The surrender of the Panama Canal
        (1977)

Crisis in Iran ... and its impact on
        America and the world

Carter sponsors the Camp David Accord
        between Egypt and Israel (1978)

China joins the world

Problems in Afghanistan

Catastrophe in Iran

Carter's "Economic Czar" Volcker
        addresses the issue of inflation

The Soviets break from the energy cartel

Iraq attacks Iran (September 1980)

The textual material on page below is drawn directly from my work A Moral History of Western Society © 2024, Volume Two, pages 333-346.

The Republicans narrowly chose Ford to be their presidential candidate in the 1976 elections.  Former Hollywood actor and two-term California governor (1967-1975) Ronald Reagan tried to get the Republican nomination … but after a bitter contest with Ford, fell just slightly short of the goal. On the other side of the contest, the Democrats might have wanted to put the Kennedy name into action … but Chappaquiddick was still too closely associated with the Kennedy name.  Instead they came up with a former single-term governor of Georgia (1971-1975), Jimmy Carter … who went in short order from being virtually unknown nationally to the picture (shaped by the press) of an amazing political genius … someone who promised to bring forward a more moral national political dynamic.  This struck a responsive chord in America, a nation deeply hungry to put behind it an ugly political world it had been through over the last decade. Interestingly, Carter made it a point that the Republican policy of Realpolitik, employed by Nixon and Ford – and Kissinger under both presidents – he was going to do away with … because of its cynical, non-moral character.1  He was also going to end America's program of working with dictators. Anyway, Americans bought the Carter deal … and voted 50.1% for Carter against Ford's 48% … with the Electoral College voting 297 for Carter and 240 for Ford. 1Yes … but it was Realpolitik that moved Nixon to open relations with China and undertake détente with the Soviets … plus find a way to get out of the Vietnam mess that former president Johnson started – and then simply gave up on. THE SURRENDER OF THE PANAMA CANAL (SEPTEMBER 1977) Back in 1903, America bought the rights from the French to build a canal linking the Atlantic and Pacific … which Colombia, claiming the narrow strip of land as its own, chose to block.  As a result, America "helped" the Panamanian people secure their independence from Colombia … and then have the Panamanians turn around and grant canal-building rights to America.  From that point on the canal, built at American expense but largely by Panamanian workers, was considered American property …  in perpetuity. But over the years, the Panamanians (and neighboring Hispanic nations) grew to resent the American ownership and military occupation of the Canal Zone … a hostile sentiment that reached a flash point in early 1964, ultimately resulting in bloody violence – followed by the decision of the Panamanian government to break relations with the US. Negotiations were soon undertaken to secure a treaty to increase the role of Panama in the affairs of the Canal ... resulting finally in 1967 in a treaty over the matter – which, however, failed ratification in the Panamanian parliament.  The following year, a military coup led by Omar Torrijos not only changed the hands of Panama’s government, it also led to the full rejection of the 1967 treaty. Under Nixon, discussions were resumed in 1973 after Torrijos hosted a U.N. Security Council meeting in Panama to go over the issue.  In 1974 the Kissinger-Tack Treaty was signed … promising, at some future date yet to be decided on, to transfer ownership of the canal to Panama – under the condition, however, that America would continue to provide "security" at the canal. But the full return of the canal to Panama became a high priority of the new Carter Administration.  And within mere weeks of Carter taking office, negotiations concerning this exchange began … completed that August (1977) with the signing of a new treaty – which was quickly ratified in a Panamanian referendum (96% approving) in October, and by the necessary 2/3rds in two Senatorial votes the following March and April (1978). The actual terms of the transfer were that the Canal Zone was to be rather immediately done away with as such – that is, integrated into Panamanian sovereign territory – with the actual turnover of the canal to then take place in stages … to be completed by the end of 1999. Conservatives (mostly Republicans) were furious at the "giveaway" of such a strategic American naval asset … pointing out that Carter also was yielding to the very kind of military dictator that he claimed he would avoid all diplomatic relations with!  And why was Carter in such a hurry to do this?  What exactly did America gain in this transaction?  Would this make our Latin neighbors to the South love and respect America more?  That seemed most unlikely. But the fact was that the Conservatives had no means of stopping the exchange.  