The crisis of the 1970s: the Nixon shock, the oil shocks and stagflation

What did Nixon announce on 15 August 1971?

On the evening of Sunday 15 August 1971 President Richard Nixon announced a "New Economic Policy" on television. Prosperity without war, he said, required action on three fronts: creating more and better jobs, stopping the rise in the cost of living, and protecting the dollar "from the attacks of international money speculators". There were three measures. First, he directed Treasury Secretary John Connally to suspend "temporarily" the convertibility of the dollar into gold or other reserve assets; this was the closing of the "gold window". Second, he froze all prices and wages in the United States for 90 days. Third, he imposed an additional 10 percent tax on dutiable goods imported into the United States. The package is commonly called the "Nixon shock". Why the gold window could no longer be held open, and how the Smithsonian Agreement of December 1971 and the move to floating rates in 1973 followed, are covered in the event on the rise and fall of the Bretton Woods system; this event follows the crisis of the 1970s that the announcement opened. 1 2 3 4

The wage and price freeze was the first such control the US government had used since the Korean War. Its legal basis was the Economic Stabilization Act of 1970. The 90-day freeze was Phase I; on 22 October 1971 Nixon set up a Pay Board and a Price Commission to run Phase II, under the overall goals of a Cost of Living Council chaired by Treasury Secretary Connally. The controls went through further phases until 1974. The Federal Reserve's own historians judge that they only temporarily slowed the rise in prices while making shortages worse, particularly of food and energy. In August 1971 Nixon also put a ceiling on the price of oil; since demand was rising and domestic production falling, the low price encouraged consumption and deepened dependence on imported oil. 2 5 6 7

Connally became known for telling European finance ministers worried about the export of American inflation that the dollar "is our currency, but your problem." At home the announcement was a great political success: Americans believed the government was rescuing them from price gougers and from an exchange crisis they blamed on foreigners. The Dow Jones Industrial Average rose 33 points on 16 August, its largest daily gain to that date, and a New York Times editorial said, "We unhesitatingly applaud the boldness with which the President has moved." Nixon was re-elected by a landslide in 1972. Federal Reserve Chairman Arthur Burns had opposed closing the gold window but assured the President he would support the new programme fully, and while the controls were in force the Fed increased the money supply. Burns recorded in his diary a meeting at which Nixon fulminated against the press and demanded that every piece of economic news be given an optimistic face. The Nixon shock is widely considered a political success but an economic failure that brought on the 1973–1975 recession, the stagflation of the 1970s and the instability of floating currencies. 8 2 9

How did OPEC take control of the price of oil? {saudi-arabia} {venezuela}

After the Second World War the world oil market was dominated by the Anglo-American multinationals known as the "Seven Sisters". They ran all oil operations inside the producing countries, and the taxes and royalties paid to producing governments were calculated on the "posted prices" the companies announced. When in February 1959 the companies unilaterally cut the posted prices of Venezuelan and Middle Eastern crude by 10 percent, Saudi Arabia's Abdullah Tariki and Venezuela's Juan Pablo Pérez Alfonzo met weeks later at the first Arab Petroleum Congress in Cairo and demanded that the companies consult the exporters before changing prices. When the companies cut Middle Eastern prices again in August 1960, five countries, Iran, Iraq, Kuwait, Saudi Arabia and Venezuela, founded the Organization of the Petroleum Exporting Countries (OPEC) at a conference in Baghdad the following month, despite strong US opposition. 10

In its first decade OPEC was generally regarded as ineffective. Producers and companies split profits fifty-fifty, and if one member demanded too much the companies could simply slow production there and raise it elsewhere. The balance shifted around 1970. After Libya won a 58/42 split from Occidental in 1970, other members asked for the same, and the Tehran Agreement of 14 February 1971 and the Tripoli Agreement of 2 April 1971 raised posted prices and the producers' share. As the market tightened the risks of nationalisation fell, and a wave of nationalisations followed in Libya, Algeria, Iraq, Nigeria, Saudi Arabia and Venezuela. By the early 1970s OPEC members accounted for more than half of world oil production. 10 7

