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William Peter Hamilton.

The stock market barometer; a study of its forecast value based on Charles H. Dow's theory of the price movement. With an analysis of the market and its history since 1897 online

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at 33 per cent of the national wealth, or a proportion
of about I y 2 per cent more than that at the conclusion
of the Napoleonic wars, which had lasted, with a
three-year interregnum, from 1793 to 1815. No doubt
it is a formidably high proportion. But it is far from
a hopeless proportion; and this is a basic reason why,
of all the money units depreciated in the conflict, the
British pound sterling approximates respectably in ex-
change credit to the American dollar.

One of Our Own Liabilities

In 1917 the stock market was asking itself what
would happen to the pound sterling, and everything



ITS GREATEST VINDICATION 1917 201

else, if Germany won. If the German printing presses
are working overtime to turn out paper marks, what
sort of currencies would the allies be circulating now
had the German drive in the spring of 1918 succeeded?
We have satisfied ourselves by analysis that the essen-
tial quality of the stock market barometer is its fore-
sight. Could there have been a more striking instance
of the clarity of its vision than that salutary bear mar-
ket, when we were deceiving ourselves with paper
profits, inflation wages and inflation prices? In 1916
we had placed in the hands of the labor unions, through
the Adamson Act, the power to inflate wages without
guaranty of any corresponding productive return.
Congress, with a presidential election in sight, had
tried to buy votes, lulling the American consumer and
taxpayer, who were to pay the bill, with professions of
a philanthropic desire to inaugurate shorter hours with
consequent greater safety for the railroad traveler.
Of course the Adamson Act did not mean shorter
hours but only earlier, and more, overtime. The
hours of railroad labor were actually lengthened; for
it was made strictly to the interest of the men, up to
sixteen hours, to stretch their day to the legal limit.
We know now what the demoralizing effect upon other
labor was, in every department of industry. With
such a precedent no wage demand was too preposterous
after our own entry into the war, early in 1917, had
tied our hands. There was hardly a single manufac-
turer in the country, and certainly not a consumer, who
did not reap the deadly consequences of that humiliat-
ing Congressional surrender.



202 THE STOCK MARKET BAROMETER

What Watered Labor Means

In an earlier chapter, that on u Water in the Barom-
eter," I have alluded to watered labor as being in-
comparably more deadly than watered capital. How
many billions of our national debt might not have
been deducted, as never incurred, if there had been no
such dilution? Mr. Piez, director-general of the
Emergency Fleet Corporation during the war, esti-
mated that the efficiency of labor had been dangerously
reduced through smaller individual output and larger
wages, the latter only excused by the higher prices for
commodities of which those wages themselves had
been the automatic cause. He said:

"Labor had been deliberately slack during the war. In the
Atlantic Coast shipyards workmen received $2 for the same time
that a year ago (1916) brought only $i, but that the individual
output was only two-thirds of what it had been a year before."

Guy Morrison Walker, in The Things That Are
Caesar's, quoting Director-General Piez, says that
the unit of cost production during our share in the
war was only one-third what it was at the beginning
of hostilities. Estimating our national debt at
$24,000,000,000 and deducting from it all, up to
$11,000,000,000, owed by the allied nations who bor-
rowed from us, there remains $13,000,000,000, of
which a large part, possibly half, constitutes watered
labor. But we are to remember that in the advances
to the allies, which were made not in cash but in the
necessaries of war, of which labor was the costliest



ITS GREATEST VINDICATION 1 9 1 7 203

item, the water was also present in the same propor-
tions. It was less the cash wages than the slacking,
shirking and bad work. If we took all the water
which has ever been squeezed out of corporation capi-
talization, by the remorseless stock market, we should
not have a sum anything nearly approaching the shame-
lessly watered labor upon which we and our children
and our children's children must continue to pay inter-
est for half a century to come.

Paying for Bad Work

It has not been difficult to show the largely nominal
character of "water" in capitalization. How relatively
seldom has it represented any real loss, to anybody,
compared with the irreparable losses from watered
labor! How unsatisfying must seem the industrial
and commercial activity, recorded of the five years of
the war in graphic statistical tabulation, when we have
deducted from it the triple price for that prosperity
for which from henceforth we have to pay. Everyone
of those sham dollars must be met in real dollars.
Every wasted hour of bad work or shirked work has
to be paid for in an hour of good work.