It was a done deal. As a first act to reduce the image of American "imperialism" Carter decides to surrender the Panama Canal to Panama Carter explaining to representatives of Georgia and Florida his proposed new treaty to turn the Panama Canal over to Panama -  August 1977 September 1977 - Jimmy Carter agreeing with Panama's President Omar Torrijos to surrender the Panama Canal over to Panama – a sign of our ending the era of American imperialism Symbolic burning of the 1903 Panama treaty – with Panamanian President Omar Torrijos looking on CRISIS IN IRAN ... AND ITS IMPACT ON AMERICA AND THE WORLD One of Carter's initial concerns was Shah Mohammad Reza Pahlavi's Iranian government … judged by Carter to be quite oppressive and needing reform if America was to continue to supply it with armaments (something he had attacked Ford for supporting).  Indeed, Amnesty International reported that some 3,000 people were imprisoned in Iran simply for political reasons. But the situation in Iran was very tricky.  The political conditions there were certainly worsened by the fact that the Shah seemed unable to make the distinction between those who wanted the Shah overthrown and those who simply wanted to see some political reforms take place in Iran.  But there were other problems troubling Iran … big problems. First of all, the Shah had lost a lot of his former popularity with Iran's huge agricultural community with 1) the huge inflation that hit the country as a result of the global energy crisis of the early 1970s, 2) the failure of agricultural prices to keep up with that inflation, and 3) the vast wealth from the huge increase in oil prices going only to a few select families rather than to Iranian society as a whole. Then there was the matter of the large number of Western-educated Iranian youth with their engineering degrees from various Western universities ... jobless in Iran because the Iranian oil industry required very little of such expertise to conduct its operations.  They were a very unhappy lot … finding it easy to blame the Shah's government for their inability to find a place of prosperity back in their home country. An additional factor in the Iranian dynamic was the enormous interest the Soviets had in political developments to the south of their empire – in Iran, Afghanistan and Pakistan … the area that separated the Soviets from the strategic Persian Gulf and its entry into the Indian Ocean – through which a huge portion of the Western world's oil flowed.  Consequently, a huge amount of political intrigue was undertaken by the Soviets to bring the area under Soviet mastery.   Helping shape this dynamic was the Afghan-Pakistani war undertaken by Mohammed Daoud Khan, who in 1973 overthrew the monarchy of his cousin Mohammed Zahir Shah and replaced it with a republic, which Daoud then ran as a personal dictatorship.  Daoud's war with Pakistan interested the Soviets greatly, as Pakistan was a close American ally at the time and Daoud thus needed Soviet support to conduct his side of the contest.  But Soviet support was cautious … as the Soviets did not want to upset the Arab world by appearing to oppose Pakistan.  And at the same time, the Soviets had an equal interest in seeing America's long-standing ally in the form of the Shah overthrown, or at least brought under Soviet authority. But for the moment, the Soviets were most interested in supporting a large Communist political element in Afghanistan … which however was itself divided into two opposing sub-groups, one in favor of overthrowing Daoud immediately and establishing a Communist regime there, the other rather willing to go more cautiously in the matter.   In any case, it was all a very, very tricky dynamic driving the politics of that part of the world. Thankfully – with the help of some of his advisers (who were more understanding of the importance of practicing Realpolitik in the matter) – Carter came fairly quickly to understand that cutting off the Shah was definitely not the best policy to be undertaken.   But the Shah himself became a bit confused over the matter of exactly where Carter stood in Iranian-American relations … initially releasing many of those imprisoned in the hopes of pleasing Carter.  But then Carter surprised the Shah when on a visit to Asia at the end of 1977 Carter celebrated New Year's Eve with the Shah in Iran … praising the Shah's Iran as "an island of stability in one of the more troubled areas of the world." This then was interpreted by the Shah as permission to return his opponents to prison … except that in attempting to do so, the Shah set off a firestorm of protests around the country, ones he seemed unable to control.  Thus with the help of Iran's Muslim leaders – who had always detested the way the Shah had introduced Western ways into Iran – an anti-Shah movement began to spread across Iran during 1978.  By the end of the summer these had virtually paralyzed Iran ... and merely grew worse as the end of the year approached. But this was a development that Carter was blind to because he depended on the Shah's intelligence service to keep him informed about developments in Iran … and negative information was not what the Iranian service wanted to pass on to Carter. Then in mid-January, the Shah took the same move that he did back in 1953 … simply leaving the country and going into exile – to wait out developments.  