During the 1970’s the international Economic Community experienced
a phase off little or no economic growth. This came right after many good years
after World War 2 which ravaged most of Europe creating growth in rebuilding
Continental Europe and Great Britain. Many
economists argue to why such a period came to be, I have addressed what I believe
to be the three most important reasons, the Collapse of the Bretton Wood System
at the hands of President Nixon, the Oil crisis’ (OAPAC & Iranian
revolution) and the stock market crash of 73.
The “70’s Stagnation”, denotes a period between 1973 to
1978, where the international community lacked the post-war economic growth
previously. Several factors contributed to this state, below are three reasons.
“Stagnation is a
situation that occurs within an economy when total output is either declining,
flat or rising just slightly.” Source:
Collapse of the “Bretton Wood System”.
In july 1944 a total off 33 countries met in Bretton Woods,
NH with the goals of designing a system to better ones currently in place. Other
institutions such as the IMF (International Monetary Fund) and the World Bank. The
IMF had the role of allowing countries to obtain external and internal balance by
borrowing and occasional devaluation.
Also to avoid any unwanted changed in the financial account,
which could lead to a possible balance of payments crisis, countries in the
Bretton Woods System will often limit the flow of financial assets between two
countries, but will greatly encourage the free flow off goods and services as
this as it was believed trade benefits all economies.
The Bretton Wood System was a monetary and rate management system,
established in 1944. It was designed to ensure low inflation, conserve values
of exchange rates and prevent competitive devaluation.
Under the Bretton Wood System, the dollar was fixed to the
price of gold ($35 per ounce), meaning the US dollar had a fixed value. But under
President Nixon the international settlement broke down in 1973, this was due
to the overvaluation of the dollar and failure in West German negotiation to
revalue the Deutschmark.
The collapse of the Bretton Woods system started around the
60’s and 70’s where rapid increases in purchases raised aggregate demand and
output as well as prices. This inevitable led the US dollar to become over
priced in terms off foreign currencies and gold.
Another issue was that foreign economies began to grow and
their need for official reserves to support the growth needed to grow also, but
the rate off growth was faster than the rate in which the gold in the reserves
grew. This meant that eventually the federal reserve would no longer be able to
maintain the fixed price of gold at $35 per ounce, leading for countries to
lose trust in the system and redeem their value before the reserves dried up.
By reducing government spending, increasing taxes vastly or
reducing money supply growth the US could have reduced aggregated demand,
output, inflation and greatly reduced unemployment, all of which would of have
to been at the cost of a slower economy.
However, speculation that the
imbalance of the US and the value of its dollar, led to imbalances in other
countries and made maintaining a fixed exchange rate much harder.its was
believed by many financial markets the US economy was facing a “Fundimental
Disequilibrium” ( fundamental disequilibrium. a situation under a FIXED EXCHANGE RATE SYSTEM where a
country is in a position of persistent (long-run) BALANCE OF PAYMENTS deficit
or surplus at a particular (fixed) exchange rate against other countries),
“The Bretton Woods
system itself collapsed in 1971, when President Richard Nixon severed the link
between the dollar and gold — a decision made to prevent a run on Fort Knox,
which contained only a third of the gold bullion necessary to cover the amount
of dollars in foreign hands. By 1973, most major world economies had allowed
their currencies to float freely against the dollar. It was a rocky transition,
characterized by plummeting stock prices, skyrocketing oil prices, bank
failures and inflation”. Time, M J. Stephey Oct 21 2008, http://content.time.com/time/business/article/0,8599,1852254,00.html
The graph above shows the inflation rates between different
countries between 1966 to 1972. Note how Britain goes from 6.5 to 9.7 between
1970 and 1971. The other countries don’t make a notworthy increase and the USA inflation
Now see the graph below.
On this graph you can see that after 1972 things look
considerably different the USA has had a sudden increase from 3.3 to 18.7, Europe
and Japan also experienced steep rises in inflation between 1973 and 1982, this
is due to the collapse of the Bretton Wood System and oil crisis. During this
period unemployment is very high also as work forces are being squeezed so that
companies can cope with the extra economic pressure. Looking at the Per Capita
GDP growth we can see a significant decrease with Japan displaying the worst symptoms.
Luxation in oil prices
OAPEC (Organization of Arab Petroleum Exporting Countries) imposed
an oil embargo on the USA and UK due to their assistance to Israel in 1973.
At the time thr price of oil went from $3 to $12 by 1974. As
Arab countries decided to punish the west for their support of the Yum Kippur War.
This hike in oil prices made transport costs skyrocket with talks off rationing
in the UK. Inflammation had hit more than 24%.
The US economy was slowed greatly by the Oil embargo as it
had grown increasingly dependant on foreign supplies.
