Economy

The years from 1900 to 1930 witnessed the maturing of the United States as an industrial and financial power. The growth of business at home and abroad, the merger movement of the early 20th century, and banking and financial reform, as shown in the Currency Act of 1900 and the passage of the Federal Reserve Act (1913), contributed to the ascendancy of American economic power. During these decades, the United States changed from a debtor nation, which imported and borrowed more from nations than it exported, to a creditor nation, to which many European nations owed both war debts and peace loans. The United States took the lead in the production of steel, oil, and automobiles, which rapidly supplanted the older industries of iron, coal, and rail as the leading sectors of the world economy.

Foreign trade and foreign investment grew substantially through these years, as the United States expanded into new markets. Latin America, Mexico, and the Caribbean long had been the destination of American agricultural commodities and manufactured goods. After the turn of the century, tentative steps toward developing a market in Asia and the expansion of trade with Canada and Europe shifted the balance of trade in America’s favor, especially after World War I. This also stabilized the U. S. dollar. Protective tariffs continued to play a role in fostering American industry and protecting its agriculture. The restrictive trade policy of the United States and its high tariffs, however, undermined the health of the world economy as a whole.

For most of its history, the well-being of the United States has hinged on the state of its farm economy. The turn of the century witnessed the “golden age” of AGRICULtURE, as farm producers grew and sold a large share of the world’s agricultural exports, especially in wheat, cattle, and cotton. From 1900 to 1920, the value of cultivated land and agricultural crops increased by nearly 400 percent, as prices soared to 300 percent of their 1900 value. Trends toward more intensive farming and use of scientific farming methods, however, slowed the growth of improved land. As part of a trend toward more scientific methods, new agricultural colleges sprung up, which taught young farmers to keep books, count costs, and calculate profit and loss. Farm agents in newly developed Agricultural Extension services pushed farmers toward scientific livestock raising, the use of alfalfa, rust-resistant wheat, and expanded egg and poultry, milk, sugar, and citrus fruit production. The gas engine tractor also replaced earlier equipment. These changes increased the value of crops and livestock produced from $4,717,000,000 in 1899 to $19,331,000,000 in 1917. The agricultural labor force remained about the same size, or 11 million laborers, despite expanded production.

By the 20th century, manufacturing dominated the nation’s economy and surpassed in value the agricultural sector. A slight decline in food exports between 1900 and 1913 was more than compensated for by iron and steel manufacture, which was surpassed only by raw cotton in the value of its exports. Refined copper and copper products, refined mineral oils, lumber, timber, and wood products, cars and carriages, cotton goods, and agricultural implements topped the list of goods exported. After 1897, there was a great increase in foreign trade, despite the prohibitively large tariffs instituted in the late 19th century (especially the Dingley Tariff of 1897). After 1889, the United States achieved a positive trade balance, as both agricultural and manufacturing goods came to represent a larger proportion of the nation’s economy. Industry led the way. By 1913, manufactured goods constituted 48.8 percent of all exports, in contrast to 35.3 percent of trade in 1900. Europe declined as a destination for American-made goods. In 1900, Europe received 75 percent of all U. S. exports. By 1917, this had declined, despite the need for war materiel, to two-thirds. In 1919, after the war had ended, Europe received only 40 percent of all American exports, while U. S. exports to Canada and Asia doubled.

The war in Europe intensified these trends. Arms and munitions, chemicals, and transport vehicles, as well as cotton and wool textiles, oil and coal, and foodstuffs were exported to Europe in ever-growing quantities as the conflict wore on. Unable to continue domestic food production and in desperate need of war material, combatant nations considered natural allies of the United States—Britain, France, and Italy—increased their demand for such goods, driving up domestic prices, wages, and profits. A British blockade did obstruct trade with Germany, Austria, and their allies, but these had never been major markets for American goods. With the U. S. declaration of war in April 1917, the need for the production of arms, munitions, and other war materiel further increased. For the first time, the United States produced its own high-grade textiles and chemicals, two products that had a profound effect on the postwar domestic economy. Finally, the war forced the United States to build its own merchant marine and import directly from source countries, rather than using European brokers.

