Economic Crisis and Hardship

Starting in the early 1970s the West entered into a long period of economic decline. One of the early causes of the downturn was the collapse of the international monetary system, which since 1945 had been based on the American dollar, valued in gold at $35 an ounce. In the postwar decades the United States spent billions of dollars on foreign aid and foreign wars, weakening the value of American currency. In 1971 President Nixon attempted to reverse this trend by abruptly stopping the exchange of U.S. currency for gold. The value of the dollar fell sharply, and inflation accelerated worldwide. Countries abandoned fixed rates of currency exchange, and great uncertainty replaced postwar predictability in international trade and finance.

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Even more damaging to the global economy was the dramatic reversal in the price and availability of energy. The great postwar boom had been fueled in large part by cheap oil from the Middle East. The fate of the developed world was thus increasingly linked to this turbulent region, where strains began to show in the late 1960s. In 1967, in the Six-Day War, Israel quickly defeated Egypt, Jordan, and Syria and occupied more of the former territories of Palestine, angering Arab leaders and exacerbating anti-Western feeling in the Arab states. Economics fed tension between Arab states and the West. Over the years OPEC, the Organization of Petroleum Exporting Countries, had watched the price of crude oil decline consistently compared with the rising price of Western manufactured goods. OPEC decided to reverse that trend by presenting a united front against Western oil companies.

The stage was thus already set for a revolution in energy prices when Egypt and Syria launched a surprise attack on Israel in October 1973, setting off the fourth Arab-Israeli war. With the help of U.S. weapons, Israel again achieved a quick victory. In response, the Arab members of OPEC declared an embargo on oil shipments to the United States and other industrialized nations that supported Israel in the war, and they simultaneously raised oil prices. Within a year, crude oil prices quadrupled. Western nations realized that the rapid price increase was economically destructive, but together they did nothing. Thus governments, industry, and individuals dealt piecemeal with the so-called oil shock — a “shock” that turned out to be an earthquake.

Coming on the heels of the upheaval in the international monetary system, the revolution in energy prices plunged the world into its worst economic decline since the 1930s. Energy-intensive industries that had driven the economy up in the 1950s and 1960s now dragged it down. Unemployment rose, productivity and living standards declined, and inflation soared. Economists coined a new term — stagflation — to describe the combination of low growth and high inflation that drove the worldwide recession. By 1976 a modest recovery was in progress, but in 1979 a fundamentalist Islamic revolution overthrew the shah of Iran. When oil production in that country collapsed, the price of crude oil doubled again, and the world economy succumbed to its second oil shock. Unemployment and inflation rose dramatically before another uneven recovery began in 1982.

Anxious observers, recalling the disastrous consequences of the Great Depression, worried that the European Common Market would disintegrate in the face of severe economic dislocation and that economic nationalism would halt steps toward European unity. Yet the Common Market continued to attract new members. In 1973 Britain finally joined, as did Denmark and Ireland. After replacing authoritarian regimes with democratic governments in the 1970s, Greece joined in 1981, and Portugal and Spain entered in 1986. The nations of the Common Market cooperated more closely in international undertakings, and the movement toward western European unity stayed alive.

The developing world was hit hard by slow growth, and the global economic downturn widened the gap between rich and poor countries. Governments across South America, sub-Saharan Africa, and South Asia borrowed heavily from the United States and western Europe in attempts to restructure their economies, setting the stage for a serious international debt crisis. At the same time, the East Asian countries of Japan and then Singapore, South Korea, and Taiwan started exporting high-tech consumer goods to the West. Competition from these East Asian “tiger economies,” whose labor costs were comparatively low, shifted manufacturing jobs away from the highly industrialized countries of northern Europe and North America.

Even though the world economy slowly began to recover in the 1980s, western Europe could no longer create enough jobs to replace those that were lost. By the end of the 1970s, the foundations of economic growth in the industrialized West had begun shifting to high-tech information industries, such as computing and biotechnology, and to services, including medicine, banking, and finance. Scholars spoke of the shift as the arrival of “the information age” or postindustrial society. Technological advances streamlined the production of many goods, making many industrial jobs superfluous. In western Europe, heavy industry, such as steel, mining, automobile manufacture, and shipbuilding, lost ground. Factory closings led to the emergence of “rust belts” — formerly prosperous industrialized areas that were now ghost lands, with vacant lots, idle machinery, and empty inner cities. The highly industrialized Ruhr district in northwest West Germany and the once-extensive factory regions around Birmingham (Great Britain) and Detroit, Michigan, were classic examples. By 1985 the unemployment rate in western Europe had risen to its highest level since the Great Depression. Nineteen million people were jobless.

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The crisis struck countless ordinary people, and there were heartbreaking human tragedies — bankruptcies, homelessness, and mental breakdowns. The punk rock songs of the late 1970s captured the mood of hostility and cynicism among young people. Yet on the whole, the welfare system fashioned in the postwar era prevented mass suffering and degradation. The responsive, socially concerned national state undoubtedly contributed to the preservation of political stability and democracy in the face of economic difficulties that might have brought revolution and dictatorship in earlier times.

With the commitment of governments to supporting social needs, government spending in most European countries continued to rise sharply during the 1970s and early 1980s. In 1982 western European governments spent an average of more than 50 percent of all national income on social programs, as compared to only 37 percent fifteen years earlier. Across western Europe, people were willing to see their governments increase spending, but they resisted higher taxes. This imbalance contributed to the rapid growth of budget deficits, national debts, and inflation. While this increased spending was generally popular, a powerful reaction against government’s ever-increasing role had set in by the late 1970s that would transform governance in the 1980s.