EH.net is owned and operated by the Economic History Association
with the support of other sponsoring organizations.

The U.S. Economy in the 1920s

Gene Smiley, Marquette University

Introduction

The interwar period in the United States, and in the rest of the world, is a most interesting era. The decade of the 1930s marks the most severe depression in our history and ushered in sweeping changes in the role of government. Economists and historians have rightly given much attention to that decade. However, with all of this concern about the growing and developing role of government in economic activity in the 1930s, the decade of the 1920s often tends to get overlooked. This is unfortunate because the 1920s are a period of vigorous, vital economic growth. It marks the first truly modern decade and dramatic economic developments are found in those years. There is a rapid adoption of the automobile to the detriment of passenger rail travel. Though suburbs had been growing since the late nineteenth century their growth had been tied to rail or trolley access and this was limited to the largest cities. The flexibility of car access changed this and the growth of suburbs began to accelerate. The demands of trucks and cars led to a rapid growth in the construction of all-weather surfaced roads to facilitate their movement. The rapidly expanding electric utility networks led to new consumer appliances and new types of lighting and heating for homes and businesses. The introduction of the radio, radio stations, and commercial radio networks began to break up rural isolation, as did the expansion of local and long-distance telephone communications. Recreational activities such as traveling, going to movies, and professional sports became major businesses. The period saw major innovations in business organization and manufacturing technology. The Federal Reserve System first tested its powers and the United States moved to a dominant position in international trade and global business. These things make the 1920s a period of considerable importance independent of what happened in the 1930s.

National Product and Income and Prices

We begin the survey of the 1920s with an examination of the overall production in the economy, GNP, the most comprehensive measure of aggregate economic activity. Real GNP growth during the 1920s was relatively rapid, 4.2 percent a year from 1920 to 1929 according to the most widely used estimates. (Historical Statistics of the United States, or HSUS, 1976) Real GNP per capita grew 2.7 percent per year between 1920 and 1929. By both nineteenth and twentieth century standards these were relatively rapid rates of real economic growth and they would be considered rapid even today.

There were several interruptions to this growth. In mid-1920 the American economy began to contract and the 1920-1921 depression lasted about a year, but a rapid recovery reestablished full-employment by 1923. As will be discussed below, the Federal Reserve System’s monetary policy was a major factor in initiating the 1920-1921 depression. From 1923 through 1929 growth was much smoother. There was a very mild recession in 1924 and another mild recession in 1927 both of which may be related to oil price shocks (McMillin and Parker, 1994). The 1927 recession was also associated with Henry Ford’s shut-down of all his factories for six months in order to changeover from the Model T to the new Model A automobile. Though the Model T’s market share was declining after 1924, in 1926 Ford’s Model T still made up nearly 40 percent of all the new cars produced and sold in the United States. The Great Depression began in the summer of 1929, possibly as early as June. The initial downturn was relatively mild but the contraction accelerated after the crash of the stock market at the end of October. Real total GNP fell 10.2 percent from 1929 to 1930 while real GNP per capita fell 11.5 percent from 1929 to 1930.

image002 image004

Price changes during the 1920s are shown in Figure 2. The Consumer Price Index, CPI, is a better measure of changes in the prices of commodities and services that a typical consumer would purchase, while the Wholesale Price Index, WPI, is a better measure in the changes in the cost of inputs for businesses. As the figure shows the 1920-1921 depression was marked by extraordinarily large price decreases. Consumer prices fell 11.3 percent from 1920 to 1921 and fell another 6.6 percent from 1921 to 1922. After that consumer prices were relatively constant and actually fell slightly from 1926 to 1927 and from 1927 to 1928. Wholesale prices show greater variation. The 1920-1921 depression hit farmers very hard. Prices had been bid up with the increasing foreign demand during the First World War. As European production began to recover after the war prices began to fall. Though the prices of agricultural products fell from 1919 to 1920, the depression brought on dramatic declines in the prices of raw agricultural produce as well as many other inputs that firms employ. In the scramble to beat price increases during 1919 firms had built up large inventories of raw materials and purchased inputs and this temporary increase in demand led to even larger price increases. With the depression firms began to draw down those inventories. The result was that the prices of raw materials and manufactured inputs fell rapidly along with the prices of agricultural produce—the WPI dropped 45.9 percent between 1920 and 1921. The price changes probably tend to overstate the severity of the 1920-1921 depression. Romer’s recent work (1988) suggests that prices changed much more easily in that depression reducing the drop in production and employment. Wholesale prices in the rest of the 1920s were relatively stable though they were more likely to fall than to rise.

Economic Growth in the 1920s

Despite the 1920-1921 depression and the minor interruptions in 1924 and 1927, the American economy exhibited impressive economic growth during the 1920s. Though some commentators in later years thought that the existence of some slow growing or declining sectors in the twenties suggested weaknesses that might have helped bring on the Great Depression, few now argue this. Economic growth never occurs in all sectors at the same time and at the same rate. Growth reallocates resources from declining or slower growing sectors to the more rapidly expanding sectors in accordance with new technologies, new products and services, and changing consumer tastes.

Economic growth in the 1920s was impressive. Ownership of cars, new household appliances, and housing was spread widely through the population. New products and processes of producing those products drove this growth. The combination of the widening use of electricity in production and the growing adoption of the moving assembly line in manufacturing combined to bring on a continuing rise in the productivity of labor and capital. Though the average workweek in most manufacturing remained essentially constant throughout the 1920s, in a few industries, such as railroads and coal production, it declined. (Whaples 2001) New products and services created new markets such as the markets for radios, electric iceboxes, electric irons, fans, electric lighting, vacuum cleaners, and other laborsaving household appliances. This electricity was distributed by the growing electric utilities. The stocks of those companies helped create the stock market boom of the late twenties. RCA, one of the glamour stocks of the era, paid no dividends but its value appreciated because of expectations for the new company. Like the Internet boom of the late 1990s, the electricity boom of the 1920s fed a rapid expansion in the stock market.

Fed by continuing productivity advances and new products and services and facilitated by an environment of stable prices that encouraged production and risk taking, the American economy embarked on a sustained expansion in the 1920s.

Population and Labor in the 1920s

At the same time that overall production was growing, population growth was declining. As can be seen in Figure 3, from an annual rate of increase of 1.85 and 1.93 percent in 1920 and 1921, respectively, population growth rates fell to 1.23 percent in 1928 and 1.04 percent in 1929.

These changes in the overall growth rate were linked to the birth and death rates of the resident population and a decrease in foreign immigration. Though the crude death rate changed little during the period, the crude birth rate fell sharply into the early 1930s. (Figure 4) There are several explanations for the decline in the birth rate during this period. First, there was an accelerated rural-to-urban migration. Urban families have tended to have fewer children than rural families because urban children do not augment family incomes through their work as unpaid workers as rural children do. Second, the period also saw continued improvement in women’s job opportunities and a rise in their labor force participation rates.

Immigration also fell sharply. In 1917 the federal government began to limit immigration and in 1921 an immigration act limited the number of prospective citizens of any nationality entering the United States each year to no more than 3 percent of that nationality’s resident population as of the 1910 census. A new act in 1924 lowered this to 2 percent of the resident population at the 1890 census and more firmly blocked entry for people from central, southern, and eastern European nations. The limits were relaxed slightly in 1929.

The American population also continued to move during the interwar period. Two regions experienced the largest losses in population shares, New England and the Plains. For New England this was a continuation of a long-term trend. The population share for the Plains region had been rising through the nineteenth century. In the interwar period its agricultural base, combined with the continuing shift from agriculture to industry, led to a sharp decline in its share. The regions gaining population were the Southwest and, particularly, the far West.— California began its rapid growth at this time.

 Real Average Weekly or Daily Earnings for Selected=During the 1920s the labor force grew at a more rapid rate than population. This somewhat more rapid growth came from the declining share of the population less than 14 years old and therefore not in the labor force. In contrast, the labor force participation rates, or fraction of the population aged 14 and over that was in the labor force, declined during the twenties from 57.7 percent to 56.3 percent. This was entirely due to a fall in the male labor force participation rate from 89.6 percent to 86.8 percent as the female labor force participation rate rose from 24.3 percent to 25.1 percent. The primary source of the fall in male labor force participation rates was a rising retirement rate. Employment rates for males who were 65 or older fell from 60.1 percent in 1920 to 58.0 percent in 1930.

With the depression of 1920-1921 the unemployment rate rose rapidly from 5.2 to 8.7 percent. The recovery reduced unemployment to an average rate of 4.8 percent in 1923. The unemployment rate rose to 5.8 percent in the recession of 1924 and to 5.0 percent with the slowdown in 1927. Otherwise unemployment remained relatively low. The onset of the Great Depression from the summer of 1929 on brought the unemployment rate from 4.6 percent in 1929 to 8.9 percent in 1930. (Figure 5)

Earnings for laborers varied during the twenties. Table 1 presents average weekly earnings for 25 manufacturing industries. For these industries male skilled and semi-skilled laborers generally commanded a premium of 35 percent over the earnings of unskilled male laborers in the twenties. Unskilled males received on average 35 percent more than females during the twenties. Real average weekly earnings for these 25 manufacturing industries rose somewhat during the 1920s. For skilled and semi-skilled male workers real average weekly earnings rose 5.3 percent between 1923 and 1929, while real average weekly earnings for unskilled males rose 8.7 percent between 1923 and 1929. Real average weekly earnings for females rose on 1.7 percent between 1923 and 1929. Real weekly earnings for bituminous and lignite coal miners fell as the coal industry encountered difficult times in the late twenties and the real daily wage rate for farmworkers in the twenties, reflecting the ongoing difficulties in agriculture, fell after the recovery from the 1920-1921 depression.

The 1920s were not kind to labor unions even though the First World War had solidified the dominance of the American Federation of Labor among labor unions in the United States. The rapid growth in union membership fostered by federal government policies during the war ended in 1919. A committee of AFL craft unions undertook a successful membership drive in the steel industry in that year. When U.S. Steel refused to bargain, the committee called a strike, the failure of which was a sharp blow to the unionization drive. (Brody, 1965) In the same year, the United Mine Workers undertook a large strike and also lost. These two lost strikes and the 1920-21 depression took the impetus out of the union movement and led to severe membership losses that continued through the twenties. (Figure 6)

Under Samuel Gompers’s leadership, the AFL’s “business unionism” had attempted to promote the union and collective bargaining as the primary answer to the workers’ concerns with wages, hours, and working conditions. The AFL officially opposed any government actions that would have diminished worker attachment to unions by providing competing benefits, such as government sponsored unemployment insurance, minimum wage proposals, maximum hours proposals and social security programs. As Lloyd Ulman (1961) points out, the AFL, under Gompers’ direction, differentiated on the basis of whether the statute would or would not aid collective bargaining. After Gompers’ death, William Green led the AFL in a policy change as the AFL promoted the idea of union-management cooperation to improve output and promote greater employer acceptance of unions. But Irving Bernstein (1965) concludes that, on the whole, union-management cooperation in the twenties was a failure.

To combat the appeal of unions in the twenties, firms used the “yellow-dog” contract requiring employees to swear they were not union members and would not join one; the “American Plan” promoting the open shop and contending that the closed shop was un-American; and welfare capitalism. The most common aspects of welfare capitalism included personnel management to handle employment issues and problems, the doctrine of “high wages,” company group life insurance, old-age pension plans, stock-purchase plans, and more. Some firms formed company unions to thwart independent unionization and the number of company-controlled unions grew from 145 to 432 between 1919 and 1926.

Until the late thirties the AFL was a voluntary association of independent national craft unions. Craft unions relied upon the particular skills the workers had acquired (their craft) to distinguish the workers and provide barriers to the entry of other workers. Most craft unions required a period of apprenticeship before a worker was fully accepted as a journeyman worker. The skills, and often lengthy apprenticeship, constituted the entry barrier that gave the union its bargaining power. There were only a few unions that were closer to today’s industrial unions where the required skills were much less (or nonexistent) making the entry of new workers much easier. The most important of these industrial unions was the United Mine Workers, UMW.

The AFL had been created on two principles: the autonomy of the national unions and the exclusive jurisdiction of the national union.—Individual union members were not, in fact, members of the AFL; rather, they were members of the local and national union, and the national was a member of the AFL. Representation in the AFL gave dominance to the national unions, and, as a result, the AFL had little effective power over them. The craft lines, however, had never been distinct and increasingly became blurred. The AFL was constantly mediating jurisdictional disputes between member national unions. Because the AFL and its individual unions were not set up to appeal to and work for the relatively less skilled industrial workers, union organizing and growth lagged in the twenties.

Agriculture

The onset of the First World War in Europe brought unprecedented prosperity to American farmers. As agricultural production in Europe declined, the demand for American agricultural exports rose, leading to rising farm product prices and incomes. In response to this, American farmers expanded production by moving onto marginal farmland, such as Wisconsin cutover property on the edge of the woods and hilly terrain in the Ozark and Appalachian regions. They also increased output by purchasing more machinery, such as tractors, plows, mowers, and threshers. The price of farmland, particularly marginal farmland, rose in response to the increased demand, and the debt of American farmers increased substantially.

This expansion of American agriculture continued past the end of the First World War as farm exports to Europe and farm prices initially remained high. However, agricultural production in Europe recovered much faster than most observers had anticipated. Even before the onset of the short depression in 1920, farm exports and farm product prices had begun to fall. During the depression, farm prices virtually collapsed. From 1920 to 1921, the consumer price index fell 11.3 percent, the wholesale price index fell 45.9 percent, and the farm products price index fell 53.3 percent. (HSUS, Series E40, E42, and E135)

Real average net income per farm fell over 72.6 percent between 1920 and 1921 and, though rising in the twenties, never recovered the relative levels of 1918 and 1919. (Figure 7) Farm mortgage foreclosures rose and stayed at historically high levels for the entire decade of the 1920s. (Figure 8) The value of farmland and buildings fell throughout the twenties and, for the first time in American history, the number of cultivated acres actually declined as farmers pulled back from the marginal farmland brought into production during the war. Rather than indicators of a general depression in agriculture in the twenties, these were the results of the financial commitments made by overoptimistic American farmers during and directly after the war. The foreclosures were generally on second mortgages rather than on first mortgages as they were in the early 1930s. (Johnson, 1973; Alston, 1983)

A Declining Sector

A major difficulty in analyzing the interwar agricultural sector lies in separating the effects of the 1920-21 and 1929-33 depressions from those that arose because agriculture was declining relative to the other sectors. A relatively very slow growing demand for basic agricultural products and significant increases in the productivity of labor, land, and machinery in agricultural production combined with a much more rapid extensive economic growth in the nonagricultural sectors of the economy required a shift of resources, particularly labor, out of agriculture. (Figure 9) The market induces labor to voluntarily move from one sector to another through income differentials, suggesting that even in the absence of the effects of the depressions, farm incomes would have been lower than nonfarm incomes so as to bring about this migration.

The continuous substitution of tractor power for horse and mule power released hay and oats acreage to grow crops for human consumption. Though cotton and tobacco continued as the primary crops in the south, the relative production of cotton continued to shift to the west as production in Arkansas, Missouri, Oklahoma, Texas, New Mexico, Arizona, and California increased. As quotas reduced immigration and incomes rose, the demand for cereal grains grew slowly—more slowly than the supply—and the demand for fruits, vegetables, and dairy products grew. Refrigeration and faster freight shipments expanded the milk sheds further from metropolitan areas. Wisconsin and other North Central states began to ship cream and cheeses to the Atlantic Coast. Due to transportation improvements, specialized truck farms and the citrus industry became more important in California and Florida. (Parker, 1972; Soule, 1947)

The relative decline of the agricultural sector in this period was closely related to the highly inelastic income elasticity of demand for many farm products, particularly cereal grains, pork, and cotton. As incomes grew, the demand for these staples grew much more slowly. At the same time, rising land and labor productivity were increasing the supplies of staples, causing real prices to fall.

Table 3 presents selected agricultural productivity statistics for these years. Those data indicate that there were greater gains in labor productivity than in land productivity (or per acre yields). Per acre yields in wheat and hay actually decreased between 1915-19 and 1935-39. These productivity increases, which released resources from the agricultural sector, were the result of technological improvements in agriculture.

Technological Improvements In Agricultural Production

In many ways the adoption of the tractor in the interwar period symbolizes the technological changes that occurred in the agricultural sector. This changeover in the power source that farmers used had far-reaching consequences and altered the organization of the farm and the farmers’ lifestyle. The adoption of the tractor was land saving (by releasing acreage previously used to produce crops for workstock) and labor saving. At the same time it increased the risks of farming because farmers were now much more exposed to the marketplace. They could not produce their own fuel for tractors as they had for the workstock. Rather, this had to be purchased from other suppliers. Repair and replacement parts also had to be purchased, and sometimes the repairs had to be undertaken by specialized mechanics. The purchase of a tractor also commonly required the purchase of new complementary machines; therefore, the decision to purchase a tractor was not an isolated one. (White, 2001; Ankli, 1980; Ankli and Olmstead, 1981; Musoke, 1981; Whatley, 1987). These changes resulted in more and more farmers purchasing and using tractors, but the rate of adoption varied sharply across the United States.

Technological innovations in plants and animals also raised productivity. Hybrid seed corn increased yields from an average of 40 bushels per acre to 100 to 120 bushels per acre. New varieties of wheat were developed from the hardy Russian and Turkish wheat varieties which had been imported. The U.S. Department of Agriculture’s Experiment Stations took the lead in developing wheat varieties for different regions. For example, in the Columbia River Basin new varieties raised yields from an average of 19.1 bushels per acre in 1913-22 to 23.1 bushels per acre in 1933-42. (Shepherd, 1980) New hog breeds produced more meat and new methods of swine sanitation sharply increased the survival rate of piglets. An effective serum for hog cholera was developed, and the federal government led the way in the testing and eradication of bovine tuberculosis and brucellosis. Prior to the Second World War, a number of pesticides to control animal disease were developed, including cattle dips and disinfectants. By the mid-1920s a vaccine for “blackleg,” an infectious, usually fatal disease that particularly struck young cattle, was completed. The cattle tick, which carried Texas Fever, was largely controlled through inspections. (Schlebecker, 1975; Bogue, 1983; Wood, 1980)

Federal Agricultural Programs in the 1920s

Though there was substantial agricultural discontent in the period from the Civil War to late 1890s, the period from then to the onset of the First World War was relatively free from overt farmers’ complaints. In later years farmers dubbed the 1910-14 period as agriculture’s “golden years” and used the prices of farm crops and farm inputs in that period as a standard by which to judge crop and input prices in later years. The problems that arose in the agricultural sector during the twenties once again led to insistent demands by farmers for government to alleviate their distress.

Though there were increasing calls for direct federal government intervention to limit production and raise farm prices, this was not used until Roosevelt took office. Rather, there was a reliance upon the traditional method to aid injured groups—tariffs, and upon the “sanctioning and promotion of cooperative marketing associations.” In 1921 Congress attempted to control the grain exchanges and compel merchants and stockyards to charge “reasonable rates,” with the Packers and Stockyards Act and the Grain Futures Act. In 1922 Congress passed the Capper-Volstead Act to promote agricultural cooperatives and the Fordney-McCumber Tariff to impose high duties on most agricultural imports.—The Cooperative Marketing Act of 1924 did not bolster failing cooperatives as it was supposed to do. (Hoffman and Liebcap, 1991)

Twice between 1924 and 1928 Congress passed “McNary-Haugan” bills, but President Calvin Coolidge vetoed both. The McNary-Haugan bills proposed to establish “fair” exchange values (based on the 1910-14 period) for each product and to maintain them through tariffs and a private corporation that would be chartered by the government and could buy enough of each commodity to keep its price up to the computed fair level. The revenues were to come from taxes imposed on farmers. The Hoover administration passed the Hawley-Smoot tariff in 1930 and an Agricultural Marketing Act in 1929. This act committed the federal government to a policy of stabilizing farm prices through several nongovernment institutions but these failed during the depression. Federal intervention in the agricultural sector really came of age during the New Deal era of the 1930s.

