The Big What If: The 1920s Economy Has Lessons for Today?

Today’s rapid technological advancement is set against rising inequality, fringe political movements and protectionist sentiment. The same was true in the 1920s.

As it did one hundred years ago, the bull market has three key drivers — low inflation, tax cuts and an accommodative Fed.

Governments and central banks seem committed to keeping the party going, but risks seem heavily skewed to the downside

Michael Arone, CFA
Chief Investment Strategist, State Street Global Advisors

This article was written with contributions from Charlotte Irwin. Charlotte is a Research Strategist on the ETF and Mutual Fund Research Team.

Does history rhyme or does it repeat? As the page turns to a new year and a new decade, the economy is booming, driven by rapid technological advancement and set against rising inequality, fringe political movements and protectionist sentiment. The same was true 100 years ago. And once again, the ‘20s seem poised to mark a decade of transition.

Can’t Repeat the Past? Why of Course You Can!
For most of us, the term “Roaring Twenties” conjures up the world that F. Scott Fitzgerald wrote about in The Great Gatsby – jazz, flappers and bootleg alcohol. Of course, the giant lawn party came to a screeching halt with the stock market crash of 1929. In between those extremes, the first “modern decade” brought such innovations as the assembly line and widespread adoption of electricity, which boosted both capital and labor productivity.

New products – from vacuums to radios and the processes used to develop them – spurred average GNP growth of 4.2% per year from 1920 to 1929.1 And the concurrent asset bubble is legendary. From 1925 to 1929, excluding the Black Friday crash, the Dow Jones Industrial Average delivered a staggering 27% annualized return.2

Just like today’s market, the 1920s bull market had three key drivers – low inflation, tax cuts and an accommodative US Federal Reserve (Fed).

A Single Green Light, Minute and Far Away
After a brief economic contraction with extreme price fluctuation at the outset of the 1920s, relative price stability returned in 1922 and reigned for the rest of the decade. Prices rose an average of 1.4% annually from 1922 to 1926, then fell an average of 1.1% annually from 1926 to 1929, with the 12-month change in the CPI in a range of 4.1 and -2.8% for the entire period.3 Compare that with the inflation landscape of the current bull market, where headline inflation has averaged 1.6%, with a peak of 3.9% and a low of -2.1% - nearly identical figures. Today, the absence of inflationary pressures has bolstered share prices and valuations. And with wages growing faster than inflation, consumer sentiment remains elevated.

Her Voice Is Full of Money
Lower taxes also support today’s consumers, as they did in the 1920s. While taxing personal income had just begun in 1913, tax rates dramatically increased in 1918 to fund the war effort. Post-armistice, most agreed that the rates were too high, though there was sharp disagreement on what they should be. That sounds familiar. Democrats wanted to cut tax rates for low-income taxpayers and maintain a steep progressive scale, while Republicans favored sharper cuts and less progressive tax rates. In the end, the highest marginal tax rate was reduced three times in quick succession – from 73% to 58% to 46% and, finally, to 25% for the 1925 tax year. Other rates were also reduced, and exemptions were increased.

An Unbroken Series of Successful Gestures
Finally, the Fed has promoted prosperity in both decades. In the 1920s, the Fed, which was formed in 1913, was just beginning to realize the impact that its policies had on interest rates, the money supply and the overall economy. Feeling that the recovery from the 1920-22 recession was running a little too hot, it began raising rates in 1923 and selling securities. Later in the year, signs of a slump led the Fed to increase holdings by $500 million. It also delivered three rate cuts – in what you could call its first-ever “midcycle adjustment.” It worked! Stocks began to boom and economic growth accelerated.

A few years later, however, the Fed came up against two of its most pressing current dilemmas – international policy coordination and the definition of its mandate. While the Fed successfully partnered with European counterparts to defend the gold standard in 1927, an internal rift over whether policy should be set to appease the stock market or foster general economic health meant that rates were not increased, but no open market purchases were undertaken. When the Fed did finally raise rates to 6% in August of 1929, the contraction had already begun. And in late October, the stock market crashed.

Rate increases aren’t on the immediate horizon for 2020. After the December meeting, Fed Chairman Powell said the central bank will keep interest rates where they are - unless there is a meaningful change in the economic outlook. Additionally, the Fed has committed to purchase Treasury bills and has conducted repurchase agreement operations. Perhaps today’s mid-cycle adjustment will lead to a continued rise in stock prices and a reacceleration of growth.

Boats Against the Current
Low inflation, tax cuts and an accommodative Fed supported the market in the 1920s, obscuring the asset bubble forming beneath the surface. With the same forces bolstering today’s market, major US stock benchmarks are at all-time highs and market volatility remains low.

At the dawn of a new decade, governments and central banks seem committed to keeping the party going, but risks seem heavily skewed to the downside. A century ago, “roaring” described the collective celebration of prosperity and possibility when President Warren G. Harding returned the nation to “normalcy” in 1920. However, as we look to the election year of 2020, investors will have to grapple with a myriad of risks, including the impact of the constant political roaring that continues to brutally divide the country.

Yes, the light on the horizon is still green, but it could soon start flashing yellow.  


1Historical Statistics of The United States, 1976.

2Bloomberg Finance L.P., December 10, 2019.

3Bureau of Labor Statistics, One Hundred Years of Price Change: The Consumer Price Index and American Inflation Experience, April 2014, accessed December 10, 2019.


Consumer Price Index (CPI)
Measures changes in the price level of a weighted average market basket of consumer goods and services purchased by households. It is usually calculated and reported by the Bureau of Economic Analysis and Statistics of a country on a monthly and annual basis.
Gross national product is the market value of all the products and services produced in one year by labor and property supplied by the citizens of a country. Unlike Gross Domestic Product, which defines production based on the geographical location of production, GNP allocates production based on location of ownership.
Gross Domestic Product (GDP)
The total monetary or market value of all the finished goods and services produced within a country's borders in a specific time period. As a broad measure of overall domestic production, it functions as a comprehensive scorecard of the country’s economic health.


The views expressed in this material are the views of Michael Arone through the period ended December 13, 2019 and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Investing involves risk including the risk of loss of principal.

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