“The most significant political figure in Nixon’s Washington,” economist Eliot Janeway once observed, is “Hoover’s ghost.” Not, as journalists like Henry Brandon would have us believe, Metternich’s ghost, strutting about in the guise of “the President’s first minister, Dr. Kissinger.” Like Metternich, Brandon candidly reports, Kissinger is “bored” by economics. It is a cardinal flaw in a world in which, unlike Metternich’s, economics and politics are inseparable, and it is only necessary to recall the fate of Kissinger’s much trumpeted Grand Design, produced with such fanfare in April, 1973, to see its consequences. “Pure baloney,” commented Joseph Kraft when the Kissinger plan appeared, and he was not wrong.

Janeway’s observation is salutary because it directs attention away from the short term, where politics appears to dominate, to the long-term factors in the current world situation, from the fleeting events of newspaper headlines—“flowers of a single day, fading so quickly that no one can grasp them twice”—to what Fernand Braudel, in a famous essay, called la longue durée; in other words, to the recurrent rhythms and cycles, particularly the economic cycles, by which the actions even of those whom history acclaims as among the greatest manipulators of events—Bismarck, for example—prove, on close examination, to be almost entirely conditioned. More specifically, in invoking “Hoover’s ghost,” Janeway (sponsor, incidentally, of the lectures on which James Tobin’s new book is based) directed us back to the 1930s, the great watershed in twentieth-century history. If, as Brandon predicts, the 1970s will go down in history as the second great watershed, the experience of the 1930s is certainly not irrelevant.

Janeway was not the first, and certainly will not be the last, to draw parallels between the 1970s and the 1930s. Already in 1959 that “dangerous radical” (the phrase is Tobin’s), Professor Triffin of Yale, issued a prophetic warning, only too dramatically confirmed in 1971, of a repetition of the 1931 debacle. In 1965 came William McChesney Martin’s famous “outburst” (the phrase, again, is Tobin’s) on the “lessons of 1929.” Since then the chorus has swollen without cease—and this on the part of responsible, conservative writers, bankers, economists, leaders of international finance, not the professional purveyors of Toynbeean gloom.

Consider, for example, the Institute of Applied Economics in Melbourne in 1971: the crisis facing Australia, it warned, was potentially as great as the Depression of the Thirties; “here, as in North America and Britain, the future of the economy and the society we have been building over the last quarter of a century is at stake.” Or Alan Day of the London School of Economics: “the worst crisis since 1931.” Or Professor Harry Johnson, an oracle at the University of Chicago as well as in London: “the textbook gives no answer,” or (as Alan Day puts it), “We have to rethink the whole nature of our economic and monetary system, involving a revolution as profound as the Keynesian revolution of the 1930s.” Or, finally, the statement of a senior Treasury official in England, backed by the authority of Lord Robbins and Lord Roberthall: if the position were allowed to slide—and yet no one knew the way out—“parliamentary democracy would ultimately be replaced by a dictatorship.”

Shades of Hitler, with Haldeman and Ehrlichman cast in the parts of Goebbels and Goering! The Depression of the Thirties marked the demise of old-style capitalism: will the crisis which came to a head in 1971 mark the demise of neocapitalism, or what Galbraith more innocuously calls “the new industrial state”? As late as 1968, introducing the revised edition of his Modern Capitalism, Andrew Shonfield could still maintain that “a major setback to Western economic growth” was “unlikely,” and reaffirm his belief that “there is no reason to suppose that the patterns of the past…will reassert themselves in the future.” His faith in the efficacy of the “new economics”—in improved “techniques of economic measurement,” in market management, “fine tuning,” and the manipulation of monetary policy and fiscal controls—has few convinced adherents left today.

Of the writers listed above only James Tobin, himself closely involved in the Kennedy economic machine, retains a (muted and cautious) belief in the “new economics.” No doubt, Tobin is right in saying that the “new economics” was “oversold,” that “too much was claimed” and far more expected than could possibly be delivered. The fact remains that the pendulum has swung in the opposite direction. Not only is the public disillusioned—as well it might be, with US inflation running at 14 percent or more and likely to top 20 percent by the year’s end, and gross national product down by more than 5 percent in the first quarter of 1974—but economists also have turned sour. Rickenbacker’s book is, in effect, a diatribe against the sins of the “money managers,” while Rolfe and Burtle advocate, less stridently, recourse to “free market prices” as the best and quickest way to find the “right answers.” Even Robert Heilbroner makes gentle fun of “fine tuning” and of “the Kennedy generation of managerialists” who propagated the art. Not only the ghost of Hoover is stalking the corridors of Washington, it seems, but the ghost of Adam Smith as well.


Economic crisis always produces a rash of plausible and less plausible remedies, and I do not believe, any more than Professor Tobin does, that the currently fashionable exercises in “monetarist” or “Friedmanite” heterodoxy offer a solution, or, even if in theory they did, that there would be the smallest likelihood of their being adopted. Considering how rapidly short-term analysis is overtaken by events, not much would be gained by subjecting all the books listed above to detailed examination; but cumulatively their existence is symptomatic, and perhaps more indicative of what Heilbroner calls “the pervasive unease of our contemporary mood” than Tobin’s rather complacent review of the current scene.