Conditions were changing on the consumer side too. US oil production peaked in 1970, and oil imports rose by 52 percent between 1969 and 1972. Through the 1960s crude stayed at $1.80 a barrel, so in real terms it got cheaper every year; this cheap oil underpinned the West's long prosperity after 1945. The Nixon shock hit the producers directly. Because oil was priced in dollars, the producers' real income fell when the dollar came loose from gold and lost value. In a joint communiqué of September 1971 OPEC said it would henceforth price oil in terms of a fixed amount of gold, but prices were slow to adjust. With the end of the Bretton Woods peg of $35 an ounce, gold rose to $455 an ounce by the end of the decade, so the great increases of 1973–1974 largely returned the producers' incomes to their former level in terms of commodities such as gold. 7 11

How did oil become a weapon in October 1973? {egypt} {israel}

On 6 October 1973 Egypt and Syria launched a surprise attack to recover the Sinai Peninsula and the Golan Heights that Israel had taken in 1967 (the Yom Kippur War). King Faisal of Saudi Arabia said he was willing to use the "oil weapon" if necessary to support Egypt. On 16 October an OPEC meeting in Kuwait City announced that the price of oil would go from $3.01 to $5.12 a barrel, and the next day the Arab producers of the Organization of Arab Petroleum Exporting Countries (OAPEC), a separate body made up of OPEC's Arab members plus Egypt and Syria, cut production by 5 percent and threatened an embargo against Israel's allies. The Saudi oil minister Ahmed Zaki Yamani later recalled that the king still wanted to give America a chance to stay out of the fighting. When on 19 October Nixon asked Congress for $2.2 billion in emergency military aid to Israel, Faisal called Yamani in that evening and dictated a total embargo on the United States. Libya proclaimed an embargo at once and Saudi Arabia and the other Arab producers followed the next day. The embargo was extended from the United States and the Netherlands to Portugal, Rhodesia and South Africa, and Arab production was eventually cut by 25 percent. 7 12 10 11

Prices soared even outside the embargoed countries. By November oil exports from the Middle East to the West were down by 60 to 70 percent, and producers that had not joined the embargo, such as Iran, Venezuela and Nigeria, raised output and sold at higher prices. At an auction by the Iranian state oil company on 16 December bids of $17 a barrel were made, and in late December OPEC raised the price again to $11.65 a barrel. The leader who pushed hardest for that increase was not Faisal but the Shah of Iran. Crude rose from about $3 a barrel before the embargo to nearly $12 in January 1974, a quadrupling. Daily life in the consuming countries changed. In the United States the price of gasoline rose 43 percent in a year and long lines formed at filling stations; the United Kingdom, West Germany, Italy, Switzerland and Norway banned Sunday driving. Japan, which imported 90 percent of its oil from the Middle East, ordered a 20 percent cut in oil and electricity use by its major industries. In Britain, which imported all its oil, a dispute by coal miners and railway workers came on top, and Edward Heath's government limited commercial electricity use to three days a week from 1 January 1974, the Three-Day Week. 7 11 13

Henry Kissinger flew to Riyadh in November to ask Faisal to lift the embargo and was refused. Defense Secretary James Schlesinger suggested seizing the oil fields of Saudi Arabia and other states, and on 21 November Kissinger publicly threatened "countermeasures" if the embargo was not lifted. The Saudis answered with threats of further cuts and of burning their oil fields, and the United States dropped military intervention for negotiations on Israeli troop withdrawals. The first Egyptian-Israeli disengagement agreement was signed on 18 January 1974, and once the prospect of talks between Israel and Syria appeared, the Arab oil ministers, Libya excepted, announced the end of the embargo on 17 March 1974. Since it did not force Israel back to the 1949 armistice lines, most scholars judge the embargo a failure; Daniel Yergin, on the other hand, said that it "remade the international economy". On 7 November the United States had announced Project Independence for energy self-sufficiency, and the Strategic Petroleum Reserve, a national 55-mile-per-hour speed limit and the International Energy Agency followed. 7 14 10

