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^^3d SessKm ^^} SENATE COMMITTEE PRINT



INVESTIGATION OF CONCENTRATION
OF ECONOMIC POWER



TEMPORARY NATIONAL ECONOMIC
COMMITTEE

A STUDY MADE UNDER THE AUSPICES OF THE DEPART-
MENT OF COMMERCE FOR THE TEMPORARY NATIONAL
ECONOMIC COMMITTEE, SEVENTY-SIXTH CONGRESS,
THIRD SESSION, PURSUANT TO PUBLIC RESOLUTION
NO. 113 (SEVENTY-FIFTH CONGRESS), AUTHORIZING
AND DIRECTING A SELECT COMMITTEE TO MAKE A
FULL AND COMPLETE STUDY AND INVESTIGATION
WITH RESPECT TO THE CONCENTRATION OF ECONOMIC
POWER IN, AND FINANCIAL CONTROL OVER,
PRODUCTION AND DISTRIBUTION
OF GOODS AND SERVICES



MONOGRAPH No. ^-6
CONCENTRATION AND COMPOSITION OF
INDIVIDUAL INCOMES, 1918-1937



Printed for the use of the
Temporary National Economic Committee




UNITED STATES

GOVERNMENT PRINTING OFFICE

WASHINGTON : 1940



f^ORTHEASTERN UNIVERSfTY SCHOOlof LftWDBRRRl



TEMPORARY NATIONAL ECONOMIC COMITTEE

(Created pursuant to Public Res. 113, 75th Cong.^

JOSEPH C. O'MAHONEY, Senator from Wyoming, Chairman

HATTON W. SUMNERS, Representative from Texas, Vice Chairman

WILLIAM H. KING, Senator from Utah

WALLACE H. WHITE, Jr., Senator from Maine

CLYDE WILLIAMS, Representative from Missouri

B. CARROLL REECE, Representative from Tennessee

THURMAN W. ARNOLD, Assistant Attorney General

•WENDELL BERGE, Special Assistant to the Attorney General

Representing the Department of Justice

JEROME N. FRANK, Chairman

•SUMNER T. PIKE, Commissioner

Representing the Securities and Exchange Commission

GARLAND S. FERGUSON, Commissioner

•EWIN L. DAVIS, Chairman
Representing the Federal Trade Commission
ISADOR LUBIN, Commissioner of Labor Statistics
•A. FORD HINRICHS, Chief Economist, Bureau of Labor Statistics
Representing the Department of Labor
JOSEPH J. O'CONNELL, Jr., Special Assistant to the General Counsel lr^r» 1

•CHARLES L. KADES, Special Assistant to the General Counsel lS^> 1'

Representing the Department of the Treasury IO"l^ ''

Representing the Department of Commerce

* * * k.-

CO r*

LEON HENDERSON, Economic Coordinator

DEWEY ANDERSON, Executive Secretary C3

THEODORE J. KREPS, Economic Adviser
'Alternates



^



Monograph No. 4

CONCENTRATION AND COMPOSITION OF INDIVIDUAL INCOMES,

1918-1937

BY

ADOLPH J. QOLDENTHAL



REPRINTED
BY

WILLIAM S HEIN & CO , INC

BUFFALO. N. Y.
1968



ACKNOWLEDGMENT

This monograph was written

by
ADOLPH J. GOLDENTHAL

Economic Analyst, National Income Division, Department oj Commerce
Under the general supervision of

ROBERT R. NATHAN

Chief, Xational Income Division, Department of Commerce

The Temporary National Economic Committee is greatly indebted
to the author for this contribution to the literature of the subject
under review.

The status of the materials in this volume is precisely the same as that of
other carefully prepared testimony when given by individual witnesses; it is
information submitted for Committee deliberation. No ntatter what the
official capacity of the witness or author may be, the publication of his
testimony, report, or monograph by the Committee in no way signifies nor
implies assent to, or approval of, any of the facts, opinions or recommenda-
tions, nor acceptance thereof in whole or in part by the members of the
Temporary National Economic Committee, individually or 'collectively.
Sole and undivided responsibility for every statement in such testimony,
reports, or monographs rests entirely upon the respective authors.

