Labor Busted, Rising Inequality and the Financial Crisis of 1929: An Unlearned Lesson
AbstractAlthough 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 â€“ 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.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by American University, Department of Economics in its series Working Papers with number 2013-07.
Date of creation: 2013
Date of revision:
Contact details of provider:
Web page: http://www.american.edu/cas/economics/
inadequate demand; consumer externalities; social respectability; speculation; financial innovation; ideology;
Find related papers by JEL classification:
- E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- G01 - Financial Economics - - General - - - Financial Crises
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-06-04 (All new papers)
- NEP-HIS-2013-06-04 (Business, Economic & Financial History)
- NEP-HME-2013-06-04 (Heterodox Microeconomics)
- NEP-MAC-2013-06-04 (Macroeconomics)
- NEP-PKE-2013-06-04 (Post Keynesian Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Christina D. Romer, 1993. "The Nation in Depression," Journal of Economic Perspectives, American Economic Association, vol. 7(2), pages 19-39, Spring.
- Romer, Christina D, 1990.
"The Great Crash and the Onset of the Great Depression,"
The Quarterly Journal of Economics,
MIT Press, vol. 105(3), pages 597-624, August.
- Christina D. Romer, 1988. "The Great Crash and the Onset of the Great Depression," NBER Working Papers 2639, National Bureau of Economic Research, Inc.
- Lee E. Ohanian, 2009.
"What - or Who - Started the Great Depression?,"
NBER Working Papers
15258, National Bureau of Economic Research, Inc.
- Jon D. Wisman, 2012.
"Wage Stagnation, Rising Inequality and the Financial Crisis of 2008,"
2012-01, American University, Department of Economics.
- Jon D. Wisman, 2013. "Wage stagnation, rising inequality and the financial crisis of 2008," Cambridge Journal of Economics, Oxford University Press, vol. 37(4), pages 921-945.
- Martha L. Olney, 1999. "Avoiding Default: The Role Of Credit In The Consumption Collapse Of 1930," The Quarterly Journal of Economics, MIT Press, vol. 114(1), pages 319-335, February.
- White, Eugene N, 1990. "The Stock Market Boom and Crash of 1929 Revisited," Journal of Economic Perspectives, American Economic Association, vol. 4(2), pages 67-83, Spring.
- Jon D. Wisman, 2008. "Household Saving, Class Identitiy, and Conspicuous Consumption," Working Papers 2008-19, American University, Department of Economics.
- Jon D. Wisman & Matthew E. Davis, 2013.
"Degraded Work, Declining Community, Rising Inequality, and the Transformation of the Protestant Ethic in America: 1870–1930,"
American Journal of Economics and Sociology,
Wiley Blackwell, vol. 72(5), pages 1075-1105, November.
- Jon D. Wisman & Matthew Davis, 2011. "Degraded Work, Declining Community, Rising Inequality, and the Transformation of the Protestant Ethic in America: 1870-1930," Working Papers 2011-08, American University, Department of Economics.
- Peter Temin, 1991. "Lessons from the Great Depression," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262700441, December.
- Milton Friedman & Anna J. Schwartz, 1963. "A Monetary History of the United States, 1867-1960," NBER Books, National Bureau of Economic Research, Inc, number frie63-1, July.
- Persson, T. & Tabellini, G., 1993.
"Is Inequality Harmful for Growth,"
537, Stockholm - International Economic Studies.
- Milton Friedman & Anna J. Schwartz, 1965. "The Great Contraction, 1929-33," NBER Books, National Bureau of Economic Research, Inc, number frie65-1, July.
- Clarence D. Long, 1960. "Wages and Earnings in the United States, 1860-1890," NBER Books, National Bureau of Economic Research, Inc, number long60-1, July.
- Samuel Bowles & Yongjin Park, 2005.
"Emulation, Inequality, and Work Hours: Was Thorsten Veblen Right?,"
Royal Economic Society, vol. 115(507), pages F397-F412, November.
- Samuel Bowles & Yongjin Park, 2004. "Emulation, Inequality, and Work Hours: Was Thorsten Veblen Right?," UMASS Amherst Economics Working Papers 2004-14, University of Massachusetts Amherst, Department of Economics.
- Samuel Bowles & Yongjin Park, 2003. "Emulation, Inequality, and Work Hours: Was Thorsten Veblen Right," Department of Economics University of Siena 409, Department of Economics, University of Siena.
- Jon D. Wisman & James F. Smith, 2009.
"Legitimating Inequality: Fooling Most of the People All of the Time,"
2009-25 JEL classificatio, American University, Department of Economics.
- Jon D. Wisman & James F. Smith, 2011. "Legitimating Inequality: Fooling Most of the People All of the Time," American Journal of Economics and Sociology, Wiley Blackwell, vol. 70(4), pages 974-1013, October.
- Nelson H. Barbosa-Filho & Lance Taylor, 2006. "Distributive And Demand Cycles In The Us Economy-A Structuralist Goodwin Model," Metroeconomica, Wiley Blackwell, vol. 57(3), pages 389-411, 07.
- Peter Rappoport & Eugene N. White, 1991.
"Was there a bubble in the 1929 Stock Market?,"
NBER Working Papers
3612, National Bureau of Economic Research, Inc.
- Stockhammer, Engelbert & Onaran, Ozlem, 2004. "Accumulation, distribution and employment: a structural VAR approach to a Kaleckian macro model," Structural Change and Economic Dynamics, Elsevier, vol. 15(4), pages 421-447, December.
- Glaeser, Edward L. & Saks, Raven E., 2006. "Corruption in America," Journal of Public Economics, Elsevier, vol. 90(6-7), pages 1053-1072, August.
- Huberman, Michael & Minns, Chris, 2007. "The times they are not changin': Days and hours of work in Old and New Worlds, 1870-2000," Explorations in Economic History, Elsevier, vol. 44(4), pages 538-567, October.
- Robert J. Gordon & John M. Veitch, 1987.
"Fixed Investment in the American Business Cycle, 1919-83,"
NBER Working Papers
1426, National Bureau of Economic Research, Inc.
- Robert J. Gordon & John Veitch, 1986. "Fixed Investment in the American Business Cycle, 1919-83," NBER Chapters, in: The American Business Cycle: Continuity and Change, pages 267-358 National Bureau of Economic Research, Inc.
- Jon D. Wisman & Aaron Pacitti, 2013. "Ending the Crisis With Guaranteed Employment and Retraining," Working Papers 2013-12, American University, Department of Economics.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Thomas Meal).
If references are entirely missing, you can add them using this form.