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Quote of the Day:
Because consumers in the United States had not previously faced double digit inflation, they were probably unprepared for the rapid inroads that price increases of that magnitude make on real incomes. Only gradually, as bills accumulated, did it become clear that family spending would have to be curbed—and big ticket items like cars and color TV sets were the first to feel the jolt.
-Bruce MacLaurey, 1974 – Then President of the Minneapolis branch of the Federal Reserve.
January 1st – This Day in Stock Market History
January 1st, 1879 – The United States Returns to Gold Standard.
The country was moved to a paper, or fiat, system in 1862 during the civil war when President Lincoln signed the ‘Legal Tender Act’ . It was not until 17 years later that the country would return to a gold backed currency.
The fiat system used prior to this day in 1879 was paper currency that would be known as the “Greenback”.
Excess printing of the Greenback would result in inflation rates as high as 25% in 1863 and 1864.
This nation’s return to a gold standard in 1879 was also the nation’s first and only true gold standard. Previously, the United States used a bi-metallic system of gold and silver.
The nation would remain on the gold standard until 1933 when FDR would not only remove the nation from the gold standard, but make gold ownership illegal.
For more details on the history of the US dollar and our history with gold and silver backed currency, the paper “A Brief History of the Gold Standard in the United States” is a good and interesting read.
January 1st, 1974 – Arab gulf nations double the price of their oil exports overnight.
Since the oil embargo was announced on October 6th, oil prices in the U.S. had quadrupled in just 4 months.
Originally, the price increases from the Arab subset of OPEC came as a result of the United States’ support for Israel during the Yom Kippur War of 1973.
The price increases pushed the U.S. into a deep recession. The Dow Jones Industrial Average fell 16.5% in 1973 and 27.5% in 1974.
In total, from its 1973 peak to its 1974 low, the Dow would fall 45.8%.
To make things worse, inflation would also spike during this period. in 1974, both unemployment and inflation would be around 9%, the highest the United States had seen in decades.
Besides just the drop in the stock market and rise in the price of oil, this period would usher in several notable long term changes.
First, it would lead to the rise of OPEC. This period in 1973 and 1974 proved to the Arab nations the strength they held over the rest of the world with their oil reserves.
For several decades, Arab nations such as Saudi Arabia, Iraq, Iran, Qatar, and the UAE would find themselves flooded with cash as the value of their oil reserves grew substantially.
Second, the oil price shocks led to very significant changes in the United State’s energy policies.
To start, the oil shortage in 1974 resulted in the first serious energy conservation discussions in the United States.
Daylight savings was enacted, new requirements for energy efficiency we put into law, and perhaps most significant, America began its quest for energy independence.
U.S states such as Alaska, Texas, and Oklahoma began to see a huge rise in employment, from increasing oil prices. It would take several decades, but eventually the oil infrastructure built in the U.S. would outproduce the Arab nations.
There is a chapter dedicated to the 1970s energy crisis, the birth of OPEC, and the long term impacts, in one of my favorite stock market history books: Panic, Prosperity, and Progress.
Read of the Day
America’s economy was in rough shape in the mid-70’s. The time period saw one of the worst recessions our nation had experienced since the great depression, and also one of the worst periods of inflation adjusted stock returns in history.
In 1975, Bruce MacLaurey, then President of the Minneapolis branch of the Federal Reserve, wrote this report detailing the headwinds the economy faced, along with actions the Fed planned to do. It is a good read that combines some basics of monetary policy, with a historical recap of what we were experiencing at the time.