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Reasons for prosperity


There are 5 main reasons why the USA saw great prosperity during the 1920s.

  1. Effects of World War One

  2. Favourable Government policies

  3. Technical advances

  4. New Business methods

  5. Credit.



Evidence of the 1920s boom


    • Unemployment fell from 11.9% in 1921 to 3.2% in 1929, never rising above 3.7% from 1922-1929

    • Inflation was never higher then 1%

    • GNP stood at $72 billion in 1920 and had increased to $104 billion by 1929

    • Annual per capita income rose from $710 to $857

    • Production of industrial goods rose by 50% between 1922 and 1929

    • Steam turbine engines and hydro-electric plants meant more factories were powered by electricity

    • Real wages increased by 26%

    • Wages were on average 2-3 times higher than in Europe

    • Hours of work reduced from 47 hours in 1920 to 44 hours per week by 1929

    • Working conditions improved

    • Profit-sharing, group insurance and pension plans were introduced for workers

    • Employees could buy company stock at a reduced price

    • Workers were allowed representatives to discuss grievances

    • By 1929 1/3 of all jobs were in sales, service or finance. These areas employed many women. In 1930, over 50% of all clerical workers were women.

    • Big time baseball, American football and boxing – people had free time to attend, could afford tickets and could travel to the games.

    • Americans had more disposable income to spend

    • By 1928, there were 17,000 cinemas. It was the ‘Golden Age of Cinema’

    • Consumption of electricity doubled

    • In 1912 10% of the population lived in electrically lit dwellings, 63% by 1927.

    • Electrical goods and labour-saving devices such as vacuum cleaners and washing machines became affordable

    • In 1929 $852 million worth of radios were sold. There were 618 radio stations. 1930 census, 40% of American households possessed one.

    • 7 million cars in 1919 and by 1929 there were 23 million cars

    • Motor cars increased mobility to work and leisure

    • Cars stimulated the building of roads

    • Movement from the countryside to the cities and from the city centres to the suburbs

    • By 1925 over $1 billion was being spent on roads, parkways, bridges and tunnels to handle the exploding volume of motor traffic

    • Living longer – in 1900 average age was 40 years but by 1930 it was 59 years

    • Fruit and vegetables became a more important component in the urban diet

    • 27% of 17 year olds graduated from high school in 1929, up from 16% in 1920

    • Between 1922 and 1929 6 million new homes went up

    • By 1930 50% of all homes had flushing toilets

    • Mortgages made it possible for people, even the working class to own their home

    • Skyscrapers proliferated

    • J C Penny department stores increased from 312 in 1920 to 1395 by 1929

    • Piggly Wiggly introduced the supermarket

America entered the war on the side of the Allies in 1917 and almost immediately tipped the balance in their favour. A significant reason for US involvement was its economic link to the Allied Powers. Wall Street financial institutions had given loans to Great Britain totalling over $2.3 billion, so Wall Street feared a British defeat.
After the armistice, which was granted on November 11 1918, it was clear that the effect of the war on Germany, France, Great Britain and Russia was devastating, both to their economies and in the loss of human life. America, on the other hand, came out of the war relatively unscathed. American soldiers returned home in May 1919 to ticker-tape parades and the promise of a prosperous decade. Great industrial expansion took place and as a result the USA overtook Germany and Britain in the rate of industrial production. The war gave US industry an enormous boost as countries bought American goods, and continued to do so when the war was over. The USA was a real economic winner of the war.



      1. Laissez-faire, the Republican Presidents and their policies

          1. Laissez-faire

Most Republicans believed that Governments should be involved as little as possible in the day-to-day running of the economy. If businessmen were left alone to make their own decisions higher profits, more jobs and good wages would be the result. This policy is often known as laissez-faire. When following this policy, the Government only interferes in the economy to help business when requested. Republican policies were based on the simple belief that if the Government did all that it could to help businessmen to prosper, then everyone would be better off.


          1. The Republican Presidents

Throughout the 1920s the US was governed by a succession of Republican Presidents representing the views of business and the Wall Street stock market:

            1. Warren Harding (1920-23)

            2. Calvin Coolidge (1923-28)

            3. Herbert Hoover (1928-32)

The Republican Party was strongly represented in Congress also. The main reason for the popularity of the Republicans at this time was that by the middle of the 1920s, many Americans were better off than they had ever been before. The USA was prospering and the Republicans claimed that much of it was the result of their policies.


President Harding shared the values of the business elite, and so did the colleagues who he appointed. He and Coolidge both followed policies that largely gave business what it wanted. Both men chose Cabinets mostly composed of millionaires who could be expected to sympathise with any difficulties facing businessmen. Calvin Coolidge, who became President after the sudden death of Harding, said, “The chief business of the American people is business”. The policies of Coolidge’s administration were to revolve around the principle that businesses should be allowed to operate as far as possible unrestricted by regulation. Coolidge believed firmly in the free market. He greatly admired businessmen and felt private enterprise should be left alone to produce wealth and profits. The Wall Street Journal, a financial newspaper, approvingly declared: “Never before, here or anywhere else, has a Government been so completely fused with business.” Under Coolidge, the Republicans became frankly the businessmen’s party.
More than any of their predecessors, these Republican Presidents identified the fortune of America with the fortunes of business. When they spoke of business, Republicans meant privately operated business.


