After retiring his positions at the New Era Fund, Mr. Price disappeared from the financial stage to take care of his beautiful roses, enjoy being free of the constraints of business, and explore new countries with Eleanor. What became of his gloomy forecast?

The day he retired – April 30, 1971, as he noted in his journal – the Dow Jones Industrial Average was 942. It rose irregularly until January 11, 1973, when it closed at a high of 1052. This level was not exceeded for the next ten years, during which the market stayed most of the time well under 700, creating one of the worst bear markets since World War II. At this level, the stock market had shown no progress since October 1962. Mr. Price's conservative position, with 50 percent of his assets in highly liquid short‐ and intermediate‐term Treasuries, turned out to be well justified. The Treasury notes produced more than an 8 percent yield throughout this entire time period.

He was also correct that the long postwar business boom was over. It came to a slow grinding halt during the decade following his retirement, in concert with the market. There were two official business recessions in the 1970s. The major expenses of establishing a home and raising the huge number of baby boomers were now behind the army of young men and women who had come marching home from World War II. Their outlays were no longer boosting the economy. As Mr. Price pointed out as early as September 1964 in “Notes on the Economic Trend and Investment Policy,” “Rising debt, particularly consumer debt, has reached dangerous levels.” The increased interest rates had made this debt even more painful. Moreover, “building construction, automobiles and most other durable goods industries have caught up with demand.” Europe had fully recovered its manufacturing capability following the war. The U.S. balance of trade tipped deeply into the red, subtracting from our economic growth. As Mr. Price had pointed out, we had created our own competition. In 1971, the total U.S. trade deficit was $2 billion. By January 1978, the U.S. Treasury Department reported it had grown to $27 billion.

Richard M. Nixon had been elected president in 1968, replacing Lyndon Johnson, who chose not to run because of his enormous unpopularity, chiefly due to the Vietnam War. Unfortunately, exchanging a liberal Democrat for a conservative Republican did little to help the country's budget deficit: in 1970, the deficit was $3 billion, but by 1978 it was up to another record peacetime peak of over $70 billion. Americans continued to enjoy the butter, while buying guns and armaments for the Vietnam War and handing out welfare checks to its poorer citizens. In the same September 1964 memo, Mr. Price pointed out that even government expenditures for the Vietnam War and defense generally “had reached their peak and were headed downward.” To pay for trade deficits, as well as budget deficits, the U.S. Treasury began to print money in increasing quantity. In 1971, the U.S. money supply, as measured by M2, grew 10 percent. (M2 is a measure of the total amount of cash, checking deposits, and time deposits in the U.S. economy. When M2 grows faster than the economy, surplus paper dollars are created, diminishing the value of the dollar and creating the risk of inflation.)

The following brief history of gold in the U.S. economy should help in understanding its role in the 1970s. In 1933, Franklin Roosevelt proposed that all citizens turn in their gold and gold certificates to the Treasury, in return for a flat payment in paper dollars and coins of $20.67 per troy ounce. The United States formally went off the gold standard. Roosevelt's advisors believed this move was necessary because individuals and companies, panicked by the bank failures, had been converting dollars into gold, thus rapidly drawing down the United States gold supply, causing deflation. By eliminating the restraints of the gold standard, the government was free to increase the supply of paper dollars at will, which, in turn, created inflation but stopped the run on its gold supply. England had successfully followed this same path two years before. The price that the U.S. government would pay for an ounce of gold was increased to $35 in 1934.

In July 1944, as the war in the Pacific was still raging, delegates from 44 countries met at the Mount Washington Hotel in Bretton Woods, New Hampshire, to design a better system. Under the ultimate Bretton Woods system, the signatories would settle their international balances in dollars and, in turn, U.S. dollars would be convertible into gold at $35 an ounce. It was up to the U.S. government to keep the price of gold at $35 by controlling the supply of dollars. The United States dollar effectively became the world's currency.

