HISTORY OF AMERICAN ECONOMY
New Goods and the Rise of the Middle Class
The Roaring 20’s was a time where America seemed to be at it’s most
prosperous. The American dream was not only to do well, but to over succeed and
have a wealthy lifestyle. One technological innovation that laid the stepping‐stones
for the 1920’s was the mass production of the automobile. At the beginning of the
1920’s the automobile was thought of as a luxury for the wealthy, but by the end of
the decade over 60 percent of American families owned one. With such a large
influence on the American economy, a lot of the American landscape was paved for
the use of automobiles such as motels, road signs, gas stations and the Federal Aid
Road Act of 1916, which committed the government to spending $75 million to pave
mud roads. Another major development was the innovation of consumer credit or a
system known as “buy now, pay later.” Instead of a consumer having to save up
money in order to buy a product, they could immediately go out and buy the
product by making a down payment and then paying the rest with an installment
plan. This system greatly increased the demand side of consumer durable products
such as vacuum cleaners, radios, and refrigerators. The supply side of durable
products then matched the progression by creating technological innovations and
using mass production, which lowered the cost of a given quality service for many
consumer goods. The 1920’s was also exemplified by the passing of the Volstead Act
in 1919, which prohibited the consumption of alcohol. The intention of the act was
to increase the savings of the working/middle class and raise industrial
productivity. In theory, the Volstead Act made sense but consequences would soon
ensue based upon this decision.
According to the first principle of economics, “people choose, and individual
choices are the source of social outcomes.” There is no better case of this than that
of the automobile. The automobile was so popular and such a major driving force of
the 1920’s that the economy basically ran itself around the automobile. Since people
were traveling more that means that they would be away from home and would
need places to eat, drink, and sleep. As a result gas stations, restaurants, and motels
basically sprung up overnight to meet the needs of the people that were traveling.
Since 60 percent of American families owned a car, this was a huge source of
potential income that people did not want to miss out on.
With the widespread use of consumer credit, people’s choices were greatly
affecting what producers were putting out on the market. Since people did not have
to have a large source of income in order to get certain durable goods, sales of
products such as radios and refrigerators skyrocketed. Annual refrigerator
production expanded from 5,000 units in 1920 to nearly 1 million units in 1930. The
increased purchasing of consumer durables also promoted growing volume of
advertising. As a result, a large amount of advertising was put into newspapers and
magazines that were heavily geared towards women. However, advertising was also
put into the radio, which brought about the formation of the broadcasting
companies NBC and CBS. The decision to prohibit the consumption of alcohol was meant to increase
the productivity of workers and make society a better place, but what people soon
realized was that there are sometimes unforeseen consequences and costs to their
actions.
According to the second principle of economics, “Choices impose costs”.
When the prohibition of alcohol was ratified as the Eighteenth Amendment to the
Constitution in 1920, it was widely supported by the middle class. However, the
opinions would change, as the consequences would begin rear it’s ugly head. Crime
soared in the 13 years prohibition was enacted even though there was a dramatic
increase in the amount spent on enforcement from $6.3 million in 1921 to $13.4
million in 1930. Homicide rates rose and prohibition cases dominated the federal
courts. And by the time prohibition was ended by the Twenty‐First Amendment in
1933, the view of the public on the results of prohibition was greatly changed.
Because of the increasing popularity of a consumer credit system, it seemed
that the economy was booming due to the increase in economic demand and the
immediate response of the supply by the producers. As a result, the government
decided to run on the principle that businesses should be free to grow without
government interference. Since the government did not mediate, that meant that
businesses were free to consolidate and set their own prices and basically run a
monopoly. Antitrust laws were rarely enforced, and as a result, mass consumption,
production, and giant corporations dominated the 1920’s.
The cost of the government to hop on the bandwagon of the automobile was
to the tune of over $75 million. This money would be spent over five years and
would go to building rural post roads. However, with the passing of the Highway Act
of 1921, Congress spent as much money for a single year’s construction as it had for
all of the preceding five years. This means that the extra money that they could have
spent elsewhere went to the construction and rebuilding of roads.
According to the third principle of economics, “Incentives matter”. The
incentives of the automobile almost seemed endless because of the predicted
possibilities. The construction boom of the 1920’s was credited to the automobile
because it gave people the ability to travel from longer distances. Since people were
able to travel longer distances, this also gave the incentive for the boom of suburban
living. The suburban lifestyle gave people the notion of a great place to raise a family
instead of the hustle and bustle of the city where there was more likely to be crime
and questionable activity. The automobile also gave the incentive for people to
build establishments such as restaurants and gas stations in parts of the country
that people would have never thought to build. However, since highways were being
heavily funded, people had incentive to build since more people would be passing
by.
