Chapter I



CYCLES AND STOCK MARKET RECORDS

AN English economist whose unaffected humanity always made him remarkably readable, the late William Stanley Jevons, propounded the theory of a connection between commercial panics and spots on the sun. He gave a series of dates from the beginning of the seventeenth century, showing an apparent coincidence between the two phenomena. It is entirely human and likable that he belittled a rather ugly commercial squeeze of two centuries ago because there were not then a justifying number of spots on the sun. Writing in the New York Times early in 1905, in comment on the Jevons theory, I said that while Wall Street in its heart believed in a cycle of panic and prosperity, it did not care if there were enough spots on the sun to make a straight flush. Youth is temerarious and irreverent. Perhaps it would have been more polite to say that the accidental periodic association proved nothing, like the exact coincidence of presidential elections with leap years.

Cycles and the Poets

Many teachers of economics, and many business men without pretension even to the more modest title of student, have a profound and reasonable faith in a cycle in the affairs of men. It does not need an understanding of the Einstein theory of relativity to see that the world cannot possibly progress in a straight line in its moral development. The movement would be at least more likely to resemble the journey of our satellite around the sun, which, with all its planetary attendants, is moving toward the constellation of Vega. Certainly the poets believe in the cycle theory. There is a wonderful passage in Byron's "Childe Harold" which, to do it justice, should be read from the preceding apostrophe to Metella's Tower. This was Byron's cycle :

"Here is the moral of all human tales, 'Tis but the same rehearsal of the past; First freedom and then glory ; when that fails Wealth, vice, corruption, barbarism at last, And history, with all her volumes vast, Hath but one page."

There seems to be a cycle of panics and of times of prosperity. Anyone with a working knowledge of modern history could recite our panic dates 1837, 1857, 1866 (Overend-Gurney panic in London), 1873, 1884, 1893, 1907, if he might well hesitate to add the deflation year of 1920. Panics, at least, show a variable interval between them, from ten to fourteen years, with the intervals apparently tending to grow longer. In a subsequent chapter we shall analyze this cycle theory, to test its possible usefulness.


Periodicity

But the pragmatic basis for the theory, a working hypothesis if nothing more, lies in human nature itself. Prosperity will drive men to excess, and repentance for the consequence of those excesses will produce a corresponding depression. Following the dark hour of absolute panic, labor will be thankful for what it can get and will save slowly out of smaller wages, while capital will be content with small profits and quick returns. There will be a period of readjustment like that which saw the reorganization of most of the American railroads after the panic of 1893. Presently we wake up to find that our income is in excess of our expenditure, that money is cheap, that the spirit of adventure is in the air. We proceed from dull or quiet business times to real activity. This gradually develops into extended speculation, with high money rates, inflated wages and other familiar symptoms. After a period of years of good times the strain of the chain is on its weakest link. There is a collapse like that of 1907, a depression foreshadowed in the stock market and in the price of commodities, followed by extensive unemployment, often an actual increase in savings-bank deposits, but a complete absence of money available for adventure.

Need for a Barometer

Read over Byron's lines again and see if the parallel is not suggestive. What would discussion of business be worth if we could not bring at least a little of the poet's imagination into it? But unfortunately crises are brought about by too much imagination. What we need are soulless barometers, price indexes and averages to tell us where we are going and what we may expect. The best, because the most impartiaf, the most remorseless of these barometers, is the recorded average of prices in the stock exchange. With varying constituents and, in earlier years, with a smaller number of securities, but continuously these have been kept by the Dow-Jones news service for thirty years or more.

There is a method of reading them which has been fruitful of results, although the reading has on occasion displeased both the optimist and the pessimist. A barometer predicts bad weather, without a present cloud in the sky. It is useless to take an axe to it merely because a flood of rain will destroy the crop of cabbages in poor Mrs. Brown's backyard. It has been my lot to discuss these averages in print for many years past, on the tested theory of the late Charles H. Dow, the founder of The Wall Street Journal. It might not be becoming to say how constantly helpful the analysis of the. price movement proved. But one who ventures on that discussion, who reads that barometer, learns to keep in mind the natural indignation against himself for the destruction of Mrs. Brown's cabbages.

Dow's Theory

Dow's theory is fundamentally simple. He showed that there are, simultaneously, three movements in progress in the stock market. The major is the primary movement, like the bull market which set in with the re-election of McKinley in 1900 and culminated in September, 1902, checked but not stopped by the famous stock market panic consequent on the Northern Pacific corner in 1901; or the primary bear market which developed about October, 1919, culminating June- August, 1921.

It will be shown that this primary movement tends to run over a period of at least a year and is generally much longer. Coincident with it, or in the course of it, is Dow's secondary movement, represented by sharp rallies in a primary bear market and sharp reactions in a primary bull market. A striking example of the latter would be the break in stocks on May 9, 1901. In like secondary movements the industrial group (taken separately from the railroads) may recover much more sharply than the railroads, or the railroads may lead, and it need hardly be said that the twenty active railroad stocks and the twenty industrials, moving together, will not advance point for point with each other even in the primary movement. In the long advance which preceded the bear market beginning October, 1919, the railroads worked lower and were comparatively inactive and neglected, obviously because at that time they were, through government ownership and guaranty, practically out of the speculative field and not exercising a normal influence on the speculative barometer. Under the resumption of private ownership they will tend to regain much of their old significance.


The Theory's Implications

Concurrently with the primary and secondary movement of the market, and constant throughout, there obviously was, as Dow pointed out, the underlying fluctuation from day to day. It must here be said that the average is deceptive for speculation in individual stocks. What would have happened to a speculator who believed that a secondary reaction was due in May, 1901, as foreshadowed by the averages, if of all the stocks to sell short on that belief he had chosen Northern Pacific? Some traders did, and they were lucky if they covered at sixty-five points loss.

Dow's theory in practice develops many implications. One of the best tested of them is that the two averages corroborate each other, and that there is never a primary movement, rarely a secondary movement, where they do not agree. Scrutiny of the average figures will show that there are periods where the fluctuations for a number of weeks are within a narrow range; as, for instance, where the industrials do not sell below seventy or above seventy-four, and the railroads above seventy-seven or below seventy-three. This is technically called "making a line," and experience shows that it indicates a period either of distribution or of accumulation. When the two averages rise above the high point of the line, the indication is strongly bullish. It may mean a secondary rally in a bear market; it meant, in 1921, the inauguration of a primary bull movement, extending into 1922.
If, however, the two averages break through the lower level, it is obvious that the market for stocks has reached what meteorologists would call "saturation point." Precipitation follows a secondary bear movement in a bull market, or the inception of a primary downward movement like that which developed in October, 1919. After the closing of the Stock Exchange, in 1914, the number of industrials chosen for comparison was raised from twelve to twenty and it seemed as if the averages would be upset, especially as spectacular movements in stocks such as General Electric made the fluctuations in the industrials far more impressive than those in the railroads. But students of the averages have carried the twenty chosen stocks back and have found that the fluctuations of the twenty in the previous years, almost from day to day, coincided with the recorded fluctuations of the twelve stocks originally chosen.

Dow-Jones Averages the Standard

The Dow-Jones average is still standard, although it has been extensively imitated. There have been various ways of reading it; but nothing has stood the test which has been applied to Dow's theory. The weakness of every other method is that extraneous matters are taken in, from their tempting relevance. There have been unnecessary attempts to combine the volume of sales and to read the average with reference to commodity index numbers. But it must be obvious that the averages have already taken those things into account, just as the barometer considers everything which affects the weather. The price movement represents the aggregate knowledge of Wall Street and, above all, its aggregate knowledge of coming events.

Nobody in Wall Street knows everything. I have known what used to be called the "Standard Oil crowd," in the days of Henry H. Rogers, consistently wrong on the stock market for years together. It is one thing to have "inside information" and another thing to know how stocks will act upon it. The market represents everything everybody knows, hopes, believes, anticipates, with all that knowledge sifted down to what Senator Spooner once called, in quoting a Wall Street Journal editorial in the United States Senate, the bloodless verdict of the market place.

Chapter II




WALL STREET OF THE MOVIES

WE shall prove, by strict analysis, the fidelity of the stock market barometer, tested over a long period of years. With the aid of Dow's theory of the price movement we shall examine the major swings upwards or downwards, extending from less than a year to three years or more; their secondary interruption in reactions or rallies, as the case may be ;
and the relatively unimportant but always present daily fluctuation. We shall see that all these movements are based upon the sum of Wall Street's knowledge of the business of the country ; that they have no more to do with morality than the precession of the equinoxes, and that manipulation cannot materially deflect the barometer.

Movies and Melodrama

But, to judge from some of my correspondence, the case must not even be argued, because it is alleged that Wall Street does not come into court with clean hands. It has seemed, in the past, at least discouraging to point out how the dispassionate, the almost inhuman, movement of the market has nothing whatever to do with the occasional scandals which disfigure the record of every market for anything anywhere. But the proportion of people who only feel is, to those who think, overwhelming. The former are in such a majority that concession must be made to them, although I still decline to apologize for the stock market.
I should as soon think of apologizing for the meridian of Greenwich. To quote one of the best known of Grover Cleveland's useful platitudes, it is a condition and not a theory which confronts us.

In the popular imagination there is a fearful and wonderful picture of Wall Street something we may call the Wall Street of the movies. What the English call the cinema is our modern substitute for the conventional melodrama of our grandfathers. Its characters are curiously the same. Its villains and vampires are not like anything in real life; but they behave as consistent villains or vampires ought to behave if they are to satisfy critics who never saw a specimen of either. Many years ago Jerome K. Jerome wrote a chapter on stage law. He showed that on the English stage the loss of a three-and-six-penny marriage certificate invalidated the marriage. In the event of death the property of the testator went to the person who could secure possession of the will. If the rich man died without a will the property went to the nearest villain. In those days lawyers looked like lawyers on the stage. The detective looked like a gimlet-eyed sleuth, and a financier looked so like a financier that it positively seemed to hurt his face.

