By Peter C . Earle

On July 1 , 1974 , the economic newsletter writer James Dines wrote with a palpable sense of awe . Beginning in January 1973 , the Dow Jones Industrial Average ( DJIA ) had fallen from 1031.68 to 806.24 — almost 22 %. The United States was in a recession , having emerged from another recession only a few years earlier . In his journallike account in The Invisible Crash ( 1975 ), Dines comments :

You are watching history being made — movies will be made and books written about this era , such as about 1929 … As bank failures and record high interest rates prompted a smashing decline below the much vaunted 800 level … we can only shake our heads at our inability to get people out of the stock market before it is too late . Who would believe Polaroid at 23½ , down from an all-time high at 149 , and McDonald ’ s down 9 points in one day to 38 … Add to this the bombed-out favorites of yore , like Levitz , Disney , Combustion Engineering , Damon , and Intel , where prices collapsed suddenly , affording investors no chance to get out in time , and one realizes this is not an ordinary bear market . This is a Crash .

And the worst was yet to come . Between the publication of that missive and December 1974 , five months later , the Dow would fall to 577.60 . In all , 1974 saw the Dow fall just over 28 % and the S & P 500 fall just under 30 %. And between 1973 and 1975 , those indices fell 56 % and 42 % of all trading days , respectively , while averaging a decline of less than one-tenth of a percent per day . Fifty years later , the period between January 1973 and December 1974 still recalls one of the most vicious bear markets in history .

Beginnings

The foundation of the deep decline in stock prices was largely laid in the preceding half decade . John Brooks , in The Go-Go Years , writes :

All through the stormy course of 1967 and 1968 , when things had been coming apart and it had seemed that the center couldn ’ t hold — the rising national economic crisis culminating in a day when the dollar was unredeemable in Paris , the Martin Luther

King and Robert Kennedy assassinations , the shame of the Chicago national convention , the rising tempo of student riots — the silly market had gone its merry way , heedlessly soaring upward as if everything were OK or would surely come out OK as mindlessly euphoric as a Japanese beetle in July . Or as a doomed man enjoying his last meal . One could only ask : Did Wall Street , for all its gutter shrewdness , have the slightest idea what was really going on ?

The “ Paper Crisis ” on Wall Street between 1968 and 1970 was a major operational bottleneck caused by the sheer volume of stock trades overwhelming the manual processing systems used at the time . As the market boomed and trading activity surged , brokerage firms struggled to handle the paperwork involved in settling trades , leading to significant delays , errors and even the collapse of several firms . The crisis exposed the inadequacies of the outdated settlement system and eventually led to the development of automated processes and the creation of the Depository Trust Company ( DTC ) in 1973 to modernize and centralize trade clearing and settlement . This marked a turning

20 FINANCIAL HISTORY | Fall 2024 | www . MoAF . org