Where did the dollars earned from oil go? {saudi-arabia}

The dollars that oil exporters earned but could not spend at home came to be called "petrodollars", a word coined during the oil crisis of 1973. From 1974 through 1981 the combined current account surplus of the OPEC members came to $450 billion, 90 percent of it accumulated by the Arab states of the Persian Gulf and Libya. Ernest Mandel estimated the producers' income for 1974 alone at $75 billion. The money did not disappear. Oil-importing countries ran large current account deficits, and the exporters' surpluses were channelled back through Western capital markets to finance them. For this "petrodollar recycling" to work, the oil importers had to relax their capital controls, and Western capital markets began to grow exponentially. 15 16 7

One axis of the flow was the arrangement between the United States and Saudi Arabia. Three months after the embargo was lifted, in the summer of 1974, the two countries signed a wide-ranging agreement on expanded economic and military cooperation. In fiscal 1975 alone $2 billion in arms contracts followed, including 60 fighter jets, and a key part of the agreement was that the Saudis would price oil in dollars and invest billions of dollars in US Treasury notes. The arrangement is often described as a bargain in which Nixon and Kissinger, fearing a fall in demand for the dollar after the end of gold convertibility, traded military protection of the Saudi oil fields for dollar pricing. The exchange between the two countries that dates back to 1945 is covered in the entry on the oil-for-security deal. There is also a theory of "petrodollar warfare" that sees dollar oil pricing as a hidden driver of US hegemony, but critics argue that it adds only a tiny fraction to the demand for dollars. 17 15

The other axis was the banks. Billions of petrodollars were deposited with the big commercial banks of the United States, Europe, Switzerland and Britain, and in the process the Eurodollar market, a dollar market outside US regulation, grew rapidly. As the recession made corporate investment less attractive, the banks lent much of this money directly to the governments of developing countries, in Latin America such as Brazil and Argentina and elsewhere such as Turkey, which after the rise in oil prices were short of the dollars they needed to import oil and machinery. The IMF ran an "Oil Facility" in 1974–1976, funded by oil exporters, that lent to Italy, the United Kingdom and dozens of developing countries. The IMF estimated that the foreign debts of 100 oil-importing developing countries rose by 150 percent between 1973 and 1977, and its managing director Johan Witteveen said in 1974 that the international monetary system faced "its most difficult period since the 1930s". What became of these debts in the 1980s is covered in the event on the Third World debt crisis and structural adjustment. 15

In October 1974 Mandel read in this flow the emergence of "a new, autonomous Arab and Iranian finance capital". His examples were the Shah of Iran's purchase of 25 percent of the West German Krupp trust, Kuwaiti investment companies buying American and British real estate and shipping lines, and a Saudi state company building a steel plant with a multinational consortium. Noting that extracting a barrel of oil in the Middle East cost no more than 10 to 12 cents while it now sold for $11.65, he calculated that the division of surplus value, once 90 percent for the oil trusts and 10 percent for the local owning classes, then 75/25, 67/33 and 50/50, had now been turned around to 20/80. In his view what united the owning classes of countries as different as Iran, Nigeria and Venezuela was not a common political project but the chance of a major redistribution of the surplus value extracted on a world scale, at the expense of the imperialist bourgeoisie and to the profit of the bourgeoisie of certain semi-colonial countries. 16

Why did prices and unemployment rise together?

The oil embargo ended the long period of Western prosperity that had begun in 1945 and threw the world economy into its steepest contraction since the Great Depression. The US recession lasted from November 1973 to March 1975, and the Bureau of Labor Statistics estimates that 2.3 million jobs were lost, a post-war record at the time. British GDP fell by 3.9 percent, and West Germany had its largest post-war fall in 1975. In the 1973–1974 stock market crash the main indices of the future G7 lost at least 34 percent of their value in nominal terms and 43 percent in real terms, and the US market only returned to its 1973 level in August 1993. At the end of 1974 Mandel called it "the first generalized recession since the second world war", the first to strike all the great imperialist powers at once: between 1948 and 1968 the industrial cycles of different countries had been out of step, so a slump in one was offset by exports to others, but this time there was nowhere to export to. 7 18 19 20

