The global crisis of 1973-75: a turning point for capitalism

50 years ago, after the long postwar boom, the world economy experienced its first truly global crisis. Falling output and spiralling inflation combined to devastate the working class. Today, capitalism faces similar turmoil. It must be overthrown.

[Originally published at communist.red]

Conflict in the Middle East. The persistent menace of inflation. Global economic instability. A wave of industrial militancy. Revolutionary movements erupting in one country after another.

No, this is not a political review of 2023, nor a synopsis of our perspectives for the period ahead.

Rather, this is a brief summary of events from half a century ago, when the capitalist system entered into its first ever synchronous worldwide downturn, marking a definitive end to the postwar boom – and ushering in of a new period of disturbance and turbulence.

Necessity and accident

For superficial bourgeois commentators, the crisis of 1973-75 is explained away as little more than an unfortunate accident. The apologists of capitalism assert that this global recession was simply the product of an international ‘oil shock’.

It is true that energy prices did soar as a result of an embargo implemented by the Arab petroleum states against the western imperialist powers, in response to their support for Israel in the Yom Kippur war.

But this is an entirely empirical analysis, which only examines the surface of the situation, and which fails to understand the underlying processes and accumulating contradictions that were pushing the whole system to breaking point.

Marxists understand such ‘accidents’ in their broader context: in this case, the fragile state that the world economy was in by this point.

When you have a house of cards, it only takes a small nudge or an unexpected gust to bring down the entire edifice. Similarly, a forest dried by months of drought only needs a slight spark to ignite all its collected combustible material and produce an infernal blaze.

This is what is meant by the dialectical assertion that ‘necessity expresses itself through accident’.

When a system – whether it be in nature or in society – is pregnant with crisis, any number of secondary factors or incidents can trigger a transition or collapse. A build up of small quantitative changes leads to a qualitative transformation. Objective dynamics are reflected in-and-through seemingly random or chance events.

Such was the case with capitalism globally by the 1970s. The world economy was fraught with contradictions and tensions. The system was ready to implode. And when it finally did, it marked the beginning of a new epoch: one of crisis and class struggle – through which we are still living today.

Conditions for crisis

In reality, the 1973-75 crash was a reflection of an organic crisis of capitalism, as described by Marx over 150 years ago in his economic writings.

British Docker Vic Turner is carried aloft after being released from jail / Image: public domain

As Marx also explained, to genuinely understand any capitalist crisis, you must first examine the period that precedes it. It is the conditions prepared in advance – not the immediate ‘accidental’ catalyst or jolt – that is the true cause of such crises. And the same applies to the recession of the mid-1970s.

In this respect, the ‘70s crisis was the product of all the contradictions that had piled up during (and as a result of) the postwar boom. All the factors that gave rise to the prolonged economic upturn turned into their opposite.

This decades-long upswing was a golden age for capitalism; an unprecedented era of development for the productive forces on a world scale. But within this astonishing growth-spurt were planted the seeds of the system’s own destruction.

Ted Grant – the original founder of our organisation, and the leading Marxist theoretician internationally following the death of Leon Trotsky – brilliantly outlined the reasons for the postwar boom in a 1960 article entitled Will There be a Slump?

Writing at a time when the rest of the ‘left’, including many so-called Marxists, had adapted themselves to the reformist, Keynesian ideas that predominated at the time, Ted explained the various factors that were fuelling the boom. And he accurately predicted that these same forces would eventually turn into their opposite, plunging the system into crisis.

Political factor

Of primary importance for the robust recovery that followed WW2 were the political conditions of the time.

As the conflict drew to a close, and society emerged from the darkness and destruction of the war, revolution was on the order of the day in country after country. But the betrayals of the Stalinist and reformist leaders ensured that these movements were quelled, allowing the ruling class to cling to power.

In ruined West Germany and Japan, for example, workers’ leaders acted as handmaidens for imperialist occupying forces, helping to hold back the radicalised masses, who were looking to replace overturned fascist regimes with communist ones.

