From The Stock Market Barometer by William P. Hamilton, published in 1922

Action and Reaction in the Stock Market

Are They Equal?

And what becomes of that imposing premise that "action and reaction are equal?" Are they? There is little real evidence to prove the assumption, in accorded human affairs. Of course the holders of that theory may respond, "Well, if they are not equal they ought to be." I cannot even see why they ought to be. Certainly, holding a Christian faith in the perfectibility of human nature, I do not see why crises should not be eliminated altogether. It is easy to see how the periods between them at least seem to have grown longer. The interval between 1893 and 1907 was fourteen years, and 1920 was no panic year.

Unless we are to force the construction of what constitutes a panic until we actually distort it, we can hardly regard the deflation liquidation of 1920 as a typical crisis. It could not begin to compare with the damaging effects of 1893,1873, 1857, or.1837. It had none of the earmarks of a panic year. I dare say I shall believe, in five years' time, that the drastic contraction and deflation were about the best thing that could have happened to us. They should certainly discount all sorts of trouble in the future.

A Business Pathology Needed

There must be some sort of scientific pathology of business affairs, or perhaps it might be better to call it morbid psychology. I have suggested in another chapter how utterly inadequate the records of history are in the vital matter of commerce and all that contributes to it. But we are beginning to acquire a scientific knowledge of the symptoms of the diseases which afflict it. In this respect we have probably made more advance in the past quarter of a century than in all the years since Carthage sold the purple weaves of Tyre to Rome. We may well hope that we are developing a scientific method of diagnosing the symptoms or business disease. There was no such method in 1893, because there were no such records as we have today.

But why need we assume that once every ten years or twenty years, or any other period, the most intelligent part of mankind loses its head and forgets all the lessons of the past? One thing is certain about a panic. It could never occur if it were foreseen. Are we not working toward a sum of knowledge and an accuracy of analysis which will, in a sufficiently safe measure, foresee all but the non-insurable risks - "the act of God and the King's enemies?"

The Federal Reserve Safeguard

I can see a great deal too much politics, and many defects, in the Federal Reserve banking system. But under that system it is hard to imagine a set of conditions which would force the country to resort once more to clearing-house certificates, as it did in 1907 and 1893. It would pass the wit of man to devise a perfect banking system; and what would seem perfect to one would appear utterly inadequate to another. But the progress from the old national banking system to the Federal Reserve system represents the most tremendous stride in business practice which the country has ever seen. Is not the Reserve system itself an entirely new factor for the cycle theorist to consider? It must not be assumed for a moment that possible crises in the future may be dismissed from consideration. On the contrary; they are certain to come. But may we not hope that, with fuller knowledge, they will be at least in part anticipated and, in their most dangerous effects, radically mitigated?

Teaching the Teacher

If these studies have shown the man who takes an intelligent, even if not a financial interest in Wall Street, that knowledge will, protect him there as it will anywhere else, the educational design has been largely accomplished. Certainly one of the desirable educative services of this, series has been to show the writer how much there was about the stock market movement which he had never before formulated to himself in any useful fashion. The way to get at the essence of such a proposition is pragmatic - to live with it from day to day. The stock market problem, considered in the light of Dow's Theory, is essentially simple. It can be set forth in a thoroughly useful way, provided only that the teacher is neither a crank nor a quack, a gambler or a crook. Harvard University is performing a greatly needed service in putting out tabulations and index charts on general business conditions which are above suspicion. The compilers have not tied themselves down to dangerous assumptions. They are not lashed to an assumed "medial line" of national wealth with a constant upward tendency at the same rate of speed in good times or bad, which loses its certainty in face of the grim facts of war, and hysterically changes its course.

Does the Physical Law Apply?

Such a system as that of Harvard University is not committed to the proposition that in human affairs action and reaction are equal. That is a fine-sounding phrase, but. it should require incalculably more evidence than has yet been adduced to persuade us to adapt a law of physics to something so unstable and elusive as human nature itself. Among the many things which our stock market averages prove, one stands out clearly. It is that so far as the price movement is concerned action and reaction are not equal. We do not have an instance of a bull market offset in the extent of its advance by an exactly corresponding decline in a bear market. And if this is true, as it demonstrably is, about the extent of the price movement in any given major swing, it is still more true about the time consumed. We have seen that bull markets are, as a rule, of materially longer duration than bear markets. There is no automatically balancing equation there. I do not believe there is such an equation in human affairs anywhere. Certainly there is none recorded in history. I am compelled to rely upon others for tabular figure compilations of all kinds, and do not profess to have used my modest razor for the cutting of any of these tables of stone. But in all the study of figures prepared for use in my profession, I have been unable to find a balance of action and reaction.

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From The Stock Market Barometer by William P. Hamilton, published in 1922