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1973 in Retrospect

Capitalist World’s Economy in Serious Difficulties

by Shih Chi-ping

[This article is reprinted from Peking Review, #3, Jan. 18, 1974, pp. 14-16.]

LAST year was an extremely turbulent year for the capitalist world’s economy. One violent wave after another—repeated monetary and financial crises, runaway inflation and the oil shortage resulting from the fourth Middle East war—crashed down on the already shaky capitalist economies, causing chaos in the whole Western world.

Monetary Crises

From the beginning of last year, furious squalls in the international monetary markets repeatedly aggravated the dollar crises. Under the blows of currency speculation and rushes to buy gold, the U.S. Government was forced to devalue the dollar for the second time within 14 months on February 22. But this second devaluation was still unable to stabilize the bedevilled monetary markets. With currency speculation going from bad to worse, the major capitalist countries in the West were compelled to close their foreign exchange markets twice in 20 days. In the end, after a series of emergency consultations, the monetary authorities in various Western countries finally decided to cut their countries’ fixed parity rates of exchange with the dollar and to let their currencies float together or independently. This resulted in the collapse of the capitalist international monetary system established after World War II with the U.S. dollar as the hub through which all other currencies in the world maintained a fixed parity with each other.

After the fixed parity syntem was dumped, the parity between capitalist countries’ currencies fluctuated even more and monetary markets in the West continued to be unstable.

With the dollar’s second devaluation, the official price for gold rose from 38 dollars an ounce to 42.22 dollars. By mid-May, however, the price for an ounce of gold on the free bullion markets in the West topped 100 dollars. Between June and July, the price in the free markets had soared to nearly 130 dollars an ounce.

At the same time as the sharp fall in the U.S. dollar’s parity, the British pound and the Italian lira were also caught in the dilemma of growing weakness. In early March, when the dollar crisis was extremely grave, the nine West European Common Market countries decided to let their currencies jointly float, but the pound and the lira, being too weak to join, had to float independently. Since then, these two currencies have been in a most critical position.

With the recent oil shortage in the West European countries, the economic future looks even bleaker. A gold rush has already happened in London, Zurich and other places. Besides the big drop in the pound’s parity and a decline in that of the Dutch guilder, the F.R.G. mark and the Japanese yen, all of which were always on the rise, have also started showing signs of instability.

The Western countries held a meeting in Nairobi, Kenya, in June to discuss ways and means to solve the monetary crisis and to establish a new monetary system for the capitalist world. But as there were deep-seated clashes of interest and differences, the meeting ended with no results at all.


To ease their economic crises, the major capitalist countries all adopted deficit financing—increasing government spending, expanding credits and artificially creating fictitious prosperity by so-called ”economic growth.” The result was that runaway inflation swept the capitalist world, which in turn further aggravated the monetary crisis.

A report by the West’s Organization for Economic Co-operation and Development gave the rates of inflation to the end of October 1973 as: Japan, 14.4 per cent; Britain, 9.9 per cent; France, 8.1 per cent; the United States, 7.9 per cent; and the Federal Republic of Germany, 6.6 per cent. The speed and scale of inflation in these countries had seldom been seen in the 20-odd postwar years.

A direct result of inflation was soaring prices, with wholesale prices climbing faster than retail prices and the price of foodstuffs and raw materials going higher than other general commodities so that prices of all commodity rose steadily with undiminished force.

Inflation and steep price hikes directly affected the people’s lives, lowered their purchasing power, sharpened the contradictions between production and marketing and hence created conditions for a new economic crisis.

In an effort to check inflation, the United States, Britain, France, Italy, the Netherlands and other countries have since 1972 resorted to such emergency measures as freezing wages, prices, rents and profits in varying degrees and at various stages. At the same time, all the capitalist countries have rushed to raise bank rates steeply, hoping that it would check credit and reduce the money in circulation. Some countries like Britain and Italy did this also to curb the outflow of short-term capital and to prop up the position of their currencies. At present, the central banks of various countries have nearly all gradually raised their interest rates to the highest in history: 13 per cent in Britain; 11 per cent in France; 9 per cent in Japan; and 7 per cent in the F.R.G. The U.S. Federal Reserve Bank raised its discount rates a dozen or more times from January to mid-August, from 4 per cent at the end of 1972 to 7.5 per cent. The various big commercial banks’ favourable interest rates for loans to big clients with the best credit hit a record peak of 9.75 per cent.