What set this recession apart from earlier ones was that prices did not fall but jumped. "Stagflation", a portmanteau of stagnation and inflation, is high inflation together with stagnant growth and high unemployment. Post-war economics held that unemployment and inflation move in opposite directions: when demand is strong firms hire more and raise prices, when it is weak unemployment rises and prices settle. The Phillips curve described this relationship, and policymakers of the 1960s believed that permanently lower unemployment could be bought with modestly higher inflation. But a US economy with 1 percent inflation and 5 percent unemployment in 1964 had inflation above 12 percent and unemployment above 7 percent ten years later, and by the summer of 1980 inflation near 14.5 percent and unemployment above 7.5 percent. With both rising, policy was caught in a dilemma: fighting unemployment would drive inflation higher, fighting inflation would push unemployment higher. 21 6

Fed Chairman Burns explained in 1974 that the manipulation of oil prices and supplies "came at a most inopportune time": by mid-1973 wholesale prices of industrial commodities were already rising at more than 10 percent a year and industrial plant was operating at virtually full capacity. The prevailing view among policymakers was that "cost-push" inflation, arising from higher input costs such as wages and raw materials, was outside the reach of monetary policy; an economist presenting to the Federal Open Market Committee in 1971 said continuing cost increases should be regarded "as a structural problem not amenable to macro-economic measures". Western central banks cut interest rates sharply after the oil shock to encourage growth, a policy some now consider to have deepened and lengthened its effects. Milton Friedman and Edmund Phelps had warned in the late 1960s that once people came to expect inflation the Phillips curve would shift upward, and in the 1970s this critique became the springboard for monetarism and supply-side economics. 11 7 21 6

Why did Keynesian demand management lose credibility in Britain?

The Keynesian prescription is to raise aggregate demand in a downturn through government spending, tax cuts and lower interest rates, and so reduce unemployment. In the 1970s Britain met its limits more dramatically than any other country. In 1972 the Conservative Chancellor Anthony Barber's expansionary budget produced a brief "Barber Boom", followed by a wage-price spiral, high inflation and currency depreciation. Importing all its oil, Britain had to turn from now costlier oil to coal, in which it was self-sufficient, and this gave the miners' union immense leverage. Amid a miners' dispute after they rejected Heath's pay offer, the Conservatives lost the general election of February 1974, and Harold Wilson's returning Labour government settled the strike with a 35 percent pay rise. Labour offered a "social contract" under which the unions accepted voluntary wage restraint in return for measures to control the cost of living and higher social spending, and Chancellor Denis Healey's first budget raised food subsidies and pensions. Even so, inflation came close to 25 percent in 1975. 22 7 18 23 24

When James Callaghan succeeded Wilson as Prime Minister on 5 April 1976, sterling remained under pressure on the foreign exchange markets and by June had reached a record low against the dollar. To maintain the value of sterling, Healey asked the IMF for a loan of $3.9 billion, at the time the largest ever requested from the Fund. The IMF demanded large cuts in public spending in return, and the Cabinet split. The party's left, led by Tony Benn, put forward an Alternative Economic Strategy involving protectionism, which the Cabinet rejected. After tough negotiations the government reduced the cuts from £5 billion to £1.5 billion in the first year and £1 billion a year over the next two, and the loan was announced in Parliament on 15 December 1976. Only half of it was drawn, and it was repaid in full by May 1979. Healey later said that the main reason the loan had to be requested was that the Treasury had grossly overstated the public sector borrowing requirement. In parts of the Labour Party the move from "Healey Mark I", which had proposed a wealth tax, to "Healey Mark II", associated with government-specified wage control, was seen as a betrayal. 22 23 24