As the United States' debts began to mount in the late 1960s, and the supply of printed dollars grew concurrently, it was obvious to the Bretton Woods signers that, just as Mr. Price had forecast in 1966, the dollar was becoming increasingly overvalued against gold. He had pointed out that the United States then held $14 billion in gold, but only $3 billion of that was available to cover its international obligations. Foreign banks held $14 billion in paper dollars that potentially could be converted into gold. Recognizing the situation, several nations began to ask that they be paid in gold instead of dollars. As these demands increased, the United States was, in effect, being subjected to a run on the dollar. It became obvious that the Treasury didn't have enough gold to satisfy the demand.

President Nixon went on television the evening of August 15, 1971, to announce that the United States would temporarily suspend the convertibility of the dollar into gold. As Mr. Price told George Roche, who was then an analyst and vice president of the New Era Fund and would later become the president and chairman of T. Rowe Price Associates in 1997, “Nixon, in effect declared national bankruptcy that evening.” The following day, the Dow Jones rose over 30 points. Hard assets, such as the shares of profitable corporations, were worth more in terms of the suddenly cheaper dollar. This was particularly true of the shares of large international growth companies with high returns on capital, such as IBM. By the end of the year, the dollar was down 8 percent in terms of gold. Later, during 1973, the price of gold more than tripled to $126. The metal was rapidly gaining favor over the dollar.

In 1970, most of the world was being supplied with cheap crude oil from the Organization of the Petroleum Exporting Countries (OPEC), at a price of $1.21 a barrel. OPEC raised the price to $1.70 in 1971 to compensate for the decline in the dollar relative to gold. In 1973, Egypt and Syria invaded Israel, the beginning of what would be called the Yom Kippur War, in which the U.S. and several other nations supported Israel. Before hostilities ceased on October 26, OPEC retaliated by raising the price of oil by 70 percent to over $5 per barrel, and declaring an oil embargo against the United States and the other countries that had sided with Israel. OPEC also cut oil production back by 5 percent per month, and threatened to continue to cut back unless Israel moved out of its newly occupied territory. By the end of 1973, nominal oil prices were up to $15 a barrel.

With inflation escalating, the economy in a tailspin, the market hitting new lows, and the value of the dollar collapsing, these were tumultuous, dark times by any definition. The T. Rowe Price firm, however, did very well in the early years of this dark new era, although many of its competitors had a hard time in the weak stock market. At a number of mutual funds, shareholders were selling more shares than they were buying, causing net redemptions, or an actual shrinkage of the assets of these mutual funds. Some firms were being forced to merge and disappeared altogether. In 1971, the three equity mutual funds of T. Rowe Price took in an astounding 54 percent of the industry's net sales that year, yet they accounted for less than three percent of the industry's assets. Profits of the firm in 1971 hit a record of $1.8 million, as reported in the April 1972 issue of Fortune. As usual, Mr. Price had sold too soon but, as he had once noted in a client mailing, “It is always better in such situations to be a bit early than late.”

Lines of cars began to stretch out for miles to buy gas. What had been 10‐minute fill‐ups of gasoline at American pumps could now take more than an hour. Many gas stations completely ran out of petroleum products. Various forms of gas rationing were quickly established at the state and local levels. The increased price of petroleum spread throughout the economy, adding to the inflation already created by the decline in the value of the dollar. The Consumer Price Index went up 7 percent in June 1972, and then rose 11 percent more the next year. All around the industrialized world inflation began running at double‐digit rates. Again, Mr. Price's forecast came true, although even he could not have anticipated the “help” from OPEC.

Rapidly rising prices were, in effect, a tax on U.S. consumers. This caused another recession, beginning in November 1973 and lasting until March 1975. Industrial production fell 13 percent and unemployment rose to 9 percent, the highest recorded level since the Great Depression. In this environment, consumers were suffering the worst of all possible economic worlds. The prices of goods and services were rising at a rapid rate because of persistent inflation, which, coupled with high unemployment, created a stagnant demand in the economy. This condition was called “stagflation” by the press.

In the firm's April 1973 revision of the brochure on the Growth Stock Philosophy, the basic definition remained the same, but “should rise at a rate faster than the rise in the cost of living to offset the expected erosion in the purchasing power of the dollar” was added. It was important that the growth be real, after adjusting for inflation. Sales growth and return on invested capital would have to be well above the inflation rate.

