From the May 2008 issue of Research Magazine • Subscribe!

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.

The Ford InterludePresident Gerald Ford inherited a dilapidated economy and a demoralized nation. As he took office, inflation had moved into double digits, and economic growth was stalled. Early in his tenure, he held an economic summit, getting advice from various experts and asking the public to send him ideas on how to conserve energy and restrain prices.

Soon afterward, he unveiled his Whip Inflation Now program, which involved a surcharge on taxes and reductions in federal spending, along with a grassroots push for disciplined spending habits. People were encouraged to wear WIN buttons to express solidarity with these public and private measures. Public response was mixed, however, and some skeptics wore the buttons upside down to read "NIM," which carried such meanings as "No Immediate Miracles" or "Need Immediate Money."

In early 1975, the stock market started moving up, and by the second quarter the economy was growing again. Inflation, which had peaked in late 1974, was back in single digits, though still high by historical standards. In early 1976, the Dow pushed above the 900 line, and before long it was sporadically closing above the 1,000 level. Inflation continued to fall, dropping to the vicinity of 6 percent. The administration's focus on restraining federal spending seemed to be doing some good.

By late in the year, the economy was slowing again, however, and the Dow was spending most of its time back in triple digits. That did not help Ford's political prospects, which were in any event damaged by his pardon of Nixon. Jimmy Carter won the election on November 2, 1976. The Dow ended the year at 1004.65.

The Carter MalaiseA cardigan-wearing President Carter announced in April 1977 that conserving energy was the "moral equivalent of war." Critics adopted the acronym "MEOW," and not much came of Carter's energy plans. Inflation pushed steadily upward during the first two years of the Carter presidency, and jumped back into double digits in 1979. Unemployment remained high as well, such that economists increasingly questioned the traditional Keynesian view that there's a distinct tradeoff between inflation and unemployment.

On July 15, 1979, Carter appeared on TV saying "the true problems of our nation" were "deeper than gasoline lines or energy shortages, deeper even than inflation or recession." America was in "a crisis of confidence," he explained. This came to be known as "the malaise speech," though Carter didn't actually use that word (which had appeared in an aide's memo to him). In any event, the address did little to restore confidence.

Starting in late 1978, the Carter administration tried curbing inflation with a new round of price controls, which it called "voluntary guidelines" (companies that did not volunteer would not get government contracts). This had little effect. Much more important was Carter's appointment, in August 1979, of Paul Volcker as chairman of the Federal Reserve. Described by Time magazine as a "mild-mannered, balding bureaucrat whom most people outside the cloistered international banking fraternity have never heard of," Volcker was determined to break inflation by tightening the money supply.

Ultimately that would work, though it would require several years and a deep recession in the early 1980s. And before that, Carter, plagued by the misery index of inflation plus unemployment, would lose the 1980 election to Ronald Reagan. It would not be until 1983 that the Dow moved above the 1,000 line and stayed there. Such a milestone seemed out of reach in October 1979, as the Dow sank toward 800 and some people worried they were about to see a 50th-anniversary replay of the Great Crash.

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The Nifty FiftyIn the early 1970s, investors were enamored of a group of large-cap stocks known as the "Nifty Fifty." Featuring such companies as Black & Decker, Bristol-Myers, Coca Cola, Dow Chemical, Eastman Kodak, Gillette and Walt Disney, the Fifty were thought to be "one-decision" stocks -- they were so good, it was said, that all you needed to do was buy them, and you never needed to think about selling them.

The bear market of 1973-74 dampened enthusiasm for the Nifty Fifty. However, it has become a matter of historical debate as to how sound the advice to buy and hold those stocks actually turned out to be. While some experts see the Nifty Fifty as an ill-considered fad among investors, others have suggested that the portfolio did not do badly over time.

Complicating the debate is the fact that there was no definitive list determining which companies were in the Nifty Fifty, which was after all an informal term. Rather, different brokerage firms circulated varying but overlapping lists at the time. So how well you would have done depends in part on exactly which Nifty Fifty you were buying.

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Readers with anecdotes or suggestions for Historical Research are encouraged to write to the author at ksilber@highlinemedia.com. Correspondents' names will not be used in an article without explicit permission.

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