Book Reviews

The End of Globalization Lessons from the Great Depression

Harold James

Harvard University Press, Cambridge, Massachusetts/London, England, 2001, vi + 260 pp., $39.95/£27.50 (cloth).

Harold James presents a fascinating treatment of the implosion of the world economy in the years between the two world wars. The Great Depression, he argues, was a consequence of the flaws of the first era of globalization in the four decades before World War I and, thus, a cautionary tale for the current era.

The book's main thesis is that globalization in the nineteenth century contained the seeds of its own destruction: the free movement of goods, capital, and labor had negative effects on powerful groups in the world's leading economies, and, more important, globalization was generally perceived as harmful. James treats the backlash against free trade in the 1880s and 1890s by European landowners harmed by cheap American grain and rapidly declining transportation costs, the backlash against free migration by New World labor threatened by competition from Old World immigrants, and the rise of central banks and domestic monetary policies to protect domestic economies from the vicissitudes of capital mobility. While his treatment complements the work of Kevin O'Rourke and Jeffrey Williamson (Globalization and History: The Evolution of a Nineteenth Century Atlantic Economy, MIT Press, 1999) and Barry Eichengreen (Globalizing Capital: A History of the Industrial Monetary System, Princeton University Press, 1996), what is new is the political dimension linking fears of globalization to the rise of nationalism across the world.

The elements in the global crisis that the author stresses-political upheaval, weak financial systems, price instability, poor public finances, loss of credibility, destabilizing capital flows, and adherence to gold pegs-have resonance, according to James, in the recent East Asian crisis. However, the fact that the 1930s crisis was a core-country phenomenon centered on the international gold standard, and the 1990s crisis a peripheral event involving diverse exchange rate arrangements, suggests that this analogy is a trifle overblown.

Although the author's analytical framework is well established, some of the new historical details are not. One novel interpretation is that of the sterling crisis in September 1931. James disputes both the traditional view that the collapse of the currency was due to overvaluation and fiscal imbalances and the more recent view that it was due to the fear of high unemployment. According to the author, the 1931 British crisis was a twin crisis triggered by a deteriorating financial system. The monetary authorities threw in the towel, he argues, primarily because they feared the possible insolvency of important merchant banks (if the peg of $4.86 to the pound sterling were to continue), whose portfolios were severely damaged by the earlier crises in Austria and Germany. This interpretation is both controversial and questionable. The British clearing banks were solvent, there was no sign of a classic internal drain (a rise in the currency-to-deposit ratio), and the Bank of England was well versed in the rules a lender of last resort should follow in the event of a real financial crisis.

The author is also controversial in his treatment of the events behind the U.S. crisis of 1931-32, which he views as being similar to the circumstances on the European continent. According to James, the U.S. Federal Reserve was unable to conduct expansionary open market operations to offset the banking panics not because it didn't have sufficient free gold, but because it feared capital flight in the face of a growing fiscal imbalance. This hypothesis also will need serious testing.

In his excellent discussion of the collapse of international trade, James links rising tariffs and nontariff barriers and then the move toward bilateralism with the collapse of the international payment system, the growth of nationalism, and the rise of the extreme solutions of Soviet communism and German national socialism. He also views the movement to restrict...