Up to the year 1948, there were 5 film studios with major roles. At the time, they could crank out a new movie every week. If one movie did not catch the fan wave, no big deal, another one was coming out next week. Movie theaters were cheap, and a popular destination in a society trying to recuperate after the first and second world wars and go through the Great Depression. Not only was it cheap, but you could also get free stuff as a gift for attending, when you went to the movies.
During the Great Depression, all industries where suffering with layoffs. But everybody in Hollywood had jobs. Actors, camera operators, and all sorts of other creative film types had full working days, moving from one project to the next. It was very different from today's movie industry employment, where most of your time is spent looking for a job.
How could the film studios afford to keep all those people constantly employed? They controlled the distribution channels, the movie theaters. They held exclusive rights to which theaters would show their movies. The studios created the films, had the writers, directors, producers and actors on staff ("under contract" as it was called), owned the film processing and laboratories, created the prints and distributed them through the theaters that they owned.
Actors where under contract, which guaranteed employment with a particular studio for a given number of years, as well as forcing them to be "stuck" with that studio, with no rights to work for another studio.
In a time when presence of a certain movie star in a movie was the only factor guaranteeing the film's success, studios where able to strike deals with theaters who would rent movies in blocks of 13, 52, or even 104 titles, even before they were made, without even looking at them first. If a theater wanted a few Class A movies with a certain star, studio owners made them sign an agreement that they had to rent the studio's entire output for the season. So along with a few class A, studio's could rent out a number of class B movies at a flat price, rather than as a percentage of popularity compared to class A movies. This allowed for full-time production, without worrying about the quality of any one film.
That was a much more economical way of distributing movies than in today's theater scene, where you have to convince individual theater companies to show your film, with every film you produce. Film studios in the golden age had guaranteed distribution. This eliminated the marketing challenges faced by today's fragmented film industry. They had a ready customer base which kept coming back and watching their movies.
In July 1938, the Justice Department's antitrust division filed a suit, United States v. Paramount Pictures, Inc. et al., charging the eight major Hollywood studios with violating the Sherman Antitrust Act. On October 29, 1940, the Big Five studios (Loews/MGM, Paramount, 20th Century-Fox, Warner Bros.-First National, and RKO—the majors that owned large theater chains) signed a consent decree in an attempt to settle the case. It provided, among other things, that "block booking would continue, but in blocks no larger than five films; trade shows would be held regularly to provide exhibitors with advance screenings; [and] forcing of shorts and newsreels would be banned.
In its 1948 decision, the Supreme Court ordered the elimination of block booking and demanded a separation of theater holdings from production and distribution. This, essentially, forced studios to stop renting out movies in blocks, and sell their theaters. Without control over block booking, studios feared that they could no longer force theaters to buy up to 400 movies each year. In anticipation of mass profit-loss, studios cut production schedules and terminated contracts with actors, producers, directors and other staff.
The era of mass film production and guaranteed film employment came to an end. Newly unemployed artists began pursuing careers in a new medium - the television. Film goers followed their stars to the new medium. And so the film industry went into decline.
Actors saw that they had more choices now, and began to find ways to break contracts with studios.
Besides threats from the government and television, American studios where faced with rising foreign film production. Producers from France, Italy, and Britain, went to inventing new cinematic concepts, which caught traction with the American audience.
Sources:
http://tvtropes.org/pmwiki/pmwiki.php/Main/FallOfTheStudioSystem
http://en.wikipedia.org/wiki/United_States_v._Paramount_Pictures,_Inc.
http://en.wikipedia.org/wiki/Block_booking