What was prosperity in the 1920s

As indicated above, the premises of the Transportation Act of were wrong. Railroads experienced increasing competition during the s, and both freight and passenger traffic were drawn off to competing transport forms.

Passenger traffic exited from the railroads much more quickly. As the network of all weather surfaced roads increased, people quickly turned from the train to the car. Harmed even more by the move to automobile traffic were the electric interurban railways that had grown rapidly just prior to the First World War. Hilton-Due, Not surprisingly, during the s few railroads earned profits in excess of the fair rate of return. The use of trucks to deliver freight began shortly after the turn of the century.

Before the outbreak of war in Europe, White and Mack were producing trucks with as much as 7. Most of the truck freight was carried on a local basis, and it largely supplemented the longer distance freight transportation provided by the railroads.

However, truck size was growing. In Trailmobile introduced the first four-wheel trailer designed to be pulled by a truck tractor unit. During the First World War, thousands of trucks were constructed for military purposes, and truck convoys showed that long distance truck travel was feasible and economical.

The use of trucks to haul freight had been growing by over 18 percent per year since , so that by intercity trucking accounted for more than one percent of the ton-miles of freight hauled. As early as , the National Association of Railroad and Utilities Commissioners issued a call for the regulation of motor carriers in general.

In the ICC called for federal regulation of buses and in extended this call to federal regulation of trucks. Most states had began regulating buses at the beginning of the s in an attempt to reduce the diversion of urban passenger traffic from the electric trolley and railway systems. However, most of the regulation did not aim to control intercity passenger traffic by buses.

As the network of surfaced roads expanded during the twenties, so did the routes of the intercity buses. In a number of smaller bus companies were incorporated in the Greyhound Buslines, the carrier that has since dominated intercity bus transportation.

Walsh, A complaint of the railroads was that interstate trucking competition was unfair because it was subsidized while railroads were not. All railroad property was privately owned and subject to property taxes, whereas truckers used the existing road system and therefore neither had to bear the costs of creating the road system nor pay taxes upon it.

Beginning with the Federal Road-Aid Act of , small amounts of money were provided as an incentive for states to construct rural post roads. Dearing-Owen, However, through the First World War most of the funds for highway construction came from a combination of levies on the adjacent property owners and county and state taxes.

The monies raised by the counties were commonly 60 percent of the total funds allocated, and these primarily came from property taxes. In Oregon pioneered the state gasoline tax, which then began to be adopted by more and more states.

A highway system financed by property taxes and other levies can be construed as a subsidization of motor vehicles, and one study for the period up to found evidence of substantial subsidization of trucking. Herbst-Wu, However, the use of gasoline taxes moved closer to the goal of users paying the costs of the highways. Neither did the trucks have to pay for all of the highway construction because automobiles jointly used the highways.

Highways had to be constructed in more costly ways in order to accommodate the larger and heavier trucks. Ideally the gasoline taxes collected from trucks should have covered the extra or marginal costs of highway construction incurred because of the truck traffic.

Gasoline taxes tended to do this. The American economy occupies a vast geographic region. Because economic activity occurs over most of the country, falling transportation costs have been crucial to knitting American firms and consumers into a unified market. Throughout the nineteenth century the railroads played this crucial role. Because of the size of the railroad companies and their importance in the economic life of Americans, the federal government began to regulate them.

But, by it appeared that the railroad system had achieved some stability, and it was generally assumed that the post-First World War era would be an extension of the era from to Nothing could have been further from the truth. Communications had joined with transportation developments in the nineteenth century to tie the American economy together more completely.

As the cost of communications fell and information transfers sped, the development of firms with multiple plants at distant locations was facilitated. The interwar era saw a continuation of these developments as the telephone continued to supplant the telegraph and the new medium of radio arose to transmit news and provide a new entertainment source. Telegraph domination of business and personal communications had given way to the telephone as long distance telephone calls between the east and west coasts with the new electronic amplifiers became possible in The number of telegraph messages handled grew The number of local telephone conversations grew There were 5 times as many long distance telephone calls as telegraph messages handled in , and 5.

