What was racism like during the Jazz Age? Why wouldn't record label companies record jazz musicians' music?

During the 1920s, there was still a great deal of overt racism in US society. There was still no thought of integration of the races. The Army had been segregated in WWI. The KKK was strong even in such relatively northern states as Indiana. Major League Baseball had no black players and would have none until after WWII. So there was clearly racism.

Record companies that did not record jazz probably shunned it for the same reasons that they wouldn't record early rock-n-roll 30 years later.  The worry was that white audiences would not want to listen to "black" music and so the records wouldn't sell.