America had the environment, created by the long-term causes, for an economic boom. She had raw materials, hardworking workers and an internal market. All that was needed now was a spark to turn economic growth into an economic boom. America had the means of making the goods but did not have a large enough demand for their goods. This demand came during the First World War. There are two main reasons why the war led to an economic boom in America. Firstly, the war was fought in Europe. Many European factories had been destroyed by the war and some factories were converted to produce weapons and uniforms. This meant that there were fewer factories producing consumer goods for the civilians. So the allied countries turned to America for consumer goods. This created demand for American goods as American industry and agriculture had not been affected by the war, as no fighting took place in America and she did not join the war until 1917. This huge amount of demand for American goods turned economic growth into an economic boom. Secondly, America had lots of money because of this economic stability and therefore she was able to lend “huge sums” (Harriet Ward “World Powers in the 20th century”) of money to allied countries during the war. After the war America lent money to Germany “so that she could pay her war debts to Britain, France and Belgium.” (Harriet Ward “World Powers in the 20th century”). This money was to be paid back with interest that created extra money to be invested in industry. Hence, American industries continue to grow and became more mechanised and efficient. This enabled more goods to be produced, which contributed to the economic boom.
The long-term causes had created the environment for an economic boom to take place in and the First World War acted as a spark to “ignite” the boom. However, short term factors were also needed because the economic boom had to be maintained and developed. The first short-term cause that allowed the economic boom to continue and grow was the policies followed by the Federal Government of America. “A car in every garage and a chicken in every pot.” (BBC GCSE Bitesize). This was the aim of American politicians in the 1920s, and the Federal Government followed two economic policies to create this. The first of these was “laissez faire”, which, in English, means ‘leave it alone’. As a result of laissez faire taxes were kept low. This meant that more people had more money, which created more demand for goods. This all linking back to the circle of prosperity and fed into it. Laissez faire also meant that banks were able to lend more money to people, who could invest it in new businesses. These new businesses were able to meet the increased demand created by the decrease in taxes. This kept the circle of prosperity going. The President at the time, Calvin Coolidge, agreed with the policies of the Government as he once said “the business of America is business”. This meant that it was America’s aim to make her businesses rich, powerful and successful. The Federal Government also started to use tariffs. High taxes were put on foreign goods, this encouraged Americans to buy American products as imported goods would cost more. There were two tariff acts. In 1922 the Americans introduced the Fordney - McCumber Tariff Act and in 1929 tariffs were made even higher as a result of the Hawley – Smoot Tariff Act. The tariffs added to the circle of Prosperity as it created more demand for American goods. The Circle of Prosperity was continuing to go and grow as a result of the Federal Governments policies.
Another short-term factor which contributed to the economic boom was that companies used a great deal of advertising during the economic boom. This is supported by the fact that in 1914, approximately $250,000 was spent on advertising in magazines but by 1929, this had increased dramatically to $3 billion. Companies and businesses started to spend more and more money on advertising because it directly created demand for their products. “Posters advertisements, radio advertisements and travelling salesmen encouraged Americans to spend” (Modern World History, Ben Walsh). The aim of the advertising was to make people feel dissatisfied if they did not have a certain product. The advertisements led people to believe that their lives would be enhanced and improved by the certain products or goods. A range of advertising methods such as posters, radios and magazines were used. Advertising was very important because it stimulated demand and consequently maintained and increased the cycle of prosperity and the economic boom. People wanted to buy goods because of advertisements, this meant that they would also work harder, to try to earn more money. This had another positive effect, because people were working so hard that it meant that more goods could be produced. All this kept the circle of prosperity going and growing, which kept the economic boom going.