But in early February, Iran's Muslim leader, the Ayatollah Ruhollah Khomeini, ended his exile in Paris and flew into Iran – received by cheering crowds as their liberator. But the protesting Westernized Iranians had their own agenda they wanted to see put in place – and the two anti-Shah groups clashed.  But in this contest, the Westernized Iranians were greatly outnumbered by the Muslim traditionalists in Iranian society … and a crackdown on the Western voices began to silence those hoping to see a Western-style republic put in place. And in all of this, America had no role to play whatsoever … except as the enemy – the "evil Satan" – that helped unify the anti-Western movement taking over Iran. But the shock to America (and the rest of the world) did not end there.  With Iran in full commotion, the Iranian oil industry came to a halt … creating an international oil shortage.  And in response to this development, once again OPEC took advantage of the situation by tightening even further the world's oil supply – which quickly quadrupled oil prices … and likewise drove up astronomically prices at the world's gas pumps … if gasoline was even available at that point.  Thus another global energy crisis was to hit the world in the late 1970s … one that would last well into the early 1980s.  Carter and his cabinet meet with the Shah of Iran - November 1977 (Carter, 2nd from the right ... with his secretary of State Cyrus Vance to his right and his National Security Advisor Zbigniew Brzezinski to his left ... discussing with the Shah the political reforms the Shah must undertake in order to continue to enjoy American financial support) Carter arrives in Tehran in time to celebrate New Year's Eve with the Shah (December 31, 1977) 1978 - Iranian students protesting the Shah's government Iranians celebrating in Tehran on January 17, 1979, after the Shah's departure Iranian welcome the returning Ayatollah Ruhollah Khomeini - January 1979 February 1, 1979 - the Ayatollah Khomeini arrives in Iran Followers of the Ayatollah Khomeini celebrating his return to Iran from exile - Feb. 1979. The Ayatollah Khomeini arriving in Tehran - February 1979 Gas station attendants watching Carter's July 15, 1979 energy speech CARTER SPONSORS THE CAMP DAVID ACCORDS BETWEEN SADAT'S EGYPT AND BEGIN'S ISRAEL (SEPTEMBER 1978) Thankfully there were some positive developments in those days.  A major victory for Carter was the agreement he was able to get Egypt and Israel to adopt, one which finally moved things forward diplomatically … previously stalemated since the end of the 1973 Yom Kippur October War. Carter had taken the initiative in his first year in office to visit Egypt, Jordan, Syria, and Israel … to see if he could get some action to end that stalemate.  But nothing much came of the effort. Then Egyptian President Sadat took the initiative himself, flying to Israel in November (1977) to speak before the Israeli Knesset (parliament) about the possibilities of moving things forward.  This was a daring move on Sadat's part, likely to alienate the rest of the Arab world – even if he succeeded … which most people thought was not likely to happen anyway. But Sadat's concerns were Egypt, suffering economic difficulties … not the larger Arab world.  Unlike Nasser, Sadat had no interest in playing the role as leader of the Arab world.  He had Egypt to worry about.  And he was hoping to recover lost Egyptian land opposite the Suez Canal in the Sinai Peninsula.  At the same time, dealing only with Egypt – and not the larger and still quite hostile Arab world – seemed to be of some interest to Israeli Prime Minister Menachem Begin. But efforts to actually come to some kind of agreement between Israel and Egypt seemed to lead nowhere … prompting Carter to decide to host private bilateral talks between Sadat and Begin in America itself, at the Presidential retreat at Camp David.  Thus it was that talks got started there on 5 September 1978. However, early on it appeared that these talks were also leading nowhere … determining Carter to come up with his own proposal and then to meet separately with Begin and Sadat – to see if some progress could not be made that way.  However even with a lot of back and forth and constant revision of the Carter proposal, as the 12-day meeting was about to come to an end it still looked as if nothing was going to be accomplished. And then on the last day, Begin came to an agreement with Sadat.2  Some kind of process for Palestinian self-government in the West Bank and Gaza areas was to be put into operation; with the Sinai Peninsula being turned over to Egypt, the Israeli Knesset would be given the responsibility of deciding the fate of the Israeli settlements there; and additional peace agreements were to be pursued with Israel's other Arab neighbors. And indeed, in the following March (1979) a formal treaty in line with the Camp David Accords went into effect, formally ending the state of war between Egypt and Israel – and beginning the withdrawal of Israeli troops from the Sinai Peninsula and the opening of the Suez Canal to use by Israel (it had been opened earlier in 1975 to other nations with the clearing of the Canal of the last of the mines left from the 1973 war). But as a springboard for a similar end to the Arab-Israeli standoff this was not fated to be.  