(Signed) Joseph C. O'Mahoney,
Chairman, Temporary National Economic Committee.

in



TABLE OF CONTENTS



Page

Letter of transmittal. ix

Summary of statistical findings xi

CHAPTER I

Introduction 1

I. Distribution of income and problems before the Temporary

National Economic Committee 1

II. Purpose of present inquiry 6

III. General characteristics of data 6

CHAPTER II

The concentration of income, 1918-37_- 9

I . Definitions 9

1. "Earning Power" 9

2. "Purchasing Power" II

3. "Real Income" ^ 11

4. Income Recipient 12

II. Statistics of income concentration, 1918-37 13

1. The highest 1 percent of income recipients 14

2. Selected proportions of income recipients 20

CHAPTER III

The composition of income, 1918-37 35

I. Introductory 35

II. Composition of income: All income recipients and the highest

] percent ._ 37

III. Shifts in the composition of income of the highest 1 percent of

income recipients 41

IV. Concentration of types of income 44

V. Composition of income by income classes 47

VI. Composition of income and concentration of income 49

CHAPTER IV

The concentration of "purchasing power" and the effects of relief and

vetei'ans' adjusted-service payments on income concentration 55

I. The concentration of "purchasing power," 1918-37 55

1. The transition from "earning power" to "purchasing
power" 55

2. Statistics of "purchasing power" concentration 59

II. Relief and veterans' adjusted-service payments 65

1. Statistics of income concentration, excluding work-relief

wages, 1931-37 , 67

2. Statistics of income concentration, including direct and

work relief and veterans' adjusted-service pavments,

1934-37 1 69

APPENDIX A

Notes to tables 71

Note A- h (tables 1-5) 71

Note A-2 (table 6) 79

Note A-3 (compensation and rumber of employees of State and local

governments) ' 81

V



TI TABLE OF CONTENTS

Notes to tables — Continued. Pagfe

Note A-4 (table 10) 83

Note A-5 (table 12) . 89

Note A-6 (table 15) __.. 96

Note A-7 (tables 16 and 18) 97

APPENDIX B

Some aspects of the statistics on high incomes 99

Note B-1 Relation of Statutory Net Income to Economic Income 99

Note B-2 Effect on Measures of Income Concentration of Income

Concept in Use During the Years 1934-37, 101

Note B-3 Characteristics of Income-Tax Data and Method of Measur-
ing Income Concentration 104

Index _ 109



SCHEDULE OF TABLES AND CHARTS

TABLES

Pag*

1. Shares of total individual income received by the highest 1 percent of

income receipients, 1918-37 ^ 16

2. Shares of total individual income received by selected proportions of

income recipients, 1918-37 22

3. Shares of total individual income received by selected proportions of

income recipients, 1926-37 23

4. Minimum statutory net incomes of selected proportions of income

recipients, 1918-37 26

5. Minimum economic incomes of selected proportions of income re-

cipients, 1934-37.-_. - '. . - 26

6. Number oif individuals in the selected proportions of income recipients,

1918-37 27

7. Average statutory net incomes of selected proportions of income re-

cipients, 1918-37 ■ 28

8. Average economic incomes of selected proportions of income recipients,

1926-37 :..__.- 29

9. Percentage increases in shares of total individual income from year of

lowest to year of highest income concentration 32

10. Composition of total individual income, 1918-37 37

11. Percentage distribution of total individual income, by type of receipt,

1918-37 1 - -. 38

12. Composition of incomes of the highest 1 percent of income recipients,

1918-36 39

13. Percentage distribution of incomes oi the highest 1 percent of income

recipients, by type of receipt, 1918-36 — 40

14. Percentages 'of each type of income received by the highest 1 percent

of income recipients, 1918-36 45

16. Composition of incomes by income classes, 1926, 1929, 1932, 1935 48

16. Shares of total "purchasing power" available to the highest 1 percent

of income recipients, 1918-37 60

17. Effect of adjustments for "purchasing power" on the income shares

of the highest 1 percent Of income recipients, 1918-37 61

18. Shares of "purchasing power" available to selected proportions of

income recipients and effect of adjustments for purchasing power,
1926and 1936 62

19. Proportions of economic incomes of highest 1 percent of income re-

cipients paid in Federal income taxes, 1918-37 63

20. Direct and work relief and veterans' adjusted service compensation

payments 1929-37 - - 67

21. Shares of total individual income, excluding relief and veterans'

adjusted service payments, received by selected proportions of income
recipients, 1934-37_-_ - - - - 68

