Oil, Money and Recession

For about a quarter of a century after the end of the Second World War, the market economies of the non-communist world enjoyed an unprecedented rate of growth, an exceptionally low level of unemployment, and comparatively low inflation. The average growth of the gross national product (GNP) in the advanced industrial nations of the Organization for Economic Cooperation and Development (OECD) from 1951 to 1973 was 4.8 percent a year in real terms. It was not until 1975 that output actually fell in the noncommunist world as a whole-and then by only one percent-whereas before the war there were periods when it fell very dramatically by from five to seven percent. Since 1975, growth has been averaging less than it did from 1951 to 1973-about 3.8 as against 4.8 percent-but there are ominous signs that it may settle down over the next decade to an average significantly lower than the current rate. Moreover, all the evidence is that, in the foreseeable future, the average growth of output in the free world is not going to recover to the level we experienced during those golden years from 1951 to 1973.

Why did we enjoy this uniquely high rate of growth and employment during those postwar years? First of all, the governments concerned accepted the principle of free trade. There has been a very close correlation over the years between the growth of gross domestic product (GDP) in individual countries and the growth of world trade. Free trade was exceptionally helpful to those of the developing countries which operated market economies, until the recent increase in import restrictions in the industrial world following the 1973-74 oil crisis. The second reason was that countries used the techniques of demand management, as taught by Keynes, and that in the immediate postwar period the United States used its big current account surpluses to finance, through the Marshall Plan, the deficits of those countries which had been damaged by the war and also helped to finance developing country deficits, initially through President Truman's Point Four program by increasing the flow of private investment capital to poor nations.