Manufacturing

Agriculture was not the only sector experiencing difficulties in the twenties. Other industries, such as textiles, boots and shoes, and coal mining, also experienced trying times. However, at the same time that these industries were declining, other industries, such as electrical appliances, automobiles, and construction, were growing rapidly. The simultaneous existence of growing and declining industries has been common to all eras because economic growth and technological progress never affect all sectors in the same way. In general, in manufacturing there was a rapid rate of growth of productivity during the twenties. The rise of real wages due to immigration restrictions and the slower growth of the resident population spurred this. Transportation improvements and communications advances were also responsible. These developments brought about differential growth in the various manufacturing sectors in the United States in the 1920s.

Because of the historic pattern of economic development in the United States, the northeast was the first area to really develop a manufacturing base. By the mid-nineteenth century the East North Central region was creating a manufacturing base and the other regions began to create manufacturing bases in the last half of the nineteenth century resulting in a relative westward and southern shift of manufacturing activity. This trend continued in the 1920s as the New England and Middle Atlantic regions’ shares of manufacturing employment fell while all of the other regions—excluding the West North Central region—gained. There was considerable variation in the growth of the industries and shifts in their ranking during the decade. The largest broadly defined industries were, not surprisingly, food and kindred products; textile mill products; those producing and fabricating primary metals; machinery production; and chemicals. When industries are more narrowly defined, the automobile industry, which ranked third in manufacturing value added in 1919, ranked first by the mid-1920s.

Productivity Developments

Gavin Wright (1990) has argued that one of the underappreciated characteristics of American industrial history has been its reliance on mineral resources. Wright argues that the growing American strength in industrial exports and industrialization in general relied on an increasing intensity in nonreproducible natural resources. The large American market was knit together as one large market without internal barriers through the development of widespread low-cost transportation. Many distinctively American developments, such as continuous-process, mass-production methods were associated with the “high throughput” of fuel and raw materials relative to labor and capital inputs. As a result the United States became the dominant industrial force in the world 1920s and 1930s. According to Wright, after World War II “the process by which the United States became a unified ‘economy’ in the nineteenth century has been extended to the world as a whole. To a degree, natural resources have become commodities rather than part of the ‘factor endowment’ of individual countries.” (Wright, 1990)

In addition to this growing intensity in the use of nonreproducible natural resources as a source of productivity gains in American manufacturing, other technological changes during the twenties and thirties tended to raise the productivity of the existing capital through the replacement of critical types of capital equipment with superior equipment and through changes in management methods. (Soule, 1947; Lorant, 1967; Devine, 1983; Oshima, 1984) Some changes, such as the standardization of parts and processes and the reduction of the number of styles and designs, raised the productivity of both capital and labor. Modern management techniques, first introduced by Frederick W. Taylor, were introduced on a wider scale.

One of the important forces contributing to mass production and increased productivity was the transfer to electric power. (Devine, 1983) By 1929 about 70 percent of manufacturing activity relied on electricity, compared to roughly 30 percent in 1914. Steam provided 80 percent of the mechanical drive capacity in manufacturing in 1900, but electricity provided over 50 percent by 1920 and 78 percent by 1929. An increasing number of factories were buying their power from electric utilities. In 1909, 64 percent of the electric motor capacity in manufacturing establishments used electricity generated on the factory site; by 1919, 57 percent of the electricity used in manufacturing was purchased from independent electric utilities.

The shift from coal to oil and natural gas and from raw unprocessed energy in the forms of coal and waterpower to processed energy in the form of internal combustion fuel and electricity increased thermal efficiency. After the First World War energy consumption relative to GNP fell, there was a sharp increase in the growth rate of output per labor-hour, and the output per unit of capital input once again began rising. These trends can be seen in the data in Table 3. Labor productivity grew much more rapidly during the 1920s than in the previous or following decade. Capital productivity had declined in the decade previous to the 1920s while it also increased sharply during the twenties and continued to rise in the following decade. Alexander Field (2003) has argued that the 1930s were the most technologically progressive decade of the twentieth century basing his argument on the growth of multi-factor productivity as well as the impressive array of technological developments during the thirties. However, the twenties also saw impressive increases in labor and capital productivity as, particularly, developments in energy and transportation accelerated.

 Average Annual Rates of Labor Productivity and Capital Productivity Growth.

Warren Devine, Jr. (1983) reports that in the twenties the most important result of the adoption of electricity was that it would be an indirect “lever to increase production.” There were a number of ways in which this occurred. Electricity brought about an increased flow of production by allowing new flexibility in the design of buildings and the arrangement of machines. In this way it maximized throughput. Electric cranes were an “inestimable boon” to production because with adequate headroom they could operate anywhere in a plant, something that mechanical power transmission to overhead cranes did not allow. Electricity made possible the use of portable power tools that could be taken anywhere in the factory. Electricity brought about improved illumination, ventilation, and cleanliness in the plants, dramatically improving working conditions. It improved the control of machines since there was no longer belt slippage with overhead line shafts and belt transmission, and there were less limitations on the operating speeds of machines. Finally, it made plant expansion much easier than when overhead shafts and belts had been relied upon for operating power.

The mechanization of American manufacturing accelerated in the 1920s, and this led to a much more rapid growth of productivity in manufacturing compared to earlier decades and to other sectors at that time. There were several forces that promoted mechanization. One was the rapidly expanding aggregate demand during the prosperous twenties. Another was the technological developments in new machines and processes, of which electrification played an important part. Finally, Harry Jerome (1934) and, later, Harry Oshima (1984) both suggest that the price of unskilled labor began to rise as immigration sharply declined with new immigration laws and falling population growth. This accelerated the mechanization of the nation’s factories.

Technological changes during this period can be documented for a number of individual industries. In bituminous coal mining, labor productivity rose when mechanical loading devices reduced the labor required from 24 to 50 percent. The burst of paved road construction in the twenties led to the development of a finishing machine to smooth the surface of cement highways, and this reduced the labor requirement from 40 to 60 percent. Mechanical pavers that spread centrally mixed materials further increased productivity in road construction. These replaced the roadside dump and wheelbarrow methods of spreading the cement. Jerome (1934) reports that the glass in electric light bulbs was made by new machines that cut the number of labor-hours required for their manufacture by nearly half. New machines to produce cigarettes and cigars, for warp-tying in textile production, and for pressing clothes in clothing shops also cut labor-hours. The Banbury mixer reduced the labor input in the production of automobile tires by half, and output per worker of inner tubes increased about four times with a new production method. However, as Daniel Nelson (1987) points out, the continuing advances were the “cumulative process resulting from a vast number of successive small changes.” Because of these continuing advances in the quality of the tires and in the manufacturing of tires, between 1910 and 1930 “tire costs per thousand miles of driving fell from $9.39 to $0.65.”

John Lorant (1967) has documented other technological advances that occurred in American manufacturing during the twenties. For example, the organic chemical industry developed rapidly due to the introduction of the Weizman fermentation process. In a similar fashion, nearly half of the productivity advances in the paper industry were due to the “increasingly sophisticated applications of electric power and paper manufacturing processes,” especially the fourdrinier paper-making machines. As Avi Cohen (1984) has shown, the continuing advances in these machines were the result of evolutionary changes to the basic machine. Mechanization in many types of mass-production industries raised the productivity of labor and capital. In the glass industry, automatic feeding and other types of fully automatic production raised the efficiency of the production of glass containers, window glass, and pressed glass. Giedion (1948) reported that the production of bread was “automatized” in all stages during the 1920s.

Though not directly bringing about productivity increases in manufacturing processes, developments in the management of manufacturing firms, particularly the largest ones, also significantly affected their structure and operation. Alfred D. Chandler, Jr. (1962) has argued that the structure of a firm must follow its strategy. Until the First World War most industrial firms were centralized, single-division firms even when becoming vertically integrated. When this began to change the management of the large industrial firms had to change accordingly.

Because of these changes in the size and structure of the firm during the First World War, E. I. du Pont de Nemours and Company was led to adopt a strategy of diversifying into the production of largely unrelated product lines. The firm found that the centralized, divisional structure that had served it so well was not suited to this strategy, and its poor business performance led its executives to develop between 1919 and 1921 a decentralized, multidivisional structure that boosted it to the first rank among American industrial firms.

General Motors had a somewhat different problem. By 1920 it was already decentralized into separate divisions. In fact, there was so much decentralization that those divisions essentially remained separate companies and there was little coordination between the operating divisions. A financial crisis at the end of 1920 ousted W. C. Durant and brought in the du Ponts and Alfred Sloan. Sloan, who had seen the problems at GM but had been unable to convince Durant to make changes, began reorganizing the management of the company. Over the next several years Sloan and other GM executives developed the general office for a decentralized, multidivisional firm.

Though facing related problems at nearly the same time, GM and du Pont developed their decentralized, multidivisional organizations separately. As other manufacturing firms began to diversify, GM and du Pont became the models for reorganizing the management of the firms. In many industrial firms these reorganizations were not completed until well after the Second World War.

Competition, Monopoly, and the Government

The rise of big businesses, which accelerated in the postbellum period and particularly during the first great turn-of-the-century merger wave, continued in the interwar period. Between 1925 and 1939 the share of manufacturing assets held by the 100 largest corporations rose from 34.5 to 41.9 percent. (Niemi, 1980) As a public policy, the concern with monopolies diminished in the 1920s even though firms were growing larger. But the growing size of businesses was one of the convenient scapegoats upon which to blame the Great Depression.

However, the rise of large manufacturing firms in the interwar period is not so easily interpreted as an attempt to monopolize their industries. Some of the growth came about through vertical integration by the more successful manufacturing firms. Backward integration was generally an attempt to ensure a smooth supply of raw materials where that supply was not plentiful and was dispersed and firms “feared that raw materials might become controlled by competitors or independent suppliers.” (Livesay and Porter, 1969) Forward integration was an offensive tactic employed when manufacturers found that the existing distribution network proved inadequate. Livesay and Porter suggested a number of reasons why firms chose to integrate forward. In some cases they had to provide the mass distribution facilities to handle their much larger outputs; especially when the product was a new one. The complexity of some new products required technical expertise that the existing distribution system could not provide. In other cases “the high unit costs of products required consumer credit which exceeded financial capabilities of independent distributors.” Forward integration into wholesaling was more common than forward integration into retailing. The producers of automobiles, petroleum, typewriters, sewing machines, and harvesters were typical of those manufacturers that integrated all the way into retailing.

In some cases, increases in industry concentration arose as a natural process of industrial maturation. In the automobile industry, Henry Ford’s invention in 1913 of the moving assembly line—a technological innovation that changed most manufacturing—lent itself to larger factories and firms. Of the several thousand companies that had produced cars prior to 1920, 120 were still doing so then, but Ford and General Motors were the clear leaders, together producing nearly 70 percent of the cars. During the twenties, several other companies, such as Durant, Willys, and Studebaker, missed their opportunity to become more important producers, and Chrysler, formed in early 1925, became the third most important producer by 1930. Many went out of business and by 1929 only 44 companies were still producing cars. The Great Depression decimated the industry. Dozens of minor firms went out of business. Ford struggled through by relying on its huge stockpile of cash accumulated prior to the mid-1920s, while Chrysler actually grew. By 1940, only eight companies still produced cars—GM, Ford, and Chrysler had about 85 percent of the market, while Willys, Studebaker, Nash, Hudson, and Packard shared the remainder. The rising concentration in this industry was not due to attempts to monopolize. As the industry matured, growing economies of scale in factory production and vertical integration, as well as the advantages of a widespread dealer network, led to a dramatic decrease in the number of viable firms. (Chandler, 1962 and 1964; Rae, 1984; Bernstein, 1987)

It was a similar story in the tire industry. The increasing concentration and growth of firms was driven by scale economies in production and retailing and by the devastating effects of the depression in the thirties. Although there were 190 firms in 1919, 5 firms dominated the industry—Goodyear, B. F. Goodrich, Firestone, U.S. Rubber, and Fisk, followed by Miller Rubber, General Tire and Rubber, and Kelly-Springfield. During the twenties, 166 firms left the industry while 66 entered. The share of the 5 largest firms rose from 50 percent in 1921 to 75 percent in 1937. During the depressed thirties, there was fierce price competition, and many firms exited the industry. By 1937 there were 30 firms, but the average employment per factory was 4.41 times as large as in 1921, and the average factory produced 6.87 times as many tires as in 1921. (French, 1986 and 1991; Nelson, 1987; Fricke, 1982)

The steel industry was already highly concentrated by 1920 as U.S. Steel had around 50 percent of the market. But U. S. Steel’s market share declined through the twenties and thirties as several smaller firms competed and grew to become known as Little Steel, the next six largest integrated producers after U. S. Steel. Jonathan Baker (1989) has argued that the evidence is consistent with “the assumption that competition was a dominant strategy for steel manufacturers” until the depression. However, the initiation of the National Recovery Administration (NRA) codes in 1933 required the firms to cooperate rather than compete, and Baker argues that this constituted a training period leading firms to cooperate in price and output policies after 1935. (McCraw and Reinhardt, 1989; Weiss, 1980; Adams, 1977)

Mergers

A number of the larger firms grew by merger during this period, and the second great merger wave in American industry occurred during the last half of the 1920s. Figure 10 shows two series on mergers during the interwar period. The FTC series included many of the smaller mergers. The series constructed by Carl Eis (1969) only includes the larger mergers and ends in 1930.

This second great merger wave coincided with the stock market boom of the twenties and has been called “merger for oligopoly” rather than merger for monopoly. (Stigler, 1950) This merger wave created many larger firms that ranked below the industry leaders. Much of the activity in occurred in the banking and public utilities industries. (Markham, 1955) In manufacturing and mining, the effects on industrial structure were less striking. Eis (1969) found that while mergers took place in almost all industries, they were concentrated in a smaller number of them, particularly petroleum, primary metals, and food products.

The federal government’s antitrust policies toward business varied sharply during the interwar period. In the 1920s there was relatively little activity by the Justice Department, but after the Great Depression the New Dealers tried to take advantage of big business to make business exempt from the antitrust laws and cartelize industries under government supervision.

With the passage of the FTC and Clayton Acts in 1914 to supplement the 1890 Sherman Act, the cornerstones of American antitrust law were complete. Though minor amendments were later enacted, the primary changes after that came in the enforcement of the laws and in swings in judicial decisions. Their two primary areas of application were in the areas of overt behavior, such as horizontal and vertical price-fixing, and in market structure, such as mergers and dominant firms. Horizontal price-fixing involves firms that would normally be competitors getting together to agree on stable and higher prices for their products. As long as most of the important competitors agree on the new, higher prices, substitution between products is eliminated and the demand becomes much less elastic. Thus, increasing the price increases the revenues and the profits of the firms who are fixing prices. Vertical price-fixing involves firms setting the prices of intermediate products purchased at different stages of production. It also tends to eliminate substitutes and makes the demand less elastic.

Price-fixing continued to be considered illegal throughout the period, but there was no major judicial activity regarding it in the 1920s other than the Trenton Potteries decision in 1927. In that decision 20 individuals and 23 corporations were found guilty of conspiring to fix the prices of bathroom bowls. The evidence in the case suggested that the firms were not very successful at doing so, but the court found that they were guilty nevertheless; their success, or lack thereof, was not held to be a factor in the decision. (Scherer and Ross, 1990) Though criticized by some, the decision was precedent setting in that it prohibited explicit pricing conspiracies per se.

The Justice Department had achieved success in dismantling Standard Oil and American Tobacco in 1911 through decisions that the firms had unreasonably restrained trade. These were essentially the same points used in court decisions against the Powder Trust in 1911, the thread trust in 1913, Eastman Kodak in 1915, the glucose and cornstarch trust in 1916, and the anthracite railroads in 1920. The criterion of an unreasonable restraint of trade was used in the 1916 and 1918 decisions that found the American Can Company and the United Shoe Machinery Company innocent of violating the Sherman Act; it was also clearly enunciated in the 1920 U. S. Steel decision. This became known as the rule of reason standard in antitrust policy.

Merger policy had been defined in the 1914 Clayton Act to prohibit only the acquisition of one corporation’s stock by another corporation. Firms then shifted to the outright purchase of a competitor’s assets. A series of court decisions in the twenties and thirties further reduced the possibilities of Justice Department actions against mergers. “Only fifteen mergers were ordered dissolved through antitrust actions between 1914 and 1950, and ten of the orders were accomplished under the Sherman Act rather than Clayton Act proceedings.”

Energy

The search for energy and new ways to translate it into heat, light, and motion has been one of the unending themes in history. From whale oil to coal oil to kerosene to electricity, the search for better and less costly ways to light our lives, heat our homes, and move our machines has consumed much time and effort. The energy industries responded to those demands and the consumption of energy materials (coal, oil, gas, and fuel wood) as a percent of GNP rose from about 2 percent in the latter part of the nineteenth century to about 3 percent in the twentieth.

Changes in the energy markets that had begun in the nineteenth century continued. Processed energy in the forms of petroleum derivatives and electricity continued to become more important than “raw” energy, such as that available from coal and water. The evolution of energy sources for lighting continued; at the end of the nineteenth century, natural gas and electricity, rather than liquid fuels began to provide more lighting for streets, businesses, and homes.

In the twentieth century the continuing shift to electricity and internal combustion fuels increased the efficiency with which the American economy used energy. These processed forms of energy resulted in a more rapid increase in the productivity of labor and capital in American manufacturing. From 1899 to 1919, output per labor-hour increased at an average annual rate of 1.2 percent, whereas from 1919 to 1937 the increase was 3.5 percent per year. The productivity of capital had fallen at an average annual rate of 1.8 percent per year in the 20 years prior to 1919, but it rose 3.1 percent a year in the 18 years after 1919. As discussed above, the adoption of electricity in American manufacturing initiated a rapid evolution in the organization of plants and rapid increases in productivity in all types of manufacturing.

The change in transportation was even more remarkable. Internal combustion engines running on gasoline or diesel fuel revolutionized transportation. Cars quickly grabbed the lion’s share of local and regional travel and began to eat into long distance passenger travel, just as the railroads had done to passenger traffic by water in the 1830s. Even before the First World War cities had begun passing laws to regulate and limit “jitney” services and to protect the investments in urban rail mass transit. Trucking began eating into the freight carried by the railroads.

These developments brought about changes in the energy industries. Coal mining became a declining industry. As Figure 11 shows, in 1925 the share of petroleum in the value of coal, gas, and petroleum output exceeded bituminous coal, and it continued to rise. Anthracite coal’s share was much smaller and it declined while natural gas and LP (or liquefied petroleum) gas were relatively unimportant. These changes, especially the declining coal industry, were the source of considerable worry in the twenties.

Coal

One of the industries considered to be “sick” in the twenties was coal, particularly bituminous, or soft, coal. Income in the industry declined, and bankruptcies were frequent. Strikes frequently interrupted production. The majority of the miners “lived in squalid and unsanitary houses, and the incidence of accidents and diseases was high.” (Soule, 1947) The number of operating bituminous coal mines declined sharply from 1923 through 1932. Anthracite (or hard) coal output was much smaller during the twenties. Real coal prices rose from 1919 to 1922, and bituminous coal prices fell sharply from then to 1925. (Figure 12) Coal mining employment plummeted during the twenties. Annual earnings, especially in bituminous coal mining, also fell because of dwindling hourly earnings and, from 1929 on, a shrinking workweek. (Figure 13)

The sources of these changes are to be found in the increasing supply due to productivity advances in coal production and in the decreasing demand for coal. The demand fell as industries began turning from coal to electricity and because of productivity advances in the use of coal to create energy in steel, railroads, and electric utilities. (Keller, 1973) In the generation of electricity, larger steam plants employing higher temperatures and steam pressures continued to reduce coal consumption per kilowatt hour. Similar reductions were found in the production of coke from coal for iron and steel production and in the use of coal by the steam railroad engines. (Rezneck, 1951) All of these factors reduced the demand for coal.

Productivity advances in coal mining tended to be labor saving. Mechanical cutting accounted for 60.7 percent of the coal mined in 1920 and 78.4 percent in 1929. By the middle of the twenties, the mechanical loading of coal began to be introduced. Between 1929 and 1939, output per labor-hour rose nearly one third in bituminous coal mining and nearly four fifths in anthracite as more mines adopted machine mining and mechanical loading and strip mining expanded.

