Theme: Lies we were told
I remember well the stagflation of the nineteen seventies. I also remember how politicians and the mass media all agreed that it was ‘our fault’. By ‘us’ I mean the ordinary working people of Britain. Greedy, lazy workers, over-powerful trades unions and an inflexible labour market with good pensions, jobs for life and other outrageous luxuries were the cause of all out suffering and we were being justly punished by the gods of economics.
Our punishment would not cease until we all returned to path of righteousness, of low wages, weak labour unions, lousy conditions and no job security. The decadence of our civilised way of life was to be replaced with the law of the jungle favoured, as ever by those who are most disproportionately well rewarded for every little thing they do. Apparently they deserve it, (so they say anyway!).
As is usual for our great democracy, with its wonderful press, the best in the world, what we were not told was what all the experts knew, but the general public didn’t, namely that the inflation was triggered by the Vietnam war. This may sound strange to those who do not know about it, but the chain of cause and effect went like this.
After the Second World War the western leadership set up an international monetary system in which the major currencies did not move much, their exchange rates being pegged to each other. Adjustments were occasional. Underpinning the system was the US Dollar as the world’s main reserve currency which was pegged against gold. The international monetary system was a Dollar-gold standard.
During the Vietnam War the US government became so determined on victory, later renamed ‘peace with honour’ under President Nixon, that it was decided to just spend as much as was necessary to achieve this victory. America’s credibility as a global power was at stake, no cost was too high to prevent national humiliation. What this meant in practice was printing vast amounts of US Dollars. The outcome was that by the early nineteen seventies the US could no longer maintain the Dollar-gold standard. In August 1971 President Nixon announced that the US Dollar would no longer be fixed against gold, and a new era of floating exchange rates steadily spread through the world.
This world of volatile exchange rates was one in which inflation could easily result, and easily be exported around the world. One effect was that oil exporting nations who were used to earning hard US dollars for their petroleum steadily found the purchasing power of their oil revenues declining. This led to them calling for price rises, leading to the Geneva I and Geneva II oil price negotiations.
The outbreak of the Yom Kippur War in October 1973 and the resulting oil embargo led to the discovery by major oil producers that years of low oil prices, and the consequent under-investment in oil exploration and production at a time of steady global economic growth, had created a physical shortage of oil. OPEC now had the bit between their teeth and ran with it. By the end of 1973 the nominal price of crude oil had quadrupled.
This ‘First Oil Shock’ had an immediate inflationary effect. A rise in the price of oil meant a rise in the price of energy, and anything that used energy. This was practically everything, electricity, practically all manufacturing, heating, lighting, shipping and transport costs. Naturally prices started to rise and workers demanded wage increases to compensate for their falling standard of living. Thus a wage-price spiral took off.
However as was later pointed out by right wing leaders, inflation is a purely monetary phenomenon caused by an increase in the money supply. Thus it was no more logical to blame greedy workers for demanding higher wages than to blame shop keepers for raising prices. However these theoretical niceties were not going to be allowed to get in the way of creating a more ‘flexible’ labour market. In other words it would be the least powerful in society who would bear the brunt of the costs of fighting inflation. What a surprise!
Needless to say the only people who really suffer from long term inflation are those at the top, ‘creditors’, those who invest and lend money, who see the value of the debts they hold steadily eroded. Thus fighting inflation became the central obsession of right wing politicians in the nineteen eighties.