The Truth About Why OPEC Was Formed

Source: EPJ

David Henderson informs us during a speech at The Naval War College, in Newport, Rhode Island:

We all heard of OPEC in 1973 when they almost quadrupled the price of oil. But OPEC formed in 1960. Why? Because President Eisenhower had imposed import quotas on oil and given preference to Mexico, Venezuela and Canada. And so some of the – Algeria was one of them – I know there’s someone from Algeria here – and three other countries organized to essentially fight back. And then they gradually acquired members in the ’60s and early ’70s. So OPEC was an unintended consequence of US import quotas.

Here's Henderson on war and the ratchet effect:

 I was a senior economist with President Reagan’s Council of Economic Advisors, my office was an old, exotic-looking building called the Old Executive Office Building, now the Eisenhower Building, located right next to the White House, which is separated by a narrow driveway. It’s the place most people work when they say they work in the White House. It’s not literally true they do. I’ve started doing that, too. Oh, yeah, I used to work in the White House.

(LAUGHTER)

Being a curious type, I looked into the history of the building and found that when it was first built in about 1870, it housed the War Department, the State Department and the Navy Department. That means that that building, combined with the Treasury, which was on the other side of the White House and just a carbon copy, housed virtually all of government except the post office and the fledgling Department of Agriculture. That was the size of the US government.

Now what happened in between that led to such a massive growth of the federal government in a country that was justifiably celebrated as the Land of the Free? And by the way, let me just give you a couple of statistics. The federal government in those days spent roughly between 2% and 3% of GDP. Now, it spends approximately 21%.

So what happened? A large part of what happened was war. A huge amount of the new power that the government took on in the 20th century was power that it acquired during and due to war. When the wars ended, the power diminished but never back close to its prewar level.

Economic historian Robert Higgs, in his bookCrisis and Leviathan, was the first to point out this pattern, and he called it a “ratchet effect.”...we generally in America think of Prohibition as starting in 1920, two years after the war. Well, not quite. It started during the war. During the war, the government imposed price controls on wheat. As almost any economist can tell you, if you impose a price control below the free-market price, you get a shortage. And when you get a shortage, the government then puts itself in line to get the resources first, and when everyone else has what’s left, it’s very hard for them to justify making grain into alcohol. So under the Lever Act, they imposed Prohibition. They refused to allow grain to be made into alcohol.

Also, other federal powers grew during World War I. The US government, under Wilson, nationalized the railways. They gave it back into private hands at the end of the war but they controlled them more at the end of the war than they had before. We also had the first draft since the Civil War in the United States as a result.

Also, our tax system. We had started taxing income in 1913. The top tax rate was 7%. And it was on incomes that, translated into today’s dollars, would be over $7 million. By the end of the war, the top tax rate was 77%; 11 times. And although Secretary Mellon, the Treasury Secretary in the ’20s, brought the tax rate down, he never brought the top tax rate below 25%. And the bottom tax rate started at 1% and it went to 6%.

So a big part of the growth of government in the United States, the federal government of the United States, as I said, was due to war.