Neighboring Jordan and Syria – as well as the larger Arab League – were in agreement with none of the terms of the Accords.  In fact, the fellow Arab nations were so incensed by Sadat's agreement with Israel that they decided to terminate Egypt's membership in the Arab League.  So in the end, little beyond the direct Egyptian-Israeli boundary settlement was accomplished … except that Iraq's dictator Saddam Hussein felt that the door was opened for him – now that the Egyptian president was removed from his usual position as the leader of the Arab world – to take on that role himself.   Nonetheless, the Norwegians felt it right to extend to both Sadat and Begin the 1978 Nobel Peace prize for their efforts. Tragically however, the Accords became the motivation for hardliners of the Egyptian Islamic Jihad to attempt to get rid of Sadat as Egyptian president … which they accomplished in October of 1981 when he was assassinated while attending a military celebration.  But his successor, General Hosni Mubarak, simply continued down the same road that Sadat had laid out. 2Neither Begin nor Sadat wanted to go home with nothing to show for the grand effort. Carter also believed that moral persuasion might also bring the Arab-Israeli crisis to a peaceful resolution. But Egyptian President Anwar al-Sadat beat him to the punch by flying to Israel to offer Egyptian terms of peace with Israel. Israel's Prime Minister Menachem Begin welcomes Egyptian President Anwar Sadat to Jerusalem - November 1977 Carter then moved to sponsor a meeting at the President's Camp David retreat where he intended to see some serious negotiations take place. Begin was dragging his feet on some kind of compromise with Sadat ... putting Sadat in political trouble back in Egypt the longer Begin held out.   Carter would have to lean on Begin a bit to get him to move forward. Begin, Carter and Sadat at Camp David - September 1978 Anwar Sadat and Menachem Begin embracing while Jimmy Carter looks on - September 1978 Anwar Sadat, Menachim Begin and Jimmy Carter at the end of the Camp David talks - September 1978 Menachem Begin and Anwar Sadat Egyptian President Anwar Sadat, President Jimmy Carter and Israeli Prime Minister sign Camp David Accords in 1978 CHINA JOINS THE WORLD Despite Nixon's opening of American relations with China, this would, for the time being, have little impact on how China went about its political business.  That was a matter strictly up to Chairman Mao.  But of course there were other political interests moving cautiously around Mao. Lin Biao and the Gang of Four General Lin Biao had indeed been able to bring the chaos created by Mao's young Red Guards under fair control.  This cautiously pleased what was left of the Chinese "pragmatists" … but alienated the radicals – most notably Mao's actress wife Jiang Qing (his fourth wife).  But taking any kind of position of importance on any Chinese party matter was a very dangerous thing to do … if you were not the Great Chairman himself. What finally brought down General Lin, however, was not the rivalry going on between the pragmatists and the radicals … but the fact that Lin took on too much personal authority in his response to the border conflict China was having with Soviet Russia in 1969.  At first Mao reacted simply by elevating his close friend (a pragmatist however) Zhou Enlai to power as a personal advisor in order to counterbalance Lin's power.  Then when Zhou promoted the Chinese opening to Nixon and the Americans (mid-1971), Lin's strong opposition to this move put Lin in deep trouble.  Indeed, rumors (perhaps true) were that Lin was actually planning some kind of political coup.  In any case, deciding in September of 1971 that it was simply time to avoid the consequences of a probable Chinese political loss, Lin apparently chose to flee to Russia … only to have his plane mysteriously crash in the process.  Lin would subsequently be condemned as a Chinese traitor. Taking Lin's place now as the leading voice of the anti-Western radicals was Mao's wife, Jiang.  She did not back down any in her political opposition to any opening to the West … although as many as 1,000 Chinese officials (including military) were purged from the party for their probable support of Lin.  But as a matter of overall importance, Mao tended to look more to Zhou than Jiang in the conduct of his affairs ... stirring the wrath of Jiang and some of her cohorts (the "Gang of Four"). Zhou and Mao die (1976) Then when in 1972 Zhou found himself struggling with cancer, Mao decided to order the political rehabilitation of the formerly imprisoned pragmatist Deng Xiaoping … in order to have him work with Zhou.  But when in January of 1976 Zhou finally succumbed to the disease, Mao called on the "centrist" (cautiously neither radical nor pragmatist) Hua Guofeng to take Zhou's place. However, Mao himself was struggling with his health … and died that same September (1976).  The next month, Jiang and the others of the "Gang of Four" were arrested and imprisoned. The rise of Deng Xiaoping At this point, Hua attempted to make himself into the apparent spiritual successor to Mao … even though it was the pragmatist Deng who was now actually commanding the operations of the party from behind the scenes.  