The main cause of the depression was a huge inequality in the distribution of wealth. In 1929, the top 0.1% of Americans had a combined income equal to the bottom 42%, while that same top 0.1% controlled 34% of the savings while 80% of Americans had no savings at all (1). The industry reflected this dichotomy as well, where 200 companies controlled half of the corporate wealth at the time. John Maynard Keynes published his book The General Theory of Employment, Interest, and Money in 1936. He said in the preface of this book:.
"This book, on the other hand, has evolved into what is primarily a study of the forces which determine changes in the scale of output and employment as a whole; and, whilst it is found that money enters into the economic scheme in an essential and peculiar manner, technical monetary detail falls into the background." (2).
At this point in economic history, millions of unemployed people were calling for government intervention to combat the depression, though few viable solutions were offered. Keynes, however, went one step further by presenting a coherent theory, which stressed the role played by aggregate demand in determining output in the macroeconomy (3). Prior to Keynes" theories, most economists believed in the premise of a "self-correcting" economy. This postulate (referred to as the "neoclassical theory") requires two major assumptions: flexible labour markets, and Say's Law. .
Neoclassical economists believed that involuntary employment was no more than a short-run problem. They believed that flexible labour markets depended on "both the demand and supply of labour depend on the real wage rate, or wages expressed in constant base-year dollars, rather than the nominal wage rate, which is valued in current dollars" (3). .
Employers and workers only adjust their behavior when the purchasing power of their wages change. An example of this is in an inflationary market, if prices rise, purchasing power will fall .