22. Shares of total individual income, including relief and veterans'

adjusted service payments, received by selected proportions of
income recipients, 1934-37 70

CHARTS

I. Concentration of income and total income per recipient, 1918-37^ 18

II. Shares of total individual income received by selected proportions of

income recipients, 1918-37 30

III. Composition of incomes of the highest 1 percent of income recipients,

1918-36 - - 42

vn



VIII SCHEDULE OF TABLES AND CHARTS

APPENDIX TABLES

Page

A-1. Aggregate statutory net income of selected proportions of income

recipients, 1918-37 78

A-2. Aggregate economic income of selected proportions of income re-
cipients, 1926-37 78

A-3. Total individual income excluding compensation of State and local

governmental employees, 1918-37 79

A-4. Number of persons with gainful occupations. 1918-37 80

A-5. Compensation and number of employees of State and local govern-
ments, 1918-37 83

A-6. Federal income taxes paid by all income recipients and the highest

1 percent, 1918-37 - , 98

A-7. Federal income taxes paid by selected proportions of income re-
cipients, 1926 and 1936 98

B-1. Ratios of statutory net income to economic income — Highest 1

percent of income recipients, 1918-37 99

B-2. Relative mean deviations of the* two measures of income concentra-
tion, 1926-37 -< - 100

B-3. Ratios of statutory net income to economic income — Selected pro-
portions of income recipients, 1926-37 101

B-4. Nurober of individuals among the various proportions of income
recipients reporting a statutory capital loss of $2,000 and over,
1934-36 104



LETTER OF TRANSMITTAL



This report concerns itself with the problems of how the distribution
of individuals' income has changed since 1918, and how it varies from
year to year. Attention is centered particularly on the degree of
concentration in the hands of the largest income receivers. The
record is based upon income-tax material, with various adjustments
making the data as comparable as possible, despite the many changes
in tax laws and regulations. Further analysis breaks these incomes
down according to source, in order to find explanations for the
shifts. Finally, corrections are made for relief and veterans' bonus
payments, and estimates are made after taxes, in order to picture the
concentration of purchasing power.

It should not be necessary to argue that such information is of
great significance to any understanding of the functioning of the
economic system. It is basic to the problem of capital accumulation
and the underlying adjustment of consumption, savings, and invest-
ment, so necessary to attaining full activity and employment. How-
ever, it has a more direct connection to the subject of monopoly.
Large fortunes have most often had their basis in situations in which
strong elements of monopoly appear. And the possession of financial
strength is helpful, to say the least, in obtaining or maintaining in-
dustrial controls which take various monopolistic forms and which
perpetuate or enhance the concentration of income. Of course,
incomes would be by no means equal in a perfectly competitive
economic system. However, the degree of income concentration can
be taken as one indicator of the degree to which monopolistic elements
are present in our economy.

This report has been prepared in the National Income Division of
the Bureau of Foreign and Domestic Commerce, under the direct
supervision of Robert R. Nathan.

WiLL.\RD L. Thorp,
Adviser on Economic Studies, Department of Commerce.

Washington, D. C, March 1, lO^O.



SUMMARY OF STATISTICAL FINDINGS

This summary is confined to the statistics presented in this study.
With the exception of the introduction, each chapter contains, in
addition to statistical data, material on the meaning of income con-
centration and cortiposition which, it is believed, will be of assistance
in properly interpreting the statistical findings. Chapter II presents,
for the past two decades, measures of the concentration of income
received by individuals in the United States in return for personal
services and the ownership of property. The concentration of income
is measured by the shares of the income of all individuals received by
the highest 2 percent and smaller proportions of the Nation's income
recipients. The statistics reveal that the shares of total individual
income received by the higher income recipients have generally
increased during periods of business expansion and declined during
periods of business contraction. Subject to certain exceptions, the
larger the average income of all income recipients the greater has been
the degree of income ..concentration.