Financiers of Fiction

Our modern financier on the screen looks like that, especially in the "close-ups." But he is no new creation.
I remember reading a magazine story, a score of years ago, of a stock market coup by a great ''manipulator," of the type of James R. Keene. The illustrations were well drawn and even thrilling. In one of them Keene, or his prototype, was depicted bending dramatically over a Consolidated Stock Exchange ticker! It is to be presumed that he was smashing the market with ten-share lots. Only a Keene could do it, and only a Keene of the movies at that. Doubtless the author of the story, Mr. Edwin Lefevre, who was dissipating his talents in hazy financial paragraphs for the New York Globe at that time, felt that he had been artistically frustrated. But perhaps he had himself to thank. Here is his own description of such a manipulator. It is in a short story published in 1901, called
The Break in Turpentine:

"Now, manipulators of stocks are born, not made. The art is most difficult, for stocks should be manipulated in such wise that they will not look manipulated. Anybody can buy stocks or can sell them. But not every one can sell stocks and at the same time convey the impression that he is buying them, and that prices therefore must inevitably go much higher. It requires boldness and consummate judgment, knowledge of technical stock market conditions, infinite ingenuity and mental agility, absolute familiarity with human nature, a careful study of the curious psychological phenomena of gambling and long experience with the Wall Street public and with the wonderful imagination of the American people ; to say nothing of knowing thoroughly the various brokers to be employed, their capabilities, limitations and personal temperaments; also, their price."

That is professedly fiction, and, incidentally, more true and respectable as art than the product of the melodrama or the screen. It lays no stress on the deeper knowledge of values and business conditions necessary to assure the existence of the kind of market which alone makes manipulation possible. Truth is stranger than fiction, and perhaps harder to write, although the remark is open to an obvious retort.

Silk Hats and Strained Faces

Not long ago there appeared a letter to a popular newspaper, notorious for what may be called the anti-Wall Street complex. It professed to give, in a series of gasps, the impressions of a Western stranger on visiting Wall Street. One of these "flashlights" was, "silk hats and strained faces." Let me be exact. I have seen a silk hat in Wall Street. It was when Mayor Seth Low opened the new Stock Exchange in 1901. My stenographer, bless her honest heart, said it was real stylish. But financiers of the movies tend to wear silk hats, just as the heroes in melodrama, even when reduced to penury and rags, wore patentleather shoes. A screen financier without a silk hat would be like an egg without salt. We cannot otherwise infer, as we are required, that he is a bad egg.

"A Long Way Back for Soup"

Only a few years ago there was a severely localized scandal over a "corner" in a stock called Stutz Motor, for which no true market had been established. Nobody was hurt except a few speculators who chose to sell the thing short. They paid up without whining. But it formed an irresistible text for a popular attack upon Wall Street. One of the New York newspapers said that the incident was only in a piece with "the Metropolitan Traction corruptionists, the New Haven wreckers, the Rock Island wreckers, and" what it called, with a free rendering of history, "the life insurance corruptionists." This was in a newspaper professing to sell news. It did not tell its readers that the last of the Metropolitan Street Railway financing happened twenty years before. Even the foolish and indefensible capitalization of the surface lines of New York, unloaded on what was then called the Interborough Metropolitan Company, was fifteen years old. The life insurance investigation, which, incidentally, neither charged nor proved "corruption," went back sixteen years. Even the last essay in misjudged New Haven financing, a comparatively minor matter, occurred fully eleven years earlier; that of Rock Island, nineteen years before; while that favorite charge against Wall Street, the recapitalization of the Chicago & Alton, was carried through in 1899 and not a soul saw anything wrong with it until 1907. I suppose I write myself down a hopeless reactionist when I say that, with the fullest knowledge of the facts, I cannot see anything reprehensible in it now.

Widows and Orphans

Even an incident so spectacular as the Northern Pacific corner, with the purely stock market panic which it produced, cannot be pleaded as an example of a kind of manipulation which would disable our barometer. That particular panic occurred in the course of a primary bull market. It produced merely a severe secondary reaction, for the upward movement was resumed and did not culminate until sixteen months afterwards. That incident of 1901, however, is still alive and kicking, so far as the politicians who denounce Wall Street are concerned. It is remarkable that all the stock affected in these bygone incidents is alleged to have been held by widows and orphans. I wish somebody would marry that widow and adopt, or even spank, the orphan. After depriving their trustees of the commonest business sense they have no right to come around in this indelicate way and remind us of our crimes. There is a lucrative engagement waiting for them elsewhere in the movies.

Dow's Theory True of any Stock Market

Let us be serious, and get back to our text. The law which governs the movement of the stock market, formulated here, would be equally true of the London Stock Exchange, the Paris Bourse or even the Berlin Boerse. But we may go further. The principles underlying that law would be true if those Stock Exchanges and ours were wiped out of existence. They would come into operation again, automatically and inevitably, with the re-establishment of a free market in securities in any great capital. So far as, I know, there has not been a record corresponding to the Dow-Jones averages kept by any of the London financial publications. But the stock market there would have the same quality of forecast which the New York market has if similar data were available.

It would be possible to compile from the London Stock Exchange list two or more representative groups of stocks and show their primary, their secondary and their daily movements over the period of years covered by Wetenhall's list and the London Stock Exchange official list. An average made up of the prices of the British railroads might well confirm our own. There is in London a longer and more diversified list of industrial stocks to draw upon. The averages of the South African mining stocks in the Kaffir market, properly compiled from the first Transvaal gold rush in 1889, would have an interest all their own. They would show how gold mining tends to flourish when other industries are stagnant or even prostrated. The comparison of that average with the movement of securities held for fixed income would be highly instructive to the economist. It would demonstrate in the most vivid way the relation of the purchasing power of gold to bonds held for investment. It would prove conclusively the axiom that the price of securities held for fixed income is in inverse ratio to the cost of living, as we shall see for ourselves in a later chapter.

The Fact Without the Truth is False

It is difficult, and with many observers it has proved impossible, to regard Wall Street comprehendingly from the inside. Just as it will be shown that the market is bigger than the manipulator, bigger than all the financiers put together, so it is true that the stock market barometer is in a way bigger than the stock market itself. A modern writer, G. K. Chesterton, has said that the fact without the truth is sterile, that the fact without the truth is even false. It was not until Charles H. Dow propounded his theory of the price movement that any real attempt had been made to elicit and set forth the truth contained in the fact of the stock market. Can we make it possible for the man whose business brings him into the midst of that whirling machinery to understand the power which moves it, and even something of the way that power is generated? Apparently the only picture which has hitherto reached the popular retina is the distorted image which we have called the Wall Street of the movies.

Homage Vice Pays to Virtue

Why does the swindling oil-stock promoter circularize his victims from some reputable address in the financial district, and use all sorts of inducements to get his stock quoted in the financial columns of reputable metropolitan newspapers? Would he do that if the public he addresses, the investor and the speculator, the investor in embryo, really believed that Wall Street was the sink of iniquity which the country politician depicts? If that were truly the case the shady promoter would seek other quarters. But he uses the financial district because he knows that its credit and integrity are the best in the world. Hypocrisy is the tribute which vice pays to virtue. He would have no use for a Wall Street as rotten as himself. Indeed, if the financial district were one tithe as corrupt as the demagogues who abuse it there would be no problem for them to propound. The money center of the United States would fall to pieces of its own rottenness. All this is true, and yet if the exact contrary were the case the theory of the stock-market movement would still be valid.

Rhodes and Morgan

It will not be charged that the writer is like the dyer's hand, subdued to what he works in, if his illustrations have been chosen mainly from the financial district. There is a Wall Street engaged upon tasks so serious, so exacting, that it has neither time nor inclination to be crooked. If it is true, as we have seen, that nobody can know all the facts which at any one time influence the stock-market movement, it is true, as any of us can record from personal experience, that some have far more knowledge than others. The men who really know lift you out of this scuffle of petty criticism and recrimination. When they are rich men their wealth is incidental, the most obvious means to larger ends, but not an end in itself.

When I was following my profession in South Africa, a quarter of a century ago, I was thrown in contact with Cecil John Rhodes. He had definite ideas and large conceptions, far above the mere making of money. Money was necessary to the carrying out of his ideas, to the extension of white civilization from the Cape to Cairo, with a railroad as the outward and visible sign of something of even spiritual significance. In the respect of intuitive intelligence I have met only one man like him the late J. Pierpont Morgan. It was impossible to follow the rapidity of their mental processes. There was something phenomenal about it, like the performances of mathematically gifted children who can give you the square root of a number in thousands with a few moments of mental calculation. Other well-known men speaking perhaps from the point of view of a reporter seemed to have mental processes much like our own. Most of the great captains of industry I have met, like James J. Hill and Edward H. Harriman, had a quality essential to a first-rate thinker. They could eliminate the irrelevant. They could grasp the fundamental fact in a page of verbiage. But Rhodes and Morgan could do more. They could reason to an often startling but sound conclusion before you could state the premises.

