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ECOS3024 > Topic 6 > Flashcards

Topic 6 Flashcards

1
Q

how much did income per person grow over golden age

A

3-4%

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2
Q

labour productivity in golden age

A

grew twice as fast as before, associated with a rapid and sustained rate of growth of capital stock

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3
Q

international trade during golden age

A

unprecedented growth in the volume of international trade, and a marked increase in the rate of growth of manufactured goods produced and internationally traded

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4
Q

average unweighted growth rate for six largest advanced capitalist countries between 1950-1973

A

4.4%

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5
Q

growth rate for period 1913-1950

A

1%

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6
Q

growth rate for period 1973-1989

A

2.2%

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7
Q

government expansion in golden age

A

large expansion of government in which a Keynesian approach to policy intervention was adopted by governments

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8
Q

who dominated the capitalist world in this era, and what was the impact

A

US, and this established an international economic order that facilitated the golden age

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9
Q

how much had the populations of major cities in japan fallen by late 1945

A

by about half

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10
Q

germany had a shortage of how many houses after the war

A

16 million

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11
Q

how many people left tokyo to try buy food in the countryside in September 1945

A

3 million

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12
Q

which cities saw starvations deaths in tens of thousands

A

Berlin, Vienna, Warsaw and Budapest

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13
Q

how many refugees by 1948 came to Germany’s Western occupied zones and where from

A

8 million from Poland, Czechoslovakia and the Soviet zone of east Germany

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14
Q

how many refugees from Japan’s Asian empire returned home

A

six million

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15
Q

how much did Japan’s labour force increase by

A

15%

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16
Q

rise of labour force in British and American zones of Germany

A

7%

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17
Q

how much did labour force increase in US

A

by 15% as military personnel return to civilian life

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18
Q

how much did labour force increase in UK

A

5%

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19
Q

railway damage in Germany

A

less than 10% of railways were operational with nearly 2400 rail bridges, 10,000 locomotives and 100,000 wagons destroyed. however, with repairs, nearly 90% of the railway system was operational by early 1946

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20
Q

railway damage in France

A

only 50% of the railway was operational but was back to full operation by early 1946

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21
Q

railway damage in Japan

A

railway system was not much affected by war as the US had concentrated it bombing on cities, war industry and shipping. 80% of merchant fleet destroyed

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22
Q

post-war coal shortage

A

european coal production about 70% of pre-war levels
deterioration in mining equipment and exhaustion of miners
coincided with terrible winter in 1946-47

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23
Q

when did coal production nearly recover

A

by mid-1947 consumption reached 90% of pre-war level

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24
Q

Japanese post-war coal production

A

Japan coal production in late 1945 was so low that there was not sufficient supply to run the railways. By 1947, production returned to pre-war levels

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25
Q

impact of food shortages

A

led to tens of thousands of deaths and undermined the productivity of workers across the economy

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26
Q

reasons for food shortages in Europe

A

due to scarcity of agricultural labour, insufficient availability of fertilisers, loss of livestock, dilapidated farming equipment and poor weather

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27
Q

reasons for food shortages in Japan

A

lack of food imports, comprising about 20% of pre-war calories
also poor distribution of food by government so cities suffered most

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28
Q

obstacle to post-war recovery in Europe and Japan

A

lack of managerial control to reorganise production that arose from worker occupation of factories

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29
Q

basis of wider labour movement in germany

A

councils that were ineffective control, with management discredited or having disappeared

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30
Q

why did the labour movement grow strongly in japan

A

after trade unions were made legal by the occupying authority

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31
Q

impact of Japanese labour movement

A

led to production control struggles at numerous enterprises to remove management closely associated with a broader political demand for the removal of key government officials associated with the militarist regime

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32
Q

workers movements in France and Italy

A

played a leading role in the resistance to German occupation and pursuing fascist collaborators. controlled many firms via workers committees, sidelining often discredited management
improved workers pay and conditions and were part of a larger leftist movement that demanded socio-economic and political changes

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33
Q

US labour movements

A

strikes increased in late 1945/46 as firms began to cut overtime and lay-off workers in response to a reduction in the military-based demand for goods. led to govt intervention in some key sectors to settle disputes and end the strikes