For the period from IWS through 1937 the degree of income con-
centration was lowest in the depression years 192D and 1932 and
highest in the prosperous years 1928 and 1929. There has been no
significant trend over the period as a whole and the degree of income
concentration during the recent years 1934 through 1937 has been at
approximately the same level as during the years 1918 through 1924.
For these two periods the average income, corrected for price changes,
was also approximately the same. The years 1925 tluoiigh 1933 wit-
nessed wide fluctuations in income concentration. In contrast, from
1918 through 1924 and 1934 through 1937 the degree of income con-
centration fluctuated within relatively narrow limits. Apart from
minor variations associated with the short cyclical movements in
business activity, the concentration of income increased during the
period of rising income and expanding business activity from 1922
through 1928. Most of this increase took place during the years 1925
through 1928. After 1929 the iricome shares of the higher income
recipients declined sharply along with general business activity,
reaching a minimum in 1932 and 1933. These shares then increased
from 1934 until 1937. The sharp reversal in the upward trend of
business in the middle of 1937 was accompanied by a decline for that
year in the income shares of the higher income recipients.

Measiu'es of income concentration are presented for five proportions
of income recipients, varying in size from the highest 2 percent to the
highest one one-hundredth of 1 percent. The changes in the income
shares received by these various proportions of income recipients in the
higher brackets followed for the most part the same general pattern,
increasing in years of business prosperity and declining in years of
business depression. However, the smaller the group of income re-
cipients, the larger, relatively, were the year-to-year changes in the size
of the income shares. The income shares of the smaller groups, that



XII SUMMARY OF STATISTICAL FINDINGS

is, the groups with the higher incomes, dedined more during periods
of business depression and increased more during periods of business
prosperity than the shares received by the more inclusive groups. This
difference in the behavior of the income shares received by the various
proportions of income recipients was larger as the size of the group
varied from the highest 2 percent to the highest one one-hundredth of
1 percent. The increases in the shares received by the higher income
groups were particularly large during the period of marked business
prosperity ft-om 1925 through 1928. For example, the income share
of the highest 2 percent of income recipients rose by 35 percent from
1924 through 1928 while the income share received by the highest
one-tenth of 1 percent rose by as much as 75 percent. There are some
further differences in the nlovement of the shares of income received
by these various proportions of income recipients which are described
in chapter II.

Tables are also presented in chapter II showing the number of
persons included in the various proportions of income recipients, the
income levels which separate these income groups, and the average
incomes. In the year 1936, for example, there were approximately
50,363,000 income recipients, excluding employees of State and local
governments. In this year the highest 2 percent of income recipients
included slightly over 1,000,000 persons with incomes of $4,390 and
over.' The average income of this group was $11,955 as compared
with an average of $1,065 for the other 98 percent and $1,275 for all
income recipients. The smallest group for which income shares are
measured is the highest one one-hundredth of 1 percent of income
recipients which in 1936 .included 5,036 persons with incomes above
$116,430. The average income of this group was approximately
$250,000.

During the period studied, the minimum income levels of the various
proportions of income recipients have been subject to wide fluctuations.
In 1928, for example, persons with incomes above $10,140 were
included within the highest 1 percent of income recipients whereas in
1934 it would have required an income of but $5,375 to be included
with the same group. In 1932 and 1933 the minimum incomes for
the highest 1 percent of income recipients were even lower than in
1934, but for reasons indicated at a later point no data are presented
for these years. The income levels which separated the various
smaller proportions of income recipients have also varied widely dur-
ing relatively brief periods. In 1934 anyone with an income in excess
of $80,775 would have been included with the highest one one-hun-
dredth of 1 percent of income recipients, while in* 1936 an income at
least 44 percent "larger, $116,430, was necessary for inclusion in this
category.

Chapter III presents statistics showing how the various types of
inconie, such as employee compensation, dividends, and interest were
combined each year to produce the incomes of all income recipients
and of the various proportions of higher income recipients whose
income shares were given in the preceding chapter. In addition, the
concentration of each type of income among the higher income
recipients is shown. These statistics have a twofold purpose: First,
they indic ate how the different types of income were distributed

' Thi? income level rpprcserts an understatement as the income tax statistics which were used as the ,
basis for the estimate were not adjusted for nonreporting or underreporting tf incomes. See ch. II. n. 15.



SUMMARY OF STATISTICAL FINDINGS XIII

among the various groups of income receivers and how this distribu-
tion changes with increases and declines of the total income and of
each type of income. Second, they provide the basis for an analysis
of the shifts in income concentration in terms of the composition of
income.

