How was the unequal distribution of wealth connected to the Great Depression?

The unequal distribution of wealth was connected to the Great Depression in that the wealthiest classes controlled much of the income and savings and the lower classes worked for low wages and were unable to save. This led to an unstable economy, and when the stock market crashed due to speculation, the economy also crashed, leading to the Great Depression.

Expert Answers

An illustration of the letter 'A' in a speech bubbles

The 1920s were a time period where wealth gaps were accelerating, with more and more wealth becoming concentrated among a super-wealthy elite. However, if you look toward the experience of farmers and factory workers, you'll find that they had already been struggling across the decade in question.

Meanwhile, you should...

Unlock
This Answer Now

Start your 48-hour free trial to unlock this answer and thousands more. Enjoy eNotes ad-free and cancel anytime.

Start your 48-Hour Free Trial

The 1920s were a time period where wealth gaps were accelerating, with more and more wealth becoming concentrated among a super-wealthy elite. However, if you look toward the experience of farmers and factory workers, you'll find that they had already been struggling across the decade in question.

Meanwhile, you should factor in that an industrial economy is first and foremost driven by consumption, and this fundamental reality makes severe instances of wealth inequality dangerous for a national economy. After all, the super wealthy will only ever be a small subset of the larger population, and its purchasing power will always be limited as a result. Thus, when it comes to the health of a national economy, the lower and middle classes, by weight of population, will always be far more vital in driving economic growth: if they have purchasing power, the economy is in a position to thrive, and if they lack purchasing power and must focus on making ends meet, the economy is going to stall.

This was precisely the pattern in the leadup to the Great Depression, which saw a great deal of industrial overproduction and consumer products not being purchased. The economy was fundamentally unhealthy, even as the stock market, driven by rampant speculation and unrealistic optimism, remained decidedly out of touch with the larger economic realities. The result was the Great Depression.

Last Updated by eNotes Editorial on
An illustration of the letter 'A' in a speech bubbles

The Roaring Twenties are often presented as a time of great prosperity and excitement. The rise of industrialism and the First World War led to increases in production and wealth. Yet that wealth was not spread equally throughout the population—quite the opposite, in fact. By the end of the 1920s, the 0.1% of Americans at the top of the social scale made as much money as the 42% at the bottom. Wealthy people also held 34% of the country's savings accounts. About 80% of Americans did not even have a savings account. They lived from paycheck to paycheck with no backup in case of emergencies.

Further, the wealthiest people in American brought home large incomes that they often invested unwisely, speculating in the stock market with abandon and taking major risks. They felt they could afford to do so. The vast majority of Americans, however, settled for low wages, often less than $2,500 per year for a family. They could not afford to purchase the consumer goods being produced by the companies for which they worked. This economic disparity led to a highly unstable economy.

The speculation in the stock market (along with other factors) eventually led to an economic crash. Wealthy Americans lost their investments and went from rich to poor overnight. Banks failed, and Americans who had managed to save lost their savings. Industrialists scaled back production, for the market could no longer support sales. Workers lost their jobs, and many of them had no savings to support them when their paychecks disappeared. The poor became poorer yet, to the point of desperation. Indeed, the Great Depression hit America hard as the already shaky economy disintegrated completely.

Last Updated by eNotes Editorial on
An illustration of the letter 'A' in a speech bubbles

There were many developments that took place during the 1920’s which culminated in the Great Depression at the end of that decade. This period is known as the “Roaring Twenties” as a result of the industrial revolution and the discovery of electricity which transformed people’s way of life tremendously. In America in particular, industries manufactured electric home appliances which marketers triggered demand for by portraying them as necessities for each home. Henry Ford’s automobiles were also quite affordable thanks to mass production and a majority of people went out of their way to purchase them. The vast majority of Americans worked in the burgeoning industries at the time for poor wages. They resorted to installment buying to fit in the lifestyle demands of that era. The manufacturers on the other hand exploited the cheap labor to produce more goods at very low cost thereby enjoying very high profits which they kept to themselves. However, the workers’ wages did not increase and they sank into debt soon after because they lacked surplus money after catering to their basic needs to offset their installment purchases.
The discrepancy between the wealthy company owners and the poorly paid workers created an unstable economic environment. It is estimated that the top 0.1% of the America population in combination earned what the bottom 42% of the population earned. It is also estimated that in the same year Ford recorded an individual income of 14 million dollars, the average income of the population stood at approximately 7 thousand dollars. After a while, the product sales plummeted because the market could not afford luxury spending and the manufacturers had over produced. Investors lost confidence in the market and rushed to sell their shares leading to the stock market crash in 1929.

Approved by eNotes Editorial Team
An illustration of the letter 'A' in a speech bubbles

According to mainstream historians, the connection between these is that unequal distribution of wealth did a great deal to cause the Depression.

The idea is that the rich had too much of the money and the rest did not have enough.  When the Depression started, this meant that the non-rich did not have enough money to spend to tide them over.  If the wealth had been distributed more equally, the average person would have been able to spend more and the demand for goods and services would not have dropped so severely.  If the US as a whole had had the same amount of wealth, but distributed more equally (historians argue) the Depression might not have happened.

Approved by eNotes Editorial Team