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34
Q

British labour movements

A

trade unions acquired considerable powers at the shop-floor level during the war when there was a strong demand for workers. the pent up demand for organised labour was largely defused by the election of the labour government in 1945

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35
Q

main post-war objectives of the US

A

ensure its access to overseas export markets and freedom to invest abroad to obtain raw materials needed for its industry

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36
Q

Anglo-US loan

A

loan of $3.75 billion to Britain for reconstruction to replace lend lease

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37
Q

US policy for economic reconstruction of Western Europe and Japan

A

didn’t have one
appeared intent on weakening their ability to recover including imposing reparations

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38
Q

instructions to General McArthur, head of Japanese occupying authority

A

not to assume responsibility for the economic rehabilitation of Japan or the strengthening of the Japanese economy

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39
Q

central policies of occupying power of Japan

A

break up of Zaibatsu, believed that these undermined democracy and helped create the environment for militarist takeover

guarantee the right of workers to organise unions and to bargain collectively with the right strike - to tilt the bargaining power towards workers

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40
Q

directive on economic policy to US occupying authority in Germany

A

no steps looking toward rehabilitation of Germany or designed to maintain or strengthen the German economy

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41
Q

main policy of occupying authority in Germany

A

break up large industrial cartels, chiefly by deconcentrating the banks

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42
Q

when and how was the cold war formally launched

A

12 March 1947 by President Truman in a speech to congress

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43
Q

Truman Doctrine

A

it must be the policy of the US to support free peoples who are resisting attempted subjugation by armed minorities or by outside pressure

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44
Q

first example of use of truman doctrine

A

military aid to Greece and Turkey

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45
Q

Marshall plan - when and what

A

5 June 1947 - provide ongoing support to economic recovery of Europe

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46
Q

new US policy on reconstruction of Europe and Japan 1947

A

now intent on maintaining aid and assisting in the reconstruction of occupied countries as part of its cold war against the Soviets

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47
Q

Potsdam Conference dates and what happened

A

July-August 1945 - tensions first came to the surface as Truman became distrustful of Stalin’s intentions in Eastern Europe

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48
Q

Secondary motivation for the Marshall Plan

A

a realisation that European economic reconstruction was in the best interests of the US economy. Without recovery and growth in Western Europe, the demand for US exports would fall off, compromising America’s post war growth. European recovery was needed to create conditions conducive for overseas business investment by US firms

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49
Q

Why was it relatively easy for ex-service personnel to absorb into civilian employment

A

a spurt in pent-up consumption finance by wartime saving and an increase in European export demand that countered the decline in government military spending

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50
Q

Net exports as %GDP in US 1946 and 47

A

3.7% of GDP in 1946 and 5.4% by 1947

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51
Q

Marshall Plan

A

extended and enlarged the aid to European countries so that they could continue to import the necessary materials from the US to speed up their economic recovery

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52
Q

what did the marshall plan mark

A

the US determination to support European reconstruction and improve living conditions in order to eliminate the political vulnerability of Western Europe to communist influence

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53
Q

what specific problem (aside from like communism and stuff) did the marshall plan aim to rectify

A

Whilst there was a ready supply of food and materials on world markets, Western European economies did not have the US dollars to buy them

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54
Q

how much aid was given out under the marshall plan

A

$13 billion over four years

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55
Q

how did UK and western European countries respond to marshall plan

A

by establishing the Organisation of European Economic Cooperation to devise plans for reconstruction and to supervise the distribution of aid among the 18 European recipient countries

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56
Q

Impact of OEEC

A

became a crucial vehicle for removing trade restrictions between Western European countries and in the promotion of greater integration and cooperation

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57
Q

1949 change to marshall plan

A

US made Marshall aid conditional on greater intra-European trade so pressuring OEEC members to make an agreement for freer intra-trade

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58
Q

Stats on intra-european trade 1950 and 1959

A

By the end of 1950, 60% of private intra-European trade had been freed, rising to 89% by 1959

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59
Q

How much did western European industrial productivity rise between 1947 and 1951

A

40%

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60
Q

Success of the Marshall Plan

A

enabled its nations to relax austerity measures and rationing and to alleviate poverty and discontent

achieved greater intra-European trade that enabled economisation on the use of scarce US dollars

put the European nations structurally on the path of export-based growth, promoting greater industry specialisation and thereby productivity

fostered greater Western European integration and cooperation, laying the seeds for the European Economic Community