I doubt whether Tobin will have much success in convincing anyone today that “the social costs of inflation” have been “greatly exaggerated.” When he assures us that, in spite of inflation, “the economy is producing more and more of the goods, services, and jobs that meet people’s needs,” the simple answer—or at least the answer of left-wing critics—is that the goods produced are far too often not the ones people need, the services are deplorable and shockingly neglected (let him try the public transport if he has any doubts), and the job market is erratic and inadequate. When the Republicans lost the congressional by-election in Michigan in April, one reason alleged (not, I have no doubt, the only one) was that unemployment there was in excess of 12 percent.

It would not be difficult to find other examples of a similar complacency—for example, Tobin’s suggestion that recovery and growth in the 1960s did “more to lift the incomes of the poor and disadvantaged than any conceivable redistribution” program, a proposition, I would have thought, disposed of trenchantly enough in these pages by Leonard Ross as long ago as 1971.1 But two more general aspects of Tobin’s position seem to me more germane. The first is the suggestion, never quite stated but implicit in the argument, that the “system” is sound in itself and that you can get out of current difficulties by tinkering with the tax and budget machinery (or, as Tobin puts it, by sharpening “our fiscal and monetary tools”). The second is that (in the words of the 1965 Economic Report of the President) “no law of nature compels a free market economy to suffer from recessions or periodic inflations.”

About the first, it is sufficient to say that it looks suspiciously like fiddling while Rome burns; or (as William Rickenbacker puts it), “We cannot deal with fundamentals by technicalities and improvisations.” The second is, of course, the current orthodoxy. With the advent of Keynesian economics, Kindleberger assures us, a depression of the severity of that of the 1930s would “never again” be possible; the basic trouble was “economic ignorance.” Today, in 1974, we shall be inclined to ask whether economic wisdom has done a great deal better.

Professor Tobin is, of course, perfectly correct when he says that there is no reason why we should “fatalistically accept business cycles, unemployment and inflation as acts of nature.” Indeed, we have only to look as far as the socialist world to see that booms and recessions can be obviated; as Victor Perlo insists, “There are no reasons for the business cycle to exist in the planned economy of socialism.” The question, rather, is whether Marxist economists are right in arguing that a cycle of booms and recessions is inherent in the capitalist mode of production. Here it is necessary to make an important distinction. Even Perlo, for all his Marxist dogmatism, does not deny that economic management and the manipulation of “stabilizers” have been successful in smoothing out short-term business cycles and mitigating their consequences, though predictably enough he maintains that “they do not eliminate the contradictions that are rooted in capitalism.” But short-term cycles, of which Perlo counts five (on the average, one every five years) since 1945, are one thing, long-term cycles another.

Economists conventionally distinguish between the short-term (forty-month) Kitchin cycle, the intermediate (nine or ten year) Juglar cycle, and the long-term Kondratieff cycle of approximately fifty years. What concerns us today is the long-term Kondratieff cycle. Based on an analysis of European and American prices, wages, interest rates, and other indices from (roughly) 1780 to 1920, this cycle shows a regular series of rises and falls (rising, for example, from 1789 to 1814, from 1849 to 1873, and from 1896 to 1920; and falling in between). Kondratieff’s observations enabled him to predict the beginning of the decline in 1921, and the point is that—assuming his calculations still apply—the year 1971, like 1921 before it, marked the mid-term of the cycle, the beginning of the downturn and the start of the next long period (twenty to twenty-five years) of lean times, recession, and austerity. And though it may be conceded that “fine tuning” makes it possible in some degree to control short-term business cycles, the duration of the Kondratieff cycle, as Peter Jay has pointed out,2 is so long that there is no evidence or reason to think that “Keynesian principles of economic management have displaced it.”


Cyclical theory, of which the best known exponent was Joseph Schumpeter, has been under a cloud ever since the 1950s when a new generation of economists, led by W. W. Rostow, discovered (or thought they discovered) the secret of self-sustaining, self-generating, almost irreversible growth. When, lecturing not far from Chicago a couple of years ago, I spoke of Kondratieff—whose name, incidentally but perhaps not insignificantly, occurs only once, misspelled, in Kindleberger’s book—I was told afterward by the chairman of the economics department that not one of the graduate students had any idea whom or what I was talking about. And since Kondratieff was purged by Stalin, his name is anathema among orthodox Marxists too (needless to say, he is systematically ignored by Perlo).

Today, as we become more impressed (in H. V. Hodson’s words) by the “diseconomics” than by the magic of growth,3 and as we move into the downturn of the cycle, the climate is changing. It is no accident that Kondratieff’s two most notable articles were reissued in German in 1972 by heretical Marxists dissatisfied with the limitations of “pure” Marxist analysis.4 And now we have a paperback edition of Shuman and Rosenau’s The Kondratieff Wave, first published in 1972, which should at least ensure that the American reading public is aware of Kondratieff’s name and the outlines of his theory.

Long-wave theory, unfortunately, has little interest for “practical” economists with their noses fixed to the Wall Street grindstone. Anything that looks beyond next month’s fluctuations of the Dow Jones Index smacks, to them, more of theology than of economics. Moreover, the problem is compounded by the fact that, though no one, so far as I know, questions its existence, the way the long-term cycle operates is still shrouded in mystery.5 I am afraid Shuman and Rosenau, more enthusiastic than discriminating in their attempt to apply Kondratieff to the current American scene, are unlikely to win over the skeptical. 6 On the contrary, their book, with its facile and light-hearted predictions (not a few of them already disproved by events), could discourage rather than encourage the use of Kondratieff for serious analysis.

