00 PM Eastern Standard Time on the 15th of August, 1971, President Nixon interrupted the transmission of Bonanza to announce a new economic policy. He was making a fundamental change in American international economic policy by closing what was known as the Gold Window. He was effectively ending the international monetary policy agreed at Bretton Woods in 1944. His speech on the 15th of August was emblematic of a crisis in the global economy of the early 1970s. And in trying to understand this crisis of the global and of capitalism, I want to focus upon five points of that crisis. And the first of those points is the end of the Bretton Woods regime. The Bretton Woods Agreement of 1944 laid down the principles for international economic relations. It fixed the dollar at$35 an ounce of gold and this rate was not easily changed. It required congressional approval. Other currencies were then pegged the dollar within a margin of plus or minus one percent to the exchange rate. The idea here was to stabilize currencies to end the currency warfare which had marked the 1930s, and it was hoped that having stable exchange rates of currencies would lead to revival of trade and recovery of the global economy. But rather than be absolutely fixed, currencies could be devalued if there were a fundamental disequilibrium that would then allow a country, which is in balance of payments deficits, to devalue, make its exports more competitive, and so re-stabilizes balance of payments. And in order to keep exchange rates stable and, at the same time, to allow countries to pursue an active domestic monetary policy for domestic welfare and prosperity, the Bretton Woods agreement allowed capital exports to be controlled. So countries could then reduce their interest rate to stimulate the domestic economy without the risk of capital fleeing the country in search of high interest rates elsewhere. So this system was introduced fully in 1958. It took some time after the war to be brought into effect. Currencies in 1958 became convertible on current account. But no sooner was the new system introduced that difficulties were to be experienced. And those difficulties led through to the speech of Nixon in 1971. What were these difficulties? Well, the first was a liquidity issue, or what was known as the Triffin Dilemma, after Robert Triffin, a Belgian-American economist. After the Second World War, there was a so-called "dollar gap." Other countries wished to buy American goods, America was the major economy of the world, but they were not yet able to export their own goods. The result of that was that dollars, which other countries, like Britain, had, were being sucked into America, being sucked out of the global economy. There was a liquidity problem. By the 1960s, that dollar gap, or shortage, had turned into a dollar glut. Other countries, like Germany, Japan, had recovered. They were exporting their goods. Meanwhile, the American economy had become less competitive. But more than that, the Americans were also spending a large amount of dollars on overseas defense, particularly, of course, in Vietnam. This meant that dollars were being pumped into the world economy to cover the United States' deficit. The result of this was that there's a lot of dollars going into the world economy to keep the world economy growing to create liquidity, but there is a dilemma which Triffin pointed to. The dollars are only going into the world economy to keep the world's economy growing if the American economy is weak. Is that going to be a stable situation? Well, not if at some point, there was a loss of confidence in the dollar. Now, other countries could, if they were in weakness, like Britain in 1949, could devalue, but it was very difficult for the United States to devalue in order to put its economy on an even keel. It would mean changing the price of gold. A dollar is pegged to gold at $35 an ounce, that required congressional approval. Even if Congress gave approval, it wouldn't necessarily help. Because all other currencies were pegged to the dollar, they would all just fall down with the dollar as well. It wouldn't changed the relative values of currencies. In any case, if the price of gold were changed, who would it benefit? Well, the countries which had a lot of gold. And who were they? Not people that the Americans wished to help. South Africa, obviously with civil rights issues at home. You couldn't be seen supporting the apartheid regime; The Soviet Union during the Cold War; And the French, who were basically just seen, as the Americans, as trouble makers. In any case, it would only be a one shot increase. You would change the price of the gold, that was a one shot. It wouldn't be a continual process. In February 1961, President Kennedy said he would not change the price of gold. It would be inflationary, it would mean more currency in the country, and it would be immoral. Now, so the price of the dollar is not going to change. Meanwhile, surplus countries, particularly Germany, but increasingly, also Japan, were under no obligation to devalue their currencies. The Americans were resentful about these countries not changing the price of their currencies and therefore getting an advantage in competition for trade. They