Similarly, in France, Italy, and Greece the ‘communist’ leaders helped to ensure the stability of capitalism in the wake of the war. And in Britain, Clement Attlee’s 1945 Labour government carried out reforms from above to prevent revolution from below.

It was only on this basis, with the working class subdued, that capitalism was able to survive and later prosper. These betrayals provided the political premise for the upswing.

World trade

Another essential element behind the boom was the hegemonic position of US imperialism, which had displaced British imperialism as the world’s dominant power.

With no fighting on home soil, American capitalism came out of the war with its factories, machinery, and infrastructure completely intact. Furthermore, wartime investment and modernisation had enormously bolstered US industry.

As a result, between 1938-50, the US economy grew at an average annual rate of 6.5 percent; output per hour in the private business sector increased by 2.7 percent per year^[1]; and industrial production almost doubled. ^[2]

All of the USA’s major rivals, in turn, had beaten each other to a pulp, leaving them mutually wounded and indebted. Starved and desperate, Western Europe and Japan became reliant on the Americans for the capital and resources needed to rebuild their own industries and cities.

The dollar had become the de facto world currency, as sanctified by the Bretton Woods agreement / Image: public domain

This included access to dollars – both in the form of Marshall aid, and in terms of other loans. Of course, this financial support came with strings attached, obliging recipients to buy goods from US suppliers, giving a further boost to American profits.

Thanks to the strength and dominance of US capitalism, which accounted for 58 percent of economic output amongst the advanced capitalist countries by 1950, ^[3] the dollar had become the de facto world currency, as sanctified by the Bretton Woods agreement.

On this basis, US imperialism was able to break down barriers to trade – in the interests of American big business. This included the reduction and removal of various protectionist tariffs. Furthermore, national liberation for the colonial countries opened up new markets in places that had formerly been the domain of older empires such as Britain and France.

This all gave an enormous thrust to world trade. The volume of global trade in manufactured goods grew by 349 percent between 1951-71, compared to an increase in output of ‘just’ 194 percent. For the advanced countries, the explosion in manufacturing trade in this period was even bigger, at 480 percent.^[4]

This was one of the key components of the postwar boom. Increased international trade meant a greater integration of the world market. This, in turn, meant the creation of huge multinational monopolies, now serving consumers in far away lands, at previously unimaginable scales.

Such vast expansion and reach was enabled by developments in communications, transport, and other fields of technology. But it also itself paved the way for a further explosive growth in productivity.

A new international division of labour led to improved specialisation and efficiency. A concentration of capital resulted in economies of scale. And intensified competition between different national monopolies – no longer able to hide behind the protection afforded by geographic restrictions and naturally localised markets – helped to drive investment in new machinery and methods.

The process bore a striking resemblance to that seen in the heyday of capitalism, as described by Marx and Engels in the Communist Manifesto:

“The increase in the means of exchange and in commodities generally…this [increased world] market, has given an immense development to commerce, to navigation, to communication by land. This development has, in its turn, reacted on the extension of industry…

“All old-established national industries have been destroyed or are daily being destroyed. They are dislodged by new industries, whose introduction becomes a life and death question for all civilised nations; by industries that no longer work up indigenous raw material, but raw material drawn from the remotest zones; industries whose products are consumed, not only at home, but in every quarter of the globe.

“In place of the old wants, satisfied by the production of the country, we find new wants, requiring for their satisfaction the products of distant lands and climes. In place of the old local and national seclusion and self-sufficiency, we have intercourse in every direction; universal interdependence of nations.”

Capitalist accumulation

The most impressive growth rates were registered in West Germany and Japan.

Both countries had been flattened by the war. Whilst this was devastating for ordinary citizens, it provided fertile ground for capitalism to thrive.