Facilitated the chief Bretton-Woods aim of multilateral trade

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61
Q

important task of policy in Western Europe and Japan after 1947

A

to restore competitiveness by bringing down the high rate of post-war inflation borne of persistent shortages and to increase labour productivity

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62
Q

policies to bring down inflation

A

deflationary financial policies, along with measures to weaken the power of the labour movement

63
Q

major benefit of policies to bring inflation down after 1947

A

re-imposition of managerial control over production, largely achieved by dismissing workers and weakening union power, facilitating higher productivity. resulted in increasing profits, which given tight credit conditions, enabled them to reorganise production, invest in new capital equipment and expand capacity consistent with greater opportunities for specialisation

64
Q

deflationary policies in Germany 1948

A

new revalued currency was created called the Deutchmark
national debt was cancelled and all manufactured goods were freed from price controls
price controls were retained for food, utilities, transport and rent, whilst wage determination was subsequently freed from control.
these measures caused a collapse of the black market and products began appearing in retail stores. profits ncreased

65
Q

impact of a deflationary policy stance in Germany

A

created higher unemployment, weakened the bargaining power of trade unions and enabled a major rationalisation of industry that markedly increased productivity

66
Q

post-war recovery in Japan

A

slow with economy floundering
relied on US aid for imports, so the economy suffered from food shortages, high rising inflation with a flourishing black market economy, low real wages and growing labour unrest

67
Q

impact of US post-war recovery policy in Japan

A

imposing a punitive peace, to demilitarise the country and eventually extract reparations inhibited the Japanese government from dealing with these social and economic issues. Prohibitions placed on heavy industry and the Zaibatsu dissolution as well as removing leading businessmen tainted by war involvement, tended to disperse capital and undermine managements control over the economy

68
Q

the dodge line

A

nine point stabilisation program proposed by Joseph Dodge to arrest inflation, regulate credit and impose budgetary discipline

69
Q

Some points in Dodge Line

A

balanced budget measures such as cutting payrolls, subsidies etc
wage and price controls
longer hours of work and mass lay-offs to weaken the union movement

70
Q

impact of Dodge Line

A

induced stagnation, deflation and high unemployment in 1949, it did check inflation and put management back in charge of production, restoring profitability and labor productivity in 1950 and 1951

71
Q

Devaluations in 1949

A

concerned with widening trade deficits of the European countries and Japan with the US, US treasury policymakers believed that with their labour movements in retreat it was timely in 1949 to devalue their exchange rates. A downturn in the US had led to a serious deterioration in the UKs reserves placing upward pressure on its interest rates

72
Q

1949 devaluation of pound

A

30% devaluation against USD

73
Q

1949 devaluation of franc and Deutschmark

A

20%

74
Q

1949 devaluation of lira

A

10%

75
Q

concern for US that underpinned marshall plan

A

labor unrest building which had the potential to destabilise the establishment of democratic institutions and national government. there was a concern that independent nationalist movements may reermege which could bring them within the Soviet orbit and politically isolate the US. hence, recovery without US assistance was seen as a long term threat to US interests

76
Q

Turning point for post-war growth

A

Korean War

77
Q

Korean War dates

A

1950-53

78
Q

average rate of growth in US in 1950 and 51

A

9%

79
Q

economic impact of Korean War

A

provided a timely stimulus to production in Europe and Jaoan. The export growth, particularly for West Germany and Japan, gave an import impetus to inestment in the installation of more technologivally efficient capital equipment. it also led to an expansion in employment and income that gave impetus to greater consumption spenidng

80
Q

commodity boom as a result of Korean War

A

USD prices of wool, rubber, tin, cotton and other basic materials increased by nearly 40%
ToT of commodies against manufactures increased 30% giving stimulus to commodity producing countries such as Aus, Canada and Argentina. Also led to sharp increase in inflation in 1951 and 1952

81
Q

Korean war inflationary boom

A

substanitally increased the profits of firms, providing a financial basis for subsequent business investment

82
Q

growth in US in second half of 50s

A

decline in growth due to a slackening of demand as the Korean War and rearmament spending subsided

