Part VII: From the 1950S to the 1970s

I have concentrated on the role of war in generating profits for US companies, although it is clear that much bigger profits were generated in America in the 1920s and 1930s, not due to war, but under conditions of relative peace. This was generally the case after World War II, although by this time the United States had established itself as the most powerful economic entity in the world, in confrontation with the Soviet Union, China and the rest of the Socialist Bloc, and its military-industrial complex had started to grow in line with the imperialist role it assumed, generally under such titles as the “defender of democracy” or of “Western Values” in its crusade against the threat of Communism, notwithstanding the fact that America’s large corporations (like Europe’s, etc.) prospered via trade with the Socialist Bloc countries⁴⁹.

Graph 13

Source: Based on Bureau of Economic Analysis data

The 1950s and 1960s

After World War II, thanks to pent-up demand from the war, there was a boom and profits went on rising through 1946 to the end of 1948, but then collapsed, gradually rising again through 1949/50 to reach a record level in the fourth quarter of 1950, following the outbreak of the Korean War (1950-53). Profits fell back then but rose again during the early 1950s, and were down significantly in the fourth quarter of 1953. After that they rose continuously to reach a new peak in the second quarter of 1955. They wavered around a bit during the second half of the 1950s, to fall again in the first quarter of 1958. Then they rose almost continuously into the second quarter of 1959, falling after that to a minimum in the first quarter of 1961.

Although U.S. inflation-adjusted profits fell in 1960, they were at a high level, and they grew slightly in 1961. Then they shot up from 1962 to 1965. Taking 1965 as the first year of the Vietnam War, its influence on profits is not possible to know just looking at the profit figures. Certainly, profits rose by more than 12% in that year, but in 1964, they had grown by more than 9%. Then, in 1966, they grew by only 3.6%, and in 1967, they fell by nearly 5%. However, it was in 1966 that defense spending rose dramatically -from US$ 49.560 billion in 1965 to US$ 64.531 billion in 1966. Nevertheless, it had been higher than this prior to 1965, and as a percentage of GDP it rose only slightly and not to a higher degree than in previous years, i.e. nothing like as high as during the Korean War years. Moreover, in 1966, US profits (in nominal and inflation-adjusted terms) also reached a historical high, so that the almost 5% decline in inflation-adjusted profits in 1967 did not hurt very much, and was largely righted in 1967 when they rose by nearly 4%.

Back in 1973, Victor Perlo wrote:

“Beginning with 1965, the rapid Vietnam buildup of military contracts gave several years of extra life to the tired boom and raised it to new heights: This added stimulation was primarily for military reasons; its economic consequences were side-effects⁵⁰.”

This looks like exaggeration when we consider the figures referred to above. Moreover, it should also be noted here that Eisenhower in 1961 had warned of a military-industrial complex growing up in America⁵¹, and the Vietnam War appears to have consolidated that growth – in other words, the U.S. economy during the post-World War II boom years was increasingly oriented around an imperialist war machine. Also, by 1964, America reached its peak as an exporter, a situation that only began to deteriorate in the second half of the 1960s.

Two French economists⁵² writing in 1968 refer to:

“a decline of the gross national product at the beginning of 1967, the first such decline experienced in America since the end of 1960…”

And they end their book by asking:

“whether the United States brought its economy out of the recession by means of fiscal and monetary measures, or rather as a result of the Vietnam war. In any case, the position of the dollar was weakened.”

***

The 1970s

The 1970s are known for two great changes: the collapse of the world monetary system based on a gold exchange (dollar) standard in 1971 and OPEC’s oil prices increases, which massively increased the price of crude, imposing huge costs on the rest of the world economy. However, another change was also developing -increased income polarization.