Brooks, ; Temin, ; Garnet, ; Lipartito, Telephone usage rose and, as Figure 19 shows, the share of all households with a telephone rose from 35 percent to nearly 42 percent. By , the non-Bell operating companies were all small relative to the Bell operating companies. Surprisingly there was a decline in telephone use on the farms during the twenties. Hadwiger-Cochran, ; Fischer Rising telephone rates explain part of the decline in rural use. The imposition of connection fees during the First World War made it more costly for new farmers to hook up.

However, it also seems likely that during the s there was a general decline in the rural demand for telephone services. One important factor in this was the dramatic decline in farm incomes in the early twenties.

Prior to the First World War, the telephone eased farm isolation and provided news and weather information that was otherwise hard to obtain. After automobiles, surfaced roads, movies, and the radio loosened the isolation and the telephone was no longer as crucial.

This machine, which quickly created a line of soft, lead-based metal type that could be printed, melted down and then recast as a new line of type, dramatically lowered the costs of printing.

Previously, all type had to be painstakingly set by hand, with individual cast letter matrices picked out from compartments in drawers to construct words, lines, and paragraphs. After printing, each line of type on the page had to be broken down and each individual letter matrix placed back into its compartment in its drawer for use in the next printing job.

Newspapers often were not published every day and did not contain many pages, resulting in many newspapers in most cities. In contrast to this laborious process, the linotype used a keyboard upon which the operator typed the words in one of the lines in a news column. Matrices for each letter dropped down from a magazine of matrices as the operator typed each letter and were assembled into a line of type with automatic spacers to justify the line fill out the column width.

When the line was completed the machine mechanically cast the line of matrices into a line of lead type. The line of lead type was ejected into a tray and the letter matrices mechanically returned to the magazine while the operator continued typing the next line in the news story. The first Merganthaler linotype machine was installed in the New York Tribune in The linotype machine dramatically lowered the costs of printing newspapers as well as books and magazines.

Prior to the linotype a typical newspaper averaged no more than 11 pages and many were published only a few times a week. The linotype machine allowed newspapers to grow in size and they began to be published more regularly.

A process of consolidation of daily and Sunday newspapers began that continues to this day. Many have termed the Merganthaler linotype machine the most significant printing invention since the introduction of movable type years earlier.

For city families as well as farm families, radio became the new source of news and entertainment. Barnouw, ; Rosen, and ; Chester-Garrison, It soon took over as the prime advertising medium and in the process revolutionized advertising. By more homes had radio sets than had telephones. The radio networks sent news and entertainment broadcasts all over the country.

The radio began a process of breaking down regionalism and creating a common culture in the United States. Because the Department of Commerce could not deny a license application there was an explosion of stations all broadcasting at the same frequency and signal jamming and interference became a serious problem. By the Department of Commerce had gained control of radio from the Post Office and the Navy and began to arbitrarily disperse stations on the radio dial and deny licenses creating the first market in commercial broadcast licenses.

In a U. District Court decided that under the Radio Law of Herbert Hoover, the secretary of commerce, did not have this power. New stations appeared and the logjam and interference of signals worsened.

Licenses were to be issued in the public interest, convenience, and necessity. A number of broadcasting licenses were revoked; stations were assigned frequencies, dial locations, and power levels. The FRC created 24 clear-channel stations with as much as 50, watts of broadcasting power, of which 21 ended up being affiliated with the new national radio networks. The Communications Act of essentially repeated the act except that it created a permanent, seven-person Federal Communications Commission FCC.

Local stations initially created and broadcast the radio programs. The expenses were modest, and stores and companies operating radio stations wrote this off as indirect, goodwill advertising. Several forces changed all this. Though advertising continued to be condemned, the fiscal pressures on radio stations to accept advertising began rising. By the end of , most stations were paying the fees. All of this drained the coffers of the radio stations, and more and more of them began discreetly accepting advertising.

Radio networks allowed advertisers to direct advertising at a national audience at a lower cost. Network programs allowed local stations to broadcast superior programs that captured a larger listening audience and in return received a share of the fees the national advertiser paid to the network. In a new network, the Columbia Broadcasting System CBS financed by the Paley family began operation and other new networks entered or tried to enter the industry in the s.

Communications developments in the interwar era present something of a mixed picture. By long distance telephone service was in place, but rising rates slowed the rate of adoption in the period, and telephone use in rural areas declined sharply. Though direct dialing was first tried in the twenties, its general implementation would not come until the postwar era, when other changes, such as microwave transmission of signals and touch-tone dialing, would also appear.