The increasing supply and falling demand for coal led to the closure of mines that were too costly to operate. A mine could simply cease operations, let the equipment stand idle, and lay off employees. When bankruptcies occurred, the mines generally just turned up under new ownership with lower capital charges. When demand increased or strikes reduced the supply of coal, idle mines simply resumed production. As a result, the easily expanded supply largely eliminated economic profits.

The average daily employment in coal mining dropped by over 208,000 from its peak in 1923, but the sharply falling real wages suggests that the supply of labor did not fall as rapidly as the demand for labor. Soule (1947) notes that when employment fell in coal mining, it meant fewer days of work for the same number of men. Social and cultural characteristics tended to tie many to their home region. The local alternatives were few, and ignorance of alternatives outside the Appalachian rural areas, where most bituminous coal was mined, made it very costly to transfer out.

Petroleum

In contrast to the coal industry, the petroleum industry was growing throughout the interwar period. By the thirties, crude petroleum dominated the real value of the production of energy materials. As Figure 14 shows, the production of crude petroleum increased sharply between 1920 and 1930, while real petroleum prices, though highly variable, tended to decline.

The growing demand for petroleum was driven by the growth in demand for gasoline as America became a motorized society. The production of gasoline surpassed kerosene production in 1915. Kerosene’s market continued to contract as electric lighting replaced kerosene lighting. The development of oil burners in the twenties began a switch from coal toward fuel oil for home heating, and this further increased the growing demand for petroleum. The growth in the demand for fuel oil and diesel fuel for ship engines also increased petroleum demand. But it was the growth in the demand for gasoline that drove the petroleum market.

The decline in real prices in the latter part of the twenties shows that supply was growing even faster than demand. The discovery of new fields in the early twenties increased the supply of petroleum and led to falling prices as production capacity grew. The Santa Fe Springs, California strike in 1919 initiated a supply shock as did the discovery of the Long Beach, California field in 1921. New discoveries in Powell, Texas and Smackover Arkansas further increased the supply of petroleum in 1921. New supply increases occurred in 1926 to 1928 with petroleum strikes in Seminole, Oklahoma and Hendricks, Texas. The supply of oil increased sharply in 1930 to 1931 with new discoveries in Oklahoma City and East Texas. Each new discovery pushed down real oil prices, and the prices of petroleum derivatives, and the growing production capacity led to a general declining trend in petroleum prices. McMillin and Parker (1994) argue that supply shocks generated by these new discoveries were a factor in the business cycles during the 1920s.

The supply of gasoline increased more than the supply of crude petroleum. In 1913 a chemist at Standard Oil of Indiana introduced the cracking process to refine crude petroleum; until that time it had been refined by distillation or unpressurized heating. In the heating process, various refined products such as kerosene, gasoline, naphtha, and lubricating oils were produced at different temperatures. It was difficult to vary the amount of the different refined products produced from a barrel of crude. The cracking process used pressurized heating to break heavier components down into lighter crude derivatives; with cracking, it was possible to increase the amount of gasoline obtained from a barrel of crude from 15 to 45 percent. In the early twenties, chemists at Standard Oil of New Jersey improved the cracking process, and by 1927 it was possible to obtain twice as much gasoline from a barrel of crude petroleum as in 1917.

The petroleum companies also developed new ways to distribute gasoline to motorists that made it more convenient to purchase gasoline. Prior to the First World War, gasoline was commonly purchased in one- or five-gallon cans and the purchaser used a funnel to pour the gasoline from the can into the car. Then “filling stations” appeared, which specialized in filling cars’ tanks with gasoline. These spread rapidly, and by 1919 gasoline companies werebeginning to introduce their own filling stations or contract with independent stations to exclusively distribute their gasoline. Increasing competition and falling profits led filling station operators to expand into other activities such as oil changes and other mechanical repairs. The general name attached to such stations gradually changed to “service stations” to reflect these new functions.

Though the petroleum firms tended to be large, they were highly competitive, trying to pump as much petroleum as possible to increase their share of the fields. This, combined with the development of new fields, led to an industry with highly volatile prices and output. Firms desperately wanted to stabilize and reduce the production of crude petroleum so as to stabilize and raise the prices of crude petroleum and refined products. Unable to obtain voluntary agreement on output limitations by the firms and producers, governments began stepping in. Led by Texas, which created the Texas Railroad Commission in 1891, oil-producing states began to intervene to regulate production. Such laws were usually termed prorationing laws and were quotas designed to limit each well’s output to some fraction of its potential. The purpose was as much to stabilize and reduce production and raise prices as anything else, although generally such laws were passed under the guise of conservation. Although the federal government supported such attempts, not until the New Deal were federal laws passed to assist this.

Electricity

By the mid 1890s the debate over the method by which electricity was to be transmitted had been won by those who advocated alternating current. The reduced power losses and greater distance over which electricity could be transmitted more than offset the necessity for transforming the current back to direct current for general use. Widespread adoption of machines and appliances by industry and consumers then rested on an increase in the array of products using electricity as the source of power, heat, or light and the development of an efficient, lower cost method of generating electricity.

General Electric, Westinghouse, and other firms began producing the electrical appliances for homes and an increasing number of machines based on electricity began to appear in industry. The problem of lower cost production was solved by the introduction of centralized generating facilities that distributed the electric power through lines to many consumers and business firms.

Though initially several firms competed in generating and selling electricity to consumers and firms in a city or area, by the First World War many states and communities were awarding exclusive franchises to one firm to generate and distribute electricity to the customers in the franchise area. (Bright, 1947; Passer, 1953) The electric utility industry became an important growth industry and, as Figure 15 shows, electricity production and use grew rapidly.

The electric utilities increasingly were regulated by state commissions that were charged with setting rates so that the utilities could receive a “fair return” on their investments. Disagreements over what constituted a “fair return” and the calculation of the rate base led to a steady stream of cases before the commissions and a continuing series of court appeals. Generally these court decisions favored the reproduction cost basis. Because of the difficulty and cost in making these calculations, rates tended to be in the hands of the electric utilities that, it has been suggested, did not lower rates adequately to reflect the rising productivity and lowered costs of production. The utilities argued that a more rapid lowering of rates would have jeopardized their profits. Whether or not this increased their monopoly power is still an open question, but it should be noted, that electric utilities were hardly price-taking industries prior to regulation. (Mercer, 1973) In fact, as Figure 16 shows, the electric utilities began to systematically practice market segmentation charging users with less elastic demands, higher prices per kilowatt-hour.

Energy in the American Economy of the 1920s

The changes in the energy industries had far-reaching consequences. The coal industry faced a continuing decline in demand. Even in the growing petroleum industry, the periodic surges in the supply of petroleum caused great instability. In manufacturing, as described above, electrification contributed to a remarkable rise in productivity. The transportation revolution brought about by the rise of gasoline-powered trucks and cars changed the way businesses received their supplies and distributed their production as well as where they were located. The suburbanization of America and the beginnings of urban sprawl were largely brought about by the introduction of low-priced gasoline for cars.

Transportation

The American economy was forever altered by the dramatic changes in transportation after 1900. Following Henry Ford’s introduction of the moving assembly production line in 1914, automobile prices plummeted, and by the end of the 1920s about 60 percent of American families owned an automobile. The advent of low-cost personal transportation led to an accelerating movement of population out of the crowded cities to more spacious homes in the suburbs and the automobile set off a decline in intracity public passenger transportation that has yet to end. Massive road-building programs facilitated the intercity movement of people and goods. Trucks increasingly took over the movement of freight in competition with the railroads. New industries, such as gasoline service stations, motor hotels, and the rubber tire industry, arose to service the automobile and truck traffic. These developments were complicated by the turmoil caused by changes in the federal government’s policies toward transportation in the United States.

With the end of the First World War, a debate began as to whether the railroads, which had been taken over by the government, should be returned to private ownership or nationalized. The voices calling for a return to private ownership were much stronger, but doing so fomented great controversy. Many in Congress believed that careful planning and consolidation could restore the railroads and make them more efficient. There was continued concern about the near monopoly that the railroads had on the nation’s intercity freight and passenger transportation. The result of these deliberations was the Transportation Act of 1920, which was premised on the continued domination of the nation’s transportation by the railroads—an erroneous presumption.

The Transportation Act of 1920 presented a marked change in the Interstate Commerce Commission’s ability to control railroads. The ICC was allowed to prescribe exact rates that were to be set so as to allow the railroads to earn a fair return, defined as 5.5 percent, on the fair value of their property. The ICC was authorized to make an accounting of the fair value of each regulated railroad’s property; however, this was not completed until well into the 1930s, by which time the accounting and rate rules were out of date. To maintain fair competition between railroads in a region, all roads were to have the same rates for the same goods over the same distance. With the same rates, low-cost roads should have been able to earn higher rates of return than high-cost roads. To handle this, a recapture clause was inserted: any railroad earning a return of more than 6 percent on the fair value of its property was to turn the excess over to the ICC, which would place half of the money in a contingency fund for the railroad when it encountered financial problems and the other half in a contingency fund to provide loans to other railroads in need of assistance.

In order to address the problem of weak and strong railroads and to bring better coordination to the movement of rail traffic in the United States, the act was directed to encourage railroad consolidation, but little came of this in the 1920s. In order to facilitate its control of the railroads, the ICC was given two additional powers. The first was the control over the issuance or purchase of securities by railroads, and the second was the power to control changes in railroad service through the control of car supply and the extension and abandonment of track. The control of the supply of rail cars was turned over to the Association of American Railroads. Few extensions of track were proposed, but as time passed, abandonment requests grew. The ICC, however, trying to mediate between the conflicting demands of shippers, communities and railroads, generally refused to grant abandonments, and this became an extremely sensitive issue in the 1930s.

As indicated above, the premises of the Transportation Act of 1920 were wrong. Railroads experienced increasing competition during the 1920s, 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, 1960) Not surprisingly, during the 1920s 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 7.5 tons of carrying capacity. 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 1915 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 1925, so that by 1929 intercity trucking accounted for more than one percent of the ton-miles of freight hauled.

The railroads argued that the trucks and buses provided “unfair” competition and believed that if they were also regulated, then the regulation could equalize the conditions under which they competed. As early as 1925, the National Association of Railroad and Utilities Commissioners issued a call for the regulation of motor carriers in general. In 1928 the ICC called for federal regulation of buses and in 1932 extended this call to federal regulation of trucks.

Most states had began regulating buses at the beginning of the 1920s 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 1929 a number of smaller bus companies were incorporated in the Greyhound Buslines, the carrier that has since dominated intercity bus transportation. (Walsh, 2000)

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 1916, small amounts of money were provided as an incentive for states to construct rural post roads. (Dearing-Owen, 1949) 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 1919 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 1920 found evidence of substantial subsidization of trucking. (Herbst-Wu, 1973) 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 1917 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 1900 to 1917. Nothing could have been further from the truth. Spurred by public investments in highways, cars and trucks voraciously ate into the railroad’s market, and, though the regulators failed to understand this at the time, the railroad’s monopoly on transportation quickly disappeared.

Communications

Communications had joined with transportation developments in the nineteenth century to tie the American economy together more completely. The telegraph had benefited by using the railroads’ right-of-ways, and the railroads used the telegraph to coordinate and organize their far-flung activities. 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 1915. The number of telegraph messages handled grew 60.4 percent in the twenties. The number of local telephone conversations grew 46.8 percent between 1920 and 1930, while the number of long distance conversations grew 71.8 percent over the same period. There were 5 times as many long distance telephone calls as telegraph messages handled in 1920, and 5.7 times as many in 1930.

The twenties were a prosperous period for AT&T and its 18 major operating companies. (Brooks, 1975; Temin, 1987; Garnet, 1985; Lipartito, 1989) Telephone usage rose and, as Figure 19 shows, the share of all households with a telephone rose from 35 percent to nearly 42 percent. In cities across the nation, AT&T consolidated its system, gained control of many operating companies, and virtually eliminated its competitors. It was able to do this because in 1921 Congress passed the Graham Act exempting AT&T from the Sherman Act in consolidating competing telephone companies. By 1940, 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, 1984; Fischer 1987) 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. As AT&T gained control of more and more operating systems, telephone rates were increased. AT&T also began requiring, as a condition of interconnection, that independent companies upgrade their systems to meet AT&T standards. Most of the small mutual companies that had provided service to farmers had operated on a shoestring—wires were often strung along fenceposts, and phones were inexpensive “whoop and holler” magneto units. Upgrading to AT&T’s standards raised costs, forcing these companies to raise rates.

However, it also seems likely that during the 1920s 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. The second reason was a change in the farmers’ environment. Prior to the First World War, the telephone eased farm isolation and provided news and weather information that was otherwise hard to obtain. After 1920 automobiles, surfaced roads, movies, and the radio loosened the isolation and the telephone was no longer as crucial.

Othmar Merganthaler’s development of the linotype machine in the late nineteenth century had irrevocably altered printing and publishing. 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 1886. 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 400 years earlier.

For city families as well as farm families, radio became the new source of news and entertainment. (Barnouw, 1966; Rosen, 1980 and 1987; Chester-Garrison, 1950) It soon took over as the prime advertising medium and in the process revolutionized advertising. By 1930 more homes had radio sets than had telephones. The radio networks sent news and entertainment broadcasts all over the country. The isolation of rural life, particularly in many areas of the plains, was forever broken by the intrusion of the “black box,” as radio receivers were often called. The radio began a process of breaking down regionalism and creating a common culture in the United States.

The potential demand for radio became clear with the first regular broadcast of Westinghouse’s KDKA in Pittsburgh in the fall of 1920. 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 1923 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 1926 a U.S. District Court decided that under the Radio Law of 1912 Herbert Hoover, the secretary of commerce, did not have this power. New stations appeared and the logjam and interference of signals worsened. A Radio Act was passed in January of 1927 creating the Federal Radio Commission (FRC) as a temporary licensing authority. 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 50,000 watts of broadcasting power, of which 21 ended up being affiliated with the new national radio networks. The Communications Act of 1934 essentially repeated the 1927 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. In 1922, AT&T opened up a radio station in New York City, WEAF (later to become WNBC). AT&T envisioned this station as the center of a radio toll system where individuals could purchase time to broadcast a message transmitted to other stations in the toll network using AT&T’s long distance lines and an August 1922 broadcast by a Long Island realty company became the first conscious use of direct advertising.

Though advertising continued to be condemned, the fiscal pressures on radio stations to accept advertising began rising. In 1923 the American Society of Composers and Publishers (ASCAP), began demanding a performance fee anytime ASCAP-copyrighted music was performed on the radio, either live or on record. By 1924 the issue was settled, and most stations began paying performance fees to ASCAP. AT&T decided that all stations broadcasting with non AT&T transmitters were violating their patent rights and began asking for annual fees from such stations based on the station’s power. By the end of 1924, 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.

RCA became upset at AT&T’s creation of a chain of radio stations and set up its own toll network using the inferior lines of Western Union and Postal Telegraph, because AT&T, not surprisingly, did not allow any toll (or network) broadcasting on its lines except by its own stations. AT&T began to worry that its actions might threaten its federal monopoly in long distance telephone communications. In 1926 a new firm was created, the National Broadcasting Company (NBC), which took over all broadcasting activities from AT&T and RCA as AT&T left broadcasting. When NBC debuted in November of 1926, it had two networks: the Red, which was the old AT&T network, and the Blue, which was the old RCA network. 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 1927 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 1930s.

Communications developments in the interwar era present something of a mixed picture. By 1920 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.

Banking and Securities Markets

In the twenties commercial banks became “department stores of finance.”— Banks opened up installment (or personal) loan departments, expanded their mortgage lending, opened up trust departments, undertook securities underwriting activities, and offered safe deposit boxes. These changes were a response to growing competition from other financial intermediaries. Businesses, stung by bankers’ control and reduced lending during the 1920-21 depression, began relying more on retained earnings and stock and bond issues to raise investment and, sometimes, working capital. 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 1929.

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.—The Federal Reserve member banks held the bulk of the assets of all commercial banks, even though most banks were not members. A high bank failure rate in the 1920s has usually been explained by “overbanking” or too many banks located in an area, but H. Thomas Johnson (1973-74) 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 1926. The sharp rise in bank suspensions in 1930 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 1920s 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 1921 to 1929; 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. As incomes rose, personal savings increased, and housing construction expanded in the twenties, there was an increasing demand for the thrifts’ interest earning time deposits and mortgage lending.

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 1929; and the stock market, like a barometer of this prosperity, was on a dizzying ride to higher and higher prices. “Playing the market” seemed to become a national pastime.

The Dow-Jones index hit its peak of 381 on September 3 and then slid to 320 on October 21. In the following week the stock market “crashed,” with a record number of shares being traded on several days. At the end of Tuesday, October, 29th, the index stood at 230, 96 points less than one week before. On November 13, 1929, the Dow-Jones index reached its lowest point for the year at 198—183 points less than the September 3 peak.

The path of the stock market boom of the twenties can be seen in Figure 25. 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 1929, 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 1928, 3,875,910 shares were traded in one day, establishing a record. By late 1928, 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.—Stock pools, which were not illegal until the 1934 Securities and Exchange Act, took advantage of the boom to temporarily drive up the price of selected stocks and reap large gains for the members of the pool. 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. Frequently pool insiders would “churn” the stock by repeatedly buying and selling the same shares among themselves, but at rising prices. 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. Without the additional demand from the pool, the stock’s price usually fell quickly bringing large losses for the unsuspecting outside investors while reaping large gains for the pool insiders.

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 1928, and by the fall of 1929, margin requirements were the highest in the history of the New York Stock Exchange. In the 1920s, 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 1928 and by the fall of 1928, 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. Securities with a selling price below $10 could only be purchased for cash. Securities with a selling price of $10 to $20 had to have a 50 percent margin; for securities of $20 to $30 a margin requirement of 40 percent; and, for securities with a price above $30 the margin was 30 percent of the purchase price. In the first half of 1929 margin requirements on customers’ accounts averaged a 40 percent margin, and some houses raised their margins to 50 percent a few months before the crash. These were, historically, very high margin requirements. (Smiley and Keehn, 1988)—Even so, during the crash when additional margin calls were issued, those investors who could not provide additional margin saw the brokers’ sell their stock at whatever the market price was at the time and these forced sales helped drive prices even lower.

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, 1929, as brokers cleaned up their accounts and sold off the stocks of clients who could not supply additional margin. After that, prices began to slowly rise and by April of 1930 had increased 96 points from the low of November 13,— “only” 87 points less than the peak of September 3, 1929. From that point, stock prices resumed their depressing decline until the low point was reached in the summer of 1932.

 

—There is a long tradition that insists that the Great Bull Market of the late twenties was an orgy of speculation that bid the prices of stocks far above any sustainable or economically justifiable level creating a bubble in the stock market. John Kenneth Galbraith (1954) observed, “The collapse in the stock market in the autumn of 1929 was implicit in the speculation that went before.”—But not everyone has agreed with this.

In 1930 Irving Fisher argued that the stock prices of 1928 and 1929 were based on fundamental expectations that future corporate earnings would be high.— More recently, Murray Rothbard (1963), Gerald Gunderson (1976), and Jude Wanniski (1978) have argued that stock prices were not too high prior to the crash.—Gunderson suggested that prior to 1929, stock prices were where they should have been and that when corporate profits in the summer and fall of 1929 failed to meet expectations, stock prices were written down.— Wanniski argued that political events brought on the crash. The market broke each time news arrived of advances in congressional consideration of the Hawley-Smoot tariff. However, the virtually perfect foresight that Wanniski’s explanation requires is unrealistic.— Charles Kindleberger (1973) and Peter Temin (1976) examined common stock yields and price-earnings ratios and found that the relative constancy did not suggest that stock prices were bid up unrealistically high in the late twenties.—Gary Santoni and Gerald Dwyer (1990) also failed to find evidence of a bubble in stock prices in 1928 and 1929.—Gerald Sirkin (1975) found that the implied growth rates of dividends required to justify stock prices in 1928 and 1929 were quite conservative and lower than post-Second World War dividend growth rates.

