Smith’s ideas quickly crossed the Atlantic and were the subject of
much discussion in Great Britain. John Maynard Keynes, the great
British economist and originator of the business cycle theory that be-
came the accepted paradigm for future generations, reviewed Smith’s
book with much excitement. Keynes stated:
The results are striking. Mr. Smith finds in almost every case, not only
when prices were rising, but also when they were falling, that common
stocks have turned out best in the long-run, indeed, markedly so.... This
actual experience in the United States over the past fifty years affords
prima facie evidence that the prejudice of investors and investing institu-
tions in favor of bonds as being “safe” and against common stocks as hav-
ing, even the best of them, a “speculative” flavor, has led to a relative
over-valuation of bonds and under-valuation of common stocks.^11
Money managers were also quick to realize the impact of Smith’s
work. Hartley Withers wrote in the London Investors ChronicleandMoney
Market Review:
Old-fashioned investors and their old-fashioned advisers have so long
been in the habit of looking on all holdings of ordinary shares or common
stocks as something rather naughty and speculative, that one feels a cer-
tain amount of hesitation in even ventilating the view that is now rapidly
gaining acceptance that ordinary shares, under certain conditions, are re-
ally safer than [bonds], even though the latter may be of the variety which
is commonly called “gilt-edged.”^12
Smith’s writings were published in such prestigious journals as the
Review of Economic Statisticsand the Journal of the American Statistical As-
sociation.^13 Further research confirmed his results. Smith acquired an in-
ternational following when Siegfried Stern published an extensive study
of returns in common stock in 13 European countries from the onset of
World War I through 1928. Stern’s study showed that the advantage of
investing in common stocks over bonds and other financial investments
extended far beyond America’s financial markets.^14CHAPTER 6 The Investment View of Stocks 81
(^11) John Maynard Keynes, “An American Study of Shares versus Bonds as Permanent Investments,”
The Nation & The Athenaeum, May 2, 1925, p. 157.
(^12) Quoted by Edgar Lawrence Smith in Common Stocks and Business Cycles, New York: William-Fred-
erick Press, 1959, p. 20.
(^13) Edgar Lawrence Smith, “Market Value of Industrial Equities,” Review of Economic Statistics, vol. 9
(January 1927), pp. 37–40, and “Tests Applied to an Index of the Price Level for Industrial Stocks,”
Journal of the American Statistical Association, Supplement (March 1931), pp. 127–135.
(^14) Siegfried Stern, Fourteen Years of European Investments, 1914–1928, London: Bankers’ Publishing
Co., 1929.