The Dow Jones industrial average closing Jan. 25 at more than 20,000 inspired big, top of the fold front-page headlines in both the Wall Street Journal and the Financial Times (although the story was on Page 14 of The Washington Post). The Journal and FT both ran long-term graphs of the DJIA, but both were in nominal dollars. In nominal dollars, the 100-year history looks like Graph 1—the DJIA is 211 times its Dec. 31, 1916, level.

This history includes two world wars, a Great Depression, several other wars, the great inflation of the 1970s, numerous financial crises, both domestic and international, booms and recessions, amazing innovations, unending political debating and 18 U.S. presidents (10 Republicans and eight Democrats). Through all this, there has been, up until yesterday, an average annual nominal price increase of 5.5 percent in the DJIA.

graf 1

Using nominal dollars makes the graphs rhetorically more impressive, but ignores that, for much of that long history, the Federal Reserve and the government have been busily depreciating the dollar. A dollar now is worth 4.8 percent of what it was 100 years ago, or about 5 cents in end-of-1916 dollars. To rightly understand the returns, we have to adjust for a lot of inflation when we look at history.

Graph 2 shows 100 years of the DJIA in inflation-adjusted terms, stated in end-of-1916 dollars:

graf 2

Average annual inflation over these 100 years is 3.1 percent. Adjusting for this, and measuring in constant end-of-1916 dollars, 20,069 on the DJIA becomes 964. Compared to a level of 95 as of Dec. 31, 1916, the DJIA in real terms has increased about 10 times. Still very impressive, but quite different from the nominal picture. The average annual real price increase of the DJIA is 2.3 percent for the 100 years up to yesterday.

Growth rates of 2 percent, let alone 3 percent, extended over a century do remarkable things.


Image by Vintage Tone