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.— Each individual investor was motivated by that person’s subjective expectations of each firm’s future earnings and dividends and the future prices of shares of each firm’s stock. 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 1928 and 1929. Yields on common stocks were somewhat lower in 1928 and 1929. In October of 1928, brokers generally began raising margin requirements, and by the beginning of the fall of 1929, margin requirements were, on average, the highest in the history of the New York Stock Exchange. Though the discount and commercial paper rates had moved closely with the call and time rates on brokers’ loans through 1927, the rates on brokers’ loans increased much more sharply in 1928 and 1929.— This pulled in funds from corporations, private investors, and foreign banks as New York City banks sharply reduced their lending. 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 1928 and early 1929. White (1990) created a quarterly index of dividends for firms in the Dow-Jones index and related this to the DJI. Through 1927 the two track closely, but in 1928 and 1929 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 1928 and 1929 that White assembled was strengthened by the findings of J. Bradford De Long and Andre Shleifer (1991). 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.— Using evidence from these funds, De Long and Shleifer estimated that in the summer of 1929, the Standard and Poor’s composite stock price index was overvalued about 30 percent due to excessive investor optimism. Rappoport and White (1993 and 1994) found other evidence that supported a bubble in the stock market in 1928 and 1929. There was a sharp divergence between the growth of stock prices and dividends; there were increasing premiums on call and time brokers’ loans in 1928 and 1929; margin requirements rose; and stock market volatility rose in the wake of the 1929 stock market crash.

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.— Eugene White (1990) suggests that “While investors had every reason to expect earnings to grow, they lacked the means to evaluate easily the future path of dividends.” As a result investors bid up prices as they were swept up in the ongoing stock market boom. 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.— New, inexperienced commission sales personnel were hired to sell stocks and they promised glowing returns on stocks they knew little about.

These observations were strengthened by the experimental work of economist Vernon Smith. (Bishop, 1987) 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 1928 and 1929 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 1928 and early 1929 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 1929. By the middle of August, the rise in stock prices had slowed down as better information on the contraction was received. There were repeated statements by leading figures that stocks were “overpriced” and the Federal Reserve System sharply increased the discount rate in August 1929 was well as continuing its call for banks to reduce their margin lending. 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 1930 suggests that stock prices may have been driven somewhat too low during the crash.

There is now widespread agreement that the 1929 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 1928-29 stock market bubble. The stock market crash did make the downturn become more severe beginning in November 1929. It reduced discretionary consumption spending (Romer, 1990) and created greater income uncertainty helping to bring on the contraction (Flacco and Parker, 1992). Though stock market prices reached a bottom and began to recover following November 13, 1929, the continuing decline in economic activity took its toll and by May 1930 stock prices resumed their decline and continued to fall through the summer of 1932.

Domestic Trade

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, 1977; Chandler, 1977; Marburg, 1951; Clewett, 1951) 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.

Department Stores

A department store is a combination of specialty stores organized as departments within one general store. A. T. Stewart’s huge 1846 dry goods store in New York City is often referred to as the first department store. (Resseguie, 1965; Sobel-Sicilia, 1986) R. H. Macy started his dry goods store in 1858 and Wanamaker’s in Philadelphia opened in 1876. By the end of the nineteenth century, every city of any size had at least one major department store. (Appel, 1930; Benson, 1986; Hendrickson, 1979; Hower, 1946; Sobel, 1974) 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.

The department stores relied on a “one-price” policy, which Stewart is credited with beginning. 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. Prices were reduced with a smaller markup over the wholesale price, and a large sales volume and a quicker turnover of the store’s inventory generated profits.

Mail Order Firms

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, 1950; Chandler, 1962, 1977) Both firms had begun in the late nineteenth century and by 1914 the younger Sears Roebuck had surpassed Montgomery Ward. Both located in Chicago due to its central location in the nation’s rail network and both had benefited from the advent of Rural Free Delivery in 1896 and low cost Parcel Post Service in 1912.

In 1924 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 1925 Sears Roebuck had opened 8 retail stores, and by 1929 it had 324 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.

Chain Stores

Though chain stores grew rapidly in the first two decades of the twentieth century, they date back to the 1860s when George F. Gilman and George Huntington Hartford opened a string of New York City A&P (Atlantic and Pacific) stores exclusively to sell tea. (Beckman-Nolen, 1938; Lebhar, 1963; Bullock, 1933) Stores were opened in other regions and in 1912 their first “cash-and-carry” full-range grocery was opened. Soon they were opening 50 of these stores each week and by the 1920s A&P had 14,000 stores. They then phased out the small stores to reduce the chain to 4,000 full-range, supermarket-type stores. A&P’s success led to new grocery store chains such as Kroger, Jewel Tea, and Safeway.

Prior to A&P’s cash-and-carry policy, it was common for grocery stores, produce (or green) grocers, and meat markets to provide home delivery and credit, both of which were costly. 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 1879 Frank W. Woolworth developed a “5 and 10 Cent Store,” or dime store, and there were over 1,000 F. W. Woolworth stores by the mid-1920s. (Winkler, 1940) Other firms such as Kresge, Kress, and McCrory successfully imitated Woolworth’s dime store chain. J.C. Penney’s dry goods chain store began in 1901 (Beasley, 1948), Walgreen’s drug store chain began in 1909, and shoes, jewelry, cigars, and other lines of merchandise also began to be sold through chain stores.

Self-Service Policies

In 1916 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

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 1920s, 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. Yehoshua Cohen (1972) says, “The owner of such a center was responsible for maintenance of the center, its parking lot, as well as other services to consumers and retailers in the center.” Perhaps the earliest such shopping center was the Country Club Plaza built in 1922 by the J. C. Nichols Company in Kansas City, Missouri. Other early shopping centers appeared in Baltimore and Dallas. By the mid-1930s 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.

International Trade and Finance

In the twenties a gold exchange standard was developed to replace the gold standard of the prewar world. Under a gold standard, each country’s currency carried a fixed exchange rate with gold, and the currency had to be backed up by gold. 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. Falling prices made the deficit countries’ exports more attractive and imports more costly, reducing the deficit. Countries with a surplus imported gold, which increased the money stock and caused prices to rise. This made the surplus countries’ exports less attractive and imports more attractive, decreasing the surplus. 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.

After the First World War it was argued that there was a “shortage” of fluid monetary gold to use for the gold standard, so some method of “economizing” on gold had to be found. To do this, two basic changes were made. First, most nations, other than the United States, stopped domestic circulation of gold. Second, the “gold exchange” system was created. Most countries held their international reserves in the form of U.S. dollars or British pounds and international transactions used dollars or pounds, as long as the United States and Great Britain stood ready to exchange their currencies for gold at fixed exchange rates. 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.

Economizing on gold by no longer allowing its domestic circulation and by using key currencies as international monetary reserves was really an attempt to place the domestic economies under the control of the nations’ politicians and make them independent of international events. 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 Allied Reparations Commission collected the charges by supervising Germany’s foreign trade and by internal controls on the German economy, and it was authorized to increase the reparations if it was felt that Germany could pay more. The treaty allowed France to occupy the Ruhr after Germany defaulted in 1923.

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.S. debts. If these conditions did not occur, (and note that the “new” gold standard of the twenties had lost its flexibility because the price adjustment mechanism had been eliminated) disruption in international activity could easily occur and be transmitted to the domestic economies.

In the wake of the 1920-21 depression Congress passed the Emergency Tariff Act, which raised tariffs, particularly on manufactured goods. (Figures 26 and 27) The Fordney-McCumber Tariff of 1922 continued the Emergency Tariff of 1921, and its protection on many items was extremely high, ranging from 60 to 100 percent ad valorem (or as a percent of the price of the item). The increases in the Fordney-McCumber tariff were as large and sometimes larger than the more famous (or “infamous”) Smoot-Hawley tariff of 1930. 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. In January 1929, after Hoover’s election, but before he took office, a tariff bill was introduced into Congress. 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 1930 and rates rose sharply.

Following the First World War, the U.S. government actively promoted American exports, and in each of the postwar years through 1929, the United States recorded a surplus in its balance of trade. (Figure 28) However, the surplus declined in the 1930s as both exports and imports fell sharply after 1929. From the mid-1920s 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 1922 and 1923, the Dawes Plan reformed the German economy and currency and accelerated the U.S. capital outflow. American investors began to actively and aggressively pursue foreign investments, particularly loans (Lewis, 1938) and in the late twenties there was a marked deterioration in the quality of foreign bonds sold in the United States. (Mintz, 1951)

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 1928, the flow of short-term capital began to decline. In 1928 the flow of “other long-term” capital out of the United States was 752 million dollars, but in 1929 it was only 34 million dollars. 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.

The Start of the Depression

The United States had the majority of the world’s monetary gold, about 40 percent, by 1920. In the latter part of the twenties, France also began accumulating gold as its share of the world’s monetary gold rose from 9 percent in 1927 to 17 percent in 1929 and 22 percent by 1931. In 1927 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.S. government securities on the open market to increase the reserves of the banking system) to push down interest rates and assist Great Britain in staying on the gold standard. By early 1928 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. As the United States and France accumulated more and more of the world’s monetary gold, other countries’ central banks took contractionary steps to stem the loss of gold. In country after country these deflationary strategies began contracting economic activity and by 1928 some countries in Europe, Asia, and South America had entered into a depression. More countries’ economies began to decline in 1929, including the United States, and by 1930 a depression was in force for almost all of the world’s market economies. (Temin, 1989; Eichengreen, 1992)

Monetary and Fiscal Policies in the 1920s

Fiscal Policies

As a tool to promote stability in aggregate economic activity, fiscal policy is largely a post-Second World War phenomenon. Prior to 1930 the federal government’s spending and taxing decisions were largely, but not completely, based on the perceived “need” for government-provided public goods and services.

Though the fiscal policy concept had not been developed, this does not mean that during the twenties no concept of the government’s role in stimulating economic activity existed. Herbert Stein (1990) 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 Smiley and Keehn, 1995.  investment. Both concepts fit the ideas held by Hoover and others of his persuasion that the U.S. economy of the twenties was not the result of laissez-faire workings but of “deliberate social engineering.”

The federal personal income tax was enacted in 1913. Though mildly progressive, its rates were low and topped out at 7 percent on taxable income in excess of $750,000. (Table 4) As the United States prepared for war in 1916, rates were increased and reached a maximum marginal rate of 12 percent. With the onset of the First World War, the rates were dramatically increased. To obtain additional revenue in 1918, marginal rates were again increased. The share of federal revenue generated by income taxes rose from 11 percent in 1914 to 69 percent in 1920. The tax rates had been extended downward so that more than 30 percent of the nation’s income recipients were subject to income taxes by 1918. However, through the purchase of tax exempt state and local securities and through steps taken by corporations to avoid the cash distribution of profits, the number of high income taxpayers and their share of total taxes paid declined as Congress kept increasing the tax rates. The normal (or base) tax rate was reduced slightly for 1919 but the surtax rates, which made the income tax highly progressive, were retained. (Smiley-Keehn, 1995)

President Harding’s new Secretary of the Treasury, Andrew Mellon, proposed cutting the tax rates, arguing that the rates in the higher brackets had “passed the point of productivity” and rates in excess of 70 percent simply could not be collected. Though most agreed that the rates were too high, there was sharp disagreement on how the rates should be cut. Democrats and  Smiley and Keehn, 1995.  Progressive Republicans argued for rate cuts targeted for the lower income taxpayers while maintaining most of the steep progressivity of the tax rates. They believed that remedies could be found to change the tax laws to stop the legal avoidance of federal income taxes. Republicans argued for sharper cuts that reduced the progressivity of the rates. Mellon proposed a maximum rate of 25 percent.

Though the federal income tax rates were reduced and made less progressive, it took three tax rate cuts in 1921, 1924, and 1925 before Mellon’s goal was finally achieved. The highest marginal tax rate was reduced from 73 percent to 58 percent to 46 percent and finally to 25 percent for the 1925 tax year. All of the other rates were also reduced and exemptions increased. By 1926, only about the top 10 percent of income recipients were subject to federal income taxes. As tax rates were reduced, the number of high income tax returns increased and the share of total federal personal income taxes paid rose. (Tables 5 and 6) Even with the dramatic income tax rate cuts and reductions in the number of low income taxpayers, federal personal income tax revenue continued to rise during the 1920s. Though early estimates of the distribution of personal income showed sharp increases in income inequality during the 1920s (Kuznets, 1953; Holt, 1977), more recent estimates have found that the increases in inequality were considerably less and these appear largely to be related to the sharp rise in capital gains due to the booming stock market in the late twenties. (Smiley, 1998 and 2000)

Each year in the twenties the federal government generated a surplus, in some years as much as 1 percent of GNP. The surpluses were used to reduce the federal deficit and it declined by 25 percent between 1920 and 1930. Contrary to simple macroeconomic models that argue a federal government budget surplus must be contractionary and tend to stop an economy from reaching full employment, the American economy operated at full-employment or close to it throughout the twenties and saw significant economic growth. In this case, the surpluses were not contractionary because the dollars were circulated back into the economy through the purchase of outstanding federal debt rather than pulled out as currency and held in a vault somewhere.

Monetary Policies

In 1913 fear of the “money trust” and their monopoly power led Congress to create 12 central banks when they created the Federal Reserve System. The new central banks were to control money and credit and act as lenders of last resort to end banking panics. The role of the Federal Reserve Board, located in Washington, D.C., was to coordinate the policies of the 12 district banks; it was composed of five presidential appointees and the current secretary of the treasury and comptroller of the currency. All national banks had to become members of the Federal Reserve System, the Fed, and any state bank meeting the qualifications could elect to do so.

The act specified fixed reserve requirements on demand and time deposits, all of which had to be on deposit in the district bank. Commercial banks were allowed to rediscount commercial paper and given Federal Reserve currency. Initially, each district bank set its own rediscount rate. To provide additional income when there was little rediscounting, the district banks were allowed to engage in open market operations that involved the purchasing and selling of federal government securities, short-term securities of state and local governments issued in anticipation of taxes, foreign exchange, and domestic bills of exchange. The district banks were also designated to act as fiscal agents for the federal government. Finally, the Federal Reserve System provided a central check clearinghouse for the entire banking system.

When the Federal Reserve System was originally set up, it was believed that its primary role was to be a lender of last resort to prevent banking panics and become a check-clearing mechanism for the nation’s banks. Both the Federal Reserve Board and the Governors of the District Banks were bodies established to jointly exercise these activities. The division of functions was not clear, and a struggle for power ensued, mainly between the New York Federal Reserve Bank, which was led by J. P. Morgan’s protege, Benjamin Strong, through 1928, and the Federal Reserve Board. By the thirties the Federal Reserve Board had achieved dominance.

There were really two conflicting criteria upon which monetary actions were ostensibly based: the Gold Standard and the Real Bills Doctrine. The Gold Standard was supposed to be quasi-automatic, with an effective limit to the quantity of money. However, the Real Bills Doctrine (which required that all loans be made on short-term, self-liquidating commercial paper) had no effective limit on the quantity of money. The rediscounting of eligible commercial paper was supposed to lead to the required “elasticity” of the stock of money to “accommodate” the needs of industry and business. Actually the rediscounting of commercial paper, open market purchases, and gold inflows all had the same effects on the money stock.

The 1920-21 Depression

During the First World War, the Fed kept discount rates low and granted discounts on banks’ customer loans used to purchase V-bonds in order to help finance the war. The final Victory Loan had not been floated when the Armistice was signed in November of 1918: in fact, it took until October of 1919 for the government to fully sell this last loan issue. The Treasury, with the secretary of the treasury sitting on the Federal Reserve Board, persuaded the Federal Reserve System to maintain low interest rates and discount the Victory bonds necessary to keep bond prices high until this last issue had been floated. As a result, during this period the money supply grew rapidly and prices rose sharply.

A shift from a federal deficit to a surplus and supply disruptions due to steel and coal strikes in 1919 and a railroad strike in early 1920 contributed to the end of the boom. But the most—common view is that the Fed’s monetary policy was the main determinant of the end of the expansion and inflation and the beginning of the subsequent contraction and severe deflation. When the Fed was released from its informal agreement with the Treasury in November of 1919, it raised the discount rate from 4 to 4.75 percent. Benjamin Strong (the governor of the New York bank) was beginning to believe that the time for strong action was past and that the Federal Reserve System’s actions should be moderate. However, with Strong out of the country, the Federal Reserve Board increased the discount rate from 4.75 to 6 percent in late January of 1920 and to 7 percent on June 1, 1920. By the middle of 1920, economic activity and employment were rapidly falling, and prices had begun their downward spiral in one of the sharpest price declines in American history. The Federal Reserve System kept the discount rate at 7 percent until May 5, 1921, when it was lowered to 6.5 percent. By June of 1922, the rate had been lowered yet again to 4 percent. (Friedman and Schwartz, 1963)

The Federal Reserve System authorities received considerable criticism then and later for their actions. Milton Friedman and Anna Schwartz (1963) contend that the discount rate was raised too much too late and then kept too high for too long, causing the decline to be more severe and the price deflation to be greater. In their opinion the Fed acted in this manner due to the necessity of meeting the legal reserve requirement with a safe margin of gold reserves. Elmus Wicker (1966), however, argues that the gold reserve ratio was not the main factor determining the Federal Reserve policy in the episode. Rather, the Fed knowingly pursued a deflationary policy because it felt that the money supply was simply too large and prices too high. To return to the prewar parity for gold required lowering the price level, and there was an excessive stock of money because the additional money had been used to finance the war, not to produce consumer goods. Finally, the outstanding indebtedness was too large due to the creation of Fed credit.

Whether statutory gold reserve requirements to maintain the gold standard or domestic credit conditions were the most important determinant of Fed policy is still an open question, though both certainly had some influence. Regardless of the answer to that question, the Federal Reserve System’s first major undertaking in the years immediately following the First World War demonstrated poor policy formulation.

Federal Reserve Policies from 1922 to 1930

By 1921 the district banks began to recognize that their open market purchases had effects on interest rates, the money stock, and economic activity. For the next several years, economists in the Federal Reserve System discussed how this worked and how it could be related to discounting by member banks. A committee was created to coordinate the open market purchases of the district banks.

The recovery from the 1920-1921 depression had proceeded smoothly with moderate price increases. In early 1923 the Fed sold some securities and increased the discount rate from 4 percent as they believed the recovery was too rapid. However, by the fall of 1923 there were some signs of a business slump. McMillin and Parker (1994) argue that this contraction, as well as the 1927 contraction, were related to oil price shocks. By October of 1923 Benjamin Strong was advocating securities purchases to counter this. Between then and September 1924 the Federal Reserve System increased its securities holdings by over $500 million. Between April and August of 1924 the Fed reduced the discount rate to 3 percent in a series of three separate steps. In addition to moderating the mild business slump, the expansionary policy was also intended to reduce American interest rates relative to British interest rates. This reversed the gold flow back toward Great Britain allowing Britain to return to the gold standard in 1925. At the time it appeared that the Fed’s monetary policy had successfully accomplished its goals.

By the summer of 1924 the business slump was over and the economy again began to grow rapidly. By the mid-1920s real estate speculation had arisen in many urban areas in the United States and especially in Southeastern Florida. Land prices were rising sharply. Stock market prices had also begun rising more rapidly. The Fed expressed some worry about these developments and in 1926 sold some securities to gently slow the real estate and stock market boom. Amid hurricanes and supply bottlenecks the Florida real estate boom collapsed but the stock market boom continued.

The American economy entered into another mild business recession in the fall of 1926 that lasted until the fall of 1927. One of the factors in this was Henry’s Ford’s shut down of all of his factories to changeover from the Model T to the Model A. His employees were left without a job and without income for over six months. International concerns also reappeared. France, which was preparing to return to the gold standard, had begun accumulating gold and gold continued to flow into the United States. Some of this gold came from Great Britain making it difficult for the British to remain on the gold standard. This occasioned a new experiment in central bank cooperation. In July 1927 Benjamin Strong arranged a conference with Governor Montagu Norman of the Bank of England, Governor Hjalmar Schacht of the Reichsbank, and Deputy Governor Charles Ritt of the Bank of France in an attempt to promote cooperation among the world’s central bankers. By the time the conference began the Fed had already taken steps to counteract the business slump and reduce the gold inflow. In early 1927 the Fed reduced discount rates and made large securities purchases. One result of this was that the gold stock fell from $4.3 billion in mid-1927 to $3.8 billion in mid-1928. Some of the gold exports went to France and France returned to the gold standard with its undervalued currency. The loss of gold from Britain eased allowing it to maintain the gold standard.

