Topic 6 Flashcards
(153 cards)
1
Q
how much did income per person grow over golden age
A
3-4%
2
Q
labour productivity in golden age
A
grew twice as fast as before, associated with a rapid and sustained rate of growth of capital stock
3
Q
international trade during golden age
A
unprecedented growth in the volume of international trade, and a marked increase in the rate of growth of manufactured goods produced and internationally traded
4
Q
average unweighted growth rate for six largest advanced capitalist countries between 1950-1973
A
4.4%
5
Q
growth rate for period 1913-1950
A
1%
6
Q
growth rate for period 1973-1989
A
2.2%
7
Q
government expansion in golden age
A
large expansion of government in which a Keynesian approach to policy intervention was adopted by governments
8
Q
who dominated the capitalist world in this era, and what was the impact
A
US, and this established an international economic order that facilitated the golden age
9
Q
how much had the populations of major cities in japan fallen by late 1945
A
by about half
10
Q
germany had a shortage of how many houses after the war
A
16 million
11
Q
how many people left tokyo to try buy food in the countryside in September 1945
A
3 million
12
Q
which cities saw starvations deaths in tens of thousands
A
Berlin, Vienna, Warsaw and Budapest
13
Q
how many refugees by 1948 came to Germany’s Western occupied zones and where from
A
8 million from Poland, Czechoslovakia and the Soviet zone of east Germany
14
Q
how many refugees from Japan’s Asian empire returned home
A
six million
15
Q
how much did Japan’s labour force increase by
A
15%
16
Q
rise of labour force in British and American zones of Germany
A
7%
17
Q
how much did labour force increase in US
A
by 15% as military personnel return to civilian life
18
Q
how much did labour force increase in UK
A
5%
19
Q
railway damage in Germany
A
less than 10% of railways were operational with nearly 2400 rail bridges, 10,000 locomotives and 100,000 wagons destroyed. however, with repairs, nearly 90% of the railway system was operational by early 1946
20
Q
railway damage in France
A
only 50% of the railway was operational but was back to full operation by early 1946
21
Q
railway damage in Japan
A
railway system was not much affected by war as the US had concentrated it bombing on cities, war industry and shipping. 80% of merchant fleet destroyed
22
Q
post-war coal shortage
A
european coal production about 70% of pre-war levels
deterioration in mining equipment and exhaustion of miners
coincided with terrible winter in 1946-47
23
Q
when did coal production nearly recover
A
by mid-1947 consumption reached 90% of pre-war level
24
Q
Japanese post-war coal production
A
Japan coal production in late 1945 was so low that there was not sufficient supply to run the railways. By 1947, production returned to pre-war levels
25
impact of food shortages
led to tens of thousands of deaths and undermined the productivity of workers across the economy
26
reasons for food shortages in Europe
due to scarcity of agricultural labour, insufficient availability of fertilisers, loss of livestock, dilapidated farming equipment and poor weather
27
reasons for food shortages in Japan
lack of food imports, comprising about 20% of pre-war calories
also poor distribution of food by government so cities suffered most
28
obstacle to post-war recovery in Europe and Japan
lack of managerial control to reorganise production that arose from worker occupation of factories
29
basis of wider labour movement in germany
councils that were ineffective control, with management discredited or having disappeared
30
why did the labour movement grow strongly in japan
after trade unions were made legal by the occupying authority
31
impact of Japanese labour movement
led to production control struggles at numerous enterprises to remove management closely associated with a broader political demand for the removal of key government officials associated with the militarist regime
32
workers movements in France and Italy
played a leading role in the resistance to German occupation and pursuing fascist collaborators. controlled many firms via workers committees, sidelining often discredited management
improved workers pay and conditions and were part of a larger leftist movement that demanded socio-economic and political changes
33
US labour movements
strikes increased in late 1945/46 as firms began to cut overtime and lay-off workers in response to a reduction in the military-based demand for goods. led to govt intervention in some key sectors to settle disputes and end the strikes
34
British labour movements
trade unions acquired considerable powers at the shop-floor level during the war when there was a strong demand for workers. the pent up demand for organised labour was largely defused by the election of the labour government in 1945
35
main post-war objectives of the US
ensure its access to overseas export markets and freedom to invest abroad to obtain raw materials needed for its industry
36
Anglo-US loan
loan of $3.75 billion to Britain for reconstruction to replace lend lease
37
US policy for economic reconstruction of Western Europe and Japan
didn't have one
appeared intent on weakening their ability to recover including imposing reparations
38
instructions to General McArthur, head of Japanese occupying authority