Destroyed industries and infrastructure could be rebuilt and organised on the basis of the most modern technologies and techniques. As in other advanced capitalist countries, wartime scientific developments – such as aeronautics, electronics, plastics, and atomic energy – could be sweepingly applied across the economy. Other key sectors, such as metals, chemicals, and electrics also experienced a leap forward.

The labour movement, meanwhile, had been severely weakened by years of fascist rule, followed by continued political repression by imperialist occupiers and their local, comprador bourgeoisie.

Combined with a steady stream of migrant labour from the countryside to the cities, this ensured that the capitalists had access to an ample supply of low-wage workers. And for added benefit, the skill and educational level of this workforce was high relative to its cost.

Throughout these decades, Germany and Japan remained far behind US capitalism in terms of productivity. The average American worker had a far greater quantity of machinery at their elbow than their equivalent in these former countries.

By 1970, German and Japanese manufacturing productivity was still at only 30 percent and 27 percent of US levels, respectively. ^[5] But this was partially compensated for by the comparatively cheap cost of labour. For this same year, hourly labour costs in Germany and Japan stood at 57 percent and 23 percent, respectively, compared to average US wages in the sector.^[6]

With wages remaining suppressed, and productivity gradually improving, German and Japanese exports became increasingly competitive on a global scale. In one industry after another, these countries’ companies began to muscle their way into foreign markets, challenging US monopolies and taking a slice of their profits.

This international competition, in turn, spurred the capitalists in every advanced economy to further modernise production and increase productivity through new capital investment.

Thus a powerful, worldwide dynamic of capitalist accumulation and growth – as outlined by Marx in Capital – was created, stoked and lubricated by an expanding world market.

Fictitious capital

State stimulus also played a role in augmenting and prolonging the postwar boom.

In the USA expenditure on armaments accounted for around 10 percent of annual GDP, at its height / Image: The Communist

New technologies developed thanks to wartime economic planning helped to raise productivity. Similarly with the nationalisation of vital – but moribund – industries such as coal, steel, and rail in Britain, which needed to be modernised in order to aid private enterprise.

Keynesian ‘demand-side management’, including welfare payments and other public programmes, also acted as a stimulant.

In addition, military spending by the imperialist powers induced investment in a range of adjacent sectors. In the USA, for example, expenditure on armaments accounted for around 10 percent of annual GDP, at its height. ^[7]

This represented a double-edged sword, however, becoming an increasingly heavy burden on the real economy.

Arms expenditure was a huge drain, syphoning money away from productive investment. And government spending in general – whether it be on bombs or benefits – was increasingly funded through ‘deficit financing’: i.e. through printing money and national borrowing.

The result was a vast increase in the world economy of what Marx referred to as ‘fictitious capital’: money that circulates without any equivalent in real values, as embodied in actual commodities.

And this, in turn, created inflationary pressures throughout the system – pressures that were clearly beginning to burst to the surface by the 1970s.

Similarly to recent years, the capitalists and their mouthpieces attempted to blame workers and their unions for this inflation, claiming that ‘unreasonable’ pay demands were responsible for creating a ‘wage-price spiral’.

But in truth, it was the ruling class – and the anarchic capitalist system they defend – that were fanning the flames of inflation. And this remains the case today.

Class battles

After almost 25 years of effectively uninterrupted economic growth, by the end of the ‘60s, warning lights were flashing across the capitalists’ dashboard.

Most prominent of these was the reemergence of industrial militancy and intense class battles, following a long period of rising living standards, full employment, and relative social peace.

Events such as May ‘68 in France and the Italian Hot Autumn of ‘69 were an indication that the era of class compromise was over.

At root, these movements were a response to sharpening economic conditions for the working class, which in turn were a reflection of the intrinsic dynamics of the capitalist system.

In Capital, Marx explained how there is a general tendency under capitalism for the rate of profit to decline over time, as the bosses reinvest their surplus into new machinery and automation.