argued... The Americans argued that they were deliberately keeping the value of their currency down to steal American markets. So the United States put pressure upon Bonn and upon Tokyo to try and make them change the price of their currencies under the threat,"If you don't change the price of your currencies,"we will remove our troops from you," which is not, of course, a very good thing to do in the Cold War. Meanwhile, the Europeans thought that the Americans were misbehaving. Why did the United States have a deficit? Because it was failing to hold down its prices, it was failing to hold down its consumption, it was failing to make the American economy more efficient. So... General De Gaulle, in particular, was concerned about the situation. He said, "the Americans had an exorbitant privilege."They had the right to print dollars,"which meant that they had a deficit without tears." As he said, "The unilateral facility"which is granted to America is serving"to cloud the idea that the dollar is"an important and international medium of exchange,"when it is a means of credit belonging to one state." So its solely belonging to America, they're using it for their own interest and not for the wider interest of the global economy. So we got these tensions which had been building up after 1958. And when Nixon took office in 1969, he was not really interested in these issues. He was more interested in bigger geopolitical strategy. As one of his advisors pointed out, he viewed economics somewhat like a little boy doing required lessons. What he wanted to concentrate upon was detente with the Soviet Union and the new strategy with Mao and China. He had certainly no intention of deflating the United States economy to make it more competitive overseas if that would threaten the chances of his winning control of Congress in the midterm elections or, indeed, his own reelection in the next presidential campaign. So what to do when he came to power in 1979? The administration was divided. On the one hand, there was George Schulz, who was an economist at the University of Chicago, later on became the Secretary of the Treasury under Nixon, who was a friend of Milton Friedman, another professor of economics at the University of Chicago. Milton Friedman produced a document for Nixon just after his election saying,"Why not give up the whole Bretton Woods system?"Why not give up this attempt to peg exchange rates?" Friedman said,"If you're trying to control the exchange rate,"you've got to control everything else."In order to keep the dollar at a certain value,"you've got to try and control prices,"you've got to try and control wages,"you've got to try and control everything"within the economy." He said, "You're letting the tail wag the dog," was the phrase that he used. He said, "This is going to congeal the blood of capitalism"and capitalism depends upon free markets."Rather than trying to control everything else," he said,"why not just give up the whole exercise?""There is one and only one satisfactory solution," he said,"abolish governmental price fixing."Let exchange rates become free market prices determined"primarily by private dealings."Let the government simply stay out of the picture." So a completely different view of how to manage the economy. And basically, George Schulz believed that, as well as Milton Friedman. On the other hand, within the administration, there were those who felt that keeping hold of the Bretton Woods regime was vital, that that is what had led to recovery after the war, and it solved the problems of the Great Depression of the 1930s, of trade warfare, currency warfare. And above all, there were two people who wanted to keep the existing system going: Arthur Burns, the chairman of the Federal Reserve; and Paul Volcker, who was undersecretary at the Treasury who was responsible for American international monetary policy. They both preferred to have evolutionary change. Try and force other countries to revalue their currencies, perhaps allow the dollar to devalue, perhaps allowing the gold price to change, but keep the basic system as it was because that, they thought, was at the heart of the recovery since the Second World War. But Nixon wasn't really interested in this debate and the outcome of the policy was what was called "benign neglect." That is to say, "Don't do anything."Wait for crisis."When a crisis comes,"then use the crisis to force a realignment"in exchange rates." Which, of course, begged a fundamental question; What would you do once the crisis came? The debate would then reopen. Well, the crisis hit in the summer of 1971. There was the loss of confidence in the dollar, money fled from America to Germany'cause it was felt that the Deutschmark was very strong, and Nixon closed the Gold Window on the 15th of August, 1971, that is you could no longer change the dollar into gold. It was inconvertible. He announced not only that, the closing of the convertibility of the dollar into gold, he also announced his wider new economic policy. He imposed a 10% import surcharge on goods coming from other countries, to look like trade warfare is back, and he also, within the United States, introduced price and wage controls run by somebody who some of you might remember from