The stock market crash of December 6, 1974, marked a pivotal moment in American economic history, coinciding with the genesis of a revolutionary economic theory. The Dow Jones Industrial Average plummeted to a 12-year low of 577, reflecting the pervasive gloom of stagflation that gripped the nation. This economic malaise, characterized by stagnant growth and high inflation, had eroded investor confidence and sent the market tumbling from its peak above 1000 just a year earlier. The prevailing sentiment was one of despair, captured vividly by financial commentator Louis Rukeyser’s somber assessment of the market on his show, Wall $treet Week. However, unbeknownst to the public, the seeds of a dramatic turnaround were being sown behind closed doors that very evening.
A seemingly innocuous meeting between two high-ranking Ford administration officials, Donald Rumsfeld and Dick Cheney, and a group including Wall Street Journal editorial writer Jude Wanniski and economist Arthur Laffer, held near the White House, would prove to be a turning point. During this meeting, Laffer, seeking to illustrate his economic theory, sketched a curve on a napkin, demonstrating the relationship between tax rates and tax revenues. This simple sketch, now known as the Laffer Curve, argued that excessively high tax rates can stifle economic activity and ultimately decrease government revenue, suggesting that tax cuts could, paradoxically, increase revenue by stimulating economic growth. This meeting, and the napkin sketch it produced, became the symbolic origin of the supply-side economics revolution that would transform the American economy in the following decades.
The timing of the Laffer Curve’s creation is crucial. Coming on the heels of the Republican Party’s devastating defeat in the November 1974 midterm elections, it signaled a potential shift in economic policy. Wanniski began writing about the relationship between tax rates and revenues in the Wall Street Journal the following week, subtly hinting at the nascent theory. While the Laffer Curve story didn’t become public knowledge until Wanniski’s 1978 book, The Way the World Works, its influence began to permeate the financial world almost immediately. The market’s sudden reversal on the following Monday, December 9, suggests that whispers of this potential policy shift, emanating from the meeting’s participants, reached influential ears, sparking a resurgence of optimism.
This nascent optimism, though initially imperceptible to the broader public, was grounded in the dire economic circumstances of the time. With top marginal tax rates at 70%, exacerbated by rampant inflation, the economy was suffocating under the weight of high taxes. The Laffer Curve offered a compelling solution: tax cuts to stimulate investment and growth. The credibility of the individuals involved – Rumsfeld and Cheney, both powerful figures in the Ford administration, and Laffer, a respected economist – lent weight to the theory. The market, with its uncanny ability to anticipate future trends, seemingly sensed this potential shift and reacted accordingly, beginning its long climb out of the depths of the bear market.
The Laffer Curve’s impact on the subsequent economic trajectory of the United States is undeniable. The first tangible result was a cut in capital gains taxes in 1978. This was followed by the Reagan-era tax cuts of the 1980s, championed by President Ronald Reagan and Congressman Jack Kemp, which dramatically reduced the top marginal tax rate from 70% to 28%. These tax cuts, inspired by the Laffer Curve, are credited with fueling a period of robust economic growth, high investment returns, and a surge in entrepreneurial activity. The Laffer Curve served as the intellectual underpinning for this policy shift, becoming a constant point of reference in economic and political discourse.
The evidence supporting December 6, 1974, as the date of the pivotal Laffer Curve meeting rests on several key factors. Wanniski consistently maintained that the meeting took place after the November 1974 elections, and his subsequent writings in the Wall Street Journal further corroborate this timeline. While alternative dates have been suggested, the market’s dramatic turnaround immediately after December 6 provides compelling circumstantial evidence. The market’s sudden resurgence, after a prolonged period of decline, suggests a response to new information – a glimmer of hope in the form of potential tax cuts. This timing strongly suggests that the Laffer Curve meeting, and the promise of a new economic direction it represented, served as the catalyst for the market’s revival. This marked the end of the bear market and the beginning of a new era of economic growth fueled by the principles of supply-side economics.