Not Indescribable

And these men were rich, almost fortuitously. They had great tasks to accomplish, and it was necessary that they should have the financial means which made achievement possible. In the past few years we have heard a great deal about "ideals," and found that most of them were half-digested opinions. But there is a Wall Street with an ideal. There has usually been, and I hope there always will be, the right man to take the right objective view at the right moment. Not long ago I heard a lecturer setting forth what he called the "indescribable" beauties of the Grand Canyon of the Colorado. In the space of an hour and a quarter he proved conclusively that those beauties were indescribable, at least so far as he was concerned. But Milton could have described them, or the Psalmist. Perhaps any reasonably intelligent man could give you an idea of that natural wonder if he set forth simply the spiritual truth in the physical fact before him.

The Unchangeable

I feel I have said before, perhaps in editorials you read to-day, and forget to-morrow, what I am saying now. The problems of humanity do not change, because human nature is what it has been as far back as human record tells. "Cycles" are as old as organized humanity. The changes we see are superficial, especially where sincere and intelligent men so legislate that they may the better live together in peace and good will. The human heart is essential to all progress. Reform starts there, and not in the halls of legislation.

The Bells of Trinity

Facing the western end of Wall Street, casting its shadow from the setting sun upon the most criticized and least understood section of a great nation, stands the spire of Trinity. We have often heard its bells ringing the old familiar Christmas hymns. The shepherds will be watching their flocks again, all seated on the ground. It may well be that, hearing those bells, the glory of the Lord shall in some manner shine round about us. There is little that laws can do to make men happier or richer or more contented. There is no form of government to-day, without its parallel, and warning, in the past. There is none in the past of which it could not be said that only righteousness exalteth a nation. Wall Street knows as well as the most disinterested of its critics that goodness and justice and sacrifice and love are the foundation of all good government, because in that spirit alone a people truly governs itself.

We have said that the laws we are studying are fundamental, axiomatic, self-evident. And in this higher truth surely there is something permanent which would remain if the letter of the Constitution of the United States had become an interesting study for the archeologist, and the surviving writings of our day were classical in a sense their authors never dreamed. Such a foundation is permanent because truth has in it the element of the divine.

Chapter III



CHARLES H. DOW, AND HIS THEORY

TO judge from a large number of letters received from readers of past discussions on Dow's theory of the averages, and on panic and prosperity cycles generally, that theory is assumed to be something in the nature of a sure way to make money in Wall Street. It may be said at once that it bears no resemblance to any "martingale" or system of beating the bank. Some of the questions show more intelligence and understanding than this, and one of them at least deserves an extended reply.

A Newspaper Man, and More

"Who was Dow, and where can I read his theory?" Charles H. Dow was the founder of the Dow-Jones financial news service in New York, and founder and first editor of The Wall Street Journal. He died in December, 1902, in his fifty-second year. He was an experienced newspaper reporter, with an early training under Samuel Bowles, the great editor of the Springfield Republican. Dow was a New Englander, intelligent, self-repressed, ultra-conservative; and he knew his business. He was almost judicially cold in the consideration of any subject, whatever the fervor of discussion. It would be less than just to say that ? never saw him angry ; I never saw him even excited. His perfect integrity and good sense commanded the confidence of every man in Wall Street, at a time when there were few efficient newspaper men covering the financial section, and of these still fewer with any deep knowledge of finance.

Dow also had the advantage of some years experience on the floor of the Stock Exchange. It came about in a rather curious way. The late Robert Goodbody, an Irishman, a Quaker and an honor to Wall Street, came over from Dublin to America. As the New York Stock Exchange requires that every member shall be an American citizen, Charles H. Dow became his partner. During the time necessary for Robert Goodbody to naturalize, Dow held a seat in the Stock Exchange and executed orders on the floor. When Goodbody became an American citizen Dow withdrew from the Exchange and returned to his more congenial newspaper work.

Dow's Caution, and His Theory

Knowing and liking Dow, with whom I worked in the last years of his life, I was often, with many of his friends, exasperated by his overconservatism. It showed itself particularly in his editorials in The Wall Street Journal, to which it is now necessary to allude because they are the only written record of Dow's theory of the price movement. He would write a strong, readable and convincing editorial, on a public question affecting finance and business, and in the last paragraph would add safeguards and saving clauses which not merely took the sting out of it but took the "wallop" out of it. In the language of the prize ring, he pulled his punches.

He was almost too cautious to come out with a flat, dogmatic statement of his theory, however sound it was and however close and clear his reasoning might be. He wrote, mostly in 1901 and the first half of 1902, a number of editorials dealing with methods of stock speculation. His theory must be disinterred from those editorials, where it is illustrative and incidental and never the main subject of discussion. It is curious also that in one of his earliest statements of the price movement he makes an indefensible claim. Under the caption "Swings Within Swings," in the Review and Outlook of The Wall Street Journal of January 4, 1902, he says:

"Nothing is more certain than that the market has three well defined movements which fit into each other. The first is the daily variation due to local causes and the balance of buying or selling at that particular time. The secondary movement covers a period ranging from ten days to sixty days, averaging probably between thirty and forty days. The third swing is the great move covering from four to six years."

Where Dow Went Wrong

Remember that Dow wrote this twenty years ago, and that he had not the records for analysis of the stock market movement which are now available. The extent of the primary movement, as given in this quotation, is proved to be far too long by subsequent experience; and a careful examination has shown me that the major swing before Dow wrote was never "from four to six years," rarely three years and oftener less than two.

But Dow always had a reason for what he said, and his intellectual honesty assures those who knew him that it was at least an arguable reason. It was based upon his profound belief in the recurrence of financial crises, at periodic intervals (as shown by recorded financial history), of a little more than ten years. Dow assumed for that period one primary bull market and one primary bear market, and therefore split the ten-year period in half. It was rather like the little boy who, being asked to name ten arctic animals, submitted "five seals and five polar bears!"


Panic Dates of Jevons

In the opening chapter we spoke of historic panics, of Professor Stanley Jevons, and of his theory connecting such crises with the recurrence of spots on the sun and their assumed influence upon the weather and crops. I said that the reasoning was about as good as associating presidential elections with leap years. But here are the dates of commercial crises in England as recorded by Jevons, and it is fair to say that they are sufficiently impressive. These years are 1701, 1711, 1712, 1731-32, 1742, 1752, 1763, 1772-3, 1783, 1793, 1804-5, 1815, l825, l836, l847, l857, 1866, and 1873.

As Dow says in an editorial quoting these dates, published in The Wall Street Journal on July 9, 1902 :
"This makes a very good showing for the ten-year theory and is supported, to a considerable extent, by what has occurred in this country during the past century."

Dow's account of the successive crises in this country (he had personal experience of three of them 1873, 1884 and 1893) was so good and interesting that it is well worth quoting here. So far as Jevons's dates are concerned, it is curious to note that he omitted one serious crisis near the beginning of his list. That occurred in 1715, and was precipitated by the Scottish invasion of England in that year to restore the Stuarts to the English throne. It is rather human of Jevons to omit it, if, as I suspect, there were not enough spots on the sun in that year to fit the parallel.

Dow on Our Own Crises

Here is Dow's account of our own crises :
"The first crisis in the United States during the nineteenth century came in 1814, and was precipitated by the capture of Washington by the British on the 24th of August in that year. The Philadelphia and New York banks suspended payments, and for a time the crisis was acute. The difficulties leading up to this period were the great falling off in foreign trade caused by the embargo and non-intercourse acts of 1808, the excess of public expenditures over public receipts, and the creation of a large number of state banks taking the place of the old United States Bank. Many of these state banks lacked capital and issued currency without sufficient security.

1819, 1825, and 1837

"There was a near approach to a crisis in 1819 as the result of a tremendous contraction of bank circulation. The previous increase of bank issues had prompted speculation, the contraction caused a serious fall in the prices of commodities and real estate. This, however, was purely a money panic as far as its causes were concerned.

"The European crisis in 1825 caused a diminished demand for American products and led to lower prices and some money stringency in 1826. The situation, however, did not become very serious and was more in the nature of an interruption to progress than a reversal of conditions.

"The year 1837 brought a great commercial panic, for which there was abundant cause. There had been rapid industrial and commercial growth, with a multitude of enterprises established ahead of the time. Crops were deficient, and breadstuffs were imported. The refusal of the government to extend the charter of the United States Bank had caused a radical change in the banking business of the country, while the withdrawal of public deposits and their lodgment with state banks had given the foundation for abnormal speculation.

1847, 1857, and 1866

"The panic in Europe in 1847 exerted but little influence in this country, although there was a serious loss in specie, and the Mexican war had some effect in checking enterprises. These effects, however, were neutralized somewhat by large exports of breadstuffs and later by the discovery of gold in 1848-9.

"There was a panic of the first magnitude in 1857, following the failure of the Ohio Life Insurance and Trust Company in August. This panic came unexpectedly, although prices had been falling for some months. There had been very large railroad building, and the proportion of specie held by banks was very small in proportion to their loans and deposits. One of the features of this period was the great number of failures. The banks generally suspended payments in October.

"The London panic in 1866, precipitated by the failure of Overend, Gurney & Co., was followed by heavy fall in prices in the Stock Exchange here. In April there had been a corner in Michigan Southern and rampant speculation generally, from which the relapse was rather more than normal.

1873, 1884, and 1893

"The panic of September, 1873, was a commercial as well as a Stock Exchange panic. It was the outcome of an enormous conversion of floating into fixed capital. Business had been expanded on an enormous scale, and the supply of money became insufficient for the demands made upon it. Credit collapsed, and the depression was extremely serious.

"The year 1884 brought a Stock Exchange smash but not a commercial crisis. The failure of the Marine Bank, Metropolitan Bank and Grant & Ward in May was accompanied by a large fall in prices and a general check which was felt throughout the year. The Trunk Line war, which had lasted for several years, was one of the factors in this period.

