The Korean War and the Market, Part II

The Korean War and the Market, Part II

So, last week we closed with the Dow Jones (hereinafter, DJ) at

the 226.35 level, end of September, 1950, and with the U.N.

forces having launched their counterattack against the North

Koreans after almost being pushed into the sea. The market

didn”t react severely to any of the future events in the “police

action” and admittedly, this two-part series I”m running may not

have much relative value in terms of lessons to be learned. But

alas, it”s history.as well as market history. What happened,

happened.

On October 7, 1950 (DJ 231.81), the U.S. won approval from the

U.N. General Assembly to allow MacArthur to push on and try

to reunify Korea. Truman, concerned about hints of intervention

by Red China, flew to Wake Island to meet with MacArthur on

Oct. 15th (DJ 227.63). MacArthur discounted these reports, but if

Red China did act, he predicted “there would be the greatest

slaughter.”

That same day Peking announced that China “cannot stand idly

by.” On Oct. 20th (DJ 230.88) U.N. forces entered the North

Korean capital of Pyongyang. On Oct. 26th (DJ 226.65) advance

units had reached Chosan on the Yalu River border with China.

MacArthur predicted victory by Christmas. But on the night of

Nov. 25th (though others peg it at Nov. 27th.DJ 228.61 after

having been at 234.96) Chinese “volunteers” counterattacked,

with massive “human wave” attacks, with the support of tanks

and planes, turning the tables on the U.N. forces, sending them

into a desperate retreat just at the onset of winter. [The DJ slid to

222.33 by Dec. 4th].

MacArthur blamed the administration for the setback, saying that

they were requiring that he conduct a limited war. He proposed

air raids on China”s sanctuary in Manchuria, a naval blockade of

China and an invasion of the mainland by the Taiwan

nationalists. [The DJ finished 1950 at 235.41]

Truman was against leading the U.S. into the “gigantic booby

trap” of war with China and soon the U.N. forces rallied. By Jan.

1951 (1/30, DJ 249.58) U.N. troops under General Matthew

Ridgway finally secured their lines below Seoul and then

launched a counterattack that in some places carried them back

across the 38th parallel in March. When Truman seized the

chance and offered negotiations to restore the prewar boundary,

MacArthur undermined the move by issuing an ultimatum for

China to make peace or be attacked. Truman had had enough.

On April 5th (DJ 250.32), on the floor of the House, the

Republican minority leader read a letter in which MacArthur

criticized the president and said that “there is no substitute for

victory.” Truman later said civilian control of the military was

now at stake. With the backing of the Joint Chiefs of Staff

Truman fired MacArthur on April 11th (DJ 249.76) and replaced

him with Ridgeway.

Truman”s action ignited an immediate uproar in the country and

MacArthur returned home (for the first time since 1937) to a

tumultuous reception. On April 19th (DJ 254.92) he gave a

historic speech to Congress. “Once war is forced upon us, there

is no alternative than to apply every available means to bring it to

a swift end. War”s very object is victory.Why, my soldiers

asked of me, surrender military advantages to an enemy in the

field? I could not answer them.” MacArthur ended his speech,

recalling a barracks ballad of his youth, “which proclaimed most

proudly that old soldiers never die, they just fade away.” And

like the old soldiers of that ballad, he said, “I now close my

military career and just fade away, an old soldier who tried to do

his duty as God gave him the light to see that duty.”

General Omar Bradley, chairman of the Joint Chiefs of Staff,

later said that MacArthur”s strategy of war with China “would

involve us in the wrong war at the wrong place at the wrong time

and with the wrong enemy.” While Americans liked MacArthur

and wanted to win, Bradley”s logic was persuasive. In fact a

Gallop poll taken at that time showed that 69% of the American

people supported MacArthur but only 30% wanted a wider war

with China.

On June 24, 1951 (DJ 245.30) the Soviets proposed a cease-fire

and armistice along the 38th parallel; Ridgway was inflicting

severe losses at the time and China and North Korea responded

favorably. Truce talks started July 10, 1951 (DJ 250.00) at

Panmunjom only to drag out another two years while the fighting

continued. The chief snags were prisoner exchanges and the

insistence of the South Korean president on unification. A truce

was finally reached on July 27, 1953 (DJ 268.46.or just a 7%

gain in the two years while the talks were going on). No final

peace conference took place. The U.S. lost 33,000 soldiers on

the battlefield, 54,000 overall. South Korean casualties

numbered around 1 million and North Korea and Chinese

casualties stood at 1.5 million.

Finally, it”s interesting to note that it took until November 23,

1954 for the Dow to exceed the 1929 pre-crash high of Dow 381

set on September 3rd of that year.

[Primary Source: “America: A Narrative History” by George

Tindall and David Shi]

Brian Trumbore