Modern Times: The World From the Twenties to the Nineties (130 page)

Equally serious was the effect on productivity. One example was the coal industry, where production stood at 19.9 tons per worker per day in 1969. By 1976, when the full effects of the 1969 Coal-Mine Health and Safety Act (in some ways a highly desirable statute) had been felt, production had slipped to 13.6 tons, a fall of 32 per cent.
¹¹
In 1975, over the whole of American industry, productivity was 1.4 per cent lower than otherwise as a result of meeting government pollution and job-safety regulations.
¹²
During the late 1960s and throughout the 1970s, therefore, excessive government regulation was applying the same kind of destructive friction to the American economy as trade union legal privilege in Britain. As a result, in the decade 1967–77, productivity in American manufacturing industry grew by only 27 per cent, about the same as in Britain (the corresponding figure for West Germany was 70 per cent, for France 72 per cent and for Japan 107 per cent). From the mid-1970s onwards, American productivity actually declined. The most detailed analysis of this stagnation and decline in American economic dynamism suggested the causes were mainly political: failure to control the money supply, excessive tax burdens and above all government intervention and regulation.
¹³

But the anti-business climate was not the creation of politics alone. It was also the work of the courts, which in the 1960s entered a period of aggressive expansion – part of the movement towards a litigious society – led by the Supreme Court. Chief Justice Waite had laid down the correct principle in 1877: ‘For protection against abuses by legislatures, the people must resort to the polls, not the courts.’ But in the 1950s and early 1960s, liberal America had appealed to the courts to remedy the refusal of Congress to pass effective civil rights legislation. The courts responded and, having acquired the taste for power, indulged it long after the essential civil rights battle was won. They eroded the legitimate sphere not only of Congress but of the presidency, not only in the area of rights but in the conduct of the economy. Thus the early 1970s saw the birth not only of the ‘imperial press’ but of the ‘imperial judiciary’.

The animus of the courts was directed particularly against businessmen, notably when the judiciary, by an extension of the civil rights concept, embraced the principle of ‘affirmative action’ (that is, discrimination in favour of ‘underprivileged groups’) and began the process of imposing ‘race quotas’. This was only one aspect of ‘rights’: the rights of women, homosexuals, the handicapped and many other collective entities were interpreted by the courts as enforceable against powerful institutions, such as business or government. The Supreme Court in effect reinterpreted the constitution to sustain the particular political and legislative preferences of the
judiciary, which were liberal. Hence constitutional principles, and the legal practice derived from them, changed with frightening speed.
¹⁴
A growing proportion of business resources and executive time was devoted to responding to litigation: in the 1970s, America had four times as many lawyers
per capita
as West Germany, twenty times as many as Japan.
¹⁵

The courts also moved to make it difficult for government, at local, state or federal level, to reduce the size and cost of the public sector. When Nixon provided no funds for the 1974 Office of Economic Opportunity, which meant closing down its nine hundred Community Action agencies (a bureaucratic extravaganza of no great practical value), a federal judge ruled the action illegal.
¹⁶
The courts also ruled that a governing authority failing to provide social or welfare services in such a way as to infringe the civil rights of citizens was liable for damages; that an authority which reduced prison staff as an economy measure damaged the civil rights of prisoners; that for Congress to refuse funds in a specific civil rights area (e.g., the right to abortion) was unconstitutional; and that all government departments, and all private companies receiving government funds or contracts, must employ races by quota.
¹⁷
The cumulative effect of these and many similar decisions was to make it exceedingly difficult to reverse the growth of government expenditure and create room for a revival of business confidence and efficiency.

The peak post-war year for the American economy, relative to the rest of the world, was 1968, when American industrial production was more than one-third (34 per cent) of the world total. It was also the climax of the American global paramountcy, the year of Lyndon Johnson’s agony, the point at which the combined burden of foreign and domestic spending became too great to bear. Thereafter all was decadence. And with America’s relative economic decline came a progressive softening of the dollar as a reserve currency. This inevitably undermined the Bretton Woods arrangements. From the late 1960s Washington ceased to control the world monetary system. To some extent it ceased to control its own currency since the quantity of unrepatriated dollars – what de Gaulle stigmatized as ‘America’s export of her own inflation’ – now reached catastrophic proportions. The age of the dollar was over. The age of the Eurodollar dawned.