"The panic of 1893 was the outcome of a number of causes uncertainty in regard to the currency situation, the withdrawal of foreign investments and the fear of radical tariff legislation. The anxiety in regard to the maintenance of the gold standard was undoubtedly the chief factor, as it bore upon many others."

A Weak Prediction

With a caution in prediction which is not merely New England but almost Scottish, Dow, in a typical final paragraph, goes on to say :

"Judging by the past and by the developments of the last six years, it is not unreasonable to suppose that we may get at least a Stock Exchange flurry in the next few years."

So far from being unreasonable, it was not even a daring guess. It was more than a "flurry" in 1907, five years after, when the New York banks resorted to clearing-house certificates and the stock market grazed a panic by a bare five minutes. But the prediction was made during a primary upward swing which culminated in September of the year 1902, three months before Dow died.

Events soon disproved Dow's five-year primary swings, arrived at by splitting the assumed ten-year cycle in half. There was a primary bear market from September, 1902, lasting nearly a year. A primary bull market originated in September, 1903, becoming definitely marked by June, 1904, and culminating in January, 1907 a period of three years and four months; while the primary bear market which followed it and covered the period of the crisis of 1907 lasted until the following December a period of eleven months.

Nelson's Book on Speculation

All that Dow ever printed is in The Wall Street Journal, and only by search through the precious files of Wall Street's Bible can his theory of the stock market price movement be reconstructed. But at the end of 1902 the late S. A. Nelson wrote and published an unpretentious book called The A B C of Stock Speculation. It is long out of print, but may occasionally be picked up from the second-hand booksellers. He tried to persuade Dow to write the book, and, failing that, he incorporated in it all that he could find of what Dow had said on stock speculation in The Wall Street Journal. Of the thirty-five chapters in the book, fifteen (Chapters V to XIX inclusive) are editorials, some slightly abridged, from The Wall Street Journal, covering such subjects as Scientific Speculation/' "Methods of Reading the Market," "Methods of Trading" and market swings generally all of them interesting but not suitable for entire reproduction here, although they will be sufficiently quoted in subsequent chapters.

Nelson's is a conscientious and sensible little book. He was a conscientious and sensible little man one we loved and laughed at, for young reporters could not take him as seriously as he took himself. His autographed copy lies before me as I write, and I can see his pathetic figure and earnest, strained face he was dying of tuberculosis as I read his rather conventional discussions on the morality of speculation. He died not long after, far away from his beloved Wall Street, but it was he who evolved the name of "Dow's Theory." It was an honorable ascription, to which Dow is fully entitled; for if many people had recognized meaning! in traceable movements in the stock market the great and useful barometer of trade it was Dow who first formulated those ideas in a practical way.

Chapter IV



DOW'S THEORY, APPLIED TO SPECULATION

WE have seen in past discussions of Dow's theory of the stock-market price movement that the essence of it could be summed up in three sentences. In an editorial published December 19, 1900, he says, in The Wall Street Journal:

"The market is always to be considered as having three movements, all going on at the same time. The first is the narrow movement from day to day. The second is the short swing, running from two weeks to a month or more; the third is the main movement, covering at least four years in its duration."

It has already been shown that his third and main movement may complete itself in much less than Dow's assumed four years, and also how an attempt to divide the ten-year period of the panic cycle theory into a bear and bull market of approximately five years each led to an unconscious exaggeration. That, however, is immaterial. Dow had successfully formulated a theory of the market movements of the highest value, and had synchronized those movements so that those who came after him could construct a business barometer.

The Truth Beneath Speculation

This is the essence of Dow's theory, and it need hardly be said that he did not see, or live to see, all that it implied. He never wrote a single editorial on the theory alone, but returns to it to illustrate his discussions on stock-market speculation, and the underlying facts and truths responsible not only for speculation (using the word in its best and most useful sense) but for the market itself.

It is not surprising that The Wall Street Journal received many inquiries as to the assumptions it made on the basis of Dow's major premise. On January 4, 1902, Dow replies to a pertinent question, and any thoughtful reader of these pages should be able to answer it himself. The correspondent asks him, "For some time you have been writing rather bullish on the immediate market, yet a little bearish in a larger sense. How do you make this consistent?" Dow's reply was, of course, that he was bullish after the secondary swing but that he did not think, in view of stock values from earnings of record, that a bull market which had then been operative sixteen months could run much further. It was a curious contraction, incidentally, of his own minimum four-year estimate, but that major upward swing as a matter of fact ran until the following September. It may be said that such a swing always outruns values. In its final stage it is discounting possibilities only.

A Useful Definition

In the same editorial Dow goes on to give a useful definition from which legitimate inferences may drawn. He says :

"It is a bull period as long as the average of one high point exceeds that of previous high points. It is a bear period when the low point becomes lower than the previous low points. It is often difficult to judge whether the end of an advance has come because the movement of prices is that which would occur if the main tendency had changed. Yet, it may only be an unusually pronounced secondary movement."

This passage contains, by implication, both the idea of "double tops" and "double bottoms" (which I frankly confess I have not found essential or greatly useful) and the idea of a "line," as shown in the narrow fluctuation of the averages over a recognized period, necessarily one either of accumulation or distribution. This has been found to be of the greatest service in showing the further persistence of the main movement, or the possible termination of the secondary movement, so apt to be mistaken for the initiation of a new major trend. I shall, in a later chapter, analyze such a "line," made in the stock market in 1914.

Successful Forecast

In subsequent discussions there ,will be no difficulty in showing, from the various studies in the price movement since 1902, standing for record in the columns of The Wall Street Journal, that the method for a forecast of the main market movement and for a correct discrimination between that and the secondary movement had been provided in Dow's theory, and that it has been used with surprising accuracy. A prophet, especially in Wall Street, takes his life in his hands. If his predictions are always of the rosiest, whatever the facts of the situation may be, he will at worst be merely called a fool for his pains. The charge against him will be far more serious if he sees that a boom nas overrun itself, and says so. If he is bearish and right he will be accused of unworthy motives. He will even be held contributory to the decline which he foresaw, although his motives may have been of the highest and he may have not a penny of interest in the market either way.

"Recalling" a Prophet

Is the American public so ungrateful to its Micaiahs and Cassandras as this? Yes, indeed, and more so. It does not like unpleasant truths. In 1912, when Colonel C. McD. Townsend of the United States Engineers, an army man with a brilliant record then and since, was president of the Mississippi River Commission, he predicted, from the height of the water in the upper rivers, one of the greatest Mississippi floods. He warned the city of New Orleans that the flood might be expected in a month's time, recommending the most vigorous and immediate steps to lessen the calamity. Was New Orleans grateful? Its citizens held an indignation meeting to demand from President Taft the recall of this "calamity howler" and "dangerous alarmist." Mr. Taft characteristically kept his head, and Colonel Townsend was not removed. A good deal of property in the Mississippi Valley was "removed," and it is needless to record that New Orleans did not escape. The railroads and great industrial concerns, where they were likely to be affected, took the warning seriously, with advantage to themselves. The mayor of New Orleans subsequently rescinded the resolution, with an apology. Anyone who knows one of the ablest and least advertised engineers in the United States Army will readily understand that Townsend regarded the mayor and the previous mass meeting with equal indifference.

Synchronizing the Price Movement

It has been said before that Dow's theory is in no sense to be regarded as a gambler's system for beating the game. Any trader would disregard it at his peril, but Dow himself never considered it in that light, as I can testify from many discussions with him. I was writing the stock market paragraphs of the Dow-Jones news service and The Wall Street Journal in those days, and it was, of course, essential that I should thoroughly understand so scientific a method of synchronizing the market movement. Many men in Wall Street knew Dow and set their experience at his service. His mind was cautious to a fault, but logical and intellectually honest. I did not always agree with him and he was oftener right than I. When he was wrong it was clearly from lack of accurate data such as is now available.

Necessary Knowledge

It would perhaps be well to point out here that a knowledge of the major movement of the market, whether up or down, is necessary for the successful flotation of any largely capitalized enterprise. In a future discussion it will be convenient and highly interesting to illustrate, from James R. Keene's own admissions, how he distributed Amalgamated Copper to an oversanguine public at a time when the Boston News Bureau, to its everlasting honor, was warning New England investors to have nothing to do with that property at anything like the prices asked, or allow themselves to be deceived by the quarterly dividend of 1 l /2 per cent and a half per cent extra. That rate was retained at a time when The Wall Street Journal was openly calling the company a u blind pool," and showing, as the Boston News Bureau had shown, that neither the conditions of the copper trade nor the capitalization itself justified the flotation price. But Keene could never have distributed the stock except during the known major swing of a great bull market. He had exactly the same condition to help him in the much more formidable, and creditable, task of distributing the enormous capitalization of the United States Steel Corporation. That stock could never have been sold, and its sale would never have been attempted, in the subsequent bear market of 1903.

An Instructive Editorial

It would be unfair to Dow if the reader were not given the opportunity of extracting for himself some light on Dow's own application of his theory, or at any rate some idea of his method in the series of editorials which, as I have said before, dealt primarily with stock speculation as such and only incidentally with rules for reading the market. Here is an editorial, almost in full, published on July 20, 1901, only ten weeks after the panic which resulted from the Northern Pacific corner. At the time he wrote he did not see clearly that it was not a culmination of a major swing but a peculiarly violent secondary reaction in a primary bull market. He speaks first of individual stocks :

"There is what is called the book method. Prices are set down, giving each change of one point as it occurs, forming thereby lines having a general horizontal direction but running into diagonals as the market moves up and down. There come times when a stock with a good degree of activity will stay within a narrow range of prices, say two points, until there has formed quite a long horizontal line of these figures. The formation of such a line sometimes suggests that stock has been accumulated or distributed, and this leads other people to buy or sell at the same time. Records of this kind kept for the last fifteen years seem to support the theory that the manipulation necessary to acquire stock is oftentimes detected in this way.

