Jin Haeng Lee
These days, everyone seems to be interested in the stock market; everyone thinks he or she can make a huge fortune by participating in the stock market. However, all the people should keep in mind that even Newton, the renowned physicist who mastered mathematics, failed at predicting the stock market. This shows that it is extremely difficult to foresee what is going to happen in the stock market unless one tries to approach it with extreme carefulness.
One of the most efficient ways would be approaching it in a social studies context; looking at the social events or issues that hugely impacted the stock market would definitely help people to predict the future of the stock market. This essay will discuss how the stock market has changed so far – the history of the stock market. Moreover, the essay will explicate the current issues that possibly could influence the stock market.
To begin with, in my opinion, to understand how the Dow Jones Indicator works, people need to know what it is. The Dow Jones is the value of thirty main companies in the United States combined. The following is the 30 companies that consist of the Dow Jones Average.
Company / Date Added3M / 1976-08-09 1976-08-09 (as Minnesota Mining and Manufacturing)
Alcoa / 1959-06-01 1959-06-01 (as Aluminum Company of America)
American Express / 1982-08-30 1982-08-30
AT&T / 1999-11-01 1999-11-01 (as SBC Communications)
Bank of America / 2008-02-19 2008-02-19
Boeing / 1987-03-12 1987-03-12
Caterpillar / 1991-05-06 1991-05-06
Chevron Corporation / 2008-02-19 2008-02-19
Cisco System / 2009-06-08 2009-06-08
Coca-Cola / 1987-03-12 1987-03-12
DuPont / 1935-11-20 1935-11-20 (also 1924-01-22 to 1925-08-31)
ExxonMobil / 1928-10-01 1928-10-01 (as Standard Oil)
General Electric / 1907-11-07 1907-11-07
Hewlett-Packard / 1997-03-17 1997-03-17
The Home Depot / 1999-11-01 1999-11-01
Intel / 1999-11-01 1999-11-01
IBM / 1979-06-29 1979-06-29
Johnson & Johnson / 1997-03-17 1997-03-17
JPMorgan Chase / 1991-05-06 1991-05-06 (as J.P. Morgan & Company)
Kraft Foods / 2008-09-22 2008-09-22
McDonald's / 1985-10-30 1985-10-30
Merck / 1979-06-29 1979-06-29
Microsoft / 1999-11-01 1999-11-01
Pfizer / 2004-04-08 2004-04-08
Procter & Gamble / 1932-05-26 1932-05-26
Travelers / 2009-06-08 2009-06-08
United Technologies Corporation / 1939-03-14 1939-03-14 (as United Aircraft)
Verizon Communications / 2004-04-08 2004-04-08
Wal-Mart / 1997-03-17 1997-03-17
Walt Disney / 1991-05-06 1991-05-06
(The New York Job Source).
The chart above shows that most of the industries are included in the Dow Jones Indicator after 1970s. Then one must be curious about what other industries from 1896, when Dow Jones founded the Dow Jones Indicator, were included in the consideration. There are thirty industries included in the Dow Jones Average these days, at the beginning of its history, there were only 12 major industries that comprised Dow Jones Average; other than General Electric, the other 11 industries are now gone. The other industries are as follows; American Cotton Oil Company; American Sugar Company; American Tobacco Company; Chicago Gas Company; Distilling & Cattle Feeding Company; Laclede Gas Company; National Lead Company; North American Company; Tennessee Coal, Iron and Railroad Company; the U.S. Leather Company; United States Rubber Company (Money Zone). The main reason that there were several changes in the list is that as the US economy has grown to rely on other sectors, greater emphasis has been placed on companies providing financial services, retailing, and technology (Geisst).
Now since I briefly discussed what consists of the Dow Jones Average, I will mainly discuss the history of the Wall Street, which is the main center of stock market of the world, and how Dow Jones Average has been changed. First of all, although the original the Wall Street was created in the 17th century, the Wall Street we know today was not created until the late 18th century. Stock-interested traders gathered informally under a buttonwood tree around the Wall Street. Then in 1792, the traders declared ‘Buttonwood Agreement’, which noted the beginning of the New York Stock Exchange, or the Wall Street that people usually think of (The Library of Congress). The significance of the Wall Street was evident even before the Buttonwood Agreement. George Washington took the oath of office on the balcony of Federal Hall overlooking The Wall Street on April 30, 1789 (GeisstCharles).
However, it was not until the late 19th century that The Wall Street became the most important economical center of the U.S. As I mentioned above, in 1896, Dow Jones Industrial Average was founded. As soon as it was founded, however, it faced an immediate downfall, because of the Panic of 1893, followed by Panic of 1896; The Dow Jones Average falls from 40.94 to 28.48. Both Panics were marked by the collapse of railroad overbuilding and shaky railroad financing which set off a series of bank failures. Compounding market overbuilding and a railroad bubble was a run on the gold supply and a policy of using both gold and silver metals as a peg for the US Dollar value. The panics are considered the most serious economic downfall until the 1920s, when the Great Depression hit the US (The history box).