And Deng's pragmatism would change dramatically the direction of Chinese politics – and economics – from that point forward. Thus in 1977 the Cultural Revolution was declared to be officially over … and in 1978 Deng announced the startup of his Four Modernizations program, in which agriculture, industry, science and defense were to take on more of a Western look in their operation … with fourteen designated cities being open to foreign investment.  Deng was intending to get the Chinese economy up and running (similar to the successful program that Taiwan had undertaken) by being active in the global market.  And indeed, under Deng's reforms, the Chinese economy was quick to take off! Politically, Deng would take for himself merely the position as chairman of the Central Military Commission … although everyone knew who was running the show.  Hua would be removed from some of his positions … though certainly not removed from power altogether.    Lin Biao Zhou Enlai  Jiang Qing  Deng Xiaoping Hua Guofeng A Chinese-American détente At the same time, Deng was quick to realize the international opportunities awaiting post-Maoist China.  Carter himself had proved very helpful in this regard, sending his National Security Advisor Zbigniew Brzezinski to China in August of 1977 to discuss the possibility of improving US-China relations … American relations with Taiwan being one of the hurdles to be overcome.  Negotiations that followed finally produced a full severance of American diplomatic ties with Taiwan … but under Deng's promise that America would be able to continue its commercial relations with Taiwan.  This agreement in turn led Carter to invite Deng to visit America … which he did in late January-early February of 1979.   Carter and Deng had much to discuss … especially the matter of China wanting to invade Vietnam – at a time when the Soviets were Vietnam's major patron.  But Deng affirmed that China was not afraid of this starting a war with Russia.  This mounting problem was not something that pleased Carter.  Otherwise, the visit was very positive (with even Nixon being invited to the White House – at Deng's insistence – to be part of the occasion). The new China takes off In 1980, Jiang and the other three members of the Gang of Four were finally put on trial, convicted of treason, but had the death penalty put aside in favor of life imprisonment.  And the Maoist radical wing of the Party quickly disappeared.  And although the Party bureaucracy would still preside over Chinese programming, it was now the Chinese entrepreneurs who would actually take the lead in developing the Chinese economy … which then tended to grow annually by 10% almost every year thereafter!  It was truly a Chinese miracle!  Carter makes the decision to extend formal diplomatic recognition to the Communist Government in Beijing ... confirming the fact (set in Nixon's presidency) that America recognized Taiwan as actually part of China ... under the promise from Beijing that America could continue to trade freely with Taiwan. Carter receiving a visit in January of 1979 from Chinese leader Deng Xiaoping A meeting in the White House of Carter and Deng Xiaoping and their diplomatic teams – January 1979 PROBLEMS IN AFGHANISTAN Political instability in Afghanistan In April of 1978, Russia's Afghan Communist clients made their move against Daoud's more or less internationally neutral government, assassinating Daoud and declaring the establishment of a new "Democratic Republic" under the Communist leader Nur Mohammad Taraki.  Taraki in turn then moved strongly against the country's known intellectuals … or anyone in Afghanistan harboring pro-West sentiments.  But Taraki was just as cruel in eliminating those accused of just being conservative in political thinking – which was the actual moral-spiritual foundations of the country.  Thus perhaps as many as 27,000 of Afghanistan's leaders (across a wide political spectrum) were arrested and executed in Afghan prisons over the next year and a half. Unsurprisingly, all this inspired the outbreak of rebellions all across the country … with much of the Afghan military joining the rebels.  Adding to the turmoil, Carter – despite his earlier promise to conduct only "open diplomacy" – was secretly aiding the rebels financially. Finally, a desperate Taraki called on the Soviets for direct assistance in putting down the uprisings.  But the Soviets instead threw their support to Taraki's opposing Communist group, led by Hafizullah Amin … who in turn had Taraki "removed" (assassinated) in October of 1979 and took control of the government.  But Amin did not appear to be as dependent on the Soviets as they had hoped, and thus in December of that year the Soviets made their move to take direct control of Afghanistan.  Amin was assassinated (KGB) … and Babrak Karmal was put in his place as Afghan president.  He in turn invited the Soviets to offer him full military assistance in bringing the country under control.  Muhammad Daud Khan – Afghan ruler (1953-1963 and 1973-1978) Communist leader Nur Mohammad Taraki Chairman of the Revolutionary Council of Afghanistan (April 1978-September 1979).  Overthrown in September and murdered in October under Amin's orders Communist leader Hafizullah Amin Chairman of the Revolutionary Council of Afghanistan (September - December 1979).  