At that year's Labour Party Conference Callaghan said: "We used to think that you could spend your way out of a recession and increase employment by cutting taxes and boosting government spending. I tell you in all candour that that option no longer exists, and in so far as it ever did exist, it only worked on each occasion since the war by injecting a bigger dose of inflation into the economy, followed by a higher level of unemployment as the next step." Since every post-war government had put full employment first, the speech has been read as a repudiation of the Keynesian economics that formed the bedrock of the post-war consensus, and a precursor of monetarism with its priority on fighting inflation. Callaghan was never a full monetarist, however, for he rejected the larger spending cuts that would have raised unemployment. Wage restraint, which had worked reasonably well for four years, broke down when the government tried to hold pay rises to 5 percent in 1978, and in the winter of 1978–1979 the unions won higher pay through widespread strikes (the "Winter of Discontent"). Margaret Thatcher's Conservatives won the election of May 1979, and from the late 1970s neoliberalism largely replaced Keynesianism as the dominant paradigm. 23 25 22

What did the Third World demand? {algeria}

To poor countries that sold raw materials, the rise in oil prices looked like an example. At the UN's sixth Special Session in April 1974 the Algerian president Houari Boumédiène said: "The OPEC action is really the first illustration and at the same time the most concrete and most spectacular illustration of the importance of raw material prices for our countries, the vital need for the producing countries to operate the levers of price control, and lastly, the great possibilities of a union of raw material producing countries. This action should be viewed by the developing countries as an example and a source of hope." On 1 May 1974 the UN General Assembly adopted the "Declaration on the Establishment of a New International Economic Order" and its programme of action. The declaration said that the existing international economic order had been established at a time when most developing countries did not even exist as independent states and perpetuated inequality; it allocated only 30 percent of the world's income to the 70 percent of the world's population who lived in the developing world. The central forums of the discussion were the UN Conference on Trade and Development (UNCTAD), founded in 1964, the Group of 77 and the Non-Aligned Movement. 10 26

The principles of the New International Economic Order (NIEO) were the sovereign equality of all states and non-interference in their internal affairs; full sovereignty of each state over its natural resources and economic activities, with regulation of transnational corporations; a just and equitable relationship between the prices of raw materials exported by developing countries and the prices of goods exported by developed countries; and finance and technology transfer for industrialisation. Its reforms included an overhaul of the rules of trade, with international commodity agreements and a common fund for commodity price stabilisation, and a reform of the Bretton Woods monetary system, which had benefited the states that created it, above all the United States. It was a call for "trade not aid". On 12 December 1974 the General Assembly adopted the "Charter of Economic Rights and Duties of States" by 115 votes to 6 with 10 abstentions; it had first been proposed by the Mexican president Luis Echeverría at the third UNCTAD in Santiago, Chile, in 1972. On the producers' side, the OPEC Special Fund to help other developing countries was established in January 1976. 26 27 10

For the poor countries that bought oil, however, the 1970s were harsh. At the end of 1974 Mandel noted that India, Bangladesh, Pakistan and most of East and equatorial Africa had suffered "the cruelest fate since the end of the Korean War boom": in 1973 the cost of their food and fertiliser imports had risen by $5 billion, more than the $1.2 billion rise in the cost of their oil imports. Leaders of the oil producers made extravagant promises: the Shah launched a "Great Civilization" project to make Iran a First World nation by the 1990s, and Carlos Andrés Pérez of Venezuela his "Gran Venezuela". The US government rejected the NIEO almost immediately. The economist Harry Johnson criticised it for using central planning and monopoly power to extort income and wealth from the developed countries, and at the North–South Summit in Cancún in 1981 Ronald Reagan said private investment and free markets were the surest path to development. In the debt crisis of the 1980s the NIEO became very difficult to realise, and the Washington Consensus took its place; only parts survived, such as the Common Fund for Commodities, which came into force in 1989. 20 7 26

South Korea was hit hard by both oil shocks. Inflation jumped from 3.5 percent in 1973 to 24.8 percent in 1974, growth fell from 12.3 to 7.4 percent, and the trade deficit widened from $1 billion to $2.4 billion. The shock was the greater because industry was then shifting from light industry to energy-hungry heavy and chemical industries, and the economy only returned to normal in 1976. By the second shock of 1979 dependence on oil was even higher. Coming on top of the assassination of Park Chung Hee on 26 October 1979 and the political turmoil of 1980, it produced in 1980 the first negative real growth (−2.1 percent) since industrialisation began, with inflation at 28.7 percent. Total foreign debt swelled from $20.3 billion in 1979 to $46.8 billion in 1985, making South Korea one of the world's five largest debtors. 28 29

