J. Devine/The Political Economy of US Prosperity in the 1960s

I. Introduction: nostalgia.

II. The Basis for Prosperity in the 1960s. At the beginning of the 1960s,

A. the U.S. was the main military, manufacturing, and financial power in the capitalist world, in competition with the USSR’s bureaucratic state socialism.

1) little competition from other capitalist powers (Japan, what was then West Germany), which were just recovering from WWII. The UK, France had fallen.

2) much less capital mobility, both of real capital (direct investment) and hot money.

3) the U.S. dollar was the center of the international monetary system. Fixed to gold at $35/ounce, while most currencies (₣, ₤, Yen, DM) were hooked to the dollar. There was no Euro, in that the process of Western European unification was just beginning.

B. In response to the rise of the  U.S.  to being one of the two world super-powers and to the Great Depression, there was a warfare-welfare state (guns and butter).

1) guns: the first large peace-time military in U.S. history, as part of the Cold War.

2) butter: the “welfare state” (though not as strong as in Western Europe), was often centered on the “warfare state”:

(a) the G.I. bill

(b) the interstate highway system.

(c) encouraging of housing.

3) some of the welfare state arose in the 1930s, i.e., the social security system, unemployment insurance, “welfare.”

4) the 1960s “war on poverty” extended this.

C. In the 1960s, the U.S. economy was much more “introverted” than it is today.

1)  It focused more on domestic sources of demand than it did on success in exports. 

2) Wages were definitely seen as a cost, but they were also a source of domestic demand: high wages allowed the purchase of U.S.-produced manufacturing goods.

D. In the 1960s, the AFL-CIO was still a “junior partner,” gaining relatively good wages while supporting  U.S.  foreign policy (the Cold War), even when it hurt labor’s interests.

1) there was still a big unionized sector outside of government employees.

2) there was the rise of the blue collar middle class, earning decent wages despite nasty work, owning houses.

III. The 1960s in Brief: a short history, showing the beginning of the end.

A. the benefits of prosperity.

1) falling over-all unemployment from 1961 until 1969.

2) this is also true for the Black unemployment rate.

3) the benefits trickled down:

(a) the official poverty rate fell until 1969.

(b) racial inequality – as measured by the ratio of White median household income to that of Blacks – mostly fell.

B. The costs of 1960s prosperity.

1) rising inflation rates due to increased demand (“guns & butter”) until 1969.

2) this wasn’t simply a matter of inconvenience to consumers and workers (the need to win higher wages to keep up with prices).

(a) with a fixed exchange rate system, it meant that U.S. exports became relatively expensive, since the U.S. was suffering more inflation than the products of Japan & West Germany.

(b) this meant that the U.S. trade deficit on goods – and on goods & services – also got really bad.

(c) this was intensified by the war spending in Southeast Asia.

(d) The fixed exchange rate meant that the U.S. had to use its gold reserves at Fort Knox to buy dollars to keep the exchange rate at par. But it started running out of gold.

C. The costs might be seen as having been balanced by the benefits, but at the end of the 1960s, beginning of the 1970s, this stopped working.

1) from the late 1950s to 1969, there was a “trade off” (the Phillips Curve).

2) then, when Nixon engineered a recession it didn’t reduce inflation as promised. We got the worst of both worlds (stagflation). This got worse later.

3) Nixon also dropped the fixed exchange rate, while trying to fight inflation with wage and price controls.

4) In sum, for a long time, the benefits of growth during the 1960s (chart 1) corresponded to costs (chart 2). But after 1969, the benefits fell at the same time the costs rose.


James G. Devine

Professor of Economics

University Hall (Rm. 4227)

Loyola Marymount University

One LMU Drive, Suite 4200

Los Angeles, CA 90045-2659 USA

office phone: 310/338-2948; FAX: 310/338-1950

home phone: 310/543-5064; FAX: 310/316-1010

e-mail: jdevine@lmu.edu