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How Did The Kipur War Affect The Economy In The 1970's

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Since the early 1970s, and until today, macroeconomists have regarded fluctuations in the price of oil as a significant source of economic activity, as well as an archetype of a global shock, likely to affect many economies at the same time. This widely held perception is predominantly due to the two periods of high unemployment, low growth, and high inflation that typified most industrialized economies in the 1970s. Common accounts of those periods of stagflation blame them on the immense increases in the price of oil brought about by the Yom Kippur War in 1973, and the Iranian Revolution in 1979, respectively (1,2). Understanding the extensive impacts oil shocks have on the world economy allows for the examination of the various macroeconomic responses by the United States. Up until the 1970s, industries …show more content…

He warned Americans that the country was wasting too much energy, and their supplies were being depleted, which meant they were subject to OPEC’s ability to create oil embargoes. Carter campaigned for a long term solution to the energy problem, by proposing limits on oil that was imported, deregulating domestic oil prices, development of alternate energy sources, and rigorous conservation programs.
Consequences of 1979 Oil Shock Following the oil shock, the United States entered another period of stagflation where inflation reached into the double digits, yet productivity and GNP remained relatively normal. Paul Volcker was appointed as the Chairman of the Federal Reserve, and focused on fighting the inflation rate with strong monetary policy. First of which he did by increasing the federal funds
LM2 rate, but this had a negative effect sending in interest rates, but not before 1.3 million jobs were lost, causing unemployment to reach a peak of 7.8%

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The energy crisis began after OPEC seized oil production because of the, “anger at the United States for aiding Israel.” (Farber, 22) This caused a mass panic amongst Americans and resulted in long waits to get gas and constant fuel outages. Carter was extremely adamant that Americans reduce their consumption of fuel in order to reduce the extent of the energy crisis, at one point suggesting putting heavy penalizing taxes on non-fuel efficient vehicles. Political journalist Nicholas Lemann recalled, “[The energy crisis was] the automotive equivalent to the Depression’s bank runs.”

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This tragic event sent Wall Street into a complete frenzy and took out millions of investors. Over the next few years, consumer investment and spending decreased. This caused sharp declines in manufacturing production and rising levels of unemployment. By 1933, 13 plus million Americans were unemployed and nearly half of the country’s banks failed (Coker, 2005). Thanks to the reform and relief measures placed by President Franklin D. Roosevelt helped diminish the most horrible effects of the Great Depression.

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