So also did monetary policy. Many government officials throughout the free world became monetarists in the 1970s. Major efforts were made by the Federal Reserve Board in the United States and the Bank of England in the United Kingdom to stabilize their disordered economies by regulating the money supply. These efforts were not successful, and actually increased instabilities. Economist Milton Friedman raged against the errors of his own disciples, repeatedly accusing the governors of the Federal Reserve System and the Bank of England of grievous incompetence. But John Kenneth Galbraith comments, “An economic policy, it might be pointed out in response, needs to be within the competence, however limited, of those available to administer it.” A major problem was the complexity of factors that constrained monetary decision-making—domestic politics, international conditions, class interests, and social policy.29
Other sources of instability in the world included the acts of well-meaning economic planners who tried to stabilize the disordered world economy. Like generals trained to fight the last war, they tended to think in terms of past crises while new ones developed around them. A classic example was the Thatcher government in Britain. During the 1970s, that nation had suffered from chronic slow growth, soaring prices, massive unemployment and industrial disintegration. In 1986, recovery began at last. The British economy began to grow more rapidly than it had done for many years, but only a few months into the recovery, the British government became deeply concerned about the dangers of inflation. As the economy struggled painfully to its feet after decades of decline, an editorial in the London Times asked, “Is the economy in danger of overheating?” A few days later, the government deliberately drove up interest rates to “cool” it. The cause of their concern was the memory of double-digit inflation; the effect was to retard a fragile recovery and revive unemployment, in a nation where more than 15 percent of the work force were without a job.30
Economic instability in general, and inflation in particular, took a heavy toll in human suffering. Crime increased rapidly around the world during the period from 1965 to 1993. In the United States homicide rates rose in a series of surges that peaked in 1974, 1980, and 1991. These movements correlated very closely with rates of inflation. Similar patterns also appeared in theft and robbery. It should be understood that the primary cause was not inflation, but the stress that inflation caused. In the United States, crime had also tended to increase in the depth of the great depression, when prices were falling, but material stress was also very high. Nevertheless, in the penultimate stage of every price-revolution, price-surges caused crime-surges. This pattern appeared in the fourteenth century, the sixteenth century, the eighteenth century and again in the late twentieth century. Periods of price equilibrium, on the other hand, were marked by sustained decline in crime rates in the early years of each price-revolution.
Similar patterns appeared in the use of drugs and drink. In the United States, consumption of alcohol and the use of drugs both tended to rise during the 1960s and 1970s in a series of surges that correlated with the rate of inflation in consumer prices. Similar tendencies had occurred in the United States during the price-revolution of the eighteenth century. The Victorian equilibrium, on the other hand, was marked by a sustained decline in alcohol consumption, and in the United States by a decline in drug use after 1830.
Figure 4.23 compares rates of inflation in the United States (more precisely, the annual percent increase in a fixed-weight price index of personal consumption expenditures), with rates of homicide (annual cases of murder and nonnegligent manslaughter known to the police per 100,000 population), and with annual rates of theft (theft, larceny and burglary known to the police, per 100,000 population). The sources include Historical Statistics of the United States (1976) series H972; Statistical Abstract of the United States (1976), table 248; (1981), table 293; (1988), table 263; (1993), table 300; and Federal Bureau of Investigation, Uniform Crime Reports (1993–94).
Figure 4.24 compares the annual rate of inflation in the United States with annual consumption of distilled liquor per capita (population 18 and older); and also with the proportion of young adults (aged 18-25) who described themselves as “current users” of marihuana. Broadly similar trends (with variations) also appeared for the use of heroin, cocaine, hallucinogens, and inhalants; and for beer and wine. The source for liquor consumption is the Economic Research Service, U.S. Dept. of Agriculture; for drug use, the National Household Survey on Drug Abuse. Both are reported in Statistical Abstract of the United States (1981), tables 199, 1429; (1981), tables 180, 186; (1993), tables 208, 220. Readers should note that liquor consumption and drug use peaked when real incomes were falling rapidly, prices were surging and unemployment was increasing. A comparable surge in drinking (to the highest recorded levels in American history) occurred in similar circumstances during the climactic years of the eighteenth century price revolution. A long decline in alcohol consumption coincided with the Victorian equilibrium. See figure 3.30.
