Introduction
Dow Jones is a term commonly used in business circles. It refers to one of the indices used to calculate stock market prices on the stock exchange. This is the second oldest index in the United States of America after the Dow Jones Transportation Average by the same creator. The term may also be used to refer to the famous Dow Jones company responsible for the publication of the Wall Street Journal, a daily newspaper published in Asia, Europe as well as online for ease of access. There is even a special version for iPad users only simply known as ‘The Daily’. The company also publishes Barron’s magazine and Smart Money. Economists and persons interested in financial markets are their targeted consumer base as their publications provide information on financial news and market trends.
History of Dow Jones
The company was born in 1882 as a little known news agency by three reporters. These were Mr. Charles Dow, Mr. Charles Bergstresser and Mr. Edward Jones who took a plunge into financial journalism. The three gentlemen created three products which form the identity of the Dow, Jones and Company; the wall street journal, the Dow Jones Industrial Average or Index, and the Dow Jones newswire within ten years from the inception of the company. During its formative year in 1882, the reporters delivered their financial news through bulletins during the day to day customers at the stock exchange using runners. With time, these snippets of information were consolidated and printed collectively in an afternoon publication, ‘Customer’s Afternoon Letter’. The very first publication of the Wall Street Journal was made in 1889 as a daily afternoon paper. The Dow Jones Industrial Average was then launched in 1896. Moreover, the Dow Jones newswire was introduced a year later. In 1930 the company was officially incorporated in New York as Dow Jones and Company. The company’s innovation saw it pioneer the digital storage of its news and the eventual use of satellites to make its financial information accessible at a national level. The company grew over the subsequent years launching the Asian and European Wall Street journal. In 2007, Dow Jones and Company was acquired by News Corporation, headed by Mr. Murdoch; a global company. The Dow Jones Industrial Average index formed by Charles Dows is used to calculate the dollar averages of 30 American companies that trade in the United States of America`s Stock Market. It shows the performance of these companies. As such, the growth of the economy may be inferred.
Importance of Dow Jones to the American Economy
Dow Jones indices are one of the leading indicators of economic growth in the USA. Therefore, the Federal Reserve Bank relies on the Dow Jones indices to monitor economic performance and consequently determine appropriate policy measures. For example, when the index drops by more than 20 percent the Federal Reserve Board takes measures to increase the amount of money in circulation in the economy. This is achieved by reducing lending rates thus encouraging more people to borrow from banks. The increased money in circulation stimulates a rise in economic activities leading to economic growth. The converse holds true. When the index appreciates too rapidly, the Federal Reserve Board increases lending rates and provides attractive rates for persons depositing their money in banks. Consequently persons borrow less and save more. This protects the economy from inflation and bubble which are common in real estate. Therefore, the index facilitates monitoring and regulation of the U. S thus facilitating the Federal Reserve Bank to control the four macroeconomic goals; price stability, economic growth, full employment and favorable balance of payment.
Secondly, the index determines the level of local and foreign investment in the country which consequently influences economic growth, unemployment and balance of payment. Investors monitor the performance of the Dow Jones when deciding whether to invest in companies listed in the U.S. Investors who are interested in the value of stocks usually purchase stocks when they are at a low value and hold the stocks until their value rises to take advantage of the capital gains. However, this is only possible if the stock index is rising over time. If the Dow Jones index is rising over time, it will attract investors to companies listed in the U.S. These funds can be invested by companies to increase production and productivity consequently reducing unemployment and increasing economic growth. Influx of foreign investors will also result in favorable balance of payment. However, if the Dow Jones index is declining over time, there will be capital flight as both local and foreign investors will shift to offshore investments. This will result in stagnation or reduction of investment and consequently economic stagnation and increase in unemployment. Capital flight will also result in an unfavorable balance of trade. Therefore, Dow Jones in a way influences economic growth, balance of payment and unemployment rates.
Despite its contributions to the economy of the United States of America, the Dow Jones has been criticized for being a biased indicator of economic growth. This is because it is based on the prices of shares and not actual commodities in the market whose performance may be different from the shares. The financial markets are not synonymous to the economy. Additionally, it does not measure the value of business. Moreover, the Dow Jones only takes into account the stocks of 30 companies which are not necessarily the most significant companies in these economic times. This means that the findings derived from the calculation of the index cannot be applied uniformly across the economy.
Dow Jones and the great Depression
The Dow Jones has also been profiled as a false indicator of good economic times. In 1929, the Dow Jones index hit a whole time high and crashed a few months later leading to the Great Economic Depression. Dow Jones had a significant contribution to the great Depression. Just before the depression, the Dow Jones index was rising rapidly. Investors saw this as an opportunity to speculate and make capital gains. Speculation fueled rapid price increases resulting in an economic bubble. When the market turned down, it resulted in panic selling. Investors lost huge sums of money due to margin buying just before the depression. Although, some academics argue that Dow Jones did not cause the great Depression, they agree that it definitely made it the situation worse.
Conclusion
Dow Jones is a barometer companies’ performance. It significantly influences economic performance with regards to economic growth, inflation, unemployment and balance of payment. Dow Jones played a central role in the great depression.
Work Cited
Dow Jones . (2013, April 4). Dow Jones History. Retrieved April 25, 2013, from Dow Jones : http://www.dowjones.com/history.asp?link=djc-topnav
McEachern, W. A. (2011). Macroeconomics: A Comtemporary Introduction (9 ed.). New York: Cengage Learning.
Reed, L. W. (2010, May 26). Great Myths of The Great Depression. Retrieved April 26, 2013, from http://www.uwosh.edu: http://www.uwosh.edu/llce/conted/lir/course-listings/The%20Great%20Depression.pdf
