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AQA A-Level History Study Notes

10.2.2 Economic Change and Crisis, 1920–1945

The period 1920–1945 saw immense economic shifts in the United States, from postwar prosperity to crippling depression and wartime revival.

The 1920s Boom

Mass Production and Technological Advancements

The United States experienced rapid industrial expansion during the 1920s, particularly through the rise of mass production techniques. Pioneered by Henry Ford, the moving assembly line allowed the efficient manufacture of goods such as the Model T car, reducing production times and costs.

  • Efficiency: Ford’s techniques reduced the time to build a car from 12 hours to 1.5 hours.

  • Standardisation: Products became more uniform and cheaper.

  • Spin-off industries: Growth in car production stimulated steel, glass, rubber, and road construction.

Consumerism and Credit Culture

The economic optimism of the 1920s encouraged consumer spending, leading to a culture of conspicuous consumption. Technological innovations such as radios, refrigerators, and vacuum cleaners became widely accessible.

  • Advertising boom: Marketers used newspapers, billboards, and radio to encourage consumption.

  • Hire-purchase plans: Consumers could buy goods with small down payments and repay in instalments, increasing household debt.

  • Electricity expansion: By 1929, two-thirds of American homes had electricity, powering new consumer appliances.

Stock Market Speculation

The prosperity of the decade led to a surge in investment in the New York Stock Exchange, where millions of Americans speculated on rising stock prices.

  • Buying on margin: Investors bought stocks with borrowed money, expecting prices to rise and cover the debt.

  • Speculative bubble: Prices far exceeded companies’ actual values.

  • Widespread participation: Even middle-class Americans were drawn into the market due to easy credit.

Real Estate Bubbles

The 1920s also saw real estate speculation, particularly in Florida, where buyers hoped to profit from skyrocketing land values.

  • Rapid urbanisation: Cities like Miami expanded rapidly.

  • Collapse: By 1926, the Florida land boom ended with collapsing prices and ruined investors.

Structural Weaknesses in the Economy

Rural Poverty

While cities flourished, agriculture suffered due to overproduction and falling prices.

  • Mechanisation increased output, but demand did not match supply.

  • Farm income dropped by nearly 50% between 1920 and 1930.

  • Many farmers, especially in the South and Midwest, lived in deep poverty and debt.

Uneven Distribution of Wealth

Despite overall growth, prosperity was not equally shared.

  • The richest 5% controlled over 30% of the nation’s wealth.

  • Many Americans, especially industrial workers and farmers, could not afford the very goods they produced.

Banking Instability

The American banking system was fragmented and unregulated, especially in rural areas.

  • Thousands of small banks operated independently, lacking federal protection or reserve backing.

  • Weak banks were vulnerable to runs, where depositors withdrew funds en masse, forcing bank closures.

  • The absence of a central safety net, such as deposit insurance, meant banking crises had devastating consequences.

Causes and Effects of the Wall Street Crash and Great Depression

Causes of the Crash

The Wall Street Crash of October 1929 marked the beginning of the economic collapse.

  • Over-speculation: Investors bought overvalued stocks expecting perpetual growth.

  • Margin debt: Buying on borrowed money inflated the risk.

  • Loss of confidence: As stocks began to fall, panic selling ensued.

  • Lack of safeguards: No mechanisms existed to halt trading or support falling prices.

Effects of the Crash

The crash triggered a decade-long Great Depression.

  • Stock values fell by nearly 90% from 1929 to 1932.

  • Unemployment soared to over 25% by 1933.

  • Business closures: Thousands of firms went bankrupt, and industrial output halved.

  • Bank failures: Over 9,000 banks failed during the early 1930s.

  • International repercussions: The US called in foreign loans, worsening global economic conditions.

Impact of New Deal Programmes on Recovery

Public Works and Job Creation

President Franklin D. Roosevelt’s New Deal introduced ambitious federal programmes to reduce unemployment.

  • Civilian Conservation Corps (CCC): Employed young men in environmental projects.