And yet, intelligently used—not, that is to say, as a magic wand opening all doors and disclosing all secrets, but as a practical tool—Kondratieff can help us to perceive and understand many features of the current world situation. For one thing, he forces us to view it in historical perspective, not as the unhappy outcome of a series of historical accidents caused by a glut of foot-loose Eurodollars, the greed of Arab sheiks, the costs of the Vietnam war, or the machinations of over-mighty multinational corporations (though all these and other things enter in), but rather as a particular phase in a recurrent phenomenon, which has its parallels in the past. In other words, he directs us back—and this is the second point—to earlier periods of large-scale recession—1871 to 1896, or 1921 to 1940—as landmarks from which to take our bearings.

Thirdly, he makes us aware that the long wave, though economic in origin, is not merely an economic phenomenon. Rather, as Shuman and Rosenau rightly insist, “It reflects not only major economic trends…but all facets of national life—from prosperity to social unrest to involvement in foreign affairs”—producing major sociological and political changes, including in the phase of downturn “a strong shift to political conservatism.”

Finally, if we accept the Kondratieff cycle, it conveys the frightening warning that we are only at the beginning of the “lean years” and that we must suppose that things will get worse before they get better. To that extent the parallels often drawn between 1971 and 1931 are misleading, and so is the conclusion that as things did not turn out as bad when the dollar went off gold as they did when the pound went off gold in 1931, we are out of the wood. On the contrary, the parallel, if there is one, of 1971 is with 1921, when the boom which began in 1896 ran out, and our comparative place in the cycle today is 1924, not 1934. Evidently, there is still time, as governments fiddle and inflation grows, for another Hitler—or worse.


The necessary starting point for any consideration of the present-day economic crisis is the Depression of 1929, not because of any facile comparisons we may be tempted to draw, but because it was the catalyst of the world in which we live. By 1933, when Roosevelt succeeded Hoover, it appeared that the capitalist system was on its last legs, and the purpose of the New Deal—no different from the purpose of John Maynard Keynes—was to ensure that it did not totter to its fall. The experience of the Depression colored the mental outlook of a whole generation. No one who stood in the breadline was likely to forget it; but neither were the businessmen, corporation lawyers, and Wall Street financiers who thronged into the Roosevelt Administration. For them, also, it was a traumatic experience.

As revisionist historians, such as Williams and Kolko, and Lloyd Gardner in particular, have shown, the international policies of the New Deal were conditioned by the Depression, not only before but during the war years.7 Dean Acheson’s statement in November, 1944, to the Congressional Committee on Postwar Economic Policy has been much quoted, but is worth recalling because it epitomizes so much of American thinking. “We cannot,” he said, “go through another ten years like the ten years at the end of the Twenties and beginning of the Thirties without having the most far-reaching consequences upon our economic and social system.” Six years later Truman drove home the same lesson even more directly:

In 1932, the private enterprise system was close to collapse. There was real danger that the American people might turn to some other system. If we are to win the struggle between freedom and communism, we must be sure that we never let such a depression happen again.

What such a depression signified in economic terms and the stages by which it developed—beginning with the recession in agriculture and primary commodities many months before the Wall Street crash in October, 1929, signaled the general collapse—we can now see, with a minimum of dogmatism and a maximum of cool factual information, thanks to C. P. Kindleberger. Kindleberger’s book is a major achievement. Perhaps because its impact was so overwhelming, its scale so vast, there has been so far—as any teacher searching for an appropriate book for his reading list can testify—no really satisfactory history of the Great Depression. Kindleberger fills the gap. His views of the origins of the Depression are frankly eclectic, and he is deliberately cautious about the sort of one-track remedies which are being so freely canvassed today. Even “with perfect monetary policy,” he insists, “even with anticyclical capital movements, there would have been a depression.” Symmetry “may obtain in the scholar’s study,” but “is hard to find in the real world.” Kindleberger’s concern is with the real world, or at least with that part of the real world where administrators, Treasury officials, bankers, and the politicians operate.

The story Kindleberger unfolds is of a chain reaction which, granting the initial conditions and built-in predispositions of the actors, it was beyond human capacity to halt; and the attentive reader cannot fail to be struck by the number of disturbing parallels with today. Reading through Kindleberger I quickly noted no fewer than fifteen points of similarity. Obviously I cannot list, still less discuss, them all. But who, for example, can fail to be impressed by the similarity between Roosevelt’s “America First” policy when he took the dollar off gold in 1933 and Nixon’s economic nationalism when he took the dollar off gold in 1971? “This,” said Lewis Douglas in the first instance, “is the end of Western civilization”; Nixon’s policy of “benign neglect,” Arthur Burns is reported by Henry Brandon to have said, amounted to “murdering the international monetary system without proposing to put anything else in its place.” True, it was followed by the Smithsonian agreement of December 18, 1971, a parallel in its way to the Tripartite Monetary Agreement of 1936, and the world of international finance heaved a sigh of relief. But where today is the Smithsonian agreement, with its elaborate devices of “snakes” and “crawling pegs,” to replace the link between the dollar and gold? “Dead,” is Tobin’s succinct answer.