As long ago as 1949 the Communist Chinese, fearing America might block any dollars they earned, decided to keep their dollars outside the US in a Soviet Paris bank. Its cable address was ‘Eurobank’ – hence the term Eurodollar. America first went into deficit in 1958, and thereafter the flow of dollars into Europe
increased steadily. A British financier, Sir George Bolton, of the Bank of London and South America, now grasped the idea that here, for the first time, was a currency growing up outside national supervision, an expatriate currency capable of providing colossal amounts of credit. He made London the centre of the new Eurodollar system.
¹⁸
The Eurodollar market tripled in 1959 alone; doubled again in 1960. Attempts by Kennedy to break it up by controls merely boosted its attractiveness. Similar measures by European governments were equally counter-productive. It was a good example of the way in which the market defies the suppressive puritanism of governments and world agencies. As Walter Wriston of New York’s Citibank put it, the Eurocurrency market was ‘fathered by controls’. It was, in fact, a kind of black market world financial system. Freed of government interference, it was able to make the maximum use of the new electronic communications devices which became available in the 1960s and 1970s. To quote Wriston again: ‘Mankind now has a completely integrated international financial and information marketplace, capable of moving money and ideas to any place on this planet within minutes.’
¹⁹

But of course the Eurodollar market, the product of American inflation, was itself highly inflationary. It reproduced some of the worst features of the 1920s New York money market, especially in its international loans. It increased the volatile nature of money, stacked up credit in multiple tiers of borrowings, thus creating ‘dollars’ which did not exist.
²⁰
Eurobonds and Eurocredits were invented. All the world’s major banks came into the market, and formed syndicates to handle loans to governments on a scale never before imagined. The first Eurodollar syndicated loan was to the Shah’s Iran in 1969. It was for $80 million. Italy got a $200 million loan later that year. Soon up to two hundred banks joined syndicates, and the size and number of loans, and the speed at which they were packaged, grew dramatically. The billion-dollar loan became routine. Commercial banks replaced wealthy Western governments and development aid as the chief source of finance for the Third World. In 1967, commercial banks accounted for only 12 per cent of external public debt in the world. By the end of 1975 they passed the 50 per cent mark at a trot.
²¹

As the banks took over the international monetary system, the supervisory role of Washington collapsed. In 1971 the Nixon administration lost or abandoned control of what was happening.
²²
Two years later, in March 1973, Nixon cut the link between gold and dollars, and thereafter most major currencies floated, either singly or in groups. The float revealed the weakness of the dollar, which lost 40 per cent of its value against the Deutschmark
between February and March 1973. It also increased the speed and hysteria of monetary movements which, thanks to electronic gadgetry, surged backwards and forwards across frontiers in gigantic masses (in the late 1970s, money transactions in New York alone averaged $23 billion a day
²³
). In short, by autumn 1973, the financial underpinning of the world economy was coming apart. To produce disaster, all that was required was a sudden shock. What happened was by no means a mere shock: it was an earthquake.

It was no accident that the earthquake emanated from the Middle East. The great post-war boom had been propelled by cheap energy. Between 1951 and 1972, the price of fuel declined consistently compared to the price of manufactured goods. It fell sharply in relative terms 1953–69, and in the years 1963–9 it actually fell in absolute terms.
²⁴
This fall in price was made possible by the rapid increase of exports of cheap Middle East oil. It is significant that the three leading sectors in the Western economic boom, motors, chemicals and electricity, were all energy-intensive, indeed oil-intensive.
²⁵
By assuming energy would remain cheap, all the industrial nations were short-sighted. But American energy policy was a particularly sad tale of improvidence, since government intervention kept domestic prices well below world averages. From being a world exporter of energy America became a net importer – 7 per cent of the total by 1960 – with her energy consumption increasing fast every year (5 per cent annually in the second half of the 1960s). Her imports of petroleum products were particularly disturbing: in 1960 she imported 10 per cent; by 1968 28 per cent; by 1973 36 per cent.
²⁶
America’s own oil production peaked in 1970 and thereafter declined.

