Oil Shock, European Monetary System, and Creative Destruction

In 1973, the confluence of an internal and an external shock brought the Glorious Thirty to an end. The internal shock came from the international monetary system, specifically the US dollar, while the external shock came from the oil industry. The transmission mechanism between the two was that oil prices were denominated in US dollars, as they still are. The sharp fall in the US dollar in the foreign exchange market led to a substantial shortfall in income for oil-exporting countries. The Arab members of the Organisation of the Petroleum Exporting Countries (OPEC) used the Yom Kippur War between Israel and its neighbors, which broke out on October 6, 1973, as a pretext to drive up oil prices. It was the political upheaval in Iran that caused the second oil shock. Faced with an erosion in their purchasing power and having experienced a rise in unemployment for the first time since the Glorious Thirty, the French, bewildered, voted for François Mitterrand. While the monetary shock helped the United States consolidate its global hegemony and led the European Union to lay the foundations for the single currency, the oil shock failed to encourage them to innovate and turn to alternative sources of energy.