What did the oil price explosion mean for the socialist bloc? {soviet} {poland}

For the Soviet Union, one of the world's largest oil producers, the oil price explosion was a windfall. As world prices quadrupled in 1973–1974 and rose again in 1979–1981, the energy sector became the chief driver of the Soviet economy and covered multiple weaknesses. Premier Alexei Kosygin is recorded as telling the head of oil and gas production: "things are bad with bread. Give me 3 million tons [of oil] over the plan". Yegor Gaidar later wrote that the hard currency from oil exports stopped the growing food supply crisis, increased imports of equipment and consumer goods, ensured a financial base for the arms race and nuclear parity with the United States, and permitted risky foreign-policy actions such as the war in Afghanistan. Scholars also see the same money as masking the need for reform: Kosygin's reform attempts, halted in 1971, gave way to a more modest second reform that was halted because of growth based on selling oil, and a reform of 1979 failed in an economy already "addicted" to high oil prices. The slowdown of these years is covered in the entry on the Era of Stagnation. 30 31

Things were different for the Eastern European allies. After the oil crisis the Soviet Union raised energy prices within the Council for Mutual Economic Assistance (Comecon), and since it could not meet all its allies' demand, Eastern European governments had to buy oil from the Middle East at rising world prices, crippling their balance of payments and accentuating their other economic shortcomings. High oil prices allowed the USSR to support the struggling economies of the bloc in 1974–1981, and the loss of that income in the oil glut of the 1980s contributed to the bloc's collapse in 1989. Some Eastern European countries borrowed in exactly these years from Western banks flush with petrodollars. Poland's Edward Gierek planned to re-equip Polish industry and import consumer goods with money borrowed mainly from the United States and West Germany, and the debt reached $23 billion by 1980. Romania's growth was also fuelled by foreign credits in the 1970s, until its foreign debt peaked at $11–12 billion. What followed is covered in the entries on the Polish economic crisis of 1980–1981 and on Romanian debt repayment and austerity. 7 15 32 33

How is the crisis of the 1970s explained?

Mainstream economics and central banks today explain the period mainly as a failure of monetary policy. The Federal Reserve's historians write that there is little debate that the source of the "Great Inflation" of 1965–1982 lay in Federal Reserve policies that allowed an excessive growth in the supply of money. The motive was faith in the Phillips curve and the pursuit of full employment; the means was the collapse of Bretton Woods, the dollar's last link to gold; the opportunity came from the fiscal imbalances of the Vietnam War and the Great Society, two energy crises, and data that overstated potential output and understated the unemployment rate consistent with full employment. In this account the oil embargo was just one of many factors, and Burns himself listed in 1979 the loose financing of the Vietnam War, the devaluations of the dollar in 1971 and 1973, the world boom of 1972–1973, the crop failures and surge in food prices of 1974–1975, and the extraordinary rise in oil prices together with the sharp slowdown in productivity. 6 11

Keynesians separate aggregate demand from aggregate supply. Monetary and fiscal policy can stabilise fluctuations in demand but are not very useful against supply shocks such as a jump in oil prices, and an adverse supply shock can by itself give rise to stagflation. The Friedman–Phelps critique of inflation expectations, aimed at first against early Keynesianism, was gradually accepted and incorporated into New Keynesian models. The political economists Jonathan Nitzan and Shimshon Bichler explain stagflation differently, as a phase of "differential accumulation" in which dominant firms raise their prices faster than their rivals to increase their relative profits. 21

