The Economics of the 1920s

   by Betsy Jane Clary, Professor of Economics

The 1920s represented the beginning of a new era in the way economists, public officials, and lay people think about economic life and in the approach to the economic process. The United States emerged from World War I as the strongest economic and military power in the world. The decade of the 1920s ended with the stock market crash of 1929 and the onset of the worst depression in the history of the country. The period between, the Roaring 20s, the Jazz Age, saw the formulation of a "new economics," a new approach to the economic process, largely under the leadership of Herbert Hoover.

The accepted role of government in the economy was changing, in part due to the experience of economic mobilization during World War I. The U.S. economy had produced at levels previously thought unattainable, in very large part because of the unprecedented degree of government intervention. Professional economists for the first time played a major role, along with government and business leaders, in affecting the economic policy and the increased production, and the economics profession was challenged, especially by Irvin Fisher, to participate in shaping the "new economics."

Managing the wartime economy also taught the value of collecting and utilizing comprehensive economic data, and, under the leadership of Wesley C. Mitchell, the collection and use of what has come to be called national income statistics in empirical studies placed economics on a more scientific foundation. A unique American style of economic theory and application was on the threshold of development. Further, the American interpretation of the Treaty of Versailles and its denunciation by the British economist Maynard Keynes led to an enhanced suspicion of Europe and European policies. The United States was seen as having the opportunity, as well as the obligation, to chart a new and uniquely American course in the pursuit of improving the human condition.

The 1920s was also the period during which consumption and consumerism became the accepted way of life in the American economy. Purchases of houses, automobiles, radios, electrical equipment, and other durable goods led to never-before-seen increases in productive capacity. There appeared to be few, if any, limits to what the nation could produce, and the problem of production seemed to have been solved, at least in the United States. Also during the 1920s the widespread use of consumer credit made its appearance. The use of advertising and public relations became prominent during the 20s, and selling strategies augmented the massive growth in personal consumption.

Among the most important and influential social theorists in the United States during the early twentieth century was Thorstein Veblen. Not only did the work of Veblen influence Hoover and the economists involved in developing economic policy, his influence can also be seen in the literature of the period. Veblen's analysis of waste in the industrial system, his descriptions of the leisure class, with its conspicuous consumption and pecuniary emulation, and his analysis of the dichotomy between the profit motive of business and the productive motive of industry is evident in the work of F. Scott Fitzgerald and Sinclair Lewis, among others, as seen in The Great Gatsby and Babbitt.

The period of the 1920s was significant in shaping the institutional framework of economic theory and policy for much of the remainder of the century, and it continues to be relevant in the new century. Much of the world of the 1920s—government economic policy-making, the role of the United States in the world economy, big corporations, advertising, consumerism—continues to be very much with us in the first decade of the twenty-first century.