Assassinated by Soviet agents December 27, 1979 to open the way for the Soviet invasion Communist leader Karmal Babrak Chairman of the Revolutionary Council of Afghanistan (December 1979 - May 1986).  He was in power during the effort of the Soviets to establish control over Afghanistan ... but was removed from power by Soviet Premier Gorbachev in 1986 Soviet troops entering Afghanistan to "protect" its political client there The Afghan mujahideen resisting the Soviet invasion Soviet-American contention over Afghanistan The Soviets were not fully aware of Carter's secret involvement in Afghanistan's dynamics at the time … believing that Carter had only a minor interest in the area and therefore unlikely to have much of a reaction to a Soviet invasion of Afghanistan.   They were wrong.  And it would bring an abrupt end to the Soviet-American discussions over the possibility of going even deeper into their prior Strategic Arms Limitation Talks (SALT).  Earlier that year, in June of 1979, Carter and Soviet Premier Leonid Brezhnev had met in Vienna to sign a SALT II Agreement … in the effort to update technological advances since the earlier (1972) SALT Agreement between Nixon and Brezhnev.  Of particular interest in SALT was the matter of the MIRV missiles capable of carrying multiple nuclear warheads on a single rocket … something that America had moved ahead of the Soviets on.  Also, Brezhnev had been hoping the Vienna meeting would counterbalance some of the new China-America relationship going on at the time. At the time, the Republicans in Congress were very upset that the limitation levels agreed on in the SALT II Agreement was merely voluntary … which Carter certainly was willing to undertake – at a time in which many Americans still did not trust the Soviets on matters of "voluntary" self-restraint. Thus discussions in the Senate about ratifying the treaty dragged on … until the December invasion of Afghanistan by the Soviets finally decided the matter. At this point, even Carter was upset enough by the Soviet action in Afghanistan that he simply withdrew the treaty from further Senate consideration.  SALT II was not completely dead.  Carter would work to bring the MIRV issue under some kind of international understanding.  But the treaty itself was dead. The "more moral" Carter then followed up on his step-back from Soviet-American détente when he announced that American athletes would not be participating in the 1980 Moscow summer Olympics … if the Soviets had not pulled out of Afghanistan by then.  As threats go, there was little likelihood that the Soviets, at that point deeply committed militarily in Afghanistan, would be willing to perform such a retreat.  Consequently, the only result of the Carter decision was that American athletes who had trained hard for the Olympics challenges would now not be able to compete.3  And for Carter personally, it further worsened his image as he approached the 1980 national elections. 3>The Soviets would then return the favor by boycotting the 1984 summer Olympics held in Los Angeles! Carter and Brezhnev Carter and Brezhnev sign SALT II in Vienna - June 1979 HOWEVER ... Carter withdrew the treaty from Senate confirmation in January 1980 after the USSR invaded Afghanistan six months after the signing of the SALT treaty! CATASTROPHE IN IRAN But what really finished off Carter's chances for re-election were developments taking place in Iran – and the impact that had on the American economy and national morale. When in October of 1979, Carter was considering the possibility of bringing the very sick Shah to America for cancer treatment … the Iranian Muslim youth (the "Revolutionary Guard") became massively outraged.  This then led them to attack the American Embassy in Tehran and take the American personnel there captive … even displaying them blindfolded before a taunting crowd. This so pleased the Iranians that the following month they easily approved a referendum establishing a new Islamic Republic.  And these captured Americans would be held prisoner for the rest of Carter's term in office.  Iranian students climbing over the wall of the American Embassy - November 4, 1979 Some of the 90 hostages taken at the US Embassy - November 4, 1979 American embassy staff taken hostage in Tehran by Muslim radicals - November 4, 1979 American embassy staff taken hostage in Tehran by Muslim radicals - November 4, 1979  US Black hostages released by Khomeini in November  (he also released the women hostages as well) And this would be the case despite an attempt by Carter in April of 1980 to rescue these American captives.  He planned (Operation Eagle Claw) to drop eight helicopters of Delta troops just outside of Tehran by night (Americans having first shut down Tehran's electrical grid) and have them taken by truck to the American embassy – where they could gather up the 52 American hostages held there and then fly them out of the country.  But an unexpected sandstorm that developed in Southern Iran – which was supposed to be the launching site for the helicopter assault – produced both human and mechanical failure.4   In having to announce publicly the disaster in Iran, Carter's humiliation grew even worse – monumentally worse.  