From an article in today's Telegraph, written by George Blakey, author of A History of the London Stock Market-While it is tempting to to blame today's chaotic market conditions on the complications resulting from the introduction of countless new exchange-traded derivatives over the past decade, there's nothing new about booms and busts.
They originate in periods of credit expansion and end in periods of credit contraction, a sequence that gives banks a pivotal role to play. This was very much the case in 1972-1975.
The abolition of credit controls and the opening up of competition in 1971 paved the way for the secondary banks and the hire-purchase companies to make inroads into what had once been the exclusive preserve of the big commercial banks, and all went on a lending spree, principally funding property investment.
When it all came tumbling down, thanks to a soaring oil price and a domestic background of strict price controls coupled with a wages free-for-all, the banks ran for cover and called in their loans. The fact that many borrowers were unable to repay them meant that the banks were in big trouble.
One by one the secondary banks collapsed, and rumours swirled around the clearing banks, prompting the Bank of England to issue a denial that that National Westminster Bank had ever requested or been offered large scale support as its shares slipped below par.
The article ends-
This one is going to run and run, and when triple A mortgage-backed securities are getting tarred with the subprime brush,one lesson we can heed from 1974 is the advice Jim Slater gave to his shareholders in May of that year when the stock market was poised to halve again, "Cash is the best investment now".
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