At the end of the day, it is the working class that produces all the new wealth in society, through the application of their labour. And this includes the surplus value appropriated by the capitalists, in the form of profit, rent, and interest, which comes from the unpaid labour of the working class.

As more and more is invested in productive plant and equipment, what Marx called constant capital, the proportion spent by the capitalists on wages – to buy workers’ labour-power – diminishes.

But since it is this part of their expenditure, the variable capital, that is responsible for creating surplus, this means that there is a tendency (all other factors remaining equal) for the capitalists to see a falling average rate of profit as machinery is introduced and production expands.

Individual capitalists who bring new technologies and techniques into their productive processes will temporarily gain super-profits. Automation allows these business owners to produce more commodities with fewer workers, and thereby reduce their costs below that of their competitors.

But on average, across the economy, the overall result is to lower the general rate of profit, since it is the application of labour by workers that generates all new value – including surplus value.

This is exactly what took place in the postwar period. As discussed earlier, global competition propelled the capitalists in all advanced countries to invest in ever-greater levels of technology and automation; to rationalise and streamline production.

For a time, with markets everywhere expanding, there was nothing to worry about. The rate of profit was falling: from over 16 percent for US and UK non-financial firms in 1950, by some measures, to less than 10 percent by 1970^[8]; a postwar peak-to-trough decline of around one fifth for the advanced countries as a whole, and of one third for American capitalism. ^[9] But importantly, the absolute mass of profits for big business was still going up.

Similarly, while the capitalists in America, Britain, France, and Italy were losing market share to their German and Japanese rivals, and later to rapidly industrialising countries in south-east Asia, their overall profits were still rising.

But eventually the tables began to turn, and the bosses went onto the offensive – squeezing the working class harder in order to counteract falling profitability.

The working class had been enormously strengthened thanks to the boom, however. And after years of slumber, this powerful potential force began to rear its head and flex its muscles, causing the ruling classes to tremble.

Bretton Woods

Another clear symptom of the fissures in the world economy – and harbinger of the 1973 downturn – was the slow collapse of the Bretton Woods system.

This monetary setup was, in essence, a dollar-based gold standard, made possible by the unrivalled dominance of US capitalism at the time that the arrangement was negotiated, in 1944.

Back then, there was a universal demand for dollars to fund postwar reconstruction. With over two-thirds of the world’s bullion in Fort Knox, the ‘greenback’ was deemed as good as gold.

Furthermore, at this time, the US economy was in surplus: both in terms of its federal budgets, and in relation to its trade with – and financial obligations to – other countries.

But over the years, as US capitalism underwent a relative decline, the situation flipped. Foreign imports increased. American exports became less competitive. Government spending ballooned. And by the early 1970s, the White House was presiding over fiscal and balance–of–payments deficits.^[10]

Added to this volatile mix was a deluge of worthless dollars circulating in the global economy.

Abusing its position as the issuer of the official global universal equivalent, US capitalism was buying up profitable foreign assets and strategic industries with dollars printed by American banks. Ditto with US imperialism and its vast military expenditure.

But this money had nothing to back it up in the real economy. Inflationary pressures were therefore building up everywhere, thanks to the reckless attempts by the American ruling class to curb the atrophy of US capitalism at the expense of its competitors.

With a mass of dollars sloshing around, and relatively fewer US gold reserves to underpin these, doubts were increasingly raised about the convertibility of the dollar into gold – the backbone of the Bretton Woods system. This led to speculative runs on the American currency, which was clearly overvalued.

After a number of failed attempts to export the crisis, by forcing rival powers to revalue and thus make their own exports less competitive, this unstable, unsustainable setup eventually came crumbling down.

Just like the gold standard before it, or the Euro single currency that came later, the fixed-exchange-rate Bretton Woods arrangement was able to facilitate world trade and financial stability for a period, as long as capitalism was booming and every national economy was moving in the same direction.