the Iraq War, Donald Rumsfeld. In other words, Nixon was doing just what Milton Friedman said should not be done. Nixon, of course, was only interested in one thing: Winning the next election. And he thought that he could sell this new policy as being beneficial in electoral terms. He was trying to win support of the blue collar workers away from the Democrats, and support from the South. The South was experiencing competition from imports, from textiles, from the far east, and workers wanted, of course, to have a better standard of living. So what did he say in the discussions before this policy was introduced? He said, well, labor wouldn't care one way or the other about closing the Gold Window. This was something which only really affected Wall Street, they wouldn't be interested. But he said, "Labor will sure as hell understand"the border tax,"the price fees,"and other actions that would stimulate employment." So he was hiding what looked like... Excuse me, he was hiding what could look like a defeat on international policy behind a domestic policy which he thought would be able to sell in the next election. Well, what to do next? There was no plan. Paul Volcker caught a plane to London and the next morning, at Number 11 Downing Street, he met European finance ministers. And what did he say? Well, he said administration has no specific program or blueprint for reform in mind. Rather, he said, "they had an objective,"which was that the United States must now be put back"into a strong balance of payments position." In other words, you are going to put us back into a strong balance of payments position. We're not going to do anything about it. Well, the Europeans were absolutely astonished. They said "the Americans are abdicating responsibility." They were even more astonished by the United States' Secretary of the Treasury, John Connally. John Connally had been governor of Texas and was in the car when President Kennedy was assassinated. He was now Republican Secretary of the Treasury. The British, when they encountered John Connally, thought that he was a tough Texan who thinks like a shrewd poker player and not a sophisticated exponent of diplomacy. To one British newspaper, he was the Nixon Administration's John Wayne. John Connally summed up his approach to the international monetary system in the following words,"My basic approach," he said,"is the foreigners are about to screw us."Our job is screw them first." Nixon agreed."This country," he said,"wants to kick foreigners in the ass." I should apologize for language, which is entirely from President Nixon, as you'll see, I guess, even worse as the lecture proceeds. By December, attitudes were shifting. This toughness of Connally was forcing the Europeans to accept change, to accept that the currencies in Europe should be revalued. In December, President Nixon met President Pompidou of France on the Azores to broker a deal, and then that was confirmed by other countries meeting at the Smithsonian Institute in Washington on the 17th of December, 1971. The Bretton Woods regime was patched together. Other countries agreed to revalue their currencies, the United States finally accepted it would change the price of gold, so it did devalue, and the range of flexibility of variation around a fixed central point was widened from one percent, up or down, to two and a quarter percent, up and down. To Nixon, this agreement was the most significant monetary agreement in the history of the world. Well, that was of course nonsense. Volcker whispered to his neighbor at the conference,"It might last three months." Well, it lasted a few months longer, but not much longer. And why didn't it last? Because Nixon wasn't going to sustain it. Nixon would not deflate the American economy to preserve the Smithsonian agreement. And by February, Georges Pompidou of France was complaining about Nixon's failure to do anything. He said there were "shortcomings"which risk weakening the correct implementation"of our agreements,"as well as my preoccupation over steps taken"or of positions envisaged by your administration,"and which, at first glance,"do not seem to me to be consistent"with what we agreed." Well, in short terms, you're not following the agreements. He said that you are allowing American deficits to remain high because you're trying to buy off the electorate, you're keeping interest rates low to stimulate the economy so that you have a booming economy ready for the next presidential election. There's no confidence in the dollar. And in May 1972, George Schulz replaced Connally as Secretary of the Treasury. It was clear that policy was going to change towards a more market... Different approach. But Schulz was also careful. He didn't want to do it too quickly and to upset markets. So he asked Paul Volcker to come up with a plan for reform to try and keep the system going a little bit longer. But then, the British undermined the whole thing. On the 23rd of June, 1972, the Pound floated. The Pound could just... The rate could be set by the market. It was the first break in the Smithsonian agreement. It seemed to reflect the decision of Anthony Barber as Chancellor of the Exchequer in March 1972. He said, in 1972, that "it was neither necessary nor