Why did the US economy lurch from boom to bust between 1920 and 1930?
The economy went from "boom" to "bust" during the Twenties because of a number of factors. In short, most of them had to do with the fact that the prosperity of the 1920s was for many people a bit of a mirage. In reality, the economy was weak in several key areas.
For one thing, the farming sector, which still represented a significant portion of the American economy, was faltering throughout the Twenties. This was due, in short, to declining farm prices after World War I. Having borrowed heavily to invest in equipment and land during the war (when prices were high) farmers faced ruin when they fell rapidly after the war. The pattern of foreclosures and farm failures that many associate with the Depression of the 1930s actually began a decade earlier.
Also, industries that had been the bedrock of the American economy were foundering. Railroads in particular shed jobs as it struggled to compete with the emerging automobile industry, and the coal and steel industries, tied to railroad construction, slowed accordingly.
This pointed to another cause of the economic collapse. The economic expansion of the Twenties was based largely on consumer consumption and the manufacture of consumer goods. This in turn was fueled by consumer credit, where individuals borrowed money to purchase items such as automobiles and household appliances. Retailers, backed by banks, offered installment plans to consumers, who piled on considerable debts even as real wages declined.
Finally, the consumption economy of the Twenties masked a reality about the economy. Free of regulation and largely free of significant taxation, a gap between the nation's wealthy and the rest of Americans developed. A very small percentage of the nation's people controlled a very large portion of its wealth, a situation that would prove untenable. Ordinary people just didn't have the spending power to sustain the new consumption economy.