83
Q

Kennedy Johnson fiscal expansion

A

1960s - associated with social programs and then Vietnam War saw the US grow substantially faster pulling the rest of the world with them. Again the European countries, especially Germany, and Japan grew at a faster rate on average

84
Q

Reasons for Sustained growth in the golden age

A

Expanding role of government
Keynesian demand management policies
High Productivity Growth
Unprecedented Consumption Growth
Unprecedented Growth of international trade

85
Q

influence of US on golden age growth

A

US set the pace of demand-led growth during the golden age, and world trade and output in western capitalism expanded and contracted with the US. so while fiscal policy intervention to stimulate activity in the US was less than France, Italy and UK, its effects were globally greater because of its sheer size

86
Q

Export growth of France, Germany, Italy, Japan, US and UK 1950-1973

A

France 8.2%
Germany 12.4%
Italy 11.7%
Japan 15.4%
US 6.3%
UK 3.9%

87
Q

what is strong export growth during golden age a reflection of?

A

the strong growth of domestic demand in all the advanced countries as well as the possibilities provided by the post-war system of multilateral trade

88
Q

role of government 1950-73

A

expanded with government spending and taxation revenue rising as a percentage of GDP. Major area of expansion was in social welfare, in which coverage for involuntary unemployment and aged pensions was considerably widened, especially in Europe

89
Q

Major innovation in Britain’s post-war welfare system

A

development of NHS which set a standard for European health systems

90
Q

rise in government civil expenditure 1952 to 1973

A

rose from 15% to 24% of GDP

91
Q

government investment 1952 to 1973

A

remained stale at about 3% of GDP over the period

92
Q

government defence spending 1952 to 1973

A

declined from 10% to 4%

93
Q

two ways the expansion in welfare systems contributed to a higher social propensity to consumer and therefore stronger growth in consumption

A

larger social safety net encourage greater consumption over saving, especially fore retirement

a more equal distribution of income

94
Q

fiscal policy influence on long-term demand

A

appears fairly neutral, as average fiscal balance was close to zero - underlies how the governments tended to fund their expenditures with increased taxation over the long run

95
Q

stimulatory contribution of fiscal policy

A

appears to be a ratcheting effect associated with the expansion of government of the advanced countries in which increases in government spending, when followed by stronger growth and taxation revenue, gave impetus to further increases in spending, and so on. this gave fiscal policy a stimulatory bias that was probably greater than simply the balanced-budget multiplier effect of a growing public sector

96
Q

fiscal expansion in which sectors supported consumption growth, and in turn promoted growth in private investment and how

A

welfare and other social services
directly contributed to higher private consumption by raising the incomes of the lower-paid and disadvantaged but indirectly by strengthening the bargaining power of organised labour to extract higher real wages

97
Q

average budget deficit of US 1950-1979

A

0.3% of GDP

98
Q

when was fiscal policy in US slightly contractionary

A

After the Korean War until the end of the 1950s

99
Q

major source of demand stimulation in US

A

US government defence spending which involved considerable funding of scientific and technological research that contributed to commercial innovation. Korean and Vietnam Wars both significantly contributed to growth during this age

100
Q

US expenditure abroad total 1950-67

A

$95 billion of which $44 billion was associated with military spending and cold war

101
Q

effect of US expenditure abroad

A

provided direct ongoing stimulus to other advanced economies, and undeveloped economies, though this usually came with economically damaging conflict
supplied USD to other advanced countries which relieved earlier shortages and helped them accumulate reserves need to stabilise their exchange rates

102
Q

bretton woods monetary policy

A

monetary policy of Federal Reserve Bank of US called the tune on worldwide interest rates and the monetary policies of other advanced countries were often dictated by the needs of external balance and maintaining exchange rate stability

103
Q

average short-term funding rate of Federal Reserve Bank 1940 vs 1950 vs 1960

A

1.2% in 1940s
2.2% in 1950s
5.9% in 1960s

104
Q

Long term rates on US govt securities 1940s, 50s, 60s

A

2.3% in 1940s
3% in 1950s
4.5% in 1960s

105
Q

interest rates until 1960s

A

remained relatively low until 1960s when inflationary pressures began to cause central banks to adopt tighter monetary policies

