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The End of Globalization: Lessons from the Great Depression by Harold James
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Published January 1, 1751
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About the author
Harold James
84 books26 followersHarold James is Claude and Lore Kelly Professor in European Studies and Professor of History and International Affairs at Princeton University.
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July 6, 2019
An excellent and detailed account of the financial and policy measures taken around the world in response to the Great Depression.
Notes on Chapter One – Introduction
It’s an introduction. What else is there to say?
Notes on Chapter Two – Effects on Finance
James posits that insufficient banking regulation led to over-extended and weak banks. The mechanisms that had been set up pre-1914 that were intended to help moderate volatilities and tensions only ended up exacerbating them. He singles out in particular central banks and the gold standard.
The central banks come under criticism for doing little more than just wringing their hands and moaning, “Oh, we’re helpless. Nothing can be done.” The lack of action did nothing to restore confidence in the economies of the countries affected.
The gold standard acted as a mechanism of spreading the contagion between the countries on the gold standard. The effect of the gold standard was to create massive flights of capital into and then out of perceived safe havens. The only responses available would be to either impose capital controls (which would strangle trade) or to defend the gold standard (expensive as this would require countries to buy up gold). Neither worked: people would smuggle out currency and defending the gold standard left countries massively exposed to speculators who would seek to make money by betting on the resulting rises in gold prices and/or an eventual collapse of the currency.
This dynamic eventually forced all countries off the gold standard, and the ones that remained on it the longest also suffered the longest. On the other hand, the countries that acted quickly to remove the peg from the gold standard recovered the fastest from the Great Depression.
At the end of this (very long) first chapter on monetary policy and capital outflows, James comments that the one clear trigger in all cases for the financial crisis was the deregulation of banks in a globalised economy.
While this might seem a minor conclusion to draw, let us remember that for over a decade, the US and the world were in thrall to the "genius" of Alan Greenspan and his vision of a deregulated financial market being more stable than regulated one. There we have ideology triumphing over facts. Which is why I totally love this article by Singapore's Deputy Prime Minister and Minister for Finance and Manpower, Tharman Shanmugaratnam, entitled "Learning from Facts not Beliefs".
Notes on Chapter Three – The Impact on International Trade
After discussing the financial and monetary crises that engulfed countries around the world, James looks at the impact on international trade. The picture is not pretty. It looks like this:
International trade shrank year after year. By and large, the blame has been put on “beggar thy neighbour” protectionist policies that each country found itself forced to engage in.
Part of the difficulty in finding a proper response was due to the contradictory pulls that each government found itself under from the conflicting needs of trade and finance. In a simplistic schematic nutshell, keeping the country open to capital inflows and outflows was needed to keep trade going. However, capital inflows and outflows were highly destabilising to the money supply. To paraphrase a prominent banker in our own time, once the music had started playing, you had to play along; there was no way not to.
The waltz of death started with the currency devaluations and price volatilities engendered by the financial and monetary crises. Where Country A experienced a devaluation of its currency, its exports became more competitive than those from Country B that had yet to undergo devaluation. Country B, especially if a democracy, then came under intense pressure to set up trade barriers to keep its producers happy.
Price volatilities—wild swings up and, especially, down—gave rise to the same political pressures. Downward pressure on prices came especially from countries moving up the trade ladder and trying to develop their own industries. This lowered the comparative advantage of existing industrialised countries, and resulted in cheaper goods flooding their markets from the lower cost industrialising countries. Producers of those countries cried out for protectionist measures. On the other side, producers of industrialising countries also cried out for protectionist measures to allow their still infant industries time to get stronger and more competitive.
Faced with these pressures, many governments began to cave. The first to do so in any significant way was the US government, which passed the Smoot-Hawley Act which raised tariffs on many imports. The natural result, of course, was retaliatory tariffs in other countries. Pretty soon, everybody wanted to play.
The effect of tariffs was to strangle world trade. The drop in exports rendered goods internally more expensive, thereby dampening internal demand. The restrictions on international trade dampened external demand, and so began the death spiral.
