The Longest Bear Market Begins


On this day in economic and business history...

The Dow Jones Industrial Average began its existence in the swelling optimism of a post-panic bull market. That growth continued for five years, with a brief interruption at the turn of the century, before peaking on June 17, 1901. That day marked the start of the longest secular bear market in Dow history.

Trading that day was light, and reports offered little indication of the long-term weakness to come. The export of $4 million worth of gold -- approximately 6.6 tons' worth at prevailing exchange rates -- to cover various debts was the only unpleasant news to be found, as lower gold stores could become a problem in the event of widespread withdrawals. A railroad price war in the American Northwest drew to a close. The damage wrought on the railroad industry by the Panic of 1893 finally seemed to be a thing of the past, and newly instituted railroad dividends and higher earnings appeared everywhere.

However, the optimism wouldn't last. Labor unrest in the steel industry and a national corn shortage contributed to the early market slide into the first of several standard bear markets that wracked the Dow during its secular bearish period. President William McKinley's assassination in September of 1901 exacerbated the problem, as Wall Street began to freak out once it no longer had a steadfastly pro-business president on its side. The Dow would spend 20 years trying and failing to climb out of this extended secular bear. Inflation hammered Wall Street hard during this period: The real losses came to 63% from 1901 to 1921, compared to the 22% in nominal losses one can calculate from the Dow's closing prices on the first and last days of the secular bear.

Want to learn more about secular bear markets? Click here for an in-depth explanation.

A funny name for an awful piece of legislation
On June 17, 1930, exactly 29 years after the Dow began the longest secular bear market in its history, President Herbert Hoover signed into law the Smoot-Hawley Tariff, ensuring (at least in part) that the Dow's second-longest secular bear market would be no picnic either. The Smoot-Hawley Tariff instituted record-high protectionist tariffs against thousands of imported goods. At no time in the history of an industrialized United States have tariffs ever been higher -- although 19th-century tariffs were higher in fact, in practice most imported goods were never taxed.

Although it was designed to protect American jobs and goods from foreign competition during the early days of a historic economic downturn, the severity of the Smoot-Hawley Tariff caused a retaliatory wave of tariffs to rise against American goods elsewhere in the world, while many of America's key trading partners simply avoided U.S. trade altogether when they could. Global trade plunged throughout the remainder of the Hoover administration, bottoming at a level roughly two-thirds lower than its 1929 peak by 1934.

Where the rubber meets the road
Charles Goodyear received his first patent on June 17, 1837, for a process of treating rubber to make it more durable. The rubber pioneer had been inspired to improve on natural rubber, or "gum elastic," which was a product of trees harvested in South America. Goodyear attempted to commercialize this first discovery, but the economic crash that hit later in 1837 destroyed his ambitions. However, Goodyear kept working on rubber, particularly in hopes of making the product less sticky. Goodyear's greatest breakthrough occurred two years later, when he discovered the Vulcanization process, which heats rubber to the point of charring. Unfortunately, as Pfizer Associate Director Brian Nunnally writes on the company's science blog:

As with many revolutionary products, his patent was largely ignored, forcing him to spend lots of money on expensive litigation. When Goodyear died, on July 1, 1860, he was $200,000 in debt. In 1898, the Goodyear Tire and Rubber Company was founded, with Frank Seiberling naming it after Goodyear. ...

Goodyear's story is a sad one in that he would not realize the fruits of his ingenuity. But we should not weep for him, for he did not weep for himself. He supposedly said, in this regard, "Life should not be estimated exclusively by the standard of dollars and cents. I am not disposed to complain that I have planted and others have gathered the fruits. A man has cause for regret only when he sows and no one reaps."

The War on Drugs is declared
The "War on Drugs," as we now know it, is said to have begun on June 17, 1971, at a press conference held by President Richard Nixon. This conference, which made public the arguments Nixon had made to Congress earlier that day, contains the following declarations:

America's public enemy number one in the United States is drug abuse. In order to fight and defeat this enemy, it is necessary to wage a new, all-out offensive. ...

If we are going to have a successful offensive, we need more money. Consequently, I am asking the Congress for $155 million in new funds, which will bring the total amount this year in the budget for drug abuse, both in enforcement and treatment, to over $350 million. ...

I very much hesitate always to bring some new responsibility into the White House, because there are so many here, and I believe in delegating those responsibilities to the departments. But I consider this problem so urgent -- I also found that it was scattered so much throughout the Government, with so much conflict, without coordination -- that it had to be brought into the White House.

His earlier proclamations to Congress were, if anything, far more dire. Nixon claimed: "If we cannot destroy the drug menace in America, then it will surely in time destroy us. I am not prepared to accept this alternative." This publicity led to the creation of the Drug Enforcement Administration two years later to further consolidate federal power over drug offenses. That department now employs nearly 10,000 people and controls a budget of nearly $3 billion per year -- but this is only a fraction of the amount spent on the War on Drugs each year.

The federal government alone spent more than $15 billion prosecuting the War on Drugs in 2010 -- equal to nearly $50 for every man, woman, and child in the country. State-level spending rose to nearly double that amount. Nearly 1.6 million arrests are made for drug-abuse violations each year, and since 1996 a quarter of all new prison inmates are imprisoned for drug offenses. More than $1 trillion has been spent on prosecuting the War on Drugs since 1971, and more than 40 million people have been arrested for drug-related violations.

That's undeniably a tremendous long-term drag on the U.S. economy, and for what benefit? Drugs have not been destroyed in the U.S., nor have they destroyed us. Nixon was wrong.

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