"Another method is what is called the theory of double tops. Records of trading show that in many cases when a stock reaches top it will have a moderate decline and then go back again to near the highest figures. If after such a move, the price again recedes, it is liable to decline some distance.

"Those, however, who attempt to trade on this theory alone find a good many exceptions and a good many times when signals are not given.

Trading on Averages

"There are those who trade on the theory of averages. It is true that in a considerable period of time the market has about as many days of advance as it has of decline. If there come a series of days of advance, there will almost surely come the balancing days of decline.

"The trouble with this system is that the small swings are always part of the larger swings, and while the tendency of events equally liable to happen is always toward equality, it is also true that every combination possible is liable to occur, and there frequently come long swings, or, in the case of stock trading, an extraordinary number of days of advance or decline which fit properly into the theory when regarded on a long scale, but which are calculated to upset any operations based on the expectation of a series of short swings.

"A much more practicable theory is that founded on the law of action and reaction. It seems to be a fact that a primary movement in the market will generally have a secondary movement in the opposite direction of at least three-eighths of the primary movement. If a stock advances ten points, it is very likely to have a relapse of four points or more. The law seems to hold good no matter how far the advance goes. A rise of twenty points will not infrequently bring a decline of eight points or more.

"It is impossible to tell in advance the length of any primary movement, but the further it goes, the greater the reaction when it comes, hence the more certainty of being able to trade successfully on that reaction.

"A method employed by some operators of large experience is that of responses. The theory involved is this : The market is always under more or less manipulation. A large operator who is seeking to advance the market does not buy everything on the list, but puts up two or three leading stocks either by legitimate buying or by manipulation. He then watches the effect on the other stocks. If sentiment is bullish, and people are disposed to take hold, those who see this rise in two or three stocks immediately begin to buy other stocks and the market rises to a higher level. This is the public response, and is an indication that the leading stocks will be given another lift and that the general market will follow.


"If, however, leading stocks are advanced and others do not follow, it is evidence that the public is not disposed to buy. As soon as this is clear the attempt to advance prices is generally discontinued. This method is employed more particularly by those who watch the tape. But it can be read at the close of the day in our record of transactions by seeing what stocks were put up within specified hours and whether the general market followed or not. The best way of reading the market is to read from the standpoint of values. The market is not like a balloon plunging hither and thither in the wind. As a whole, it represents a serious, well-considered effort on the part of farsighted and well-informed men to adjust prices to such values as exist or which are expected to exist in the not too remote future. The thought with great operators is not whether a price can be advanced, but whether the value of property which they propose to buy will lead investors and speculators six months hence to take stock at figures from ten to twenty points above present prices.

"In reading the market, therefore, the main point is to discover what a stock can be expected to be worth three months hence and then to see whether manipulators or investors are advancing the price of that stock toward those figures. It is often possible to read movements in the market very clearly in this way. To know values is to comprehend the meaning of movements in the market."

There are assumptions here to which modifications might be offered, but there is no need. It would be impossible to show, except by the research of records covering at least half a century, that there are as many days of advance as of decline. The information would be valueless if obtained. It amounts to saying that heads and tails will equalize themselves if a coin is spun a sufficient number of times.

But what may be commended is Dow's clarity and sterling good sense. What he had to say was worth saying and he stopped when he had said it a rare virtue in editorial writing. His feeling for the essential fact and for the underlying truth, without which the fact is bare and impertinent, will be readily remarked. He dealt with speculation as a fact, and could still show forth its truth without profitless moralizing, or confusing it with gambling. It will be well to imitate his point of view in further discussion, both on his theory and on the immense and useful significance of the stock market generally.

Chapter V



MAJOR MARKET SWINGS

IT may be said, in continuing the discussion of what Charles H. Dow actually published in the columns of The Wall Street Journal, on his now well-known theory of the stock price movement as shown by the averages, and it must be emphasized, that he was consciously devising a scientific barometer for practical use. Remember the difference between the thermometer and a barometer. The thermometer records actual temperature at the moment, just as the stock ticker records actual prices. But it is essentially the business of a barometer to predict. In that lies its great value, and in that lies the value of Dow's Theory. The stock market is the barometer of the country's, and even of the world's, business, and the theory shows how to read it.

The Averages Sufficient in Themselves

It stands alone in this respect, for a sufficient reason. Wall Street has been called "the muddy source of the nation's prosperity," and we nee'd not concern ourselves with question-begging adjectives. The sum and tendency of the transactions in the Stock Exchange represent the sum of all Wall Street's knowledge of the past, immediate and remote, applied to the discounting of the future. There is no need to add to the averages, as some statisticians do, elaborate compilations of commodity price index numbers, bank clearings, fluctuations in exchange, volume of domestic and foreign trade or anything else. Wall Street considers all these things. It properly regards them as experience of the past, if only of the immediate past, to be used for estimating the future. They are merely creating causes of the weather predicted.

It is a common superstition, exemplified in the Pujo Committee's inquiry into some supposed supercontrol of banking and finance, that "powerful interests" in Wall Street exist which have a sort of monopoly of knowledge and use it to their own nefarious ends. The stock market is bigger than all of them, and the financial interests of Wall Street are seldom combined except momentarily to stop a panic, as in the crisis of 1907. Taken separately, or even in temporary alliance, these interests are often wrong in their estimate of the stock market. In the days of H. H. Rogers and the supposedly all-powerful activities of what was called the Standard Oil group, I have known that group wrong on stocks for months and even years together. There was no shrewder judge of business conditions as affecting great enterprises than Henry H. Rogers, but I have heard him argue seriously that it was not he that was wrong but the stock market and the headstrong public.

Bigger Than any Manipulation

In the price movements, as Dow correctly saw, the sum of every scrap of knowledge available to Wall Street is reflected as far ahead as the clearest vision in Wall Street can see. The market is not saying what the condition of business is to-day. It is saying what that condition will be months ahead. Even with manipulation, embracing not one but several leading stocks, jbe market is saying the same thing, and is bigger than the manipulation. The manipulator only foresees values which he expects and hopes, sometimes wrongly, the investing public will appreciate later. Manipulation for the advance is impossible in a primary bear market. Any great instances of designed manipulation and they are few in number occurred in a primary bull market, necessarily so because the market sees more than the manipulator. A personal experience of not only Wall Street but other great markets has taught that manipulation in a falling market is practically non-existent. The bear trader carries his own letter of marque, and fights for his own hand. A major bear swing has always been amply justified by future events, or for exception, as in 1917, by terrifying future possibilities.

Writing in a Bull Market

Starting feebly near the end of June, 1900, with a pitifully small volume of transactions, four months before the re-election of McKinley, a bull market developed which covered a period of more than twenty six months. This was interrupted by the May panic of 1901, arising out of the Northern Pacific corner, proving to be only a secondary downward swing of a typical, if violent, kind. It was during the course of this bull market that Dow wrote the editorials in The Wall Street Journal to which reference has here been freely made because they contain the substance of his theory. He had designed a barometer for practical use, and it is characteristic of the man that he proceeded to apply it, to find out if it had the vital quality of dependable forecast. It is a pity that he could not have lived to test it in the twelve months' bear market which followed. All subsequent market swings, up or down, have proved the value of his method.

Throughout that bull market his forecasts were remarkably accurate, if necessarily general and not applied to particular stocks or small groups. He was correct in the essential matter of the adjustment of prices to values. His concluding editorials were published in July, 1902, not long before his death. In those he foresaw that prices were outrunning values, and that within a few months the market would begin to predict a contraction in railroad earnings, at least a slower development in the great industrial groups, and contraction of trade elsewhere.

Primary Movements

It will be well to give here the major swings from the time Dow wrote to the end of the bear market which culminated in 1921. They are as follows:

1. Up. June, 1900, to Sept., 1902.

2. Down. Sept., 1902, to Sept., 1903.

3. Up. Sept., 1903; to Jan., 1907.

4. Down. Jan., 1907, to Dec., 1907.

5. Up. Dec., 1907, to Aug., 1909.

6. Down. Aug., 1909, to July, 1910.

7. Up. July, 1910, to Oct., 1912.

8. Down. Oct., 1912, to Dec., 1914.

9. Up. Dec., 1914, to Oct., 1916.

10. Down. Oct., 1916, to Dec., 1917.

11. Up. Dec., 1917, to Oct.-Nov., 1919.

12. Down. Nov., 1 9 19, to June-Aug., 1921.

If the late J. Pierpont Morgan said that he was "a bull on the United States," this exhibit confirms his judgment. In that period of twenty-one years the bull markets lasted rather less than twice as long as the bear markets. The average duration of six major bull swings is twenty-five months; while the average duration of six major bear swings is seventeen months.

It will be noted from the table that the longest major swing upward was that from September 22, 1903, to January 5, 1907. The actual top of the averages was January 22, 1906, with a subsequent irregular decline of some months and a like irregular recovery, all within the year 1906, to a figure close to the old high point. This is therefore taken as the end of that primary movement, although the secondary swing of 1906 was by far the most extended of which we have any record. This exceptional year, of which the San Francisco earthquake was the feature, will be fully discussed in a subsequent chapter. The other five bull markets show periods of from something over nineteen months to a few days less than twenty-seven months.