  • Public Works Administration (PWA): Funded large infrastructure projects like schools, dams, and bridges.

  • Works Progress Administration (WPA): Provided jobs for over 8 million people in construction, arts, and literacy programmes.

Banking Reform

To stabilise the financial system, Roosevelt introduced vital banking legislation.

  • Emergency Banking Act (1933): Closed all banks temporarily to restore public trust.

  • Federal Deposit Insurance Corporation (FDIC): Guaranteed deposits up to a set limit, preventing bank runs.

  • Securities Act (1933): Introduced federal regulation of the stock market to prevent fraud.

Social Security and Welfare

The Second New Deal (1935–1936) included long-term social reform.

  • Social Security Act (1935): Established a national pension scheme for the elderly and unemployment insurance.

  • Aid for dependent children and the disabled was introduced.

  • Laid the foundation for the modern American welfare state.

Limitations of the New Deal

Despite many successes, the New Deal had limits:

  • Unemployment remained high throughout the 1930s.

  • Many African Americans and women were excluded or received less support.

  • Critics from the right accused Roosevelt of excessive government expansion; leftist critics argued it did too little for the poor.

Economic Transformation During WWII

War Production and Industrial Mobilisation

America’s entry into WWII in 1941 catalysed unprecedented economic mobilisation.

  • War Production Board coordinated industrial output, directing factories to produce military goods.

  • Arms, ships, aircraft, and other military supplies were mass produced.

  • By 1944, the US produced nearly 50% of all weapons used by Allied forces.

Full Employment and Labour Shifts

The war effort effectively ended the Great Depression.

  • Unemployment dropped to under 2% by 1943.

  • Over 15 million men served in the armed forces; labour shortages pulled more women and minorities into the workforce.

  • Rosie the Riveter became a symbol of female industrial labour.

Financing the War and Economic Growth

To pay for the war, the government introduced new financial policies.

  • War bonds were sold to the public, raising over $150 billion.

  • Increased taxation: The Revenue Act of 1942 expanded the number of taxpayers dramatically.

  • Deficit spending: The federal government borrowed heavily, leading to temporary national debt growth.

Despite this, wartime production laid the groundwork for postwar prosperity by revitalising industries, expanding infrastructure, and boosting national morale.

Legacy of WWII Economic Changes

The wartime economy reshaped American society:

  • The federal government gained permanent control over aspects of economic planning and welfare provision.

  • New technologies and innovations accelerated industrial efficiency.

  • Urbanisation increased, with millions relocating for war jobs, shaping future demographics.

The economic transformation during WWII marked the definitive end of the Depression and positioned the United States for global economic leadership in the post-war world.

FAQ

The Federal Reserve’s actions during the late 1920s and early 1930s significantly worsened the economic downturn. Initially, it failed to control excessive speculation by keeping interest rates low in the lead-up to the Wall Street Crash, encouraging reckless borrowing and stock purchases. When the crash occurred, the Fed reversed course and raised interest rates in 1931, aiming to protect the gold standard and maintain confidence in the dollar. However, this contractionary policy reduced the money supply at a time when the economy desperately needed liquidity. As banks failed and businesses collapsed, the Fed’s refusal to act as a lender of last resort led to further financial panic and mass withdrawals from banks. Its inaction caused widespread deflation, falling prices, and rising real debt burdens. Instead of supporting recovery, the Federal Reserve's mismanagement turned what might have been a severe recession into a prolonged and devastating depression, undermining confidence in monetary policy.

The agricultural sector was one of the hardest hit during the Great Depression. Facing long-term overproduction, falling prices, and mounting debt since the 1920s, many farmers were already struggling before the Wall Street Crash. By the early 1930s, commodity prices collapsed, and rural incomes plummeted. The Dust Bowl—a severe environmental disaster caused by drought and poor farming practices—devastated areas of the Midwest, turning once-productive farmland into desert and displacing thousands. In response, the New Deal introduced the Agricultural Adjustment Act (AAA) in 1933, which sought to raise prices by reducing output. Farmers were paid to plough under crops or slaughter livestock, controversial measures that nonetheless stabilised some markets. However, benefits often favoured large landowners, leaving tenant farmers and sharecroppers—many of them Black Americans—worse off. Later reforms focused more on soil conservation and rural electrification. Though some relief was provided, deep-rooted issues in agriculture persisted throughout the 1930s, requiring long-term policy changes.

