Loaded, landed and out of luck

July 2, 2004

As the Anglo-American Conference of Historians gathers, we offer three takes on its theme, wealth and poverty.

The fate of the rich over the 20th century has been largely in the hands of the taxman, says William Rubinstein.

In many respects, surprisingly little is known about the very rich in the 20th century compared with other centuries. It wasn't until the 1980s, when The Sunday Times published its first Rich List, that there was anything approaching accurate knowledge that was international and comprehensive.

But studying the rich in the Great Depression and postwar periods can lead to surprises.

The Great Depression affected the very wealthy in America far more severely than it did those in Britain. The collapse of corporate profits for much of the 1930s in the US meant that the proportion of personal income earned by the top 1 per cent of earners fell from 17 per cent in 1929 to 12 per cent in 1941. The size of the fortunes owned by America's richest men and families almost certainly declined by about the same extent, and no new fortunes were generated - arguably the first time in American history. This was due largely to a little-known factor: the extraordinarily high top marginal rates of taxation at the time. In 1932, Congress raised the top marginal rate of income tax from 25 to 63 per cent.

In 1936, it was raised to 79 per cent, and, during the Second World War it increased to 91 per cent, until it was lowered to "only" 70 per cent in 1963. It is a myth that America was a low-taxing society until very recently.

In Britain, even in the most severe phase of the Depression, 1931-32, considerable numbers of very large estates remained, and the number of high-income earners was not greatly affected. By the end of the decade, the situation for the rich had more or less returned to what it had been in the more prosperous 1920s and, indeed, in the Edwardian period, with lifestyles virtually unchanged. In many respects, the British Establishment reached its zenith in the 1930s, with Britain's institutions, almost uniquely among post-First World War European states, wholly intact. Chiefly because of the size of the national debt and the creation of a welfare infrastructure, Britain's tax rates could not return to pre-1914 levels, but the top marginal rate of taxation never rose above 40 per cent during the decade.

The Second World War, however, probably affected both societies in similar and perhaps surprising ways. In Britain, the nadir of wealth-holding was almost certainly reached in the mid-1950s, when it appeared that great fortunes and high incomes had almost vanished from the scene. By 1953, according to one Inland Revenue officer, there were only 36 millionaires in Britain, compared with more than 1,000 in 1939. The number and size of great fortunes suffered a similar decline. In 1958, there were only two millionaire estates in Britain, compared with 17 in 1928, when the pound was worth twice as much.

While some of this decline was the result of estate duty avoidance, it seems clear that wealth-holding fell sharply as a result of unprecedently high tax rates from 1939 onwards - the top rate reached 75 per cent in the 1950s - and international and UK economic deficiencies. Something like socialism, in the sense of a real levelling of income and wealth, had come to Britain.

Something similar also happened in the US at this time (and, indeed, probably throughout the Western world). Compared with the situation before 1929, the number and size of America's top fortunes certainly declined, and any new postwar fortunes were in oil, which benefited from tax concessions.

But ordinary Americans were better off. Indeed, the so-called Age of Affluence appears to have been an age of affluence for everyone except the affluent. Economists dispute why, but some have linked the general rise in living standards to the relatively large amount of savings accumulated in the period of full employment caused by war and to expansionist economic policies.

In Britain, the outlook for the rich began to change in the 1960s, but it altered decisively only in the 1980s. Probably crucial to this change were the cuts in levels of personal taxation that began in the 1960s. The scale of personal wealth also began to rise around 1965, but it increased categorically only after 1980, coinciding with Thatcherism, the end of communism and the beginnings of user-friendly internet capitalism. Some time during the 1980s, the chattering classes ceased to regard making money as ipso facto a criminal pursuit. Indeed, it can be argued that, in Britain, attitudes towards making money have changed just as drastically in the past generation as attitudes towards sex and religion, and in a way that could not readily have been foreseen 60 years ago.

William D. Rubinstein is professor of modern history at the University of Wales, Aberystwyth and author of Genocide: A History , published by Longman.

The Anglo-American Conference of Historians will meet July 7-9 at the Institute of Historical Research in London.

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