not to assume responsibility for the economic rehabilitation of Japan or the strengthening of the Japanese economy
39
central policies of occupying power of Japan
break up of Zaibatsu, believed that these undermined democracy and helped create the environment for militarist takeover
guarantee the right of workers to organise unions and to bargain collectively with the right strike - to tilt the bargaining power towards workers
40
directive on economic policy to US occupying authority in Germany
no steps looking toward rehabilitation of Germany or designed to maintain or strengthen the German economy
41
main policy of occupying authority in Germany
break up large industrial cartels, chiefly by deconcentrating the banks
42
when and how was the cold war formally launched
12 March 1947 by President Truman in a speech to congress
43
Truman Doctrine
it must be the policy of the US to support free peoples who are resisting attempted subjugation by armed minorities or by outside pressure
44
first example of use of truman doctrine
military aid to Greece and Turkey
45
Marshall plan - when and what
5 June 1947 - provide ongoing support to economic recovery of Europe
46
new US policy on reconstruction of Europe and Japan 1947
now intent on maintaining aid and assisting in the reconstruction of occupied countries as part of its cold war against the Soviets
47
Potsdam Conference dates and what happened
July-August 1945 - tensions first came to the surface as Truman became distrustful of Stalin's intentions in Eastern Europe
48
Secondary motivation for the Marshall Plan
a realisation that European economic reconstruction was in the best interests of the US economy. Without recovery and growth in Western Europe, the demand for US exports would fall off, compromising America's post war growth. European recovery was needed to create conditions conducive for overseas business investment by US firms
49
Why was it relatively easy for ex-service personnel to absorb into civilian employment
a spurt in pent-up consumption finance by wartime saving and an increase in European export demand that countered the decline in government military spending
50
Net exports as %GDP in US 1946 and 47
3.7% of GDP in 1946 and 5.4% by 1947
51
Marshall Plan
extended and enlarged the aid to European countries so that they could continue to import the necessary materials from the US to speed up their economic recovery
52
what did the marshall plan mark
the US determination to support European reconstruction and improve living conditions in order to eliminate the political vulnerability of Western Europe to communist influence
53
what specific problem (aside from like communism and stuff) did the marshall plan aim to rectify
Whilst there was a ready supply of food and materials on world markets, Western European economies did not have the US dollars to buy them
54
how much aid was given out under the marshall plan
$13 billion over four years
55
how did UK and western European countries respond to marshall plan
by establishing the Organisation of European Economic Cooperation to devise plans for reconstruction and to supervise the distribution of aid among the 18 European recipient countries
56
Impact of OEEC
became a crucial vehicle for removing trade restrictions between Western European countries and in the promotion of greater integration and cooperation
57
1949 change to marshall plan
US made Marshall aid conditional on greater intra-European trade so pressuring OEEC members to make an agreement for freer intra-trade
58
Stats on intra-european trade 1950 and 1959
By the end of 1950, 60% of private intra-European trade had been freed, rising to 89% by 1959
59
How much did western European industrial productivity rise between 1947 and 1951
40%
60
Success of the Marshall Plan
enabled its nations to relax austerity measures and rationing and to alleviate poverty and discontent
achieved greater intra-European trade that enabled economisation on the use of scarce US dollars
put the European nations structurally on the path of export-based growth, promoting greater industry specialisation and thereby productivity
fostered greater Western European integration and cooperation, laying the seeds for the European Economic Community
Facilitated the chief Bretton-Woods aim of multilateral trade
61
important task of policy in Western Europe and Japan after 1947
to restore competitiveness by bringing down the high rate of post-war inflation borne of persistent shortages and to increase labour productivity
62
policies to bring down inflation
deflationary financial policies, along with measures to weaken the power of the labour movement
63
major benefit of policies to bring inflation down after 1947
re-imposition of managerial control over production, largely achieved by dismissing workers and weakening union power, facilitating higher productivity. resulted in increasing profits, which given tight credit conditions, enabled them to reorganise production, invest in new capital equipment and expand capacity consistent with greater opportunities for specialisation
64
deflationary policies in Germany 1948
new revalued currency was created called the Deutchmark
national debt was cancelled and all manufactured goods were freed from price controls
price controls were retained for food, utilities, transport and rent, whilst wage determination was subsequently freed from control.