The major capitalist countries’ scramble to raise interest rates brought alarming rises in rates on credit loans for purchases of daily necessities and short-term loans which greatly added to the burden on the people and put a squeeze on market demand. On the other hand, the sharp interest rate rise inevitably raises the cost of production, thus reducing the amount of fixed investments by enterprises which in turn will increase unemployment and result in a sharp fall in economic activity.

Under the twin pressures of monetary crisis and inflation, Western economic circles have predicted since the middle of last year that 1974 will see an end to the fictitious prosperity in the major capitalist countries and the outbreak of a new economic crisis.

Oil Shortage

Following the fourth Middle East war last October, the Arab countries and some oil-producing countries decided to cut down oil production, raise oil prices and carry out an embargo against those countries that support Israel. These measures violently shook the Western world’s economy and threw it into chaos.

The Middle East and North Africa produce 41 per cent of the world’s total oil and more than 90 per cent of their output is exported to Western Europe, Japan and the United States. In 1972, oil from the Middle East and North Africa made up more than 80 per cent of West European and Japanese oil imports and 33 per cent for the United States. Reduction of the oil supply may paralyse the economy and this has caused widespread fear in the West.

This fear first made itself known when stocks dropped drastically in all major capitalist countries, a reflection of the capitalists’ apprehension over economic prospects. On November 19, the U.S. Dow Jones industrial average for 30 kinds of stock showed a record drop for 11 years with the biggest in oil, automobile and chemical companies. By December, the stock indices of various countries, compared to their peak periods, showed that Italy had dropped 50 per cent, Britain and the F.R.G. were down about 40 per cent, and the United States, Japan and France were down 25 per cent.

International oil monopoly companies took the opportunity to sharply raise the price of their oil products and get a steep rise in profits which caused an all-round hike in costs of production and transport, etc. This in turn led to further price increases and even more serious inflation. The U.S. November consumer price index rose by 0.8 per cent, meaning that the rate of increase for the year would be 9.6 per cent, which was an increase of 8.4 per cent over the previous year. It was reported that in November last year consumer prices in Japan went up 14.8 per cent as compared to 1972; the price of 1,200 commodities went, up from 20 to 50 per cent, an increase of 11 times in the varieties of goods and an increase of 6 times in prices compared to previous years. Inflation in the West European countries sharpened all round. Consumer prices in Britain in November rose 10.4 per cent compared to the year before while they went up 7.4 per cent in the F.R.G.

The ”energy crisis” caused by the oil shortage has compelled the United States, Japan and many West European countries to restrict the consumption of oil, electricity and other energy sources. The broad masses of people are experiencing a very hard winter due to the lack of oil and electricity for heating purposes.

Bleak Prospects

It is generally held in the West that 1973 was a turbulent year for the Western worlds economy and that prospects for 1974 are even bleaker.

At present, the energy crisis and rises in the oil price have seriously hit the economies of Western Europe and Japan which rely too much on oil imports, causing their currencies in the foreign exchange markets to fall steadily, the price of gold to sharply rise and the dollar to recover a bit. This has added to the turmoil and instability in the international money markets.

Economists and the press in the United States estimate that as a result of the energy shortage, the U.S. gross national product for 1974 will be down by 25,000 million to 30,000 million dollars, inflation and unemployment will be more serious with the rate of unemployment exceeding 6 per cent. Steel production may drop by 7 million to 12 million tons, and the petro-chemical, plastics, aluminium refining, copper refining, aircraft, automobile and chemical fertilizer industries will be badly hit. Agricultural production will be widely affected by the shortage of chemical fertilizers and oil for farm machines. People in economic circles in the Western capitalist countries expect that the United States will probably have a new economic crisis in its hands this year.

Japanese economic circles predict that Japan’s actual rate of economic growth this year will be down by 5.2 per cent and prices will go up, by at least 19.5 per cent. According to official Japanese estimates, Japanese production will be down by one-fifth or one-quarter, exports of many industrial products will be reduced, the scale of foreign trade will be cut down, and there will be a deterioration in Japan’s balance of payments and a drop in its foreign exchange reserves.

Likewise, the West European countries predict that their economic growth rates this year will drop while the rate of unemployment and inflation will rise. It has been said in Japan that if economic crises hit Japan, the United States and Western Europe simultaneously, the capitalist world will be caught in a serious recession.

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