By the time Rolfe and Burtle wrote, in 1973, there were five major currencies floating independently, and this floating was accompanied by “a plethora of short-term capital controls” and trade enactments. We do not yet have, quite, the “headlong stampede to protection and restrictions,” to the “beggar-thy-neighbor tactics in trade and exchange depreciation,” that Kindleberger describes as characteristic of the 1930s. But for how much longer? Rolfe and Burtle take heart from the fact that the “horror scenarios” of “trade war…tariffs and counter-tariffs and a return to the competitive devaluations of the 1930s” have not “come to pass.” The point is that we are not yet at that stage in the cycle.

There is plenty of food for thought in Kindleberger’s book. In particular, there is food for thought in his conclusion that “the main lesson of the inter-war years” is “that for the world economy to be stabilized, there has to be stabilizer,” Before 1931 it was the United Kingdom; after 1945 it was the United States. Today there is none. Mrs. Camps’s conclusion in The Management of Interdependence is that “the United States, Western Europe, and Japan will in effect share leadership,” but none will “fully accept the obligations of that role” and none “will be prepared to see any of the others gain the perquisites that go with the obligations.” A discouraging prospect.

The alternative, according to Kindleberger, is “international institutions with real authority and sovereignty,” and this I find more discouraging still, in a world in which, as Mrs. Camps puts it, “the dominant characteristics” are “an increasing concern with domestic problems, a more strident emphasis on national interest, and a decline in the prestige of international organizations.” In the 1930s also, “proposals for embryonic international monetary funds were legion…. They were uniformly turned down.” Those who, like Rolfe and Burtle, pin their hope on Special Drawing Rights (SDRs) as the “base for a future monetary system without economic warfare” please take note.

Kindleberger’s book, for all its merits, does not quite live up to the promise of its title. Its subject is not “the world in depression,” but, as he himself correctly says, “the world economy in depression.” The difference is important. Apart from the usual obligatory references to Hitler, and a passing remark about its effect in stimulating “fifty revolutions in Latin America,” there is little in Kindleberger’s book to bring home to the reader the shattering political consequences of the Depression or its global impact.8 His attitude is rather like that of a general on a battlefield, unmoved by the carnage and destruction, thinking only of tactics and strategy. It would be a pity if this rather severely technical approach obscured the fact that the Depression was not just an unfortunate economic relapse, but also the solvent of the entire, admittedly fragile, existing international order. It was scarcely an accident of history that the Japanese invasion of Manchuria, the first major break in the international structure established after 1918, occurred in 1931.

Historians too often write as though Hitler, or Saito and Konoye, or Mussolini overthrew the existing status quo. In reality, they simply exploited the dislocation the Depression had created. And this also is not without modern connotations. If in 1930 the international order re-established after the First World War collapsed under the impact of the slump, by 1970 the new international order created by the United States after 1945 was visibly creaking at the joints. Already in the summer of 1968 one commentator announced that “money pressure” was “forcing détente all over the world.”9

With the advent of Nixon the prediction was amply confirmed. The Guam doctrine, announced on July 25, 1969, and the Kissinger-Nixon visits to Peking and Moscow that followed, may not, as Rolfe and Burtle insist, have meant a “retreat of American power,” but they certainly indicated a major shift in world forces, and no one would deny that “money pressure”—in other words, a radical change in the economic climate, a downward swing in the Kondratieff cycle—was an operative factor. As Henry Brandon puts it, “Shortage of money became one of the most potent American policy makers, just as its abundance had been a generation earlier.”

The broader effects of the Depression in the advanced industrial countries are too well known to need description; but their impact on existing ideologies was no less shattering. Above all, they drove home the lesson that unemployment on the scale of the 1930s must never be allowed to occur again. The classic remedy of massive deflation was out, and the maintenance of full employment became the central pillar of postwar economic policy, both domestic and international.

This preoccupation with full employment was due to the “gnawing fear” (as The New York Times put it in 1946) that, once the postwar boom was over, “the United States might run into something even graver than the Depression of the Thirties,” with all its incalculable social and political possibilities.10 Internationally, it translated into a fear “whether the American capitalist system could continue to function if most of Europe and Asia should abolish free enterprise,” a determination “to increase our outlets abroad for manufactured products,” and an opposition to high tariffs, exclusive trading blocs, and unfair economic competition, which—as Cordell Hull never tired of insisting—bred the war which broke out in the Far East in 1937, spread to Europe in 1939, and engulfed the United States in 1941. Considering the small part that foreign trade played (and still plays) in the United States economy, this obsession with foreign markets is easier to explain on psychological than on rational grounds; but Dean Acheson was certainly expressing a prevalent view when he said:

You don’t have a problem of production. The United States has unlimited creative energy. The important thing is markets…. My contention is that we cannot have full employment and prosperity in the United States without the foreign markets.

The other thing that was necessary was the restoration of a functioning international monetary system to revive the flow of trade. This, as everyone knows, was the purpose of the Bretton Woods agreement of 1944, which in effect restored the gold exchange system operating between 1925 and 1931 with the dollar as “reserve currency”—that is to say, the currency that could be held by central banks in lieu of gold—and at the same time set up the International Monetary Fund as a mechanism for maintaining currency stability. Since 1971 a great deal of myth and a good deal of mystique have been attached to Bretton Woods; it “guided the postwar world,” it is often said, “to peace and prosperity.” In harsh reality, “Bretton Woods was a system,” as Rolfe and Burtle point out, “that never, or hardly ever, worked,” and the middle section of their book, entitled “the rise and fall of the Bretton Woods system,” is a clear and vigorous (if sometimes opinionated) account of the reasons why.