The first is associated with America’s external trade. 1964 marks the post-World War II peak for U.S. balance of payments and balance of trade surpluses, at US$ 6.022 billion and US$ 6.801 billion, respectively. According to the U.S. Census Bureau, America’s balance of payments fell into deficit in 1971 -for the first time since 1888, in fact. A balance of payments surplus briefly appeared in 1973 and again in 1975 -since then, the U.S. balance of payments has been in deficit every year, peaking at US$ 151.6 billion in 1987, falling towards 1991 (when it stood at US$ 31.1 billion) and rising ever since⁵³. Although it is true that America has been importing increasing amounts from the developing countries (and China is the leading one today), as Charles Sabel notes (see below), it has also been importing from the other leading capitalist countries, such as Japan.

America’s “trade openness” (imports plus exports as a percentage of Gross Domestic Product, or the degree to which its overall economy depends on trade) has grown tremendously -in the 1960s, US imports and exports represented 6.8% of U.S. GDP; by the 1990s this had jumped to 16.9%; and between 2000 and 2003⁵⁴ it stood at 18.6%. However, the United States remains one of the least “open” economies in the world, and trade openness also grew very fast worldwide -i.e. globalization. As a result, America competing for world markets and opening its own economy to do so, saw its share of total world exports fall from 15.3% in 1960 to 11.7% in 1997 and to 9.8% in 2003⁵⁵. As we shall see, this is directly tied up with America’s productivity performance, and its R&D focus on armaments. Meanwhile, although America’s foreign direct investment contribution to globalization has grown since World War II, its share of world outward direct investment stock fell from 50.4% in 1960 to 24.7% in 1996, and to 21.9% in 2003⁵⁶.

The second factor, although it was the product of primary producers (of crude oil), boosted the profits of the big oil companies, thanks to the price of crude rising by nearly 1000 per cent during the 1970s. But it is worth noting that the massive growth in Big Oil’s profits was followed by dramatic losses in the late 1970s-early 1980s (see Graph 10).

The post-war “boom” had also meant higher wages:

Not only was the pie growing, but especially during the 1960s, the shares were becoming more equally distributed among working people and their families. At the same time, greater income equality itself contributed to the more rapid economic growth out of which public expenditures (and even further redistribution, for example, through the War on Poverty) could be financed. Most important of all, more and more parents could realistically expect that their children would eventually be better off financially and less insecure than they had been⁵⁷....

However:

After about 1973, the direction changed. Wages, adjusted for inflation, began a long downward trend … Median annual family income stopped growing, even though more family members were working than ever before … And, by the latter half of the decade, even the most stable “core” workers in the economy -the roughly three-fifths of the labor force working year round and full time -were becoming more and more likely to earn low wages. In particular, between 1973 and 1979 one out of every five net additional YRFT workers earned less than $11,000 a year (in 1986 prices). But since 1979, fully 36 percent of such employees have earned wages and salaries below that threshold. After 1980, at the other extreme of the job distribution, the number of elite earning high wages rose as well, leaving a declining proportion of employees receiving middle-level incomes. Inequality was again rising, in the labor market and at the level of family income… The distribution of wealth-income from property, such as stocks, bonds, and real estate was also becoming increasingly unequal.

The authors consider that the reversal of wages in America was due to the profit squeeze that had been going on for some time previously:

Whether measured as business owners’ share of the total national income or by the conventional rate of return on investment, profits peaked in the mid-1960s and continued to fall or stagnate for the next fifteen years. From a peak of nearly 10 percent in 1965, the average net after tax profit rate of domestic non-financial corporations plunged to less than 6 percent during the second half of the 1970s-a decline of more than a third.

This, they note, was due to heightened competition worldwide. However, it is also pointed out that such an intensification of competition is ultimately due to greater productivity all over the world and, hence, to increased output seeking out markets. They quote Charles Sabel of M.I.T., as follows:

A fundamental cause of the slowdown of the 1970s was the saturation of domestic markets for consumer durables and hence exhaustion of new investment opportunities in the business lines that had been the mainstay of the post-war expansion. In the United States, for example, there was one car for every two residents in 1979, as against a ratio of one to four in the early 1950s. By 1970, 99% of American homes had refrigerators, electric irons, and radios; more than 90 percent had automatic clothes washes, vacuum cleaners, and toasters. Statistics from other advanced capitalist countries tell a similar story. Saturation in one market led to saturation in others as producers looked abroad when the possibilities for domestic expansion were exhausted. The results were simultaneous export drives by companies in all the advanced countries, with similar, technologically sophisticated products going into one another’s markets … Increasing exports ... from developing countries such as Taiwan, Korea, Mexico, and Brazil further increased the congestion of mass markets in the advanced economies. (my emphases)