desirable"to distort domestic economies"to an unacceptable extent"in order to retain unrealistic exchange rates." In other words, he's going to give priority to what he called "the dash for growth" rather than trying to keep exchange rates fixed. So when the Pound came under pressure in June, 1972, he gave up the fixed rate. He floated the Pound. Nixon was told. And what did he say? He said, "I don't care."Nothing we can do about it." His advisor then said,"Well, then the lira will be the next in line." What did, and what did Nixon say?"I don't give a shit about the lira." So by 1973, the Pound had floated, and basically everybody else was starting to follow. In 1974, George Schulz abandoned capital controls. He pushed for financial liberalization. So we're getting away from the Bretton Woods regime completely now. Floating rates set by the market, not controlling capital flows. Capitalism was being fundamentally remade. The consequences of this were very alarming. Floating of exchange rates meant you did not need to take corrective action on domestic wage demands. If you've got stable, fixed exchange rates, you've got to try and control domestic prices. Otherwise, the exchange rates are not going to work. So if you have floating rates, you can just say... You can give higher wages, you can let the Pound drop in value,'cause that will then keep your goods competitive even if there were higher wages. So the phrase used by the treasury was,"let the exchange rate take the strain."Let the currency," the Pound, the lira,"float downwards rather than face up to trade unions." And this of course was the big issue which came up in Britain in 1973 to '74, There was a strain within the Heath government. Heath wanted to join the European monetary system of fixing rates within Europe because we were joining the EEC, but you couldn't do that if Barber is refusing to deflate the economy because he's going for a dash for growth. And the treasury said, "Well, in any case,"you could only keep exchange rate fixed"if you stand up to the unions."Can you?" Well, in late 1973, the coal miners demanded a very large wage increase. They embarked on industrial action which led to the imposition of the Three Day Week, when the lights go out. Some of us are old enough to remember it. I was giving lectures by candlelight in 1974. Heath called a general election on the issue of who controlled Britain, to which the answer essentially was,"Well, not the Conservative government." The new Labour government comes in and negotiated a social contract with the unions to try and control wage demands. But by 1976, there was a crisis of high inflation, increasing wage demands, pressure on the Pound, for which there were two possible solutions: The first was the alternative economic strategy of Tony Benn, that is to say rather than trying to deflate the economy, to have austerity and high interest rates, why not have what he called a siege economy? Why not to have protectionism? Why not then try and increase profitability within industry? You can then invest at home. That will create a more prosperous economy, he argued, the alternative economic strategy. But Jim Callaghan, now prime minister, said no. He said the party is over. We must accept austerity in return for assistance from the IMF. And Callaghan's speech to the Labor Party Conference of 1976 to many people is the beginning of the new approach to economic policy. It's saying "the cozy world"in which we would have full employment"by increasing government spending,"that's gone."Unemployment is caused because we are paying"ourselves too much,"more than we are producing."We can't spend our way out of a recession."We've got to now squeeze inflation out of the system,"we've got to control spending, government spending,"and monetary policy." So it looks here as if we are moving towards a new economic policy. And the same time as these tensions are happening within the international monetary system, we have other tensions emerging from outside; That is, the challenge of the new international economic order and OPEC. So that takes me to my second theme, which is the challenge of the less developed countries. In October 1970, the General Assembly of the United Nations proclaimed a "development decade." They said they wish to create a more just and rational world economic and social order. They should be given preferential treatment for their goods in developed markets, and they should have the full exercise of permanent sovereignty over their natural resources. Well, the less developed countries seemed, in the early 70s, to have the upper hand, to have the initiative. There were internal domestic tensions in the West, with student protests after 1968, civil rights movement, and the crisis I was just talking about within Britain. The United States was struggling in Vietnam. The Tet Offensive of 1968, domestic opposition to the war within the United States. There was the crisis within the international monetary system I've been talking about, and the Europeans facing up to the Americans and the mutual animosities I've been talking about. Then, in September 1973, the Non-Aligned Nations met at Algiers to stress that imperialism was still the greatest obstacle to the emancipation and