The 1920s began with the last-man-standing returning, after having spent four years at the front-lines. They were coming back to their families, friends, and the life they had left behind to fight for their countries. The First World War had been good for America as it had been able to capture markets that used to buy from Europe and even after the war ended, countries continued to buy American goods. The Republican government adopted the policy of isolationism once the war ended and imposed import tariffs, leading to a boom in the economy.

Roaring Twenties, as it came to be known, was a decade of change, glamour, and successes. Factory production had risen rapidly to meet the demands of the war; mass production gave way to cars, radios, telephones, and refrigerators; hire purchase meant that people could enjoy the goods straight away and pay in the following months. For instance, Henry Ford started producing the T-Ford cars at a large scale using the assembly-line (more than one car per minute) to make it affordable for everyone. What once cost $1200 (1909), was being sold at only $295 by 1928.

An increase in the demand for various goods meant that more people had to be hired to keep up with the trend, which in turn raised the workers’ wages. The rise in wages further led to consumption expenditure, thus, creating a virtuous cycle.

Considering the example of T-Ford cars, car production used up 20 percent of America’s steel, 80 percent of its rubber, 75 percent of its plate-glass and 65 percent of its leather. Thus, more cars meant more employment in all of these sectors. The ripple-effect did not stop here. Cars use petrol, need roads, gas stations, and garages. By the end of the 1920s, seven billion gallons of petrol were being used each year. This helped to create jobs in the oil and construction industry as well. People who were employed enjoyed a higher standard of living, owing to higher wages, cheaper products and the system of hire-purchase.

Birth of the mass culture wasn’t the only highlight of the Roaring Twenties. On August 18, 1920, the Nineteenth Amendment to the American Constitution was passed, giving women the right to vote. Women also started taking up white-collar jobs, i.e. managerial and administrative work, and the advancement in technology helped relieve them of their household work. Musical styles were also changing and the 1920s came to be known as the age of Jazz. Many people also had spare cash to invest in stocks and as a result, the stock market underwent rapid expansion.

There seemed to be no reason why this cycle of growth and prosperity should stop. At least that was the prevailing idea until the end of the decade. Then, in a moment of apparent triumph, everything fell apart.

By 1929, spending had declined due to tight monetary policies aimed at curbing speculation. This led to a fall in production, an increase in unemployment, and accumulation of large loans with the banks; but none-the-less stock prices continued to rise till they could no longer be justified by expected future earnings. Investors lost confidence and this gave rise to panic selling of overpriced shares on October 24, 1929. America’s invested wealth lost $26 billion in value. By Day-5, i.e. October 29, a.k.a. ‘Black Tuesday’, 16 million shares had been traded and stock prices fell by 33 percent. The cycle of prosperity had turned into a spiral of depression and this marked the beginning of the Great Depression.

In the days that followed, output declined drastically, unemployment rose to more than 12 million and there were widespread poverty and homelessness. Banks themselves were investors and, thus, they too suffered as the stock prices dipped. Many banks had to shut down and savers lost their money, costing the banks their credibility.

Hardships faced during Depression had fueled the rise of extremist movements in a number of European countries, especially Adolf Hitler’s Nazi regime in Germany. Germany’s aggression led invasion of Poland led to the outbreak of the Second World War in Europe in 1939. Although America remained neutral until 1941, it had started strengthening its military infrastructure, which led to an increase in industrial production and the creation of jobs.

Now, there are two different views about how the Great Depression ended. The most prominent one is that the massive spending done during World War-II marked the end of the Depression. It holds that as the war started, economic output rose and unemployment fell. But it actually led to a decline in the standard of living. Sending millions of people to fight the war cannot be considered employment. And rise in output due to an increase in the production of defense equipment (guns, tanks, ships, airplanes) does not reflect the living standards of the working class. This points to the case of ‘wartime prosperity’. In fact, all this came with a huge financial burden.

The Depression actually ended with reductions in government spending, taxation and regulations at the end of the war, which is in contrast to what Keynes, Father of Macro-economics, had to say. This is because the money used to finance the government’s expenditure is collected from the private sector in the form of taxes, which drains investment capital from productive activities. Instead, tax rate cuts encourage businesses to invest and create employment opportunities. A worldwide monetary expansion fueled spending by lowering interest rates and making credit easily available. It also created expectations of inflation that made borrowers confident about being able to repay the loan with their wages and profits.

Keynes also believed that economic depression might continue indefinitely unless government spending was increased sufficiently. However, an economic miracle took place after the end of the Second World War, when the economy was in a boom not because of government spending but the opposite.

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