Though the number of newspapers declined, newspaper circulation generally held up. The number of competing newspapers in larger cities began declining, a trend that also would accelerate in the postwar American economy. These changes were a response to growing competition from other financial intermediaries. This reduced loan demand. The thrift institutions also experienced good growth in the twenties as they helped fuel the housing construction boom of the decade.

The securities markets boomed in the twenties only to see a dramatic crash of the stock market in late There were two broad classes of commercial banks; those that were nationally chartered and those that were chartered by the states. Only the national banks were required to be members of the Federal Reserve System. Figure 21 Most banks were unit banks because national regulators and most state regulators prohibited branching.

However, in the twenties a few states began to permit limited branching; California even allowed statewide branching. Thomas Johnson makes a strong argument against this. Figure 22 — If there were overbanking, on average each bank would have been underutilized resulting in intense competition for deposits and higher costs and lower earnings.

One common reason would have been the free entry of banks as long as they achieved the minimum requirements then in force. However, the twenties saw changes that led to the demise of many smaller rural banks that would likely have been profitable if these — changes had not occurred. Improved transportation led to a movement of business activities, including banking, into the larger towns and cities. Rural banks that relied on loans to farmers suffered just as farmers did during the twenties, especially in the first half of the twenties.

The number of bank suspensions and the suspension rate fell after The sharp rise in bank suspensions in occurred because of the first banking crisis during the Great Depression.

Prior to the twenties, the main assets of commercial banks were short-term business loans, made by creating a demand deposit or increasing an existing one for a borrowing firm. As business lending declined in the s commercial banks vigorously moved into new types of financial activities. As banks purchased more securities for their earning asset portfolios and gained expertise in the securities markets, larger ones established investment departments and by the late twenties were an important force in the underwriting of new securities issued by nonfinancial corporations.

The securities market exhibited perhaps the most dramatic growth of the noncommercial bank financial intermediaries during the twenties, but others also grew rapidly. Figure 23 The assets of life insurance companies increased by 10 percent a year from to ; by the late twenties they were a very important source of funds for construction investment. Mutual savings banks and savings and loan associations thrifts operated in essentially the same types of markets.

The Mutual savings banks were concentrated in the northeastern United States. But the dramatic expansion in the financial sector came in new corporate securities issues in the twenties—especially common and preferred stock—and in the trading of existing shares of those securities. Figure 24 The late twenties boom in the American economy was rapid, highly visible, and dramatic. Skyscrapers were being erected in most major cities, the automobile manufacturers produced over four and a half million new cars in ; and the stock market, like a barometer of this prosperity, was on a dizzying ride to higher and higher prices.

The Dow-Jones index hit its peak of on September 3 and then slid to on October At the end of Tuesday, October, 29th, the index stood at , 96 points less than one week before.

On November 13, , the Dow-Jones index reached its lowest point for the year at — points less than the September 3 peak. The path of the stock market boom of the twenties can be seen in Figure Sharp price breaks occurred several times during the boom, and each of these gave rise to dark predictions of the end of the bull market and speculation.

Until late October of , these predictions turned out to be wrong. Between those price breaks and prior to the October crash, stock prices continued to surge upward. In March of , 3,, shares were traded in one day, establishing a record. By late , five million shares being traded in a day was a common occurrence. New securities, from rising merger activity and the formation of holding companies, were issued to take advantage of the rising stock prices.

In stock pools a group of speculators would pool large amounts of their funds and then begin purchasing large amounts of shares of a stock. This increased demand led to rising prices for that stock. Outsiders, seeing the price rising, would decide to purchase the stock whose price was rising. At a predetermined higher price the pool members would, within a short period, sell their shares and pull out of the market for that stock. Another factor commonly used to explain both the speculative boom and the October crash was the purchase of stocks on small margins.

However, contrary to popular perception, margin requirements through most of the twenties were essentially the same as in previous decades. Brokers, recognizing the problems with margin lending in the rapidly changing market, began raising margin requirements in late , and by the fall of , margin requirements were the highest in the history of the New York Stock Exchange.