progress of the developing countries. They said, the Non-Aligned Nations, that they would take an aggressive attitude towards those who oppose its plans. They referred to the ever increasing disparity between the industrialized countries and the underdeveloped world. The Algiers Declaration called for fighting front by challenging imperialist and neo-colonial exploitation. They asserted each country's inalienable right to the full exercise of national sovereignty over its natural resources. Now, those sort of demands were given reality by the power of the oil producers. And OPEC, the Organization of Petroleum Exporting Countries, was created in 1960. It was a meeting between the Venezuelans, who were one of the major oil exporters at the time, and the Arab producers. They came together in Cairo in 1959, and the next year, OPEC was created, in 1960. At that time, there was a 50-50 split between the profits of the oil companies and the oil-producing nations. OPEC started demand an increase in their 50%. And by 1971, most of the petro-states went further and said they should have some control over the production of the oil itself, not just in the hands of the oil companies. And then, in 1973, Egypt attacked Israel, and the embargo is imposed by the Arab oil producers on the West as a result of their support, those Western support for the Israelis. Followed by OPEC increasing the price of oil from just over three to $5.12 cents a barrel on the 16th of October, and to $11.06 in December 1973. You see the sudden surge there in oil prices. The first unilateral increase introduced by the oil producers. Result of that was a squeeze on household consumption in the advanced industrial economies, an increase in their costs, and recession in most of the major economies. The less developed countries were delighted. As a delegate from Guinea said, OPEC had scored a brilliant victory in bringing about a just and more harmonious equilibrium in international economic relations. So although many of the less developed countries were themselves oil importers, were hit by high prices, they nevertheless believed they had something in common as exporters of raw materials as less developed countries. And in 1974, the new international economic order was announced. This called for full permanent sovereignty over natural resources. So these countries that produce the raw materials are saying,"We are going to take control over our resources,"our raw materials." The new international economic order called for "active, full, and equal participation"in the formulation of all decisions concerning"the international community." So oil states would have the right to nationalize their materials without compensation to the countries which owned the multinational corporations which owned that material. The countries of the... Less developed countries would have the right to full compensation for past exploitation by imperial powers. Well, this new international economic order was causing fundamental worries within the Global North, as it was coming to be known. What could they do about it? Well, there was a split, again, between the Americans and the Europeans. Henry Kissinger's view was "We must stand up for"the oil-consuming nations of the West."We shouldn't," he said,"throw any sand into the discussions"with the new international economic order."But on the other hand,"we shouldn't fully accept it."We should," he said, "fuzz it up."We should try and confuse it."We can't just say "go away,"" he said,"that's a losing wicket."But if we can, try divide and rule." On the other hand, the French and the European Economic Community felt it was much better to cooperate with the oil producers. And in November 1975, President Giscard d'Estaing called a meeting at (speaking foreign language) to try and get closer cooperation with the oil producers. The declaration of the meeting said"there should be a cooperative relationship,"an improved understanding,"between the developing nations"and the industrial world." So cooperation or conflict. So there's, again, this crisis throughout the 1970s of what the solution should be, culminating in the second oil shock of 1979. Now, this takes me to a third theme of this crisis, the return of financial liberalization. Now, I've already said that the change in the Bretton Woods regime meant that capital controls are removed by George Schulz in 1974. You could now allow capital to flow in and out of the country'cause you didn't need to control the exchange rate. If capital went out, well, the exchange rate would fall, that's fine. So it's lessened the need to control capital flows. This had been attempted though by President Kennedy back in the 1960s when he introduced interest equalization tax. He tried to stop money going overseas by imposing tax on interest received on money which went out of the country. And President Johnson in 1967 tried to control overseas investment by American multinationals. So he's trying to balance the American balance of payments by stopping money leaving the country. Now, this has an unintended consequence. It means that American multinational corporations, which earn money overseas, don't bring it back to America. They leave it in London. It's Euro-dollars; dollars held