The 1970's Economic Crises

In the US after the OPEC oil embargo, gas was rationed. (3)
In the US after the OPEC oil embargo, gas was rationed. (3)

- After the global economic boom after World War II, in 1971 America withdrew from the Bretton Woods Agreement which was established in 1945
- Other countries withdrew too which allowed world currencies to flow freely in the world market and inflation followed which slowed economic activity
- 1973, Egypt and Syria attacked Israel and America and Western Europe supported Israel
- The Arab members of The Organization of the Petroleum Exporting Countries (OPEC) prohibited America and Western European countries from trading with others for five months because of their support of Israel in its war with Egypt and Syria
- OPEC reduced the production of oil which increased the demand thus, the price of oil increased which caused gas shortages and rationing in the US
- Also, because of reduced of oil production, the production of goods was more expensive which increased inflation and slowed the economy again.
- Because of the gas shortages and increased inflation, US went through a period called stagflation
- Stagflation was also caused by governments not properly practicing Keynes' theory by not cutting spending during inflation. Governments didn't cut spending because they didn't want to be unpopular with voters
- Britain was also affected by stagflation which was severe enough that the Prime Minister at the time who led Britain to becoming a welfare state, did not support government intervention to help the economy
- The Western countries who experienced stagflation found that the cost of maintaining social programs rose because of inflation. Since inflation slows down the economy, governments collected less tax revenue which changed economic thinking in the 1970s and the 1980s [1] [2]

Significance to Liberal Economics

An illustration representing stagflation (4)
An illustration representing stagflation (4)

During the 1970s, the economy slowed down because of the misuse of Keynesian economics. Governments were still spending during inflation periods which slowed the economy. This

is a flaw of Keynesian economics because if not put in to practice properly, it won’t be effective. In a laissez-faire system, there aren’t as many mistakes to be made by the government because the economy is in the hands of the citizens. The flaw of Keynesian economics made people rethink how the economy should be handled.


1. Christison, Fielding, Harding, Meston, Smith, Zook, (2009). Perspectives on Ideology (pp. 216-217, 219)
Canada, Ontario: Oxford University Press.

2. 1973 oil crisis (March 16 2012) In Wikipedia, the free encyclopedia
Retrieved March 16, 2012 from

3. Retrieved from

4. Retrieved from