Indeed, he suffered even further with the subsequent resignation of his Secretary of State Cyrus Vance, who had opposed the rescue attempt from the outset. 4Upon arrival to Iran, three helicopters went down in the sandstorm … and then eight American troops were killed following the decision to call off the assault – when another helicopter collided with one of the six C-130 transport planes that were supposed to carry the hostages out of Iran. The disastrous rescue attempt in Iran (April 1980) Wreckage at Desert One, Iran, where eight Americans died - April 24, 1980 A burned-out and abandoned US helicopter in Iran (Operation Eagle Claw) Carter ready to deliver a nationally televised speech (April 25, 1980) announcing the failed rescue mission in Iran CARTER'S "ECONOMIC CZAR" VOLCKER ADDRESSES THE ISSUE OF INFLATION But the shock to America (and the rest of the world) did not end there.  With Iran in full commotion, the Iranian oil production dropped down to about a fourth of its normal production level … which, we have already noted, created an international oil shortage – and in general an international energy panic – one that would last well into the early 1980s. Every economist understands how prices are determined by the iron law of supply and demand.  When a shortage in the availability of something occurs – at a time when demand remains constant – prices are guaranteed to go up.  This certainly was the case of energy costs … for people cannot simply cut back on their dependence on energy.  And those offering energy for sale know full well that the price of the product they offer can be raised significantly in the face of a captive audience.  Admittedly, Saudi Arabia increased its production somewhat in the face of the international energy shortage caused by the Iranian cutback … but not at the same rate as that cutback.  And in the energy world it does not take much of a cutback (because of the inflexibility of demand) to drive prices sky high. But there's another side to this law of supply and demand.  Oversupply in the face of a world of demand that is slowing up will drop prices just as dramatically – such as what happens often in the housing industry when massive house-building gets well ahead of the actual number of people interested in buying new houses (oversupply), forcing builders to drop their prices dramatically in order to bring interested buyers forward. So, farmers in the 1950s were paid to cut back farm production in order to keep agricultural prices from falling away to the point where it cost more to produce the food than the food was able to be sold for on the open market.  That's the policy of cutting back supply in the face of a shortage of demand … in order to maintain prices.  That's what OPEC often does when too much energy production or "supply" is losing its pricing in the face of demand that has not risen any. Likewise, to bring down prices … there are two avenues that can be taken.  One is to simply increase supply … to a point that limited demand forces prices down in the face of this larger supply of goods (oil and gas in this case).  Certainly OPEC could have done that in the face of this world shortage:  simply up energy production (pump more oil and gas … done quite easily actually).  But why would OPEC want to do that?  OPEC members were getting rich – fantastically rich – from this supply-and-demand game. The other route is to bring down demand.  Higher prices should do that … especially in the face of production shortages.  But again, people's energy needs are really not that adjustable. But Carter's newly appointed Federal Reserve President Paul Volcker had another way of bringing down demand:  just impoverish the economy to the point where people are simply required to live to lower – much lower – economic expectations.   Therefore, a poorer society will be less demanding of goods … which should then bring down prices for available goods. And he did this simply by increasing the cost of produced goods to such an extent that people simply could no longer afford to purchase them.  To lure forth nervous or impoverished customers, in order to stay in business, producers would have to lower their prices.  Thus voilà … inflation solved. How was this 6'7" giant of a man able to do this?  He simply jumped the already high Federal Discount Rate from 11% to 20% – by cutting back on the amount of Federal dollar reserves available to America's leading banks.  In short, American banks – ones anyway that depended upon Federal credit dollars to be able then to turn around and offer loans to their own banking customers – had to "borrow" that money from the Fed at a 20% interest rate … requiring the banks in turn to have to offer their best or "prime" customers their own bank loans at a minimum of 22% or 23% annually – if the banks were to make any profit at all on the deal. At first, this had the countering result of actually increasing, not decreasing, inflation.  Interest rates charged by the financial industry to the industrial production sector are a key part of the costs that producers have to take into consideration in offering their products for sale.  Thus if borrowed money becomes more expensive, then prices have to be raised in order to continue to make any kind of profit … even to make enough to pay the salaries and wages of the company's employees.  