Then again, in the 1900’s, the Dow Jones Average encounters another minor downfall, due to the Panic of 1901 and 1907. The Panic of 1901 is important, as it is the first stock market crash on the New York Stock Exchange. (note that it is not the first crash on the Dow Jones Average; Dow Jones Average, as I mentioned, already faced a downfall from the Panic of 1896)
Meanwhile, the Panic of 1907 was also known as 1907 Bankers' Panic, and was a financial crisis that occurred in the United States when the New York Stock Exchange fell close to 50% from its peak the previous year (Robert F.). The graph following will show how the Dow Jones Average fell during 1907
(Henry).
The economic condition of US before the panic of 1907 was not pleasant. In addition to the panic of 1901, the April 1906 earthquake that devastated San Francisco contributed to the market instability, prompting a great flood of money from New York to San Francisco to aid reconstruction.
A further stress on the money supply occurred in late 1906, when the Bank of England raised its interest rates, partly in response to the UK insurance companies paying out so much to the U.S policyholders, and more funds remained in London than expected (TallmanEllis). From their peak in January, stock prices declined 18% by July 1906. By late September, stocks had recovered only half of their losses.
In July of 1906, the congress passed the Hepburn Act, which gave the Interstate Commerce Commission (ICC) the power to set maximum railroad rates, which depreciated the value of railroad securities (Boyer). This depreciation of railroad securities caused 7.7% slid in stock market. Between March 9 and 26, stocks fell a further 9.8%. The economy remained unstable through the summer. A number of shocks hit the system; the most significant one was the stock of Union Pacific, which fell 50 points. Until the September of 1907, stocks were lower by 24.4%.
On July 27, The Commercial & Financial Chronicle noted that "the market keeps unstable ... no sooner are these signs of new life in evidence than something like a suggestion of a new outflow of gold to Paris sends a tremble all through the list, and the gain in values and hope is gone" (Bruner.). The fall season was such a vulnerable time for the banking system—combined with the roiled stock market, that even a minor shock could have grave consequence. Then in 1907, the panic began.
The 1907 panic began with a stock manipulation plot to corner the market in United Copper Company of F. Augustus Heinze, who made a fortune as a copper magnate. In 1906 he moved to New York City, where he formed a close relationship with notorious The Wall Street banker Charles W. Morse, who had once successfully cornered New York City's ice market. With Heinze, Morse gained control of many banks—the duo served on six national banks, ten state banks, five trust companies and four insurance firms (Geisst).
Believing that the Heinze’s family already manipulated a majority of the company, Otto, Augustus's brother, devised the plot to corner the United Copper. He also believed that a significant number of the Heinzes' shares had been borrowed, and sold short, with ‘speculators’ who bet that the stock price would drop, from which they could repurchase the borrowed shares cheaply, pocketing the difference. Otto proposed a ‘short squeeze’, an economic term for a rapid increase in the price of a stock that occurs when there is a lack of supply and an excess of demand for the stock. He believed that the Heinzes would aggressively purchase as many remaining shares as possible, and then force the ‘short sellers’ to pay for their borrowed shares. The aggressive purchasing would drive up the share price, and, being unable to find shares elsewhere, the short sellers would have no option but to turn to the Heinzes, who could then name their price (Bruner.).
To find financial supporter for the scheme, Otto, Augustus and Charles Morse met with Charles T. Barney, president of the city's third-largest trust, the Knickerbocker Trust Company. Barney was willing to provide financing for previous Morse schemes. On Monday, October 14, he began to aggressively buy shares of the United Copper, which rose in one day from $39 to $52 per share. On Tuesday, he asked for short sellers to return the borrowed stock. The share price rose to nearly $60, but unlike what Otto has expected, the short sellers easily found plenty of United Copper shares from sources other than the Heinzes; Otto had misread the market, and the share price of United Copper began to collapse (Bruner.). The stock closed at $30 on Tuesday and fell to $10 by Wednesday, causing Otto Heinze to go bankrupt.
The failure of the corner left Otto unable to meet his obligations and made his brokerage house, Gross & Kleeberg, go bankrupt. On Thursday, October 17th, the New York Stock Exchange suspended Otto's trading privileges. As a result of United Copper's collapse, the State Savings Bank of Butte Montana, which was owned by F. Augustus Heinze, announced its insolvency. The Montana bank had been a ‘correspondent bank’ for the Mercantile National Bank in New York City, of which F. Augustus Heinze was then president.
However, F. Augustus Heinze's association with the corner and the insolvent State Savings Bank proved too much for the board of the Mercantile to accept. Although they forced him to resign, it was too late. As news of the collapse spread, depositors rushed in to withdraw money from the Mercantile National Bank. The Mercantile had enough capital to withstand a few days of withdrawals, but depositors began to pull all the cash from the banks of the Heinzes' associate Charles W. Morse. By the weekend after the failed corner, there was not yet systemic panic. Funds withdrawn from Heinze-associated banks were deposited in other banks in the city.
