It was a commonplace in the 1970s that after several decades of unprecedented stability Western democracies had entered a crisis. Shortly before his resignation in May 1974, the West German chancellor Willy Brandt expressed his fear that western Europe’s democracies had only 20 or 30 years left before they would slide through chaos into dictatorships. The pessimism of that decade, especially about the fate of democracy, lingers today.
But the 1970s are frequently misunderstood. Energy-driven inflation did cause Western democracies great difficulties during that decade. But the crises of the 1970s originated in a set of deep geopolitical changes, not the nature of democratic politics itself. In the mid 20th century, Western states and companies could largely control the international chains of production and transportation for oil. From the 1970s, by contrast, Western democracies had to function in a world where for the first time no European country had an imperial presence in the Middle East and the United States had no capacity to export oil to Europe, even in an emergency. In this new geopolitical environment, the Middle Eastern states controlled the price and much of the supply of the primary energy source on which Western material life depended.
It was as this geopolitical shift occurred that a belief took hold in some quarters that democracy had run its course. In 1975, the Trilateral Commission – an influential forum established to convene politicians and business figures from North America, Europe and Japan to contemplate the future – published its report, The Crisis of Democracy. The authors believed that democracy’s fatal weakness was its propensity to cause inflation. For the American political scientist Samuel Huntington, inflation was “the economic disease of democracies” since “it becomes difficult if not impossible for democratic governments to curtail spending, increase taxes, and control prices and wages”.
But this idea, that the majoritarian dynamics of democracies generate and then sustain inflation, is unpersuasive. The price and wage controls governments used to try to reduce inflation enjoyed widespread support, particularly among the working class and lower middle classes. Indeed, Richard Nixon was never more popular in his first term than when he introduced a wage and price freeze in 1971. In class terms it was big business, in the US in particular, that had an interest in higher prices and pressed the case for them.
Far from democracies being rendered ungovernable, the governments that came to office promising to reduce inflation, such as Margaret Thatcher’s in Britain, stayed in power. During the 1980s, legislation that made strikes more difficult passed in most western European democracies without causing anything like the political instability that should have been expected if, as the Trilateral Commission suggested, “the demands on democratic government” were growing “while the capacity of democratic government stagnates”.
Inflation was not a democratic disease overcome by capital-friendly politics in the 1980s. It was a function of the geopolitical energy crisis. Inflation fell after 1980 partly because oil prices came down. Moreover, oil prices eventually fell because oil firms won their fight to end the price controls that disincentivised high-cost oil production in Alaska and the North Sea. In a world of more abundant Western-produced supply, Western democracies were less vulnerable to energy inflation in the 1980s than in the 1970s.
The impact of oil on the politics of these decades is most obvious in the US. Until the early 1970s, the US was the world’s largest oil producer, allowing the Texas oil and gas regulator – the Texas Railroad Commission – effectively to set prices. The slide in American oil production that began in 1970 and which handed the capacity to fix prices to Opec – the largely Middle Eastern oil cartel led by Saudi Arabia – was an existential political shock.
In a televised address in November 1973, President Richard Nixon declared that “we, as a nation, must now set upon a new course… which will give us the capacity to meet our needs without relying on any foreign nation”. He compared this task to the US’s founding as an independent state two centuries earlier. In what became known as his “malaise” speech, President Jimmy Carter pronounced in July 1979 that the energy crisis “strikes at the very heart and soul and spirit of our national will. We can see this crisis in the growing doubt about the meaning of our own lives and in the loss of a unity of purpose for our nation.” He insisted that “the confidence that we have always had as a people is not simply some romantic dream or a proverb in a dusty book that we read just on the Fourth of July”. Rather, it was “the idea which founded our nation and has guided our development as a people” and which now had to be restored through shared sacrifice.
By telling some truths about the energy crisis, including that oil was in the long term a finite resource, Jimmy Carter probably destroyed his presidency. For his many critics, as his energy secretary explained, “the American way” had to be more production. To that end, Ronald Reagan, pretty much as his first act in office, abolished all remaining federal energy controls. He left for his successors the problem of what to do when new supply from inside the West faltered, and the US had to work out how to exercise military power in the Middle East to secure more production from non-hostile regimes in the region.