Harrison and Bluestone explain that the high employment rates of the late 1960s, helped by the Vietnam War, gave power to the work force. This was undoubtedly true. However, these high levels of employment had been due to a worldwide growth of output which dictated to U.S. capital that it would have to produce more efficiently if it were to compete with its rivals who were seizing an increasing share of the U.S. market.

Returning to the economy, Harrison and Bluestone elsewhere note that between the mid-1960s and the mid-1970s, corporate profits from the domestic economy across 12 industries declined by 46 percent, that in the early 1960s the annual rate of return on investment was 15.5 percent, in the late 1960s, it was 12.7 percent, in the early 1970s, about 10 percent, and (writing in 1988) after 1975 it never rose above 10 percent again. During this same period, U.S. investment abroad showed continued growth, and the share of corporate profits from foreign investments increased steadily⁵⁸.

Profits continued to grow throughout the rest of the 1970s, but more slowly⁵⁹. However, although defense spending was increased in 1976 and 1977, this did not have the effect of pushing up the growth-rate for profits, which fell slightly in 1977 and remained unchanged in 1978. However, in 1979 profits grew more slowly and in 1980 they fell. In that year, Carter increased defense spending but profits continued to slide in 1981, though at a slower rate.

Accounting largely for Carter losing the 1980 presidential election was the state of the economy:

Inflation that dogged the administration from its first days in office, and which crested in 1980, was probably the decisive reason for the defeat. Inflation was combined with unemployment in the last year of the Carter term. The economy fell into recession in the second quarter, the sharpest one-quarter drop in national output on record. If eleven presidential four-year terms, starting with Truman and ending with Bill Clinton, are compared, only in the Carter administration was the total output of the economy declining in the fourth year in office, the year critical for reelection⁶⁰.

Also, note the following:

When inventories and fixed assets are valued at the original purchase price rather than at replacement cost, as they commonly were in the 1970s, costs are understated and profits overstated, an accounting practice that has the effect of increasing the tax liability. [Federal Reserve Chairman Paul] Volcker again pointed out in his first appearance before a House committee [in mid-1979] that “we can observe in these recent inflationary years a declining tendency in the profitability of investment. . . . One estimate indicates that the annual after-tax return on corporate net worth, measured as it reasonably should be, against the replacement cost of inventories and fixed assets, has averaged 3.8 percent during the 1970s, a period characterized by rapid inflation, as compared to 6.6 percent in the 1960s.” (ibid)

In other words, while the nominal profit figures suggest that profits were growing reasonably (even when adjusted for inflation), the real rate of return was low.

Not only has America been deluged with products from abroad, a reflection of the worldwide growth of abundance, but it has found it increasingly difficult to compete with the other major producers, except by closing down factories in the U.S. and transferring operations to the rest of the world via the transnationals.

The recession of the mid-1970s should be seen in this light, with less emphasis on OPEC’s big price increases, which certainly exacerbated the crisis, while transferring profits to the big oil companies (as well as to OPEC), most of which are in the United States. In January, 1974, the U.S. oil companies reported huge profits for 1973 -Exxon’s were up 57% over the same period in 1973⁶¹.

From the table below, it can be seen that unadjusted profits grew very rapidly in the first half of the 1970s, and somewhat less rapidly during the second half of the 1970s . However, during the first half of the 1970s, Presidents Nixon and Ford made drastic cuts in defense spending every year. Only in the second half of the 1970s did President Carter make some increases to defense spending. Profits depended more on other factors during the decade, the decade, in fact, when America’s trade balance turned from a surplus into a deficit (with the exception of one year, 1973).