“Long‐term growth” was added explicitly in 1973. Normal business cycles can cause a company's growth rate to vary. Increasing profit margins can also cause a company to appear temporarily to be a growth stock. Sales growth is a much better indicator of long‐term growth than growth in earnings per share.

Though he had first publicly defined a growth stock in 1939, Mr. Price was reluctant at that time to ascribe a specific expected growth rate. There were many internal and external factors to consider in determining such a number. Expectations were so low in the 1930s that even a modest growth rate would have seemed overly optimistic. By 1973, after long experience with his own model accounts, the outstanding performance of the Growth Fund, and with a bit of morale help from his more optimistic young associates, of which I was one, he would finally establish a numerical goal. “A portfolio of growth stocks,” he would write in this brochure, “should double in earnings over a 10‐year period. It is believed that market value would follow earnings and also double in a 10‐year period.” He would also return to his warning that “only careful research could separate the effects of the business cycle from the underlying growth of the company.”

With its new hires, the firm had an excellent cohort of investment professionals, many of them experienced, over a number of years, in the Growth Stock Philosophy. In truth, T. Rowe Price Associates had not been a “one‐man firm” for many years. When Mr. Price retired, he had not attended a Growth Stock Fund Investment Committee meeting for eight years, or a meeting of the New Horizons Fund for three years. His attention had been solely focused on the New Era Fund, his model accounts, and a few of his long‐term personal clients.

The firm had then operated for at least a decade with the committee system, a majority vote carrying the decision. The fund investment committees operated in the same manner. They were made up of three to five voting members from both the counsel and the research divisions. At the weekly meetings, several other research analysts were also in attendance to discuss specific buy/sell decisions. Stock turnover remained low for all three funds.

Investments continued to be made with a projected time horizon of more than five years. In an article published in the April 1972 issue of Fortune, Cub Harvey, the president of the New Horizons Fund since 1969, told “How T. Rowe Price Does It”: “Although I might wander across the floor to get a quote from the trading department, I could just as easily wait until the next morning and read the quote in the paper.” Very few, if any, so‐called performance funds were managed in such a relaxed manner in 1972. Most were run by a single superstar who spent his or her harried day in the trading room, selling stocks that appeared weak and buying those that seemed to be in an early uptrend.

Walter Kidd, an original founder and long‐term head of research, retired in 1972. By then, he had thoroughly instilled the T. Rowe Price method of performing research into all the analysts. This included at least annual on‐site visits with the top executives of the twenty or thirty companies for which an analyst might be responsible, phone calls to discuss important changes and new quarterly reports, and continuous monitoring via trade publications and brokerage reports. The analyst would also schedule visits with competitors. Although the companies might be located in pleasant cities like Atlanta or San Francisco, trips to visit them, as I well remember, were anything but pleasurable with Walter in command. Heavy leather‐strapped briefcases were carried for each company to be visited. These contained all the annual and quarterly reports since the last visit, SEC filings, selected financial data kept by the firm's statisticians, carefully clipped and filed items from newspapers and trade journals, and reports by Wall Street analysts. Walter even insisted that analysts include a 100‐watt bulb to replace the usual 20‐watt bulb in the hotel lamps of the cheap hotels we analysts were permitted to stay in. These powerful bulbs allowed us to properly absorb all this information late into the nighttime hours and develop a written agenda for the next day's meeting with management.

No more than two meetings would be scheduled per day. The evening before, it was always an early dinner, with the 100‐watt bulb still on after midnight. For most analysts, it was like preparing for a final exam at college in a tough subject. Questions were carefully written out and strategically placed in notes for the interview so that key points were asked different times from different directions. The focus was not only on financial projections, but also included an in‐depth discussion of products and sales and any important changes in management, what the CEO thought about when he woke up at three in the morning (still a favorite question, according to recently retired firm president and CEO James A. C. “Jim” Kennedy).