these measures caused a collapse of the black market and products began appearing in retail stores. profits ncreased
65
impact of a deflationary policy stance in Germany
created higher unemployment, weakened the bargaining power of trade unions and enabled a major rationalisation of industry that markedly increased productivity
66
post-war recovery in Japan
slow with economy floundering
relied on US aid for imports, so the economy suffered from food shortages, high rising inflation with a flourishing black market economy, low real wages and growing labour unrest
67
impact of US post-war recovery policy in Japan
imposing a punitive peace, to demilitarise the country and eventually extract reparations inhibited the Japanese government from dealing with these social and economic issues. Prohibitions placed on heavy industry and the Zaibatsu dissolution as well as removing leading businessmen tainted by war involvement, tended to disperse capital and undermine managements control over the economy
68
the dodge line
nine point stabilisation program proposed by Joseph Dodge to arrest inflation, regulate credit and impose budgetary discipline
69
Some points in Dodge Line
balanced budget measures such as cutting payrolls, subsidies etc
wage and price controls
longer hours of work and mass lay-offs to weaken the union movement
70
impact of Dodge Line
induced stagnation, deflation and high unemployment in 1949, it did check inflation and put management back in charge of production, restoring profitability and labor productivity in 1950 and 1951
71
Devaluations in 1949
concerned with widening trade deficits of the European countries and Japan with the US, US treasury policymakers believed that with their labour movements in retreat it was timely in 1949 to devalue their exchange rates. A downturn in the US had led to a serious deterioration in the UKs reserves placing upward pressure on its interest rates
72
1949 devaluation of pound
30% devaluation against USD
73
1949 devaluation of franc and Deutschmark
20%
74
1949 devaluation of lira
10%
75
concern for US that underpinned marshall plan
labor unrest building which had the potential to destabilise the establishment of democratic institutions and national government. there was a concern that independent nationalist movements may reermege which could bring them within the Soviet orbit and politically isolate the US. hence, recovery without US assistance was seen as a long term threat to US interests
76
Turning point for post-war growth
Korean War
77
Korean War dates
1950-53
78
average rate of growth in US in 1950 and 51
9%
79
economic impact of Korean War
provided a timely stimulus to production in Europe and Jaoan. The export growth, particularly for West Germany and Japan, gave an import impetus to inestment in the installation of more technologivally efficient capital equipment. it also led to an expansion in employment and income that gave impetus to greater consumption spenidng
80
commodity boom as a result of Korean War
USD prices of wool, rubber, tin, cotton and other basic materials increased by nearly 40%
ToT of commodies against manufactures increased 30% giving stimulus to commodity producing countries such as Aus, Canada and Argentina. Also led to sharp increase in inflation in 1951 and 1952
81
Korean war inflationary boom
substanitally increased the profits of firms, providing a financial basis for subsequent business investment
82
growth in US in second half of 50s
decline in growth due to a slackening of demand as the Korean War and rearmament spending subsided
83
Kennedy Johnson fiscal expansion
1960s - associated with social programs and then Vietnam War saw the US grow substantially faster pulling the rest of the world with them. Again the European countries, especially Germany, and Japan grew at a faster rate on average
84
Reasons for Sustained growth in the golden age
Expanding role of government
Keynesian demand management policies
High Productivity Growth
Unprecedented Consumption Growth
Unprecedented Growth of international trade
85
influence of US on golden age growth
US set the pace of demand-led growth during the golden age, and world trade and output in western capitalism expanded and contracted with the US. so while fiscal policy intervention to stimulate activity in the US was less than France, Italy and UK, its effects were globally greater because of its sheer size
86
Export growth of France, Germany, Italy, Japan, US and UK 1950-1973
France 8.2%
Germany 12.4%
Italy 11.7%
Japan 15.4%
US 6.3%
UK 3.9%
87
what is strong export growth during golden age a reflection of?
