UK Stock Market Crash and Stagflation

‘When America sneezes, the rest of the world catches a cold’ so it’s not really surprising that when America got the collywobbles at the beginning of the 1970s, the result was pneumonia on the London Stock Exchange – more than 70 per cent was wiped off share values in the worst bear market (market downturn) of the 20th century.

By the end of the 1960s, after a decade of consistent growth on both sides of the Atlantic, America’s economic advisers reckoned they had solved the problem of ‘boom and bust’. They congratulated themselves on having successfully applied the theories of ‘the new economics’, boasting that the idea of a business cycle was old hat and that consumer capitalist economies could enjoy continuous uninterrupted growth.

In the context of President Nixon’s politically troubled world of the Vietnam War, the Watergate scandal and a partisan involvement in the Arab-Israeli Yom Kippur War that was to lead to the Arab nations imposing an oil embargo, it was inevitable that the good times would come to an end. The experts hadn’t realized that the prosperity of the 1960s was nothing to do with their clever theories but had simply been caused by a long-lasting economic bubble.

The crash precipitated a lengthy period of ‘stagflation’ – an economic Catch-22 that was particularly keenly felt in the UK. The economy was trapped in a wage-price spiral: when the government took measures to stimulate growth, inflation rocketed; but attempts to control inflation made the economy shrink. Fuel shortages caused by the oil crisis and the government’s battle with the National Union of Mineworkers resulted in the misery of the ‘three-day week’. Not surprisingly, at the general election in February 1974 the Conservatives lost their overall majority and Britain limped on with a hung parliament.

When: November 1 1973 to June 12 1974

Where: USA and UK. It also affected the whole of Europe.

Toll: Recovery was extraordinarily slow. The UK stock market did not return to its pre-crash real level until 1987.

You should know: The economic boom of the 1960s was brought to a sudden end by Richard Nixon’s decision to remove the dollar from the gold standard. The international money market was thrown into turmoil and the loss of confidence spread to the stock market, sending the whole house of cards tumbling down.