The “buy more, pay later” system gave people more incentive to buy more
products because less money was needed to get what they desired
. Since demanded
was higher, this gave producers more incentive to make more products and as a result the economy boomed. Then, because the economy seemed to be doing so well,
this gave incentive for the government to have less interference in business affairs.
The incentives of the prohibition movement was that if alcohol consumption
were to be eliminated, then worker production would increase and the economy
would run more efficiently. However, what was later realized was that instead crime
was stimulated and bootlegging became a major industry. Due to this increased
crime rate, in 1933 the government had an incentive to get rid of the prohibition
amendment to the Constitution by ratifying the Twenty‐First Amendment.
According to the fourth principle of economics, “Institutions matter and
influence choices”. When it came to the prohibition of alcohol the government was
the driving institution that made sure that the law was enforced. Even though a
majority of the middle class supported the movement in the beginning, the threat of
legal action if you consumed or sold alcohol gave the prohibition movement it’s
backing force. Whenever there is a consequence to an action people will think twice
before they do something.
Since the government took more of a laissez‐faire approach to government in
the 1920’s, this gave a large incentive for businesses to run the way they wanted
without the government taking action on them. Since the government was not
regulating large business this gave them incentive to form trade associations and set
prices. These actions would have been deemed illegal earlier in the century and
would have been put to a halt due to antitrust laws, but since presidents Harding
and Coolidge made a point to let the economy be free, nothing was done to stop big
businesses.
The government had a huge influence on the boom of the automobile
industry due to the amount of funding they put into building new roads. The
automobile enlarged the demands on government for paved roads, as automobile
clubs and farmers pressed for assistance to get out of the mud. Also, the $75 million
that went towards building new roads and highways encouraged the construction of
establishments that would have never been built if not for the influence of the
government’s money.
According to the fifth principle of economics, “Understanding based on
knowledge and evidence imparts values to opinions”. People knew that because of
automobiles, this influenced the average person to travel more. And when people
want to travel and go on vacation, they generally want to go to somewhere warm.
These basic facts and knowledge encouraged what is known as the Florida Land
Boom. People knew that other people would be encouraged to go to Florida, so as a
result they invested in putting establishments such as motels, restaurants, and
tourist shops.
With the “buy now, pay later system”, producers knew that ther
e would be
an increased demand for products because now there would be less money required
in order to buy goods. As a result, producers realized they needed to produce more products in order to get more of a profit. This need for more production encouraged
the use of mass production and the technological advancements made towards
durable consumer goods.
When it came to the prohibition movement, it was assumed that once people
knew that drinking and selling alcohol would come with legal action, people would
not take part in it. However, instead the trafficking of alcohol became a major
industry and people began to see the consumption of alcohol as a forbidden luxury.
This encouraged people to continue to drink and sell alcohol even though it was
illegal. And since it was becoming more evident that the prohibition of alcohol was
encouraging crime, people began to have different opinions about the “Nobel
Experiment”.
Today the automobile continues to influence us in basically the same way
that it did over 80 years ago because besides an airplane, an automobile is the prime
mode of transportation from getting place to place. Recently, Montana became the
last state to enforce speed limits on roads. The government gives more money to
states that reinforce speed limits because they believe that speed limits save lives
and reduce the amount of accidents on the road. Also the recent bailouts of GM/Ford
have made the news because of the billions of dollars that were allocated towards
keeping this conglomerate in business. If a small barbershop in Tallahassee were
bailed out, this would not make news because it would affect very few people.
However, since GM/Ford employs so many people and sells so many cars, this
affects the lives of many people.
The consumer credit system definitely still applies today and not just for
good such as refrigerators and radios but also houses and car payments. If it weren’t
for consumer credit then many people would not be able to afford to buy a car for
their family. The option to be able to make a down payment on a car and pay the
rest in installments enables families to not only buy one, but multiple cars for their
needs. Also in nice parts of Jacksonville, I know that house prices can run in the
$300,000 range. This amount of money is not available to most people on demand,
so the ability to make a down payment and pay the rest in installments is a great
option for the average person.
Lastly the “Nobel Experiment” has taught us today that even though
prohibiting alcohol may sound like a good idea on paper, it creates unintended
consequences such as an increase in crime that trumps the good it does for society.
Also the concept behind the prohibition of alcohol has the same premise as today’s
prohibition of marijuana. People believe that due to the overpopulating of people in
jail and the swamping of court cases due to something as miniscule as smoking
weed, we should follow the path of alcohol and make marijuana legal. This hasn’t
been enacted yet, but I have a feeling that history will repeat itself but with
marijuana instead of alcohol.