Not 1944, the year of Bretton Woods, but 1947, the year of the Marshall Plan, or rather 1949, the year in which it actually went into effect, was the real starting point of the new postwar economic system. As the $12 billion of the Marshall Plan poured in, the pumps were primed, and the wheels began to revolve—so rapidly that by 1953 Western Europe was experiencing the biggest boom of its history. After 1950 it was fired by continuing American deficits. In the words of Rolfe and Burtle, “the wunderwirtschaft miracle economies of the early postwar years were little more than export-led booms, depending in large measure on the American deficit, aided and abetted by currencies undervalued by deliberate American action.”

No one questions the generosity of the Marshall Plan; no one should question either the element of enlightened self-interest it embodied. This was the period of the “dollar gap,” of a grossly deficient liquidity in the international monetary system, which only aid from the Marshall Plan and the subsequent outflow of dollars could correct. Foreign governments eagerly sought dollars which were “as good as gold” (in some ways better than gold, most of which was locked up in Fort Knox anyhow), and the United States, confident (as Rolfe and Burtle put it) in its “capacity to remain economically dominant,” cheerfully accepted the deficits. In 1950 the National Security Council told Truman the country was so wealthy it could safely use 20 percent of its gross national product for military purposes without danger to the economy. The administration and its successors never managed quite to live up to this percept, but they certainly did their best.

But by 1958, when the Rome treaties linked the European Common Market behind a unified tariff barrier, things were changing. Compared with growth in Germany, Italy, and France, to say nothing of Japan, growth in the United States was lagging badly. In 1963, “the year of the end of the dollar era,” a new situation took shape. After forty years characterized by the “dollar gap,” the world entered a period of dollar surplus. The signs were brushed aside as a temporary maladjustment which would right itself by 1968. This was to reckon without Vietnam. When 1968 came the dollar surplus turned into a “dollar glut”; that is to say, the outflow of dollars from the US to pay for stockpiling, military aid, the costs of military bases and the like—expenditures far in excess of the earnings of US foreign trade—caused dollars to pile up in the creditor countries.

Even now, the crisis was staved off by the willingness of the European central banks to hold and accumulate paper dollars. But in 1971 the day of reckoning arrived. This was the first year in the twentieth century when the United States had a deficit on its foreign trade account, and the over-all deficit on capital account in the third quarter—with the gold stock down to $10 billion—reached the formidable figure of $12 billion. The European central banks were saturated with paper dollars and wanted no more. Pressure on the dollar rose to new heights, and on August 15 Nixon officially abandoned convertibility. Central banks ceased to support fixed international exchange rates, and currencies were permitted to “float.” This is what is meant by “the fall of the Bretton Woods system.”


It is fashionable today, three years later, to shed no tears over the demise of Bretton Woods. Contrary to prediction chaos did not ensue, the wheels did not grind to a halt. We have learned to live with floating currencies. Why ask, Rolfe and Burtle adjure us, “whether floating can in fact work? It does.” Nor are they alone in praising the Nixon-Connally policy of “benign neglect”—that is to say, of taking no steps to check the outflow of dollars or to secure a balance of payments—as a “brilliant stratagem.” Dollar devaluation, it is argued, was a beneficent readjustment. By 1965 the dollar was evidently overvalued; now it is finding equilibrium, and would have done so sooner—so the argument runs—but for the mistake of agreeing, in December, 1971, to impose a premature stabilization in deference to European wishes and susceptibilities.

The trouble with this analysis is the way it isolates the international monetary system, as though it operates in a vacuum with no overspill. For most of us, outside the charmed circle of high finance, it is the overspill that matters. For what, in a broader context, was the result of “benign neglect”? The brief answer is a world-wide inflation, which no one knows how to stem or control. The mechanism is adequately described by Rolfe and Burtle, and a good deal less charitably by Perlo. As dollars poured out of the United States during 1969, 1970, and the first half of 1971, nothing was done to halt the flow. Instead, central banks elsewhere, notably in Western Europe and Japan, were left to absorb the unwanted dollars, thus piling up additional reserves.

If it had worked as intended, the Smithsonian Agreement of December 18, 1971, might have checked the process. In fact, the outflow continued after 1971 as before. As The Financial Times tartly put it in December, 1972,11 the United States was still “paying for its deficits with its own currency.” And “since,” as Perlo observes, “there was no prospect of ever redeeming most of the huge stockpile, the operation represented a drain on the national wealth of the countries with strong currencies.”

But, much worse than this, “the swelling flood of deutschmarks and other currencies paid out in exchange for the dollars became a source of mounting domestic inflation.” Western Germany was the country most directly affected. To fight inflation, the Bundesbank in 1970 raised its discount rate from 6 to 7 1/2 percent. The result was to make things worse. Attracted by the higher interest rates, foot-loose dollars flowed into Germany, and in the last nine months of 1970 German reserves rose by no less than $5.8 billion, aggravating all the inflationary tendencies.

