The economy recovered during the late 19th century, aided by increased railroad construction, restoration of trade, exploitation of the timber and coal resources of eastern Kentucky, and expansion of industry. Despite general economic improvement, however, agriculture suffered as a result of the dependence of many farmers on one crop, tobacco, and the collapse of land values following the Panic of 1873. Major national protest movements, such as the National Grange, the Farmers' Alliance, and the Populist party, which sought regulation of railroads and industries, gained support in Kentucky. A new constitution incorporating curbs on the powers of government and monopolistic corporations was adopted in 1891, but it failed to end political and social unrest.

In 1900, following an election marred by fraud and violence, governor-elect William Goebel, who had campaigned against “plutocratic” interests, was assassinated. Discontent among western Kentucky's tobacco farmers over their treatment by the processors (known as the “tobacco trust”) led to the Black Patch War of 1906–09, so-called because the farmers grew dark-leaf tobacco. The growers attempted to break the power of the processors by selling their tobacco only through cooperatives. Growers who refused to go along were intimidated by “night riders,” whose raids led the authorities to call out the state militia in 1908. Eventually legislation regulating the tobacco industry was enacted.

World War I brought prosperity to farmers and generated a boom in the coal mines of eastern Kentucky. In the 1920's, however, there was a prolonged agricultural depression. During the Prohibition era, 1920–33, the closing of the distilleries created serious unemployment. The Great Depression of the 1930's caused additional unemployment. During the mid-1930's, conditions of near anarchy prevailed in the coalfields, especially in Harlan and Perry counties, as mine owners resisted organization of their workers by the United Mine Workers.

Economic recovery came with World War II, as farmers and manufacturers stepped up production to meet war needs. Industrial expansion brought increased urbanization as workers left agricultural counties for major industrial centers, such as Louisville, Lexington, and Ashland. After the war, the state began a campaign to attract new industry, and made improvements in roads, schools, and various state services.

In 1950 Kentucky authorized admission of blacks to all state colleges and universities. However, there were disturbances in some areas of Kentucky when efforts were made to comply with the 1954 decision of the U.S. Supreme Court against racial segregation in public schools. In 1975 the courts ordered the use of busing to desegregate the predominantly black schools of Louisville and the mainly white schools of surrounding Jefferson County.

During the 1970's, the state's economy benefited from an increased national demand for coal, although the mining industry was beset by labor troubles that included a 109-day strike during 1977–78. In the early 1980's, the national economic recession seriously affected Kentucky; particularly hard hit were the heavy industries in the Louisville area.

In 1983 Martha Layne Collins was elected governor, the first woman to hold that post in the state's history.

Having come under attack during the previous decade, the Kentucky Supreme Court ruled the state’s public school system unconstitutional in 1989 because of unevenly distributed and inadequate funding. This led to, the passage of the Kentucky Education Reform Act in 1990.

Kentucky became one of the nation’s leaders in automobile production with the Toyota Motor Corporation opening a plant in 1988 to add to several existing auto plants.

By the end of the 1900s, fewer mining jobs left many people unemployed around Kentucky’s coal fields. This led income, health, and education levels to fall behind both the state’s urban areas and national levels.

In 1992, a constitutional amendment allowed state officers to serve two consecutive terms. In 2000, another amendment was approved that allowed the legislature to meet annually.