Similarities and Differences Between the Crises of 1979 and 2022.

Our article is the result of a discussion between Jacques de Larosière and Pierre-Louis of Choose-Bitcoin.com. We came across an article published in Le Figaro on October 3, 1979, and decided to analyze the similarities and differences between the crisis of 1979 and the one we are experiencing today. The Figaro article discussed the 1979 crisis, quoting Jacques de Larosière, who was director of the IMF at the time. And let me tell you, the newspaper’s headline, “Pessimism of the IMF Director”, has never been more relevant!

Similarities between the crises of 1979 and 2022:

• A very sharp rise in the price of oil.
• Very high inflation.

The second oil shock multiplied the price of oil by 2.7 between 1978 and 1981. It is important to note that this increase was greater then than it is today.

The major differences between 1979 and 2022:

• The Figaro article at the time was alarmist. Its front-page headline read: “Monetary disorder, inflation, pessimism”, followed in its economics section by “Pessimism of the IMF director”. Today, neither newspapers nor politicians would dare to cry inflation. We have moved from alarmist rhetoric to reassuring rhetoric. Leaders prefer to deny inflation or claim that it is temporary and will decline.
• At the time, Jacques de Larosière advised passing the entire increase in oil prices on to consumers. Today, we directly subsidize individuals against every price increase (inflation checks, price caps…). These subsidies are granted by creating unproductive debt.
• In 1979, the system consisted of countries that felt, to some extent, responsible for the money they issued. They did not want to see their currency lose value.

The director of the Monetary Fund, Frenchman Jacques de Larosière, condemned the profound and pernicious evil of inflation.

The increase in oil prices that took place in 1979 would have to be passed on “in full” to consumers, he said. Speaking “in the name of realism”, Mr. de Larosière added that this would result in a reduction in real incomes and living standards. In his view, the impact on price increases could be mitigated by income policy, notably by excluding oil prices from wage indexation mechanisms. Predicting a “very difficult phase” for the world economy, Mr. de Larosière stressed that the entire system of production and trade was threatened by inflation, “which is returning to the intolerable rates of 1975”. He acknowledged how difficult it was for governments to fight this “profound and pernicious” evil, given the recent 60% rise in oil prices and the emerging recession in the United States. Nevertheless, he urged them to show greater determination in their monetary and fiscal policies in order to “restore confidence”.

Excerpt from the Figaro article Pessimism of the IMF director, October 3, 1979.

Jacques de Larosière’s analysis, 40 years later:

Reading Le Figaro shows that the model has changed completely in 40 years. For the worse, of course, because it generates crises that we refuse to address at their roots. We numb the pain with debt and only make the situation worse.

The rise in oil prices was much greater then than it is today, but the intention was to pass it on to consumers in full.

Today’s subsidies are pointless because they fund unproductive things. This amounts to creating bad debt that we will not be able to repay. We are creating a vicious circle that fuels inflation, to the detriment of the most vulnerable consumers.

SDRs: An international monetary alternative to the dollar:

In another article on the same page, Le Figaro also discussed SDRs. In 1979, the proposal was to open a substitution account to all countries with excess dollars that wanted to exchange them for SDRs (a claim on the International Monetary Fund). This had been created to stabilize the monetary system and manage excess dollars, and would notably make it possible to:

• Avoid massive sales of dollars.
• Fight currency wars.
• Offer a secure international monetary alternative. 

According to Jacques de Larosière, this idea would be unthinkable today, in the absence of “intelligent” leadership from the United States. Biden would immediately reject it and would not give such a proposal a second thought. Back then, however, it was considered diplomatically possible.

Today, we consider the system multilateral, whereas in practice it is far less so than it was then.

Can special drawing rights (SDRs), a theoretical currency representing a basket of currencies in which the dollar accounts for only 30%, become an important—or even the principal—reserve instrument of the International Monetary System? It is in the distant hope that one day this question can be answered in the affirmative that the International Monetary Fund, through its Interim Committee, has just approved in Belgrade the proposal to create a “substitution account”, SDRs for dollars.

Excerpt from the Figaro article Plan to replace the dollar with SDRs approved, October 3, 1979.

• Also read our article by Jacques de Larosière on the Baltic Gold Scandal.