But as the world economy began to slow down, and the different capitalist powers started to pull in different directions, the rigidity of the monetary system became a fetter, and the barrier of the nation state became apparent once again. ‘Beggar-thy-neighbour’ policies were back.

On 15 August 1971, US President Nixon unilaterally suspended dollar-to-gold convertibility. Bretton Woods was soon abandoned in favour of floating currencies and competitive devaluations. The death knell of the postwar economic order had been struck.

Overproduction

Against this backdrop, it is evident that the 1973 oil shock was no isolated incident, but was one of many bombshells to blitz the world economy in quick succession in this period – a reflection of the growing contradictions that had come to penetrate the foundations of the capitalist system by this time.

Added to the plethora of problems already described was another potent economic contradiction now facing capitalism: that of overproduction.

Marx long ago explained this inherent contradiction within capitalism.

The anarchy and limits of private property, he underlined, mean that there is an inevitable tendency under capitalism for the productive forces to outstrip the restrictions of the market. Society’s capacity to produce goes beyond what ‘effective demand’ (the ability of consumers and businesses to pay) can absorb.

Capitalism, Marx and Engels state in the Communist Manifesto, “conjures up such gigantic means of production and of exchange” that it becomes “like the sorcerer who is no longer able to control the powers of the netherworld whom he has called up by his spells”.

After decades of accumulation and growth, this overproduction was manifest across the global economy.

Most symptomatic of this development was the ‘excess capacity’ that plagued industry after industry, as the ravenous capitalists blindly invested and expanded, all chaotically chasing after ever-larger profits.

In the USA, for example, the overall utilisation of productive capacity in manufacturing fell from a boom-time peak of 92 percent in 1966, to a recessionary low of 75 percent in 1971, and then even further to a mid-slump nadir of 65 percent in 1975.^[11]

Beginning in key sectors of the American economy like automobiles and construction, this overproduction began to express itself in the form of glutted markets and declining sales. This, in turn, led to a vicious cycle of falling prices, reduced profits, diminishing investment, and growing unemployment.

A dynamic of capitalist crisis was taking hold.

From boom to bust

The energy crisis compounded the problem, creating a spike in inflation and squeezing workers’ purchasing power at a time of already-depressed demand.

The ruling classes’ efforts to stomp out rising prices through deflationary measures, meanwhile, pushed the economy further into recession.

Boom turned to bust. And with the world economy more integrated than ever before, the crisis soon spread to the rest of the advanced capitalist countries.

Industrial production in the advanced economies fell by 10 percent between July 1974 and April 1975,^[12] and by even more in countries like the USA and Japan. Stock markets plunged, with share prices in the UK falling by 55 percent between September 1974 and September 1975.^[13] And banks collapsed – most notably Herstatt, Germany’s largest private bank, on 26 June 1974.

The ruling class was thrown from pillar to post. Caught between the rock of recession and the hard place of inflation, they swung between expansionist policies (to prevent the downturn from turning into a depression) to austerity and cuts (to combat spiralling prices).

By the end of 1975, the economy was beginning to rebound. But the recovery proved to be fragile and short-lived. And in most places, the only thing that was growing were dole queues, as the spectre of mass unemployment haunted society.

Total jobless numbers across the OECD countries jumped from 8 million before the recession, to 15 million afterwards.^[14] And from here, unemployment continued to rise, reaching an estimated 17 million in 1978. ^[15]

By 1979, with ‘stagflation’ – stagnant output alongside surging inflation – setting in once again, the representatives of US capitalism moved decisively to place the full burden of the crisis onto the shoulders of the working class.

Paul Volcker, chair of the US Federal Reserve, hiked interest rates to tighten the money supply and bring down inflation. Soon after, Ronald Reagan was elected president. And alongside Margaret Thatcher in Britain, and other capitalist politicians worldwide, he unleashed an onslaught of attacks against the organised working class.

The issue for the capitalists, however, was that their bitter medicine looked like it could kill the patient.