in London or held in Europe. Also American banks saw this as a very profitable way of getting around New Deal regulations on the domestic money market. And also communist countries, particularly the Soviet Union, earning money from their raw material exports don't want to send their dollars back to America because it might be controlled as a result of conflict during the Cold War, so they're going to keep their money in London. So what is happening during the 60s is a growth of the Euro-dollar market in London, and this means the recovery of the city of London. As it was said,"United Kingdom may now be a third rate military power,"but the city of London has staged a comeback"which would be the envy"of any child's movie star reaching maturity." So money is held in London, now that then has a major impact when these oil producing states are producing large sums of revenue. Where do they put it? They put it in London. Now, there's a fear here that these large sums of money sloshing about the world could be destabilizing. So initially, the American treasury and the European central banks say,"we've got to have controls on this." To which the Bank of England, the treasury, says no, because they see this money as being a way of giving revenue to the treasury and recovery of the city of London. So the Americans then, with the shock of the... Of the oil shock of oil increases, they change their minds anyway. They move away from regulation to say,"Well, look,"we've got to recycle these dollars being earned"by Saudi Arabia and Iran and Iraq."It's got to be pumped into the world economy,"and that should be done through the free market"and through commercial banks." William Simon, who becomes the secretary of the treasury after Schulz, was a former banker at Salomon Brothers in New York. He says, "the private market performs marvelously."Commercial banks and the Euro market have been able"to absorb the inflows." So the Euro-dollar market has been created by capital controls, capital control are taken off, the Euro-dollar market is then the solution within the free market economy. So it's believed by the late 70s that commercial banks are the way of dealing with these flows. This is a fundamental change from Bretton Woods, when it's the commercial banks should be controlled by the government. Now, it is the commercial banks are the solution and they are going to pump this money throughout the world system to keep it going. My fourth theme of the crisis is fundamental structural changes in the economy. By the early 1970s, economic growth had slowed down. The growth rate of growth domestic product per capita in Western Europe was just over four percent from 1950 to 1973. From 1973 to '97, it was 1.75%. It slows down because of a transfer of agriculture... Sorry, beg your pardon. It slows down because the end of the transfer of agriculture to industry has taken place, the new technology after the war has been fully exploited, and there's a fall of profitability. The profitability of British firms drops from 13.2% in 1960 to 3.2% in 1981. Fall of profitability, that means that you can't invest some more, you can't increase productivity some more. You have stagflation. You have high levels of inflation, I've been talking about, and low levels of growth. So this is putting pressure on the postwar social contract. You couldn't any longer have corporation between government and the unions because with high inflation, low profitability, firms could no longer pay higher wages, keep down prices, and maintain decent profits. Something had to give, as we saw happened in Britain in 1974... 1972 to '74, and 1976. And my final theme of this crisis is a change in social assumptions. The change wasn't only in economics, it was in social attitudes. Though this could be a whole lecture in its own right but putting it very briefly, during the war and the post-war period, we can see assumptions about solidarity during the war and post-war reconstruction. A shift to a greater sense of individualism based upon desire and choice. The American historian, Dan Rogers, calls this "the Age of Fracture."

You have a change of attitudes amongst the new generation, the postwar baby boom generation, who are growing up now in an era when they want to consumption, they want choice. New attitudes about sexuality, the woman's right to choose. There could be a progressive attitude towards freedom to choose, which is also found in the attitudes of the economists like Milton Friedman. Markets are efficient. So you get this sort of meeting of like a neoconservative economic agenda with the progressive agenda of the postwar baby boom generation. But also the change in the economy that I was talking about is also going to be leading to de-industrialization and a movement away from mass trade unions. Employment is growing in the service sector. It is retreating in the coalmines and other heavily industrialized areas. So identities are no longer being shaped by work, they're being shaped by consumption. So the postwar order is breaking down and a new order is being created. Now, I spent a long time breaking down the order, I got now (indistinct) think, in 10 minutes, how it's resolved. So let me now turn to that. And I'm going to mention five