Going back two centuries before World War 1, income per person in Colonial America was actually higher than Britain and Western Europe, and inequality was much lower. Peter Lindert and Jeffrey Williamson have taken a new approach to assembling historical GDP data. GDP can be measured in three ways that are all supposed to yield the same result: the production approach, expenditure approach and income approach. Lindert and Williamson use the income approach, which ‘exposes the distribution of income by socio-economic class, race, and gender, as well as by region and urban-rural location’.

Here are their findings:

• America actually led Britain and all of Western Europe in income per capita during colonial times.  Britain’s American colonies were already ahead by 38% in 1700 and by 52% in 1774, just before the Revolution.
• Colonial America was the most income-egalitarian rich place on the planet. Among all Americans – slaves included – the richest 1% got only 8.5% of total income in 1774. Among free Americans, the top 1% got only 7.6%. Today, the top 1% in the US gets more than 20% of total income.
• A long steep rise in US inequality took place between 1800 and 1860, matching the widening income gaps we have witnessed since the 1970s. This first great rise in inequality was broadly based, with widening income gaps throughout the whole income spectrum – rising urban-rural income gaps, skill premiums, gaps between slaves and the free, North-South income gaps, earnings inequality, and even property income inequality.
• The income share captured by the richest 1% fell dramatically between the 1910s and the 1970s, and the share of the bottom half rose.
  • “This ‘Great Leveling’ took place for several reasons. Wars and other macro-shocks destroyed private wealth (especially financial wealth) and shifted the political balance toward the left.  The labor force grew more slowly and automation was less rapid, improving the incomes of the less skilled. Rising trade barriers lowered the import of labor-intensive products and the export of skill-intensive products, favoring the less skilled in the lower and middle ranks. And in the US, the financial crash of 1929-1933 was followed by a half century of tight financial regulation, which held down the incomes of those employed in the financial sector and the net returns reaped by rich investors.”
• The equality gained in the US during the ‘Great Leveling’ slipped away after the 1970s.  The rising income gaps were partly due to policy shifts.  In this time, the US lost its lead in education and financial deregulation in the 1980s “contributed powerfully” to the rise income concentration at the top and also to crises and recessions. A regressive pattern of tax cuts allowed more wealth to be inherited rather than earned.

They conclude with the following history and economics lesson:

American history suggests that inequality is not driven by some fundamental law of capitalist development, but rather by episodic shifts in five basic forces – demography, education policy, trade competition, financial regulation policy, and labour-saving technological change. While some of these forces are clearly exogenous, others – particularly policies regarding education, financial regulation, and inheritance taxation – offer ways to check the rise of inequality while also promoting growth.