Once in place, tariffs became exceedingly hard to get rid of. They were very popular with the voting population which failed to understand that their effect was actually negative. Tariffs also allowed governments to “buy” votes from special interest groups. And when one interest group got a tariff in place, other interest groups would start to clamour for the same. As a result, tariffs kept rising with no end in sight.
Also, no country wanted to be the first to lower its tariffs because that was seen as a sure way to eviscerate its producers. An international forum was called to resolve the issue by agreeing on concerted action, but nobody came. Actually, people did come but no one could agree on anything. The description of the different negotiating stances of the various countries involved is a highly illuminating account of destructive rational self-interest. It also makes mockery of any notion of global conspiracies seeing how dysfunctionally uncooperative governments were.
Germany sought to build its political and economic prowess by entering into bilateral trade agreements with a number of countries such as Poland, Brazil, and Argentina. Such agreements were structured as barter and clearing systems. Devised by Schacht, this system is known as Schatianism. The trade agreements were not only economic in nature, they were intended to give Germany greater political world influence.
The US sought to break the stalemate by recognising that as the first to have started the trade war, it should be the one to try to end it, and brought an end to the tariff system. The man who pushed for this was a guy called Hull. However, this did not prove to be an instant cure-all. However, before anything else could be done World War II intervened.
The two other key methods for dealing with the rise of trade barriers were as follows:
● The British and the French focussed on intra-empire trade; and
● The Soviets had closed off their economy to the world prior to the Great Depression and their command economy was to a large extent insulated from its effects.
Post-World War II, the Allied victory over the Germans gave Hullism a strong boost over Schachtianism. The rest as they say is history: the US push for international trade and the Marshall Plan gave the Western world its economic golden age and the US its global hegemonic status.
Notes on Chapter Four – Effects on Immigration
While anti-immigration sentiment in response to globalisation had set in as early the late nineteenth century, barriers to immigration really came down during the Great Depression. This had the perverse effect of pushing countries towards war.
Prior to the Great Depression, free flows in immigrants allowed countries to export their excess population to countries where economic growth needed the manpower. It was said that countries either exported goods or exported people.
Once trade and immigration barriers came down, countries had to find a way to deal with the excess people. More land was needed. In a way this was really a logical extension of the intra-empire trade of the British and the French by countries that did not at that time have their own empires. The Japanese therefore invaded Manchukuo and tried to create the Great Asia Prosperity Sphere. The Germans invaded Poland and the eastern bloc countries. Both were trying to find a way out of the economic impasse that they found themselves in.
Notes on Chapter Five: Nationalism and Capital
The socio-psychological effect of the Great Depression was to transfer burgeoning feelings of nationalism to the three areas of capital, trade, and people. Losses of these to other countries were seen as damaging to the exporting country. Such losses engendered anger against the other countries and reinforced feelings of nationalism.
Notes on the Concluding Chapter: Can It Happen Again?
James posits that while the current thinking is that “this time is different” and that the world is not going to experience another anti-globalisation backlash, he cautions that this is hardly a foregone conclusion. He cites four potential areas that might act as seeds for a backlash against globalisation to form should a crisis occur:
● The ci-devants. The term refers to members of the aristocracy who used their position to manoeuvre themselves to become trade barons in the new economies after the industrial revolution. Ci-devants in our time will resist any globalisation measures that threaten their wealth, preferring instead to consolidate their strength by shutting down globalisation channels.
● The banana-skin effect. The banana-skin effect is the tendency to blame the universe for one slipping on a banana skin. He notes that in a world of free trade, economic shocks will from time to time act as banana skins to cause accidents. The danger is that people will over-react and blame the “system”.
● Persons who lose out during the crash revolt.
● The crash brings out the hate-mongers who use it for their own ends.
Written just after the Asian Financial Crisis, the book ends on a somewhat optimistic note, suggesting that previous anti-globalisation ideas such as fascism and communism have been discredited and without an organising force around which anti-globalisation forces can organise, it is unlikely that such forces will gain much traction.
Of course, James did not (at least in this book) foresee the Global Financial Crisis or the Great Recession. This lacuna can be addressed by listening to James’s lecture at Ohio University in Athens, Ohio, Thursday, October 14, 2010 as part of the George Washington Forum on American Ideas, Politics and Institutions. His speech is entitled "The World Order after the Financial Crisis". It'll be one of the more productive and enlightening 51 mins you'll ever spend.
