Review & Outlook (Editorial): Mr. Dow's Barometer

The Wall Street Journal

May 28, 1996

"The stock market is in the nature of a barometer which reflects the rise and fall of general conditions." Charles Dow wrote in May, 1899, in one of the first columns to bear the "Review and Outlook" title that continues above. The Dow Jones Industrial Average has persisted for a century precisely because it symbolizes not merely 30 blue-chip stocks, but the general health of the economy if not indeed our civilization. If Dow were alive today, surely he would be proud to see his average commanding attention daily, if not minute-by-minute, throughout the world.

What the market may be telling us is of course still debated among its adepts. Is it "efficient," in the economist's sense of digesting all information available at any given moment, and therefore sounder than even the wisest single sage? Or to the contrary, is it driven by "popular delusions and the madness of crowds"? Our own prejudice is toward the former, though even mere madness would be important as a reflection of the passing times.

As a barometer of the times, the Dow Average has the great strength of continuity. Other averages may be mathematically more sophisticated, but the Dow has been tended with great care for a hundred years now. So only the Dow Jones Industrials show the sweep of the century, reflecting not only the market but economic and social history.

As a barometer of the times, the Dow Average has the great strength of continuity. Other averages may be mathematically more sophisticated, but the Dow has been tended with great care for a hundred years now. So only the Dow Jones Industrials show the sweep of the century, reflecting not only the market but economic and social history.

Gazing at this panoply plotted above we ask, what is the market telling us? The clear and by no means trivial lesson is that by and large, for all the bumps on the road, history is progress. Over the last hundred years, the average has moved from 40.94 on May 26, 1896 to a record of 5778 on May 22, 1996. The market's progress also tracks, even allowing for the vagaries of inflation, the well-being of society and people not only in the United States but throughout the world.

Charles Dow cut his first industrial average at the intersection of two eras. In the time since the Civil War, five great intercontinental railroads had been laid. The 1890 census had measured the closing of the frontier. By 1895, the United States produced more steel than Great Britain. Indeed, development of the American continent had been the great project of mankind, with the world's capital and energies brought to bear by such international institutions as the gold standard and British free trade policies. By the year 1896 British dominance of the world economy was already ebbing, and in the U.S. the "Robber Barons" were losing sway. The era then budding, today still in bloom if perhaps starting to fade, is of American global dominance and government's intrusion to curb the harsh edges of the market.

This era was economically successful, the average shows, despite the large traumas of two World Wars, the Cold War and the Great Depression. Within the sweep of success, the stock market also shows us the era's fits and starts. Allowing for other interpretations of the charts, a few speculations: The market thrives on sound money, and sours on prohibitive tax rates. We live in a global economy; particularly on the monetary side, world events repeatedly intrude.

America was slow to pick up the world economic leadership Great Britain was forced to relinquish. The period after World War I was riled by war debts the U.S. insisted on collecting from its allies and the reparations the Allies insisted on extracting from Germany. This proved unsustainable, as John Maynard Keynes predicted in his most prescient book, "The Economic Consequences of the Peace." Especially so after the Smoot-Hawley Tariff precluded the trading profits other nations would need to earn money to service their American debts.

After World War II, America displayed firm leadership in establishing the Bretton Woods system and the ensuing brilliant quarter-century. It again tried to opt out of leadership in August 1971, and an era of world inflation started. Gradually the Fed restored stability to the dollar, and thus the world economy, and this too was reflected by Mr. Dow's barometer. The wars of the century brought big government and high taxes. Stripping away wartime tax rates, as Andrew Mellon and Calvin Coolidge did in the 20s, Douglas Dillon and John Kennedy did in the 1960s, and Ronald Reagan did in the 1980s, contributed to booms in the markets and growth in the economy. We can hope that with the fall of the Berlin Wall in 1989, an era of large wars has ended and that we are on a new trend toward lower taxes and smaller government.

Indeed, if at its centenary the Dow Average happens also to mark a new era, it bids to be one ruled less by nation-state politicians than by impersonal international markets. If so, we can also hope that it will be bullish for the market, promising for international prosperity and empowering for men and women around the globe.

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