Looking back at the first roaring twenties
By Robert J. Shiller
We are in a second Roaring Twenties, or so you might think, from the countless comments suggesting that we are entering an exuberant decade that echoes the one of a century ago.
The 1920s were marked by frenetic celebration, amazing stock market returns — and, ultimately, one of the worst crashes and most devastating depressions in modern history.
A century is a long time, and the original Roaring Twenties have become something of a lost world, glimpsed through legend, movies and pop fantasy.
It’s worth looking back more closely. History doesn’t provide a clear guide to the future — many economists avoid studying it, preferring instead to dwell on mathematical models, the latest changes in fiscal and monetary policy and statistically significant leading indicators.
These are all important, but understanding the pop culture of another time can give us an inkling of the possibilities for changes in the mass psychology of the current, highly speculative market.
First, the numbers
We don’t know how the stock market will end up for the entire 2020s, but the decade ending in March 2021 was spectacular. By my calculations, the total return for the monthly inflation-corrected S&P 500, including dividends, averaged 12% annually in the 10 years through March. The real value of an investment tripled in that period.
Great as that was, the stock market in most of the Roaring Twenties was even better: It was the biggest bull stock market in U.S. history, when you factor in inflation. I calculate that the real total return for the Standard & Poor’s Composite Index (an S&P 500 predecessor), including dividends, from September 1919 to September 1929 averaged 20% a year. That implies a sixfold increase in real value over the decade.
It didn’t end well, however: Including inflation, the index crashed 77% from September 1929 to June 1932.
No worries, at first
While there is evidence that many people sensed that the market’s steep rise was precarious, there was practically no anticipation of how bad the crash would be, or that it would lead to the prolonged, severe unemployment of the Great Depression.
In The New York Times on New Year’s Day 1929, 10 months before the crash, financial editor Alexander Dana Noyes wrote both of “the most reckless stock speculation” and of a series of “exceedingly favorable” factors protecting the economy: a “sound banking system,” “expanding production and consumption,” “large profits,” “stability of prices,” “conservative methods of trade,” “labor’s high wages” and “increasing exports.”
As stocks rose, people who had little knowledge of the market blithely bought shares for the first time, as Eunice Fuller Barnard described in “Ladies of the Ticker,” a firsthand account in April 1929.
Recently, there has been a parallel rise in trades by inexperienced retail investors.
Playing the market, with games and gadgets
Early in the 1920s, people played the market as a grand game, abetted by technological innovation and new mass media.
In 1923 the Trans-Lux company came out with the “movie ticker” — a large illuminated screen showing rapidly changing stock prices. For the first time, a crowd at a retail brokerage could watch together as a facsimile of the stock ticker tape whizzed by in bright light.
And they heard about the stock market on the radio, the hot new technology of that era.
Westinghouse, in Pittsburgh, created one of the world’s first commercial radio stations, KDKA, which broadcast Warren G. Harding’s victory in the presidential election on Nov. 2, 1920.
Sports events, comedy shows and stock market reports soon followed, and radio stations spread throughout the United States and the world.
The world entered homes electronically, giving people an immediate sense of the possibility of new technologies and access to a global narrative about financial success.
What is startling, in retrospect, is that while there was plenty of discussion of the brave new horizons for investing in the 1920s, there was very little skeptical scrutiny of the underpinnings of the markets available in mass media, at least at first.
The term “price-earnings ratio,” for example, was used by investment professionals as a tool for analyzing stock valuations long before the 1920s. In the most basic sense, that simple ratio provides a means for comparing stock prices and corporate earnings. I’ve developed a more sophisticated, inflation-adjusted version of the ratio, known as the CAPE, which enables us to say stock prices today are quite high on a historical basis.
But my research suggests that in the early 1920s, scarcely anyone, outside of investment professionals, knew what a price-earnings ratio was. There was not a single use of the phrase in the ProQuest News & Newspapers database before 1928.
The mood shifts
This inattention shifted in the months before the October 1929 crash. In May 1929, for example, The New York Herald Tribune published “Price-Earnings Ratio Ignored by Traders in Present Market.”
It was a sign of worry. Suddenly, many people became aware that this important measure was at record highs, indicating that prices were difficult to justify. The article helped to spread a pessimistic narrative about the stock market that began to dominate discourse.
“The purchaser of securities on tips, who gives no thought or study to intrinsic values, must suffer the consequences of his own lack of reasonable care in conserving his resources,” the article said.
As the crash approached, newspapers reported that many people had taken excessive loans from brokers, noting that the severity of a market decline could be amplified when brokers made “margin calls,” requiring repayment of those loans.
As early as March 1928, an article in The Times said there was a widespread “uncomfortable feeling” about the “unpleasant possibilities” for the still roaring stock market. Such a feeling exists today, though perhaps not in as severe a form.
In early 1929, the Federal Reserve issued a sequence of warnings about the risk of excessive speculation. Yet the Standard & Poor’s Composite Index rose 29% from Jan. 1 to Sept. 8 that year. (The increase in the S&P 500 from March 23, 2020, to Thursday, at 86%, is even larger.)
In 1929, the warnings only heightened public attention to the market.
Are there similarities today? Certainly. The current widespread fascination with the rising market accompanied by recent concern about a possible downward spiral and strained stock market valuations echo those of 100 years ago.
That said, there is no particular reason to expect a market collapse that would be as bad as the 1929 crash, and the government and the Fed have shown themselves to be far more adept in staving off prolonged recessions than their predecessors. But we shouldn’t be surprised if uncomfortable feelings about the market grow to unmanageable proportions, leading eventually to a major stock market decline.