By early 1928 the Fed was again becoming worried. Stock market prices were rising even faster and the apparent speculative bubble in the stock market was of some concern to Fed authorities. The Fed was also concerned about the loss of gold and wanted to bring that to an end. To do this they sold securities and, in three steps, raised the discount rate to 5 percent by July 1928. To this point the Federal Reserve Board had largely agreed with district Bank policy changes. However, problems began to develop.

During the stock market boom of the late 1920s the Federal Reserve Board preferred to use “moral suasion” rather than increases in discount rates to lessen member bank borrowing. The New York City bank insisted that moral suasion would not work unless backed up by literal credit rationing on a bank by bank basis which they, and the other district banks, were unwilling to do. They insisted that discount rates had to be increased. The Federal Reserve Board countered that this general policy change would slow down economic activity in general rather than be specifically targeted to stock market speculation. The result was that little was done for a year. Rates were not raised but no open market purchases were undertaken. Rates were finally raised to 6 percent in August of 1929. By that time the contraction had already begun. In late October the stock market crashed, and America slid into the Great Depression.

In November, following the stock market crash the Fed reduced discount rates to 4.5 percent. In January they again decreased discount rates and began a series of discount rate decreases until the rate reached 2.5 percent at the end of 1930. No further open market operations were undertaken for the next six months. As banks reduced their discounting in 1930, the stock of money declined. There was a banking crisis in the southeast in November and December of 1930, and in its wake the public’s holding of currency relative to deposits and banks’ reserve ratios began to rise and continued to do so through the end of the Great Depression.

Conclusion

Though some disagree, there is growing evidence that the behavior of the American economy in the 1920s did not cause the Great Depression. The depressed 1930s were not “retribution” for the exuberant growth of the 1920s. The weakness of a few economic sectors in the 1920s did not forecast the contraction from 1929 to 1933. Rather it was the depression of the 1930s and the Second World War that interrupted the economic growth begun in the 1920s and resumed after the Second World War. Just as the construction of skyscrapers that began in the 1920s resumed in the 1950s, so did real economic growth and progress resume. In retrospect we can see that the introduction and expansion of new technologies and industries in the 1920s, such as autos, household electric appliances, radio, and electric utilities, are echoed in the 1990s in the effects of the expanding use and development of the personal computer and the rise of the internet. The 1920s have much to teach us about the growth and development of the American economy.

References

Adams, Walter, ed. The Structure of American Industry, 5th ed. New York: Macmillan Publishing Co., 1977.

Aldcroft, Derek H. From Versailles to Wall Street, 1919-1929. Berkeley: The University of California Press, 1977.

Allen, Frederick Lewis. Only Yesterday. New York: Harper and Sons, 1931.

Alston, Lee J. “Farm Foreclosures in the United States During the Interwar Period.” The Journal of Economic History 43, no. 4 (1983): 885-904.

Alston, Lee J., Wayne A. Grove, and David C. Wheelock. “Why Do Banks Fail? Evidence from the 1920s.” Explorations in Economic History 31 (1994): 409-431.

Ankli, Robert. “Horses vs. Tractors on the Corn Belt.” Agricultural History 54 (1980): 134-148.

Ankli, Robert and Alan L. Olmstead. “The Adoption of the Gasoline Tractor in California.” Agricultural History 55 (1981):— 213-230.

Appel, Joseph H. The Business Biography of John Wanamaker, Founder and Builder. New York: The Macmillan Co., 1930.

Baker, Jonathan B. “Identifying Cartel Pricing Under Uncertainty: The U.S. Steel Industry, 1933-1939.” The Journal of Law and Economics 32 (1989): S47-S76.

Barger, E. L, et al. Tractors and Their Power Units. New York: John Wiley and Sons, 1952.

Barnouw, Eric. A Tower in Babel: A History of Broadcasting in the United States: Vol. I—to 1933. New York: Oxford University Press, 1966.

Barnouw, Eric. The Golden Web: A History of Broadcasting in the United States: Vol. II—1933 to 1953. New York: Oxford University Press, 1968.

Beasley, Norman. Main Street Merchant: The Story of the J. C. Penney Company. New York: Whittlesey House, 1948.

Beckman, Theodore N. and Herman C. Nolen. The Chain Store Problem: A Critical Analysis. New York: McGraw-Hill Book Co., 1938.

Benson, Susan Porter. Counter Cultures: Saleswomen, Managers, and Customers in American Department Stores, 1890-1940. Urbana, IL: University of Illinois Press, 1986.

Bernstein, Irving. The Lean Years: A History of the American Worker, 1920-1933. Boston: Houghton Mifflin Co., 1960.

Bernstein, Michael A. The Great Depression: Delayed Recovery and Economic Change in America, 1929-1939. New York: Cambridge University Press, 1987.

Bishop, Jerry E. “Stock Market Experiment Suggests Inevitability of Booms and Busts.” The Wall Street Journal, 17 November, 1987.

Board of Governors of the Federal Reserve System. Banking and Monetary Statistics. Washington: USGOP, 1943.

Bogue, Allan G. “Changes in Mechanical and Plant Technology: The Corn Belt, 1910-1940.” The Journal of Economic History 43 (1983): 1-26.

Breit, William and Elzinga, Kenneth. The Antitrust Casebook: Milestones in Economic Regulation, 2d ed. Chicago: The Dryden Press, 1989.

Bright, Arthur A., Jr. The Electric Lamp Industry: Technological Change and Economic Development from 1800 to 1947. New York: Macmillan, 1947.

Brody, David. Labor in Crisis: The Steel Strike. Philadelphia: J. B. Lippincott Co., 1965.

Brooks, John. Telephone: The First Hundred Years. New York: Harper and Row, 1975.

Brown, D. Clayton. Electricity for Rural America: The Fight for the REA. Westport, CT: The Greenwood Press, 1980.

Brown, William A., Jr. The International Gold Standard Reinterpreted, 1914-1934, 2 vols. New York: National Bureau of Economic Research, 1940.

Brunner, Karl and Allen Meltzer. “What Did We Learn from the Monetary Experience of the United States in the Great Depression?” Canadian Journal of Economics 1 (1968): 334-48.

Bryant, Keith L., Jr., and Henry C. Dethloff. A History of American Business. Englewood Cliffs, NJ: Prentice-Hall, Inc., 1983.

Bucklin, Louis P. Competition and Evolution in the Distributive Trades. Englewood Cliffs, NJ: Prentice-Hall, 1972.

Bullock, Roy J. “The Early History of the Great Atlantic & Pacific Tea Company,” Harvard Business Review 11 (1933): 289-93.

Bullock, Roy J. “A History of the Great Atlantic & Pacific Tea Company Since 1878.” Harvard Business Review 12 (1933): 59-69.

Cecchetti, Stephen G. “Understanding the Great Depression: Lessons for Current Policy.” In The Economics of the Great Depression, Edited by Mark Wheeler. Kalamazoo, MI: W. E. Upjohn Institute for Employment Research, 1998.

Chandler, Alfred D., Jr. Strategy and Structure: Chapters in the History of the American Industrial Enterprise. Cambridge, MA: The M.I.T. Press, 1962.

Chandler, Alfred D., Jr. The Visible Hand: The Managerial Revolution in American Business. Cambridge, MA: the Belknap Press Harvard University Press, 1977.

Chandler, Alfred D., Jr. Giant Enterprise: Ford, General Motors, and the American Automobile Industry. New York: Harcourt, Brace, and World, 1964.

Chester, Giraud, and Garnet R. Garrison. Radio and Television: An Introduction. New York: Appleton-Century Crofts, 1950.

Clewett, Richard C. “Mass Marketing of Consumers’ Goods.” In The Growth of the American Economy, 2d ed. Edited by Harold F. Williamson. Englewood Cliffs, NJ: Prentice-Hall, 1951.

Cochran, Thomas C. 200 Years of American Business. New York: Delta Books, 1977.

Cohen, Yehoshua S. Diffusion of an Innovation in an Urban System: The Spread of Planned Regional Shopping Centers in the United States, 1949-1968. Chicago: The University of Chicago, Department of Geography, Research Paper No. 140, 1972.

Daley, Robert. An American Saga: Juan Trippe and His Pan American Empire. New York: Random House, 1980.

De Long, J. Bradford, and Andre Shleifer. “The Stock Market Bubble of 1929: Evidence from Closed-end Mutual Funds.” The Journal of Economic History 51 (September 1991): 675-700.

Clarke, Sally. “New Deal Regulation and the Revolution in American Farm Productivity: A Case Study of the Diffusion of the Tractor in the Corn Belt, 1920-1940.” The Journal of Economic History 51, no. 1 (1991): 105-115.

Cohen, Avi. “Technological Change as Historical Process: The Case of the U.S. Pulp and Paper Industry, 1915-1940.” The Journal of Economic History 44 (1984): 775-79.

Davies, R. E. G. A History of the World’s Airlines. London: Oxford University Press, 1964.

Dearing, Charles L., and Wilfred Owen. National Transportation Policy. Washington: The Brookings Institution, 1949.

Degen, Robert A. The American Monetary System: A Concise Survey of Its Evolution Since 1896. Lexington, MA: Lexington Books, 1987.

De Long, J. Bradford and Andre Shleifer. “The Stock Market Bubble of 1929: Evidence from Closed-end Mutual Funds.” The Journal of Economic History 51 (1991): 675-700.

Devine, Warren D., Jr. “From Shafts to Wires: Historical Perspectives on Electrification.” The Journal of Economic History 43 (1983): 347-372.

Eckert, Ross D., and George W. Hilton. “The Jitneys.” The Journal of Law and Economics 15 (October 1972): 293-326.

Eichengreen, Barry, ed. The Gold Standard in Theory and History. New York: Metheun, 1985.

Barry Eichengreen. “The Political Economy of the Smoot-Hawley Tariff.” Research in Economic History 12 (1989): 1-43.

Eichengreen, Barry. Golden Fetters: The Gold Standard and the Great Depression, 1919-1939. New York: Oxford University Press, 1992.

Eis, Carl. “The 1919-1930 Merger Movement in American Industry.” The Journal of Law and Economics XII (1969): 267-96.

Emmet, Boris, and John E. Jeuck. Catalogues and Counters: A History of Sears Roebuck and Company. Chicago: University of Chicago Press, 1950.

Fearon, Peter. War, Prosperity, & Depression: The U.S. Economy, 1947-1945. Lawrence, KS: University of Kansas Press, 1987.

Field, Alexander J. “The Most Technologically Progressive Decade of the Century.” The American Economic Review 93 (2003): 1399-1413.

Fischer, Claude. “The Revolution in Rural Telephony, 1900-1920.” Journal of Social History 21 (1987): 221-38.

Fischer, Claude. “Technology’s Retreat: The Decline of Rural Telephony in the United States, 1920-1940.” Social Science History, Vol. 11 (Fall 1987), pp. 295-327.

Fisher, Irving. The Stock Market Crash—and After. New York: Macmillan, 1930.

French, Michael J. “Structural Change and Competition in the United States Tire Industry, 1920-1937.” Business History Review 60 (1986): 28-54.

French, Michael J. The U.S. Tire Industry. Boston: Twayne Publishers, 1991.

Fricke, Ernest B. “The New Deal and the Modernization of Small Business: The McCreary Tire and Rubber Company, 1930-1940.” Business History Review 56 (1982):— 559-76.

Friedman, Milton, and Anna J. Schwartz. A Monetary History of the United States, 1867-1960. Princeton: Princeton University Press, 1963.

Galbraith, John Kenneth. The Great Crash. Boston: Houghton Mifflin, 1954.

Garnet, Robert W. The Telephone Enterprise: The Evolution of the Bell System’s Horizontal Structure, 1876-1900. Baltimore: The Johns Hopkins University Press, 1985.

Gideonse, Max. “Foreign Trade, Investments, and Commercial Policy.” In The Growth of the American Economy, 2d ed. Edited by Harold F. Williamson. Englewood Cliffs, NJ: Prentice-Hall, 1951.

Giedion, Simon. Mechanization Takes Command. New York: Oxford University Press, 1948.

Gordon, Robert Aaron. Economic Instability and Growth: The American Record. New York: Harper and Row, 1974.

Gray, Roy Burton. Development of the Agricultural Tractor in the United States, 2 vols. Washington, D. C.: USGPO, 1954.

Gunderson, Gerald. An Economic History of America. New York: McGraw-Hill, 1976.

Hadwiger, Don F., and Clay Cochran. “Rural Telephones in the United States.” Agricultural History 58 (July 1984): 221-38.

Hamilton, James D. “Monetary Factors in the Great Depression.” Journal of Monetary Economics 19 (1987): 145-169.

Hamilton, James D. “The Role of the International Gold Standard in Propagating the Great Depression.” Contemporary Policy Issues 6 (1988): 67-89.

Hayek, Friedrich A. Prices and Production. New York: Augustus M. Kelly reprint of 1931 edition.

Hayford, Marc and Carl A. Pasurka, Jr. “The Political Economy of the Fordney-McCumber and Smoot-Hawley Tariff Acts.” Explorations in Economic History 29 (1992): 30-50.

Hendrickson, Robert. The Grand Emporiums: The Illustrated History of America’s Great Department Stores. Briarcliff Manor, NY: Stein and Day, 1979.

Herbst, Anthony F., and Joseph S. K. Wu. “Some Evidence of Subsidization of the U.S. Trucking Industry, 1900-1920.” The Journal of Economic History— 33 (June 1973): 417-33.

Higgs, Robert. Crisis and Leviathan: Critical Episodes in the Growth of American Government. New York: Oxford University Press, 1987.

Hilton, George W., and John Due. The Electric Interurban Railways in America. Stanford: Stanford University Press, 1960.

Hoffman, Elizabeth and Gary D. Liebcap. “Institutional Choice and the Development of U.S. Agricultural Policies in the 1920s.” The Journal of Economic History 51 (1991): 397-412.

Holt, Charles F. “Who Benefited from the Prosperity of the Twenties?” Explorations in Economic History 14 (1977): 277-289.

Hower, Ralph W. History of Macy’s of New York, 1858-1919. Cambridge, MA: Harvard University Press, 1946.

Hubbard, R. Glenn, Ed. Financial Markets and Financial Crises. Chicago: University of Chicago Press, 1991.

Hunter, Louis C. “Industry in the Twentieth Century.” In The Growth of the American Economy, 2d ed., edited by Harold F. Williamson. Englewood Cliffs, NJ: Prentice-Hall, 1951.

Jerome, Harry. Mechanization in Industry. New York: National Bureau of Economic Research, 1934.

Johnson, H. Thomas. “Postwar Optimism and the Rural Financial Crisis.” Explorations in Economic History 11, no. 2 (1973-1974): 173-192.

Jones, Fred R. and William H. Aldred. Farm Power and Tractors, 5th ed. New York: McGraw-Hill, 1979.

Keller, Robert. “Factor Income Distribution in the United States During the 20’s: A Reexamination of Fact and Theory.” The Journal of Economic History 33 (1973): 252-95.

Kelly, Charles J., Jr. The Sky’s the Limit: The History of the Airlines. New York: Coward-McCann, 1963.

Kindleberger, Charles. The World in Depression, 1929-1939. Berkeley: The University of California Press, 1973.

Klebaner, Benjamin J. Commercial Banking in the United States: A History. New York: W. W. Norton and Co., 1974.

Kuznets, Simon. Shares of Upper Income Groups in Income and Savings. New York: NBER, 1953.

Lebhar, Godfrey M. Chain Stores in America, 1859-1962. New York: Chain Store Publishing Corp., 1963.

Lewis, Cleona. America’s Stake in International Investments. Washington: The Brookings Institution, 1938.

Livesay, Harold C. and Patrick G. Porter. “Vertical Integration in American Manufacturing, 1899-1948.” The Journal of Economic History 29 (1969): 494-500.

Lipartito, Kenneth. The Bell System and Regional Business: The Telephone in the South, 1877-1920. Baltimore: The Johns Hopkins University Press, 1989.

Liu, Tung, Gary J. Santoni, and Courteney C. Stone. “In Search of Stock Market Bubbles: A Comment on Rappoport and White.” The Journal of Economic History 55 (1995): 647-654.

Lorant, John. “Technological Change in American Manufacturing During the 1920s.” The Journal of Economic History 33 (1967): 243-47.

MacDonald, Forrest. Insull. Chicago: University of Chicago Press, 1962.

Marburg, Theodore. “Domestic Trade and Marketing.” In The Growth of the American Economy, 2d ed. Edited by Harold F. Williamson. Englewood Cliffs, NJ: Prentice-Hall, 1951.

Markham, Jesse. “Survey of the Evidence and Findings on Mergers.” In Business Concentration and Price Policy, National Bureau of Economic Research. Princeton: Princeton University Press, 1955.

Markin, Rom J. The Supermarket: An Analysis of Growth, Development, and Change. Rev. ed. Pullman, WA: Washington State University Press, 1968.

McCraw, Thomas K. TVA and the Power Fight, 1933-1937. Philadelphia: J. B. Lippincott, 1971.

McCraw, Thomas K. and Forest Reinhardt. “Losing to Win: U.S. Steel’s Pricing, Investment Decisions, and Market Share, 1901-1938.” The Journal of Economic History 49 (1989): 592-620.

McMillin, W. Douglas and Randall E. Parker. “An Empirical Analysis of Oil Price Shocks in the Interwar Period.” Economic Inquiry 32 (1994): 486-497.

McNair, Malcolm P., and Eleanor G. May. The Evolution of Retail Institutions in the United States. Cambridge, MA: The Marketing Science Institute, 1976.

Mercer, Lloyd J. “Comment on Papers by Scheiber, Keller, and Raup.” The Journal of Economic History 33 (1973): 291-95.

Mintz, Ilse. Deterioration in the Quality of Foreign Bonds Issued in the United States, 1920-1930. New York: National Bureau of Economic Research, 1951.

Mishkin, Frederic S. “Asymmetric Information and Financial Crises: A Historical Perspective.” In Financial Markets and Financial Crises Edited by R. Glenn Hubbard. Chicago: University of Chicago Press, 1991.

Morris, Lloyd. Not So Long Ago. New York: Random House, 1949.

Mosco, Vincent. Broadcasting in the United States: Innovative Challenge and Organizational Control. Norwood, NJ: Ablex Publishing Corp., 1979.

Moulton, Harold G. et al. The American Transportation Problem. Washington: The Brookings Institution, 1933.

Mueller, John. “Lessons of the Tax-Cuts of Yesteryear.” The Wall Street Journal, March 5, 1981.

Musoke, Moses S. “Mechanizing Cotton Production in the American South: The Tractor, 1915-1960.” Explorations in Economic History 18 (1981): 347-75.

Nelson, Daniel. “Mass Production and the U.S. Tire Industry.” The Journal of Economic History 48 (1987): 329-40.

Nelson, Ralph L. Merger Movements in American Industry, 1895-1956. Princeton: Princeton University Press, 1959.

Niemi, Albert W., Jr., U.S. Economic History, 2nd ed. Chicago: Rand McNally Publishing Co., 1980.

Norton, Hugh S. Modern Transportation Economics. Columbus, OH: Charles E. Merrill Books, Inc., 1963.

Nystrom, Paul H. Economics of Retailing, vol. 1, 3rd ed. New York: The Ronald Press Co., 1930.

Oshima, Harry T. “The Growth of U.S. Factor Productivity: The Significance of New Technologies in the Early Decades of the Twentieth Century.” The Journal of Economic History 44 (1984): 161-70.

Parker, Randall and W. Douglas McMillin. “An Empirical Analysis of Oil Price Shocks During the Interwar Period.” Economic Inquiry 32 (1994): 486-497.

Parker, Randall and Paul Flacco. “Income Uncertainty and the Onset of the Great Depression.” Economic Inquiry 30 (1992): 154-171.

Parker, William N. “Agriculture.” In American Economic Growth: An Economist’s History of the United States, edited by Lance E. Davis, Richard A. Easterlin, William N. Parker, et. al. New York: Harper and Row, 1972.

Passer, Harold C. The Electrical Manufacturers, 1875-1900. Cambridge: Harvard University Press, 1953.