Meeting the top people was important, although the first meeting might be with the analyst's normal contact, such as the vice president of finance. Another key executive, such as the vice president of sales, would often be included later. Meeting the key decision maker, or CEO, at least annually, was often difficult due to his (CEOs were usually men at that time) busy schedule, but was a top priority of Mr. Price. As T. Rowe Price Associates grew larger and better known as an important shareholder with an excellent reputation for thorough preparation, it became easier for the research analysts to set up these interviews with top executives. Between clients and the funds, the firm's total position in a company's stock might exceed 10 percent of the total capitalization. Such large positions were quite common in the New Horizons Fund, where the companies were smaller.

These meetings were then written up for internal consumption in considerable detail. Patents were monitored and often discussed in these write‐ups, occasionally with the actual drawings. The last paragraph of a report was a carefully considered buy, sell, or hold recommendation, with the reasons spelled out in detail. The focus was, of course, on the longer term, with a poor short‐term outlook often a good reason to recommend buying the stock as it declined in price. These recommendations were an important consideration at bonus time.

While this in‐depth research did not change with the departure of Mr. Price or Walter Kidd, the major problem the firm had in the early 1970s was finding suitable growth companies selling at reasonable prices. The New Horizons Fund was closed, as mentioned, to new investors for nearly three years because of the inability to find suitably priced small companies for investment. Cub Harvey told Fortune in the same April 1972 article mentioned above, “If we had a sharp drop in the stock market, we would be in great shape.” In a speech Charlie Schaeffer gave in the summer of 1970 called “The Laser Beam Effect,” he predicted this overvaluation of growth stocks. Like atoms being squeezed in a strong magnetic field and rising to higher energy states, a relatively small supply of growth stocks would be squeezed to higher levels of valuation by the force of huge sums of money funding the rapidly increasing appetite of pension funds.

The deep recession of 1973–1975 temporarily cooled inflation. In 1976 the Consumer Price Index was “only” up 5 percent – still quite high compared to the 1960s. In 1976, in reaction to the weak economy, the Watergate scandal, and inflation, Jimmy Carter was elected to replace Gerald Ford as U.S. president. In July 1979, in a revolution sponsored by supporters of the Shia Muslim cleric Ayatollah Khomeini, the Shah of Iran was overthrown and forced to flee to Egypt. Partly in retaliation for Carter allowing the Shah's subsequent entrance to the U.S. for treatment of advanced lymphoma, a group of Khomeini supporters stormed the U.S. Embassy in November, taking more than 50 Americans as hostages. In response, Iran's oil shipments were cut off by the Carter administration. Although this only affected about 4 percent of the U.S. oil supply, it caused oil prices to rise to 90 dollars per barrel over the following 12 months. Consumers, remembering the oil embargo of 1973, again began to form lines at gas stations and to hoard petroleum products in tanks at home.

All of this contributed to the industrial world's focus on the weak American dollar. From the sidelines, in articles and memos, Mr. Price had been strongly recommending gold, and the metal climbed rapidly again, peaking on January 21, 1980, at $850 an ounce, a record that would hold for 26 years. Inflation around the world began to ramp up again. By March 31, 1979, the increase in the CPI was back into double digits, with a 10‐percent increase. A year later to the day, the CPI rose a record 14.8 percent.

Consumers began to anticipate inflation in their buying decisions. This created a positive feedback loop that drove inflation even higher. The actual cause for inflation in the 1970s was not well understood at the time, and even many years later there is considerable debate among economists. To Mr. Price, however, the reasons were not mysterious. He had written about them extensively. Fundamentally, he believed that the U.S. government was, once again, printing too much money. To him it was plain common sense (horse sense). It was obvious to him that printing dollars at a rate faster than the real growth of the economy will inherently cause the value of the dollar to decline and the CPI to commensurately increase. When Milton Friedman, the Nobel Prize–winning economist, wrote in his 1970 book, The Counter Revolution in Monetary Theory, “Inflation is always and everywhere a monetary phenomenon,” Mr. Price would likely have agreed, though there is no mention of Friedman in his writings.

