US Economic History 9 — America’s Transition to a Global Economy (1960s-1990s)
The US became a global economy, but also struggled with stagflation and trade conflicts. Video created with the Bill of Rights Institute to help students ace their exams.
This is the final video in our series with Professor Brian Domitrovic, which aims to be a resource for students studying for US History exams, and to provide a survey of different (and sometimes opposing) viewpoints on key episodes in U.S. economic history.
- Income Inequality and the Effects of Globalization – Learn Liberty (video): Professor Tyler Cowen explains that globalization has decreased income inequality worldwide.
- What is the Gold Standard? – Learn Liberty (video): Professor Lawrence White explains what a gold standard is and why the US left it, and argues that it’s more stable than fiat currency.
- Explainer: What You Should Know About NAFTA (blog post): Joe Carter explains the North American Free Trade Agreement, what it is, why it’s controversial, and how it affects the US economy.
Brian Domitrovich: America prospered in the years of World War II as the world’s dominant superpower, but in time that prosperity gave way to a more uncertain economy, especially that of the stagflation years of the 1970s, and the slow growth and Great Recession years of the 21st century.
By the 1950s and 1960s, a number of nations that had been devastated by the war began to recover strongly. This happened as the United States pursued two major policies aimed at promoting the post-World War II economic order.
The first of these was the reestablishment of the international gold standard that would make all countries’ currencies acceptable globally. The American-led Bretton Woods Monetary Conference of 1944 began the International Monetary Fund.
The IMF was chartered to help nations after the war to keep their currencies’ exchange rates fixed to the dollar, and the dollar to gold. With currencies fixed to the dollar in gold, consumers and businesses the world over used them without fear that their value would erode.
The second American initiative in the global economy was the Marshall Plan, by which the United States, from the end of World War II through 1953, provided European nations with $15 billion to relieve hardship and rebuild their industries that had been devastated by the war.
By the 1960s, America’s two great antagonists from the war, Japan and West Germany, were now the second and third largest economies in the world, trailing only the dominant United States. Both of these rapidly recovering nations ran trade surpluses, selling more abroad than they imported.
By the 1970s, American industry was having increasing difficulty competing with the sophisticated industries of Japan and West Germany, particularly in such areas as cars, scientific goods, and electronics.
One problem was that startup companies in the United States were rare. This led established American corporations to become lax in planning and operations. Labor unions also had an impact as they squeezed profit margins by winning more pay and benefits for workers from their companies.
In 1971, the United States, in a stunning development, ended the Bretton Woods monetary system that it had been leading and took the dollar off the gold standard as it tacked on a tariff on imported goods.
When the United States decided to no longer fix the price of the dollar in gold, the oil price shot up tremendously. The Organization of Petroleum Exporting Countries, also known as OPEC, embargoed exports of oil to the United States in 1973 in order to punish America for supporting Israel in an Arab-Israeli war. That caused the price of oil to triple.
In 1980, OPEC cut production a second time and the price of oil tripled another time. These huge price increases accompanied a series of terrible recessions in the United States in which economic growth stopped or shrunk, as prices shot up by 10% or more per year.
Commentators call this stagflation, which was the combination of an economy not moving, stagnation, and an unprecedented series of price increases, inflation. Economists were confused by this development because Keynesianism had taught that recessions and unemployment were the antidote to inflation, and vice versa.
Europe, meanwhile, was working on coming together economically. The European Coal and Steel Community of 1951 became the broader free trade zone of the European Economic Community, EEC, of 1958. The common currency, the Europe, planned for decades, was launched in 1999. Substantial deindustrialization hit the United States in the 1980s, as inflation fell off and the dollar appreciated against world currencies to all-time high levels, making American goods more expensive for foreigners to buy, and therefore uncompetitive. Regions where steel and other heavy industrial production used to dominate the economy, from Pittsburgh and Buffalo and the Mid-Atlantic, to Cleveland, Detroit, and Milwaukee in the Midwest, now became known as the Rust Belt, as factories went overseas in search of cheaper labor.
One response of the United States was to broker regional trade deals such as the North American Free Trade Agreement, NAFTA, of 1992, which emulated the European Economic Community, in an effort to increase the market for American goods.
In the late 1990s, Japan’s rate of economic growth fell sharply as new Asian competitors to the American economy began to come of age: China and India. China ran enormous trade surpluses with the United States, meaning that it sold more merchandise to the United States than it bought for us, and then used a substantial portion of the money made from selling exports to the United States to buy US government treasury bonds. The substantial United States federal budget deficits of the 2000s were largely financed by these bonds.
The United States has a broad range of historical experience to learn from in terms of great successes and great challenges in the global economy since World War II. If Americans learn from those experiences and draw upon this nation’s rich economy history from across the centuries, and its traditional of global economic stewardship, then the United States will remain a prosperous and innovative global economic leader.