It would, of course, be wrong to blame all this entirely on Nixon’s policy of “benign neglect.” Already in 1970 a shrewd commentator pointed out that “throughout the 1960s” the United States had been “exporting inflation” on a grand scale; it was “thrusting an inflationary solution to an inflationary problem upon the world.”12 As, under Johnson, the war in Vietnam reached its peak, stoking the fires of inflation in the United States, the outflow of dollars overheated an already overheated world economy. Indeed, it could be argued—as Perlo argues—that such countries as West Germany, Switzerland, and Japan were in effect “subsidizing…US imperialism to the tune of many billions of dollars per year,” and doing themselves untold harm in the process.

By the time Nixon succeeded Johnson as president, according to Max Silberschmidt’s figures,13 short-term dollar debts, which had amounted to $8 billion in 1949, had risen to $33 billion. But “benign neglect” opened the sluice gates. By 1971 dollar liabilities abroad had almost doubled, from $33 billion to $63 billion. Today what Rolfe and Burtle call the “vast and unregulated…cascade of dollars pouring into the rest of the world” and frustrating all efforts to check inflation is well in excess of $100 billion. When the recording angel writes up the ledger of history for the 1970s, the havoc inflicted on the world by “benign neglect” may well be entered as a worse sin than Watergate.


The theory of inflation, as set out by writers such as Samuelson, is simple enough.14 If credit is easy and employment at a high level, there will be inflation; if credit is tight and there is considerable unemployment, inflation will decline or even cease. Granted that no government anywhere is prepared to countenance the vast unemployment of the 1930s, the practical problem for economists and administrators is to secure the proper “trade off” between unemployment and inflation by timely “inputs” and equally timely “cut-offs.” The answer was provided by the so-called “Phillips curve.” Put crudely, if by tolerating a “mild inflation” of (say) 3 percent, you could ensure an increase in gross national product of (say) 4 percent, the net result was another increment of economic growth, and (as Samuelson puts it) “the losses to fixed-income groups”—a few millionaires with inherited wealth, no doubt, but mainly pensioners, the swelling ranks of the old aged, people on Social Security, and the unemployed—would usually be “less than the gains to the rest of the community.”

In fact, the new “growth economics” worked tolerably well (considering the amount of slack in the European economy to be eliminated it could hardly have done otherwise) for a dozen or more years after the war. After 1968 there was a sudden and startling change. It was not only that inflation took off on the spiraling course, like a missile aiming for the moon, which leaves us today with inflation rates hitting (often far exceeding) double figures in all the major countries of the world—14 percent in the United States and the United Kingdom, 13 percent in Australia, 26 percent in Japan, 16 percent in France, around 10 percent in Western Germany—and still rising.15 More ominously, it became only too obvious that the “Phillips curve” had ceased to operate.

When, after eighteen months of Conservative government in England, you got unemployment over the million mark—the highest rate since 1940—and at the same time a rise in prices of 17 percent (the position in the United States during Nixon’s first two years was little different except in degree), something was evidently wrong. As Sir Frederick Catherwood, director general of the National Economic Development Council in the United Kingdom, put it, “The inflation we now face is very different not only in degree but in kind, too, from the inflation of the mid-Sixties”; and since it had occurred “in every advanced economy in the free world,” it was “fair to assume that there is now a new situation.”

I do not propose to discuss the causes of this new situation, still less the responsibilities. Much could be said of the role of the multinational corporations, still more of the effects of the Vietnam war, once pooh-poohed, now admitted by writers across the whole political spectrum from Tobin to Perlo to have been a vital factor. More recently, there have been the effects of the energy crisis, brewing already in April, 1973, when Nixon made his well-known speech on the subject, much accentuated after the Arab-Israeli war in October, 1973, when oil supplies from the Middle East were shut down and prices forced up. For present purposes it must suffice to mention them. Nor is there much profit in arguing whether or not “benign neglect” was forced on Washington by the recalcitrance of the French, the Germans, and the Japanese. The game of the pot calling the kettle black, indulged in once again by Nixon in his Chicago speech on March 15, is fine for politicians; for those of us who have to live with them—and that is all of us—the consequences matter more than who is to blame; and the consequences are grim enough.

The clearest conclusion of Kindleberger’s book is that all countries were responsible in one way or another for the Depression of the Thirties; that fact was small comfort for the victims and did not make the consequences more bearable. If we slide into a depression today—as every index suggests we are doing—we shall be less concerned with who was responsible than with what it is doing to us and to the world in which we live.

It is often said—by writers as dissimilar in all their assumptions as Rolfe and Perlo—that there will be “no repetition of 1929-1932.” That is surely true. There will not be a recrudescence—at least in the industrialized countries (the underdeveloped world is a different matter)—of the sort of unemployment facing Roosevelt when he took over in the United States at the beginning of 1933. That can be avoided and, by all conceivable calculations, will be avoided. What other problems will be created in avoiding it is another question. Social stability can be eroded by unemployment, as it was in Germany in 1932; it can also be eroded by inflation, as it was in Germany in 1923. The down-swing of the Kondratieff cycle does not mean that the present crisis is identical with the 1929 crisis; but it does mean that the time has come, as Shuman and Rosenau insist, to stop talking about “recession” and start talking about “depression”—“the awful word economists have refused to apply to any economic downturn since the 1930s.”

