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International Socialism, January 1978


Notes of the Month

World Economy: Slowing Down


From International Socialism (1st series), No. 104, January 1978, pp. 2–3.
Transcribed by Christian Høgsbjerg, with thanks to Sally Kincaid.
Marked up by Einde O’Callaghan for ETOL.


The last hope that the Western capitalist economies would enjoy a rapid and easy recovery from the 1974–75 recession is now dead. A year ago we pointed out to the ‘signs that the world economy is slipping back into recession’. (Notes of the Month, IS 94, January 1977) Originally these signs were interpreted as meaning that the world economy was ‘pausing’ before resuming the steady growth rates of the 1950s and 1960s. The ‘pause’ has now lasted eighteen months. To quote the Economist:

‘The industrial world no [trough, capital outlays, when] longer has any credible chance [adjusted for inflation, have] of staggering back on to the path pegged out by its economic club, the Organisation for Economic Co-operation and Development, for a return to full employment before 1980.’ (19 November 1977)

The OECD secretariat now predicts that there will be a marked slow-down in the growth rate of the Western capitalist economy during the second half of 1978. This slowdown will affect, not only the weaker economies like Britain, France and Italy, but also the ‘miracle’ economies of the post-war boom – West Germany and Japan.

The latest forecast by the five leading economic research institutes in West Germany predicts a growth rate for the country of 3 per cent during 1978. (Financial Times, 25 October 1977) And the Japanese economy has slowed down sharply from a 2.1 per cent rise in gross national product in the first quarter of 1977, to 1.7 per cent in the second quarter and only 0.5 per cent in the third. (ibid., 10 December 1977)

Only the United States has, to some extent, been exempt from these problems – real growth has been running over the last two years at an annual rate of 5.5 per cent, compared to the OECD average of 4 per cent. However, the underlying situation is equally serious:

‘A continuation of the recovery now depends more than ever on corporations overcoming their marked reluctance to go ahead with their capital investment programmes. In the two and a half years since the recession [trough, capital outlays, when adjusted for inflation, have] increased less than half as much as they did not average over similar periods in previous expansions since Hitler’s war.’ (Economist, op. cit.)

All over the Western world capitalists are not investing in new plant and equipment. In the absence of investment, the motor of capitalist growth, the Western economy is sluggish and stagnant.

The slow rise in world trade causes overcapacity in many industries. This, in turn, gives rise to vicious competition as companies and even countries fight to dominate markets that are too narrow to accommodate everyone.


The result is the confrontation between the three main Western capitalist states – the US, West Germany, and Japan. America has run up a huge balance of payments deficit. This deficit is due, in part, to massive oil imports, but also the high rate of growth clocked up by the US economy since 1975 which has sucked in imports.

At the same time, both West Germany and Japan have run up large balance of payments surpluses, partly because of their success in exporting to the US. American capitalists increasingly restive about the situation, are demanding that the Germans and Japanese reflate their economies and thus help spread the burden of economic recovery more evenly. The Germans and Japanese are not very receptive to this idea, since their economies involve massive capital investments geared to exporting, and they see little economic advantage in risking a revival of inflation by boosting domestic demand.

This situation has led to a wave of protectionism that has affected sections of American big business as well as the trade union bureaucrats of the AFL-CIO, and whose main target is Japan, whose super-efficient export industries are only able to handle their huge problems of overcapacity by unloading large quantities of goods abroad (see Notes of the Month, IS 103, November 1977).

The integration of American capitalism in the world economy is too great for the protectionist card to be pushed very far:

‘One out of every eight workers in manufacturing produces for export. More than half America’s wheat, soya bean and rice is sold abroad. Almost one out of every three dollars of American corporate profits now derives from the international activity of American firms, including their foreign investment, as well as their exports’ (Economist, op. cit.)

So Washington (although not loath to threaten higher tariffs on imports when it suits its game, for example, in the case of steel), is using another weapon – the devaluation of the dollar. Particularly from September–October 1977 the US Treasury adopted a policy of ‘benign neglect’ towards the dollar aimed at forcing it down on the foreign exchanges.

As the dollar has fallen so the currencies of its two main competitors – West Germany and Japan – have risen. By December 1977 the deutschemark had risen from over 2.40 to the dollar to about 2.18. The yen rose even more dramatically – from over 290 yen to the dollar to around 240 yen. The result is to give American capitalists a competitive edge – as the dollar falls so does the price of American goods on the world market.

This policy carries a number of dangers with it. First, it is likely to lead to a slowdown of the West German and Japanese economies. The rise in the exchange rates of their currencies means that their exports become more expensive and exporting less profitable. West German anger at this situation lay behind a secret meeting of Western finance ministers in early December, whose aim was to organise joint action to halt the decline in the dollar.

Moreover, the devaluation of the dollar could usher in a new period of international monetary instability comparable to the late 1960s and early 1970s. The American balance of payments deficit means that a flood of dollars is pouring into the world economy to pay for American debts. Of particular importance is the concentration of international money capital in the hands of Arab oil producers, much of which is held in dollars.

‘The Bank for International Settlements estimates that dollars held in banks outside America now amount to a staggering 350 billion dollars, three times the amount held at the end of 1972. And foreigners have also invested over 100 billion in short-term bank deposits and in ‘government securities in America itself.’ (ibid., 5 November 1977)

This huge reservoir of speculative money is effectively independent of the control of any single government. It can move at great speed from one financial centre to another, overturning national economic strategies in passing. One example is the huge inflow of money into London this year, which eventually forced Healey to allow the pound to float freely and raise interest rates -developments which threaten to choke off any British economic recovery in 1978.


A temporary relief from this vicious circle can only come from a new wave of investment throughout the Western capitalist bloc. But for this to happen the return on new investment must outweigh the risks. Capitalists are haunted by the inflationary boom of 1972–3 and the recession that followed it. They fear that any sustained revival in growth rates will inevitably lead to an equally rapid rise in the rate of inflation as interest rates, the price of raw materials and wages all shoot up under the pressure of competition. They know that the recession did not clear inflation out of the system. Although the rate of inflation fell, prices continued to rise. They are not prepared to face the massive bankruptcies and resulting confrontations with workers that would get rid of inflation – instead they appeal to the state to prop them up when they are in trouble. They also know that the real rate of return on their capital has fallen since the late 1960s and that although profits have risen since the depth of the slump in 1974–75 they have not kept pace with the cost of new investment. The system continues to drift on. It survived the recession, but only severely weakened. A massive increase in the rate of surplus-value might restore the profitability of capital. But the obstacle remains workers’ organisations, which also emerged from the slump intact, albeit a bit battered. The bourgeoisie is not yet prepared to confront these organisations, head on, so it will continue to rely on the trade union bureaucracy to persuade rank-and-file workers to accept cuts in their living standards. The formula varies from country to country – social contract in Britain, historic compromise in Italy social pact in Spain, social plan in West Germany – but the essence is the same. Revolutionary parties will be built through organising rank-and-file opposition to the class collaborationist policies of their leaders.

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