Another linkage appeared between price movements and family disruption. In the United States, the proportion of children born outside of marriage increased in proportion to the movement of consumer prices. This trend had also appeared in every earlier price-revolution for which evidence survives. It was very strong in the eighteenth century, and appeared also in fragmentary sources for the sixteenth century. Here again periods of price equilibrium were marked by countertrends. Material instability, and high rates of inflation placed heavy stresses on families as well as individuals. In short, the three trends that Americans identified as the most urgent social problems facing the nation—crime, drugs and family disruption—all correlated with rates of inflation.
Figure 4.25 compares annual illegitimacy ratios (births to unwed women per 1000 total live births in the United States) with consumer prices (1967=100). Sources include Daniel Scott Smith, “The Long Cycle in American Illegitimacy and Prenuptial Pregnancy,” in Peter Laslett, Karla Osterveen, and Richard M. Smith, eds., Bastardy and Its Comparative History (Cambridge, 1980), 363-66; P. Cutright, “Illegitimacy in the United States, 1920-68,” in R. Parke Jr., and C. F. Westoff, eds., Demographic and Social Aspects of Population Growth (Washington, 1972), 383; Statistical Abstract of the Unïted States (1993), tables 101, 102, 756; Historical Statistics of the United States (1976), series E135.
The Crisis of the Late Twentieth Century
In the 1980s and 1990s, material tensions approached the breaking point. Everywhere in the world, established orders came under heavy strain. Entire systems began to collapse, in a sequence of events that was similar to the climax of every other price-revolution since the Middle Ages. The crisis took different forms from one region to another, but every part of the world was caught up in it.
The people of Africa experienced the crisis in its most catastrophic form. Here the imbalances had become most extreme. After independence, the growth of population had accelerated sharply, and economic development had lagged far behind. In 1988, the twenty poorest nations of sub-Saharan Africa all had negative rates of economic growth. Per capita product fell from $324 to $270 a year. By 1990, much of Africa was in the grip of a classic Malthusian crisis, on a scale that Europe had not known since the fourteenth century.31
Sir William Osler observed that “humanity has but three great enemies: fever, famine and war.” All were abroad in Africa. Famine stalked the Sahel. In Somalia, governments collapsed, order disintegrated; a large part of the nation was reduced to starvation, while warlords murdered relief workers who came to help. In Uganda and Zaire new epidemic diseases appeared in forms more terrible even than the plagues of the 14th century. In Rwanda and Burundi, tribal war led to mass murder of entire populations.
Even in the midst of crisis, there were countervailing tendencies. Nations such as Ghana built strong institutions and maintained them. The people of South Africa ended their system of apartheid, and struggled to construct a genuinely multiracial society. But in South Africa, half the work force was unemployed, and social
stresses were very great. By 1996 Africa below the Sahara was in the grip of a general crisis as severe as any the world had ever seen.32
In eastern Europe, the general crisis caused one of the most dramatic reversals in modern history. In the 1980s, leaders of communist regimes found themselves under heavy stress in many ways at once. They felt themselves to be threatened from abroad by an American government that had become increasingly bellicose, and was spending heavily on armaments—even what appeared to be first-strike nuclear weapons, designed to “decapitate” command and control systems in the Soviet Union. At the same time, aging socialist economies were unable to maintain earlier rates of economic growth, and their citizens were demanding higher standards of living. The increasing ossification of the Soviet system coincided with the late stages of a global price-revolution, and with growing scarcities throughout the world. The result, as we have seen, was price-rationing in capitalist countries and state-rationing in the communist nations. Price-rationing was cruel in the west, but state-rationing was worse. It became grossly corrupt, and made a mockery of the ideals on which socialist systems were founded. The ruling few lived well; the many subsisted miserably. The rapid growth of corruption and inequality destroyed the moral legitimacy of the socialist states at the same time that the great wave eroded their material base. Any one of these problems alone was a serious threat to the standing system. All of them together were fatal.
