The Oil Shock

America's economic history has been defined more by financial crises rather than financial successes. Government involvement in trade, finance, and infrastructure generally wasn't accepted until the late 1810s, when the War of 1812 produced an economic calamity so severe it left the United States with no other choice but to embrace these policies. The New Deal, which has provided the American working class with some of its most important liberties and protections (social security, guaranteed unionization, mortgage insurance, minimum wage laws, etc.), was initiated by Franklin D. Roosevelt in order to catalyze an economic recovery from the Great Depression. The modern neoliberal economy, which supports decreased regulation, free trade, and reduced social safety net programs, was constructed by Ronald Reagan and then expanded upon by Bill Clinton in order to quell the stagflation crisis of the 1970s. Ever since Reagan's inauguration in 1981, neoliberalism has functioned as the centerfold of American monetary life, so it's important to understand the economic crisis that it was designed to resolve. Among the causes of that crisis, known as the stagflation era, is an episode of shortages and diplomatic strain known as the Oil Shock.

In 1969, Richard Nixon replaced Lyndon B. Johnson as president of the United States. Soon after Nixon entered office, severe inflation wracked the entire country. Nixon, who had suffered a pair of electoral defeats in 1960 against John F. Kennedy and in 1962 in his pursuit of being governor of California, was horrified of losing his reelection bid and so was determined to mitigate this stagflation. He began by trying to halt the production of money by the mint. The logic was simple and rooted in basic economics: If there is less money, then individual banknotes and coins will be worth more, hence causing businesses to demand less money in exchange for goods. In other words, prices would decline. When this didn't work, Nixon appointed Arthur Burns to be director of the Federal Reserve, hoping the revered economics expert would provide him with sound advice on how to quell the inflation. Burns, however, opposed large-scale government expenditures and so said that unless Nixon kept annual spending under $200,000,000,000, he would give no new advice or ideas.

To try and appease Burns' demands, Nixon cut the salaries of government employees, sparking a collection of nationwide strikes. Growing desperate, Nixon disregarded Burns and fled to Camp David in the summer of 1971. There, he convened with other economic advisors, begging for new ideas. When he emerged from Camp David, Nixon presented the country with a 3-pronged response to the inflation issue: First, Nixon would cut taxes, leaving consumers with more money to contribute to the economy. Second, he would institute price caps, creating a roof for inflation that it couldn't dare venture past. Third (and most importantly when discussing the Oil Shock), Nixon suspended the gold standard. The rationale centered around the fact that gold, being so rare and cherished, was a valuable economic resource. Thus, in times of financial hardship, gold was a useful tool. If the United States continued to abide by the gold standard, Nixon's advisors warned, countries using the US dollar could simply demand American gold in exchange for that currency, depleting America's gold reserves.

At home, the Nixon Shock (as Nixon's program for economic relief was known) was a smashing success. By the end of 1971 and the start of 1972, prices began to stabilize. However, in countries reliant on the US dollar, the Nixon Shock was devastating. Because banknotes no longer had to be associated with or supported by gold, the US government could produce as much money as it desired. This created the inverse of what Nixon hoped his initial response to inflation would bring: Money became more common and thus less valuable, requiring corporations to demand more money in exchange for goods. Prices started to sharply rise in the developing world. Really, all the Nixon Shock did was end the concentration of inflation within the US and let the economic issue flood into the rest of the world. The Middle East, where many of these economies using the US dollar existed, was hit particularly hard by inflation. Thus, tensions between the US and the Arab world emerged.

Meanwhile, also in the Middle East, a second crisis was brewing. On September 28, 1970, long-time Egyptian President Gamal Abdel Nasser died. His successor was Vice President Anwar el-Sadat. El-Sadat had long been an important figure in Egyptian society. During World War 2, he infamously worked with the Nazi Party and Adolf Hitler to try and expel British colonizers from Egypt. Since Britain was working with the Allies to stop the growth of fascist imperialism, el-Sadat hoped that he could form a temporary alliance with Berlin to purge Egypt of British influence. For this reason, el-Sadat was imprisoned twice. El-Sadat also brought false Soviet reports of Israel planning to invade Syria to Nasser. These accusations caused the Six-Day War between Israel and the rest of the Middle East. Despite his past, el-Sadat realized how damaging Egypt's rivalry with Israel had become. He started looking for a solution.

