George washington university. Before he introduces our speaker today, let me acknowledge our partnership with the National History center and the American Historical Association we are cosponsoring and coorganizing this seminar with. Let me acknowledgment our donors, the George WashingtonUniversity History department as well as a number of individuals giving support for this series. We want to acknowledge roger lewis, the cochairman of the seminar. Hes here all the way from texas. I want to welcome all of you and say thank you to the ones who do the heavy lifting in terms of getting is here and organize. We are grateful to you. [applause] thank you. With that, i think we should turn it over to eric. One last technical announcement, if you have one of these devices, and i suspect everyone in the room does. Turn it to vibrate or silence, that will prevent embarrassment and interruption in the next hour and a half. With that, it is my pleasure to introduce this afternoons speaker, an independent historian and economist living in washington d c. Hes the former finance rector of the economist and a Senior Member of the council on foreign relations. His previous books include the box how the shipping container made the world smaller and the economy bigger one of the bestknown Business Books in recent years. He received a doctorate in history from the City University of new york and today, he will be speaking on his new book. Marc thank you very welcome, everyone. Relations. His previous books include the im very honored to be asked to present here on my book and im pleased all of you came. I want to start by given a bit of an exclamation here. Giving a bit of an explanation here. People have looked at 1973 as a sort of turning point. Here is what it looked like. 41973, and all the advanced economies, Economic Growth had been rapid improvements in Living Standards and around the world, the economy grew at an average rate of 4. 9 from 1951 to 1971. At that rate, and economy will double in size in 14 years and quadruple in size in about 28 years. This is a world in which people can feel themselves becoming better off either day, by the year. Then, where you see the vertical line on the graph, everything changed. In the quarter century after 1973, the World Economy grew just 3. 1 per year. The decline was even sharper in the advanced economies of western europe, north america and japan. To a remarkable extent, the basic fact i have just outlined, and japan. Externally strong Economic Growth during the Third Quarter of the 20th century, much more ordinary performance during the Fourth Quarter are ignored in the many political, social and diplomatic histories of this time. So is the fact that these trends transcended International Boundaries in affecting every wealthy country in many developing countries. What i was trying to do with an extraordinary time is resent a new history of the second half of the 20th century from a perspective that from a perspective historians have largely ignored. Its important to remember the starting point here. At the end of world war ii, millions of refugees in japan and across europe filled bill rhodes, filled transit camps and needed relief. There was widespread destruction of infrastructure and capacity. In north america, there is no destruction of infrastructure but we had plans converted to war production that took a prolonged conversion back to peace time production and everywhere, inflation was a problem. Because there was Strong Demand for goods that have not been available since the 1920s, the on that, the day economies in the postwar era were far from modern. It is hard to take ourselves back to that europe but this is an age at the end of world war ii and most farms in this country and other countries lacked electricitys lacked electricity still. Lacked electricitys lacked electricity still. Many urban houses still had outhouses. For americans, the home phone was a party line and in other lacked electricitys lacked electricity still. Many urban houses still had outhouses. For americans, the home phone was a party line and in other parts of the world, getting a home phone could take years if you can get one at all. Lacked electricitys lacked electricity still. Many urban houses still had outhouses. For americans, the home phone was a party line and in other parts of the world, getting a home phone could take years if you can get one at all. Here is a statistic in 1945 at the end of the war, there were 3. 1 million mules on u. S. Farms. Farmers were more likely to own a mural to own a mules and a tractor. It was not just material goods much less than today, it was Living Conditions in many other ways. A woman born in japan in 1947 could expect to live to age 54. A man born in italy could expect to live to about 60. The first couple of years after the war ended was an Economic Disaster and many of you know this story. In the United States, this was known for labor conflict. In europe and japan, there were no currency reserves so governments did not have the wherewithal to import the most a sick products people needed for survival. Power plants could not generate power because there was no cold. Tractors could not allow fields because the words no diesel fuel. There was no diesel fuel. It was a chaotic time. In 1948, things began to change. There were three factors. One was a shift of u. S. Economic policies. In europe, the United States brought in the Marshall Plan which helped stabilize currencies and provide Foreign Exchange so countries could import the necessities to restart production. In japan, we had a had an