Startling Predictions

The longest of the six bear markets here illustrated extended to nearly twenty-seven months, including the outbreak of the Great War and the hundred days' closing of the Stock Exchange, culminating immediately before Christmas, 1914. That was a black Christmas, as some of us may happen to remember; but it was followed, in 1915, by the tremendous boom in the production of material for the combatants in a war which America had not then entered a boom which the stock market predicted with the greatest accuracy at a time when the business of the country was hardly beginning to grasp its significance.

Two of these six bear markets did not last quite a year, one of them less than a month more, and one of them less than fifteen months. There seems sufficient material here to say that a bear market is normally appreciably shorter than a bull market; perhaps as secondary downward swings in a primary rising average are short and sharp, with a halting recovery consuming a longer time than the decline.

The Market Is Always Right

It will be shown at a later stage that throughout these great market movements it was possible from the stock market barometer to predict, some valuable distance ahead, the development of the business of the country. These discussions would fail in their purpose if they did not make the subject clear to the unfinancial layman interesting to the man who never bought a share of speculative stock in his life. A barometer is a necessity for all vessels at sea, from the smallest coasting Schooner to the Aqultania. It means as much, and even more, to the "Bolivar" of Kipling's ballad, "swamping in the sea," watching, in dispair,

"Some damned liner's lights go by, like a grand hotel"

as it does to the navigating officers on the liner's bridge. There is no business so small that it can afford to disregard the stock market barometer. Certainly there is no business so large that it dare disregard it. Indeed the most serious mistakes in the management of great business have come from a failure of these navigators of the great liners of the sea of commerce to take heed when the passionless, disinterested stock market called their attention to bad weather ahead.

-and Never Thanked

When, in the United States Senate, the late Senator Spooner, reading an editorial of The Wall Street Journal, said, "Listen to the bloodless verdict of the market place," he saw the merciless accuracy of that verdict; because it is, and necessarily must be, based upon all the evidence, even when given by unconscious and unwilling witnesses.

No wonder the rural politician can so easily make Wall Street the scapegoat for depressing conditions, affecting his farmer constituents no more than the rest of us. Wall Street is guilty in their eyes, for they are willing enough to hold Wall Street responsible for a condition which it merely foresaw and predicted. It was said in a preceding chapter that the prophet of calamity will make himself hated in any case, and hated all the more if his predictions come true. But Wall Street's predictions do come true. Its predictions of prosperity, duly fulfilled as we have seen, are forgotten. Its predictions of adversity are remembered, and by none more than the man who ignored those predictions and is therefore the more bound to find somebody other than himself to blame.

Wall Street the Farmer's Friend

Wall Street is often called "provincial" by politicians and others actuated by an unreasoning sectional jealousy of the necessary financial center of the country. The country can have only one such center, although the framers of the Federal Reserve Act, overloading it with sectional politics, tried hard to make twelve. The farmers say, or their political spokesman says, "What does Wall Street know about farming?" Wall Street knows more than all the farmers put together ever knew, with all the farmers have forgotten. It can, moreover, refresh its memory instantly at any moment. It employs the ablest of the farmers, and its experts are better even than those of our admirable, and little appreciated, Department of Agriculture, whose publications Wall Street reads even if the farmer neglects them.

The stock market which began to break at the end of October and the beginning of November, 1919, when the farmer was insanely pooling his wheat for $3 a bushel and his cotton for forty cents a pound, knew more than the farmer about cotton and wheat. And that barometer was telling him then to get out, to sell what he had at the market price and to save himself while there was yet time. He blames Wall Street and the Federal Reserve banking system and everyone but his own deluded and prejudiced self. He thinks he can change it all by getting his Congressman to take an axe to break the barometer. He is trying to break the barometers of the grain trade in Chicago and Minneapolis, the barometers of the cotton trade in New Orleans and New York. Twenty years ago, at the demand of her farmers, Germany broke her grain barometer, with destructive legislation. What was the consequence? She had to construct a new barometer on the old plan, and it was the farmers who paid for it in advance out of their own pockets. The Germans have learned to let free markets alone, a thing the British always knew, and built up the greatest empire, with the widest commerce the world ever saw, on exactly that knowledge.

Chapter VI



A UNIQUE QUALITY OF FORECAST

THERE are two Wall Streets. One of them is the Wall Street of fact, slowly arriving at definition out of a chaos of misconception. The other is the Wall Street of fiction; the Wall Street of sensational newspapers, of popularity-hunting politicians; the Wall Street of false dramatic interpretation, whose characters are no more real than the types of the old-fashioned melodrama of fifty years ago those caricatures which have had an astonishing and unintelligent revival on the moving-picture screen. It was felt that our second chapter might well be devoted to that popular misconception, Wall Street of the movies.

Major Movements Are Unmanipulated

One of the greatest of misconceptions, that which has militated most against the usefulness of the stock market barometer, is the belief that manipulation can falsify stock market movements otherwise authoritative and instructive. The writer claims no more authority than may come from twenty-two years of stark intimacy with Wall Street, preceded by practical acquaintance with the London Stock Exchange, the Paris Bourse and even that wildly speculative market in gold shares, "Between the Chains," in Johannesburg in 1895. But in all that experience, for what it may be worth, it is impossible to recall a single instance of a major market movement which depended for its impetus, or even for its genesis, upon manipulation. These discussions have been made in vain if they have failed to show that all the primary bull markets and every primary bear market have been vindicated, in the course of their development and before their close, by the facts of general business, however much overspeculation or over-liquidation may have tended to excess, as they always do, in the last stage of the primary swing.

A Financial Impossibility

This is a sweeping statement, but I am convinced of its fundamental truth. When James R. Keene took up the task of marketing two hundred and twenty thousand shares of Amalgamated Copper, for the people who had brought about that amalgamation but had not been able to float the stock, it is estimated that in the course of distribution he must have traded in at least seven hundred thousand shares of that stock. He carried the price to above par to realize a net of ninety to ninety-six for his employers. This was a relatively small stock capitalization; but let us assume that some syndicate, larger than any that the stock market has ever seen, necessarily involving the cooperation of all the great banking institutions, undertook to manufacture the general bull market without which Keene's efforts would have been worse than wasted. Let us concede that this super-syndicate could afford to ignore the large number of active securities outside of the forty active stocks taken in our railroad and industrial averages and defy all trained public opinion. Let us assume that they had accumulated for the rise, against all their previous practice and conviction, without, by some miracle, arousing suspicion, not two hundred and twenty thousand shares of stock, but a hundred times that number.

Anybody who learned in the little red school house that two and two make four must see that we are here leading ourselves into an arithmetical impossibility. This syndicate would presumably not be content with less than a forty-point net profit, and its actual trades, before it had established a broad general market even equivalent to that Keene established for Amalgamated Copper, alone would therefore amount to something like one hundred and twenty million shares, which, taking them at par, would involve financing to the amount of many billions of dollars so much financing, in fact, that the great banks concerned would presumably relinquish all their other business and confine themselves to the syndicate operations alone. Such a syndicate could not have done this, or a tithe of this, at any time during the existence of our national banking system. Does anybody think it would be possible to undertake such a panic-breeding operation with the assistance of the Federal Reserve system?

Where Manipulation Was Possible

To state the terms of a corresponding bear operation, where every wealthy member of the syndicate is necessarily already a large holder in stocks, bonds, real estate and industrial production, would reduce the whole thing to the wildest absurdity. My mind refuses even to grasp it. Keene, in a broad bull market, to distribute a number of shares amounting to one- twenty-fifth of the common stock alone of the United States Steel Corporation, had behind him all the wealth and influence of the powerful Standard Oil group. When he distributed United States Steel common and preferred he had behind him not only the great Morgan banking influences but those of every group that came into that steel combination, with the general approval of a public which correctly recognized a wonderful and even unprecedented expansion in production and trade. But even with that backing could he have multiplied his efforts a hundredfold? The merchant, the banker, the manufacturer who studies the stock market barometer with reference to the major swings, can dismiss from his mind altogether the idea that they are falsified by manipulation.

Roger W. Babson's Theory

But the idea is widely held. There is no intention here to arouse or encourage controversy, and if I take an example from Roger W. Babson and 'his book on Business Barometers, he will, I am sure, readily understand that it is not intended in criticism or depreciation of his highly sincere work. It is only fair to Mr. Babson to say, also, that the extract I give here was published in 1909 (the italics are Mr. Babson's) :

"A slowly sagging market usually means that the ablest speculators expect in the near future a period of depression in general business ; and a slowly rising market usually means that prosperous business conditions may be expected, unless the decline or rise is artificial and caused by manipulation. In fact, if it were not for manipulation, merchants could almost rely on the stock market alone as a barometer, and let these large market operators stand the expense of collecting the data necessary for determining fundamental conditions. Unfortunately, however, it is impossible by studying the stock market alone to distinguish between artificial movements and natural movements; therefore, although bankers and merchants may watch the stock market as one of the barometers, yet they should give to it only a fair and proportional amount of weight."
-Business Barometers Used in the Accumulation of Money, by Roger W. Babson; second edition, 1910.

Mr. Babson's Chart

What sort of barometer should we have if we had to make allowances for a tube of mercury that was too short, or for a general lack of accuracy in the delicate and sensitive mechanism of the aneroid? The stock market barometer is not perfect, or, to put it more correctly, the adolescent science of reading it is far from having attained perfection. But it is not imperfect in the sense Mr. Babson here assumes. It does discharge its function of prediction, when viewed over any reasonable length of time, with almost uncanny accuracy. Let us take a few examples from Mr. Babson's own picture chart, those composite u plots" above and below a consistently rising line representing the steady increase in a growing country's wealth, and we shall see how the stock market predicted each of them before Mr. Babson had the material to draw them in the squares of his instructive and striking chart. To those who are unfamiliar with a publication so interesting it may be said that he divides his chart with columns for each month of the year vertically, and completes his squares horizontally with numbered lines showing the area covered by all the factors of business, above or below a gradually rising middle line across the chart representing the growing wealth of the country.

