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The End of Globalization: Lessons from the Great Depression

Author(s):James, Harold
Reviewer(s):Hatton, Tim

Published by EH.NET (January 2002)

Harold James, The End of Globalization: Lessons from the Great

Depression. Cambridge, MA: Harvard University Press, 2001. viii + 260 pp.

$39.95 (cloth), ISBN: 0-674-00474-4.

Reviewed for EH.NET by Tim Hatton, Department of Economics, University of


Harold James, who is highly renowned for his wide-ranging research on

monetary history, has written a new book analyzing the process of

de-globalization during the interwar period. He relates this to the economic

structures and institutions that developed during the era of globalization

before 1914 and he asks whether a globalization backlash could occur all over

again in the present. The book has already received considerable acclaim. No

less an organ than the Economist gave the book a full-page review (29

September, p. 107). In the wake of global uncertainty caused by the September

11th attacks on the United States, the Economist‘s reviewer commented

that “It would be hard to think of a better instance of the right book on the

right subject published at the right time.” Praise indeed. The review went on

to urge vigilance against de-globalizing tendencies in the light of the

catastrophic interwar experience.

So much for reviews of reviews. What does the book actually say? It starts

with a breezy summary of globalization before 1914 and, with this as

background plots out the dismal record of the interwar years. The three

chapters that follow deal, respectively with banking and monetary policy,

trade and tariff policy and labor and migration policy. Each in its own way

offers telling insights into the mechanics of de-globalization that are

persuasive and compelling. There follows a chapter on the politics of

nationalism and then a concluding chapter on the lessons for today. This last

chapter, perhaps the most important for the general reader, is the least

satisfactory for reasons I shall come to below.

The chapter on money and banking is Harold James at his best. With enormous

poise and consummate command of the literature, he develops the story of

structural weaknesses leading to financial instability and banking failures.

He describes how hot money flows transmitted contagion from one country to

another and how, as a result, the gold exchange standard fell like a row of

dominoes. James puts banking collapses, or the threat of collapse, at the very

center of the interwar story, beginning in central Europe in the late 1920s,

then spreading to Britain, the US and finally France and the gold bloc. In

the case of Britain, for example, he argues that the incipient threat of

banking collapse (as a result of losses in central Europe and elsewhere)

explains the puzzle of why Britain went off the gold standard without a fight

— that is without trying to stave off devaluation with tough monetary

measures. This stands in sharp contrast to accounts that emphasize the

dramatic disappearance of French and American credits, the concern about

domestic employment and even the indisposition of Governor Norman. Similarly

for the United States, the banking crisis of 1932-33 is seen as originating

in the international sphere rather than in the domestic economy.

The next chapter looks at the causes of declining international trade and

rising tariff barriers. James sees delicate domestic political balances across

the industrialized world, which promoted logrolling politics, as lending an

upward ratchet effect to trade barriers. But his most compelling point is that

during the 1930s trade and payments policies became ever more closely and

inextricably entwined. Thus what began with tariffs ended with trading blocs,

bilateralism and exchange controls. International co-operation proved totally

unable to untie this Gordian knot. Perhaps the most telling quote comes from

Sir Frederick Leith Ross (the British Government’s Chief Economic Advisor)

who, in discussions leading up to the abortive 1933 World Economic Conference

in London, commented thus: “The Financial Sub-Committee thought action in the

monetary sphere was dependent on greater freedom in the movement of goods,

while the Economic Sub-Committee considered that no progress could be made

until financial and monetary questions were settled” (p. 130).

Two shorter chapters then deal with migration and nationalism. On

international migration, James argues that the US immigration acts of 1921 and

1924, followed by growing restrictions elsewhere, led to increasing labor

market pressures which lent impetus to calls for national economic polices,

and in one notorious case added to pressure for “lebensraum.” But the argument

that immigration policies were a globalization backlash is not treated in any

depth. The following chapter deals with the interrelations between economic

events and nationalism, stressing the disenchantment with internationalism

(even among central bankers, of which Schacht is an extreme example) and the

rise of national policies of self-sufficiency that took place against the

backdrop of the apparently successful Soviet industrialization drive.

In the final chapter James asks: “Can it happen again?” Could the progressive

globalization that proceeded cautiously and incrementally from the 1950s, and

that seems to have accelerated since the fall of the Berlin wall, lead to a

backlash that could precipitate the descent once more into the economic

turmoil and de-globalization characteristic of the interwar years? His

conclusion is cautious and (contrary to the impression given by the

Economist‘s reviewer) somewhat agnostic: “The absence of … two

features — the intellectual cement and the specific model of national success

— explains why the pendulum is so slow in swinging back from globality. But

it does not explain why it will not swing” (p. 224).