In order to restore profitability, the ruling class needed to destroy swathes of capital locked up in outdated and obsolete industries; they needed to rationalise and modernise production, at the expense of workers’ jobs, pay, and conditions; and they needed to drive down wages and intensify labour, in order to increase the rate of exploitation.

But the tools at their disposal were blunt and heavy: tight monetary policies and so-called ‘creative destruction’, which scorched the earth and throttled new productive businesses from developing; and state repression against the most militant trade unions, which provoked immense social and political instability.

In the end, the ‘monetarists’ partially achieved their aims. A new upswing for capitalism was generated. But this was accomplished on the backs of the working class. And for large layers, living standards were only maintained thanks to an explosion of credit.

The downfall of the Soviet Union and the reintegration of China into the world market gave capitalism a new lease of life in the subsequent decades.

Globalisation – with production offshored and supply-chains stretched – provided the imperialist powers and their multinational monopolies with access to cheap labour and raw materials abroad, helping to keep a lid on inflation and augment profits.

At home, meanwhile, the acquiescence of the labour leaders allowed the employers to get away with murder.

But the liberal establishment’s hubristic talk about the supposed ‘end of history’ turned out to be extremely misguided. In hindsight, the collapse of Stalinism proved to be the prelude for a far bigger collapse: that of capitalism.

Revolutionary perspective

Fifty years on, the reverberations of the 1970s economic earthquake can still be felt.

We must learn the lessons and draw the appropriate conclusions from this period of crisis and class struggle / Image: own work

The 1973-75 recession was a historic turning point for capitalism; a profound blow to the system, from which, according to all the indices, it never truly recovered.

From this time onwards, faced with a Gordian Knot of contradictions, a powerful worldwide working class, and the threat of revolution, the ruling class responded to every new crisis by bailing out capitalism with state intervention, taxpayers’ money, and cheap credit.

As a result, a mountain of debt – government, corporate, and household – has amassed across the globe, weighing down on the world economy.

As far as there was a recovery after the ‘70s, then, it was one built on sand – paving the way for the even deeper, wider crisis of 2008.

This has important implications for perspectives today.

Far from seeing a repeat of the postwar boom, the outlook for capitalism is one of increasing instability and intensifying crises at all levels: economically, environmentally, militarily, socially, and politically.

We are not in an epoch of reforms, but of counter-reforms and vicious attacks, with all the hard-fought gains of previous generations being eroded and snatched away by the capitalists and their representatives.

The ideas of Keynesianism have been completely discredited. At the same time, the monetarist wing of the bourgeoisie has no solutions either. The system is at an impasse.

A new chapter is therefore opening up: one of revolutionary upheavals in all countries, just as was seen in the 1970s – with the explosive movements and militant battles in Spain, Greece, Portugal, Chile, Britain, and elsewhere – but this time on a higher level.

We must learn the lessons and draw the appropriate conclusions from this period of crisis and class struggle. Capitalism was on its knees in this decade, ready to be dealt a deadly blow. But unfortunately there was no revolutionary leadership capable of carrying out this necessary task.

That is the primary contradiction that we must overcome today: the chasm between the objective needs demanded by history, and the absence of the subjective factor – the revolutionary party.

It is beholden on us to build the forces of communism, and put the dying capitalist system out of its misery once and for all.

[1] The economics of global turbulence, Robert Brenner, New Left Review issue 229, p48-49

[2] Capitalism since World War II, Armstrong, Glyn, and Harrison, p69

[3] Ibid, p212

[4] Ibid, p214

[5] Ibid, p212

[6] Ibid, p221

[7] The economics of global turbulence, p56

[8] The second slump, Ernest Mandel, Verso 1980 edition, p22-23

[9] Capitalism since World War II, p257

[10] The economics of global turbulence, p119

[11] The second slump, p26

[12] Capitalism since World War II, p314

[13] Ibid, p317

[14] Ibid, p324

[15] The second slump, p88