These surplus dollars were created by out‐of‐control government spending. This caused a huge budget deficit of $74 billion in 1976 ($327 billion in 2018 dollars), a postwar record. As Mr. Price well understood, when faced with choosing between inflation or higher unemployment, the Fed would always choose the former. However, Arthur Burns, chairman of the Fed throughout most of the 1970s, noted: “‘Maximum’ or ‘full’ employment, after all,” he said, “had become the nations' major economic goal – not stability of the price level.” M2 money growth again accelerated to double‐digit rates, reaching an 11 percent growth in December of 1983, based on the Board of Governors of the Federal Reserve System, “Money Stock and Debt Measures.”

Jimmy Carter was swept out of office in a landslide vote for Ronald Reagan. The Californian assumed the presidency in 1981. Carter's popularity had been badly affected by the runaway inflation, but it was his weak performance in attempting to gain the release of the American hostages, during which eight American soldiers died, that also undermined his term (their eventual release occurred some months into Ronald Reagan's first term).

Carter, however, should get a lot of credit for appointing Paul Volcker as chairman of the Federal Reserve. Strong actions were needed and Volcker proved to be the individual to take them. On October 6, 1979, he began to rein in runaway inflation. Overnight, he switched Fed policy from targeting interest rates to focusing on the root cause of the inflation – money supply. The days of easy money quickly turned to the days of expensive credit. Loans at the prime interest rate carried an interest rate of more than 20 percent, 30‐year mortgages cost over 18 percent in interest, and 10‐year Treasuries paid a 15.8‐percent yield during 1981, according to the U.S. Treasury Department. Mr. Price was certainly not suffering with 50 percent of his money still in reserves at such interest rates.

The economy began to slow and unemployment to rise. Mr. Price had written in a September 1971 internal memo, “Current Beliefs about the Future, or Interpreting Current Events,” that voters “will not support any government in the near future which puts the control of inflation ahead of full employment and continued prosperity.” He was proven absolutely correct. None did, but when Volcker took such measures as an unelected academic, Mr. Price opposed his actions in “Economic Trends and Current Investment Policy” (July 20, 1981). It was not because he didn't believe this was what was needed to end inflation, but rather he thought that Volcker might be stepping too hard on the brakes. He felt that the economy would be seriously affected by 20‐percent‐plus interest rates. Business could not operate at such high interest levels – which were well above the return on capital for most companies. It is uncertain if inflation could have been stopped with a lighter touch, but clearly something had to be done quickly to stop what was rapidly becoming an uncontrollable situation.

Volcker came under tremendous criticism at the height of the resulting economic setback. Unemployment went back over 6 percent. The construction industry stalled, with rates for construction loans at more than 19 percent by October 1981. The House Majority Leader, James Wright, a Democrat, called for Volcker's resignation, and even President Reagan's Treasury Secretary, Donald Regan, directly criticized the Fed's position.

By paying no attention to the Employment Act of 1946 or to the 1978 amendment to that act, known as the Humphrey‐Hawkins Full Employment Act, Volcker had stopped the United States just short of the cliff. Inflation had peaked in March 1980, and began to decline into a long period of low inflation. The Dow Jones Industrial Average turned up in July 1982, with smart investors beginning to understand and appreciate Volcker's miraculous rescue. He set the stage for a vibrant economy that lasted nearly twenty years and ultimately put millions of Americans back to work.

It was clear to those of us who worked with him that Mr. Price had little use for economists generally. He particularly objected to the English economist John Maynard Keynes. He believed that his theories of deficit spending to stimulate the economy had done much to lead the UK and the United States down the path toward greater socialism, but had offered little to pull their economies out of recession. This was discussed in Chapter 9, and particularly in Mr. Price's memo “State Capitalism.” In a speech at a 2003 conference at the Federal Reserve Bank of Dallas, Ben Bernanke, the Fed chairman who would go through the financial crisis beginning in 2007, referred to Friedman's eleven key monetarist propositions. He pointed out that the efforts by economists to reduce unemployment by accelerating money growth “contributed significantly to the Great Inflation of the 1970s … after the Great Depression, the second most serious monetary mistake of the 20th century.” Bernanke noted that “the Great Inflation would simply not have been possible without the excessively expansionist monetary policies of the late 1960s and 1970s.” Mr. Price would have agreed.