the strong growth of domestic demand in all the advanced countries as well as the possibilities provided by the post-war system of multilateral trade
88
role of government 1950-73
expanded with government spending and taxation revenue rising as a percentage of GDP. Major area of expansion was in social welfare, in which coverage for involuntary unemployment and aged pensions was considerably widened, especially in Europe
89
Major innovation in Britain's post-war welfare system
development of NHS which set a standard for European health systems
90
rise in government civil expenditure 1952 to 1973
rose from 15% to 24% of GDP
91
government investment 1952 to 1973
remained stale at about 3% of GDP over the period
92
government defence spending 1952 to 1973
declined from 10% to 4%
93
two ways the expansion in welfare systems contributed to a higher social propensity to consumer and therefore stronger growth in consumption
larger social safety net encourage greater consumption over saving, especially fore retirement
a more equal distribution of income
94
fiscal policy influence on long-term demand
appears fairly neutral, as average fiscal balance was close to zero - underlies how the governments tended to fund their expenditures with increased taxation over the long run
95
stimulatory contribution of fiscal policy
appears to be a ratcheting effect associated with the expansion of government of the advanced countries in which increases in government spending, when followed by stronger growth and taxation revenue, gave impetus to further increases in spending, and so on. this gave fiscal policy a stimulatory bias that was probably greater than simply the balanced-budget multiplier effect of a growing public sector
96
fiscal expansion in which sectors supported consumption growth, and in turn promoted growth in private investment and how
welfare and other social services
directly contributed to higher private consumption by raising the incomes of the lower-paid and disadvantaged but indirectly by strengthening the bargaining power of organised labour to extract higher real wages
97
average budget deficit of US 1950-1979
0.3% of GDP
98
when was fiscal policy in US slightly contractionary
After the Korean War until the end of the 1950s
99
major source of demand stimulation in US
US government defence spending which involved considerable funding of scientific and technological research that contributed to commercial innovation. Korean and Vietnam Wars both significantly contributed to growth during this age
100
US expenditure abroad total 1950-67
$95 billion of which $44 billion was associated with military spending and cold war
101
effect of US expenditure abroad
provided direct ongoing stimulus to other advanced economies, and undeveloped economies, though this usually came with economically damaging conflict
supplied USD to other advanced countries which relieved earlier shortages and helped them accumulate reserves need to stabilise their exchange rates
102
bretton woods monetary policy
monetary policy of Federal Reserve Bank of US called the tune on worldwide interest rates and the monetary policies of other advanced countries were often dictated by the needs of external balance and maintaining exchange rate stability
103
average short-term funding rate of Federal Reserve Bank 1940 vs 1950 vs 1960
1.2% in 1940s
2.2% in 1950s
5.9% in 1960s
104
Long term rates on US govt securities 1940s, 50s, 60s
2.3% in 1940s
3% in 1950s
4.5% in 1960s
105
interest rates until 1960s
remained relatively low until 1960s when inflationary pressures began to cause central banks to adopt tighter monetary policies
106
objective of Monetary Policy in US in 1940
concerned wholly with keeping interest rates as low as possible to refinance Federal government war debt and to minimise debt-servicing costs whilst inflation was kept in check by rationing and price controls
107
Monetary Policy in US after 1951
In 1951, the Federal Reserve Bank broke with Treasury and thereafter conducted monetary policy more independently with the main purpose of countering cyclical fluctuations in the economy and maintaining price stability
108
interest rates up until 1965 US
remained below 4% overall providing a stimulus to residential construction investment and credit-financed spending on consumer durables
109
interest rates 1965 to 73 US
interest rates rose to above 6% as the Federal Reserve tightened monetary policy to counter building inflationary pressures
110
constraint on independence of MP for countries other than US
need to maintain an external balance under the fixed exchange rate regime of Bretton Woods
111
why did the UK want to sustain the cheap money policy after WW2
to minimise the government's debt-servicing costs and to promote domestic expenditure and economic recovery.