106
Q

objective of Monetary Policy in US in 1940

A

concerned wholly with keeping interest rates as low as possible to refinance Federal government war debt and to minimise debt-servicing costs whilst inflation was kept in check by rationing and price controls

107
Q

Monetary Policy in US after 1951

A

In 1951, the Federal Reserve Bank broke with Treasury and thereafter conducted monetary policy more independently with the main purpose of countering cyclical fluctuations in the economy and maintaining price stability

108
Q

interest rates up until 1965 US

A

remained below 4% overall providing a stimulus to residential construction investment and credit-financed spending on consumer durables

109
Q

interest rates 1965 to 73 US

A

interest rates rose to above 6% as the Federal Reserve tightened monetary policy to counter building inflationary pressures

110
Q

constraint on independence of MP for countries other than US

A

need to maintain an external balance under the fixed exchange rate regime of Bretton Woods

111
Q

why did the UK want to sustain the cheap money policy after WW2

A

to minimise the government’s debt-servicing costs and to promote domestic expenditure and economic recovery.

However, in 1949 when American lend-lease credit dried up and balance of payments pressures emerged the Bank of England was compelled to abandon low interest rates to support the sterling

112
Q

What was a constraint on the UKs growth during the golden age and why

A

The balance of payments. Its large foreign borrowing from the US during the war and for post-war recovery and loss of export competitiveness chronically weakened the countries balance of payments

113
Q

how did stop-go policies in the UK lower the trend of growth

A

when the British economy grew at a pace that kept unemployment low, import demand led to external imbalance and a loss of reserves that compelled the Bank of England to raise interest rates to defend the sterling and avoid a currency crisis.

114
Q

labour productivity, productivity growth in golden age

A

historically high productivity growth associated with high investment growth. labour productivity growth was typically more than double for most advanced economies, except in US where it was similar to before

115
Q

Major cause of productivity growth

A

European countries and Japan adopted American techniques, especially in manufacturing.
growth of international trade enabled the most competitive firms to capture a larger global market and derive cost efficiencies from larger scale production. Facilitated greater specialisation

116
Q

rate of capital formation in manufacturing of advanced countries for period 1952-1973 - average, Japan, germany, italy, US

A

Average - 4.8%
Japan - 11.9%
Germany - 7.4%
Italy - 5.6%
US - 3.2%

117
Q

what did the great expansion in manufacturing reflect

A

reflected the growth in spending on consumer durables and housing during a period in which affluence spread widely to the population mass. Key manufacturing industry was automobile production

118
Q

what made the growth of investment possible?

A

impressive growth in consumption which was made possible by growth in household income

growth in household income was made possible by high labour productivity which translated to real wage growtj

119
Q

besides strong productivity growth and greater capacity of wage-bargaining to capture a share of productivity gains, what other factors promoted consumption growth

A

an equitable distribution of income facilitated by the taxation and welfare system

widening of the social security safety net with greater public funding of health, education and retirement

the greater availability of mortgage and consumer credit finance to purchase homes and consumer durables

low unemployment conditions ensured a high rate of employed workers and high wage incomes as well as strengthening wage-bargaining power

120
Q

Convergence of advanced economies

A

European countries, Japan and some other smaller countries caught up to the UK and the US
The living standards of Germany, France, Italy and Japan all converged on that of the US by the early 1970s as a result of faster economic growth

121
Q

what allowed for the convergence process to occur

A

involved a process of technological catch-up by the more backward countries whose productivity growth was more superior. from a demand led perspective this process could only occur with the expansion in demand made possible by the postwar opening up of multilateral trade which gave these countries access to the lucrative US market

122
Q

weakening of the US Domination

A

process of convergence naturally involved a weakening of the US domination over the world economy.

123
Q

US % output of all advanced countries 1950 to 1970

A

nearly 60% in 1958 but declined to below 50% by 1970

124
Q

beginning of the trade liberalisation process

A

opening up of multilateral trade by the US under Bretton Woods after the War

125
Q

series of multilateral agreements that progressively cut protection and tariffs

A

Reduction in tariff barriers occurred after the formation of the European Economic Community (EEC) in 1957

The establishment of EFTA (European Free Trade Association) by non-EEC countries (including the UK) gave impetus to lower tariffs

The Kennedy round of GATT trade negotiations finalised in 1967 led to the average rate of tariffs on manufactures cut by one-third

126
Q

proportion of trade which attracted tariffs of less than 15%

A

increased from 54% to 85% in the USA, from 37% to 85% in the UK and from 71% to 97% in the EEC.