The severity of the 1929 crash stemmed from the unprecedented scale of speculation and systemic weaknesses in financial regulation. During the 1920s, widespread optimism and loose credit fuelled a speculative bubble. Millions of Americans—many with little financial literacy—invested in stocks, often using margin buying, where they paid only a small fraction of the stock price upfront and borrowed the rest. This created a highly leveraged market, vulnerable to any loss of confidence. When prices began to dip in October 1929, panic spread quickly, leading to mass sell-offs. Crucially, the lack of safeguards, such as circuit breakers, deposit insurance, or federal oversight of brokers and banks, meant there was no institutional buffer to prevent the collapse. Unlike previous downturns, the interconnectedness of speculative investment, consumer credit, and fragile banking systems allowed the crash to spiral into a broader economic catastrophe. The psychological blow to investor and consumer confidence further deepened the downturn.

World War II transformed the position of industrial workers, offering economic opportunity and greater bargaining power. The sudden demand for war matériel led to massive government contracts and retooling of factories for weapons, vehicles, and supplies. This created a labour shortage, especially with millions of men enlisted. Consequently, wages rose, working hours increased, and unemployment effectively disappeared. For many workers who had struggled through the Depression, the war provided stable jobs and improved living standards. The government encouraged union cooperation through the National War Labor Board (NWLB), which mediated disputes to avoid strikes that could disrupt production. While strikes were limited, union membership grew substantially during the war. African Americans and women entered industrial work in greater numbers, though often faced discrimination and unequal pay. The war also set the stage for future labour rights developments. In sum, WWII boosted industrial labour and began shifting workforce demographics, laying the groundwork for post-war economic expectations.

Between 1920 and 1945, there was a fundamental shift in how the federal government approached economic responsibility. In the 1920s, Republican administrations under Harding and Coolidge promoted a laissez-faire philosophy, believing minimal federal intervention and low taxation would encourage growth. The government’s role in economic management was limited, and the private sector was trusted to regulate itself. However, this approach faltered with the onset of the Great Depression. The inadequacy of Hoover’s voluntaryism further discredited non-interventionist policies. The election of Franklin D. Roosevelt marked a turning point. Under the New Deal, the federal government took an active role in economic recovery and social welfare. This included regulating banks, creating public jobs programmes, implementing social insurance, and promoting industrial recovery. WWII expanded this role even further, with centralised control over production, prices, and employment. By 1945, federal economic responsibility was entrenched, and government intervention had become an accepted and expected part of managing the national economy.

Practice Questions

To what extent did the New Deal resolve the economic problems caused by the Great Depression in the years 1933–1941?

The New Deal significantly mitigated the worst effects of the Great Depression, offering relief through public works and reforming the banking system. Programmes like the WPA and CCC reduced unemployment, while the FDIC and Social Security Act stabilised finance and welfare. However, structural problems such as persistent unemployment and racial inequality remained, and full recovery was only achieved through WWII mobilisation. Though the New Deal laid the foundation for a more active federal government, its success in resolving economic problems was partial and incomplete without the transformative impact of the wartime economy.

How far was the Wall Street Crash the main cause of the Great Depression?

While the Wall Street Crash of 1929 was a major trigger, it was not the sole cause of the Great Depression. Deeper structural weaknesses—such as overproduction, income inequality, rural poverty, and an unstable banking system—made the economy vulnerable. The crash exposed these fragilities, leading to a collapse in confidence and demand. Additionally, poor government responses and global trade issues worsened the crisis. Thus, the crash was a catalyst rather than a root cause, and the Depression resulted from a combination of long-term economic imbalances and policy failures.

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