Because the depression into which we are moving is not identical with the Depression of the Thirties, I have no intention of indulging in prognostication. Least of all do I propose to discuss Robert Heilbroner’s apocalyptic vision—familiar, in any case, to readers of this periodical, where it first saw light16—of the coming centuries when, like monks in a sixth-century monastery after the fall of Rome, we shall find “solace” in “tradition and ritual” and our “private beliefs,” amid the ruins of “the giant factory, the huge office,” and “the urban complex.” Truly, The Great Ascent has become The Great Descent! Spengler and Toynbee could not have done it better—though they would have done it at far greater length. For me, I must confess, there is something infinitely sad in this capitulation of a liberal conscience and in the fatalism which surveys, one by one, the possible remedies only to conclude that they “are not likely to be realized.” Nevertheless, Heilbroner’s book is important, as a reflection and expression of the new mood of resigned pessimism which the growing sense of economic crisis has bred.

It is important, too, because it shows how pervasive the new conservatism, concomitant always of stringency and crisis, has already become. Heilbroner has managed to convince himself, and now seeks to convince us, that we must forego the freedoms he prizes so highly and accept the necessity of authoritarian governments, “capable of rallying obedience,” as the only way of making “the passage through the gauntlet ahead.” He need not have agonized so much over his conversion, or justified himself so profusely, for all the signs are that the reaction, whether “necessary” or not, is beginning; indeed, in retrospect, it may well appear that Nixon’s only mistake was to turn the machinery of espionage, intimidation, and harassment thought appropriate for militant workers, blacks, students, and other underprivileged and “subversive” groups, against the other half of the establishment.

In 1968 and 1969 we witnessed the last efflorescence of the liberal dream, the end, as the Administration liked to call it, of the “era of permissiveness.” Shuman and Rosenau are not exceptional in predicting “a strong shift to political conservatism.” Rolfe and Burtle foresee “departures from the type of democracy now dominant in all the developed world,” and Ricken-backer can discover “no reason” why, faced by the choice between totalitarianism and depression, “we shall choose depression without first having had a go at totalitarianism.” The odds, it seems to me, are that we shall get both. Fascism can stage a comeback—provided, as Huey Long once said, it call itself antifascism.

“Unstable world economic conditions,” Rolfe and Burtle tell us, “can be disastrous for…the system.” Hardly a world-shattering insight, but significant enough when we survey the signs of instability around us. Early in May, before the fall of the government in Thailand, The Financial Times listed no fewer than twenty countries (excluding Latin America and Africa and the rest of the underdeveloped world) which “are now politically unstable,” and the basis of instability in every case, it suggested, was economic.17 Inflation and conflict over the methods of coping with it were the main factors, of course, but not only inflation.

What else? In Germany (where the much-publicized revelations about Brandt’s personal life only masked more deep-seated conflicts) unemployment, almost unheard of in the past, over the half-million mark; in the United States gross national product down more than 5 percent; prime rate at the Bank of England 12 percent (“according to tradition,” Kindleberger tells us, “a 10 percent bank rate…would draw gold from the moon”), and the rate for federal funds used for interbank borrowing scarcely better at 10.78 percent; in England a disastrous slump in fixed capital investment, in the United States, on the contrary, a huge increase, but (as The New York Times points out) with “enormous disparities,” the clearest indication of “an economy being twisted out of shape by the differential impact of inflation”;18 building starts down from 2.5 to 1.5 million in the United States, the construction industry in England bedeviled by bankruptcies (Lyon) and the “land market near to collapse”; spectacular bankruptcies, also, in secondary banking (Cedar Holdings), or in the United States large-scale rescue operations (over $1 billion in the case of Franklin National) by the “Fed”; prime rate in New York at 11 1/2 percent, recalling William Ricken-backer’s prediction in 1969 of “shortterm interest levels reaching 10 or 20 percent,” accompanied by the ominous warning: “Toward the end of the inflationary boom of the 1920s, shortterm money earned exactly 20 percent on Wall Street. Just before the end.”

Each item might, perhaps, be capable of being coped with separately on a national basis. But today, confronted as we are by a vast, uncontrolled flow of international liquid capital, estimated at over $130 billion—a strikingly new feature of the situation, for the “hot money” of the Thirties reached nothing like the same dimension—there is no separate national basis, even for the United States. Tobin writes of the need for “international monetary devices which preserve some national autonomy”; but his words sound more like pious hope than firm conviction. Mrs. Camps, who shares Tobin’s views, candidly admits that “the present mood—almost everywhere—is running against the kinds of change that seem to be required.” The alternative? Controls. Controls on money, controls on trade (the latest, at the time of writing—for there will be more—the 50 percent deposit clamped down by Italy on “nonessential” imports, accompanied, naturally, by the usual protestation that it is “strictly temporary”), retaliation, and a retreat into economic autarchy.

As Tobin rightly says, “We can hardly imagine that the Common Market will passively allow the US to manipulate the dollar exchange rate in the interests of US domestic stabilization. Nor can we imagine the reverse.” Already in May, 1972, Arthur Burns was speaking pessimistically of a “world economy divided into restrictive and inward-looking blocs” and of the “financial manipulations, economic restrictions and political frictions” that would ensue. The blocs, it is true, have not yet fully materialized, but they took time to materialize in the Thirties also; the political friction, however, is already a fact. Who today would seriously quarrel with Shuman and Rosenau’s prediction that “tariffs are here to stay because America is feeling the first pinch of the long-wave downturn,” or with Brandon’s view of the Seventies as a period of increased economic warfare?