Peak, Hugh S., and Ellen F. Peak. Supermarket Merchandising and Management. Englewood Cliffs, NJ: Prentice-Hall, 1977.

Pilgrim, John. “The Upper Turning Point of 1920: A Reappraisal.” Explorations in Economic History 11 (1974): 271-98.

Rae, John B. Climb to Greatness: The American Aircraft Industry, 1920-1960. Cambridge: The M.I.T. Press, 1968.

Rae, John B. The American Automobile Industry. Boston: Twayne Publishers, 1984.

Rappoport, Peter and Eugene N. White. “Was the Crash of 1929 Expected?” American Economic Review 84 (1994): 271-281.

Rappoport, Peter and Eugene N. White. “Was There a Bubble in the 1929 Stock Market?” The Journal of Economic History 53 (1993): 549-574.

Resseguie, Harry E. “Alexander Turney Stewart and the Development of the Department Store, 1823-1876,” Business History Review 39 (1965): 301-22.

Rezneck, Samuel. “Mass Production and the Use of Energy.” In The Growth of the American Economy, 2d ed., edited by Harold F. Williamson. Englewood Cliffs, NJ: Prentice-Hall, 1951.

Rockwell, Llewellyn H., Jr., ed. The Gold Standard: An Austrian Perspective. Lexington, MA: Lexington Books, 1985.

Romer, Christina. “Spurious Volatility in Historical Unemployment Data.” The Journal of Political Economy 91 (1986): 1-37.

Romer, Christina. “New Estimates of Prewar Gross National Product and Unemployment.” Journal of Economic History 46 (1986): 341-352.

Romer, Christina. “World War I and the Postwar Depression: A Reinterpretation Based on Alternative Estimates of GNP.” Journal of Monetary Economics 22 (1988): 91-115.

Romer, Christina and Jeffrey A. Miron. “A New Monthly Index of Industrial Production, 1884-1940.” Journal of Economic History 50 (1990): 321-337.

Romer, Christina. “The Great Crash and the Onset of the Great Depression.” Quarterly Journal of Economics 105 (1990): 597-625.

Romer, Christina. “Remeasuring Business Cycles.” The Journal of Economic History 54 (1994): 573-609.

Roose, Kenneth D. “The Production Ceiling and the Turning Point of 1920.” American Economic Review 48 (1958): 348-56.

Rosen, Philip T. The Modern Stentors: Radio Broadcasters and the Federal Government, 1920-1934. Westport, CT: The Greenwood Press, 1980.

Rosen, Philip T. “Government, Business, and Technology in the 1920s: The Emergence of American Broadcasting.” In American Business History: Case Studies. Edited by Henry C. Dethloff and C. Joseph Pusateri. Arlington Heights, IL: Harlan Davidson, 1987.

Rothbard, Murray N. America’s Great Depression. Kansas City: Sheed and Ward, 1963.

Sampson, Roy J., and Martin T. Ferris. Domestic Transportation: Practice, Theory, and Policy, 4th ed. Boston: Houghton Mifflin Co., 1979.

Samuelson, Paul and Everett E. Hagen. After the War—1918-1920. Washington: National Resources Planning Board, 1943.

Santoni, Gary and Gerald P. Dwyer, Jr. “The Great Bull Markets, 1924-1929 and 1982-1987: Speculative Bubbles or Economic Fundamentals?” Federal Reserve Bank of St. Louis Review 69 (1987): 16-29.

Santoni, Gary, and Gerald P. Dwyer, Jr. “Bubbles vs. Fundamentals: New Evidence from the Great Bull Markets.” In Crises and Panics: The Lessons of History. Edited by Eugene N. White. Homewood, IL: Dow Jones/Irwin, 1990.

Scherer, Frederick M. and David Ross. Industrial Market Structure and Economic Performance, 3d ed. Boston: Houghton Mifflin, 1990.

Schlebecker, John T. Whereby We Thrive: A History of American Farming, 1607-1972. Ames, IA: The Iowa State University Press, 1975.

Shepherd, James. “The Development of New Wheat Varieties in the Pacific Northwest.” Agricultural History 54 (1980): 52-63.

Sirkin, Gerald. “The Stock Market of 1929 Revisited: A Note.” Business History Review 49 (Fall 1975): 233-41.

Smiley, Gene. The American Economy in the Twentieth Century. Cincinnati: South-Western Publishing Co., 1994.

Smiley, Gene. “New Estimates of Income Shares During the 1920s.” In Calvin Coolidge and the Coolidge Era: Essays on the History of the 1920s, edited by John Earl Haynes, 215-232. Washington, D.C.: Library of Congress, 1998.

Smiley, Gene. “A Note on New Estimates of the Distribution of Income in the 1920s.” The Journal of Economic History 60, no. 4 (2000): 1120-1128.

Smiley, Gene. Rethinking the Great Depression: A New View of Its Causes and Consequences. Chicago: Ivan R. Dee, 2002.

Smiley, Gene, and Richard H. Keehn. “Margin Purchases, Brokers’ Loans and the Bull Market of the Twenties.” Business and Economic History. 2d series. 17 (1988): 129-42.

Smiley, Gene and Richard H. Keehn. “Federal Personal Income Tax Policy in the 1920s.” the Journal of Economic History 55, no. 2 (1995): 285-303.

Sobel, Robert. The Entrepreneuers: Explorations Within the American Business Tradition. New York: Weybright and Talley, 1974.

Soule, George. Prosperity Decade: From War to Depression: 1917-1929. New York: Holt, Rinehart, and Winston, 1947.

Stein, Herbert. The Fiscal Revolution in America, revised ed. Washington, D.C.: AEI Press, 1990.

Stigler, George J. “Monopoly and Oligopoly by Merger.” American Economic Review, 40 (May 1950): 23-34.

Sumner, Scott. “The Role of the International Gold Standard in Commodity Price Deflation: Evidence from the 1929 Stock Market Crash.” Explorations in Economic History 29 (1992): 290-317.

Swanson, Joseph and Samuel Williamson. “Estimates of National Product and Income for the United States Economy, 1919-1941.” Explorations in Economic History 10, no. 1 (1972): 53-73.

Temin, Peter. “The Beginning of the Depression in Germany.” Economic History Review. 24 (May 1971): 240-48.

Temin, Peter. Did Monetary Forces Cause the Great Depression. New York: W. W. Norton, 1976.

Temin, Peter. The Fall of the Bell System. New York: Cambridge University Press, 1987.

Temin, Peter. Lessons from the Great Depression. Cambridge, MA: The M.I.T. Press, 1989.

Thomas, Gordon, and Max Morgan-Witts. The Day the Bubble Burst. Garden City, NY: Doubleday, 1979.

Ulman, Lloyd. “The Development of Trades and Labor Unions,” In American Economic History, edited by Seymour E. Harris, chapter 14. New York: McGraw-Hill Book Co., 1961.

Ulman Lloyd. The Rise of the National Trade Union. Cambridge, MA: Harvard University Press, 1955.

U.S. Department of Commerce, Bureau of the Census. Historical Statistics of the United States: Colonial Times to 1970, 2 volumes. Washington, D.C.: USGPO, 1976.

Walsh, Margaret. Making Connections: The Long Distance Bus Industry in the U.S.A. Burlington, VT: Ashgate, 2000.

Wanniski, Jude. The Way the World Works. New York: Simon and Schuster, 1978.

Weiss, Leonard W. Cast Studies in American Industry, 3d ed. New York: John Wiley & Sons, 1980.

Whaples, Robert. “Hours of Work in U.S. History.” EH.Net Encyclopedia, edited by Robert Whaples, August 15 2001 URL— http://www.eh.net/encyclopedia/contents/whaples.work.hours.us.php

Whatley, Warren. “Southern Agrarian Labor Contracts as Impediments to Cotton Mechanization.” The Journal of Economic History 87 (1987): 45-70.

Wheelock, David C. and Subal C. Kumbhakar. “The Slack Banker Dances: Deposit Insurance and Risk-Taking in the Banking Collapse of the 1920s.” Explorations in Economic History 31 (1994): 357-375.

White, Eugene N. “The Stock Market Boom and Crash of 1929 Revisited.” The Journal of Economic Perspectives. 4 (Spring 1990): 67-83.

White, Eugene N., Ed. Crises and Panics: The Lessons of History. Homewood, IL: Dow Jones/Irwin, 1990.

White, Eugene N. “When the Ticker Ran Late: The Stock Market Boom and Crash of 1929.” In Crises and Panics: The Lessons of History Edited by Eugene N. White. Homewood, IL: Dow Jones/Irwin, 1990.

White, Eugene N. “Stock Market Bubbles? A Reply.” The Journal of Economic History 55 (1995): 655-665.

White, William J. “Economic History of Tractors in the United States.” EH.Net Encyclopedia, edited by Robert Whaples, August 15 2001 URL http://www.eh.net/encyclopedia/contents/white.tractors.history.us.php

Wicker, Elmus. “Federal Reserve Monetary Policy, 1922-1933: A Reinterpretation.” Journal of Political Economy 73 (1965): 325-43.

Wicker, Elmus. “A Reconsideration of Federal Reserve Policy During the 1920-1921 Depression.” The Journal of Economic History 26 (1966): 223-38.

Wicker, Elmus. Federal Reserve Monetary Policy, 1917-1933. New York: Random House, 1966.

Wigmore, Barrie A. The Crash and Its Aftermath. Westport, CT: Greenwood Press, 1985.

Williams, Raburn McFetridge. The Politics of Boom and Bust in Twentieth-Century America. Minneapolis/St. Paul: West Publishing Co., 1994.

Williamson, Harold F., et al. The American Petroleum Industry: The Age of Energy, 1899-1959. Evanston, IL: Northwestern University Press, 1963.

Wilson, Thomas. Fluctuations in Income and Employment, 3d ed. New York: Pitman Publishing, 1948.

Wilson, Jack W., Richard E. Sylla, and Charles P. Jones. “Financial Market Panics and Volatility in the Long Run, 1830-1988.” In Crises and Panics: The Lessons of History Edited by Eugene N. White. Homewood, IL: Dow Jones/Irwin, 1990.

Winkler, John Kennedy. Five and Ten: The Fabulous Life of F. W. Woolworth. New York: R. M. McBride and Co., 1940.

Wood, Charles. “Science and Politics in the War on Cattle Diseases: The Kansas Experience, 1900-1940.” Agricultural History 54 (1980): 82-92.

Wright, Gavin. Old South, New South: Revolutions in the Southern Economy Since the Civil War. New York: Basic Books, 1986.

Wright, Gavin. “The Origins of American Industrial Success, 1879-1940.” The American Economic Review 80 (1990): 651-668.

Citation: Smiley, Gene. “US Economy in the 1920s”. EH.Net Encyclopedia, edited by Robert Whaples. June 29, 2004. URL http://eh.net/encyclopedia/the-u-s-economy-in-the-1920s/

Rural Electrification Administration

Laurence J. Malone, Hartwick College

Market Failure in Delivering Electricity to Rural Areas Before 1930

The advent of the electric industry in the 1880s ushered forward a rapidly expanding domestic market in the United States. The physical scale of the electric utility industry mirrored the national economy that sprung up with it — massive power generation facilities, substantial capital investments for network construction, high maintenance costs, and production technologies that were obtrusive and degrading to the natural environment. But the adaptation of electricity to manufacturing and services further liberated firms from having to locate in proximity to moving water, and with rising immigration from liberal naturalization policies accelerated the pace of economic growth.

While urban households and businesses gained electricity in large numbers after 1910, the more sparsely populated rural regions of the United States were generally without electricity and were denied the commercial progress it brought. Electrical service providers ignored the rural market due to its high network construction costs and the prospect of meager immediate profits. From the supplier standpoint, rural homes, farms and businesses were stretched too far apart and offered too little demand relative to the cost of investment. Unlike their counterparts in cities, rural residents were expected to advance the financing for the necessary infrastructure to the firm supplying electrical power from a distant location. In rural areas that were serviced, electrical rates in the 1920s were commonly twice as high as urban rates (Brown, 1980, p. 5).

The disincentives to investment in electrical infrastructure left rural America increasingly distant from the rising standard of living in the urban and emerging suburban settings of the national economy. Lacking the greater productive efficiencies secured by the adaptation of electricity, productivity growth in agriculture, the industry that served as the central organizing principle for rural life, lagged other sectors in the economy over the 1880 to 1930 period. Rural demands for the newest manufactured items found in urban American homes — telephones, radios, refrigerators, washing machines, hot water heaters, and household appliances — were latent. Given the widening disparities between rural and urban settings, it was not surprising that rural Americans reverted to the cooperative lifestyles of the nineteenth century as the urban markets for their agricultural products collapsed in the Great Depression.

The Origins of the New Deal Rural Electrification Initiative

The failure of the market to deliver affordable electricity to rural locales led to over thirty state rural power initiatives during the 1920s and early 1930s, as President Herbert Hoover argued that responsibility for rural electrification rested with state government (Brown, 1980, pp. 6 and 29). Governor of New York Franklin Delano Roosevelt aggressively promoted rural electrification, and the New York Power Authority was created in 1931 to develop a substantial new source of inexpensive hydroelectric generating capacity along the St. Lawrence River (Brown, 1980, p. 32). But the Depression led to the collapse of many state power authorities and further raised the bar in discouraging private investment in rural electrical infrastructure. When Roosevelt assumed the Presidency on March 4, 1933, the market for new rural electrification investment no longer existed.

While Roosevelt clearly understood the benefits electrification would bring to the rural American economy, it was Morris L. Cooke who provided vision and leadership to rural electrification efforts under the New Deal. Cooke had led Giant Power, the Pennsylvania rural electrification program, and Roosevelt invited him to address the problem at the federal level. Using data supplied by the utility industry, electrical engineers, Giant Power, and the U. S. Census of 1930, Cooke authored an eleven-page report in 1934 that provided the foundation for a federal rural electrification program. In an appendix to the report, Cooke included detailed estimates of the cost per mile of “high wire” distribution lines and suitable construction materials and standards to use in rural regions. He wrote: “This cost of the line with transformers and meters included for one to three customers will range from $500 to $800 the mile. To amortize this cost in twenty years at four percent involves a cost to each of the three customers on a mile of line of about one dollar a month” (Cooke, 1934, p. 6). Studies commissioned by Cooke suggested that household payments for electricity would be a minimum of one dollar per month for the first ten kilowatts of electricity, three cents per kilowatt for the next forty kilowatts, and two cents per kilowatt for the remaining balance (Cooke, 1934, p. 8). All told, the estimated cost to provide electricity to 500,000 farms, at an average of three farms per mile of rural road, was $112 million, or $225 per farm. In a worst case scenario, if new generating facilities were needed for all 500,000 farms, the 333 power plants that would have to be constructed would cost an additional $87 million. Consequently, Cooke’s high-end estimate for the complete electrical infrastructure needed to bring electrical service to 500,000 rural American farms was $200 million, or $400 per farm (Cooke, 1934, p. 9). The concluding paragraph of his report states that a new “rural electrification agency” should build the necessary infrastructure since the market would not otherwise furnish electricity to sparsely populated localities (Cooke, 1934, p.11).

Presidential Executive Order 7037 created the Rural Electrification Administration, or R.E.A., on May 11, 1935. With passage of the Norris-Rayburn Act the following year, Congress authorized $410 million in appropriations for a ten-year program to electrify American farms. The rural cooperative model, which had been successfully employed by Giant Power in Pennsylvania, was adopted by the R.E.A., with Congressional Representatives serving as the administrative liaisons for the formation of cooperatives within their districts (Brown, 1980, p. 68). Cooperatives were not-for-profit consumer-owned firms organized to provide electric service to member-customers. Each cooperative was typically governed by a board of directors elected from the ranks of its residential customers. The board established rates and policies for the cooperative, and hired a general manager to conduct the ordinary business of providing electricity to customers within the service region. Only two restrictions were placed on the formation of cooperatives: they could not compete directly with utility companies, and coop members could not live in areas served by utilities or within a municipality with a population of 1500 or more (Brown, 1980, p. 69).

The R.E.A. was essentially a government-financing agency providing subsidized loans to private companies, public agencies, or cooperatives for the construction of electrical supply infrastructure in rural regions. The loans were guaranteed by the federal government and had an attractive interest rate and a generous repayment schedule of twenty-five years. The interest rate initially matched the federal funds rate when the loan was executed, but after 1944 the rate was fixed at two percent (Joskow and Schmalensee, 1983, p. 17). R.E.A. loans furnished the incentive for rural electric cooperatives to form and connect to the existing electrical network at rates comparable to the national average. R.E.A. cooperatives quickly became one of the largest capital investment projects of the New Deal, and low-cost financing for construction of electrical supply infrastructure was the key provision of the program (Brown, 1980, p 41).

R.E.A.: The Outcomes

Five decades after urban municipal electrical distribution system first appeared in the United States, the process of introducing rural areas to the twentieth-century economy began with the creation of the Rural Electrification Administration. The R.E.A. overcame the unwillingness of private utilities to bring power to households, farms and businesses in sparsely populated regions where profits were too low. The failure of the market, which left rural areas literally and figuratively in the dark, required an aggressive federal initiative to insure that residents of sparsely populated areas were no longer comparatively disadvantaged in the twentieth-century American economy.

The R.E.A. is considered one of the most immediate and profound successes in the history of federal policy-making for the national economy. By the end of 1938, just two years after its inception, 350 cooperative projects in 45 states were delivering electricity to 1.5 million farms (Schurr, Burwell, Devine Jr., Sonenblum, 1990, p. 234). The success of the R.E.A. over the next two decades was even more impressive, especially as a self-sustained financing agency. By the mid-1950s nearly all American farms had electrical service that was provided through the R.E.A. or by other means. Monies lent through the R.E.A. were also largely repaid, as the default rate was less than one percent (Brown, 1980, p 114). Moreover, as with any significant surge in investment, the accompanying new demands for household electrical appliances spurred growth in home appliance manufacturing, and spawned the electrical and plumbing trades in rural communities. Electrical service also brought revolutionary new mediums of communication to rural farms, firms and households. Radio was followed by television, and the new streams of information narrowed the cultural, educational and commercial divide between urban and rural America. Rural electrification contributed to the rapid growth of suburbs, and helped create a more integrated national market.

The REA Today

The R.E.A., originally created by executive order in 1935, was authorized as a federal agency within the United States Department of Agriculture (U.S.D.A.) when Congress passed and President Roosevelt signed the Rural Electrification Act of 1936. After 1949, the R.E.A. was authorized to finance the formation of telephone cooperatives, through low-interest federal loans, to extend telephone service to underserved rural areas. Repeatedly extending the original authorization of a ten-year program of subsidies, the federal government actively promoted rural electrification through the R.E.A. until the end of the twentieth century. In 1994, Congress established the Rural Utilities Service (R.U.S.) as a federal agency within the U.S.D.A., and it absorbed the R.E.A. and its responsibilities for rural electrification and telephone service.

Although the subsidized loans for the R.E.A. helped bring electricity and improved living standards to remote rural locales during the Great Depression, controversy has surrounded the agency in recent decades. Critics argue that the costs of the subsidies for providing electricity and telephone service must be weighed against the benefits. Beneficiaries of the R.E.A. enjoyed considerable interest rate subsidies throughout the second half of the twentieth century, long after the end of the Depression. Today, almost all rural Americans have electric service and 98 percent have telephone service. Critics of federally subsidized electrical cooperatives suggest that service would not be reduced if the subsidies were to end.

Table 1 compares the share of the electric utility market for investor owned companies, publicly owned companies, and rural cooperatives in the United States in 1998. Cooperatives served eleven percent of the nation’s population and delivered nine percent of kilowatt hours sold. The data show that in contrast to investor or publicly owned firms, the rural market continues to impose hardships to producers for costs and revenues. Rural electric cooperatives account for a much smaller portion of revenue per mile of wire ($7,873) than investor or publicly owned electrical utilities, and a greater portion of distribution plant investment per consumer ($2,352).

