3.1 Economic and political forces at work
Many will remember the 2008 economic crisis as an isolated aberration, but the reality is much more complex than that. Just as a supernova represents the demise of a supermassive and highly unstable star, the collapse of 2008 owes to policy changes in the decades that preceded it, changes that culminated in the rise of fiat currencies, evisceration of government regulations, stagnation in workers’ wages, skyrocketing public and private debts, and an unprecedented, credit-driven explosion in real estate prices.
As the 1960s came to a close, America took a deep breath, following a turbulent decade that included the assassination of a president, his aspiring brother, and an iconic civil rights leader, the invasion, sensation and rapid disintegration of The Beatles, the struggle of American people of colour for desegregation and equal rights, the catastrophic Vietnam War, a raft of potent substances designed to alter one’s perception of what was real, and one small step for a man that altered everyone’s perception of what was possible. All the while, the so-called Baby Boom generation was coming of age in Western countries, and activists of various political stripes were beginning to question the dominant forces of imperialism, capitalism, colonialism, and white supremacy that informed much of the political, economic and cultural discourse at the time.
The decade that followed, though perhaps less dramatic than its predecessor on a social level, ushered in changes at the economic level that would transmute the course of 20th-century history.
3.2 Nixon’s closure of the gold window
In the late 1960s and early 1970s, the U.S. and other industrialized economies entered a period of price inflation, the causes of which were multifarious. The U.S. was left with substantial debts at the end of the Vietnam War, which its president, Richard Nixon, attempted to pay down by printing money rather than raising taxes, as economists of the Keynesian school would have recommended, or slashing government spending, as economists of the Austrian school may have favoured. In 1971, Nixon also took the decision to unshackle the U.S. dollar from the gold window to which it had adhered since the 1930s—and under the new arrangement, the convertibility of U.S. dollars to gold was abandoned entirely in favour of the floating currency regime (variable exchange rate) that exists today.
While some historians and conservative economists attribute Nixon’s abandonment of the gold standard to his government’s profligacy and reticence to make potentially unpopular political decisions (at least in public), according to research professor, economist and economic historian Michael Hudson of the University of Missouri at Kansas City, the Republican president simply had no alternative.
“Nixon didn’t have a choice,” Hudson explained in a 2011 interview with Thom Hartmann. “In the 1950s, ‘60s, and early 1970s, the entire balance-of-payments deficit was military spending. The private sector was just exactly in balance. So there was no more gold to cover the currency.”
In other words, prior to 1971, the U.S. government had pegged its currency to the price of gold at a ratio of $35 to one ounce. However, due to the expansionary fiscal and monetary policies adopted by Nixon to repay foreign creditors for his country’s massive military spending (owing to Vietnam, Korea, and an ongoing arms race with the Soviet Union), and the limited supply of available gold, the president was forced to transfer from a gold-backed currency, to a “fiat” currency.
However, the consequences of his decision were monumental, as not only did the U.S. Federal Reserve—and all of the world’s central banks—suddenly inherit the ability to create unlimited amounts of money at will, but private banks could lend at an immense scale as well. And along with this power, financial institutions in the U.S., U.K., Canada and elsewhere acquired a capacity for growth—in both size and assets—to proportions that had lain beyond the realm of possibility under the gold standard regime.
3.3 Stagflation
In the U.S., Nixon’s hefty spending on military debts and money printing to pay off foreign creditors, and his adoption and abandonment of price controls in an effort to mitigate rising prices, exacerbated he inflationary trend that prevailed in the late 1960s and 1970s. But as evidenced by the fact that the majority of industrialized countries were experiencing high inflation simultaneously, there was another crucial factor at play: a series of abrupt spikes in the price of petroleum, which then—as now—was the fuel that powered the engine of the global economy.
In 1971, the U.S.—the world’s heftiest consumer of petroleum—reached peak oil production domestically, and was forced to turn its sights to foreign energy sources. But the OPEC countries—many of which were Arab-majority states—initiated a collective embargo in 1973 in response to the West’s alliance with the state of Israel. The resultant scarcity induced an oil price shock that came to a head by the end of the year, and by March of 1974, the cost of West Texas intermediate (WTI) crude had climbed by more than 134 per cent. A more moderate but persistent rise in petroleum prices ensued between mid-1974 and April of 1979, when the people of Iran—one of the world’s primary oil exporters—deposed their nation’s ruling Shah in an Islamic revolution and seized control of export and refining capacity. By the summer of 1980, WTI’s price on global markets saw a two-and-a-half-fold rise on its cost the previous spring.
Given that oil was so integral to the global economy, a rise in prices was the ineluctable outcome of the oil shocks. Welfare states that had been established before World War II in the U.S. and U.K. contended with a combination of high inflation and economic recession, as the rate of the rise in prices always seemed to outpace their rate of expenditure. The result was labeled “stagflation” by Milton Friedman, an economist who rose to prominence during this period of tribulation. But rather than oil shocks, Friedman was convinced that stagflation was the product of excessive government spending and an expansionary monetary policy (or money creation). Thus, predictably, he prescribed reductions in spending—and a contraction of the money supply—as the solution to the problem.