Painful period of stagflation

In the 70s, it arrived almost all over the world as a new economic phenomenon of stagflation, which the economic theories of the time could not cope with. How did it affect the economic development of individual countries at that time?

The post-war development is called the golden age of economies, especially the American one. They were characterized by dynamic economic growth and small recessions. It all ended in the early 70s, when the gold standard was abolished. The XNUMXs are then associated with stagflation or slumpflation.

This period was marked by high inflation and stagnation or economic downturn. At the same time, the erroneous nature of various economic theories, which most often recommended treating the recession in economies by higher spending from the government position and cheaper money (rate cuts), became apparent.

The crisis probably begins with the abolition of the gold standard in 1971 by US President Richard Nixon. Until then, there was a system known as "Bretton Woods", in which the US Federal Reserve guaranteed to pay its debts to other central banks in dollars or gold, which was firmly pegged to the dollar.

However, most central banks knew that the debts of the United States greatly exceeded the amount of gold that the United States owned. This is justified by the fact that the dollar as a global currency was necessary for the functioning of global trade and the economy. However, the diggers (and I am among them) are of the opinion that the Americans wanted to maintain their unshakable position from the 50s, which was unsustainable at the time, by printing dollars.

Richard Nixon tried to solve the situation by trying, for which no country of the then Eastern bloc would have to be ashamed. It froze wages for 90 days and introduced a protectionist import surcharge of 10%. This seemed like a successful step, as inflation fell to 3,5% in that year. Unfortunately, only for a short time.

There were states that did not like the fall of the dollar very much, and therefore wanted to solve the situation quickly. These were oil-exporting countries that were grouped in the OPEC cartel. The cartel reduced production by 5%, causing panic and speculative demand for oil worldwide.

Starring oil

The price of oil first jumped from $ 1973 to $ 3 in 5, then climbed to $ 12 the following year. At that time, the US imported only a third of oil, in contrast to Japan, for example, which was 80-90% dependent on oil imports. Between 1974 and 1975, the United States economy found itself in recession, with inflation rising to 12% and accompanied by heavy stock market crashes.

In connection with the first oil shock, the then US President Richard Nixon agreed to the construction of an oil pipeline from Alaska and resorted to regulating prices and the method of redistribution. However, this policy led to a shortage of gasoline and long queues at gas stations that lasted until 1974.

In these two years, it has become clear that what works in our heads and on the paper of economists can be completely different in reality. One of the reasons why the crisis arose at all was the revaluation of the Phillips curve, which allows us to "exchange" lower unemployment for higher inflation.

We will return to the future to compare the 70s with today and answer the question of whether this period cannot be repeated.

It was originally released on Finmag.cz

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