Notes on Chapter One – Introduction
It’s an introduction. What else is there to say?
Notes on Chapter Two – Effects on Finance
James posits that insufficient banking regulation led to over-extended and weak banks. The mechanisms that had been set up pre-1914 that were intended to help moderate volatilities and tensions only ended up exacerbating them. He singles out in particular central banks and the gold standard.
The central banks come under criticism for doing little more than just wringing their hands and moaning, “Oh, we’re helpless. Nothing can be done.” The lack of action did nothing to restore confidence in the economies of the countries affected.
The gold standard acted as a mechanism of spreading the contagion between the countries on the gold standard. The effect of the gold standard was to create massive flights of capital into and then out of perceived safe havens. The only responses available would be to either impose capital controls (which would strangle trade) or to defend the gold standard (expensive as this would require countries to buy up gold). Neither worked: people would smuggle out currency and defending the gold standard left countries massively exposed to speculators who would seek to make money by betting on the resulting rises in gold prices and/or an eventual collapse of the currency.
This dynamic eventually forced all countries off the gold standard, and the ones that remained on it the longest also suffered the longest. On the other hand, the countries that acted quickly to remove the peg from the gold standard recovered the fastest from the Great Depression.
At the end of this (very long) first chapter on monetary policy and capital outflows, James comments that the one clear trigger in all cases for the financial crisis was the deregulation of banks in a globalised economy.
While this might seem a minor conclusion to draw, let us remember that for over a decade, the US and the world were in thrall to the "genius" of Alan Greenspan and his vision of a deregulated financial market being more stable than regulated one. There we have ideology triumphing over facts. Which is why I totally love this article by Singapore's Deputy Prime Minister and Minister for Finance and Manpower, Tharman Shanmugaratnam, entitled "Learning from Facts not Beliefs".
Notes on Chapter Three – The Impact on International Trade
After discussing the financial and monetary crises that engulfed countries around the world, James looks at the impact on international trade. The picture is not pretty. It looks like this:
International trade shrank year after year. By and large, the blame has been put on “beggar thy neighbour” protectionist policies that each country found itself forced to engage in.
Part of the difficulty in finding a proper response was due to the contradictory pulls that each government found itself under from the conflicting needs of trade and finance. In a simplistic schematic nutshell, keeping the country open to capital inflows and outflows was needed to keep trade going. However, capital inflows and outflows were highly destabilising to the money supply. To paraphrase a prominent banker in our own time, once the music had started playing, you had to play along; there was no way not to.
The waltz of death started with the currency devaluations and price volatilities engendered by the financial and monetary crises. Where Country A experienced a devaluation of its currency, its exports became more competitive than those from Country B that had yet to undergo devaluation. Country B, especially if a democracy, then came under intense pressure to set up trade barriers to keep its producers happy.
Price volatilities—wild swings up and, especially, down—gave rise to the same political pressures. Downward pressure on prices came especially from countries moving up the trade ladder and trying to develop their own industries. This lowered the comparative advantage of existing industrialised countries, and resulted in cheaper goods flooding their markets from the lower cost industrialising countries. Producers of those countries cried out for protectionist measures. On the other side, producers of industrialising countries also cried out for protectionist measures to allow their still infant industries time to get stronger and more competitive.
Faced with these pressures, many governments began to cave. The first to do so in any significant way was the US government, which passed the Smoot-Hawley Act which raised tariffs on many imports. The natural result, of course, was retaliatory tariffs in other countries. Pretty soon, everybody wanted to play.
The effect of tariffs was to strangle world trade. The drop in exports rendered goods internally more expensive, thereby dampening internal demand. The restrictions on international trade dampened external demand, and so began the death spiral.
Once in place, tariffs became exceedingly hard to get rid of. They were very popular with the voting population which failed to understand that their effect was actually negative. Tariffs also allowed governments to “buy” votes from special interest groups. And when one interest group got a tariff in place, other interest groups would start to clamour for the same. As a result, tariffs kept rising with no end in sight.
