The 1920s Business and the Economy: Overview

The economic conditions of the early 1920s were a direct result of the business conditions that had developed during World War I (1914–18). There were two phases of U.S. participation in the war: first, the United States supplied goods and services to the Allied European nations; later, when the United States joined the war on the side of the Allies, it provided both economic assistance and combat troops. In general, the war benefited American business and the economy. The United States went from isolationism (staying away from involvement in international trade and politics) to become an international trader and banker. Additionally, the increased need created by the war for American products and services had a positive impact on employment, and the need for food abroad provided a similar boost to the agricultural industry.

When the war ended, certain industries remained stable, and others changed significantly. Demand for consumer products such as automobiles and radios not only continued, but grew quickly. This growth accompanied continued development of new technologies. The automobile industry grew more powerful and sophisticated, and it attracted investment from the nation's most influential financiers. The radio industry grew into a commercial marketplace as news and information reports were increasingly overshadowed by highly popular entertainment programs. Meanwhile, firms in all industries recognized the power of radio advertising.

The U.S. aircraft industry would not be transformed from military to commercial for several years. Former World War I pilots first used their skills to perform airplane stunts at local fairs; it would be years before the financial world invested in commercial aircraft manufacturing and airline transportation. Meanwhile, smaller metal and chemical industries that had supplied war-related products made smooth transitions to consumer goods. Because so many domestic products were discontinued during the war in favor of military needs, there was an enthusiastic market demand for hardware and household goods.

With a nation of eager consumers and a prospering economy, employment was high and so was consumer spending. The construction industry flourished in cities and especially in the suburbs, where entire communities were springing up. With so many automobiles sold, hundreds of thousands of middle-working-class American families could live in the suburbs and drive their cars or take newly designed public transportation to their jobs in the cities. The new suburban areas needed schools, shopping areas, and civic buildings, and so the construction field and all of its related industries prospered.

The only group that did not share in the country's economic abundance was the agriculture industry. Farmers expanded their production during the war to sell their crops to embattled countries in Europe. They added high-priced land and more modern equipment by borrowing money from banks. When the European countries regained their ability to grow their own food, the American farmer lost the international market. As a result, masses of farmers could not pay back their bank loans, and many merchants that depended upon farm customers went out of business.

While the administration of Woodrow Wilson participated in the regulation of industry, the subsequent administration of Warren G. Harding, which came into office in 1921, took an attitude of "laissez-faire" (a doctrine opposing government involvement in economic matters), leaving business and industry with few restraints. When President Harding died, his successor, Calvin Coolidge, was somewhat more cautious about industrial policies that were so unconstrained, but his attitude toward business still mirrored Harding's in many ways.

As the decade moved towards its close, a few economists and investors became concerned about the free-wheeling policies of the investment market. Overall, prosperity and unregulated business had led to a very active and volatile stock market. That situation plus a lack of clear banking practices to protect investments eventually caused a stock market crash in October 1929 that would halt the prosperity of the decade and bring about the Great Depression of the 1930s.