A cycle of booms and slumps is endemic in the capitalist system; as Perlo argues, cogently enough in spite of his lapses into stale Marxist polemics, it could not function without them. Nor, indeed, is the fact denied by liberal economists, who only argue that Keynesian analysis has taught us how to tame and control them. But the difference between the short-term recession and the long-term depression is that the former introduces strains but leaves the structure standing, whereas the latter imposes lasting structural changes. This is what happened in the 1930s, and it is safe to predict that it will happen today. What is more hazardous is to predict what the changes will be.

The first thing to say is that there is no evidence—even Perlo never quite suggests that—that the crisis of “neocapitalism” (for that is what we are witnessing) means its collapse and replacement by socialism. It is true, as Perlo points out, that capitalism today is “no longer a unique, closed system,” but instead has “to coexist in a world containing a powerful and growing socialist economic system,” and that is a major difference by comparison with the 1930s. But capitalism did not wither away of its own internal contradictions and give way to socialism in the Thirties, and I can see no reason why it should in the Seventies; the vested interests involved—conveniently summed up in the two much canvassed phrases, the “military-industrial complex” and the “multinational corporation”—are too big and powerful.

On the other hand, Heilbroner’s Malthusian forebodings seem to me to go beyond all reason. Gerhard Mensch, one of the few modern economists to concern himself seriously with Kondratieff, has shown convincingly enough how, in each crisis in the last 170 years, recovery has come about through the exploitation of a series of basic innovations.19 Why should there be no such break-through this time? Why, for example, should scientists not succeed in harnessing solar energy (a possibility mentioned in passing by Heilbroner, only to be dismissed out of hand), a break-through which, evidently, would transform the whole situation?

Heilbroner would have us believe that we stand today at the end of the world we know, like the characters in Waiting for Godot awaiting the moment when “all will vanish and we’ll be alone again, in the midst of nothingness.” In reality, we stand at the end of an era, of a fifty-year period of history, of the age of neocapitalism. We are entering a period of radical readjustment, which is bound, before it ends, to breed misery and widespread suffering; it will be a traumatic experience, as long as it lasts, but not the irreversible calamity Heilbroner foresees. Nevertheless, the world that emerges from the crisis will be as little like the world of the 1960s as the world after 1945 was like that of the 1930s. Toynbee has predicted a “stockade society” and a “siege economy” in which private property will be nationalized, free enterprise abolished, and certain economic activities—for instance, stockbroking and real-estate developing—will disappear (and who except the stockbrokers and real-estate developers will shed a tear?) at the behest of “a ruthless authoritarian government.”20

He may be right. What seems certain is that some solution to the problem of uncontrolled inflation will have to be found, if the fabric of society is not to be torn apart; and though at present most governments are resorting to the classic remedy of wage controls and restrictions on the right to strike—depressing the standard of living, Perlo would say, in order to maintain profits—the likelihood, as the crisis reaches its peak, is that the only way out will be to control business, too.

What is clear, in any case, is that there is no solution within the existing system. The underlying postulate of the “new economics” was that the capitalist system would display a steady trend to economic growth, and the socially harmful results of its operations—poverty, social neglect, unemployment—could be effectively dealt with by government intervention within the framework of private property and the market. Both parts of the theorem have been belied by events, and are likely to be even more drastically falsified as the crisis gathers pace in the next few years.

Tobin clings, rather wistfully, to the view that the “new economics” will eventually stage a comeback, but it is hard to believe he is right. For one thing, the disillusion is too great. When The Wall Street Journal conducted a countrywide survey in the fall of 1972 it found frustration everywhere, particularly frustration with the mythology of growth and affluence.21 Not surprisingly. There is, after all, a basic contradiction when an economic system which claims to have discovered the secret of rising living standards for all can only find a way out, when the crisis develops, by reducing living standards; in that way, either through miscalculation or through deception, the professions upon which the whole structure depends are proven to be false.

Secondly, it has become only too abundantly clear that the trade-off between unemployment and inflation, which is a fundamental element of the equation, is unattainable under present conditions. And since no government dares contemplate the risks of massive unemployment and no government can live with galloping inflation, they will be forced—less, no doubt, through choice than through the inexorable pressure of events—to devise some other system.

What it will be, how far it will depart from the present system, no one can predict. On the whole, I would agree with Heilbroner that the most likely outcome is the “transformation of ‘private’ capitalism into planned ‘state’ capitalism.” This, he says, is already “partially realized” in Japan. It was also pretty effectively realized by Hitler—and, the historian with a longer memory might add, in the Byzantine Empire. What we can see, in any case, is that neocapitalism, with its pretensions to have found the answer to Marx, was the expression of a temporary situation, borne along not by its own dynamic but by the upward wave of the economic cycle; but Marx’s vision of a society dedicated to welfare, not to power and profit—the only vision that makes sense in today’s circumstances—still eludes us, and will do so until another crisis, even more crippling than the crisis, that is brewing today, brings home to the whole world the perils it faces.

This Issue

June 27, 1974