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First, stock prices plummeted. From Jan. 1 to May 26, which was the blackest day of the bear market, the Dow-Jones industrial average sank from 800 to an eight-year low of 631. During that period alone, the paper loss for securities listed on the New York Stock Exchange was $113 billion, and the nation's 31 million investors lost an average of $3,645 each. The losses were even more severe for stocks on the American Stock Exchange and on the over-the-counter market. The latter came close to collapse for many days during the late spring. Since then, the stock market has rebounded, though many faded glamour stocks remain 70% below their highs of a few years ago. The Dow-Jones average closed last week at 823, far down from its alltime high of 995 in February 1966.
Biggest Collapse. The second shattering event of 1970 was the biggest collapse in U.S. corporate history. On June 21 the Penn Central Transportation Co., owner of the nation's largest railroad, went bankrupt. The Penn Central had long been a victim of mismanagement and executive infighting, but it was pushed right off the tracks by its inability to refinance $152 million of its commercial paper. Such paper is a form of unsecured, short-term IOU. When money became difficult to borrow from banks, scores of corporations issued commercial paper to raise funds. Because such securities are usually bought by other companies that have spare cash to invest, a series of defaults could have spread financial shock waves throughout the U.S. business community. The Penn Central debacle caused well-founded fears that the $40 billion market in commercial paper might fall apart, starting a series of business failures.
The Federal Reserve's prime job is to prevent just such disasters. After Texas Congressman Wright Patman, an archenemy of banks and railroads, blocked the Nixon Administration's efforts to prop up the Pennsy with a $200 million loan guarantee, the Federal Reserve moved swiftly to steer the financial system out of danger. The board made a special point of offering to advance credit to commercial banks through its "discount window," providing them with much needed funds for relending to corporations that had to pay off commercial paper. The mechanism was conventional, but the need for speed was so urgent that five top officers of the New York Federal Reserve Bank spread news of the rescue scheme by making weekend phone calls to key Manhattan bankers. Banks borrowed heavily from the Federal Reserve, and advanced some $2 billion to cash-shy corporations. In addition, the board relaxed its controversial Regulation Q, which had limited the amount of interest that banks could pay for large deposits. Result: banks picked up $13 billion more by marketing certificates of deposit.
The Federal Reserve Board thus narrowly averted a liquidity crisis—but not without a few tense moments. Some financially embarrassed companies had trouble refinancing their commercial paper. In one case, Chrysler Chairman Lynn Townsend flew to Manhattan and arranged a $400 million increase in the company's line of credit from a group of banks. Many other cash-hungry companies were not so fortunate. Business failures in 1970 rose to a three-year peak of about 10,000, and the sums of money involved reached an alltime high.