For all the furore about majoritarian democratic excess in the 1970s, it was a range of existing plutocratic threats that were destabilising democracies. Where finance was concerned, these had first been evident in the decade after the First World War. Franklin Roosevelt’s administration had designed the post-Second World War Bretton Woods monetary order to protect democracies against the instability caused by short-term international capital flows. But during the 1960s, the emergence of an offshore market for dollars in London facilitated the growth of a dollar-based international banking system beyond the control of governments and central banks. These Eurodollar markets sometimes funded political corruption. In France, the oil company Elf, created by President Charles de Gaulle out of the French state oil agencies, used the Eurodollar markets to run a huge private banking operation, through which it provided money to the primary French political parties and to bribe foreign governments and firms.
The conjunction of the Cold War and decolonisation, meanwhile, generated threats to democratic government from militaries and intelligence agencies. In 1958, Charles de Gaulle came to power through a disguised coup in which it was clear that the next French government had to be acceptable to the French army. After the French referendum on Algerian independence in 1961, De Gaulle would himself have fallen to a coup had he not been saved by the refusal of conscript soldiers to follow orders. The following year, he survived a serious assassination attempt organised by renegade French military officers.
In the US, the Cold War produced what President Eisenhower described in his farewell address of January 1961 as a “military-industrial complex” conjoining “an immense military establishment [to] a large arms industry”, which created “the potential for the disastrous rise of misplaced power”. Eisenhower also warned that the “technological revolution” behind the “military-industrial complex” created the “danger that public policy could itself become the captive of a scientific-technological elite”. American democracy constituted “a political and spiritual heritage” now at risk from “plundering for our own ease and convenience the precious resources of tomorrow”.
Where, as in parts of western Europe, the nation-state came to be seen as insufficient to cope with the problems of the postwar world, the commitment to democracy weakened. The European Economic Community (EEC), established in 1957, had tenuous democratic foundations. In France, there was relatively little support among French political parties for any supranational European authority, but French bureaucrats pushed that agenda anyway. Those who identified as European federalists and cultivated a trans-European political network to push the EEC towards ever closer union often saw constitutional and cosmopolitan authority as a counter to democratic, national authority. That is why the unelected European Commission was given the sole authority to initiate legislation. In two decisions in 1963 and 1964, the European Court of Justice asserted that the EEC constituted a legal order that imposed obligations on national governments and citizens, and that Community law was supreme over national law.
In the end, the EEC proved to be a rather limited supranational entity. For national politicians, the attraction was that it geopolitically strengthened the nation-state’s capacity to act economically, including in regard to energy. But it, nonetheless, diluted democracy in its member states by insulating executives from democratic demands expressed in national legislatures without providing an alternative supranational outlet for democratic discontent.
With these concealed weaknesses, it is unsurprising that by the mid-1980s, when labour’s bargaining power was decisively weakened, it was a renewed risk of plutocracy that threatened the futures of Western democracies. Economically, it could scarcely be otherwise. Borrowing in international financial markets alleviated the economic pressures created by the energy crisis. But a return to open international capital flows was only ever going to magnify the political influence of the affluent classes and make redistributive politics more difficult.
Macroeconomic decision-making became subject to the mercy of foreign exchange markets. American politicians were protected by the dollar’s position as the world’s pre-eminent currency. But once their currencies came under severe downward pressure European governments could only stabilise them by taking action that depressed growth or restricted public expenditure. This did not prevent some governments, especially the Italian, running sizeable budget deficits for years, and it did not lead to a general retrenchment of welfare states in Europe. But it did mean that the European Community states inside the European Exchange Rate Mechanism had to use as many instruments of economic policy as politically feasible for anti-inflationary purposes.
Meanwhile, open international capital flows would eventually make taxing the wealthy and internationalised corporations harder. Starting with the Reagan administration, many governments in the 1980s changed the rates of taxation and allowances. Some of these reforms were not particularly motivated by international financial conditions: promises of cuts on the lowest rates of income tax could help win elections, and once they came down any suggestion of raising them again became a severe electoral liability. But from the 1980s, governments competed to attract investment from multinational corporations via benign corporate tax regimes. While few large states wished to take corporation tax as low as it was in a state such as Luxembourg, they were, nonetheless, pushed by the smaller states into lower corporation tax rates than democratic politics incentivised. This international corporation tax competition then had consequences domestically. Large gaps often opened up between top rates of income tax and corporation tax, affecting governments’ ability to tax those who could take their income as company dividends.