Secondary Inflation And After

If I had to forecast the coming major bull swing
in stocks, and the area of a possible secondary infla-
tion, likely to be much less than that of the war but
sufficiently obvious, I would compare it with the six
years which followed the battle of Waterloo in Great



THE STOCK MARKET BAROMETER



Britain. It was in 1821 that the Bank of England
went back upon a gold basis, and the premium upon
gold disappeared. A self-deluded House of Commons
admitted in 1819 that the famous Bullion Report
was right, and that fiat money was wrong. And then
followed the years in which the deflation of the war
levels was taken in hand by a nation in which every
sixth person was a registered pauper. Dare we sup-
pose that we shall not pay our relatively lighter bill
in some such way as this, sooner or later? It is less
than four years since the armistice. The bull market
in progress while this is written may or may not carry
us to a date corresponding to that of 1821 in Europe.
We are in no such desperate condition as Great Britain
was then. But our foreign customers have an almost
incalculably greater reckoning to meet. It is not a
problem which can be solved by quack remedies. It
can, indeed, be settled only by throwing the quack
remedies out of the window, for the patient has been
doped to the danger point.

Unsuspected Qualities of the Barometer

But sufficient unto the day is the evil thereof. The
stock market barometer is enough for our purpose in
that it records, well in advance, the periods of depres-
sion and prosperity alike, giving, as we have seen, the
signal for a clear track ahead and the warning of
danger. The averages are saying now that general
business will be more active and more cheerful in the
summer of 1922. The barometer does not profess
to predict the duration of such prosperity, although



ITS GREATEST VINDICATION 1917 205

on close scrutiny it seems to give tolerably clear indi-
cations of the character of the boom or depression
which it forecasts. The business depression of 1908-9,
predicted by the bear market of 1907, was deep rather
than long. The period of prosperity of the latter part
of 1909 and 1910 was more extended but much shal-
lower ; and the market bull movement which preceded
it was also slower and longer than the bear market,
while its range was correspondingly less. This is strik-
ingly true of the narrower later fluctuations, both in
business and in the stock market, with the latter char-
acteristically preceding the former. It was only in the
war years that the preceding major swings of the stock
market became as vigorous as the developments in our
trade.

It is also noteworthy that during those quiet years
of narrow fluctuations before the war the volume of
transactions in stocks, as shown in our twenty-five-year
chart, contracted also. The average monthly transac-
tions compare in volume, upon the whole, rather un-
favorably with those preceding the re-election of Mc-
Kinley in 1900. The years 1911, 1912, 1913, and
1914 show a volume of trading below that recorded
in the years 1897, 1898, 1899, and 1900; and the year
1899 made a better showing in the average transac-
tions than any one of the later years here taken for
comparison.

Forecasting the War

We may say, therefore, that the stock market does
in a measure foresee, although probably in a way not



206 THE STOCK MARKET BAROMETER

sufficiently definite to be of much practical usefulness,
the character, and even the dimensions, of the thing
it predicts. One thing it foresaw, so far as human
knowledge could, was the war itself. Somebody knew
that it was a lively possibility, and the bear market
which preceded the war was no accident or mere coinci-
dence. It will be remembered that in the latter part
of 1912 a bear movement set in, of decidedly mild
intensity compared with most of the bear movements
of the past and especially those to which we have given
particular consideration. There was an area of busi-
ness depression of no great depth in 1914 which could
be offered as partly convincing justification of the pre-
ceding major bear swing. But there can be little doubt
that the decline was also influenced by liquidation of
stock held by those who realized the dangerous pos-
sibilities in the German attitude toward other nations.
This must have started somewhere about the opening
of the Kiel Canal, strategically connecting the Baltic
with the North Sea through German territory.

