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By the early 1970s, capitalism was suffocating from industrial success. Around the world and across industries, firms found it increasingly difficult to maintain their amazing (if not aberrant) postwar profitability.24

Continent of Debt

By the early 1970s, a new factor had entered the equation: there was a global glut of liquidity—too much capital was competing for too few investment outlets. That translated into very inexpensive and abundant credit. Brazil had always borrowed to fund its industrialization, but now growth slowed, and capital became cheap.

In 1973, the other shoe dropped: Arab defeat in the Yom Kippur War led to an oil embargo by many key exporters. The price of oil quadrupled in less than a year. That hit Brazil hard. Though now a major oil producer, it then imported 80 percent of its petroleum. Before prices could subside, the Shah of Iran fell to a revolution, precipitating a second oil shock in 1979. Prices nearly doubled again. By the early 1980s, the Brazilian government was desperately trying to stimulate its economy by borrowing and spending. The Miami Herald business section pointed out the unfairness of the macroeconomic situation: “In contrast to Argentina and Mexico, a very high proportion of the billions borrowed here went to productive projects, analysts say. Many were the projects of ‘Brasil Grande’—nuclear power plants, hydroelectric dams, jungle highways, petrochemical complexes, an export-oriented arms industry, steel mills, and a $3-billion railroad to facilitate steel exports.”25 But Brazil was subject to the same austerity as those who had borrowed less productively.

Then, a third layer of the crisis hit. The world’s leading economy, the United States, also faced deep trouble. Overcapacity globally meant a collapse in the rate of return on investment—a collapse of profits. “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.”26 After twenty years of continual expansion during the long postwar recovery, profits began to sag in 1966 and continued to decline steadily until 1974, until they reached a low of around 4.5 percent.27 The same pattern was visible from Germany to Japan, as all advanced capitalist countries experienced an after-tax profit decline of between 20 and 30 percent.

Robert Brenner, a leading scholar on this history, put it this way: “Due to the onset of over-capacity and over-production, world manufacturing prices had been unable to grow in line with product wages and the cost of plant and equipment: the result was falling profit shares and output-capital ratios, making for falling profit rates.”

How was this to be dealt with?

Fundamentally, for profits to recover, wages had to fall, and not just wages, but the social wage—the share of national production redistributed to the working class in the form of public goods like government-funded education, health care, and welfare. Rescue arrived in the form of Paul Volcker, the new chairman of the US Federal Reserve. Beginning in 1979, Volcker began a dramatic rise in interest rates from 7.9 percent in 1979 to 16.4 percent in 1981. This had the effect of cutting borrowing throughout the economy, and with that, investment and consumer spending also ratcheted down abruptly. Unemployment reached 10.8 percent by December 1982.28 At the same time, both Reagan and Thatcher launched offensives against the power of organized labor, cut social spending, and slashed taxes on the wealthy. As a result, the US economy plunged into what was then the most severe recession since the Great Depression.29 In the process, it dragged down many of its trading partners with it, as US imports shrank radically.

In Latin America the new monetary policy also meant that interest payments on existing debt soared. Thus began the Latin American debt crisis. From 1978 to the end of 1982, total Latin American debt more than