Economic Policy that became known as the reverse course. That was the idea that instead of punishing japan for making it caused the war, we ought to help the economy grow to stabilize japan as a bulwark against communism and create a trading partner for ourselves. U. S. Economic policy was part of the change that happened in 1948. Second, there was the currency reform in west germany which was not unrelated to the fall of the iron curtain across europe in that year. These two events had an important effect. It allowed for the fundamentals of the market economy to begin. Until then, a lot of the Economic Exchange had been to barter because there was no faith in the currency which was deliberately kept unstable by the russians who shared authority over it. The fall of the iron curtain over Eastern Europe turned to be positive for Economic Growth in the west. Think of this as the russians walling themselves off. Prior to that, they had been meddling endlessly. In Economic Affairs in west germany particularly, but also in west European Countries. The iron curtain was a bit of a withdrawal and made it possible for the west to grow. Then there was in 1948 the beginning of trade liberalization, the foundation of the general agreement on ade and what he came the common market. From those reforms, those firmer foundations, many began to grow. 1948 was the first year of growth. Many countries would grow economically straight through until 1973. There were literally countries that went more than a quartercentury without a recession. The west germans called this the economic miracle. The italians talked of the miracle. The french name was the 30 glorious years. The japanese are more modest and talk about the era of strong Economic Growth. We tend to call it the golden age. The golden age was the heyday of economic planning. Economists had new ideas and built upon the work of John Maynard Keynes and some of the experience of the war about how to use the powers of government to provide full employment and steady Economic Growth. Naturally, perhaps, as economies grew well in the 1950s and 1960s as incomes rose and unemployment stayed generally low, the economists claimed credit. One of these was walter heller, some of you may remember him as chief Economic Advisor to president kennedy and president johnson. Shortly after leaving office, he gave a famous lecture at harvard in 1965 in which he claimed so far that the government knew how to adjust spending and taxes to maintain full employment without pushing up inflation. It, economics had replaced emotion with reason. This notion that the economy was reasonable got a lot of traction in the postwar period. No one was this attitude more than Carl Schiller. Hes shown here as the leader of the christian socialists in germany. He was a trained economist with a doctorate in economics. His notion was that it was possible to maintain an equilibrium of steady economic full unemployment, low inflation, and international balance. He referred to this ideal outcome as the magic square. 4 corners ofd the it. His idea was that by adjusting macroeconomic variables properly, the government could achieve this magic square, could keep the economy in balance. But schiller understood in a market economy, the government could not achieve the magic square itself. When he became west germanys economy minister and the Coalition Government that was formed in 1966, his experts produced fiveyear goals for each of the legs of the magic square. They had computing power, they had data, and they spent a lot of time crunching numbers to figure out the optimal course for the German Economy over the next five years. Then they brought together the captains of industry, the heads of the great labor unions, the heads of the trade association. The Board Members of the central bank and ministers from the cabinet. In a room much like this they sat around tables. Carl schiller would advise them what they needed to do in order to make the magic square a reality. He would tell them if the unions would hold their wage increases to x percent if business would , increase investment to y percent, and if the finance ministry would raise consumption and investment, the economy would remain in perfect balance and everyone would have a job in and growth would be strong. West germans would be happy. As you might expect, this promoted the general idea that the government had the power to assure prosperity for everyone. Unfortunately, this structure did not work out terribly well. The German Economy never did manage to perform according to the forecast of schiller and his staff of experts, but he tried. He really tried, convinced in his heart of hearts that the economy could be treated as a rational whole and could be made to act in an orderly way without the disturbances that interrupt life in unpleasant ways. Around the world, the good times continued to roll through 1973. 1973 was the peak year. The World Economy grew 6. 6 probably the fastest global , Economic Growth recorded in a single year of all of human history. The average Unemployment Rate across 28 advanced economies was 3. 