The result was not reform but revolution. To the amazement of the West, Communist states suddenly began to fall apart. The first was Poland, where a union of shipyard workers who called themselves Solidarity founded a movement for national liberation. Their leader, Lech Walesa, declared in his Nobel speech of 1983, “He who once became aware of the power of Solidarity and who breathed the air of freedom will not be crushed.”
Then to everyone’s astonishment, the government of one of the world’s two superpowers collapsed. In 1987 Mikhail Gorbachev tried to reform the Soviet system by perestroika, or restructuring. “The new is knocking at every door,” said Gorbachev. Soon it was coming in through the windows. His reforms ended in revolution, which destroyed the communist system. Marxism was discredited, and the Soviet Union disintegrated.33
In eastern Europe every other Marxist system came crashing down. A painful period followed. Old ethnic rivalries that had been suppressed by Communist regimes exploded into war. A new and very difficult economic transition from socialism to free market economics caused negative rates of growth, hyperinflation, disorder, crime, and severe suffering. But open institutions rapidly began to develop in eastern Europe. The new regimes were very shaky, and suffered from the same stresses that had brought down their predecessors. Their future remained in doubt.
In another part of the world, the crisis took a different form. From Afghanistan to Algeria, the many nations of Islam were in turmoil during the 1980s and 1990s. After World War II, modern secular elites had ruled them with a mix of Islamic and Western ideas. Rates of economic growth were high, but the increase of population was higher. With the exception of oil-rich Arab sheikdoms, Islam experienced the same economic stresses that were felt around the world. The price-revolution took its toll. The cost of living surged. Real wages fell. Inequalities increased. The teeming urban slums of this vast region were among the worst in the world.
Figure 4.26 shows levels of hyperinflation in five former Socialist nations, 1992. Sources include United Nations, Demographic Yearbook (1993) 336-53; Grzegorz W. Kolodko, Danuta Gotz-Kozierkiewicz, and Elzbieta Skrzeszewska-Paczek, Hyperinflation and Stabilization in Postsocialist Economies (Boston and Dordrecht, 1992).
Many in Islam blamed their troubles on western values. Fundamentalist movements began to sweep the Islamic world. One by one, the secular regimes were attacked, and some were destroyed. In 1979, Iran’s Pahlevi dynasty fell from power. In 1981, Egypt’s secular leader Anwar Sadat was assassinated. A secular socialist regime in Afghanistan was destroyed by a fundamentalist revolution. Islamic insurgencies developed in six of the former Soviet republics. In 1992, Algeria’s Islamic Salvation Front won an election, but was prevented from taking power. The result was civil war, and the murder of hundreds of secular Algerian leaders. In 1993, Islamic fundamentalists in Turkey set fire to a hotel where secular leaders were meeting. Forty died in the flames. The Palestinian people turned to Islamic fundamentalism. Their aging secular leaders in desperation made peace with Israel, but there was no peace. In 1996, the general crisis had barely begun in the Middle East. Its outcome was in doubt.
In Latin America during the Cold War, the superpowers had fostered the growth of client tyrannies both of the left and right. These predatory regimes made war upon their own people. The results included civil war in central America, a corrupt Communist dictatorship in Cuba, revolution from the right in Chile, the “disappearances” in Argentina, and the boat people of Haiti. The economics of tyranny in Latin America were catastrophic. The results were social exploitation, political corruption, and some of the worst hyperinflation in the modern world.
In the 1980s, new trends began to appear. As the Cold War ended, the superpowers withdrew their support of tyranny in Latin America. The people of the region rose against the systems that had oppressed them. One by one, the tyrannies began to collapse. By 1996, all but one Latin American nation were living under democracy and the rule of law. The general crisis in this region destroyed a system of tyranny and oppression. But here again the new and more open regimes were themselves very fragile, and the outcome was uncertain.