In the year 1922 when the degree of income concentration was
approximately equal to the average for the past two decades, the
highest 1 percent of income recipients received 29 percent of their
income from salaries and wages, 19 percent from entrepreneurial net
income (net profits from unincorporated businesses), 25 percent from
dividends, 14 percent from interest, 8 percent from profits on the sale
of property, and 5 percent from net rents and royalties. In this year,
63 percent of the income of all individuals was derived from salaries
and wages, 19 percent from entrepreneurial net income, 5 percent
from dividends and 6 percent from interest, about 2 percent from net
profits on the sale of property, and 6 percent from net rents and royal-
ties. Comparison of these two sets of percentages reveals that divi-
dends, interest, and net profits from the sale of property were inuch
more important sources of income for the highest 1 percent of income
recipients than for the other income recipients. If employee com-
pensation and entrepreneurial net income are classified as income
primarily from personal service and the other income sources as income
primarily from property, the former accounted, in 1922, for 82 percent
of the income of all income recipients and 48 percent of the income of
the highest 1 percent.

For all income recipients and for the highest 1 percent the relative
importance of the various income sources has varied with changes in
business conditions. Salaries and wages were generally a larger
proportion of income in times of business depression and dividends
and net profits from the sale of property were generally larger pro-
portions of income in times of business prosperity. There has been
during the period studied a general decline in the importance of net
rents and royalties and entrepreneurial net income. The latter source
contributed a considerably smaller proportion to the income of the
highest 1 percent during recent years than during earlier years of a
comparable degree of income concentration. This decline has been
accompanied by a marked increase in the importance of employee
compensation and in recent years these two sources together consti-
tuted a slightly larger share of the income of the highest 1 percent
than in previous years characterized by a similar degree Of income
concentration.

The type of income contributing the largest share to the income of
the highest 1 percent of income recipients has changed several times
since 1918. In 11 years during the 20-year period from 1918 through
1937, the two sources classified as income primarily from personal
service (employee compensation and entrepreneurial net income)
contributed a greater share to the income of the highest 1 percent of
income recipients than did the sources classified as income primarily
from property. Employee compensation was the largest single income
component in 12 years, dividends in 6, net profits from the sale of
property in 1, and entrepreneurial net income in 1.

Data are presented which show the proportion of each type of
income received by the highest 1 percent of income recipients. The
extent of concentration varied from a small proportion of salaries



XIV SUMMARY OF STATISTICAL FINDINGS

and wages — 6 to 7 percent — to the major portion of dividends and
net profits from the sale of property. The proportion of total divi-
dends received by this group in different years ranged from 58 to 70
percent.

On the basi^ of data on the composition of income by income classes,
it is shown that the importance of employee compensation, entre-
preneurial net income, and net rents and royalties fell as the size of
income increased and t' e importance of dividends and net profits on
the sale of property rose sharply as the size of income increased.
Interest constituted an increasingly important source for the larger
incomes until the very high incomes were reached, in most years
$100,000 and over, after which it dropped in importance. Above this
amount incomes were derived chiefly from two sources — dividends
and net profits on the sale of property with profits being of greater
importance in years of high business activity. In 1932 virtually all
income classes incurred losses from the sale of property.

The data on the composition of individual incomes, and on the
concentration of the various types of income, throw considerable light
on the "causes" of the changes in income concentration. Shifts in
income concentration are largely explainable in terms pf year-to-year
differences both in the relative importance of different income sources
and in the concentration of these sources. Due to both the high
concentration of dividends and net profits from the sale of property
and the relatively large variation in their volume from year to year,
shifts in income concentration were usually associated with fluctua-
tions in these two sources of income. Increases in their volume which
were greater than the increases in total individual income accounted
in large part for .the sharp rise in income concentration during the
years 1925 through 1928. The decline in income concentration after
1929 may be attributed in large part to net losses from the sale of
property, chiefly in the form of securities. The reduction in the
amount of dividends after 1930 was also an important 'factor in the
lessened concentration of income during the early thirties.

In contrast to the large changes in the concentration of income
during the years 1925 through 1933, the degree of income concentra-
tion fluctuated within fairly narrow limits from 1918 through 1924.
During this period dividends as a share of individual income did not
vary greatly and the volume of net profits from the sale of property
was relatively small. The different behavior of these two income


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