Table 1: Electric Utility Market Comparisons, United States, 1998

Investor Owned Publicly Owned Rural Cooperatives
Number of Organizations 239 2009 930
Customers, % of U.S. total 74% 15% 11%
Revenues, % of U.S. total 77% 14% 9%
Kilowatt hour sales, % of total 75% 15% 9%
Number of consumers, per mile of line 33 43 6
Revenue per mile of line, in dollars 60,921 70,670 7,873
Distribution plant investment per consumer, in dollars 1,890 1,870 2,352
Assets, in $ billions 606 126 70

Source: National Rural Electric Cooperative Association Strategic Analysis, March 1999, www.nreca.org/coops/elecoop3.html

As Table 1 indicates, rural electric cooperatives continue to serve sparsely populated areas in the United States as not-for-profit public utilities. The R.U.S., which oversees rural electric and telephone cooperatives, has even begun to encourage the development of rural municipal water and waste disposal systems. To date, the R.E.A. and R.U.S. have organized nearly $57 billion in federally guaranteed low interest loans for the development of electric and telephone cooperatives. In recent years, despite calls for the elimination of the R.U.S., legislation has been introduced in Congress to extend its authority to offer low interest loans to firms willing to provide high-speed (broadband) Internet access to rural America (Malone, 2000, pp.12-13). As markets further expand, and rural America is comparatively disadvantaged relative to suburban and urban regions, advocates are likely to call for federal initiatives to address the disparities that arise between rural and urban and suburban regions from market failures and disincentives to investment in new forms of infrastructure.

References:

Brown, D.C. Electricity for Rural America. Westport, CT: Greenwood Press, 1980.

Cooke, Morris L. “National Plan for the Advancement of Rural Electrification under Federal Leadership and Control with State and Local Cooperation and as a Wholly Public Enterprise.” Franklin Delano Roosevelt Presidential Library, Hyde Park, NY: Cooke Papers, Box 230, February, 1934.

Cooke, Morris L. “The Early Days of the Rural Electrification Idea, 1914-1936.” American Political Science Review 42 (June 1948).

Joskow, Paul L. and Richard Schmalensee. Markets for Power: An Analysis of Electric Utility Deregulation. Cambridge, Massachusetts: MIT Press, 1983.

Malone, Laurence J. “Commonalities: The R.E.A. and High-Speed Rural Internet Access.” Washington, D.C.: United States Internet Council, www.usic.org, 2000.

National Rural Electric Cooperative Association, Strategic Analysis, March 1999, www.nreca.org/coops/elecoop3.html

Schurr, Sam H., Calvin C. Burwell, Warren D. Devine, and Sidney Sonenblum. Electricity in the American Economy: Agent of Technological Progress. Westport, CT: Contributions in Economics and Economic History, Number 117, Greenwood Press, 1990.

United States Department of Agriculture, Rural Utilities Service homepage, www.usda.gov/rus/.

Citation: Malone, Laurence. “Rural Electrification Administration”. EH.Net Encyclopedia, edited by Robert Whaples. March 16, 2008. URL http://eh.net/encyclopedia/rural-electrification-administration/

Reconstruction Finance Corporation

James Butkiewicz, University of Delaware

Introduction

The Reconstruction Finance Corporation (RFC) was established during the Hoover administration with the primary objective of providing liquidity to, and restoring confidence in the banking system. The banking system experienced extensive pressure during the economic contraction of 1929-1933. During the contraction period, many banks had to suspend business operations and most of these ultimately failed. A number of these suspensions occurred during banking panics, when large numbers of depositors rushed to convert their deposits to cash from fear their bank might fail. Since this period was prior to the establishment of federal deposit insurance, bank depositors lost part or all of their deposits when their bank failed.

During its first thirteen months of operation, the RFC’s primary activity was to make loans to banks and financial institutions. During President Roosevelt’s New Deal, the RFC’s powers were expanded significantly. At various times, the RFC purchased bank preferred stock, made loans to assist agriculture, housing, exports, business, governments, and for disaster relief, and even purchased gold at the President’s direction in order to change the market price of gold. The scope of RFC activities was expanded further immediately before and during World War II. The RFC established or purchased, and funded, eight corporations that made important contributions to the war effort. After the war, the RFC’s activities were limited primarily to making loans to business. RFC lending ended in 1953, and the corporation ceased operations in 1957, when all remaining assets were transferred to other government agencies.

The Genesis of the Reconstruction Finance Corporation

The difficulties experienced by the American banking system were one of the defining characteristics of the Great Contraction of 1929-1933. During this period, the American banking system was comprised of a very large number of banks. At the end of December 1929, there were 24,633 banks in the United States. The vast majority of these banks were small, serving small towns and rural communities. These small banks were particularly susceptible to local economic difficulties, which could result in failure of the bank.

The Federal Reserve and Small Banks

The Federal Reserve System was created in 1913 to address the problem of periodic banking crises. The Fed had the ability to act as a lender of last resort, providing funds to banks during crises. While nationally chartered banks were required to join the Fed, state-chartered banks could join the Fed at their discretion. Most state-chartered banks chose not to join the Federal Reserve System. The majority of the small banks in rural communities were not Fed members. Thus, during crises, these banks were unable to seek assistance from the Fed, and the Fed felt no obligation to engage in a general expansion of credit to assist nonmember banks.

How Banking Panics Develop

At this time there was no federal deposit insurance system, so bank customers generally lost part or all of their deposits when their bank failed. Fear of failure sometimes caused people to panic. In a panic, bank customers attempt to immediately withdraw their funds. While banks hold enough cash for normal operations, they use most of their deposited funds to make loans and purchase interest-earning assets. In a panic, banks are forced to attempt to rapidly convert these assets to cash. Frequently, they are forced to sell assets at a loss to obtain cash quickly, or may be unable to sell assets at all. As losses accumulate, or cash reserves dwindle, a bank becomes unable to pay all depositors, and must suspend operations. During this period, most banks that suspended operations declared bankruptcy. Bank suspensions and failures may incite panic in adjacent communities or regions. This spread of panic, or contagion, can result in a large number of bank failures. Not only do customers lose some or all of their deposits, but also people become wary of banks in general. A widespread withdrawal of bank deposits reduces the amount of money and credit in society. This monetary contraction can contribute to a recession or depression.

Bank failures were a common event throughout the 1920s. In any year, it was normal for several hundred banks to fail. In 1930, the number of failures increased substantially. Failures and contagious panics occurred repeatedly during the contraction years. President Hoover recognized that the banking system required assistance. However, the President also believed that this assistance, like charity, should come from the private sector rather than the government, if at all possible.

The National Credit Corporation

To this end, Hoover encouraged a number of major banks to form the National Credit Corporation (NCC), to lend money to other banks experiencing difficulties. The NCC was announced on October 13, 1931, and began operations on November 11, 1931. However, the banks in the NCC were not enthusiastic about this endeavor, and made loans very reluctantly, requiring that borrowing banks pledge their best assets as collateral, or security for the loan. Hoover quickly recognized that the NCC would not provide the necessary relief to the troubled banking system.

RFC Approved, January 1932

Eugene Meyer, Governor of the Federal Reserve Board, convinced the President that a public agency was needed to make loans to troubled banks. On December 7, 1931, a bill was introduced to establish the Reconstruction Finance Corporation. The legislation was approved on January 22, 1932, and the RFC opened for business on February 2, 1932.

The original legislation authorized the RFC’s existence for a ten-year period. However, Presidential approval was required to operate beyond January 1, 1933, and Congressional approval was required for lending authority to continue beyond January 1, 1934. Subsequent legislation extended the life of the RFC and added many additional responsibilities and authorities.

The RFC was funded through the United States Treasury. The Treasury provided $500 million of capital to the RFC, and the RFC was authorized to borrow an additional $1.5 billion from the Treasury. The Treasury, in turn, sold bonds to the public to fund the RFC. Over time, this borrowing authority was increased manyfold. Subsequently, the RFC was authorized to sell securities directly to the public to obtain funds. However, most RFC funding was obtained by borrowing from the Treasury. During its years of existence, the RFC borrowed $51.3 billion from the Treasury, and $3.1 billion from the public.

The RFC During the Hoover Administration

RFC Authorized to Lend to Banks and Others

The original legislation authorized the RFC to make loans to banks and other financial institutions, to railroads, and for crop loans. While the original objective of the RFC was to help banks, railroads were assisted because many banks owned railroad bonds, which had declined in value, because the railroads themselves had suffered from a decline in their business. If railroads recovered, their bonds would increase in value. This increase, or appreciation, of bond prices would improve the financial condition of banks holding these bonds.

Through legislation approved on July 21, 1932, the RFC was authorized to make loans for self-liquidating public works project, and to states to provide relief and work relief to needy and unemployed people. This legislation also required that the RFC report to Congress, on a monthly basis, the identity of all new borrowers of RFC funds.

RFC Undercut by Requirement That It Publish Names of Banks Receiving Loans

From its inception through Franklin Roosevelt’s inauguration on March 4, 1933, the RFC primarily made loans to financial institutions. During the first months following the establishment of the RFC, bank failures and currency holdings outside of banks both declined. However, several loans aroused political and public controversy, which was the reason the July 21, 1932 legislation included the provision that the identity of banks receiving RFC loans from this date forward be reported to Congress. The Speaker of the House of Representatives, John Nance Garner, ordered that the identity of the borrowing banks be made public. The publication of the identity of banks receiving RFC loans, which began in August 1932, reduced the effectiveness of RFC lending. Bankers became reluctant to borrow from the RFC, fearing that public revelation of a RFC loan would cause depositors to fear the bank was in danger of failing, and possibly start a panic. Legislation passed in January 1933 required that the RFC publish a list of all loans made from its inception through July 21, 1932, the effective date for the publication of new loan recipients.

RFC, Politics and Bank Failure in February and March 1933

In mid-February 1933, banking difficulties developed in Detroit, Michigan. The RFC was willing to make a loan to the troubled bank, the Union Guardian Trust, to avoid a crisis. The bank was one of Henry Ford’s banks, and Ford had deposits of $7 million in this particular bank. Michigan Senator James Couzens demanded that Henry Ford subordinate his deposits in the troubled bank as a condition of the loan. If Ford agreed, he would risk losing all of his deposits before any other depositor lost a penny. Ford and Couzens had once been partners in the automotive business, but had become bitter rivals. Ford refused to agree to Couzens’ demand, even though failure to save the bank might start a panic in Detroit. When the negotiations failed, the governor of Michigan declared a statewide bank holiday. In spite of the RFC’s willingness to assist the Union Guardian Trust, the crisis could not be averted.

The crisis in Michigan resulted in a spread of panic, first to adjacent states, but ultimately throughout the nation. By the day of Roosevelt’s inauguration, March 4, all states had declared bank holidays or had restricted the withdrawal of bank deposits for cash. As one of his first acts as president, on March 5 President Roosevelt announced to the nation that he was declaring a nationwide bank holiday. Almost all financial institutions in the nation were closed for business during the following week. The RFC lending program failed to prevent the worst financial crisis in American history.

Criticisms of the RFC

The effectiveness of RFC lending to March 1933 was limited in several respects. The RFC required banks to pledge assets as collateral for RFC loans. A criticism of the RFC was that it often took a bank’s best loan assets as collateral. Thus, the liquidity provided came at a steep price to banks. Also, the publicity of new loan recipients beginning in August 1932, and general controversy surrounding RFC lending probably discouraged banks from borrowing. In September and November 1932, the amount of outstanding RFC loans to banks and trust companies decreased, as repayments exceeded new lending.

The RFC in the New Deal

FDR Sees Advantages in Using the RFC

President Roosevelt inherited the RFC. He and his colleagues, as well as Congress, found the independence and flexibility of the RFC to be particularly useful. The RFC was an executive agency with the ability to obtain funding through the Treasury outside of the normal legislative process. Thus, the RFC could be used to finance a variety of favored projects and programs without obtaining legislative approval. RFC lending did not count toward budgetary expenditures, so the expansion of the role and influence of the government through the RFC was not reflected in the federal budget.

RFC Given the Authority to Buy Bank Stock

The first task was to stabilize the banking system. On March 9, 1933, the Emergency Banking Act was approved as law. This legislation and a subsequent amendment improved the RFC’s ability to assist banks by giving it the authority to purchase bank preferred stock, capital notes and debentures (bonds), and to make loans using bank preferred stock as collateral. While banks were initially reluctant, the RFC encouraged banks to issue preferred stock for it to purchase. This provision of capital funds to banks strengthened the financial position of many banks. Banks could use the new capital funds to expand their lending, and did not have to pledge their best assets as collateral. The RFC purchased $782 million of bank preferred stock from 4,202 individual banks, and $343 million of capital notes and debentures from 2,910 individual bank and trust companies. In sum, the RFC assisted almost 6,800 banks. Most of these purchases occurred in the years 1933 through 1935.

The preferred stock purchase program did have controversial aspects. The RFC officials at times exercised their authority as shareholders to reduce salaries of senior bank officers, and on occasion, insisted upon a change of bank management. However, the infusion of new capital into the banking system, and the establishment of the Federal Deposit Insurance Corporation to insure bank depositors against loss, stabilized the financial system. In the years following 1933, bank failures declined to very low levels.

RFC’s Assistance to Farmers

Throughout the New Deal years, the RFC’s assistance to farmers was second only to its assistance to bankers. Total RFC lending to agricultural financing institutions totaled $2.5 billion. Over half, $1.6 billion, went to its subsidiary, the Commodity Credit Corporation. The Commodity Credit Corporation was incorporated in Delaware in 1933, and operated by the RFC for six years. In 1939, control of the Commodity Credit Corporation was transferred to the Department of Agriculture, were it remains today.

Commodity Credit Corporation

The agricultural sector was hit particularly hard by depression, drought, and the introduction of the tractor, displacing many small and tenant farmers. The primary New Deal program for farmers was the Agricultural Adjustment Act. Its objective was to reverse the decline of product prices and farm incomes experienced since 1920. The Commodity Credit Corporation contributed to this objective by purchasing selected agricultural products at guaranteed prices, typically above the prevailing market price. Thus, the CCC purchases established a guaranteed minimum price for these farm products.

The RFC also funded the Electric Home and Farm Authority, a program designed to enable low- and moderate- income households to purchase gas and electric appliances. This program would create demand for electricity in rural areas, such as the area served by the new Tennessee Valley Authority. Providing electricity to rural areas was the objective of the Rural Electrification Program.

Decline in Bank Lending Concerns RFC and New Deal Officials

After 1933, bank assets and bank deposits both increased. However, banks changed their asset allocation dramatically during the recovery years. Prior to the depression, banks primarily made loans, and purchased some securities, such as U.S. Treasury securities. During the recovery years, banks primarily purchased securities, which involved less risk. Whether due to concerns over safety, or because potential borrowers had weakened financial positions due to the depression, bank lending did not recover, as indicated by the data in Table 1.

The relative decline in bank lending was a major concern for RFC officials and the New Dealers, who felt that lack of lending by banks was hindering economic recovery. The sentiment within the Roosevelt administration was that the problem was banks’ unwillingness to lend. They viewed the lending by the Commodity Credit Corporation and the Electric Home and Farm Authority, as well as reports from members of Congress, as evidence that there was unsatisfied business loan demand.

TABLE 1
Year Bank Loans and Investments in Millions of Dollars Bank Loans in Millions of Dollars Bank Net Deposits in Millions of Dollars Loans as a Percentage of Loans and Investments Loans as a Percentage of Net Deposits
1921 39895 28927 30129 73% 96%
1922 39837 27627 31803 69% 87%
1923 43613 30272 34359 69% 88%
1924 45067 31409 36660 70% 86%
1925 48709 33729 40349 69% 84%
1926 51474 36035 42114 70% 86%
1927 53645 37208 43489 69% 86%
1928 57683 39507 44911 68% 88%
1929 58899 41581 45058 71% 92%
1930 58556 40497 45586 69% 89%
1931 55267 35285 41841 64% 84%
1932 46310 27888 32166 60% 87%
1933 40305 22243 28468 55% 78%
1934 42552 21306 32184 50% 66%
1935 44347 20213 35662 46% 57%
1936 48412 20636 41027 43% 50%
1937 49565 22410 42765 45% 52%
1938 47212 20982 41752 44% 50%
1939 49616 21320 45557 43% 47%
1940 51336 22340 49951 44% 45%

Source: Banking and Monetary Statistics, 1914 –1941.
Net Deposits are total deposits less interbank deposits.
All data are for the last business day of June in each year.

RFC Provides Credit to Business

Due to the failure of bank lending to return to pre-Depression levels, the role of the RFC expanded to include the provision of credit to business. RFC support was deemed as essential for the success of the National Recovery Administration, the New Deal program designed to promote industrial recovery. To support the NRA, legislation passed in 1934 authorized the RFC and the Federal Reserve System to make working capital loans to businesses. However, direct lending to businesses did not become an important RFC activity until 1938, when President Roosevelt encouraged expanding business lending in response to the recession of 1937-38.

RFC Mortgage Company

During the depression, many families and individuals were unable to make their mortgage payments, and had their homes repossessed. Another New Deal goal was to provide more funding for mortgages, to avoid the displacement of homeowners. In June 1934, the National Housing Act provided for the establishment of the Federal Housing Administration (FHA). The FHA would insure mortgage lenders against loss, and FHA mortgages required a smaller percentage down payment than was customary at that time, thus making it easier to purchase a house. In 1935, the RFC Mortgage Company was established to buy and sell FHA-insured mortgages.

RFC and Fannie Mae

Financial institutions were reluctant to purchase FHA mortgages, so in 1938 the President requested that the RFC establish a national mortgage association, the Federal National Mortgage Association, or Fannie Mae. Fannie Mae was originally funded by the RFC to create a market for FHA and later Veterans Administration (VA) mortgages. The RFC Mortgage Company was absorbed by the RFC in 1947. When the RFC was closed, its remaining mortgage assets were transferred to Fannie Mae. Fannie Mae evolved into a private corporation. During its existence, the RFC provided $1.8 billion of loans and capital to its mortgage subsidiaries.

RFC and Export-Import Bank

President Roosevelt sought to encourage trade with the Soviet Union. To promote this trade, the Export-Import Bank was established in 1934. The RFC provided capital, and later loans to the Ex-Im Bank. Interest in loans to support trade was so strong that a second Ex-Im bank was created to fund trade with other foreign nations a month after the first bank was created. These two banks were merged in 1936, with the authority to make loans to encourage exports in general. The RFC provided $201 million of capital and loans to the Ex-Im Banks.

Other RFC activities during this period included lending to federal government agencies providing relief from the depression including the Public Works Administration and the Works Progress Administration, disaster loans, and loans to state and local governments.

RFC Pushed Up the Price of Gold, Devalues the Dollar

Evidence of the flexibility afforded through the RFC was President Roosevelt’s use of the RFC to affect the market price of gold. The President wanted to reduce the gold value of the dollar from $20.67 per ounce of gold. As the dollar price of gold increased, the dollar exchange rate would fall relative to currencies that had a fixed gold price. A fall in the value of the dollar makes exports cheaper and imports more expensive. In an economy with high levels of unemployment, a decline in imports and increase in exports would increase domestic employment.

The goal of the RFC purchases was to increase the market price of gold. During October 1933 the RFC began purchasing gold at a price of $31.36 per ounce. The price was gradually increased to over $34 per ounce. The RFC price set a floor for the price of gold. In January 1934, the new official dollar price of gold was fixed at $35.00 per ounce, a 59% devaluation of the dollar.

Twice President Roosevelt instructed Jesse Jones, the president of the RFC, to stop lending, as he intended to close the RFC. The first occasion was in October 1937, and the second was in early 1940. The recession of 1937-38 caused Roosevelt to authorize the resumption of RFC lending in early 1938. The German invasion of France and the Low Countries gave the RFC new life on the second occasion.

The RFC in World War II

In 1940 the scope of RFC activities increased significantly, as the United States began preparing to assist its allies, and for possible direct involvement in the war. The RFC’s wartime activities were conducted in cooperation with other government agencies involved in the war effort. For its part, the RFC established seven new corporations, and purchased an existing corporation. The eight RFC wartime subsidiaries are listed in Table 2, below.