In the s, as was the case for decades prior to that, the usual margin requirements were 10 to 15 percent of the purchase price, and, apparently, more often around 10 percent. There were increases in this percentage by and by the fall of , well before the crash and at the urging of a special New York Clearinghouse committee, margin requirements had been raised to some of the highest levels in New York Stock Exchange history.

One brokerage house required the following of its clients. These were, historically, very high margin requirements. The crash began on Monday, October 21, as the index of stock prices fell 3 points on the third-largest volume in the history of the New York Stock Exchange. After a slight rally on Tuesday, prices began declining on Wednesday and fell 21 points by the end of the day bringing on the third call for more margin in that week.

On Black Thursday, October 24, prices initially fell sharply, but rallied somewhat in the afternoon so that the net loss was only 7 points, but the volume of thirteen million shares set a NYSE record. Friday brought a small gain that was wiped out on Saturday. On Monday, October 28, the Dow Jones index fell 38 points on a volume of nine million shares—three million in the final hour of trading. Black Tuesday, October 29, brought declines in virtually every stock price. Manufacturing firms, which had been lending large sums to brokers for margin loans, had been calling in these loans and this accelerated on Monday and Tuesday.

The big Wall Street banks increased their lending on call loans to offset some of this loss of loanable funds. The Dow Jones Index fell 30 points on a record volume of nearly sixteen and a half million shares exchanged. Black Thursday and Black Tuesday wiped out entire fortunes. Though the worst was over, prices continued to decline until November 13, , as brokers cleaned up their accounts and sold off the stocks of clients who could not supply additional margin.

From that point, stock prices resumed their depressing decline until the low point was reached in the summer of In Irving Fisher argued that the stock prices of and were based on fundamental expectations that future corporate earnings would be high. The market broke each time news arrived of advances in congressional consideration of the Hawley-Smoot tariff. However, examination of after-the-fact common stock yields and price-earning ratios can do no more than provide some ex post justification for suggesting that there was not excessive speculation during the Great Bull Market.

Because of this element of subjectivity, not only can we never accurately know those values, but also we can never know how they varied among individuals. The market price we observe will be the end result of all of the actions of the market participants, and the observed price may be different from the price almost all of the participants expected.

In fact, there are some indications that there were differences in and Yields on common stocks were somewhat lower in and In October of , brokers generally began raising margin requirements, and by the beginning of the fall of , margin requirements were, on average, the highest in the history of the New York Stock Exchange.

These facts suggest that brokers and New York City bankers may have come to believe that stock prices had been bid above a sustainable level by late and early White created a quarterly index of dividends for firms in the Dow-Jones index and related this to the DJI.

Through the two track closely, but in and the index of stock prices grows much more rapidly than the index of dividends. The qualitative evidence for a bubble in the stock market in and that White assembled was strengthened by the findings of J. Bradford De Long and Andre Shleifer They examined closed-end mutual funds, a type of fund where investors wishing to liquidate must sell their shares to other individual investors allowing its fundamental value to be exactly measurable.

Rappoport and White and found other evidence that supported a bubble in the stock market in and There are several reasons for the creation of such a bubble. First, the fundamental values of earnings and dividends become difficult to assess when there are major industrial changes, such as the rapid changes in the automobile industry, the new electric utilities, and the new radio industry.

Second, participation in the stock market widened noticeably in the twenties. The new investors were relatively unsophisticated, and they were more likely to be caught up in the euphoria of the boom and bid prices upward. These observations were strengthened by the experimental work of economist Vernon Smith. Bishop, In a number of experiments over a three-year period using students and Tucson businessmen and businesswomen, bubbles developed as inexperienced investors valued stocks differently and engaged in price speculation.

As these investors in the experiments began to realize that speculative profits were unsustainable and uncertain, their dividend expectations changed, the market crashed, and ultimately stocks began trading at their fundamental dividend values.

These bubbles and crashes occurred repeatedly, leading Smith to conjecture that there are few regulatory steps that can be taken to prevent a crash. Though the bubble of and made some downward adjustment in stock prices inevitable, as Barsky and De Long have shown, changes in fundamentals govern the overall movements. And the end of the long bull market was almost certainly governed by this. In late and early there was a striking rise in economic activity, but a decline began somewhere between May and July of that year and was clearly evident by August of By the middle of August, the rise in stock prices had slowed down as better information on the contraction was received.