127
Q

average growth rate of world trade between 1950 and 73

A

grew at an average rate of about 10% - double the growth in world production

128
Q

when did the golden age end

A

1973

129
Q

what did the end of the golden age coincide with?

A

first large hike in world oil prices instigated by OPEC

130
Q

what happened in 1974 and 75

A

most advanced countries experienced stagflation with increasing unemployment and inflation
with growth half that of the golden age, high rates of unemployment and inflation persisted throughout the remainder of the 1970s

131
Q

what was a major catalyst for the decline in growth performance of major economies?

A

the oil price hike of 1973

132
Q

other major factors that brought the golden age to an end

A

breakdown of Bretton Woods in the late 1960s, collision between unrealistic wage expectations of labour, declining labour productivity and rising interest rates as inflation crept up

133
Q

how did stagflation change the objective of policymakers

A

changed the objective of policymakers from full-employment output to low inflation

134
Q

Smithsonian Agreement date and what did it do

A

December 1971, enabled a valuation of the US Dollar, marked the end of the Bretton Woods system

ten major capitalist powers agreed to a new alignment of fixed exchange rates in which the US pledged to peg the dollar at $38 per ounce of gold with 2.25% trading bands and the other countries agreed to revalue their currencies against the dollar.

135
Q

what marked the end of the Bretton Woods system

A

Smithsonian agreement in December 1971 which enabled a devaluation of the US dollar

136
Q

Effect of Smithsonian agreement

A

exchange realignment failed to correct fundamental balance of payments imbalances and by March 1973 the exchange rate of Japan and the European countries were floated. Within a decade all advanced countries had adopted a floating exchange rate

137
Q

Causes of the breakdown in Bretton Woods

A

can be traced back to original defects when the system was established in 1944. Underlying supposition that the US was the absolute dominant economic power and when that dominance faded, the major weakness of Bretton Woods was revealed: namely that the onus of adjustment to external imbalance was thrown on the deficit country, imposing a deflationary bias

138
Q

collapse of bretton woods as an outcome of its success

A

may be seen as an outcome of its success in nurturing the post-war recovery and impressive growth of the European countries and Japan. created the conditions for liberal trade so that these countries could expand their exports as the US played the major role of generating world demand. however this involved the US running persistent BoP deficits

139
Q

US BoP deficits

A

the US external deficits were not actually the result of trade deficits. On merchandise trade the US ran a surplus of $70 billion and received net interest and dividends on overseas investment of $60 billion from 1950-67. It was government expenditure abroad, much for military purposes, and the outflow of capital for private investment abroad that created its deficit of $42 billion from 1950-67

140
Q

Impact of the continuation of US BoP deficits

A

the central banks of other advanced economies continued to accumulate large stocks of US dollars whilst the US stocks of gold reserves significantly declined. By 1968 the US gold stock would not have been able to convert 40% of the dollars held abroad in reserves.

141
Q

USD under pressure

A

the usd price of gold of $35 per ounce came under pressure by speculators as the stock of US dollars increased in relation to the gold stock. In response the US placed pressure on foreign central banks not to convert dollars into gold and established the gold pool into which all countries, not just the US, would supply gold to stabilise private market gold

142
Q

measures imposed by the US to protect the US dollar by curbing capital outflow

A

in 1963 an interest equilisation tax was imposed to reduce purchases of foreign bonds and shares

in 1965 US bank lending to foreigners was curtailed

in 1968 US multinationals were required to raise funds abroad to finance their overseas investments

143
Q

Special Drawing Rights

A

to further relieve pressure on the US dollar the US agreed in 1968 and implemented in 1970 a system of SDRs which gave countries credit at the IMF fixed in value to gold and earning an interest rate of 1.5% which could be used to settle balance of payments deficits. The paper gold was intended to augment gold reserves in external adjustment to alleviate the demand to convert the USD to gold

