Labor Busted, Rising Inequality and the Financial Crisis of 1929: An Unlearned Lesson

Jon Wisman

No 2013-07, Working Papers from American University, Department of Economics

Abstract: Although the Great Depression and the financial crisis of 1929 that triggered it have been endlessly studied, there is little consensus and even much puzzlement as to why they occurred. This article claims that beneath the many causal factors that have been advanced lie deeper underlying determining forces that have received less notice: wage stagnation and the dramatic increase in inequality following World War I. Wage stagnation and rising inequality fueled three dynamics that set the stage for a financial crisis – the focus of this study -- and contributed to the duration of the depression that followed. The first is that consumption was constrained by the smaller share of total income accruing to workers, thereby restricting investment opportunities in the real economy. Flush with greater income and wealth, the elite flooded financial markets with credit, helping keep interest rates low and encouraging the creation of new credit instruments, some of which recycled the rich's surplus assets as debt to those less well off. The second dynamic is that greater inequality pressured households to find ways to consume more to maintain their relative social status. As a result, household saving rates declined, households took on greater debt, and may have worked longer hours. The third dynamic is that, as the rich took larger shares of income and wealth, they gained relatively more command over everything, including ideology. Reducing taxes on the rich, favoring business over labor, and failing to regulate newly evolving credit instruments flowed out of this ideology.

Keywords: inadequate demand; consumer externalities; social respectability; speculation; financial innovation; ideology (search for similar items in EconPapers)
JEL-codes: E21 E44 G01 (search for similar items in EconPapers)
Date: 2013
New Economics Papers: this item is included in nep-his, nep-hme, nep-mac and nep-pke
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Citations: View citations in EconPapers (3)

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https://doi.org/10.17606/temx-ax90 First version, 2013 (application/pdf)

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