It may be justly claimed that the bear market, quite
apart from predicting a contraction in business, was
also discounting the possibilities of war. In a previous
study, referring to the line of distribution made in
1914, before the outbreak of hostilities, it was shown
that foreign liquidation was responsible for turning
what would normally have been a line of accumulation
into a line of distribution, during the period of almost
three months of equilibrium so represented. To those
who profess themselves dissatisfied that the major
stock market movements are not always immediately



ITS GREATEST VINDICATION 1917 207

adjustable to the various current business charts, it
may be said that the fault is not in our barometer.
That is universal, and takes note of international facts
where those tabulations do not. If, therefore, they
inadequately confirm our deductions, so much the worse
for them. We have found that the more severe the
test we apply to our barometer the more triumphantly
does it vindicate its usefulness. It would be difficult
to overestimate the value of its prescience both before
the war and in the course of the conflict. What if
the war had come at the top of a bull market?



Chapter XVIII

WHAT REGULATION DID TO OUR RAILROADS

A SWEEPING assertion requiring no qualification
would probably be one of two things. It would
be an axiom, self-evident and containing its own proof;
as, for instance, "the sum of the angles of any triangle
is equal to two right angles." Or it would be a truism
not greatly worth stating. I have said in previous
necessary criticism that tabulated business records,
however presented, are at best records, and only in
a minor degree forecasts. But that is a statement
which requires at least some qualification, because the
youngest but most scientific of our business records
embodies a quality of forecast. This is the service of
Harvard University's Committee on Economic Re-
search. Its index chart does offer a method of fore-
casting business, for the good reason that it adapts
the idea of the stock market barometer, which has
been in successful use by The Wall Street Journal and
its allied publications for the past twenty years.

A Chart With a Forecast ,

Those familiar with the Harvard economic service
will recollect that it uses three lines in its business chart
a line of speculation, a line of banking and a line of
business. It commits itself to no floundering attempt

aot



REGULATION AND RAILROADS 209

to show that "action and reaction are equal." Its
service dates from after the war; but it publishes a
chart from 1903 to 1914 inclusive, which is a most
valuable confirmation of what has been here laid down
in the discussion of the stock market barometer. Its
line of speculation, during those twelve years, uni-
formly precedes the lines of business and banking. In
other words speculation anticipates the developments
of business, which is exactly what these chapters have
been directed to prove.

The Harvard Committee on Economic Research
takes the average stock market prices for its line of
speculation. It recognizes how completely the war
threw many such calculations out of gear by breaking
up the very foundations upon which they were based.
Harvard, therefore, does not publish any chart of the
years of the war. I find, in looking back over my rec-
ords and newspaper comments, that conclusions upon
the stock market movement and its prophetic relation
to the business of the country were dropped almost
entirely for the same reason. We have seen that when
the government took over the railroads on a guaranty
we had remaining merely the speculative movement
of the industrial stocks, without any corresponding
movement of the railroads to check and confirm it.
We have seen also, in analyzing the war period which
the Harvard service not unwisely ignores, that the
stock market did, in a most valuable way, act as best
it could in holding before the public mind the possi-
bilities of the war itself, notably in the bear market of
1917, and that it also foreshadowed the war in the



210 THE STOCK MARKET BAROMETER

line of distribution for the three months preceding its
outbreak.

A Movement Greater Than the Major Swing

But there is another indication given by the averages
which, while of the greatest importance to-day, has
been largely unrecognized. We have seen that the
railroad stocks, where there was a free market for
them, in the years under private ownership, shared the
major swings; and that we had a bull market cul-
minating in 1909, a bear market determined in the
following year, a greatly restricted and hesitating bull
market, especially in the railroad stocks, carrying into
the latter part of 1912, and another bear market cul-
minating immediately after the reopening of the Stock
Exchange in December, 1914, following eighteen
weeks of war.

There is a historical significance a lesson and
warning of the very first importance in the general
trend downward of the prices of railroad stocks from
1906 to June, 1921. This is a movement not only
wider than the major swings but even more consider-
able than any of these assumed cycle periods with
which a previous discussion dealt. It has extended
nearly sixteen years. It is not only likely but as nearly
certain as anything merely human can be, that the
railroad stocks on the average will improve in the
coming year 1922. But there is a radical reason why
they will not, in any near period of time, attain the
old freedom and buoyancy which they enjoyed in the



REGULATION AND RAILROADS 211

later lifetime of great railroad builders like James J.
Hill and Edward H. Harriman. A condition for
railroad enterprise has been established which has not
only taken much of the speculative value out of the
stocks but much of the permanent value as well. It is a
condition which has left the railroads themselves
emasculated and weak, with their virile creative power
removed.

