Why the Twenties Roared
The 1920s became known as the “Roaring Twenties” partly because government did what it should do today: mind its own business!
When World War I ended in 1918, the countries involved began the painful task of converting their wartime economies to peacetime. While most of these countries, particularly those in Europe, converted through increased government regulation, the U.S. took the opposite approach and reduced government constraints. This resulted in the greatest prosperity boom in modern history.
Limited Government Intervention
By war’s end, most Americans were tired of government intrusions on individual liberty that had been taking place for a generation. Many were also discouraged by the Treaty of Versailles, which suggested that perhaps the war had been fought in vain. As a result, voters in 1920 elected politicians that pledged to return to the founders’ policy of non-intervention, both at home and abroad.
Warren Harding became president in 1921 on a promise to return America to “normalcy.” At the time, the U.S. was languishing in an economic depression as Americans struggled to convert to a peacetime footing, and the U.S. struggled to convert from a farm-based economy to an economy based on industry. Harding, noting the unpopular economic interventions of his predecessor, Woodrow Wilson, determined to let things correct themselves without substantial government help.
In reviewing Wilson’s economic record, members of Harding’s administration recognized that government was actually harming the economy through excessive taxing and spending. Treasury Secretary Andrew Mellon determined that the top income tax rate of 73 percent encouraged taxpayers to hide their wealth, which decreased government revenue. It also resulted in less production, innovation, and investment, which meant less jobs. Thus, Mellon recommended drastic tax cuts that proved phenomenally successful.
Within five years, the top income tax rate had been cut to 25 percent, and both government and business revenues soared. This, along with reduced government spending, cut the national debt from $24 billion to $18 billion in that same time span. With increased revenues came increased investments that created millions of new jobs. By 1926, the national unemployment rate fell to an all-time low of one percent.
The rollback of government interference in the economy stemmed from the belief of both Harding and his successor, Calvin Coolidge, that government should be a referee, not a player, in the relationship between producers and consumers. This was consistent with the nation’s founding principles, and it helped generate the largest burst of manufacturing and innovation in American history.
Technological Achievements
Advances in technology and managerial methods, along with the perfection of mass production techniques, led to the unprecedented innovation and invention of breakthrough products and devices that changed society forever.
The assembly line in auto manufacturing sparked a 225 percent increase in auto production in the 1920s. This sparked competition, as Ford was challenged as the industry’s leader by General Motors, Packard, and other manufacturers. Increased competition provided more choices to consumers at lower prices.
Increased auto production led to increased road and highway construction, which created jobs. More cars also meant more jobs in industries that helped build and maintain cars, such as steel, glass, lumber, rubber, paint, and oil. With more people owning cars came more mobility, which enhanced both tourism and job searches.
Housing construction set records in the 1920s, as more jobs meant that more people could afford to buy their own homes. More jobs also meant more people could buy new appliances such as vacuum cleaners, refrigerators, ovens, and washing machines. Many appliance companies began employing assembly line techniques, making these products more accessible and affordable than ever before.
Radio became the primary form of entertainment; by 1929, radio sales were 1,400 percent higher than they had been in 1920, and nearly every home had a radio. The motion picture industry flourished as well, with silent movies soon giving way to Technicolor and the first major talking picture: The Jazz Singer in 1927. Sports became a national craze for the first time, with athletes such as Babe Ruth, Jack Dempsey, and Red Grange becoming legends.
The aviation industry was boosted by Charles Lindbergh’s historic nonstop solo flight across the Atlantic in 1927. This led to an increase in passenger air travel. The telephone became an indispensible household item for the first time, and advances in science led to immunizations for diphtheria and breakthroughs in nutrition that helped improve the public’s health.
Other Factors Leading to Prosperity
Increased wealth led to increased speculation in the stock market, as Wall Street became the financial capital of the world in the 1920s. By 1928, 28 percent of Americans owned stock, up from 15 percent in 1900. The increased speculation led to more investment in various industries, which created even more jobs.
The federal government banned alcohol in the 1920s, but that only drove the industry underground. Soon, gangsters turned bootlegging into big business. “Speakeasies” sprang up everywhere, people mixed their own “bathtub” gin, and booze became a $3.5 billion-per-year racket. Prohibition ended in 1933 as one of the worst Progressive failures in history.
American entrepreneurs held an advantage over their European counterparts in that they had a domestic market unscathed by the devastating war. The U.S. also possessed vast materials and resources, which were employed to their maximum efficiency as more corporations invested in marketing, research, and development to enhance production.
The Beginning of the End
Many historians claim that the government’s laissez-faire (i.e., “hands-off”) approach to the economy led to unbridled greed that was corrected by the inevitable “hangover” of the Great Depression. However, government never had a truly “hands-off” policy in the 1920s. High tariffs harmed foreign trade, farm bailouts led to agricultural overproduction, and credit was irresponsibly extended by the Federal Reserve. These policies were enforced throughout the decade, and they helped lead to the downturn.
When Herbert Hoover became president in 1929, he intensified the counterproductive policies by offering more farm bailouts and enacting the highest tariff in U.S. history. These, combined with a Federal Reserve that suddenly decided to stop extending credit, sparked a stock market crash. Hoover (and later Franklin D. Roosevelt) sought to remedy the crash with even more counterproductive policies, which only pushed the economy out of a recession and into the Great Depression.
Politicians of today could learn from the vast improvement of living standards and prosperity in the 1920s that government works best when it stays within its constitutional boundaries and allows the free market to determine its own value. The freedom of individuals to produce, innovate, and prosper allowed the 1920s to roar. Massive government intervention in the private sector during the 1930s silenced that roar.