The United States emerged from World War I as the only major power with a stable economy. War and its consequences weakened European economies at the same time it strengthened the industries and finances of the United States. New markets were opened to American agricultural and financial goods, and more importantly, American businesses capitalized on strengths they had developed over decades. Corporate managers reorganized and merged businesses. New technology, hiring policies, and improved management led to greater efficiency and growth in worker productivity. The prosperity of the postwar years was rooted in the boom in industrial production. The Gross National Product (GNP) rose from $85.1 billion in 1923 to $103 billion in 1929. Income from such sources as payrolls, pensions, dividends, and profits grew from $74.2 billion in 1923 to $89 billion in 1928. Corporate income increased nearly 25 percent, from $8 to $10 billion. Savings, building and loan assets, insurance assets, and stock holdings all increased, as did total wages.

The cornerstone of this prosperity was the AUTOMOBILE INDUSTRY, which was growing in size, influence, and wealth. The most famous of the manufacturers, and the one whose name became synonymous with MASS PRODUCTION and the assembly line, was Henry Ford. His efforts to “get prices down to buying power” transformed the auto industry as he streamlined car production, and his “Five Dollar Day,” which boosted the wages of skilled workers in his employ, gave Ford much of the publicity he needed to maintain a stable labor force. His sales and profits soared, as they did among all automobile companies.

Originally a highly competitive industry with a wide range of producers, the auto industry in the 1920s featured some of the most dramatic mergers. William C. Durant, a carriage manufacturer, took over the Buick Motor Car Company in 1905. By 1908, with loans from the Dupont Company, Durant had combined a number of small companies into General Motors (GM), soon “the greatest industrial corporation in the world.” By 1920, when he was forced out as company president, Durant had managed to take over 40 percent of the domestic automobile market. In 1923, Walter P. Chrysler, head of production at GM, resigned to buy and reorganize the Maxwell Motor Company, renamed the Chrysler Corporation. By 1928, Chrysler bought Dodge Brothers and formed a corporation to rival Ford and GM. Within a year, the “Big Three” automakers were producing 83 percent of all automobiles.

The automobile and the assembly line were only two outward symbols of industrial expansion and prosperity. The making of automobiles required other industrial products: steel, glass, leather, chemical paints, and textiles in car manufacture; rubber for tires; oil refining for gasoline; and the construction of new roads. In the 1920s alone, more than a billion dollars was spent on highway construction and nearly half a billion on city streets. In the wake of the automobile boom, the number of car sales agents, filling stations, garages, motor homes, tourist motels, restaurants, and attractions also grew rapidly. With the widespread use of the automobile came the further expansion of cities and a boom in building construction. Apartment buildings, houses, factory and commercial construction, new schools, churches, and hospitals were the product of the suburbanization encouraged by the automobile. Innovations in electrical manufacturing and communications triggered a remarkable increase in domestic goods. These industries (radio, electric light, phonograph, telephone, and furniture, among others) expanded domestic markets and turned over high rates of profit in the prosperous years of the 1920s.

The key to much of the success in corporate profits was the growth of productivity. Since the turn of the century, corporations had used the ideas of FREDERICK WiNSLOW Taylor to streamline work processes. Managers used time-and-motion study to simplify human action in the workplace for greater efficiency. They centralized decision making about production, personnel, and distribution. In addition, INVENTION AND TECHNOLOGY had a tremendous impact. By 1928, the Committee on Economic Trends reported that the nation’s per capita productivity had increased in eight years by 35 percent.

Increased productivity and profits, expanding markets, and the use of consumer credit made possible new corporate consolidations and mergers. Following the pattern of the automobile industry, almost every sector of the economy witnessed this phenomenon. Over the course of the 1920s, more than 8,000 businesses disappeared, captured by corporate takeovers. Banks, utility companies, and retail stores led the way. In banking, merger mania and the development of branch, or chain, banks, aided industry concentration. In 1920, there were 1,280 branch banks; a decade later, there were over 3,500. In 1919 alone there were 80 bank mergers; in 1927, there were 259. From 1919 to 1924, utility companies consolidated into huge regional conglomerates. More than 3,700 local companies vanished as 10 holding companies controlled 72 percent of all power. What was true in manufacturing and power was equally true of wholesale and retail businesses. Chain stores, like chain banks, sprang up all over the nation, forcing out smaller family-owned grocery markets and ethnic food stores. Large chains such as Atlantic and Pacific Tea (A&P) soon dominated the retail food market, growing from 400 stores in 1912 to over 15,000 in 1932. In 1918, there were 29,000 chain retail stores; by 1929, they had increased to 160,000, including drugstores, grocery stores, and clothing stores.