Also, no country wanted to be the first to lower its tariffs because that was seen as a sure way to eviscerate its producers. An international forum was called to resolve the issue by agreeing on concerted action, but nobody came. Actually, people did come but no one could agree on anything. The description of the different negotiating stances of the various countries involved is a highly illuminating account of destructive rational self-interest. It also makes mockery of any notion of global conspiracies seeing how dysfunctionally uncooperative governments were.
Germany sought to build its political and economic prowess by entering into bilateral trade agreements with a number of countries such as Poland, Brazil, and Argentina. Such agreements were structured as barter and clearing systems. Devised by Schacht, this system is known as Schatianism. The trade agreements were not only economic in nature, they were intended to give Germany greater political world influence.
The US sought to break the stalemate by recognising that as the first to have started the trade war, it should be the one to try to end it, and brought an end to the tariff system. The man who pushed for this was a guy called Hull. However, this did not prove to be an instant cure-all. However, before anything else could be done World War II intervened.
The two other key methods for dealing with the rise of trade barriers were as follows:
● The British and the French focussed on intra-empire trade; and
● The Soviets had closed off their economy to the world prior to the Great Depression and their command economy was to a large extent insulated from its effects.
Post-World War II, the Allied victory over the Germans gave Hullism a strong boost over Schachtianism. The rest as they say is history: the US push for international trade and the Marshall Plan gave the Western world its economic golden age and the US its global hegemonic status.
Notes on Chapter Four – Effects on Immigration
While anti-immigration sentiment in response to globalisation had set in as early the late nineteenth century, barriers to immigration really came down during the Great Depression. This had the perverse effect of pushing countries towards war.
Prior to the Great Depression, free flows in immigrants allowed countries to export their excess population to countries where economic growth needed the manpower. It was said that countries either exported goods or exported people.
Once trade and immigration barriers came down, countries had to find a way to deal with the excess people. More land was needed. In a way this was really a logical extension of the intra-empire trade of the British and the French by countries that did not at that time have their own empires. The Japanese therefore invaded Manchukuo and tried to create the Great Asia Prosperity Sphere. The Germans invaded Poland and the eastern bloc countries. Both were trying to find a way out of the economic impasse that they found themselves in.
Notes on Chapter Five: Nationalism and Capital
The socio-psychological effect of the Great Depression was to transfer burgeoning feelings of nationalism to the three areas of capital, trade, and people. Losses of these to other countries were seen as damaging to the exporting country. Such losses engendered anger against the other countries and reinforced feelings of nationalism.
Notes on the Concluding Chapter: Can It Happen Again?
James posits that while the current thinking is that “this time is different” and that the world is not going to experience another anti-globalisation backlash, he cautions that this is hardly a foregone conclusion. He cites four potential areas that might act as seeds for a backlash against globalisation to form should a crisis occur:
● The ci-devants. The term refers to members of the aristocracy who used their position to manoeuvre themselves to become trade barons in the new economies after the industrial revolution. Ci-devants in our time will resist any globalisation measures that threaten their wealth, preferring instead to consolidate their strength by shutting down globalisation channels.
● The banana-skin effect. The banana-skin effect is the tendency to blame the universe for one slipping on a banana skin. He notes that in a world of free trade, economic shocks will from time to time act as banana skins to cause accidents. The danger is that people will over-react and blame the “system”.
● Persons who lose out during the crash revolt.
● The crash brings out the hate-mongers who use it for their own ends.
Written just after the Asian Financial Crisis, the book ends on a somewhat optimistic note, suggesting that previous anti-globalisation ideas such as fascism and communism have been discredited and without an organising force around which anti-globalisation forces can organise, it is unlikely that such forces will gain much traction.
Of course, James did not (at least in this book) foresee the Global Financial Crisis or the Great Recession. This lacuna can be addressed by listening to James’s lecture at Ohio University in Athens, Ohio, Thursday, October 14, 2010 as part of the George Washington Forum on American Ideas, Politics and Institutions. His speech is entitled "The World Order after the Financial Crisis". It'll be one of the more productive and enlightening 51 mins you'll ever spend.
November 27, 2025
an interesting reading about what we are living in the last 20 years
Displaying 1 - 2 of 2 reviews