El-Sadat's peaceful intentions ultimately found a very violent pathway: el-Sadat and his government began planning to launch another war against Israel. Even if Israel won, it would show both Jerusalem and the Egyptian people how potent and harmful the rivalry really was, causing people to pursue a more diplomatic alternative. Throughout 1972, el-Sadat even expelled tens of thousands of Soviet generals and advisors from Egypt so that the US (a staunch ally of Israel) would be more willing to take Cairo's side in post-war peace talks. On October 6, 1973, el-Sadat's military attacked Israel, sparking the Yom Kippur War. The war began on the Jewish holiday of Yom Kippur (hence the name), which takes place 10 days after Rosh Hashanah (the Jewish new year) and requires Jews to, for 25 hours, cease all work, wear white clothes that symbolize purity, and fast in order to focus on self-improvement and self-reflection. Since the mostly-Jewish Israeli military wasn't forced to work on Yom Kippur, el-Sadat assumed it would be the perfect time to spark his war.

In a way, el-Sadat was right. Israel was not expecting the Egyptian attack, a fact made all the more devastating by Israeli soldiers not working on Yom Kippur, when the war began, and thus being unable to launch any effective resistance. For the first few days and weeks of the war, Egypt was easily winning. However, Nixon, a strong supporter of Israel and Zionism, could not bear to witness Jerusalem's losses. After delaying the project for around a week to signal his lack of hostility toward el-Sadat or Egypt, Nixon launched Operation Nickel Grass, a secret effort to resupply the destroyed Israeli military. Through Operation Nickel Grass, Nixon was able to restore Israel's defenses and on October 24, 1973, Israel won the Yom Kippur War. Nixon was ecstatic when he heard this, as was Israel and much of America. However, this victory would not come without its consequences.

OPEC, otherwise known as the Organization of Petroleum-Exporting Countries, is an international body composed of nations with large supplies of oil. While Venezuela is a member of OPEC, basically the rest of the organization is made up of Arab countries like Iraq, Saudi Arabia, and Kuwait. For this reason, OPEC is generally viewed as a pro-Palestine, anti-Israel group and was outraged by Operation Nickel Grass. Its members were already upset with Nixon for suspending the gold standard and thus worsening inflation within their borders, so Operation Nickel Grass was seen as the final straw. On October 17, 1973, OPEC prohibited its members from shipping oil to the United States, beginning the Oil Shock. The order sparking the Oil Shock also demanded the same for allies of the US, banning the shipment of OPEC oil to Canada, Britain, the Netherlands, West Germany, Zambia, South Africa, and Japan as well.

Nixon, although having been successfully reelected in 1972, was still infuriated by the Oil Shock. Within only a few weeks, America was already running out of oil. Lines outside of gas stations were historically-long, with those in line needing to wait hours for their cars to be refueled. What oil remained had to be rationed and the little oil that could still be found was extremely expensive. The Oil Shock severed America's access to petroleum, rendering it so rare that oil companies had to charge obscene prices just to survive. By the end of 1973, living standards in the US had plummeted, reaching incredibly-deep lows in incredibly-short spurts of time. Nixon was desperate to end the Oil Shock and restore the accessibility of energy. At one point, he even considered an outright invasion of the Middle East, during which he would annex oil fields and use them to America's advantage. This unhinged suggestion was soon scrapped, though, as the Soviet Union would have intervened on behalf of its Arab allies, creating a third global war.

El-Sadat's original predictions surrounding the Yom Kippur War did come to fruition in the end. Yes, Egypt lost the war, but it also scared Israel into seeking better relations with the nation so many of its old troubles were based around. These attempts at diplomatic growth culminated in the Camp David Accords under Jimmy Carter in 1978. However, the geopolitical steps needed to achieve that progress were mutual; if Israel had to act better, so did Egypt and other Arab nations. Since Israel was a strong ally of so many countries hurt by the Oil Shock, the Oil Shock was lifted by OPEC on March 18, 1974, in order to pursue better ties with Jerusalem. However, the damage had been done. The game was set, and a half-decade of financial duress had cemented into an inevitable fate. Even as OPEC resumed giving oil to the United States, the amount of oil in the US would take years to return to pre-Oil Shock levels, creating severe inflation. The Soviet Union also purchased large amounts of American wheat, producing a wheat shortage that made inflation even worse.

Although it lasted only 5 months, the Oil Shock is one of the most important episodes in modern American history. It can be understood as the main cause of the stagflation crisis, which Ronald Reagan rode to the White House. In the White House, Reagan dismantled the New Deal, expanded the military, compensated victims of Japanese internment, and popularized conservative economics after 50 years of the country living in the shadow of FDR's New Deal and Woodrow Wilson's New Freedom. These massive reforms can be traced back to Reagan's victory in the 1980 election, which itself can be traced back to the Oil Shock and resulting stagflation crisis. The Oil Shock also produced a shocking vision of what would happen if America lost its constant access to Arab oil, with the image of such a scenario being quite concerning. The Oil Shock catalyzed the efforts of Gerald Ford and Jimmy Carter to make the US energy-independent and has likely inspired future projects to create that same state. Many of America's modern crises are rooted in this bizarre 5-month episode of financial worry.