          1. Republican policies

The Government did intervene to support business in 5 main ways.

              1. Restoring free enterprise

During the war the Government took direct control of many aspects of the economy in order to produce an efficient war effort. With the coming of peace the Republicans were determined to ‘return to normalcy’ and end this unwelcome and, as they believed, damaging interference in free enterprise. By 1920 Congress had ensure that free enterprise was fully restored.


              1. Balancing the budget

With the collapse of the wartime boom, unemployment rose sharply to reach a peak of over 10% in 1921. The major remedy for this was to balance the budget; make Government spending as low as possible and to make it equal the amount raised in revenue sales as taxes. This would encourage everyone to work harder, thus earning more money that could be kept and spent, rather than given to the taxman. The Secretary of State of the Treasury, Andrew Mellon, trimmed Government spending from $6.4 billion to $2.9 billion in 7 years.


              1. High tariffs – Protectionism

The Fordney-McCumber Act (1922) led to strict tariff barriers (additional taxes) being imposed on foreign imports so that they were now expensive and unable to compete with American-produced goods on price. This was known as ‘protectionism’. With foreign goods now expensive, US consumers bought American goods instead. Over the course of the 1920s, the tariff levels increased.


              1. Tax Reductions

Taxes were reduced throughout the 1920s, especially for business and those who earned the highest salaries. The poor hardly benefited at all.


                • Taxes on high incomes and company profits that had been imposed during the war effort were drastically reduced

                • The Government reduced Federal Tax significantly in 1924, 1926 and 1928. This benefited the wealthy more than the poor.

                • Large-scale industrialists benefited from tax rebates, deferments (putting off payment) on loans and extended credit totalling $3.5 billion.




              1. Fewer Regulations

Attempts to save Government money meant that there were fewer regulation agencies and personnel to enforce the law. This meant that businesses were often left to carry on affairs as they saw fit with no one checking up on them. Laws concerning corrupt business practices, such as price fixing, were often ignored. This could have serious effects. No one in authority stopped child labour in the textile mills of the south where a 56-hour week was common and wages rarely rose to more than 18c per hour.



      1. Technical Advances

Great technical advances in industrial production made possible huge increases both in the quantity and variety of products on sale. This is true of almost every commodity, especially motorcars and the electrical consumer goods industries.


                  1. Motor cars

The Americans’ love affair with the cars deepened as mass production, pioneered by Henry Ford, brought prices down and created huge numbers of well paid jobs on the production lines. It was people in the countryside who were the first to purchase cars in massive numbers. In the south, many whites fumed when they saw a black family taking a Sunday drive. Ford produced the Model T car with the aim that anyone earning a reasonable income could afford one. Around 1914 a Ford Model T cost $850, but by 1926 the price had fallen to just $295, and it even had a self-starter. The costs of cars fell with the introduction of production assembly lines. And all the time Ford made huge profits.
Demand rose but with competition from General Motors and Chrysler, there were always more cars to supply to customers than there were people to buy them. New designs, new models and advertising encouraged people to keep buying.
The Federal Government built roads, a responsibility that was taken away from the state Governments with the Federal Highway Act of 1921. By 1929 10,000 miles of highway were being built per year.
The growth of the motor industry stimulated growth in others. Steel was needed for the car and truck bodies and engines, glass for windscreens, leather for seats, rubber for tyres and inner tubes and petrol for power. Motor service industries developed. Motels sprung up alongside the highways, as did garages, hotels and roadside diners, and petrol stations. The used car trade began.



                  1. Electrical Consumer Goods

In 1912, 2.4 million items of electrical goods were sold. By 1929 this had risen to 160 million. Radios, refrigerators, washing machines and vacuum cleaners were all developed.
However, such figures were misleading. Much of the rural USA had no electricity in the 1920s. Many items that you would expect to be in use, such as refrigerators, were not in use. It was not a ‘domestic consumer revolution’.



      1. New Business Methods

The 1920s saw the growth of huge corporations, new management techniques and the development of advertising through mass media.


  1. Huge Corporations

Huge corporations were created in the USA due to the 1,200 mergers that took place during the 1920s. By 1929 the largest 200 corporations had 20% of the nation’s wealth and held 40% of the nation’s business wealth. At the time, many saw businessmen as heroes who had made possible the great boom period they were enjoying. Large corporations could dominate sectors of industry by fixing prices – technically illegal but the Government tended to turn a blind eye and dictated the amount of goods produced. Government policies and actions made it possible for large corporations to act in this way. Government policies also seemed to act against the interests of small businessmen.