However, in 1949 when American lend-lease credit dried up and balance of payments pressures emerged the Bank of England was compelled to abandon low interest rates to support the sterling
112
What was a constraint on the UKs growth during the golden age and why
The balance of payments. Its large foreign borrowing from the US during the war and for post-war recovery and loss of export competitiveness chronically weakened the countries balance of payments
113
how did stop-go policies in the UK lower the trend of growth
when the British economy grew at a pace that kept unemployment low, import demand led to external imbalance and a loss of reserves that compelled the Bank of England to raise interest rates to defend the sterling and avoid a currency crisis.
114
labour productivity, productivity growth in golden age
historically high productivity growth associated with high investment growth. labour productivity growth was typically more than double for most advanced economies, except in US where it was similar to before
115
Major cause of productivity growth
European countries and Japan adopted American techniques, especially in manufacturing.
growth of international trade enabled the most competitive firms to capture a larger global market and derive cost efficiencies from larger scale production. Facilitated greater specialisation
116
rate of capital formation in manufacturing of advanced countries for period 1952-1973 - average, Japan, germany, italy, US
Average - 4.8%
Japan - 11.9%
Germany - 7.4%
Italy - 5.6%
US - 3.2%
117
what did the great expansion in manufacturing reflect
reflected the growth in spending on consumer durables and housing during a period in which affluence spread widely to the population mass. Key manufacturing industry was automobile production
118
what made the growth of investment possible?
impressive growth in consumption which was made possible by growth in household income
growth in household income was made possible by high labour productivity which translated to real wage growtj
119
besides strong productivity growth and greater capacity of wage-bargaining to capture a share of productivity gains, what other factors promoted consumption growth
an equitable distribution of income facilitated by the taxation and welfare system
widening of the social security safety net with greater public funding of health, education and retirement
the greater availability of mortgage and consumer credit finance to purchase homes and consumer durables
low unemployment conditions ensured a high rate of employed workers and high wage incomes as well as strengthening wage-bargaining power
120
Convergence of advanced economies
European countries, Japan and some other smaller countries caught up to the UK and the US
The living standards of Germany, France, Italy and Japan all converged on that of the US by the early 1970s as a result of faster economic growth
121
what allowed for the convergence process to occur
involved a process of technological catch-up by the more backward countries whose productivity growth was more superior. from a demand led perspective this process could only occur with the expansion in demand made possible by the postwar opening up of multilateral trade which gave these countries access to the lucrative US market
122
weakening of the US Domination
process of convergence naturally involved a weakening of the US domination over the world economy.
123
US % output of all advanced countries 1950 to 1970
nearly 60% in 1958 but declined to below 50% by 1970
124
beginning of the trade liberalisation process
opening up of multilateral trade by the US under Bretton Woods after the War
125
series of multilateral agreements that progressively cut protection and tariffs
Reduction in tariff barriers occurred after the formation of the European Economic Community (EEC) in 1957
The establishment of EFTA (European Free Trade Association) by non-EEC countries (including the UK) gave impetus to lower tariffs
The Kennedy round of GATT trade negotiations finalised in 1967 led to the average rate of tariffs on manufactures cut by one-third
126
proportion of trade which attracted tariffs of less than 15%
increased from 54% to 85% in the USA, from 37% to 85% in the UK and from 71% to 97% in the EEC.
