What is capitalism?

An economic system built on private ownership, profit and market competition.

Under capitalism, businesses and property are owned privately, not by the state. Owners invest money (capital) to make goods or services, sell them for a profit, and reinvest to grow. Prices are set by supply and demand in a competitive market.

• Laissez-faire: the belief that government should interfere as little as possible in the economy.
• Free market: buyers and sellers make their own choices with limited regulation.
• Shares and the stock market: people buy small parts of a company, hoping its value rises.

The rise of industrial capitalism

By 1900 the USA had become the world's leading industrial economy.

Rich natural resources, a growing population fed by immigration, and new technology made the USA an industrial giant. Powerful big businesses and monopolies - in steel, oil and railways - dominated whole industries and made a small number of owners enormously wealthy.

• Mass production: Henry Ford's moving assembly line (from 1913) made goods cheaper and faster.
• Ford's Model T car put motoring within reach of ordinary families.
• Higher wages in some factories, such as Ford's $5 day, helped workers become consumers too.

The 1920s economic boom

After the First World War the USA enjoyed a decade of rapid growth and rising consumer spending.

The 1920s became known as the Roaring Twenties. Factories poured out cars, radios, telephones, fridges and other consumer goods. Advertising and easy credit (hire purchase, or 'buy now, pay later') encouraged people to spend, while cinema, jazz and new fashions changed everyday culture.

• Car ownership soared, boosting steel, rubber, glass, oil and road building.
• Electrical goods and mass advertising created a modern consumer society.
• Republican governments kept taxes low, cut regulation and raised tariffs on imports.

Why did the economy boom?

Several forces combined to drive the growth of the 1920s.

Speculation on the stock market

Rising share prices tempted millions to gamble on shares - often with borrowed money.

As share prices kept climbing, ordinary people rushed to invest, hoping to sell later at a profit - a practice called speculation. Many bought shares 'on the margin', paying only a small part of the price and borrowing the rest. This worked while prices rose, but it meant the market was built on a mountain of debt.

• Share prices rose far faster than the real value of companies.
• Buying on margin meant a small price fall could wipe out an investor.
• By 1929 the market had become dangerously overheated - a speculative bubble.

Winners and losers of the boom

The 1920s boom hid deep inequality and weaknesses beneath the surface.

From boom to bust, 1913-1938

1. 1913 Ford introduces the moving assembly line
2. 1920s The Roaring Twenties consumer boom
3. 1929 Wall Street Crash (October)
4. 1930-32 Great Depression deepens; mass unemployment
5. 1932 Franklin D. Roosevelt elected president
6. 1933 New Deal begins - the 'First Hundred Days'
7. 1935 Second New Deal: Social Security, Wagner Act

The Wall Street Crash

In late October 1929 share prices collapsed, wiping out fortunes almost overnight.

Confidence cracked and investors rushed to sell before prices fell further. On Black Thursday (24 October 1929) and especially Black Tuesday (29 October 1929), millions of shares were dumped and prices crashed. Margin buyers could not repay their loans, and banks that had lent the money began to fail.

• The value of shares fell so far that many became almost worthless.
• Panic selling fed on itself as everyone tried to get out at once.
• The crash destroyed savings, credit and confidence across the whole economy.

The Great Depression

The crash spiralled into the deepest economic crisis in modern history.

As banks failed and confidence vanished, spending dried up. Factories cut production and laid off workers; jobless people could not buy goods, so still more factories closed - a downward spiral. By 1933 roughly one in four American workers was unemployed, and shanty settlements nicknamed 'Hoovervilles' appeared in many cities.

• Thousands of banks collapsed, wiping out families' savings.
• Farm prices fell so low that crops were left to rot while people went hungry.
• High US tariffs and falling trade spread the Depression around the world.

The New Deal: the 'Three Rs'

Roosevelt rejected laissez-faire and used government power to fight the Depression.

The 'alphabet agencies' - and the arguments

A wave of new government agencies put the New Deal into practice - but it divided opinion.

In the 'First Hundred Days' and after, Roosevelt created agencies known by their initials: the CCC (jobs in conservation), the TVA (dams and electricity), the AAA (help for farmers) and the WPA (public works). The Social Security Act (1935) introduced pensions and unemployment support.

The only thing we have to fear is fear itself. Franklin D. Roosevelt, inaugural address, 1933

• Critics on the right said it gave government too much power and cost too much.
• Critics on the left said it did too little for the very poorest.
• Most historians agree full recovery came only with the Second World War, but the New Deal saved capitalism and reshaped the state.

How the Depression reached South Africa

As a trading, gold-producing country, South Africa could not escape the world crisis.

Falling world trade and prices hit South Africa hard, and a severe drought deepened the pain for farmers. The government at first stayed on the gold standard, which kept the currency expensive and worsened the slump, until it left the gold standard at the end of 1932. The gold price then rose, boosting the mines and helping the economy recover.

• White and black farmers alike were pushed off the land, speeding urbanisation.
• Leaving the gold standard revived the crucial gold-mining industry.
• The crisis helped push Hertzog and Smuts into the 1934 'Fusion' government.

What we learned - and review questions

Capitalism drove spectacular growth, produced a devastating crash, and was reshaped by state intervention.

The USA's free-market boom of the 1920s rested on mass production, credit and confidence, but also on inequality and reckless speculation. The 1929 crash triggered the Great Depression, and Roosevelt's New Deal replaced pure laissez-faire with active government - a turning point in how modern states manage their economies.