As this information was assessed, the number of speculators selling stocks increased, and the number buying decreased.

With the decreased demand, stock prices began to fall, and as more accurate information on the nature and extent of the decline was received, stock prices fell more. The late October crash made the decline occur much more rapidly, and the margin purchases and consequent forced selling of many of those stocks contributed to a more severe price fall. The recovery of stock prices from November 13 into April of suggests that stock prices may have been driven somewhat too low during the crash.

There is now widespread agreement that the stock market crash did not cause the Great Depression. Instead, the initial downturn in economic activity was a primary determinant of the ending of the stock market bubble. The stock market crash did make the downturn become more severe beginning in November It reduced discretionary consumption spending Romer, and created greater income uncertainty helping to bring on the contraction Flacco and Parker, Though stock market prices reached a bottom and began to recover following November 13, , the continuing decline in economic activity took its toll and by May stock prices resumed their decline and continued to fall through the summer of In the nineteenth century, a complex array of wholesalers, jobbers, and retailers had developed, but changes in the postbellum period reduced the role of the wholesalers and jobbers and strengthened the importance of the retailers in domestic trade.

Cochran, ; Chandler, ; Marburg, ; Clewett, The appearance of the department store in the major cities and the rise of mail order firms in the postbellum period changed the retailing market. A department store is a combination of specialty stores organized as departments within one general store.

Resseguie, ; Sobel-Sicilia, R. By the end of the nineteenth century, every city of any size had at least one major department store. Appel, ; Benson, ; Hendrickson, ; Hower, ; Sobel, Until the late twenties, the department store field was dominated by independent stores, though some department stores in the largest cities had opened a few suburban branches and stores in other cities.

In the interwar period department stores accounted for about 8 percent of retail sales. In the antebellum period and into the postbellum period, it was common not to post a specific price on an item; rather, each purchaser haggled with a sales clerk over what the price would be. Stewart posted fixed prices on the various dry goods sold, and the customer could either decide to buy or not buy at the fixed price.

The policy dramatically lowered transactions costs for both the retailer and the purchaser. What changed the department store field in the twenties was the entrance of Sears Roebuck and Montgomery Ward, the two dominant mail order firms in the United States. Emmet-Jeuck, ; Chandler, , Both firms had begun in the late nineteenth century and by the younger Sears Roebuck had surpassed Montgomery Ward. In Sears hired Robert C.

Wood, who was able to convince Sears Roebuck to open retail stores. Wood believed that the declining rural population and the growing urban population forecast the gradual demise of the mail order business; survival of the mail order firms required a move into retail sales.

By Sears Roebuck had opened 8 retail stores, and by it had stores. Montgomery Ward quickly followed suit. Rather than locating these in the central business district CBD , Wood located many on major streets closer to the residential areas.

These moves of Sears Roebuck and Montgomery Ward expanded department store retailing and provided a new type of chain store. Though chain stores grew rapidly in the first two decades of the twentieth century, they date back to the s when George F. They then phased out the small stores to reduce the chain to 4, full-range, supermarket-type stores.

As a result, retail prices were generally marked up well above the wholesale prices. In cash-and-carry stores, items were sold only for cash; no credit was extended, and no expensive home deliveries were provided. Markups on prices could be much lower because other costs were much lower.

Consumers liked the lower prices and were willing to pay cash and carry their groceries, and the policy became common by the twenties. Chains also developed in other retail product lines. In Frank W. Woolworth stores by the mids. In Clarence Saunders, a grocer in Memphis, Tennessee, built upon the one-price policy and began offering self-service at his Piggly Wiggly store.

Previously, customers handed a clerk a list or asked for the items desired, which the clerk then collected and the customer paid for. With self-service, items for sale were placed on open shelves among which the customers could walk, carrying a shopping bag or pushing a shopping cart. Each customer could then browse as he or she pleased, picking out whatever was desired.

Saunders and other retailers who adopted the self-service method of retail selling found that customers often purchased more because of exposure to the array of products on the shelves; as well, self-service lowered the labor required for retail sales and therefore lowered costs.

