The Dow Jones Industrial Average was born on May 26, 1896. It weighed in at 40.94. It did not drop below that number again, but came awfully close on July 8, 1932, when it hit 41, just as Franklin Roosevelt was becoming the Democratic Party’s nominee on an anti-tariff platform. In between, the DJIA had climbed almost tenfold, to 381 on September 3, 1929, with an exuberant run-up of 40% in the previous nine months. Imagine the DJIA doing a complete round trip at that order of magnitude over a span of 36 years! We would today have to climb to a DJIA of 70,000, and in 2033 find ourselves back where we started. And we would have had to do it with a constant price of gold, for all of the movements of the DJIA between 1896 and 1932 were traced with a dollar defined in terms of gold at $20.67 per ounce.
How silly it is for the financial press, including The Wall Street Journal, to breathlessly celebrate the DJIA at 7000, without taking any trouble to correct for the inflation in the unit of account. The New York Times at least ran a logarithmic graph that adjusts visually for the percentage increases. That is, to run to 7000 from 6000 was not quite the feat it was to run to 2000 from 1000. Still, this doesn’t give us any sense of how the DJIA has behaved for the last century when seen against its original accounting unit. With gold now at $350, the DJIA is only 413 as compared with the 41 of a century ago, a tenfold increase. That does sound more reasonable, doesn’t it? Except that if it hit 381 in 1929, the value of the Dow is only 32 points higher than it was at its peak way back then. The S&P 500 tells pretty much the same story over these years.
If these are reliable measures of the expected earning power of the U.S. capital stock, they suggest to us that at the 1929 peak, the financial market was discounting an extremely rosy future for the United States. It projected forward an extension of American ideas, influence, and commercial interests around the Earth. The 1929 Crash, and the long slide to rock bottom that followed, was simply a realistic new estimate of what to expect for the rest of the century. Reuven Brenner of McGill University in Montreal, perhaps the best economist in the world today, says that if you add up all the dead-weight dollar costs of Depression, hot wars and cold, these numbers adjusting the DJIA or the S&P500 should be no surprise. To get back to the level of optimism -- and the free flow of the goods and capital markets -- that still existed on September 3, 1929, the DJIA would have to be at 6400, which it hit earlier this year.
From this perspective, 7000 is no big deal. The financial markets of the United States should be able to project forward an extension of American ideas, influence, and commercial interests around the earth. In 1929, all that stood in the way was the immaturity of American leadership in the world, which took its most egregious form in the Smoot-Hawley Tariff Act. The all-time peak of the DJIA, when cast in gold, was on February 9, 1966, when it pierced 1000 in mid-day trading before sliding back. Because gold was then at $35, the DJIA was at 590 in relation to its peak of 381 @ $20.67. We might say what followed were costs associated with Vietnam and the final throes of the Cold War. When the DJIA finally finished above 1000 on November 14, 1972, the dollar gold price had already floated up to $63, a price at which the DJIA would be at 328 in 1929 terms.
This measurement method has its flaws, but it is far superior to the mindlessness of Wall Street commentary these days. At $350 gold, the DJIA has to make its way to 10,000 to get to the level of optimism of February 9, 1966. If American leadership could produce movement toward a new monetary system and a new tax system -- which would become templates for an awaiting world -- a DJIA of 10,000 would be a piece of cake.