Did inequality contribute to the outbreak of the Great Depression?
Inequality, especially income inequality is often cited as one cause of the Great Depression. Briefly, the theory states that since industry and production rose so rapidly, middle and low income people could not keep up with the rising prices.
Debtors thereupon were forced to curtail their consumption in an effort to create a margin that could be applied to the reduction of outstanding debts. This naturally reduced the demand for goods of all kinds and brought on what seemed to be overproduction, but was in reality underconsumption when judged in terms of the real world instead of the money world. This, in turn, brought about a fall in prices and employment.
(Eccles, Beckoning Frontiers, mtnmath.com)
The connection between debt, production, and consumption created a self-perpetuating cycle: people tried to put more money into their debts, and bought less; supply exceeded demand and so factories and shops laid off employees; prices fell, but so did income as people tried and failed to find new work. People couldn't find work because no one was hiring; no one was hiring because no one was buying; no one was buying because no one could find work. The reliance on pricing and stocks to keep the economy flowing failed as people found they could not afford even low-priced goods, and the cycle continued until the stock market crashed. By the time the government got involved, massive unemployment, displacement, and the Dust Bowl had all-but destroyed the American economy.