The Real Economy of the 1920s
Before the Fall: When Markets Lost Their Balance
Part I of “Why the New Deal Still Matters”
The 1920s are often remembered as a golden age of American capitalism—a time of innovation, prosperity, and confidence in the future. And in some ways, that reputation is deserved. Industrial output surged. New technologies transformed daily life. Corporate profits soared.
But beneath that surface, the American economy was quietly losing its balance.
Growth was real—but it was narrow. Wealth accumulated—but unevenly. Markets expanded—but the conditions that make markets resilient were steadily eroding. By the end of the decade, the system looked strong on paper and brittle in practice.
The Great Depression was not a freak accident. It was the predictable result of an economy that had outgrown its guardrails.
Growth Without Broad Participation
Productivity rose sharply throughout the 1920s. Factories became more efficient. Output increased. Corporate earnings climbed.
Wages, however, did not keep pace.
A growing share of economic gains flowed to owners and executives rather than workers. Most households saw modest income growth at best, even as the economy produced more goods than ever before. This imbalance mattered more than it appeared at the time.
Markets depend on broad purchasing power. When most people can afford what the economy produces, demand is stable and self-reinforcing. When income concentrates at the top, demand becomes fragile—propped up by credit, speculation, and optimism rather than wages.
By the late 1920s, consumption increasingly relied on household debt, while investment flowed into financial assets instead of productive capacity. The economy was growing, but the foundation underneath it was thinning.
Competition in Name Only
The era is often described as one of free enterprise, but many key industries were not truly competitive.
Several sectors were dominated by a small number of firms—or even a single firm—with the power to control prices, supply, and market access. Among the most prominent:
Standard Oil, which at its peak controlled roughly 90 percent of U.S. oil refining
U.S. Steel, which dominated steel production and pricing
This kind of concentration did not reflect healthy competition. It reflected markets that had stopped functioning as markets.
When dominant firms can undercut competitors, buy them out, or block new entrants, prices no longer signal true supply and demand. Innovation slows. Risk concentrates. Smaller businesses are squeezed out. The appearance of efficiency masks the loss of resilience.
Antitrust Laws Existed—Enforcement Didn’t
This concentration of power was not illegal in theory.
The Sherman Antitrust Act had been on the books since 1890. The law was designed to prevent exactly this kind of market dominance.
In practice, enforcement was inconsistent and often reluctant. Courts frequently favored arguments about “efficiency” and scale. Trust-busting actions, when they occurred, typically came after monopolies were already entrenched.
A rule that is rarely enforced sends a clear message: it can be ignored.
By the 1920s, antitrust law existed more as a symbol than as a constraint, and market power continued to consolidate.
Finance Without Guardrails
Nowhere was the lack of restraint more dangerous than in finance.
The financial system of the 1920s operated with remarkably few protections:
No deposit insurance
No securities regulator
No separation between commercial banking and investment speculation
Minimal transparency for investors
Banks routinely lent depositors’ money into speculative ventures. Margin trading—borrowing heavily to buy stocks—was widespread. Risk was not eliminated; it was obscured.
Confidence substituted for safeguards. As long as asset prices rose, the system appeared sound. But it had little capacity to absorb losses when prices fell.
When stress arrived, there was no backstop—and no margin for error.
The Quiet Collapse of Trust
Markets do not run on prices alone. They run on confidence.
By the end of the decade, that confidence was already fraying. Ordinary Americans distrusted banks. Investors worried about overvaluation. Businesses hesitated to extend credit. Workers, shut out of the boom, had little cushion against downturns.
Trust is invisible when it exists and devastating when it disappears. Once confidence breaks, markets freeze. Credit dries up. Even a wealthy economy can grind to a halt almost overnight.
Why Collapse Became Inevitable
By 1929, the system carried multiple structural weaknesses:
Extreme wealth concentration
Weak competition
Overleveraged finance
Wage stagnation
Debt-driven consumption
No meaningful safety nets
The economy was not resilient enough to absorb a shock—any shock.
So when the downturn came, the question was never whether the market would correct itself smoothly. It was how much damage would be done before correction arrived.
The answer, as history showed, was catastrophic.
The Question America Faced
By the early 1930s, the debate was no longer about ideology. It was about survival.
The central question wasn’t whether markets should be left alone. It was whether the market system, as it existed, could survive at all.
What followed was not an attempt to replace capitalism—but to restore the conditions that allow markets to function.
That story begins next.