144
Q

devaluation of the USD

A

as the economy grew in the late 1960s the resulting demand pressure on productive capacity also caused a steady increase in the US inflation rate.
Maintaining the value of the dollar became increasing untenable. The drain of US gold reserves continued such that in 1968 the Gold Pool collapsed. Speculation against the dollar intensified as US capital flowed into foreign securities.
The adoption of a more permissive monetary policy by the Federal Reserve in 1971 induced massive capital outflow

145
Q

President Nixon response to crisis

A

President Nixon responded to the crisis in August 1971 by imposing 90-day wage and price controls, a 10% import surcharge and suspending convertibility of the dollar into gold

146
Q

US Devaluation of the dollar 1973

A

In February 1973 the US bowed to reality and devalued the dollar by a further 10% to restore its international competitiveness, shortly followed by Japan and the European countries floating their currencies. This ended Bretton Woods (and the Smithsonian Agreement) and brought in the era of floating exchange rates. It represented the first step toward giving more prominence to using monetary policy to curb inflationary pressures.

147
Q

productivity growth in the last few years of the golden age

A

significant slowdown in productivity growth other than in manufacturing in all the advanced capitalist countries. The slowdown was greater in the US. This occurred even though the capital-labour ratio increased, indicating a greater rate of mechanisation

148
Q

Three major factors for slowdown in productivity growth in the US

A

a slowdown in technical innovation in which the technical frontier in manufacturing was pushed forward less rapidly

a greater underutilisation of capacity because of the expansion of capacity in the mid-1960s

a constraint on employers better reorganising the production process and reduction in worker intensity because of opposition by stronger unions

149
Q

organised labour movements in the late 60s

A

strengthened by low unemployment, organised labour began to pursue more ambitious wage increases and improved work conditions in the late 1960s. From 1968-71 Europe, including the UK experienced a wave of strikes which won workers large wage increases

This labour unrest reflected a breakdown in the consensus between labour and capital that characterised the golden age. Now wage-earners wanted a larger share of the ‘proceeds’ of economic success.

150
Q

Wage inflation impact

A

The wage inflation in excess of labour productivity considerably increased real unit labour costs and squeezed the profitability of firms. This was particularly the case in the United Kingdom, where productivity growth was lower than other advanced countries.

contributed to higher price inflation and caused a monetary policy tightening in 1970-71 that raised interest rates which also squeezed profitability. It also brought about a brief economic downturn. With key federal elections scheduled for 1972, the policymakers of the United States, Germany, Japan and Italy all simultaneously implemented expansionary policies which brought about a sharp worldwide upswing in 1972-3. This led to rapid growth of over 5%, but it also ratchetted up inflationary pressures and gave further impetus to wage demands by a strengthened labour movement

151
Q

Oil Price Shock 1973

A

OPEC cut oil exports by some 10% and put an embargo on the US. The resulting shortage caused world oil prices to increase by about four-fold

This was a watershed for the OPEC cartel, which had been formed in 1960 by oil exporting producers, to increase their bargaining power in negotiation with the ‘seven sisters’ cartel of oil companies which controlled the production and global distribution of oil. The 1973 OPEC directive marked a permanent shift in power over price-setting policy from the oil companies to the major oil-exporting producers (countries

152
Q

Oil Supply Shock impacts

A

brought the golden age to an end
marked the end of an era of cheap oil, drastically reducing the terms-of-trade of the advanced capitalist countries according to their dependence on oil imports.
threw most countries into recession in 1974 and 75 however this recession also had high inflation that was already rising before the shock

153
Q

Policy response to stagflation

A

The first instinct of policy makers was to give priority to countering the rise in unemployment by adopting expansionary fiscal polices. However, whilst this restored growth it exacerbated inflationary pressure as labour sought wage rises to compensate for the increase in the cost of living. In turn, longer term interest rates rose, increasing the cost of capital. With high inflation expectations now built into wage-bargaining, price-setting and yields on long-term securities, the high inflation rate persisted, especially in countries where labour productivity growth was low (i.e. UK).
Slowly but deliberately policymaking authorities in the 1970’s shifted the priority of policy from restoring full-employment to reducing the inflation rate. A second oil shock in 1978-1980, caused by the Iranian Revolution and subsequent Iran-Iraq War, fuelled higher inflation, increased the urgency of policymakers to counter it.

ECOS3024 (5 decks)

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