127
average growth rate of world trade between 1950 and 73
grew at an average rate of about 10% - double the growth in world production
128
when did the golden age end
1973
129
what did the end of the golden age coincide with?
first large hike in world oil prices instigated by OPEC
130
what happened in 1974 and 75
most advanced countries experienced stagflation with increasing unemployment and inflation
with growth half that of the golden age, high rates of unemployment and inflation persisted throughout the remainder of the 1970s
131
what was a major catalyst for the decline in growth performance of major economies?
the oil price hike of 1973
132
other major factors that brought the golden age to an end
breakdown of Bretton Woods in the late 1960s, collision between unrealistic wage expectations of labour, declining labour productivity and rising interest rates as inflation crept up
133
how did stagflation change the objective of policymakers
changed the objective of policymakers from full-employment output to low inflation
134
Smithsonian Agreement date and what did it do
December 1971, enabled a valuation of the US Dollar, marked the end of the Bretton Woods system
ten major capitalist powers agreed to a new alignment of fixed exchange rates in which the US pledged to peg the dollar at $38 per ounce of gold with 2.25% trading bands and the other countries agreed to revalue their currencies against the dollar.
135
what marked the end of the Bretton Woods system
Smithsonian agreement in December 1971 which enabled a devaluation of the US dollar
136
Effect of Smithsonian agreement
exchange realignment failed to correct fundamental balance of payments imbalances and by March 1973 the exchange rate of Japan and the European countries were floated. Within a decade all advanced countries had adopted a floating exchange rate
137
Causes of the breakdown in Bretton Woods
can be traced back to original defects when the system was established in 1944. Underlying supposition that the US was the absolute dominant economic power and when that dominance faded, the major weakness of Bretton Woods was revealed: namely that the onus of adjustment to external imbalance was thrown on the deficit country, imposing a deflationary bias
138
collapse of bretton woods as an outcome of its success
may be seen as an outcome of its success in nurturing the post-war recovery and impressive growth of the European countries and Japan. created the conditions for liberal trade so that these countries could expand their exports as the US played the major role of generating world demand. however this involved the US running persistent BoP deficits
139
US BoP deficits
the US external deficits were not actually the result of trade deficits. On merchandise trade the US ran a surplus of $70 billion and received net interest and dividends on overseas investment of $60 billion from 1950-67. It was government expenditure abroad, much for military purposes, and the outflow of capital for private investment abroad that created its deficit of $42 billion from 1950-67
140
Impact of the continuation of US BoP deficits
the central banks of other advanced economies continued to accumulate large stocks of US dollars whilst the US stocks of gold reserves significantly declined. By 1968 the US gold stock would not have been able to convert 40% of the dollars held abroad in reserves.
141
USD under pressure
the usd price of gold of $35 per ounce came under pressure by speculators as the stock of US dollars increased in relation to the gold stock. In response the US placed pressure on foreign central banks not to convert dollars into gold and established the gold pool into which all countries, not just the US, would supply gold to stabilise private market gold
142
measures imposed by the US to protect the US dollar by curbing capital outflow
in 1963 an interest equilisation tax was imposed to reduce purchases of foreign bonds and shares
in 1965 US bank lending to foreigners was curtailed
in 1968 US multinationals were required to raise funds abroad to finance their overseas investments
143
Special Drawing Rights
to further relieve pressure on the US dollar the US agreed in 1968 and implemented in 1970 a system of SDRs which gave countries credit at the IMF fixed in value to gold and earning an interest rate of 1.5% which could be used to settle balance of payments deficits. The paper gold was intended to augment gold reserves in external adjustment to alleviate the demand to convert the USD to gold
144
devaluation of the USD
as the economy grew in the late 1960s the resulting demand pressure on productive capacity also caused a steady increase in the US inflation rate.
