After the First World War, the United States entered into a period of relative prosperity. Actual GDP of the country exceeded potential GDP by about 15%. Almost all industries experienced high growth rates, as demand for every major product almost doubled in a span of 10 years. Financial institutions too enjoyed some measure of growth during this period. The available credit both to businesses and private individuals rose by 40% in a span of 6 years. Real wages increased by about 5% in two years. Agricultural products were exported to many countries at a relatively high price (especially in Europe).
In general, the economy of the United States was all but in a state of growth. Much of the prosperity gained from this time period was due to the policies of the Republican government, specifically to the secretary of commerce, Herbert Hoover. With his direction, some of the implemented policies were as follows: 1) Creation of powerful ties between the government and businesses. It was the intention of the Republican administration to improve its relationship with businesses as a means of maintaining economic stability;
2) Formalizing trade relationships with other countries such as the USSR. With the guidance of Hoover, formalization of trade relationship would eliminate wastage in export production and increase efficiency in the import sector of the US economy; 3) Subsidization of infant industries. Some of the infant industries in the country were heavily subsidized for almost 10 years. Afterwhich, these industries were expected to adapt to competition in the foreign market; 4) And, increased funding for social welfare.
During the administrations of Harding and Hoover, funding for social welfare and health infrastructure were increased. This measure though was a means to increase Republican support in the 1928 elections (in which the Democrats won). The First World War had a lasting impact on the foreign policy of the United States. When the British prime minister and the French premier asked President Wilson to allow the United States as a major member of the League of Nations, the latter reluctantly agreed.
In truth, many of the Americans at that time were not very eager to intervene in the affairs of other nations, as it might involve the United States into another major war. Here was the birth of isolationism. From the Wilson administration to that of Roosevelt before the Japanese attack of Pearl Harbor, the country remained indifferent with the affairs of Europe. The idea of isolationism was simple. If a country were to avoid a major war, then it must not intervene in the state of affairs of other countries (except when it was attacked).
This was not the whole story. Many Americans felt that it was more rational to direct the energies of the country towards economic development rather than impinge on the sovereignty of other countries. The prosperity which the United States enjoyed for almost a decade was temporary. Early in 1927, there were signs that the economy was on its dead end. Production increased at a decreasing rate. Financial institutions invested much of their capital to risky assets. Industries which were heavily subsidized showed no improvements.
Unemployment rate increased by about 5%. The United States began to experience the difficulties of having a trade deficit. Foreign borrowers of the United States failed to pay their loans. There was also a significant decline in consumption and a significant increase in savings. All these factors led to the Crash of 1929 which allowed Roosevelt to be elected as president of the country. Here, the period of the Great Depression began. Reference Morison, Samuel Eliot. 1964. The Oxford History of the American People. Oxford: Oxford University Press.
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