A Note on New Estimates of the Distribution of Income in the 1920s

Abstract

period from 1916 through 1929 is important to anyone interested in the history of income inequality in the United States. Current estimates suggest that income inequality increased in the antebellum period and reached a plateau of high income inequality from the Civil War to 1929.'' Inequality seems to have risen from the turn of the century to 1916 and then declined sharply during the First World War. 1920s brought a new surge of income inequality which, by 1929, pushed inequality to about the 1916 level.2 From 1929 to 1950 there was a significant decrease in income inequality in the United States followed by a period of relative distributional stability. Thus, 1916 and 1929 appear to have marked peaks in income inequality in the history of the United States. Because it directly preceded the Great Depression the surge of income inequality duning the prosperous 1920s has generated considerable interest. In 1946 Arthur Bums developed data which provided preliminary measures of this growing disparity, but the most iniportant evidence on changes in the distribution of income during the 1920s was presented in 1953 in Simon Kuznets's pathbreaking study, Shares of Upper Income Groups in Income and Savings. Kuznets carefully constructed income shares for upper-income percentiles of the total and nonfarm population. These shares provided evidence of increasing income inequality. For example, the share of disposable income ofthe top 1 percent of the nonfarm population rose from 13.13 percent in 1919 to 19.07 percent in 1929. From the business-cycle peak in 1923 to the cyclical peak in 1929 this share rose from 12.78 to 19.07 percent. Similar, though less pronounced, changes were found for the second and third, fourth and fifth, and sixth and seventh percentiles. share of disposable income for the lower 93 percent of the nonfarm population fell from 71.00 percent in 1919 to 69.74 percent in 1923 to 61.29 percent in 1929.4 In 1977 Charles Holt used Kuznets's data to estimate real per capita disposable incomes for nonfarn income percentiles. Holt found that the real per capita disposable incomes of the lower 93 percent of the nonfarm population fell 4 percent and concluded that, The inference is clear. Consumption increased markedly during the New Era in the face of little or no improvement in the consumption habits of the bulk of the nonfarm population.5 Recent research has shown that Kuznets's share estimates, and Holt's real per capita income estimates, overstate the rise in inequality during the twenties because no adjustments were made for changes in tax-avoidance behavior. This article draws upon new