Roosevelt and the Railroads

If Theodore Roosevelt could have foreseen the
deadly consequences of the agitation against railroad
corporations which he inaugurated; if he could have
realized that he was not applying temporary checks
to temporary evils, that his policies, so called, carried
to their logical conclusion, would cripple railroad en-
terprise for incalculable years to come, and perhaps
forever, in order to punish a few who had abused the
power which necessarily accrues to successful enter-
prise we may be sure he would have acted far other-
wise. The public power to reform has been construed,
in the past fourteen years, as the power to destroy.
Railroad development, which in the past has not only
accompanied the increase in population but, on this
continent at least, has preceded it, is now moribund or
dead. No new capital has been forthcoming for the
greatly needed extension of railroad facilities to parts
of the country which do not enjoy them, to say nothing
of greater terminal facilities. Lines of communica-
tion are the very arteries of civilization. But the



2 1 2 THE STOCK MARKET BAROMETER

adaptation of the Roosevelt theories or rather the
misconception of those theories, the ascription to Theo-
dore Roosevelt of ideas he never held has resulted
in a hardening of those arteries, in a weakening of
the 'great central heart which pumps the lifeblood
through them.

An Arrested Development

We can see the fact for ourselves in the mileage of
the United States taken contemporaneously with each
ten-year census. If we had two hundred and forty
thousand eight hundred and thirty miles of railroad
in 1910 an increase of nearly 25 per cent since 1900
and more than double the railroad mileage in 1880
we should have had a continuing increase, shown in
the census of 1920, of as much as ninety thousand
miles. We have not had one-sixth of it. The in-
crease has been less than fifteen thousand miles, the
irreducible minimum, just enough to keep the railroads
alive. A "craven fear of being great" has possessed
our politicians. They have paralyzed the growth of
our most important industry rather than permit a few
conspicuous individuals to grow rich by the turning of
great ideas to great needs. Harriman and Hill were
rich when they died. I knew them both, and I know
that their wealth was almost fortuitous. They were
rich because they could have done nothing creative
without the necessary financial strength to make them
independent. But Harriman never controlled the
stock of one of the railroads he directed. He was



REGULATION AND RAILROADS 213

implicitly and deservedly trusted by the stockholders.
He never had a voting majority in Southern Pacific,
Union Pacific or even Chicago & Alton. He and
Hill, incidentally to their own wealth, brought com-
fort, competence, affluence, to millions of Americans
they never saw. The period of railroad development
so clearly set forth in the record and chart of our
barometer from 1897, the end of the reconstruction
era, to 1907, the beginning of the destruction era, was
upon the whole the greatest, most deservedly success-
ful and most creative period in American history.

A Cycle of Human Folly

We have seen and proved the correctness of Dow's
theory of the price movement. We know that the
stock market has simultaneously a major swing up-
ward or downward, a secondary reaction or rally, and
a daily fluctuation. But might we not almost go
further and establish a sort of cycle of our own, not
related in the least to those cycles which we have previ-
ously considered, with their imposing and instructive
lists of panic dates? The Harvard University chart
ventures as far as is wise and profitable. Its series is
"Depression," "Revival," "Prosperity," "Strain,"
"Crisis," without assuming absolute length for any of
these states, and even taking "Strain" and "Crisis,"
or "Crisis" and "Panic," or "Strain" and "Panic," as
in some cases coincident. But there is another cycle
which we can deduce from our records of the averages,
which could almost be called a cycle of human folly.



2i 4 THE STOCK MARKET BAROMETER

It could only occur in a democracy such as ours, where
a people with the power to govern themselves too
rashly assume and misconstrue the greatest privilege
of such a democracy the power to make their own
mistakes.