Shopping Centers, another innovation in retailing that began in the twenties, was not destined to become a major force in retail development until after the Second World War. The ultimate cause of this innovation was the widening ownership and use of the automobile. By the s, as the ownership and use of the car began expanding, population began to move out of the crowded central cities toward the more open suburbs.

When General Robert Wood set Sears off on its development of urban stores, he located these not in the central business district, CBD, but as free-standing stores on major arteries away from the CBD with sufficient space for parking. At about the same time, a few entrepreneurs began to develop shopping centers.

Nichols Company in Kansas City, Missouri. Other early shopping centers appeared in Baltimore and Dallas. By the mids the concept of a planned shopping center was well known and was expected to be the means to capture the trade of the growing number of suburban consumers.

In the twenties a gold exchange standard was developed to replace the gold standard of the prewar world. As a result, all countries on the gold standard had fixed exchange rates with all other countries.

Adjustments to balance international trade flows were made by gold flows. If a country had a deficit in its trade balance, gold would leave the country, forcing the money stock to decline and prices to fall. Countries with a surplus imported gold, which increased the money stock and caused prices to rise. Most economists who have studied the prewar gold standard contend that it did not work as the conventional textbook model says, because capital flows frequently reduced or eliminated the need for gold flows for long periods of time.

However, there is no consensus on whether fortuitous circumstances, rather than the gold standard, saved the international economy from periodic convulsions or whether the gold standard as it did work was sufficient to promote stability and growth in international transactions. To do this, two basic changes were made. First, most nations, other than the United States, stopped domestic circulation of gold. Most countries held their international reserves in the form of U.

However, the overvaluation of the pound and the undervaluation of the franc threatened these arrangements. The British trade deficit led to a capital outflow, higher interest rates, and a weak economy. In the late twenties, the French trade surplus led to the importation of gold that they did not allow to expand the money supply. Unfortunately, in doing this politicians eliminated the equilibrating mechanism of the gold standard but had nothing with which to replace it.

The new international monetary arrangements of the twenties were potentially destabilizing because they were not allowed to operate as a price mechanism promoting equilibrating adjustments. There were other problems with international economic activity in the twenties. Because of the war, the United States was abruptly transformed from a debtor to a creditor on international accounts. Though the United States did not want reparations payments from Germany, it did insist that Allied governments repay American loans.

The Allied governments then insisted on war reparations from Germany. These initial reparations assessments were quite large. The treaty allowed France to occupy the Ruhr after Germany defaulted in Ultimately, this tangled web of debts and reparations, which was a major factor in the course of international trade, depended upon two principal actions.

First, the United States had to run an import surplus or, on net, export capital out of the United States to provide a pool of dollars overseas. Germany then had either to have an export surplus or else import American capital so as to build up dollar reserves—that is, the dollars the United States was exporting. In effect, these dollars were paid by Germany to Great Britain, France, and other countries that then shipped them back to the United States as payment on their U. In the wake of the depression Congress passed the Emergency Tariff Act, which raised tariffs, particularly on manufactured goods.

Figures 26 and 27 The Fordney-McCumber Tariff of continued the Emergency Tariff of , and its protection on many items was extremely high, ranging from 60 to percent ad valorem or as a percent of the price of the item. As farm product prices fell at the end of the decade presidential candidate Herbert Hoover proposed, as part of his platform, tariff increases and other changes to aid the farmers.

Special interests succeeded in gaining additional or new protection for most domestically produced commodities and the goal of greater protection for the farmers tended to get lost in the increased protection for multitudes of American manufactured products.

In spite of widespread condemnation by economists, President Hoover signed the Smoot-Hawley Tariff in June and rates rose sharply. Following the First World War, the U. Figure 28 However, the surplus declined in the s as both exports and imports fell sharply after From the mids on finished manufactures were the most important exports, while agricultural products dominated American imports.

The majority of the funds that allowed Germany to make its reparations payments to France and Great Britain and hence allowed those countries to pay their debts to the United States came from the net flow of capital out of the United States in the form of direct investment in real assets and investments in long- and short-term foreign financial assets.

After the devastating German hyperinflation of and , the Dawes Plan reformed the German economy and currency and accelerated the U. American investors began to actively and aggressively pursue foreign investments, particularly loans Lewis, and in the late twenties there was a marked deterioration in the quality of foreign bonds sold in the United States.