TABLE: Profits, defense spending and the Administrations

Year	Total profits in billions of US$ (unadjusted)	Annual % change of profits	% Change in Defense Spending	President
1970	46.235	-10%	-8.3	Richard Nixon
1971	54.698	18%	-8.9
1972	65.469	20%	-3.8	ELECTION
1973	84.876	30%	-4.7	Richard Nixon
1974	94.974	12%	-4.8	Gerald Ford
1975	93.896	-1%	-3.6
1976	114.415	22%	2.9	ELECTION
1977	135.973	19%	3.4	James Carter
1978	161.278	19%	-0.1
1979	181.905	13%	-0.8
1980	166.306	-9%	1.8	ELECTION
1981	159.403	-4%	9.9	Ronald Reagan 1
1982	132.043	-17%	10.3
1983	153.250	16%	6.7
1984	171.077	12%	4.6	ELECTION
1985	158.029	-8%	4.2	Ronald Reagan 2
1986	136.286	-14%	-1.5
1987	187.164	37%	-1.2
1988	244.442	31%	-1.8	ELECTION
1989	237.678	-3%	-2.4	George Bush Sr
1990	264.100	11%	-2.8
1991	284.400	8%	1.3
1992	312.378	10%	-9.3	ELECTION
1993	346.065	11%	-7.3	William Clinton 1
1994	383.317	11%	-8.7
1995	455.614	19%	-0.9
1996	501.356	10%	-1.9	ELECTION
1997	552.092	10%	-2.4	William Clinton 2
1998	469.960	-15%	-0.8
1999	517.242	10%	2.8
2000	508.226	-2%	2.5	ELECTION
2001	503.780	-1%	4.0	George Bush Jr 1
2002	574.177	14%	12.5
2003	639.556	11%	18.9

(From: U.S. Bureau of Economic Analysis)

N.B. This is a continuing project. We welcome comments, corrections, suggestions, criticisms from readers.

NOTES

⁴⁹ See, for example, Charles Levinson’s “Vodka-Cola”, 1978, for the modus operandi used, and many details on companies involved, credits, etc.

⁵⁰ Victor Perlo: “Economic Aspects of Military Spending”, in David Mermelstein: “The Economic Crisis Reader”, 1975

⁵¹ “This conjunction of an immense military establishment and a large arms industry is new in the American experience…In the councils of government, we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex. The potential for the disastrous rise of misplaced power exists and will persist. We must never let the weight of this combination endanger our liberties or democratic processes. We should take nothing for granted.” President Dwight D. Eisenhower Farewell Address, January 17, 1961.

⁵² Maurice Flamant and Jeanne Singer-Kèrel, in “Modern Economic Crises and Recessions”, 1970, page 117.

⁵³ U.S. Census Board, Foreign Trade Division.

⁵⁴ U.S. Department of Commerce, U.S. International Transactions Accounts, Table 2.

⁵⁵ International Monetary Fund, “International Financial Statistics Database”.

⁵⁶ World Investment Report, United Nations Conference on Trade and development.

⁵⁷ Bennett Harrison and Barry Bluestone: “The Great U-Turn: Corporate Restructuring and the Polarizing of America”, 1988, pages 3-17.

⁵⁸ Barry Bluestone and Bennett Harrison: “The Deindustrialization of America”, 1982. Taken from Robert Perrucci: “The Changing Global Economy and the Challenge to American Values”, 1994.

⁵⁹ According to my estimates, inflation-adjusted wages and salaries in the United States rose 49.71% in the 1950s, 49.82% in the 1960s, 8.83% in the 1970s, 33.5% in the 1980s and 33.15 in the 1990s. Meanwhile, inflation-adjusted profits rose by the 40.26% in the 1950s, 42.26% in the 1960s, 12.64% in the 1970s, 74.21% in the 1980s and 63.14% in the 1990s.

⁶⁰ W. Carl Biven: “Jimmy Carter’s Economy: Policy in an Age of Limits”, 2002.

⁶¹ David Mermelstein (ed.), “The Economic Crisis Reader”, 1975.