On the Marxist side, the first explanation to appear in the early 1970s was the "profit squeeze". In British Capitalism, Workers and the Profit Squeeze (1972) the Oxford economists Andrew Glyn and Bob Sutcliffe showed that the profit rate of British companies was falling. In theories of this kind, continued accumulation pulls up the demand for labour and so raises wages, and if wages rise "too high" the profit rate falls and a recession follows. The labour unrest of the late 1960s was the background. In Italy, as migration from the South dried up and the North approached full employment, workers gained leverage, and the great strikes of 1969–1970 known as the "Hot Autumn" swept the northern industrial centres; the British miners' dispute of 1974 was read in the same light. Glyn was a member of the Trotskyist Militant tendency in the 1970s and later a consultant to the National Union of Mineworkers. 34 35 36 20

Ernest Mandel set the crisis in a longer movement. He called the 1974–1975 recession "a classical crisis of overproduction" and said that laying the blame on the "oil sheikhs" or the trade unions was ideological. Citing statistics for Britain, the United States and West Germany, the British figures taken from Glyn and Sutcliffe, he argued that the fall in the rate of profit clearly antedated the oil price rise after the October War of 1973, and that the oil price increases accounted for an inflation rate of no more than 2 percent in the imperialist countries. In Late Capitalism (1972) and his Cambridge lectures of 1978 he held that capitalism goes through "long waves" of faster and slower growth lasting 20 to 25 years. The long post-war expansion, nourished by war and reconstruction, by the rise in the rate of exploitation that fascism and the war had allowed, and by the "third industrial revolution", had been exhausted by the rise in the organic composition of capital and the stagnation or decline in the rate of surplus value after the long period of full employment. Unlike Kondratiev, however, he did not think recovery came automatically: it depended on state policy and on the outcome of class struggles. The account rests on the law of the tendency of the rate of profit to fall. 20 37 38 39

Robert Brenner looked to competition rather than wages. He traced the "long downturn" after 1973 to a deep and lasting decline in the rate of return on capital investment from the end of the 1960s, and stressed that the profit rate failed to recover despite the huge drop-off in the growth of real wages. The main cause, in his view, was a persistent tendency to overcapacity in global manufacturing. One new manufacturing power after another entered the world market, Germany and Japan, then the newly industrialising countries of East Asia and China, producing the same goods as the earlier developers only cheaper, so that supply outran demand in one industry after another and forced down prices and profits. The squeezed corporations did not leave their industries but held their place by speeding up investment in new technologies, which only made overcapacity worse. 40

How did the second oil shock of 1979 bring the 1970s to an end? {iran}

The second shock came from Iran. In November 1978 a strike by 37,000 workers at Iran's nationalised refineries cut production from 6 million barrels a day to about 1.5 million. On 16 January 1979 Shah Mohammad Reza Pahlavi left the country and Ayatollah Khomeini became the new leader. Iranian output fell by 4.8 million barrels a day, 7 percent of world production at the time, by January 1979, but Saudi Arabia and other producers raised output, so the loss in world supply was only about 4 percent. Even so, crude more than doubled over the next twelve months to $39.50 a barrel: the disruption prompted fear of further disruptions and speculative hoarding, and demand from a booming world economy was strong. Lines formed again at American filling stations. President Jimmy Carter began a phased deregulation of domestic oil prices on 5 April 1979 and appealed for energy saving in his "Crisis of Confidence" speech of 15 July. When the Iran–Iraq War broke out in 1980, world production fell by a further 7 percent. 41 42

This time the American monetary authorities reacted differently. The Fed raised the federal funds rate from 6.9 percent in April 1978 to 10 percent by the end of the year, increases that historians now see as timid and insufficient against inflation that had already become entrenched. In August 1979 the Carter administration appointed Paul Volcker, president of the Federal Reserve Bank of New York, as Fed chairman; when he took office inflation was running above 11 percent a year. In October 1979 the Federal Open Market Committee announced that it would target the growth of reserves rather than the federal funds rate. This turn, putting the fight against inflation ahead of full employment, and the high interest rates and recession it brought are covered under the Volcker shock. High interest rates and the oil glut of the 1980s together drove the countries that had borrowed petrodollars in the 1970s into the debt crisis. OPEC's share of the world market fell from about 50 percent in 1979 to under 30 percent in 1985, and in the mid-1980s the price of oil fell below $10 a barrel. 42 6 10 7