  1. Management

Business management became increasingly complex. Specialities developed such as accounting, design, marketing and administration. Business schools flourished: there were 89 by 1928. Company management became a respectable career. Career ladders developed and people competed to get the top jobs.


  1. Advertising and Sales

To fuel the boom, people had to constantly buy new things. They had to be convinced that they could not do without the latest model of an electrical appliance or the new design in clothing. To achieve this, advertising and sales techniques developed. Using cinema and radio a revolution took place where advertisers exploited the desire of ordinary people to live the life of a film star. A successful advertising campaign might possibly be the only difference between a huge profit and a huge loss.



  1. Credit

The consumer boom was financed largely by the development of credit. By 1929, $7 billion of goods were sold on credit. This included 75% of all cars and half of all major household appliances. Credit enabled consumers to buy goods they otherwise could not have been able to afford. Even in working class households oil furnaces, radios, toasters, irons and washing machines commonly could be found. This was stimulated by a rapid expansion of consumer credit. 75% of all radios, 60% of all cars and 60% of all furniture was bought on credit. It was estimated that men earning $35 a week were paying out the same amount per month for their family car. Companies sometimes used credit facilities to finance operations. It seemed that almost everyone was in debt but there was little concern. It was assumed that everyone’s credit was good. Banks and loan companies seemed to lend money with few questions asked. There were, however, potential problems. People could become over-stretched or what would happen if they lost their job?

Husband: “I just paid the doctor $10 on his bill”

Wife: “Oh goody, two more payments and the baby’s ours”

Microsoft clipart © 2006 Microsoft Corporation




A British historian looks at the USA’s economy – Paul Kennedy, The Rise and Fall of the Great Powers, 1988
“The USA seemed to have all the economic advantages which some of the other powers possessed in part, but none of their disadvantages. It was huge, but the vast distances were shortened by some 400,000 kilometres of railway in 1914. The sheer size of the area under cultivation, the efficiency of its farm machinery, the decreasing costs of transport because of railways and steamships made American wheat, corn, pork, beef and other products cheaper than any in Europe. American firms were equal to or better than any in the world; and they enjoyed an enormous domestic market, which their European rival did not. In industry and agriculture and communications there was both efficiency and size.”




Summary

The 1920s were a period of:


  • Full employment

  • Low inflation

  • High tariffs

  • Benevolent Government policies

  • Consumer boom

  • Belief that prosperity would go on forever

  • Optimism

Problems in the Economy

Although the American economy was booming, not everybody shared in the growing affluence. Six million families – 42% of the total – had an income of less than $1,000 a year and certainly could not afford the new cars and gadgets rolling off the production lines. Presidents Coolidge and Hoover advocated a policy of ‘rugged individualism’ that meant ‘every man for himself’, with no welfare support from the Government for the poor. The growth of mass production, mass consumption and mass culture, as impressive as they were, excluded a very large segment of the population. Economic growth, rather than diminishing the gap between the rich and poor, increased it.


Prosperity was concentrated at the top. From 1922 to 1929:

  • Real wages in manufacturing went up per capita 1.4 %

  • Wages rose on average by 40% but in 1929 36,000 of the wealthiest families received as much income as the 12 million poorest

  • Some workers experienced falling wages and massive unemployment.

Every year in the 1920s, about 25,000 workers were killed on the job and 100,000 permanently disabled. Two million people in New York City lived in tenements condemned as firetraps.


There are six identified problems that existed within the economy in the 1920s that would affect the stability of the boom.

  1. Uneven distribution of income

  2. Agriculture

  3. ‘Get rich quick’ schemes

  4. Banking system

  5. Cycle if international debt

  6. Slow down.




  1. Uneven distribution of income

Prosperity in the 1920s was very uneven. The rich got richer, average workers’ incomes rose slowly. Some workers experienced falling wages and massive unemployment. Many farmers suffered through most of the decade. Blacks fared worse than Whites. The unequal distribution of wealth, though generally ignored by political and business leaders, was a central feature of the 1920s.
Regionalisation

The traditional industrial areas of the USA were the northeast and the mid-west – Illinois, Michigan and Pennsylvania. These areas also attracted the new motor and electrical goods industries because:


As a result, other regions in the USA, notably the west and south had only sparse industrial development with comparatively small towns. In such areas, the major employer was agriculture.


However, even in the industrial heartland, the situation was not always rosy. The traditional industries faced increasing competition from those that were developing. Coal suffered at the hands of the oil industry, the cotton industry was hit by the demand for cheaper synthetic fibres. The passenger railway services were hit by the growth of the motorcar.
So some groups lay outside the general prosperity. They were areas of more or less permanent slump:

  • Textile towns of New England and Southern Piedmont

  • Coal mining regions of Kentucky and Illinois

  • Agriculture. Most farmers were debt-ridden and depressed although there was some recovery in dairy, fruit and vegetable farming.



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