In time, it became significantly easier to tax those citizens on middle to high incomes where tax was deducted at source than the very rich and those with the discretion to organise their earnings and move money abroad. This shift in the balance of political influence within democracies around taxation became structurally entrenched. Offshore tax havens flourished. Since these were often bound up with the opportunities for offshore banking provided by the Eurodollar system, governments would have to contemplate serious disruption to the international dollar credit environment to act against them. Consequently, accepting the tax loss, regardless of the democratic cost, became the path of least resistance, especially when the offshore banking system yielded clear political benefits for some in power.
Beyond the effects of the Eurodollar system on tax politics, the growth of financial sectors from the 1970s also accelerated plutocratic excess. More finance-centric economies advanced the political influence of those who owned financial assets at the same time as organised labour’s wage bargaining power diminished. As well as offering very high salaries, financial sectors created whole new financial assets with high returns. This had a significant impact on wealth and income inequality in those countries with international financial centres. In the US, in particular, the top 1 per cent dramatically increased its share of income from the 1970s to the mid-2000s; the top 0.1 per cent gained even more. Those who owned these assets then sought political protection for them. From the 1970s, funds from the financial sector became indispensable to American politicians seeking to raise large sums of money to run for elected office. Large businesses led by financial firms also augmented their permanent lobbying presence in Washington, DC.
Yet, whatever the truth about inflation or the problems caused by the concentration of economic and political power in fewer hands, the economic lesson taken from the 1970s and 1980s by European politicians in both centre-left and centre-right parties was that inflation was, as the Trilateral Commission had argued, a permanent hazard in democratic politics. This risk, many governments concluded, had to be guarded against by taking monetary policy out of democratic politics, as was already the case in Germany. In the 1990s, central bank independence became a necessary condition of participating in the EU’s monetary union. Rather than inflation becoming a matter of democratic contest as debt grew after the 1970s and political strategies to manage that debt were required, its eradication became a near-moral economic principle to be constitutionalised out of democratic politics.
The cumulative effect of more internationalised and financialised economies from the 1970s terminated the mid-20th century notion that democratic stability rested on an idea of economic nationhood. As the geopolitical energy environment that had underpinned it disappeared, the notion of a national political community with a shared economic fate for which the democratic state could take responsibility was shattered. When governments turned back to borrowing in international capital markets, the practice of using citizens, as savers and taxpayers, to finance most of the state’s expenditure, which had taken hold after the Second World War, ended. In becoming much more dependent on international financial markets to finance their expenditure, democratic states became much less dependent on their citizens.
Now, the politics of what the state spends has changed again. The quantitative easing programmes pursued by central banks ensure that governments no longer need worry much about international financial markets. But there has been no accompanying shift in the balance of power within Western democracies away from finance. By inflating asset prices, quantitative easing has only strengthened the political position of those holding financial wealth over those who do not. Rather than creating the conditions for a new version of economic nationhood where the national state provides material security, the post-2008 monetary environment makes all governments dependent on the American Federal Reserve’s decision-making.
Western democracies began to weaken in the 1970s because their geopolitical underpinnings began to subside and the ways in which Western governments responded to the tumult reintroduced international finance into democratic politics. Thanks in good part to the high oil prices that caused such havoc, Western democracies would enjoy for a short while in the 1980s and the 1990s an interlude from the energy predicaments of the 1970s, even as politicians began to accept the relationship between energy consumption and climate change.
Now, there is no escape. Governments must simultaneously increase energy security and keep prices down as they attempt to realise an energy revolution unprecedented in human history. As they struggle, the temptation will be once again to say that democracy is the explanation of the failure and to constrain the substantive policy contest about energy. But, as in the 1970s, the problem is not democracy. It is a collective inability to face just how much Western democracies’ successes had energy histories and why the energy world is now extraordinarily more difficult.
This is an edited extract from “Disorder: Hard Times in the 21st Century” by Helen Thompson, published by Oxford University Press.