Besides the Heinze bankruptcy, the 1900s had other economic problems. In the early 1900s, ‘trust companies’ were booming. The leaders of the successful trusts were mostly conspicuous members of New York's financial and social circles. Charles T. Barney, as mentioned above, was one of the most notorious ones, who owned Knickerbocker. Because of his previous association with Otto and Heinze, his company, Knickerbocker, went to bankruptcy.
As news spread, other banks and trust companies were reluctant to lend any money. The interest rates on loans to brokers at the stock exchange soared and, with brokers unable to get money, stock prices fell to a low not seen since December 1900. By Thursday, October 24, a chain of failures filled the street: Twelfth Ward Bank, Empire City Savings Bank, Hamilton Bank of New York, First National Bank of Brooklyn, International Trust Company of New York, Williamsburg Trust Company of Brooklyn, Borough Bank of Brooklyn, Jenkins Trust Company of Brooklyn and the Union Trust Company of Providence (Bruner.).
When the confidence of New York's banks hit the bottom because of the chaos, the city's most famous banker, J.P. Morgan, was out of town, visiting a church convention in Richmond, Virginia. Morgan was not only one of the country’s wealthiest bankers, but also he knew how to deal with crisis. As soon as he heard the news of the crisis, Morgan returned to The Wall Street from his convention. The morning after his return, everyone came to his office to seek help and to share information about the impending crisis.
Although Morgan and his associates examined the case of the Knickerbocker Trust with all their ability, Morgan decided it was too late and regarded it as insolvent. Its failure, however, triggered chain effects on even healthy trusts, thus making Morgan take charge of the rescue operation. Morgan conferred with the United States Secretary of the Treasury, George B. Cortelyou, to help the Trust Company of America. Cortelyou even said that he was willing to deposit government money in the banks. It was only the intervention of Morgan that finally enabled the banks to declare that the panic was over.
However, it was not just Morgan that helped to save the U.S from the panic. Although Morgan enabled several banks to survive, he knew that the banks must have additional flow of money to be solvent. Then he assembled the presidents of the other trust companies and had them agree to donate $ 8.25 million. Furthermore, John D. Rockefeller, the wealthiest man in America, deposited another $10 million in Stillman's National City Bank to support Morgan. To instill public confidence, Rockefeller pledged half of his wealth to maintain America's credit (TallmanEllis).
As the panic of 1907 was the severest economic downfall in the U.S before the Great Depression, the aftermath of the panic was dramatic; bank panic and falling stock market resulted in significant economic disruption. Industrial production dropped further than after any previous bank run. Production fell by 11%, imports by 26%, while unemployment rose to 8% from under 3% (TallmanEllis).
Since the end of the Civil War, the U.S had experienced panics of varying severity. Economists Charles Calomiris and Gary Gorton regard the panics of 1873, 1893, and 1907, and a suspension in 1914 as the worst panics as those lead to widespread bank suspensions. As the crises repeated with higher frequency and each time J.P Morgan was too heavily related, people started to concern on the outsized role of J.P. Morgan; some of them even thought about reform of the banking system. As a result, in May 1908, Congress passed the Aldrich–Vreeland Act, which established the National Monetary Commission to investigate the panic and to regulate banking (Bruner.Robert).
Then the Dow Jones Average remained virtually same throughout the 1910s. The success goes throughout the 1920s, when the Dow Jones Average increased amazingly; especially in 1928, the components of the Dow were increased to 30 stocks near the economic height of that decade, thus called the “Roaring Twenties”.
The Roaring Twenties was when the U.S experienced great economic growth and widespread prosperity driven by government growth policies, a boom in construction, and the rapid growth of consumer goods such as automobiles. The economy of the US, which had successfully transitioned from a wartime economy to a peacetime economy, boomed. However, there were sectors that were stagnant, especially farming and mining, which causes grave trouble later: The Great Depression, which the essay will delve into later. The United States raised its standing as the richest country in the world, its industry aligned to mass production and its society acculturated into consumerism.
However, in 1929, followed by the Crash of 1929 or Black Tuesday, Great Depression came along, causing a 90% drop in the whole components of Dow industry. The severity of the Depression can be assumed by comparing the Dow level of September 3rd (a month before the Crash) with that of November 13th; the Dow Jones Average dropped from 381.17 to 198.69. Moreover, the high of September 3rd would not be recovered until 1954, which is two decades later (Geisst).
Some economic historians usually consider the start of the Great Depression the sudden devastating collapse of US stock market prices on October 29, 1929, known as Black Tuesday. However, other analysts see the stock crash as a symptom, rather than a cause of the Great Depression.
Even after the Wall Street Crash of 1929, optimism persisted for some time; John D. Rockefeller said that "These are days when many are discouraged. In the 93 years of my life, depressions have come and gone. Prosperity has always returned and will again." (Schultz).
In fact, the stock market increased in value in early 1930, returning to early 1929 levels by April, although it was still a little lower than the peak of September 1929 (Vronsky). Both the government and business actually spent more money in the first half of 1930 than in the corresponding period of the previous year. On the contrary, consumers, many of whom had suffered severe losses in the stock market the previous year, lessened their expenditures by ten percent.