What Was the Economy Like in the 1920s?

What Made the Twenties Roar?

Definition: The 1920s is the decade when America's economy grew 42 percent. 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 investors thanks to easy access to credit. That was a hidden weakness that 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 percent during the 1920s. The United States produced nearly half the world's output. That's because World War I destroyed most of Europe. New construction nearly doubled, from $6.7 billion to $10.1 billion. Unemployment never rose above the natural rate of around 4 percent. 

Average income rose from $6,460 to $8,016 per person. But this prosperity wasn't distributed evenly. In 1922, the top 1 percent of the population received 13.4 percent of total income. By 1929, it earned 14.5 percent. (Source: "Modern Economy 1919 - 1930," California State University, Northridge.)

The United States transformed from a traditional to free market economy. Farming declined from 18 percent to 12.4 percent of the economy. Taxes per acre rose 40 percent, while farm income fell 21 percent. 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. 

Real GDP (economic output adjusted for inflation) 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 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 percent a year. It began rising in 1924. The number of shares traded doubled to 5 million per day.

One reason for the boom is because of financial innovations. Stock brokers began allowing customers to buy stocks "on margin."  Brokers would lend 80 percent to 90 percent of the price of the stock. Investors only needed  to put down 10-20 percent. If the stock price went up, they became millionaires. This same innovation became a weakness when stock prices fell. For more, see 1929 Stock Market Crash.

Banking

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 major weakness. It meant they were vulnerable to the bank runs that occurred in the 1930s. 

Another weakness was that banks held fictitious reserves. That's because checks were counted as reserves before they cleared. That meant these checks were double-counted by the sending bank and the receiving bank. (Source: "Banking Crisis and the Federal Reserve as a Lender of Last Resort," NBER.)

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 - Recession began in January. The highest marginal tax rate was 73 percent (for those earning more than $1 million.)  Nearly 70 percent of federal revenue came from income taxes. (Source: "Historical Highest Marginal Income Tax Rates," Tax Policy Center, February 19, 2015. "Federal Income Tax Policy in the 1920s," Journal of Economic History, June 1995, PP. 285-303.)

1921 - Warren Harding (R) became President. The recession ended in July without any intervention. The corporate tax rate rose from 10 percent to 12.5 percent. The Emergency Immigration Act restricted the number of immigrants to 3 percent of the 1910 U.S. population.

1922 - Harding reduced the top tax rate to 58 percent. 

1923 - Calvin Coolidge (R) became President. His motto was "The business of America is business." He lowered the nation's top income tax rate to 43.5 percent. 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 - Recession ended in July. Air Force created.Top tax rate raised to 46 percent.

1925 - Top tax rate lowered to 25 percent. The corporate tax rate increased to 13 percent. Hoover warns Coolidge about stock market speculation. Most countries returned to the gold standard. More than 25 percent of families owned a car.

1926 - A mild recession began in October. The corporate tax rate increased to 13.5 percent. Robert Goddard invented the liquid propulsion rocket, creating a U.S. advantage in defense. More than two million farmers moved to the cities, but only one million city folk moved to the rural areas. (Source: "Farming Exodus," 1920-30.com)

1927 -  The recession ended in November after the Federal Reserve lowered the discount rate from 4 percent to 3.5 percent in September. Charles Lindbergh flew solo from New York to Paris on May 20-21. (Source: "Then and Now: Fed Policy Actions During the Great Depression and Great Recession," Federal Reserve Bank of St. Louis," November 2001.)

1928 - Stock prices rose 39 percent. To stop speculation, the Fed raised the discount rate from 3.5 percent to 5 percent. 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. At the same time, Coolidge lowered the corporate tax rate to 12%.  (Source: "Monetary Policy and the Great Crash of 1929," Federal Reserve Bank of San Francisco, March 26, 1999.)

1929 - Herbert Hoover (R) became President. He lowered the top income tax rate to 24 percent, and the top corporate tax rate to 12 percent. The Great Depression began in August, as the economy started shrinking. In September, the stock market reached its peak. It 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 manufacturing of consumer goods increased. Washing machines, vacuum cleaners, and refrigerators became common 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. (Source: "Entertainment in the 1920s," 1920s Technology.)

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." (Source: "The Golden Age of Aviation," USS Bennington. "Industry and Social Change," BBC.)

The auto industry also greatly expanded. That was due to Henry Ford's invention of the assembly line. That lowered Ford's price 80 percent between 1909-1929. 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. (Source: "Henry Ford and the Impact of the Motor Industry," BBC. "1920s Automobiles," 1920-1930.com.) More

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, Sacco and Vanzetti were sentenced to death for a robbery and murder in Boston. The evidence linking them was not ironclad. However, they were members of the same Italian anarchist organization.