As shown in the image above during the Tom Kippur War Oil
Embargo the price of oil increased greatly from little under $15 per barrel to
excess £40, such an inceease of price in a commodity as important as oil
greatly affected the international economy it slowed growth which had a
toppling effect from large economies looking to expand and invest to smalled
economies reliant on support from the larger economies.
Source: World Bank
This graph shows a sharp decrease in exports of goods and
services directly linked to the hike in oil prices. Such a large decrease in
annual growth would have massively affected global economies, growth is needed
to ensure flow off money and economic balance. When growth slows economies feel
the strain but when growth drops economies suffer, cost of commodities rise, unemployment
becomes common, and countries start to lose trust in current systems.
Quickly the prices off essential commodities began to rise resulting
in a wage stagnation tipping the population into protest, as in 1972 and 1974 where
minors in the UK protested due to wages not being enough to keep up with high
priced commodities. Both times ending with the government increasing miner’s
wages. As price for oil went up so did the prices for commodities this toppling
effect made the price of sugar increase fivefold, creating the phenomenon of
inflation. Davis, E. Philips, Comparing bear markets 1973 and 2000
Wage stagnation also meant less people were not as able to
spend as freely reducing the populations spending power decreasing in sales
The graph above shows the sudden increase in food prices after
Another key factor in the Stagnation In the International Economy
was due to the Iranian revolution, which took place in 1979.
February 28, 1979 THE IRANIAN OIL CRISIS INTRODUCTION Following a lengthy
series of paralyzing strikes and sporadic work slowdowns or ganized by
anti-Shah oilworkers last fall, the Iranian oil industry ground to a near halt
and suspended oil ex ports on December 26, throwing world oil markets into
disarray and generating intense consternation among oil-importing states…”
After the Iranian revolution spot market prices rose to $23
a barrel before slowly decreasing below $20, although this was almost $5 higher
than the price OPEC offered per barrel. Although the increase off prices from Iranian
deposits has little effect on the consumer the real danger is when other oil
producers such as OPEC feel it is their right to increase their oil prices and
achieve the same increase of revenue that Iran may,
1973 to 1974 stock market crash
The financial crisis played a large
part in the Stagnation of the 70’s. many different factors played in the running
to the financial crisis ranging from Lord Anthony Barber’s (Chancellor of The
Exchequer 70-74) failure to address the increase of unemployment caused by
falling output, the inadequent attempts made by the Health Government to fix
rent prices in 1971 and the eventual collapse of the Batton Wood Agreement.
The graph above shows a sudden spike in unemployment from 1975
through to 1983.
“In 1973, house prices
rose in real terms by 24.7%. At that time, the average price of a property was
£9,942, compared with £155,467 today. The 1973 price equates to £81,226 at
today’s values.” Rupert Jones The Guardian.
The comparison of price shoes how international factors were
affected British markets such as housing. Causing irregular shifts.
Due to the crash London stock exchanges FT30 lost a massive
73% of its value. Whilst the Dow Jones average benchmark lost 43% of its total
value. Source about.com Dampier, Mark May 6th 2003. From this John
D. Turner, banking in crisis the rise and fall of the British banking
stability, deduced that this crash partially related to the slowing of the US
economic growth from 5.26% in 1972 to -0.517% in 1974 and the decrease of the
UK’s economic growth from 4.29% in 1974 to -2.47 in 1974. This decrease helped
shape the stagnation of the 70’s, this also led to other issues arising such as
wages not being enough to support people, house prices fluctuating, and
distrust in international markets.
These drastic drops in economic growths in two off the worlds
largest powers played greatly on smaller countries as the UK and US were less
willing to expand investment, these figures also indicate a decrease in import
This graph shows a sudden spike in unemployment in America
after the collapse of the Bretton Woods system, it peaked at 1975. This was also
due to the oil crisis. It then again rises in 1979 during the oil crisis in the
Iranian revolution. This shows how movement in the middle east affected the
rest of the world.
Now see below for the comparison with inflation in America
during this period.
Now looking at the graph above one thing is visibly apparent,
that inflation went side by side with unemployment. This also goes hand in hand
with the graph below, which shows the increase in oil prices, all three of
these factors caused stagnation in America which led to an affect on world
Increase in oil prices during the embargo and Iranian revolution.
To conclude, the major reasons
which led to the Stagnant International economy were due to the collapse of the
Bretton Wood System in 1973, the oil crisis brought on by middle eastern
politics (OAPECK and Iranian revolution) and lastly the stock market crash of
All these factors led to distrust
in the global economy increases in prices imbalance in exchanges and other
issues which caused this period of stagnation. This showed how vulnerable the
global economy was to global factors, and saw that middle eastern countries had
to much influence over the west leading them to look elsewhere for oil,
“A Breif History Of
The Bretton Woods System” http://content.time.com/time/business/article/0,8599,1852254,00.html
Stagflation, 1970s Style, Barry Nielson, https://www.investopedia.com/articles/economics/08/1970-stagflation.asp
Also lecture slides and notes.