Federal Reserve Bank of MinneapolisResearch Department Staﬀ Report 294Revised December 2003
The 1929 Stock Market: Irving Fisher Was Right
Ellen R. McGrattan
Federal Reserve Bank of Minneapolisand University of Minnesota
Edward C. Prescott
Arizona State Universityand Federal Reserve Bank of MinneapolisABSTRACTMany stock market analysts think that in 1929, at the time of the crash, stocks were overvalued.Irving Fisher argued just before the crash that fundamentals were strong and the stock market wasundervalued. In this paper, we use growth theory to estimate the fundamental value of corporateequity and compare it to actual stock valuations. Our estimate is based on values of productivecorporate capital, both tangible and intangible, and tax rates on corporate income and distribu-tions. The evidence strongly suggests that Fisher was right. Even at the 1929 peak, stocks wereundervalued relative to the prediction of theory.
We thank two anonymous referees, the editor, and seminar participants at the Bank of Portugal, the FederalReserve Bank of Chicago, the SED, MIT, the University of Michigan, the University of Kansas, and theFederal Reserve Bank of Kansas City for their helpful comments. We especially thank Kent Daniel andLee Ohanian for comments on an earlier draft. We also thank the National Science Foundation for ﬁnancialsupport. The views expressed herein are those of the authors and not necessarily those of the Federal ReserveBank of Minneapolis or the Federal Reserve System. Please address correspondence to: Prescott, ResearchDepartment, Federal Reserve Bank of Minneapolis, 90 Hennepin Avenue, Minneapolis, MN, 55401-1804,email@example.com.