How the Stock Market Predicted

It will be observed that where these areas are shallow they tend to become broader in time consumed, and where the time to complete the area is less the depression or expansion is deeper or higher, as the case may be, the black areas above or below being assumed to balance each other, at least approximately. One of these black areas of depression shown in the Babson chart began in 1903, only developing recognizable space in the latter part of that year, and continued throughout 1904, finally emerging above the line of growing wealth in the earlier part of 1905. The stock market anticipated this area of business depression, for a primary bear swing began in September, 1902, and ran until the corresponding month of 1903. Mr. Babson's area of depression was still ruling when the market became mildly bullish, in September, 1903, and strongly bullish before the following June; while the Babson area of depression was not completed till the end of that year 1904. The Babson chart does not show any great degree of expansion until 1906, although it foreshadows it in September, 1905. But the stock market barometer foresaw all Mr. Babson's expansion, and the long bull market continued up to January, 1907, overrunning itself a tendency of bull markets and bear markets alike.

A True Barometer

Mr. Babson's area of expansion reached its high maximum in 1907, when a bear stock market swing had already set in, continuing for eleven months until early December of that year, predicting that length of time ahead Mr. Babson's truly calculated area of depression, which was deep, but hot long in duration, and lasted till the end of 1908. His subsequent expansion area above the line did not begin to show itself in market strength until the end of July of 1908 ; but the stock market barometer once again foretold the coming prosperity in a bull market which had its genesis in December, 1907, and its culmination in August, 1909, beginning from that time to predict with equal accuracy, and well in advance, Mr. Babson's next period of depression.

Surely this shows that the stock market is a barometer, and that the Babson chart is more strictly a record, from which, of course, people as intelligent as its industrious compilers can draw valuable guidance for the future. To use a much-abused word, the stock market barometer is unique. You will remember that "unique" is a word which takes no qualifying adjective. Our barometer is not rather unique, or almost unique, or virtually unique. There is just one of it, and it cannot be duplicated. It does predict, as this simple illustration has shown, the condition of business many months ahead, and no other index, or combination of indices, can assume to do that. Our highly scientific and competent Weather Bureau often explodes the fallacy of any assumed radical change in general weather conditions. It does not pretend to go back to the glacial age. It tells us that there have been droughts and hard winters before, coming at uncertain and incalculable intervals. When it attempts specific prophecy a single particular from its immense collection of generals it is merely guessing. Does anybody who happened to be in Washington at the time remember the "fair and warmer" weather prophesied over the Taft inauguration? I went over the Pennsylvania Railroad on the following day, when the storm had leveled every telegraph pole between New York and Philadelphia. It was even said that some of the special trains had so far missed the parade that they were not in Washington then. Even the aneroid barometer can only forecast a limited number of hours ahead, according to the atmospheric pressure.

Cycles Overestimated

There are other compilations, and that of Harvard University will be noticed in a more appropriate place. I am inclined to think that all attach too much force to the cycle theory, very much as we have seen that Charles H. Dow did in splitting the favored ten-year cycle into an assumed but non-existent five-year bear market and a similar five-year bull market. But Mr. Babson would tell you that his areas of expansion and even of inflation, extending not five years but two years or less than three in point of time, do not necessarily blow their tops off in a final explosion and that the bottom does not drop out of his period of depression. A stock market crisis may occur in the middle of a bull market, like the Northern Pacific panic of 1901 ; or a near-panic, with a development more serious and radical, may occur in the course of a major bear swing in the stock market, as in 1907. Mr. Babson correctly shows that the latter was followed by a business depression that had already been foreshadowed in the downward stock market movement. If all panics and industrial crises arose from the same causes and could be predicted with the suggested rythmical certainty, they would never happen because they would always be foreseen. This sounds something like an Irish "bull," but it may well stand as a statement of the fact. Was it not an Irishman who said that an Irish bull differed from other bulls in the respect that it was always pregnant? I do not here go deeply into this question of cycles, because it is abundantly clear that the stock market is little moved by any such consideration.


Order Is Heaven's First Law

If Wall Street is the general reservoir for the collection of the country's tiny streams of liquid capital, it is the clearing house for all the tiny contributions to the sum of truth about the facts of business. It cannot be too often repeated that the stock market movement represents the deductions from the accumulation of that truth, including the facts on building and real estate, bank clearings, business failures, money conditions, foreign trade, gold movements, commodity prices, investment markets, crop conditions, railroad earnings, political factors and social conditions, but all of these with an almost limitless number of other things, each having its tiny trickle of stock market effect.

It will be seen from this how true the postulate made in an earlier discussion was when it was said that nobody in Wall Street knows all the facts, to say nothing of the meaning of all the facts. But the impartial, passionless market barometer records them as certainly as the column of mercury records the atmospheric pressure. There is nothing fortuitous about the stock market movement, and I think I have shown that it cannot to any profitable extent be perverted to the ends of deception. There must be laws governing these things, and it is our present purpose to see if we cannot formulate them usefully. Many years ago George W. Cable said: "What we call chance may be the operation of a law so vast that we only touch its orbit once or twice in a lifetime." There is no need to lose ourselves in the mazes of predestination and foreordination, or reduce the Westminster Confession to absurdity by saying that life is just one damned thing after another. But we shall all recognize that order is Heaven's first law, and that organized society, in the Stock Exchange or elsewhere, will tend to obey that law even if the unaided individual intelligence is not great enough to grasp it.

Chapter VII



MANIPULATION AND PROFESSIONAL TRADING

READERS of preceding chapters may well pause here to take count of how much we have been able to infer, and how much of our inference we have been able to prove, starting on the sound basis of Dow's theory of the stock market. We have satisfied ourselves that he was right when he said that there are in progress three definite movements in the market the major swing, upwards or downwards; its occasional suspension by a secondary rally or reaction, as the case may be; and the incalculable, and for our purposes largely negligible, daily fluctuation. We can satisfy ourselves from examples that a period of trading within a narrow range what we have called a "line" gaining significance as the number of trading days increases, can only mean accumulation or distribution, and that the subsequent price movement shows whether the market has become bare of stocks or saturated with an oversupply.

True to Form

But we have been able to go further than this. From the preceding article alone we see that every major swing is justified by the subsequent condition of the country's general business. It has neither needed nor received manipulation. The market consequently has often seemed to run counter to business conditions, but only for the reason which represents its greatest usefulness. It is then fulfilling its true function of prediction. It is telling us not what business is today but what the future course of business will be. News known is news discounted. What everybody knows has ceased to be a market factor, except in the rare instance of a panic, when the stock market is confessedly taken by surprise.

When these articles appeared in serial form in Barron's, the national financial weekly, I included the following inference, based upon the reading of our barometer, on September 18, 1921, the date when the quoted paragraph was written. It appeared on November 5, 1921. It was no guess, but a scientific deduction from sound premises, and correctly announced the change in the main direction of the market.


"There is a pertinent instance and test in the action of the current market. I have been challenged to offer proof of the prediction value of the stock market barometer. With the demoralized condition of European finance, the disaster to the cotton crop, the uncertainties produced by deflation, the unprincipled opportunism of our lawmakers and tax-imposers, all the aftermath of war inflation unemployment, uneconomic wages in coal mining and railroading with all these things overhanging the business of the country at the present moment, the stock market has acted as if there were better things in sight. It has been saying that the bear market which set in at the end of October and the beginning of November, 1919, saw its low point on June 20, 1921, at 64.90 for the twenty industrials and 65.52 for the twenty railroad stocks."


A Contemporary Example

At the beginning of the last week of August, 1921, it looked as if the bear market might be resumed by the establishment of new low points in both averages. But remembering that the averages must confirm each other, The Wall Street Journal said, on August 25th:
"So far as the averages are concerned, they are far from encouraging to the bull, but they do not yet jointly indicate a definite resumption of the main bear movement."

The railroad stocks were forming a "line" at that time, and after a technical break of a fraction of a point through on the lower side it was resumed, and no new low point, indicating a definite resumption of the main bear movement, was given. On September 21st, after a remarkable continuance of the line of probable accumulation in the railroad stocks and a confirmatory rally in the industrials, The Wall Street Journal's "Study in the Price Movement" said:
"It is beside the point to say that we are facing a hard winter. The stock market is meaningless if it does not look beyond such contingencies. It seems to be forecasting a solid foundation for better general business in the spring. It may well be that the stage for a primary bull market is being set."

By that time both the industrials and the railroads had well-developed lines of presumed accumulation, and the former had significantly made a higher point than that of the previous rally. The Wall Street Journal's analysis of October 4th said:
"By the well-tried methods of reading the stock market averages, only a decline of eight points in the industrial average, and nine points in the railroads, or below the low figures of the main bear movement recorded June 20th, would indicate a resumption of that movement. On the other hand, the railroad stocks alone at present figures would need to advance less than a point to record the repeated new high for both averages which would indicate a primary bull market. The industrials have already recorded that point, and both averages have shown a remarkably clear and distinct line of accumulation which is likely at any time to disclose a market bereft of its floating supply of stocks."

In the last paragraph of this closely reasoned analysis it was said:
"Prices are low because all these bearish factors our critics adduce have been discounted in the prices. When the market is taken by surprise there is a panic, and history records how seldom it is taken by surprise. To-day all the bear factors are known, serious as they admittedly are. But the stock market is not trading on what is common knowledge to-day but upon the sum of expert knowledge applied to conditions as they can be foreseen many months ahead."