Mintz, The system, then, worked well as long as there was a net outflow of American capital, but this did not continue. In the middle of , the flow of short-term capital began to decline. Though arguments now exist as to whether the booming stock market in the United States was to blame for this, it had far-reaching effects on the international economic system and the various domestic economies. In the Federal Reserve System had reduced discount rates the interest rate at which they lent reserves to member commercial banks and engaged in open market purchases purchasing U.

By early the Federal Reserve System was worried about its loss of gold due to this policy as well as the ongoing boom in the stock market. It began to raise the discount rate to stop these outflows.

Gold was also entering the United States so that foreigners could obtain dollars to invest in stocks and bonds. In country after country these deflationary strategies began contracting economic activity and by some countries in Europe, Asia, and South America had entered into a depression.

Temin, ; Eichengreen, As a tool to promote stability in aggregate economic activity, fiscal policy is largely a post-Second World War phenomenon. Herbert Stein points out that in the twenties Herbert Hoover and some of his contemporaries shared two ideas about the proper role of the federal government. The first was that federal spending on public works could be an important force in reducin investment.

At the decade's end they cut back sharply, directing their surplus funds into stock market speculation. The Federal Reserve, the nation's central bank, played a critical, if inadvertent, role in weakening the economy.

In an effort to curb stock market speculation, the Federal Reserve slowed the growth of the money supply, then allowed the money supply to fall dramatically after the stock market crash, producing a wrenching "liquidity crisis. Instead of actively stimulating the economy by cutting interest rates and expanding the money supply--the way monetary authorities fight recessions today--the Federal Reserve allowed the country's money supply to decline by 27 percent between and Finally, Republican tariff policies damaged the economy by depressing foreign trade.

Anxious to protect American industries from foreign competitors, Congress passed the Fordney-McCumber Tariff of and the Hawley-Smoot Tariff of , raising tariff rates to unprecedented levels. American tariffs stifled international trade, making it difficult for European nations to pay off their debts. As foreign economies foundered, those countries imposed trade barriers of their own, choking off U.

By , international trade had plunged 30 percent. All these factors left the economy ripe for disaster. Yet the depression did not strike instantly; it infected the country gradually, like a slow-growing cancer. Measured in human terms, the Great Depression was the worst economic catastrophe in American history.

It hit urban and rural areas, blue-and white-collar families alike. In the nation's cities, unemployed men took to the streets to sell apples or to shine shoes. Thousands of others hopped freight trains and wandered from town to town looking for jobs or handouts. Unlike most of Western Europe, the United States had no federal system of unemployment insurance. The relief burden fell on state and municipal governments working in cooperation with private charities, such as the Red Cross and the Community Chest.

Created to handle temporary emergencies, these groups lacked the resources to alleviate the massive suffering created by the Great Depression. Poor Southerners, whose states had virtually no relief funds, were particularly hard hit. Urban centers in the North fared little better. Most city charters did not permit public funds to be spent on work relief. Crash 5. Labor Union 6. Full screen. Discussion Questions According to the commentators and cartoonists, what were the causes, outcomes, and possible consequences of the unrivaled prosperity of the s?

What affirmations, recommendations, judgments, and warnings did they put forth? Whose responsibility was it to nurture prosperity and to address its problems? How secure or tenuous was the prosperity of the "roaring twenties"?

Why did he say that "probably all are correct to a certain degree"? How was the automobile a major impetus of the decade's prosperity, according to Stuart Chase and Frederick Lewis Allen?

How did the novelist John Dos Passos reflect the economic conflicts and ideological divisions in the "newsreel" from The Big Money? Using the resources in this section, write a "newsreel" that reflects s prosperity from another perspective, e.

Wertenbaker, or black leader W. Du Bois. To what extent did Republicans and Democrats acknowledge each others' viewpoints on prosperity?

How did Republicans acknowledge the "friction of modern industrialism"? How did Democrats acknowledge that "prosperity.

Complete the chart of political cartoonists to analyze their viewpoints and the visual devices they used to convey them, e. Drawing evidence from the readings and cartoons in this section, write a brief overview of the economic prosperity of the s, beginning or ending with one of these statements from the resources: - "Every man and woman knows that their comfort, their hopes and their confidence for the future are higher this day than they were seven and one-half years ago.