per cent against Democrat Al Smith. Hoover took office on 4 March 1929; the Crash followed in October.

Mellon's tax cuts

Treasury Secretary Andrew Mellon served from 1921 to 1932, longer than any holder of the post. He was the third richest man in America. His doctrine ("scientific taxation") held that high rates produced lower revenue because they discouraged investment.

The Revenue Acts of 1921, 1924, and 1926 cut the top marginal income tax rate from 73 per cent (under Wilson) to 25 per cent (1926). The lowest rate was cut from 4 per cent to 1.5 per cent. Estate taxes were cut. The cuts were heavily skewed: around 65 per cent went to the top 1 per cent of earners.

Federal revenue did rise through the 1920s as the economy grew, but income inequality also widened. By 1929 the top 1 per cent of households took around 23 per cent of national income.

The tariff regime

The Emergency Tariff Act (May 1921) and the Fordney-McCumber Tariff (21 September 1922) raised average tariffs from around 16 per cent (under Wilson) to around 38 per cent. The 1922 Act gave the President discretion to vary rates by up to 50 per cent on the recommendation of the Tariff Commission.

The tariff protected American manufacturers, especially in chemicals (DuPont), steel, and textiles. It also raised the cost of capital goods for American farmers and depressed European demand for US exports. Around 28 countries retaliated.

The Hawley-Smoot Tariff (17 June 1930), signed by Hoover in the early Depression, raised average rates further to around 60 per cent. Over 1,000 economists signed a public letter opposing the bill; Hoover signed it anyway. It deepened the global Depression.

Light regulation and easy money

The Federal Reserve, established in 1913 and operating without strong central direction in the 1920s, kept the discount rate low (around 3 to 5 per cent) through most of the decade. Cheap money fed consumer credit, mortgage lending, and (from 1927) stock market speculation.

The Securities and Exchange Commission did not yet exist; it would be created in 1934. Margin requirements were 10 per cent. The Banking Act of 1933 (Glass-Steagall) was a Depression-era response to the unregulated 1920s. Anti-trust enforcement was minimal; mergers in utilities, banking, and chemicals were waved through.

The boom

The American economy doubled in size between 1921 and 1929. Real GDP rose around 42 per cent. Industrial production rose around 64 per cent. Real wages rose around 20 per cent. Unemployment averaged around 3.7 per cent.

Three sectors drove the boom:

Automobiles. Ford and GM produced around 5 million cars a year by the late 1920s. The Model T fell to 290 dollars in 1924. Registered cars rose from 8 million in 1920 to 23 million by 1929. The auto industry pulled along steel, rubber, glass, oil, and road construction.

Electrification. Around 68 per cent of homes were electrified by 1929. Appliances (refrigerators, washing machines, radios) created new industries. Per capita electricity consumption doubled.

New industries. Chemicals (DuPont, plastics), aviation, radio (RCA), and Hollywood all expanded rapidly. Consumer credit doubled from 1925 to 1929; around half of all major consumer goods were bought on instalment plans.

The weaknesses

Below the boom were structural weaknesses that the Republican policy mix did not address.

Agriculture. Wartime demand collapsed after 1920. Wheat prices fell from 2.20 dollars a bushel in 1919 to 1.00 dollar by 1922. Farm income halved between 1920 and 1932. Mechanisation reduced labour demand; tenancy rose. The McNary-Haugen Bill, which would have had the federal government buy farm surpluses, passed Congress in 1927 and 1928 and was vetoed by Coolidge both times.

Distribution of income. Real wages rose 20 per cent in the decade; the top 5 per cent's incomes rose around 75 per cent. By 1929 the top 1 per cent held around 36 per cent of national wealth. Underconsumption set in as production capacity outran working-class buying power.

Speculation. Stock prices on the New York Stock Exchange roughly doubled between 1926 and 1929. The Dow Jones Industrial Average rose from 191 (3 March 1928) to 381 (3 September 1929). Brokers' loans (margin) reached 8.5 billion dollars by September 1929.

Banking. Around 800 banks failed annually in the late 1920s, mainly small rural banks. The system was fragmented; there were over 25,000 banks, most of them state-chartered and unbranched.

The Florida real estate bubble (1925 to 1926) and its collapse showed the pattern that would repeat with stocks: easy credit, speculative mania, sudden reversal.

Historiography

John Kenneth Galbraith (The Great Crash 1929, 1955) is the foundational popular account.

Charles Kindleberger (The World in Depression, 1973) treats the 1920s American policy mix as a critical cause of the global Depression of the 1930s.

Barry Eichengreen (Golden Fetters, 1992) is the standard study of how the gold standard transmitted American shocks abroad.

Robert McElvaine (The Great Depression, 1984) is the standard American narrative.

Common exam traps

Treating the boom as the whole decade. Agriculture, textiles, and coal were depressed for most of it.

Forgetting tariff retaliation. Fordney-McCumber and especially Hawley-Smoot provoked global retaliation that hurt American exports.

Conflating Mellon and Keynes. Mellon was a deflationist; his advice to Hoover in 1931 was "liquidate labour, liquidate stocks, liquidate the farmers". Keynes's analysis came later.

In one sentence

The 1920s American economy doubled in size on the back of automobiles, electrification, and consumer credit, encouraged by Mellon's tax cuts (top rate from 73 to 25 per cent by 1926), high tariffs (Fordney-McCumber, 21 September 1922), and weak regulation under Harding, Coolidge, and Hoover, while structural weaknesses (farm distress, income concentration with the top 1 per cent on 23 per cent of income, the speculative bull market, and a fragmented banking system) built the conditions that the Crash of October 1929 would expose.