themes here, again, much more briefly, about how the crisis is resolved and a new form of capitalism is remade from around 1980. And of course, those of us who are British might associate this with Mrs. Thacher, 1979, and, of course, with President Reagan. It's the emergence of what is often called "neoliberalism" or the "Washington Consensus." Now, both of those are highly contested terms, which I will define, in a descriptive way, as fiscal and monetary discipline, tax reform to reduce marginal tax rates, financial liberalization, privatization, and deregulation of business. Now, I think there were five themes around this, and let me just highlight those very briefly. The first is how to break the inflationary expectations. Now, Arthur Burns, whom I referred to earlier on, at the Fed, had wanted to control inflation, but he didn't have the courage to do it, or least he didn't want to annoy President Nixon too much. And he said that "if I try and squeeze inflation"out of the economy,"I'll be frustrating the will of Congress."And Congress wants to provide additional services"to the electorate."It wants to provide higher incomes"in the short run." And he said, "I can't do it"because the fear (murmurs) to unemployment is going"to offend President Nixon." Well, Paul Volcker, who we mentioned earlier on, replaced Burns at the Fed in 1979, and he introduced the Volcker Shock. At the time that he introduced a shock, President Carter was in the White House. So Carter was not very happy about this, but Volcker pushed through the change of policy. He said... As you see here on the slide, he said,"An entire generation has grown up knowing only inflation."They've factored it in to their expectations."We must now stop that."We're going to have a shock."I'm going to increase interest rates"and I'm going to keep them high,"even if unemployment goes up." Carter was not very happy about that'cause he thought he would lose in the next election, which he did. But as you see, Volcker squeezed inflation out of the system, as you see, the inflation rate drop, and he had there the full backing of President Reagan. You see the back of that slide. So inflation is being squeezed out of the system. Secondly, the defeat of the new international economic order and of OPEC. In October 1981, there was a final North-South Summit at Cancun, this cooperative discussion I talked about. Reagan and Thatcher turned up, they were not having anything of it. Things were changing anyway. The oil price was starting to drop as North Sea Oil came on stream, oil from Alaska, for example. But there was also a divergence within the developing countries, or less developed countries, Africa was falling back inflation... Sorry, growth rates in Africa were very low, but areas of Asia were growing very rapidly. There was a fracturing within the new international economic order. Reagan at Cancun, at that meeting, said"we are going to promote a revolutionary idea born"more than 200 years ago."It is called freedom and it works." That was the American Declaration of Independence."It is still the most exciting,"progressive and successful idea the world has ever known." So a change in attitudes, Thatcher and Reagan, both saying the same sort of thing at Cancun. But also, this flood of money that I was talking about, financial liberalization going into Latin America, borrowing heavily, and the IMF supporting the commercial banks if things went wrong. The third theme linked to this is financialization and marketization. Thatcherism appealed to preexisting trends about individualism in the 1970s, but this was taken further and entrenched by the policies adopted by people such as Geoffrey Howe in his budget speech of 1979."We need to strengthen incentives,"we need to allow people to keep more of what they earn,"so hard work, talent and ability are properly rewarded." So the budget of Howe and his successor, Lawson, marked a major shift. Reduction of marginal tax rates, a movement from contractual saving in life insurance to encouraging investment in equities through personal equity plans, privatization, the big bang in the city, improved the profitability of companies by changing the tax regime, and, above all, giving more incentive to people on high incomes. The idea was to create a new sense of enterprise dynamism and personal responsibility. Financialization came to permeate society. And then, this goes alongside de-industrialization. Financialization of society goes along with de-industrialization. In the United Kingdom, the proportion of workers in industry fell from 48% of the workforce in 1957 to 15% in 2016. It's a major change in the whole structural nature of society. The earlier regime I was talking about was based upon tangible capital, physical capital, in Detroit or Birmingham in car plants. Industrialized workers are unionized workers, having a sense of identity from that workplace. The new world is different. It's based upon intangible capital, things like licensing software, for example, where it's not based upon physical assets and what it's based upon is skill, knowledge, highly qualified workers. So what you have happening here is a growth of what was called "lousy jobs,""service sector jobs," the most rapidly growing employment was shelf fillers, 95.5%, and care assistance. 