2 . As the world headed toward the second half of 1973, the forecasts for 1974 were just as rossy. Inflation was a little bit of a problem, people said, but its not going to be a serious problem. We will have another year of strong growth. If you went into the minutes of the Monetary Policy of the federal open committee, there were complaints everywhere about shortages, the lack of manpower, the lack of resources. The economy was really going full steam, then the bottom fell out. In october 1973, jackson and armies the egyptian and syrian armies attacked israel. The regimes brai raised the pris of will and embargoed shipments to several countries including the United States and the netherlands. Initially, this did not seem like a very serious development. Governments and Central Banks in several countries actually raised their forecast for Economic Growth after the embargo was announced. But then it became serious. This is a picture, that to me, talks about the end of this era. Starting in 1973, a number of western European Countries imposed a sunday driving ban due to the scarcity of motor fuel. Everyone took this as a bit of a lark. This occurred in the netherlands, belgium, italy and switzerland, germany and a few other places. It was great. Students went out and had a picnic on the motorway. You can find photographs of kids rollerskating down the motorway. People left their cars at home. It was a real adventure. This was at a time when it was not quite accepted that this in fact was an economic turning point. Within two weeks of this event, this was early november of 1973, within 2 weeks the mood changed rapidly. Motorists around the world began to queue for gasoline supplies ran low. This is in the u. K. , but you can see similar photos any place in europe and in north america. The panic spread with a crisis, the toilet paper crisis. Rumors went around there was a shortage of toilet paper in of stock, and there was panicked buying. There were people actually injured because the japanese were desperate to get toilet paper before supplies ran out. The ministry of International Trade actually had to order that the warehouse is be emptied and the stores be supplied with all of the toilet paper people could use in order to quell this type of panic. In italy, the crisis in the fishing industry. Fishermen went on strike to protest against the high cost of diesel fuel. At the beginning of november 1973, there was still an optimism at the end of the month. At the end of the month, a feeling of crisis. We were moving into a new time, and all of a sudden the Central Banks started downgrading or forecasts for 1974. The oil crisis itself was over fairly quickly. By the spring of 1974, supplies were back to normal and surprisingly, the economic turmoil did not go away. A few figures here will tell a tale. From 1968 to 1973, income per worker rose at a 3. 4 annual rate in the 28 wealthy economies. 3. 4 a year. From 1973 to 1979, it grew by only half that. Average unemployment in the wealthy economies top 5 in 1975 , for the First Time Since the war, and it refused to go back down. People assumed this was perhaps a cyclical thing, unemployment would go up and then go back down, and it did not come back down. Meanwhile, inflation soared. The u. S. Consumer price index rose 70 between 1973 and 1980. In italy in the united kingdom, Consumer Prices doubled over that same period. These were not happy times. The economists who had been so eager to tout their ability to maintain steady growth and full employment suddenly seemed helpless. They described the new situation with a new word stagflation. As if the world were afflicted by some unusual disease. I think it is helpful today to recall the way inflation was understood back in those days because the understanding of , inflation in the 1970s would strike us as bizarre. There were different types of inflation is what was said in the public discussion. There was something called cost push inflation caused by unions forcing up wages and employers pushing up prices. For costmended cure push inflation was price controls. President johnson, ford, and controls,right price as did the government in great britain, spain, belgium, and many other countries. Price controls were typically greeted very warmly by the public. They were going to solve the inflation problem and the editorials of the newspapers were overwhelmingly positive. Normally, this enthusiasm lasted about two months and people began to see price controls were not all they were billed to be and caused severe economic dislocations. Alongside cost push inflation, there was something called demand pull inflation. Demand pull means people were trying to buy too much stuff. One cheer for that was one q cure for that was credit controls. Households and businesses could not easily, so they couldnt buy so much. We had credit controls in this country. President carter tried them and they were used in the number of other countries. Economists and politicians overwhelmingly believed there was a permanent tradeoff between unemployment and inflation. This was best described in 1978 by president carters chief Economic Advisor who died just last year. Schultz said we know how to get to full employment. Thats not the problem. We know how to do it with the old standard tried and true techniques tax cuts, easy money, putting more money into certain government programs. But, when we do that, we set off the inflation. The government itself was helpless against inflation or so it believed. No one believed it more prominently than arthur burns. Arthur burns is here, second from the right between gerald ford and richard nixon. On the other side is Milton Friedman. Burns is most prominent economist in the United States. He was the chairman of the Federal Reserve board from 19701978, and he did not believe Central Banks could do much about inflation. As i said, you have to put yourself in the mindset of the 1970s to think about how the economy was being run, with the central banker saying inflation is not my problem. In burns view, the way to fight inflatio