Chapter 3
Data Communications: Market Competition 1969-1972
Modems and Multiplexers

3.2 The Economic Roller Coaster 1969-1975

On January 7^th, 1969, the Federal Reserve Bank, fearing inflation, decided to slow the economy by raising interest rates: the prime interest rate would jump to a record 7%. Compounding the deadening effects of this dramatic rate hike, Congress in that same month increased the capital gains tax to 35% from 24% and repealed the Investment Tax Credit. [7]

By November 1969, these actions had their intended effect and economic activity peaked, ending a growth cycle dating back to February 1961. [8] A year later, November 1970, the economy bottomed and then grew for three years before peaking once more in November 1973. The next bottom was attained in March 1975. These quick successions of peaks and bottoms made for very different conditions than the ever-predictable growth of the 1960’s.

By mid-year 1969, investors could no longer ignore the fateful signs of a slowing economy and the stock markets turned bearish. For anyone who did not appreciate how over-priced technology stocks had become, they soon took notice as their luster proved more a reflection of investors' greed than companies' prospects. Indicative of how technology would be impacted, domestic shipments of computer hardware dropped from $5.5 billion in 1969 to between $4-4.5 billion in 1970. [9]

Venture capital also began drying up in 1969. In 1970 and 1971 about half the amount committed in 1969 was invested in venture capital funds. (See Exhibit 3.0 Net New Commitments to Venture Capital Firms 1969 to 1978.) And that was the good news, because in the following years venture capital all but dried up. The lack of both public and private capital caused management to scramble. Thousands of companies that once dreamed of going public quickly sought to merge or be acquired. The stock markets would rebound with double digital growth in 1971 and 1972 before dropping drastically in 1973 and 1974 (the S&P 500 Index dropped 14.7% in 1973 and 26.5% in 1974).

Exhibit 3.0
Net New Commitments to Venture Capital Firms1969 to 1978 [10]
(Millions)