The rulers of the Middle East oil states noted this growing dependence of the West and Japan on their oil exports, and the failure to devise supplementary or alternative sources of energy. Some of them, and especially the Shah of Iran, were impressed by the arguments of the ecologists that the advanced industrial nations, especially America, were using up natural resources too fast because they were underpriced. In 1972–3 there were already signs that raw materials and other commodities, such as farm products, were rising in price, and oil began to follow. The Shah sought to persuade his fellow-rulers that the oil-exporting countries of the Middle East would do better to expand production more slowly and push up prices: thus their oil in the ground would increase in value. But to heed his advice they required not only a reason but an emotion – hatred of Israel, and of Israel’s ally America.

Strictly speaking, there had been no paramount power in the Middle East since the Suez fiasco of 1956–7. But though Britain kept a much lower profile she was quite active and surprisingly effective in
the area for the next few years. British military interventions in Jordan in 1958, in Oman in 1959, in Kuwait in 1961, were successful in keeping the area reasonably stable. It was the progressive British military withdrawal from Aden and from the Gulf in the late 1960s which made the real difference.
²⁷
Thereafter the area lacked an international policeman. The late Dag Hammarskjöld’s
UN
force was, in fact, a force working for instability, since under the
UN
doctrine of sovereignty President Nasser could ask for its withdrawal as soon as he felt strong enough to overwhelm Israel. That is precisely what he did on 16 May 1967. The
UN
complied three days later and the same evening Cairo Radio announced: ‘This is our chance, Arabs, to deal Israel a mortal blow of annihilation.’ Nasser, 27 May: ‘Our basic objective will be the destruction of Israel.’ President Aref of Iraq, 31 May: ‘Our goal is clear: to wipe Israel off the map.’ Ahmed Shukairy, Chairman of the Palestine Liberation Organization, 1 June: ‘The Jews of Palestine will have to leave …. Any of the old Jewish Palestine population who survive may stay, but it is my impression that none of them will survive.’

In view of the withdrawal of the
UN
, these threats, and the concentration on her borders of armies outnumbering her own by three to one, heavily armed with modern Soviet material, Israel launched a preventive war on 4 June, beginning with strikes against Egyptian air-power. It lasted six days and was wholly successful. The Egyptian, Jordanian and Syrian forces were routed, and in Egypt’s case humiliated. Sinai and the West Bank were occupied. The Syrian Golan Heights, which made possible the bombardment of the Israeli settlements in Upper Galilee, were stormed. Above all, Old Jerusalem, including the Wailing Wall and the Holy Places, the great prize which had eluded Israel in 1948, was now brought into the new state. Thus the war corrected a painful anomaly. In its 4,000-year history, Jerusalem had been besieged, occupied, destroyed and rebuilt repeatedly, under Canaanites, Jebusites, Jews, Babylonians, Assyrians, Persians, Romans, Byzantines, Arabs, Crusaders, Mamelukes, Ottomans and British. But it had never been divided, except during the years 1948–67. The reunification of the city under the Israelis made possible an agreed administration of the Holy Places by Muslims, Jews and Christians, within the framework of a national capital.
²⁸

In other respects the Israeli victory brought no permanent gains. Nasser survived, thanks to some adroit crowd-manipulation.
²⁹
His forces were rearmed by Soviet Russia, at more than twice the strength of the 1967 level. The thrust of his propaganda became increasingly anti-American, summed up in his endlessly repeated slogan ‘Israel is America and America is Israel.’ It was one of
Nasser’s arguments that to strike at America was to hurt Israel and that America’s growing dependence on Middle East oil was a means to do so. But Egypt was not an oil power. Nasser died on 28 September 1970 of a heart-attack, a propagandist of genius, a total failure as a military and political leader. There was no one to replace him as the cynosure of Arab hopes, delusory though they might be. But Nasser’s destructive role as an advocate and practitioner of violence was soon filled by Colonel Mohammed Gadafy of Libya. A year before, he and other young officers had overthrown the country’s pro-Western monarchy rather as Nasser had despatched Farouk. In many ways Gadafy modelled himself on Nasser and repeated his Pan-Arabist and anti-Israeli rhetoric word-for-word. Libya was one of the smallest Arab states with only 2 million inhabitants. But it was by far the largest Arab oil producer west of Suez, and the importance of its geographical location was stressed in the aftermath of the 1967 war, when the canal was closed and Middle East oil supplies to the West disrupted. From the earliest days of his dictatorship Gadafy stressed the importance of the oil weapon in hitting back at ‘western imperialism’ for its support of Israel.