1973–1974 stock market crash

The 1973–1974 bear market was a severe bear market that lasted between January 1973 and December 1974. In the US, the unemployment skyrocketed to 9% by mid-1975—the highest rate since the Great Depression. The stock market as measured by the Dow Jones index decreased 25% between 1969 and 1971 and then lost another 20% by mid-1975.

The period saw also the failure of major international banks such as Franklin National in the US and Herstatt in Germany, as well as the secondary banking crisis in the UK. The oil crisis, recession and financial instability combined to create the sharpest fall in global share prices since the Great Depression and World War Two.

Background
Like the 1920s and 1990s, the decade of the 1960s was a period of remarkable prosperity in the U.S. as measured by such statistics as GNP and the unemployment rate. While the 1950s included several periods of stagnation and recession, the following decade was a period of nearly unblemished prosperity. The economy grew at a brisk pace and employment and wages grew at good rates. America was able to fight the Cold War, the Vietnam War, the war against poverty, and win the space race, simultaneously. The only noticeable negative effect was a mild uptick in price inflation.

Credit for the expansion was given to two primary factors. The first factor was scientific management of the economy by the "new economists", Keynesians, who were brought to Washington to help fine-tune the economy with fiscal and monetary policy. The second factor was the new technology that was introduced into the economy, particularly computer technology, consumer electronics, and technological advances related to space exploration.

Academic economist Arthur Okun was a prominent member of President Johnson’s Council of Economic Advisors. Right before the crash he described the economic expansion as "unparalleled, unprecedented, and uninterrupted." Okun believed that the economy was on a new "dramatic departure" from the past.

More importantly, revolutionary changes occurred in money and banking. The U.S. Treasury stopped issuing silver coins in 1964 and Gresham's Law insured that Americans were soon using nothing but clad coins that only looked like the old silver coins. Silver certificate notes were recalled in 1968 and replaced by Federal Reserve notes. In August of 1971, Nixon initiated a "new economic policy" that closed the international gold window. The U.S. had printed too much money during the 1960s and had caused a "run" on the dollar by foreign central banks who sought to cash in their dollar holdings for gold. Despite his promises to the contrary, Nixon also instituted comprehensive wage and price controls in an attempt to block the rising price inflation before his reelection campaign. The Bretton Woods system, where currencies had fixed values in terms of gold, inevitably collapsed. Thus the last links between gold and U.S. money were broken and a completely fiat money was established.

The bubble of the 1960s and subsequent collapse have been well chronicled by John Brooks in his book, The Go-Go Years. The "go-go 60s" refers to the market for technology stocks during the 1960s when the "Nifty Fifty" emerged as a list of "one decision" stocks that could be bought and held forever. This list of stocks included Coca-Cola and IBM as well as troubled companies of today, such as Xerox and Polaroid. Like the investment trusts of the 1920s, mutual funds were touted as the fastest path to riches for the common man. As the bubble expanded, investment gurus such as Gerald Tsai used aggressive investment techniques to generate huge increases in the value of their mutual fund shares, while others made millions building the conglomerate corporations that spanned many industries and nations. Brooks well captured the euphoria that emanated from this new-era stock market: "As mutual-fund asset values went up, new money poured in. Tsai and others like him seemed to have invented a money-making machine for anyone with a few hundred or several thousands of dollars to invest."

The Crisis
Civilian unemployment increased from well below 4% to just over 6% by the end of 1970. The rate then retreated to 5% in 1973 only to skyrocket to 9% by mid-1975—the highest rate since the Great Depression. The unemployment rate remained above the normal level of 5% for the next two decades, including ten double-digit months during 1982-83.

The experiments of the new economists also resulted in higher price inflation, as would be expected from the "stimulating" fiscal and monetary policy of the 1960s. From the beginning of 1946 to the beginning of 1965 the consumer price index increased by 71.4%, but then increased 20% by the end of the decade. From 1965—when the experiment began in earnest—to the end of 1980 the CPI increased by 176.6%. The experiment had tripled the rate of inflation experienced by consumers.

The stock market as measured by the Dow Jones index decreased 25% between 1969 and 1971 and then lost another 20% by mid-1975. However, the real losses in the stock market were larger and longer lasting than an ordinary chart of the Dow might suggest. If the value of stocks is adjusted by price inflation as measured by the Consumer Price Index, a clearer and more disturbing picture emerges. The inflation-adjusted or real purchasing power measure of the Dow indicates that it lost nearly 80% of its peak value. This indicates that the economic pain of the 1970s and early 1980s may have more closely resembled that of the Great Depression of the 1930s than previously thought.

The decade that began with recession and the abandoning of the gold monetary system saw the emergence of stagflation (stagnation + inflation) and ended with the coining of the "misery index" (inflation rate + unemployment rate) by presidential candidate Ronald Reagan. While not recognized in the statistical senses as a decade of depression, and certainly not as a great depression, the decade was nonetheless a period of economic gloom and despair that was compounded by Watergate and defeat in Vietnam.

Links

 * The Go-Go Sixties by Kenneth Silber, April 2008
 * America takes us back to the seventies by Henry Ergas, May 2011
 * 1973–1974 stock market crash on Wikipedia