As this nation has seen throughout its history, a lack of balanced regulation of markets and the banking industry leads to wide swings of economic ups and downs. That history is borne out by the panics of 1819,1837,1857,1873,and1893, in the 19th century, alone.
Charles Dow’s first experience with extreme market variations was the Panic of 1873, which threw this country into severe depression. Banks failed everywhere, and greenbacks became worthless. But by 1882 when Charles Dow and Edward Jones began their financial newspaper, the Panic of 1873 was just a memory. In fact, the economy was back on one of its wild up-swings. The 1880-1890 decade was one of remarkable national growth and expansion.
Dow had studied financial cycles and desired to create a barometer for the relationship between stock market trends and general business activity. He believed the stock market as whole was a reliable measure of overall business conditions within the economy and that one could accurately gauge those conditions and identify the direction of major market trends.
He first used his theory to create the “Dow Jones Industrial Index” and the “Dow Jones Rail Index”, which is, today, called the “Transportation Index”. The theory was that, if the industrial average followed the same pattern as the rail index in an upward direction, a significant market shift — a bull market — was taking place. The reverse also held true. If they followed each other down to new lows, the market was termed bearish. Since these two averages represented two major areas of investment, it was Dow’s belief that, unless they both shifted in the same direction at the same time, the move could not be considered critical. A hundred-plus years later, that theory is still in use today, though it has been tweaked many times by technical analysts.
I write of Charles Dow, Edward Jones and the “Wall Street Journal” in my book: “The Ronnie Lee and Jackie Bancroft Spencer Morgan Story, a tale of people, greed, envy, manipulation — even crime”.