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The Ancien Regime

John Quiggin on the collapse of postwar Keynesian prosperity:

There’s a tiny element of truth in this — after the oil shock, the collapse was rapid and disorderly. But the Keynesian economic order had already broken down by October 1973, and the oil shock was a consequence of that breakdown, not a cause.

An inflationary upsurge had been going on for five years or moe by the time OPEC oil ministers met in October 1973. The term ‘stagflation’, apparently coined in 1965 by Iain MacLeod was in widespread use, to reflect the breakdown of the historically observed Phillips curve relationship between unemployment and inflation. Wage and price controls had been imposed in the US in 1971, but had broken down by early 1973 — the oil shock merely administered the coup de grace, leading to the final abandonment of controls.

Internationally, the Bretton Woods system, based on fixed exchange rates tied to gold by way of a fixed $US price of $35/oz had been under pressure since 1968. The Smithsonian agreement of 1971 was the last attempt at rescue, and the system had collapsed completely by February 1973, although it took a decade or so for the remnants of the associated regulatory architecture to be cleared away by the process of financial deregulation.

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More interesting stuff at the link.