Table 2
RFC Wartime Subsidiaries
Metals Reserve Company
Rubber Reserve Company
Defense Plant Corporation
Defense Supplies Corporation
War Damage Corporation
U.S. Commercial Company
Rubber Development Corporation
Petroleum Reserve Corporation (later War Assets Corporation)

Source: Final Report of the Reconstruction Finance Corporation

Development of Materials Cut Off By the War

The RFC subsidiary corporations assisted the war effort as needed. These corporations were involved in funding the development of synthetic rubber, construction and operation of a tin smelter, and establishment of abaca (Manila hemp) plantations in Central America. Both natural rubber and abaca (used to produce rope products) were produced primarily in south Asia, which came under Japanese control. Thus, these programs encouraged the development of alternative sources of supply of these essential materials. Synthetic rubber, which was not produced in the United States prior to the war, quickly became the primary source of rubber in the post-war years.

Other War-Related Activities

Other war-related activities included financing plant conversion and construction for the production of military and essential goods, to deal and stockpile strategic materials, to purchase materials to reduce the supply available to enemy nations, to administer war damage insurance programs, and to finance construction of oil pipelines from Texas to New Jersey to free tankers for other uses.

During its existence, RFC management made discretionary loans and investments of $38.5 billion, of which $33.3 billion was actually disbursed. Of this total, $20.9 billion was disbursed to the RFC’s wartime subsidiaries. From 1941 through 1945, the RFC authorized over $2 billion of loans and investments each year, with a peak of over $6 billion authorized in 1943. The magnitude of RFC lending had increased substantially during the war. Most lending to wartime subsidiaries ended in 1945, and all such lending ended in 1948.

The Final Years of the RFC, 1946-1953

After the war, RFC lending decreased dramatically. In the postwar years, only in 1949 was over $1 billion authorized. Through 1950, most of this lending was directed toward businesses and mortgages. On September 7, 1950, Fannie Mae was transferred to the Housing and Home Finance Agency. During its last three years, almost all RFC loans were to businesses, including loans authorized under the Defense Production Act.

Eisenhower Terminates the RFC

President Eisenhower was inaugurated in 1953, and shortly thereafter legislation was passed terminating the RFC. The original RFC legislation authorized operations for one year of a possible ten-year existence, giving the President the option of extending its operation for a second year without Congressional approval. The RFC survived much longer, continuing to provide credit for both the New Deal and World War II. Now, the RFC would finally be closed.

Small Business Administration

However, there was concern that the end of RFC business loans would hurt small businesses. Thus, the Small Business Administration (SBA) was created in 1953 to continue the program of lending to small businesses, as well as providing training programs for entrepreneurs. The disaster loan program was also transferred to the SBA.

Through legislation passed on July 30, 1953, RFC lending authority ended on September 28, 1953. The RFC continued to collect on its loans and investments through June 30, 1957, at which time all remaining assets were transferred to other government agencies. At the time the liquidation act was passed, the RFC’s production of synthetic rubber, tin, and abaca remained in operation. Synthetic rubber operations were sold or leased to private industry. The tin and abaca programs were ultimately transferred to the General Services Administration.

Successors of the RFC

Three government agencies and one private corporation that were related to the RFC continue today. The Small Business Administration was established to continue lending to small businesses. The Commodity Credit Corporation continues to provide assistance to farmers. The Export-Import Bank continues to provide loans to promote exports. Fannie Mae became a private corporation in 1968. Today it is the most important source of mortgage funds in the nation, and has become one of the largest corporations in the country. Its stock is traded on the New York Stock Exchange under the symbol FNM.

Economic Analysis of the RFC

Role of a Lender of Last Resort

The American central bank, the Federal Reserve System, was created to be a lender of last resort. A lender of last resort exists to provide liquidity to banks during crises. The famous British central banker, Walter Bagehot, advised, “…in a panic the holders of the ultimate Bank reserve (whether one bank or many) should lend to all that bring good securities quickly, freely, and readily. By that policy they allay a panic…”

However, the Fed was not an effective lender of last resort during the depression years. Many of the banks experiencing problems during the depression years were not members of the Federal Reserve System, and thus could not borrow from the Fed. The Fed was reluctant to assist troubled banks, and banks also feared that borrowing from the Fed might weaken depositors’ confidence.

President Hoover hoped to restore stability and confidence in the banking system by creating the Reconstruction Finance Corporation. The RFC made collateralized loans to banks. Many scholars argue that initially RFC lending did provide relief. These observations are based on the decline in bank suspensions and public currency holdings in the months immediately following the creation of the RFC in February 1932. These data are presented in Table 3.

Table 3
1932 Currency in Millions of Dollars Bank Suspensions Number
January 4896 342
February 4824 119
March 4743 45
April 4751 74
May 4746 82
June 4959 151
July 5048 132
August 4988 85
September 4941 67
October 4863 102
November 4842 93
December 4830 161

Data sources: Currency – Friedman and Schwartz (1963)
Bank suspensions – Board of Governors (1937)

Bank suspensions occur when banks cannot open for normal business operations due to financial problems. Most bank suspensions ended in failure of the bank. Currency held by the public can be an indicator of public confidence in banks. As confidence declines, members of the public convert deposits to currency, and vice versa.

The banking situation deteriorated in June 1932 when a crisis developed in and around Chicago. Both Friedman and Schwartz (1963) and Jones (1951) assert that an RFC loan to a key bank helped to end the crisis, even though the bank subsequently failed.

The Debate over the Impact of the RFC

Two studies of RFC lending have come to differing conclusions. Butkiewicz (1995) examines the effect of RFC lending on bank suspensions and finds that lending reduced suspensions in the months prior to publication of the identities of loan recipients. He further argues that publication of the identities of banks receiving loans discouraged banks from borrowing. As noted above, RFC loans to banks declined in two months after publication began. Mason (2001) examines the impact of lending on a sample of Illinois banks and finds that those receiving RFC loans were increasingly likely to fail. Thus, the limited evidence provided from scholarly studies provides conflicting results about the impact of RFC lending.

Critics of RFC lending to banks argue that the RFC took the banks’ best assets as collateral, thereby reducing bank liquidity. Also, RFC lending requirements were initially very stringent. After the financial collapse in March 1933, the RFC was authorized to provide banks with capital through preferred stock and bond purchases. This change, along with the creation of the Federal Deposit Insurance System, stabilized the banking system.

Economic and Noneconomic Rationales for an Agency Like the RFC

Beginning 1933, the RFC became more directly involved in the allocation of credit throughout the economy. There are several economic reasons why a government agency might actively participate in the allocation of liquid capital funds. These are market failure, externalities, and noneconomic reasons.

A market failure occurs if private markets fail to allocate resources efficiently. For example, small business owners complain that markets do not provide enough loans at reasonable interest rates, a so-called “credit gap”. However, small business loans are riskier than loans to large corporations. Higher interest rates compensate for the greater risk involved in lending to small businesses. Thus, the case for a market failure is not compelling. However, small business loans remain politically popular.

An externality exists when the benefits to society are greater than the benefits to the individuals involved. For example, loans to troubled banks may prevent a financial crisis. Purchases of bank capital may also help stabilize the financial system. Prevention of financial crises and the possibility of a recession or depression provide benefits to society beyond the benefits to bank depositors and shareholders. Similarly, encouraging home ownership may create a more stable society. This argument is often used to justify government provision of funds to the mortgage market.

While wars are often fought over economic issues, and wars have economic consequences, a nation may become involved in a war for noneconomic reasons. Thus, the RFC wartime programs were motivated by political reasons, as much or more than economic reasons.

The RFC was a federal credit agency. The first federal credit agency was established in 1917. However, federal credit programs were relatively limited until the advent of the RFC. Many RFC lending programs were targeted to help specific sectors of the economy. A number of these activities were controversial, as are some federal credit programs today. Three important government agencies and one private corporation that descended from the RFC still operate today. All have important effects on the allocation of credit in our economy.

Criticisms of Governmental Credit Programs

Critics of federal credit programs cite several problems. One is that these programs subsidize certain activities, which may result in overproduction and misallocation of resources. For example, small businesses can obtain funds through the SBA at lower interest rates than are available through banks. This interest rate differential is a subsidy to small business borrowers. Crop loans and price supports result in overproduction of agricultural products. In general, federal credit programs reallocate capital resources to favored activities.

Finally, federal credit programs, including the RFC, are not funded as part of the normal budget process. They obtain funds through the Treasury, or their own borrowings are assumed to have the guarantee of the federal government. Thus, their borrowing is based on the creditworthiness of the federal government, not their own activities. These “off-budget” activities increase the scope of federal involvement in the economy while avoiding the normal budgetary decisions of the President and Congress. Also, these lending programs involve risk. Default on a significant number of these loans might require the federal government to bail out the affected agency. Taxpayers would bear the cost of a bailout.

Any analysis of market failures, externalities, or federal programs should involve a comparison of costs and benefits. However, precise measurement of costs and benefits in these cases is often difficult. Supporters value the benefits very highly, while opponents argue that the costs are excessive.

Conclusion

The RFC was created to assist banks during the Great Depression. It experienced some, albeit limited, success in this activity. However, the RFC’s authority to borrow directly from the Treasury outside the normal budget process proved very attractive to President Roosevelt and his advisors. Throughout the New Deal, the RFC was used to finance a vast array of favored activities. During World War II, RFC lending to its subsidiary corporations was an essential component of the war effort. It was the largest and most important federal credit program of its time. Even after the RFC was closed, some of its lending activities have continued through agencies and corporations that were first established or funded by the RFC. These descendent organizations, especially Fannie Mae, play a very important role in the allocation of credit in the American economy. The legacy of the RFC continues, long after it ceased to exist.

 

Data Sources

Banking data are from Banking and Monetary Statistics, 1914-1941, Board of Governors of the Federal Reserve System, 1943.

RFC data are from Final Report on the Reconstruction Finance Corporation, Secretary of the Treasury, 1959.

Currency data are from The Monetary History of the United States, 1867-1960, Friedman and Schwartz, 1963.

Bank suspension data are from Federal Reserve Bulletin, Board of Governors, September 1937.

References

Bagehot, Walter. Lombard Street: A Description of the Money Market. New York: Scribner, Armstrong & Co., 1873.

Board of Governors of the Federal Reserve System. Banking and Monetary Statistics, 1914-1941. Washington, DC, 1943.

Board of Governors of the Federal Reserve System. Federal Reserve Bulletin. September 1937.

Bremer, Cornelius D. American Bank Failures. New York: AMS Press, 1968.

Butkiewicz, James L. “The Impact of a Lender of Last Resort during the Great Depression: The Case of the Reconstruction Finance Corporation.” Explorations in Economic History 32, no. 2 (1995): 197-216.

Butkiewicz, James L. “The Reconstruction Finance Corporation, the Gold Standard, and the Banking Panic of 1933.” Southern Economic Journal 66, no. 2 (1999): 271-93.

Chandler, Lester V. America’s Greatest Depression, 1929-1941. New York: Harper and Row, 1970.

Friedman, Milton, and Anna J. Schwartz. The Monetary History of the United States, 1867-1960. Princeton, NJ: Princeton University Press, 1963.

Jones, Jesse H. Fifty Billion Dollars: My Thirteen Years with the RFC, 1932-1945. New York: Macmillan Co., 1951.

Keehn, Richard H., and Gene Smiley. “U.S. Bank Failures, 1932-1933: A Provisional Analysis.” Essays in Economic and Business History 6 (1988): 136-56.

Keehn, Richard H., and Gene Smiley. “U.S. Bank Failures, 1932-33: Additional Evidence on Regional Patterns, Timing, and the Role of the Reconstruction Finance Corporation.” Essays in Economic and Business History 11 (1993): 131-45.

Kennedy, Susan E. The Banking Crisis of 1933. Lexington, KY: University of Kentucky Press, 1973.

Mason, Joseph R. “Do Lender of Last Resort Policies Matter? The Effects of Reconstruction Finance Corporation Assistance to Banks During the Great Depression.” Journal of Financial Services Research 20, no 1. (2001): 77-95.

Nadler, Marcus, and Jules L. Bogen. The Banking Crisis: The End of an Epoch. New York, NY: Arno Press, 1980.

Olson, James S. Herbert Hoover and the Reconstruction Finance Corporation. Ames, IA: Iowa State University Press, 1977.

Olson, James S. Saving Capitalism: The Reconstruction Finance Corporation in the New Deal, 1933-1940. Princeton, NJ: Princeton University Press, 1988.

Saulnier, R. J., Harold G. Halcrow, and Neil H. Jacoby. Federal Lending and Loan Insurance. Princeton, NJ: Princeton University Press, 1958.

Schlesinger, Jr., Arthur M. The Age of Roosevelt: The Coming of the New Deal. Cambridge, MA: Riverside Press, 1957.

Secretary of the Treasury, Final Report on the Reconstruction Finance Corporation. Washington, DC: United States Government Printing Office, 1959.

Sprinkel, Beryl Wayne. “Economic Consequences of the Operations of the Reconstruction Finance Corporation.” Journal of Business of the University of Chicago 25, no. 4 (1952): 211-24.

Sullivan, L. Prelude to Panic: The Story of the Bank Holiday. Washington, DC: Statesman Press, 1936.

Trescott, Paul B. “Bank Failures, Interest Rates, and the Great Currency Outflow in the United States, 1929-1933.” Research in Economic History 11 (1988): 49-80.

Upham, Cyril B., and Edwin Lamke. Closed and Distressed Banks: A Study in Public Administration. Washington, DC: Brookings Institution, 1934.

Wicker, Elmus. The Banking Panics of the Great Depression. Cambridge: Cambridge University Press, 1996.

Web Links

Commodity Credit Corporation

http://www.fsa.usda.gov/pas/publications/facts/html/ccc99.htm

Ex-Im Bank http://www.exim.gov/history.html

Fannie Mae http://www.fanniemae.com/company/history.html

Small Business Administration http://www.sba.gov/aboutsba/sbahistory.doc

Citation: Butkiewicz, James. “Reconstruction Finance Corporation”. EH.Net Encyclopedia, edited by Robert Whaples. July 19, 2002. URL http://eh.net/encyclopedia/reconstruction-finance-corporation/

Global Electrification: Multinational Enterprise and International Finance in the History of Light and Power, 1878-2007

Author(s):Hausman, William J.
Hertner, Peter
Wilkins, Mira
Reviewer(s):Edelstein, Michael

Published by EH.NET (May 2010)

William J. Hausman, Peter Hertner, and Mira Wilkins, Global Electrification: Multinational Enterprise and International Finance in the History of Light and Power, 1878-2007. New York: Cambridge University Press, 2008. xxiv + 487 pp. $80 (hardcover), ISBN: 978-0-521-88035-0.

Reviewed for EH.NET by Michael Edelstein, Department of Economics, Queens College and the Graduate School, City University of New York.

Any large power outage at home and work for even a day makes it clear that electrical energy is essential for modern life. Prior histories of the appearance and diffusion of electrical energy have emphasized the technology, the leadership role of an entrepreneur or a financier, the role of an enterprise, or one nation?s experience. There are a few excellent volumes that compare the development of the industry in several countries, typically the first nations to electrify. This volume studies the intersecting roles of multi-national enterprise and international finance in the globalization of electrical light and power. On a time scale, the story runs from 1878 to 1914 in its first era when private firms and finance dominated, to the second era from 1914 to the 1970s when ownership became more and more domesticated, and national or regional governments took a larger ownership role and, finally, to the more recent era from the late 1970s to the present, characterized by privatization and re-emerging multinational ownership patterns. Given the objective of telling a comprehensive global story, it is not surprising that this volume has three authors with considerable background in the economics, finance, and multi-national enterprise of electrical power and draws significant advice and contributions from Dominque Barjot, Jonathan Coopersmith, Kenneth E. Jackson, Pierre Lanthier, H. V. Nelles, John L. Neufeld, Harm Schrotter, and Luciano Segreto.

What is most remarkable is the singular authoritative voice of the text, even as first authorship shifts between Hausman (Chapters. 1 and 7) and Wilkins (Chapters 2 to 6), with most chapters employing several other authors and advisor-contributors. And yet, the middle five chapters could not have been conceived and researched by anyone other than Mira Wilkins. The pre-eminent historian of American international investment and multinational enterprise, Wilkins combines exhaustive research into business archives and contemporary sources with a gift for quickly weaving the life of a company or entrepreneur into a rigorous narrative of multiple and interacting firms.

In an excellent first chapter, Hausman et al first lay out the pattern of technical innovation, emphasizing its multinational sources and the high degree to which invention responded to the possibilities and challenges of powerful generators and grid distribution. The accompanying tables do a superb job capturing the global diffusion of the industry in its first century. In the second part of this chapter, Hausman et al lay out the special economics of the evolving electrical technologies, emphasizing the massive amounts of capital that had to be raised before a single watt could be transmitted to factories, homes or a city. As urban places began to be lit and powered by multiple and large generators, the pattern was set of small marginal costs and an overwhelming portion of total costs absorbed by a power company?s fixed financing costs. Consequently, nearly all electrical generation and transmission fell into monopoly patterns. Furthermore, between the need to acquire rights of way for the large network of power lines linked to tens and hundreds of thousands of customers and the threat of monopoly pricing, electrical power industry development was, from its earliest stages, both an economic and a heavily political story.

One of the most original contributions of the volume is a table which provides an estimate of the share of foreign ownership in electrical utilities for every country in the world, 1913-14, 1928-32, 1947-50, and 1970-72. The eighteen pages of footnotes require an appendix of their own. This is global quantitative history of the highest usefulness and provides a major anchor for the narrative history found in Chapters 3 to 7. The table gives a strikingly representation of the employment of foreign capital and, just as important, the absence of foreign capital. The table measures foreign ownership vs. domestication (private and public). At the end of the first era of electrification, 1913-14, if foreign ownership was less than 20%, it was very likely the nation or colony had already shown a pattern of significant modern economic growth when electrification started in 1878. A few colonies had no foreign ownership in 1913-14 but their utilities were largely owned by their colonial government. The only country which began significant modern economic growth after 1878 with no foreign utility ownership was Japan. Across World War I and the 1920s, there was a mixed pattern, a small tendency in South and Central America to increase foreign ownership but there were also striking reversals of foreign ownership in revolutionary Russia and Turkey. Across the Great Depression and World War II, Europe and Asia moved decisively to total domestication with only Greece, Morocco and the Philippines as exceptions. In the next period after World War II, observed in 1970-72, the domestication pattern reached South and Central America and the Caribbean.

The pattern of domestication over time and nations is one of the big stories of this volume. The authors find a number of trends which took the industry in this direction; perhaps the most important was the growing awareness that like water supplies, electricity had become essential for daily living and national security. Furthermore, as the technology matured, the need for foreign management, capital, and technology seemed less important than the pride and promise of local control. A small cadre of electrical engineers educated abroad or at home could do the few hard jobs. A small quibble with the authors might be over the strong learning effects of wartime isolation. The authors note a role for the world wars but to this reviewer the dramatic rise in public management and control during World War I and even more during World War II surely supplied experience and an ethos for the post-war trends towards utility domestication, both in the warring nations and those neutrals cut off from their foreign owners.

The other striking aspect of Hausman et al?s story is the diversity of the business organizations created by the electrical sector?s international capitalists and entrepreneurs. The second chapter acquaints us with the types of organization which Wilkins has identified in her previous work and which Wilkins et al have improved with this new foray into electrical utilities. Yet, this excellent survey provides only a rough map for the variety of company formations which the authors later analyze in Chapters 3 to 6. One of the few discernible rough patterns is the tendency for international investors to use holding companies in order to gain control, transfer technology, and increase leverage and profit, especially as large regional and national grids appeared as a possibility. But, the variety of holding company formations is simply baffling. Clearly there were many ways to skin the cat but it is also the case that the sheer murkiness of these holding companies made them good targets for politicians who worried about monopoly pricing and national security.

This is a very fine history of multinational enterprise and finance. Economic, business and international historians interested in the last century will find much new information and rigorous analysis of electrification in its most correct, global setting.

Michael Edelstein?s recent publications include “The Production of Engineers in New York Colleges and Universities, 1800-1950: Some New Data,” in David Eltis, Frank D. Lewis, and Kenneth L. Sokoloff, editors, Human Capital and Institutions: A Long-Run View. New York: Cambridge University Press, 2009.

Subject(s):Transport and Distribution, Energy, and Other Services
Geographic Area(s):General, International, or Comparative
Time Period(s):20th Century: WWII and post-WWII