The Sideways Seventies

The 1970s evoke, in some people, feelings of nostalgia for platform shoes, bell bottoms, Pet Rocks, Soul Train, mood rings, CB radios, Bruce Lee, Farrah Fawcett and more. The decade’s economic and financial conditions, however, are less conducive to nostalgia and may even produce some chills reminiscent of one of the era’s noted films, The Exorcist.

The ’70s were a decade in which rising inflation mixed with stagnant economic growth, defying the conventional wisdom of economists and giving circulation to the term “stagflation.” It was a time of oil shocks and gas lines, price controls, a devalued dollar and buttons reading “WIN” (for Whip Inflation Now). As confidence leaked out of financial markets, investors increasingly shifted to gold, real estate and other hard assets.

After two decades of generally rising stock markets, the sideways motion of share prices in the age of Watergate and disco came as a rude shock to many investors. The Dow Jones Industrial Average opened on January 2, 1970 at 800.36, and closed on December 31, 1979 at 838.74, a gain of less than 5 percent over the course of the decade.

In the intervening years, the index closed above the fabled 1,000 level for the first time, but was unable to stay there on a sustained basis. And at its nadir for the decade, on December 6, 1974, the Dow ended at 577.6, having lost a frightening 45 percent from its peak of 1,051.7 on January 11, 1973, which was the market’s highest close of the 1970s.

The decade’s economic and financial troubles offer some uncomfortable resemblances and cautionary notes for the present. A weakened dollar, surging commodity prices, a shaky stock market and the possibility of stagflation are familiar subjects in 2008. One cause for optimism, though, is that awareness of the ’70s just may prevent some unsuccessful economic policies from being tried a second time around.

The Nixon ShockIn August 1971, on Friday the 13th, President Richard Nixon assembled a top-level policy team at Camp David to discuss what to do about some worrisome economic problems. Inflation was running at over 4 percent, and the dollar looked increasingly unable to serve as linchpin of the system of fixed exchange rates set up at the 1940s Bretton Woods conference. Under the system, foreign central banks could go to the U.S. government’s “gold window” and convert dollars to yellow metal at $35 an ounce.

“In this discussion, nobody is bound by past positions,” Nixon told his advisors. The group then hashed out an array of sweeping economic measures, which the president announced on Sunday. The “New Economic Policy” included a 90-day freeze on wages and prices, an import tax, some tax cuts and putting a “Closed” sign on the gold window. The last step meant the price of gold henceforth would be determined in the open market. It also meant the U.S. government had given itself a freer hand to print lots of cash.

Nixon’s new policies got an initially favorable review on Wall Street. The Dow gained 32 points on Monday, August 16, setting a new record for daily point rise. Some investors were pleased that the president was at least doing something, and others took solace that the economic controls were to be temporary and brief. Foreign reaction was mainly negative, though, as the import tax plus weaker dollar would make it notably harder to export to the United States.

As it turned out, the wage and price controls were not so temporary. In October, the Nixon administration announced “Phase II,” which extended the controls and developed what was beginning to look like a permanent bureaucracy to oversee them. The stock market weakened in late 1971, heading back to the 800 level where the decade had begun, but in early 1972 the Dow moved back above 900 and continued to rise.

Economic growth was picking up steam, and the controls seemed to be doing a passable job against inflation, which fell below 3 percent in mid-1972. Nixon won the November election in a landslide. A week later, on November 14, the Dow closed at 1,003.16, ending the day above the 1,000 level for the first time. The market was buoyed not only by the election results and seemingly healthy economy but also by the possibility of peace in Vietnam; the North Vietnamese regime had just agreed to negotiate in Paris.

Inflation picked up, though, and the president unveiled new phases of controls, some of which were supposed to be voluntary. The controls, it became clear, merely suppressed inflation for a while. By 1974, most of the wage and price rules had been lifted, partly because Congress was annoyed that Nixon had succeeded in suppressing inflation just long enough to get reelected. By this point, Nixon was in big trouble anyway, as the Watergate scandal deepened.

The Energy CrisisNixon’s second term was dominated not only by Watergate but also by turmoil in world energy markets. One group that was alarmed by the gold window’s closing was the Organization of Petroleum Exporting Countries (OPEC), which priced its product in dollars. Seeking to bolster its revenues, OPEC began demanding shares of the operations of foreign oil companies, rather than just collecting royalties as in the past.

And OPEC’s oil was increasingly needed by the U.S. and other nations. For decades, Texas had dominated the world oil market, and regulators at the Texas Railroad Commission had virtually dictated world prices by determining production quotas in the state. But growing demand and new sources of supply had changed that picture. As of March 1972, the commission abandoned its production quotas, but even with wells running at full tap Texas now comprised a declining fraction of the world market.

Energy emerged as a full-blown crisis in October 1973, when Arab members of OPEC imposed an embargo on exports to the U.S. in retaliation for America’s support for Israel in the Yom Kippur War. The oil exporters followed up by extending the embargo to some other nations deemed unfriendly, and by making general cuts in output. But the showdown threatened to damage OPEC’s economies as well as those of its customers, and the embargo was ended in March 1974. By then, however, it had helped push the U.S. economy into recession.

The stock market, weighed down by the nation’s sundry political and economic problems, dropped like a stone through most of 1974. Nixon announced his resignation on August 8, 1974, effective at noon the next day. The Dow slid over the course of August from above 750 to below 680. In late 1974, the index took some dives below 600, exploring depths not seen since the Cuban Missile Crisis of 1962.