Robert Shiller Looks Back on the First Roaring Twenties

Robert Shiller Looks Back on the First Roaring Twenties

“It’s worth looking back more closely,” writes Robert Shiller about the “countless comments suggesting that we are entering an exuberant decade that echoes the one of a century ago.” This according to a recent article in The New York Times.

“History doesn’t provide a clear guide to the future,” he writes, adding that many economists avoid studying it in favor of mathematical models, economic indicators, and fiscal and monetary policies. But Shiller argues in favor of understanding the pop culture of other times as a way of embracing “possibilities for changes in the mass psychology of the current, highly speculative market.”

Shiller broke his analysis down into the following areas:

  • The numbers: As great as this bull market looks on paper, (Shiller describes the decade ending in March 2021 as “spectacular,” the market in most of the Roaring Twenties was even better—data shows a sixfold increase in the value between 1919 and 1929. Shiller also explains that while there is evidence that many sensed trouble in the market’s steep rise at the time, “there was practically no anticipation of how bad the crash would be or that it would lead to the prolonged, several unemployment of the Great Depression.”
  • Playing in the markets: Shiller describes how, in the early 1920s, “people played the market as a grand game, abetted by technological innovation and new mass media,” citing the advent of the “movie ticker”—a large, illuminated screen showing rapidly changing stock prices—and heard about the market on the radio, the “hot new technology of that era.”
  • Mood shift: Shiller’s research suggests, however, that while there was much discussion of brave new horizons for investing in the 1920s, there was little scrutiny of market fundamentals. He notes, “scarcely anyone, outside of investment professionals, knew what a price-earnings ratio was,” a trend that shifted in the months leading up to the October 1929 crash when suddenly, “many people became aware that this important measure was at record highs, indicating that prices were difficult to justify.” He noted how the heightened attention led to pop songs on the subject becoming extremely popular. Shiller notes that there are similarities today: “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.”

Shiller concludes with, “there is no particular reason to expect a market collapse that would be as bad as the 1929 crash,” adding that the government and the Fed have proved to be more “adept in staving off prolonged recessions” than their predecessors. That said, Shiller argues, “we shouldn’t be surprised if uncomfortable feelings about the market grow to unmanageable proportions, leading eventually to a major stock market decline.”