1920s Economy

What Made the Twenties Roar

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.

Economic Growth and Output

Auto factory in 1928.
Assembly line workers inside the Ford Motor Company factory at Dearborn, Michigan in 1928. Photo by Hulton Archives/Getty Images

The economy grew 42% during the 1920s. The United States produced almost half the world's output. That's because World War I destroyed most of Europe. New construction almost doubled, from $6.7 billion to $10.1 billion. Aside from the economic recession of 1920-21, where 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%. 

Average income rose from $6,460 to $8,016 per person. But this prosperity wasn't 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 free market economy. Farming declined from 18% to 12.4% of the economy. Taxes per acre rose 40%, while farm income fell 21%. By 1929, average annual income was only $273 for farmers, but $750 per person. 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

stock market
Brokers check the tape for daily prices in a scene from the film, 'The Wolf Of Wall Street,' which opened just months before the crash in 1929, Hollywood, California, 1929. Photo by Underwood Archives/Getty Images

On average, the stock market increased in value by 20% a year. It began rising in 1924. The number of shares traded doubled to 5 million per day.

One reason for the boom was because of financial innovations. Stockbrokers began allowing customers to buy stocks "on margin." Brokers would lend 80%-90% of the price of the stock. Investors only needed to put down 10%-20%. If the stock price went up, they became millionaires. This same innovation became a weakness when stock prices fell during the 1929 stock market crash.


1920s Bookkeeper and assistant using a ledger book and manual adding machine.
1920s Bookkeeper and assistant using a ledger book and manual adding machine. Photo by H. Armstrong Roberts/ClassicStock/Getty Images

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

Wall Street traders in 1925
Curb Market traders gesture with their hands to trade stocks, on Wall Street, New York City, in 1925. The Curb Market was for stocks not listed on the New York Stock Exchange. Photo: Hulton Archives/Getty Images

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, DC. A recession began in May. The stock market began a six-year bull market.

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%. Administration member 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 the 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 October 24th. During those same months, the Graf Zeppelin completed the first round-the-world flight. 

Why Are the 1920s Known as the Roaring Twenties?

1920s flapper changing tire on a car.
1920s flapper changing tire on a car. Photo by H. Armstrong Roberts/Getty Images19

U.S. prosperity soared as the manufacturing of consumer goods increased. Washing machines, vacuum cleaners, and refrigerators became everyday household items. Sixty percent of families bought 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. That was due to Henry Ford's mastery of the assembly line. That lowered Ford's price 80% between 1909 and1929. A Model T only cost $300. Also, more families could buy on credit. By the end of the decade, 26 million cars were registered. For the first time, women got behind the wheel. 

The expansion of the auto industry created economic benefit for all. Governments spent $1 billion 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?

1920s first women voters
Three unidentified women make history by becoming the first of their sex to vote in an election after the 19th Amendment was passed, San Francisco, California, early 1920s. Photo by Underwood Archives/Getty Images

On January 16, 1920, the Volstead Act prohibited the sale, manufacture, or transport of any alcoholic beverages. That led to an underground economy as people flouted the law. It also created a monopoly for gangsters such as 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.

The 1917 Russian Revolution instilled fear of the spread of communism and instability. In September 1920, a terrorist attack on Wall Street occurred. An Italian anarchist organization was believed to be the perpetrator. In 1921, the Italian-born American anarchists Sacco and Vanzetti were sentenced to death for a robbery and murder in Boston. The evidence linking them was not ironclad. But they were members of the same Italian anarchist organization. (Source: "Modern Economy 1919 - 1930," California State University, Northridge.)

The Bottom Line

The 1920s was a period of vigorous economic growth in the United States. That decade marked the beginning of the modern era as we know it.

Rapid rise in prosperity induced sweeping changes in technology, society, and economy. The electricity boom revolutionized our way of life in areas such as transportation, communication, personal beauty, housekeeping, entertainment, and many more.

1920s prosperity also gave rise to nouveau ideas and ways of thought. Voting and independence were new rights and concepts accorded to women. Financial innovations allowed exuberant investment in the stock market which supported rapid growth for many companies and the labor sector. But that same exuberance led to asset bubbles and an overheated economy. That eventually burst in 1929, signaling the Great Depression of the 1930s.