419.5%. Low incomes, de-casualized, they're often feminized, where very high incomes for the people who can exploit this intangible capital, lawyers, professionals, people who understand the algorithms of the Amazon warehouses, not the people who are on the shelves, filling the jobs... Filling the shelves. And this goes alongside also a change in the policy of the IMF, and, of course, a collapse of the Soviet Union. So the IMF is now encouraging financialization overseas. The IMF, when it was set up in 1944, did not. It wanted to control capital. Now, for example, in Korea, in the crisis of East Asia economies in 1997, it's forcing the ideology of neoliberalism upon Korea, and of course they didn't like it, as you see in this slide. In Poland and in the form of Soviet Union, there was shock therapy. A sudden forcing through of the Washington Consensus of privatization, of deregulation, which, of course, can then lead to exploitation by the people close to the regime, can lead to the oligarchs of Russia, to what has been called a kleptocracy. So it could work better in some countries, like Poland, than in Russia. China, meanwhile, it embarks upon its transformation by not adopting shock therapy. It keeps the IMF and the Washington Consensus at bay. It has an eclectic choice of policies and it decides instead, what is called,"grow out of the plan." It's never once and for all shock of dismantling the old. It keeps the plan, the controlled command economy, and grows out of that into the market. So we've got different strategies here going on. And of course, it's that growth of China, which is so important today for the world within which we live. Capitalism with Chinese characteristics. So to conclude, my argument here is that it's a serious crisis in 1971. It leads to remaking of the global economy, massive globalization, a remaking of capitalism. The future looked rosy to many people in the early years of this century. In 1906, Ben Bernanke, now the chairman of the Fed, said "the management of market risk"and credit risk has become increasingly sophisticated."Banking organizations of all size have made"substantial strides in their ability"to measure and manage risks."There was," he said, "a great moderation."There will be no more crises."What could possibly go wrong?" Well, we know what went wrong. In 2007-8, the Global Financial Crisis. Now, that crisis then led some people to say,"capitalism will now have to be remade again." To the critics, it showed that there had been too much financialization. Too much inequality, as (murmurs) to the lousy and lovely jobs I talked about. Consumption was only kept up in the United States and Britain by debt. Not so much debt of the state, but debt of private individuals. So the question in 2009 when the G20 nations of the world assembled here in London was,"How should the response..."What should the response be to this crisis?"Should it be, if like benign neglect,"continuing as before,"or should it be a fundamental reordering?" Well, in fact, it was not a fundamental reordering. So what I want to look at in my next lecture is, why was there not a fundamental reordering after 2009? If not, why not? And if not then, what about now, after COVID? Thank you.(audience applauding)- Nearing the oil crisis in the 70s, Russia could now cut off gas supplies to Europe. What could the economic results be?- Gosh, well, I think that goes back to my first slide, doesn't it? Which showed the crisis of 1973 and the gas price. Obviously, there's a serious issue now that if Nord Stream two were taken out of commission or the oil pipelines, gas pipelines, from Russia more generally were not used, then we... Well, we already got a massive surge in gas prices, what's going to happen? There's obviously a serious geopolitical issue there. I suppose though, it goes both ways, doesn't it? One thing which is clear about Russia, during that shock therapy I talked about after the collapse of the Soviet Union, is that it was highly dependent upon the income that was coming from oil and gas. So we're dependent upon Russian oil and gas, or rather Europe, perhaps more than Britain, but similarly, the oligarchs of Russia are dependent upon the revenues produced by that oil sale. So I think there's a really serious geopolitical issue here that will be very interesting to see how it plays out. As we're speaking, it seems as if the Russians are withdrawing some troops near the border of the Ukraine, so who knows what is go going to happen there? So I think this is another moment which, perhaps I'll be picking up in my next lecture, about the geopolitical strategy. Because one of the other issues, of course, is that one reason why our price of gas and oil are going up here is the demand coming from China and from Asia, and how this whole issue about energy is going to play out in the future. So I think we might be at another 1973 moment.- Sir Daunton, thank you so much. I'm afraid that we are out of time now. Please, may I give over a reminder that his next lecture is going to be on the 5th of April, Monday, the 5th of April,

00 PM, back here, and it's "The Global Financial Crisis and COVID: What Next?" Thanks so much, Professor Daunton.