The 1973 oil price shock: Are we headed for a new period of capitalist stagflation?

People in Amsterdam take to the streets following the 1973 oil export embargo by OPEC. Photo: Public Domain

As we head towards double-digit inflation, the Tory government in Britain is trying to offload blame for the huge price rises in fuel and gas by pointing to the price shock that has taken place this year due to the Ukraine war.

Some capitalist commentators have compared the current crisis with the big rise in inflation that occurred in the 1970s after the oil embargo that followed the Arab-Israeli war in 1973.

There are important lessons for the working class and the organised labour movement from the experience of the 1970s, but the economic condition of world capitalism today is starting from far more parlous state.

Yom Kippur war

The war between Israel and Arab states in October 1973 took place at the end of 25-year long sustained upswing in world capitalism.

In the wake of the war, often called the Yom Kippur or Ramadan war, oil-rich Arab regimes in Opec (Organisation of Petroleum Exporting Countries) retaliated against the support and arming of Israel by the main capitalist powers. The oil-producing states imposed an oil export embargo on the west. The price of oil quadrupled from $3 a barrel to $12.

The embargo produced a big shock to the capitalist system. The unprecedented post-World War Two capitalist upswing, beginning in 1948, came to a juddering halt. The price of petrol rocketed, making all transport more expensive.

In Britain, the Tory government of prime minister Ted Heath considered introducing petrol rationing. Across the capitalist world there began a year-long recession, the deepest since the Great Depression of the 1930s. A new word entered the economic lexicon, ‘stagflation’ – rising inflation cut living standards that reduced demand for goods combined with a stagnant economy.

And the capitalist economic crisis fed into political crises that questioned the existence of capitalism itself. Workers moved into action to demand pay rises that kept pace with inflation, that was cutting their real wages. A new wave of industrial militancy in Britain opened up as the miners struck in January 1974 for a 35% wage increase, that still only maintained wage levels prior to 1972.

The Heath government, that had implemented a three-day week to conserve energy stocks, called a general election in February on the theme of ‘who rules Britain?’ hoping to use its mandate to defeat the miners. But instead it was narrowly defeated in the election and the miners won their pay claim from the newly-elected Wilson Labour government.

High inflation continued throughout the 1970s, reaching as high as 24% under Harold Wilson, and the class struggle intensified. The Labour Party base, still dominated by the working class, swung to the left. The then small forces of Marxism grouped around Militant (the Socialist Party’s predecessor) started to win the ear of increasing numbers of workers and youth.

The oil shock did precipitate the first major economic crisis of the post-war period. But it is a mistake to see the shock as the primary cause of the end of the post-war boom. Already the signs were there that the boom was ending and new contradictions in the capitalist economy that had accumulated during the growth period were coming to a head.

End of post-WW2 boom

The unprecedented levels of growth across the capitalist world were already abating by 1970.

The working class had been able to gain increasing living standards and win significant reforms during the boom through struggle and increased trade union strength, like the welfare state and the NHS.

Against a very different world balance of forces, the capitalists had been making healthy profits and made concessions to the working class that had returned from WW2 demanding no return to the poverty and unemployment of the 1930s.

But by the end of the 1960s the period of sustained growth was already waning and the bosses were pushing back against workers’ demands. The signs were especially telling in Britain, where the ‘captains of industry’ in its ageing industries had refused to invest at a level that allowed them to compete with their foreign rivals and, consequently, profitability had declined.

As the sun was setting on the post-war boom, the bosses were increasingly looking to make the working class pay for the slowdown.

There was developing an increase in the class struggle. In France, in 1968, a revolutionary movement of the working class came close to overthrowing capitalism.

The number of strike days in Britain had risen from 1.8 million in 1963 to 11 million by 1970, and increasingly it was workplace shop stewards committees that were organising action rather than the old ‘conservative’ trade union leadership.

And inflation was already increasing. The ‘Keynesian’ policies of governments across the world of essentially printing money to fuel growth had helped sustain growth for a long period, but in doing so it had also fuelled an inflationary spiral.

The increase in the money supply created by governments was not matched by increases in production and so more money was chasing a relatively smaller supply of goods, causing their prices to rise. Inflation in the UK had risen from 1% in 1960 to over 9% in 1971.

The oil shock added to a process that was already baked into the capitalist economies.

Offloading the crisis

As always, the bosses were attempting to force the working class to pay for the crisis of the capitalist system. Ageing British industry was losing markets as a result of the failure to invest in capital expenditure, ie new machinery and production techniques.

The rising economies of Japan and West Germany invested 3-4 times more than the British capitalists, and were able to raise productivity and cheapen their products. But the British capitalists’ response was not to invest more, but instead to try and force down real wages and intensify labour exploitation.

For the bosses, inflation was quite useful up to  a point to force down real wages. If wages rose less than inflation then the value of workers’ pay fell as prices rose. But the attacks from the bosses opened up a new era of industrial class struggle that had already begun before the oil shock.

Strike wave

The Tory Heath government, elected in 1970, launched an offensive against the trade unions on behalf of British capitalism. It opened up one of the biggest strike periods in British history with miners, dockers and car workers leading a mass industrial movement that shredded Heath’s anti-union laws and brought his government down.

The previous Labour government under Wilson had also attempted to rein-in the trade unions on behalf of capitalism with its notorious ‘In place of strife’ policy, which was subsequently ditched following a revolt by Labour’s affiliated trade unions.

However, the incoming 1974 Labour government, again led by Wilson and later by James Callaghan, was elected and promised reforms.

But, mid-term, under pressure from the ruling class, it carried out the dictates of the capitalists and the International Monetary Fund and tried to impose wage increases well below the rate of inflation – again trying to make workers pay the price for the inflationary crisis.

Another huge strike wave including the ‘winter of discontent’ in 1978-79 culminated in Callaghan’s defeat and the coming to power of Margaret Thatcher.

Today, the huge rise in oil and gas prices has fed a new jump in inflation again. The dislocation of market supply arising from the Covid lockdowns and the war in Ukraine is forcing fuel prices up so high that 4 million households in Britain face not being able to heat their homes next winter.

While the Tory government and the ruling class will try and pin the blame on rising oil and gas prices, inflation is much more deeply embedded in the system itself.

New bosses’ offensive

Inevitably, the bosses will try and make working people pay for the inflationary crisis just as they made us pay for the 2008 financial crisis and the recession that followed.

They will be dusting off the play books from the 1970s – claiming that workers’ pay will have to be restrained to stop an inflationary spiral. Inevitably this will open up a new phase of trade union pay battles as workers fight to keep their heads above water while the bosses defend their profits.

The question will be posed, who should pay for inflation the working class or the super-rich capitalist elite?

And the world capitalist economy and especially British capitalism are in an even weaker position today than in the 1970s. Even prior to Covid the global economy was slowing down towards another possible recession.

And the living standards of working-class people across the world have already taken a battering. Across the world capitalists have forced workers to take enormous hits to living standards using austerity measures.

In Britain, nearly £250 billion a year from 1980 to today has been siphoned from the collective wealth of the working class to the capitalists.

Today, workers’ pay will be hit even harder by double-digit inflation, and there will be no alternative but to struggle for higher pay just to maintain living standards.

The fear of inflation could prompt the central banks to raise interest rates and potentially trigger a new recession. Coupled with likely economic slowdowns arising from stagflation, this crisis heralds a new phase of class struggle.

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April 2022