The First Dow Index and the Bailout that Bombed

On this day in economic and business history...

Before the Dow Jones Industrial Average (DJINDICES: ^DJI  ) , there was the Dow Jones Transportation Average (DJINDICES: DJT  ) , Charles Dow's first foray into stock indexing. This index first debuted in Dow's brief "Customer's Afternoon Letter" on July 3, 1884. Originally known as the Dow Jones Railroad Average (its name finally changed to reflect the importance of more modern transport stocks in 1970), the Transportation Average consisted of only 11 stocks -- nine railroads, one steamship mail-carrier, and one representing the cutting edge of information transmission in the 19th century: Western Union.

Dow's focus on railroads wasn't simply born out of personal interest. At the time, railroads were the backbone of the American economy, and rail stocks were then entering a second period of bubble-like growth following the Panic of 1873, which would not peak for another nine years in the Panic of 1893. Despite the Long Depression following the 1873 panic, railroad track-miles continued to increase year after year from roughly 70,000 laid across the country in the year of the crash to more than 100,000 by the time Dow put together his first stock average. If you wanted to invest in American industry in the latter half of the 19h century, you probably invested primarily in railroads.

Standardization and consolidation greatly improved the quality of rail service during this period, and three more transcontinental railroads (following the completion of the first in 1869) had also been built in the two years prior to the publication of the Transportation Index. Two of these transcontinental railroad operators, the Northern Pacific and the Union Pacific (NYSE: UNP  ) , were part of the first index, and when Dow expanded the index to 14 components a year later, the Central Pacific (the western half that joined Union Pacific in building the 1869 transcontinental line) also became a component. Dow eventually settled on 12 components in 1886; this would inform the construction of the Industrial Average when it was first published a decade later.

The same year that Dow published his Industrial Average, he also expanded the Transportation Average to a list of 20 "active" stocks, 18 of which were railroads. The Transportation Average continues to comprise 20 transport-related stocks, but its most recent iteration contains only four railroads. It now contains four trucking companies, five airlines, two marine shippers, and three package delivery companies. Union Pacific is the only company on the current Transportation Average to have survived more than a century of change, making it by far the longest continuously active component on any of Charles Dow's trademark indexes.

The bailout that bombed
The government of Japan announced the long-awaited details of a proposed banking bailout on July 3, 1998. The bailout, dubbed the "Total Plan," had established a 30 trillion yen ($214 billion) fund in Japan's Deposit Insurance Corporation to deal with Japan's long-standing problem of delinquent or otherwise faulty real-estate loans. More than $550 billion (nearly $800 billion today) of these loans weighed down Japanese banks, and the bailout plan had been designed to allow the worst of these banks to fail without wrecking the nation's financial system. The bailout resembled the one implemented in the United States to deal with the savings and loan crisis in 1991, and it made use of "bridge banks" that would prevent bad assets from dragging down creditworthy borrowers and solvent depositors.

Japan's postwar "economic miracle" had led to a massive financial bubble in the 1980s, which finally popped on the stock market in 1989 and contaminated the frothy Japanese real-estate market. One popular Japanese real-estate anecdote later claimed that the Imperial Palace grounds in Tokyo were at one point worth more than all the land in California. This sort of intense overvaluation would not be easily overcome, and the multiyear lag between implosion and government action did little to right Japan's listing economy.

In the long run, Japan's efforts were too little, too late. Despite eventually doubling the size of its bailout to more than $500 billion, representing about 12% of national economic output, Japan could neither restore its markets to health nor encourage its property values to rebound. The Nikkei, which had closed near 16,500 when the bailout was announced, ended up about 20% lower a decade later. Japanese real estate has likewise been in a long-term bear market: Prices continue to slide into the second decade of the 21st century and are down 70% on average since the peak of the bubble.

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