Even the strongest national economies showed signs of severe stress in the 1990s. A case in point was Japan, which for a generation had been perceived to be the most dynamic and successful economy in the world. In the early 1990s, signs of trouble began to appear. Increasing pressure was brought on Japan by competitors in Asia, and trading partners in America. A crisis of economic confidence developed within Japan itself. Labor costs were high; productivity gains lagged behind those of other nations. By 1994–95, Japan had negative rates of economic growth. The Japanese stock market fell sharply, and individual investors suffered huge losses. By 1995, the economic stress was so severe that the nation as a whole began to experience extended price deflation.
A growing spirit of cultural alienation began to develop in Japan, similar to that in other nations throughout the world. Religious cults grew rapidly. A militant Buddhist cult that called itself Aum Shinrikyo, who believed that the universe would end in 1997, began in their madness to manufacture a deadly nerve gas called Sarin. In March 1995, they released some of it in a crowded Japanese subway, killing eleven commuters and injuring hundreds more. The police struck quickly. Cult leader Shoko Asahara was arrested, but the incident brought home the vulnerability of modern industrial societies.
Supporters of Aum Shinrikyo included some of Japan’s most highly educated young people who dedicated their talent and discipline to the destruction of their own nation. This terrible event could have happened anywhere. That it happened even in Japan demonstrated the depth and breadth of problems that existed in all industrial societies.
The events of the late twentieth century increasingly resembled price-revolutions in the past. Once again, world systems were in crisis. This was a crisis not only in the conventional sense of a time when things hang in the balance.
When these words were written in the Spring of 1996, the outcome was very much in doubt, but some trends were clear enough. Environing conditions that had set the price-revolution in motion were changing rapidly. Rates of population-growth were plummeting throughout the world. Total numbers of people continued to rise, but rates of gain were coming down. By 1996, some nations approached zero-growth. Other nations from the West Indies to eastern Europe had negative growth.34
As the pace of population-growth diminished, rates of inflation also fell in the 1990s, with a speed that took experts by surprise. Inflation forecasts were repeatedly revised downward, but not fast enough to keep pace with the new
trends. In 1994, economic forecasters around the world swallowed hard and predicted that prices would rise only 3.5 percent the next year. In fact, they rose 2.6 percent. A journalist who studied the accuracy of economic forecasts observed in 1995, “Over the past couple of years, inflation has been consistently lower than expected in Britain and America.”35
So strong was the decline of prices by 1996 that several leading economists asserted that the age of inflation was at an end. American economist Lester Thurow called it an “extinct volcano.” British economist Roger Bootle wrote thoughtfully about “the death of inflation” and a coming “zero-era.” Japanese economists and businessmen spoke more ominously of “price destruction.” These judgments were premature. Prices continued to rise in most nations, though at a slower pace. Inflation was still institutionalized in economic systems.36
On the other side, central bankers continued to act on the belief that inflation was still the greatest danger. When economic systems showed signs of reviving, they raised interest rates, slowed expansion of the money supply, and “cooled” economies in other ways. For many years, central bankers had functioned as heroic inflation-fighters. Reflexive inflation-fighting was also institutionalized in economic systems—more so than inflation itself.
The results were the same as before. In 1996, inflation was declining, but far from dead. Anti-inflationary policies added to the miseries that inflation itself had caused. The consequences continued in the 1990s: falling real wages, rising inequality, diminished economic growth, and increasing instability in political and social systems.
All that was happening in the Spring of 1996, when this book went to press. The end of the story has not been written. It could end in many different ways. So fragile were the major trends that contingencies of various kinds threatened to disrupt them. A major war in the Middle East or eastern Europe or some other trouble spot could reignite inflation. A collapse of overvalued security markets could cause panic, depression and deep deflation.
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