Through the course of the First World War, the United States moved from being a debtor to a creditor nation. Both the U. S. government and private investors lent combatant nations more than $10 billion for the war effort and reconstruction. In addition, private lending and postwar trade imbalances shifted from a nearly $3 billion deficit to a more than $3 billion surplus. The response to this shift, however, was not to lower tariff barriers and encourage trade but to resurrect the higher customs duties and protect American goods. In 1922, under the influence of business and farm lobbying and interest groups, Congress passed the Fordney-McCumber Tariee, which restored prewar taxes on imports.

Trade and economic ties with other countries spurred economic growth at home and internationally. The war had already increased the U. S. presence abroad. In the years that followed, the United States increased its dominance of the world economy as it took its products, branch businesses, and investment capital abroad. American products, such as wheat, corn, steel, and automobiles, found new foreign markets. In mass communications too, American motion pictures, cable, radio, news services, and advertising dominated the market. As some observed, America’s “economic miracle” in the 1920s was based on access to consumer goods, mass production, and easy credit at home and abroad.

Trade was further supported by American finance and investment abroad. The Federal Reserve Act of 1913 provided the legal basis for branch banks in other countries. The demand for capital was so strong that by 1920 there were over 180 foreign branches and affiliates of American banks. Capital followed, as businesses increased their stake from an estimated $3.8 billion in 1919 to $7.5 billion in 1929. Market-oriented Ford, General Motors, and International Business Machines increased their investments in foreign countries. There was new emphasis as well on developing raw materials. Before the war, the United States had primarily exported resources from its domestic stores. During the 1920s, American corporations developed a global strategy in acquiring raw materials and mineral sources in other countries. Oil corporations expanded into Mexico, Venezuela, and Colombia. Rubber companies turned Liberia into an American protectorate. American mining corporations like the Anaconda Company, Union Carbide, and the Guggenheim Brothers exploited deposits of copper, zinc, manganese, chrome, nitrates, and other minerals in Latin America.

Another area of U. S. involvement was the increasing availability of loans to stimulate development abroad. To aid in postwar reconstruction under the Dawes Plan of 1924, the United States arranged to lend $100 million to Germany and scaled down war reparations to ease its financial burden. From 1924 to 1929, German banks and corporations borrowed from 50 to 80 percent of their capital loans from American banks. At the same time, British and French war debts limited their ability to seek credit from the United States, a cycle that figured prominently in the world economic crisis of the 1930s.

The 1920s is often characterized as a decade of economic rebirth and widespread prosperity. But higher productivity and national income did not help certain industries and regions, which suffered severe economic depression. By 1920, the wartime prosperity in agriculture had evaporated in the postwar international economy. During the war, farmers took on new debt in response to an expanding market both at home and abroad. European nations had been hungry for American wheat, corn, and cotton. Farmers mortgaged property to expand their acreage, equipment, and production. As battlefields were returned to peacetime agriculture, the international market collapsed. American farm products had to compete with Argentinian and Canadian wheat and beef, Egyptian cotton, and European foodstuffs.

The decline in the farm economy was precipitous and severe. Farm income dropped over 50 percent from 1919 to 1921. More than 13 million acres were abandoned in the first decrease in land tilled in American history. Farm bankruptcies skyrocketed. In 1905, farm bankruptcies were only 1.5 per 10,000 farmers; in 1920, that figure had soared to 20 per 10,000. The total number of bankrupt farms amounted to 453,000 over the course of the decade. Agricultural commodity prices were to blame. In 1920, the price of the leading 10 crops declined by 57 percent; in 1921, they were one-third of the prices in the previous year. The loss of family farms due to debt and bankruptcy reinforced the trend toward corporate farming.

In their experience of the 1920s as a decade of decline, farmers were not alone. As one historian wrote, “Hundreds of thousands of workers did improve their standard of living in the 1920s, but inequality grew.” Real wages stagnated over the course of the decade, and there was a great disparity of income among workers as new industries like automobile and electrical manufacturing benefited and older industries like coal and textiles experienced declining wages and unemployment. These factors contributed to the economic crisis of the 1930s.

See also oiL industry; steel industry.

Further reading: Harold Faulkner, The Decline of Laissez-Faire Economy, 1897-1917 (New York: Rinehart, 1951); Morton Keller, Regulating a New Economy: Public Policy and Economic Change, 1900-1930 (Cambridge, Mass.: Harvard University Press, 1990); George Soule, Prosperity Decade: From War to Depression, 1917-1929 (New York: Holt, Rinehart, Winston, 1962).