In 1924, Edgar Lawrence Smith published an empirical study showing that a stock premium has been achieved throughout history. The now widespread concept that stocks will outperform bonds in the long term was, on the time, a shocking rejection of conventional wisdom. Smith’s contemporaries expected that bonds would outperform under the deflationary conditions of the late nineteenth century. Using recently compiled data, I revisit the query of whether there was an unconditional equity premium prior to now. Data from the US and UK show that the historical equity premium depends upon the absence of deflation. Data from the US and Japan show that disinflation has similar effects to deflation. The article concludes by developing the implications of adopting a conditional equity premium.