Coxey's Army

It will not be difficult to show what I mean. In
the year 1890, with a Republican President and a
Republican Congress, the air was full of uncertainty
and sectionalism; and legislation, which is always in
some degree a compromise, had become an immoral
compromise. A true statesman can compromise suc-
cessfully on non-essentials with no real sacrifice of vital
principles. But the Sherman Silver Purchase Act was
a sacrifice of principle which brought about the gravest
consequences, because it adulterated the very lifeblood
of our financial system. The great and inevitable
panic, due to consequent inflation and overspecula-
tion, might well have come in 1892 had it not been
that, in that year, we had an extraordinarily large
wheat harvest coincidentally with a complete failure
of the crop of Russia, our only considerable inter-
national competitor. The panic came, therefore,
in 1893.

For four years after the country was full of very
much the same kind of Populism which is so rife at
present. Coxey's Army started from Masillon, Ohio,
to march on Washington in 1904. Coxey's main
postulate that prosperity could be restored with the



REGULATION AND RAILROADS 215

11

unlimited issue of fiat money was marching all over
the United States. The Middle West was rotten with
it. The turn of the tide was marked by William Allen
White's celebrated editorial, "What's the Matter
With Kansas?" Railroad managers, during those
dreadful years, were in the last depths of despair. All
but a few strong and sound roads went into bank-
ruptcy. As much as 87 per cent of the country's rail-
road mileage in 1896 was in receivership. Only with
the first election of McKinley did the country emerge
into a state of sanity and light.

Ten Prosperous Years

It had tried out the Populist follies -free silver and
all the rest of them and found that they pointed in
the direction of national bankruptcy. Politicians were
terrified at the results of their rash enactments. For
ten years, between 1897 and 1907, the paralyzing hand
of politics was removed from the business of the
United States. We never had such a period of pros-
perity, before or since. The railroad development in
that time was greater than it had ever been before.
It was a decade which saw the broadest and most
beneficent industrial amalgamations, of which the
United States Steel Corporation is the outstanding
example. It was a time when the cost of living was
upon the whole low, although it was rising in the latter
part of the ten-year period. It was a time when wages
were good, not merely in their amount as expressed in
dollars and cents, but in their purchasing power.



216 THE STOCK MARKET BAROMETER

"And Jesurun Waxed Fat, and Kicked"

But "Jesurun waxed fat, and kicked." Can it be
that democracies cannot stand prosperity ? Or is there
still no need to make so wide an assumption? We
have seen that labor agitation reaches its maximum,
not in the lean years, when unions are impotent or
non-existent, but in the fat years, when labor is at a
premium and the leaders have at their disposal more
union funds than they can wisely spend. Agitation is
not, as so many of us have assumed, the result of trade
depression. It is, indeed, the kicking of the national
Jesurun when he waxes fat. The dangerous founda-
tion of the Populism which ineffaceably marked the
nineties had been laid in the years before. We seem
to be running into such an era of Populism once more.
The war has, of course, thrown any possible "cycle"
out of kilter, but the evil fertilization of the impres-
sionable public mind, implanted by the agitation against
personal property, is bound to bear its noxious fruit
in the years to come.

Public Opinion's Second Thoughts

It would be extending the purpose of the stock mar-
ket barometer, and the design of these discussions
beyond their proper field, if I ventured upon a forecast
based upon this cycle of popular folly. We can see
how far behind us the golden ten-year period of true
prosperity is. We can name the peak of it. We saw
its sudden and dramatic collapse in 1907. The fever-



REGULATION AND RAILROADS 217

ish productive activity growing out of the war is no
fair test, just as it is no sound basis. Before another
ten years like those between 1897 an d 1907 can be
inaugurated, must the country go through a period
at the end of which it will ask itself, not "What's the
matter with Kansas?" but "What's the matter with
America?" I would be a poor American indeed if I
did not believe that the good sense of the American
people can find the right answer when that day comes.
There is no weaker fallacy of democracy than the one
which assumes that public opinion is always right. It
depends on what you call "public opinion." Such
opinion, as represented by the voice of the noisiest, in


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Online LibraryWilliam Peter HamiltonThe stock market barometer; a study of its forecast value based on Charles H. Dow's theory of the price movement. With an analysis of the market and its history since 1897 → online text (page 13 of 20)