It is all very well to have advertisements plastered all over, but people had to have money to buy the products. Purchasing power had to be increased to keep up with demand for goods which was created by the advertising. Purchasing power was important because without it, having demand would be of no use. We have already seen how the policy of ‘Laissez Faire’, implemented by the American Federal Government, reduced taxes enabling people to have more money to spend on goods. People were, and still are, also inclined to work harder for products that they really want or need. Good advertising, in most cases, created this need for something. However, there were two other ways in which purchasing power was increased. Between 1923 and 1929 the average hourly wage rose by 8%. This meant that people generally had more money, therefore being able to buy the products they desired and adding to the cycle of prosperity. Products also became more widely available to a wider variety of people. This was because “finance companies” (World History 1870-1992, Peter Lane) were set. These companies meant that people didn’t have to pay the whole cost in one go, but they could pay in monthly or weekly instalments, after having paid a deposit. This was called credit. Credit also allowed more people to join the cycle of prosperity as more people could buy things that they could not afford before. All this meant that there was a massive increase in purchasing power, which in turn led to an increase in demand and therefore an increase in overall production, as more products were needed all this fed into the cycle of prosperity and kept it going and growing.
So far, the short-term causes have increased demand for products, and increased purchasing power. However, if all went as it was supposed to without any addition to the cycle, people would soon have bought everything they wanted or could afford. To keep the economic boom going therefore, new industries and new types of goods were created. This was to maintain a high level of demand throughout the 1920’s. The introduction of electricity boosted the production of new goods and industries a great deal. Electricity acted as a type of catalyst for the creation of new goods. By 1927 approximately 63% of all homes in the USA had electricity. It meant that a whole new range of products could be made like vacuum cleaners, washing machines, toasters, fridge’s and radios, this, therefore also led to “the growth in the electrical engineering industry and in the industries producing these consumer goods" (World History 1870-1992, Peter Lane). This new influx of demand kept the cycle of prosperity going and the economic boom maintained. Advertising also increased as more new products came about, this also helped to create and maintain a high demand. More jobs were also created, as all these new industries needed to employ more people. This meant that there was less unemployment in the USA and more people with money to spend on American produce. This new wave of people with money to spend also contributed to the economic boom and maintained it. The industry which created the most amount of jobs was the car industry, this was because the car industry required other industries, for example the basic raw materials such as steel. The car industry also created the need for roadside petrol stations and these in turn led to the creation of roadside restaurants. These new industries and such, kept the economic boom going and growing.
Having accepted that new industries were necessary to keep the boom going, it is now necessary to look at how the demand was met with the goods. If enough goods weren’t being made to keep the demand high, the cycle of prosperity was likely to end. There were two ways in which the demand was met. The first of these ways was the buying of stocks and shares. During the 1920’s buying shares became extremely popular. Companies would float their company on the stock market so that people would buy stakes in the company. This provided money for the company, which could be invested back into the company to make it larger so that more goods could be created. This then led to higher employment, higher purchasing power and into even more demand. Also during the 1920s share buying became much easier. This was partly due to the government policy of Laissez faire. Laissez faire meant that people were able to borrow money from banks more easily so that they could invest it into shares. Another reason why it was easier to buy into shares is because people were able to buy them using instalments. People could put down a 10% deposit and then pay for them over the period of time following. The second way that the USA could keep production high enough to meet the demand was by using mass production and the moving assembly line, as pioneered by Henry Ford. The moving assembly line sped up production a great deal. For example, before the assembly line, on average a car took about 12 hours to make, but by using the line it took only 2 hours, this being a dramatic saving in time. Not only did the moving assembly line increase production, it helped to lower the price of goods meaning that the price of these goods could go down, increasing demand. The prices were able to go down because more products could be made within the same amount of time, with the same amount of workers so companies could afford to lower their prices.
This essay has shown that both long-term and short-term causes were necessary to cause the American economy to boom in the 1920s. The boom would not have happened without the long-term or short-term causes. The long-term causes created an environment for which an economic boom could happen in and the short-term causes maintained and increased the economic boom once it had started. Both the long-term and short-term causes fed into the cycle of prosperity. The long-term causes created it and the short-term causes stimulated it and kept it going. The First World War was probably the single most important factor that caused the economic boom to happen. Without the First World War America would not have had an external market to sell her goods to. America also leant money to European countries after the war, this money was repaid to America with interest. If this hadn’t happened it would have meant that not as much money would have been coming into America, therefore not as much money would have been invested into American companies and businesses, making them probably less successful. However, all the factors that created and maintained the economic boom were important. But they all needed to happening at the same time and to and to a great extent. This happened when there was increased demand, increased means of production and increased spending power. However the economic boom only lasted a short whist and on the 29th of October 1929 the American economy crashed during the Wall Street Crash and a period of depression followed.