Maintaining the value of the dollar became increasing untenable. The drain of US gold reserves continued such that in 1968 the Gold Pool collapsed. Speculation against the dollar intensified as US capital flowed into foreign securities.
The adoption of a more permissive monetary policy by the Federal Reserve in 1971 induced massive capital outflow
145
President Nixon response to crisis
President Nixon responded to the crisis in August 1971 by imposing 90-day wage and price controls, a 10% import surcharge and suspending convertibility of the dollar into gold
146
US Devaluation of the dollar 1973
In February 1973 the US bowed to reality and devalued the dollar by a further 10% to restore its international competitiveness, shortly followed by Japan and the European countries floating their currencies. This ended Bretton Woods (and the Smithsonian Agreement) and brought in the era of floating exchange rates. It represented the first step toward giving more prominence to using monetary policy to curb inflationary pressures.
147
productivity growth in the last few years of the golden age
significant slowdown in productivity growth other than in manufacturing in all the advanced capitalist countries. The slowdown was greater in the US. This occurred even though the capital-labour ratio increased, indicating a greater rate of mechanisation
148
Three major factors for slowdown in productivity growth in the US
a slowdown in technical innovation in which the technical frontier in manufacturing was pushed forward less rapidly
a greater underutilisation of capacity because of the expansion of capacity in the mid-1960s
a constraint on employers better reorganising the production process and reduction in worker intensity because of opposition by stronger unions
149
organised labour movements in the late 60s
strengthened by low unemployment, organised labour began to pursue more ambitious wage increases and improved work conditions in the late 1960s. From 1968-71 Europe, including the UK experienced a wave of strikes which won workers large wage increases
This labour unrest reflected a breakdown in the consensus between labour and capital that characterised the golden age. Now wage-earners wanted a larger share of the ‘proceeds’ of economic success.
150
Wage inflation impact
The wage inflation in excess of labour productivity considerably increased real unit labour costs and squeezed the profitability of firms. This was particularly the case in the United Kingdom, where productivity growth was lower than other advanced countries.
contributed to higher price inflation and caused a monetary policy tightening in 1970-71 that raised interest rates which also squeezed profitability. It also brought about a brief economic downturn. With key federal elections scheduled for 1972, the policymakers of the United States, Germany, Japan and Italy all simultaneously implemented expansionary policies which brought about a sharp worldwide upswing in 1972-3. This led to rapid growth of over 5%, but it also ratchetted up inflationary pressures and gave further impetus to wage demands by a strengthened labour movement
151
Oil Price Shock 1973
OPEC cut oil exports by some 10% and put an embargo on the US. The resulting shortage caused world oil prices to increase by about four-fold
This was a watershed for the OPEC cartel, which had been formed in 1960 by oil exporting producers, to increase their bargaining power in negotiation with the ‘seven sisters’ cartel of oil companies which controlled the production and global distribution of oil. The 1973 OPEC directive marked a permanent shift in power over price-setting policy from the oil companies to the major oil-exporting producers (countries
152
Oil Supply Shock impacts
brought the golden age to an end
marked the end of an era of cheap oil, drastically reducing the terms-of-trade of the advanced capitalist countries according to their dependence on oil imports.
threw most countries into recession in 1974 and 75 however this recession also had high inflation that was already rising before the shock
153
Policy response to stagflation
The first instinct of policy makers was to give priority to countering the rise in unemployment by adopting expansionary fiscal polices. However, whilst this restored growth it exacerbated inflationary pressure as labour sought wage rises to compensate for the increase in the cost of living. In turn, longer term interest rates rose, increasing the cost of capital. With high inflation expectations now built into wage-bargaining, price-setting and yields on long-term securities, the high inflation rate persisted, especially in countries where labour productivity growth was low (i.e. UK).
Slowly but deliberately policymaking authorities in the 1970’s shifted the priority of policy from restoring full-employment to reducing the inflation rate. A second oil shock in 1978-1980, caused by the Iranian Revolution and subsequent Iran-Iraq War, fuelled higher inflation, increased the urgency of policymakers to counter it.