Thus, by nearly doubling the Federal Discount Rate, Volcker actually worsened inflation.   Then too … who would want to go to a bank and take out a loan at a 23% interest rate?   Mortgage rates for home purchasers, however, did not run quite as high … as those rates are normally stretched out over a long period, usually 30 years of repayment.  But even at a reduced rate of 16%, who still would want to buy a house and then pay back the loan at that high rate for the next 30 years?  Thus new houses found themselves unsold … at a time that builders were still required to repay those 20%+ bank loans they took out originally to build those homes.  Soon bankruptcy was the only way out of total ruin for those unsuccessful home builders.   Likewise, car dealers were hit with the same problem … that unless a customer was willing to pay cash for a car (few do) a car loan was almost as bad as a home mortgage.  Thus the car business also dried up as purchasers decided to wait for rates to go down before they bought that new Chevy.  Thus car dealerships across America also fell into bankruptcy. But wait … home builders and car dealers are key customers for banks.  And if these customers go bankrupt, what was the bank itself supposed to do to keep itself in business?  Banks now faced their own version of business failure. And so – thanks to economic Czar Volcker – America fought inflation by making the nation poorer … much, much poorer.  Once again ... long lines to the gas pumps Federal Reserve Chairman Paul Volcker THE SOVIETS BREAK FROM THE ENERGY CARTEL The Soviet economy was also finding itself in trouble at the time, though not for the same reason. In fact, Russia was a major oil exporter … gaining a huge percentage of its international earnings from its oil and gas business. But the war it was conducting in Afghanistan was proving very costly … while producing no visible rewards. Also there was increasing pressure from the Soviet citizenry to open to them the market for the consumer goods that other Europeans were able to afford. But Russia was short in its holdings of the necessary international currencies such rising consumerism demanded (something of a "dollar shortage"). Thus the decision was made to offer its energy at a rate just under OPEC's rate … in order to grab a larger share of the very lucrative global energy market. Of course OPEC was in no mood to be left behind in the energy market … and thus was forced to lower its prices a bit in order to keep its position there. But there is a huge margin in the cost-benefit gap in the energy world … and the Soviets were thus easily able to come back with another price reduction. And so on. By 1982 … something of a price war was going on. And of course with much lower prices, this brought the world's energy crisis to an end. It was, after all, the energy issue that brought on the 1979-1982 global economic crisis in the first place. And with the lowering of energy costs, so too industrial producers were able to lower their prices … making their products more attractive on the open market. Thus it was that America – and much of the rest of the world – regained economic momentum. And too, huge pressure was also put on Volcker to reduce the Fed rate … which – in the face of a threat to reduce the Fed's economic powers if he did not do so – he complied. Thus it was that the global economy got itself back to some kind of normal. IRAQ ATTACKS IRAN Tensions had been building between Iran and its neighbor Iraq ever since the overthrow of the Shah's government. Iraqi President Saddam Hussein was fearful of Shi'a Iran's exploitation of the Shi'a Muslim loyalties of some 60% of the Iraqi population … at a time that Iraq was governed by a very secular Ba'athist5 government, but one controlled basically by Sunni Muslims. At the same time, he was interested in regaining Arab lands ceded to Iran by hoping to exploit anti-Iranian (or anti-Persian) Arab cultural sentiments in those Iranian lands. And too, he was hoping by taking advantage of Iran's political chaos to be able to make Iraq the dominant power in the Persian Gulf region. Thus the full military assault on Iran. At first – for a few months anyway – Saddam's troops were able to advance into the Arab region of Western Iran. But by December the Iranians were able to block any further Iraqi advances. Then the Iranians took to the counteroffensive … and slowly regained the lost territory by the middle of 1982. But despite a U.N. resolution calling on all parties to halt their action, the Iranians then launched an attack into Iraq. This then for the next five years led to a vicious back and forth war – in which some of the latest weapons technologies were employed (including greatly outlawed chemical warfare) – which gained nothing for either side except a lot of death and destruction ... but supposedly great glory for those who had sacrificed their lives for the cause (a very intense sentiment in Shi'a Iran). Then when in mid-1988 Iraq was able to launch a successful counterattack, the war simply ground to a halt. The Iran-Iraq War had become simply a gruesome stalemate. 5Ba'athist … meaning renaissance or rebirth. Go on to the next section:  A World of "Tough"   Miles H. Hodges