To my mind this rather negative conclusion follows from James’s failure to

fully confront the following questions. How different is the globalized world

now as compared with that of 1914? And given this structure, are the shocks

that occurred in the following two decades likely to be repeated? And if so,

with what effect? To be fair, this closing chapter does argue that trade and

capital markets have become progressively more liberalized, that (under the

so-called Washington consensus) international institutions remain fragile, but

that for lack of a coherent alternative vision anti-globalization forces

remain weak and unorganized. But there is little direct analysis of the likely

threats that shocks might pose to globalization in the world economy today.

Here’s how such an assessment might go. Trade is probably as globalized as it

was in 1913, international capital may be even more so, but international

migration is not — nor is it likely to become so in the foreseeable future.

Banking systems and financial markets may be as vulnerable to panics and

crises as they were in the interwar period. So the risks may be there. But a

shock like the First World War with its legacy of political and economic

turmoil and the concomitant disruption to trade and payments seems unlikely,

at least in the developed world which, after all, accounts for ninety percent

of trade and income. Such an event seems all the more remote since the demise

of the Soviet Union and the admittedly faltering steps of the successor states

towards rapprochement with the capitalist world.

Furthermore, James seems not to have noticed the radical developments in

monetary policy during the past decade — developments which have surely

lowered the downside risk. Alan Greenspan’s Fed is not the Fed of George

Harrison, neither is the Bank of England the Bank of Montague Norman, nor is

the ECB the Bank of Haljmar Schacht. Not only is the gold exchange standard,

which (according to the new orthodoxy) magnified the economic shocks of the

1920s and precipitated depression on a world scale, long since dead and

buried, new lessons have been learned from the experience of the 1980s and

1990s. One key lesson is that in a world of globalized capital there is no

hiding place between freely floating exchange rates and full currency union.

A second lesson is that the money supply or the exchange rate make poor

targets for monetary policy. As a consequence a new monetary regime has

emerged over the last decade. Among 90 central banks surveyed by researchers

at the Bank of England, more than 60 percent now have inflation targets

(although some, like the ECB, have intermediate targets as well).

In a world where inflation targeting characterizes many of the leading

economies, where more and more central banks are becoming independent, and

where we no longer worship at the alter of gold, shocks like those of the

interwar period would not be transferred across the exchanges in the domino

pattern that Harold James so eloquently describes. The stock market crash of

1987 and the Asian meltdown of 1997 did not turn into worldwide crises, and

similar shocks in the future are equally unlikely to bring the whole edifice

of trade and payments tumbling down. But even if there were more serious

shocks, the interlinking of trade policy and monetary policy in a downward

descent into bilateralism as in the interwar period is simply not seen as

feasible by the major players today. Thus, the lessons for today from the

interwar experience should be drawn from the fundamental differences between

now and then, and not from the superficial similarities. It is odd that Harold

James does not draw this conclusion since it would seem to follow directly

from his own analysis of the interwar period.

I cannot resist this final comment. James argues that the most worrying

development is wrongheaded approaches to economic policy that have

characterized the countries of Africa, with devastating effect. And he goes on

to remark that “frighteningly, the same diagnosis applies to continental

Europe.” I have to say that policies in Europe are not even remotely like some

of those we have seen in Africa — and they are not going in that direction

either. Indeed the EU has seen progressive liberalization in trade and in a

wide variety of other areas, especially in the last decade. Fortress Europe is

nowhere on the agenda (except perhaps in asylum policy). While progress may

sometimes have been slow it has nevertheless been inexorable. If Harold James

were to visit Europe more often I am sure he would revise his opinion of it.

Some of us who live here would be glad to show him around!

But I have carped on for far too long about the concluding chapter of what,

after all, is a fine book about the economic de-globalization of the interwar

period. James’s sheer depth of knowledge about the period and his clear

writing style make this stimulating book a pleasure to read — and to

recommend to others.

Tim Hatton is Professor of Economics at the University of Essex in the UK. He

has worked on international migration, unemployment and other labor market

issues in the century after 1850.

Subject(s):Macroeconomics and Fluctuations
Geographic Area(s):General, International, or Comparative
Time Period(s):20th Century: Pre WWII