Henry H. Rogers and His Critics

Here is the application of our theory, and the reader can judge from the subsequent course of the market the value of the stock market barometer. He can even make the same analysis for himself, given the same major premise and carefully tested reasoning from it.

The professional speculator might well encourage the general belief that he is invulnerable and invincible, even if an ignorant public assumes that the cards are stacked against itself and that the professional knows their backs as well as their faces. Many years ago the late Henry H. Rogers, who was not talking for publication, said to me : "The sensational newspapers, which are always attacking John D. Rockefeller and his associates for their wealth, have put millions into the treasury of the Standard Oil Company. You and I know that we are not omniscient or all-powerful. But, by editorial innuendo and suggestion in cartoons, the people who hold us up to popular envy and hate have created exactly that impression. When everybody who may have to do business with us assumes in advance that we can dictate our own terms, we have an invaluable business asset." The same agitation brought about the dissolution of the Standard Oil into its thirty-three constituent companies. That operation trebled the value of Standard Oil shares, and, incidentally, the price of gasoline. Perhaps these newspaper proprietors were holders of the stock. That was before the era of the Ford car, however, and they may have assumed that it was a public service to make the rich owner of a motor car pay more for his gasoline.

A Speculator's Reasoning

Assumption of an unfair advantage for the professional is absolutely baseless. The reasoning of a professional like Jesse Livermore is merely the reasoning presented in this and preceding articles, backed by a study of general conditions. He said on October 3, 1921, that he had been buying, and, giving him the credence of ordinary courtesy for such a voluntary statement, it is clear that he was trying to shape in his own mind what the investing and speculating public would think at a date as far ahead as he could see.

This is not manipulation. These speculators are not creating any false market or deceptive appearance of activity to lure the public into the game, like the "barker" outside a Midway show. On October 3d Jesse Livermore was quoted in the columns of Barron's as saying that "all market movements are based on sound reasoning. Unless a man can anticipate future events his ability to speculate successfully is limited." And he went on to add: "Speculation is a business. It is neither guesswork nor a gamble. It is hard work and plenty of it."

Dow's Clear Definition

Let us compare this with the words of Charles H. Dow in The Wall Street Journal twenty years before. In the editorial of July 20, 1901, he said:
"The market is not like a balloon plunging hither and thither in the wind. As a whole, it represents a serious, well-considered effort on the part of farsighted and well-informed men to adjust prices to such values as exist or which are expected to exist in the not too remote future. The thought with great operators is not whether a price can be advanced, but whether the value of property which they propose to buy will lead investors and speculators six months hence to take stock at figures from ten to twenty points above present prices."

Observe how the none too deftly expressed thought of Livermore parallels the more perfectly shaped definition of the detached and dispassionate Dow. Bernard M. Baruch, after the war, gave evidence before a Congressional committee as to a market operation by which he had largely profited. He showed in the simplest manner that he had merely analyzed a known cause and foreseen clearly its probable market effect. He showed, what nobody who knows him would question, that he had no "inside information," so called, and that no employee in a Washington department had sold the secrets of his office. Wall Street holds such secrets as of little value. They may give an unfair advantage so far as individual stocks are concerned, but they could be entirely neglected with imperceptible loss, even if the secret were not generally as worthless as the seller of it.

A Good Loser-

What is there that was done by James R. Keene or Jay Gould, by Addison Cammack or other great market figure of the past, which could not have been done, in the fairest way, by men of equal brains and intelligence, willing to pay the price of arduous study for the knowledge necessary to success? What is there that Jesse Livermore or Bernard M. Baruch do which is open to criticism? They pay the seller his price, but they do not accept stock sold "with a string to it." The vendor thinks his reasons for selling as good as theirs for buying what he sells. If he were a jobber in the woolen trade, selling his investment in American Woolen stock, or a banker selling United States Steel common on the devastating foreign competition which he thinks he foresees, he would consider his own sources of information better than those of the speculators. They take the same risks that he does. They are often wrong, but they do not whimper about it. I have known many operators of this kind, and I never heard them whine when they lost, or boast greatly when they won.

-and a Bad One

But the little gambler who takes the gutter view of Wall Street pits his wits against trained minds, not merely those of the speculators and the professional traders on the floor of the Stock Exchange, but the minds of men whose business requires them to study business conditions. This kind of gambler is a bad loser, and is often highly articulate. He, or those dependent upon him, is lucky if he receives such a lesson at his first venture that he confines his future relation with Wall Street to denouncing it as a gambling hell. It would be all that if the stock market were made by him or people like him. To the everlasting credit of the country, we may confidently assume that it is not.

Refusing a Partnership With Jay Gould

Charles H. Dow, who knew Jay Gould well and enjoyed his confidence as much as any newspaper man of the time, largely because of his incorruptible independence, says in one of his editorials that Gould based his position in the stock market primarily on values. He tested that market with purchases of sufficient stock to show whether there was a public response whether he had correctly foreseen the public appreciation of values which he thought he had recognized. If the response was not what he expected he would not hesitate to take loss after loss of a point or so, in order to reconsider his position from a detached point of view. Some years ago there was a pathetic derelict in New Street, one of the unlovely fringe of any speculative market, who could truthfully say that he had once been offered a partnership by Jay Gould. I have missed his face in recent years, but not a great many years ago he was a promising young member of the Stock Exchange. His execution of orders on the floor was remarkably good. It is a difficult and exacting task. It requires about that combination of instantaneous judgment and action which would mark a star player in big-league baseball.

To this broker a number of Jay Gould's orders were entrusted. No broker, it is needless to say, saw all of them. Gould was so pleased with the way his business was done that he sent for the young man and offered him a limited partnership. To Mr. Gould's surprise, it was refused. The broker actually said: u Mr. Gould, I have executed a great many of your orders and you seem to me to make more losses than profits. That is not a business I want to share." He could not see that his vision was restricted to only one side of Gould's many-sided activities. Opportunity knocked at his door tried to kick it in but the young man showed that he could do only one thing well. His administrative judgment would have been worthless, as indeed it afterwards proved, for he drifted out of the Stock Exchange into New Street and from there, I suppose, into oblivion. Truly, many are called but few are chosen.

An Intelligent Trader

Rare talent of any kind commands great rewards for the reason that it is rare. The amateur who regards the market as a gamble starts wrong. He holds on when he is losing and takes small profits, to his continuing regret, when the market is going his way. The speculators he envies, those he charges with cogging the dice and marking the cards, exactly reverse his process. However strong their conviction may be they run quickly when the market does not agree with them or justify the inferences they have drawn. They may be, as Gould often was, too far ahead of the market. One of the most intelligent men I ever met in Wall Street, not long dead, was a former teacher and a fine classical scholar, whose hobby was collecting rare coins but whose business was speculation. He saved no market turns or broker's commissions by partnership in a Stock Exchange house. He was just a speculator, sitting before a customers' board or near a stock ticker. And yet that man, by judgment, study, nerve tempered by caution and, above all, a readiness to see his error quickly, never made less than $30,000 a year; dying at a good age, leaving a comfortable fortune and a collection of rare coins which brought excellent prices.

He would select his stocks on analyzed value and study the market movement. He would buy with confidence but always well within his means. He would take a two-point loss on a thousand shares of stock without hesitation if the market did not move his way. When that discouragement happened he said that he could not form a correct judgment unless he got out and took an objective view. He had originally about the capital which would have been necessary to pay for the education of a doctor or a lawyer, or to start them in business. He gave his undivided but by no means selfish attention to what he had made his business. He was always long of stocks early in a bull market, and in its last stages he generally made a trip to Europe to add to his collection of coins. He was no solitary instance. I could name others like him. But I am not advising any man to speculate, even if he has the moral stamina to comply with the same exacting requirements. If you have a business that you like, one which keeps you comfortably with a margin for the unforeseen, why speculate in stocks? I don't.

The Dial of the Boiler

Some intelligent and many irrelevant questions have been put since these discussions began, and one of them, which has something of both qualities, disputes the economic necessity for the professional speculator. I am not to be drawn into a discussion of academic economics and still less into one of abstract ethical questions. I am describing the stock market barometer as it is and the great and useful service it performs. It is necessary, therefore, to explain its by no means complicated machinery. It is neither as simple as the crude three-foot tube with its column of mercury nor so complex as the highly perfected aneroid instrument. The question whether I would be willing myself to discharge the functions of a professional speculator is beside the point. We do not need to go back to the formal logic of the Greeks twenty-four centuries ago to know that there can be no argument on matters of taste.

Every bit as important as production is distribution, and distribution of capital is the greatest function of Wall Street. The professional speculator is no more superfluous than the pressure gauge of the steam-heating plant in your cellar. Wall Street is the great financial power house of the country, and it is indispensably necessary to know when the steam pressure is becoming more than the boilers can stand. It is important here to avoid getting our metaphors mixed, but the safety valve will occur to anybody. The stock market is ail that and more; and the professional speculator, however ignoble or material his motives may be, is a useful and highly dependable part of that machinery. That he may grow rich in the process is neither here nor there, unless we are to adopt the bolshevist doctrine that personal wealth is wicked. There is another doctrine, held by many who would resent the epithet of bolshevism, which is in any country much more dangerous. It holds wealth, with the power it brings, as a thing for envy and not for emulation ; that if we cannot legislate everybody rich it is demonstrably possible to legislate everybody poor. One short way to that end would be to eliminate the Stock Exchange altogether. But so long as it exists it is our business to understand it. Perhaps in so doing we may develop useful suggestions for improving the barometer and extending its usefulness.