A Sense of History

Harold James

Harvard University Press 2009

Notwithstanding their collective failure to foresee the oncoming storm, the Great Recession of 2008 has been a boon to media-savvy economists wishing to give their views on the current economic crisis. Yet, beyond the countless columns explaining the difference between mortgage-backed securities and credit default swaps, or the pundits predicting a future inflationary crisis, there has been a noticeable lack of sober historical analysis of our contemporary economic woes. It should come as no surprise that this cacophony of voices has led many members of the lay public to agree with Hegel’s assessment that what history teaches us is that economists have not learned anything from history at all.

Harold James’ latest book should therefore be welcomed by those readers avidly searching for an accessible introduction to the history of modern economic crashes. A Princeton University professor, and a specialist of twentieth century German Financial history, Prof James has been warning against the Panglossian naïveté of professional economists and public intellectuals for many years. Unlike those who saw the Financial euphoria and globalization boom of the early 2000s as evidence of ‘the end of history,’ James stresses that what history actually teaches us is that there is nothing irreversible or inexorable about the most recent wave of globalization. On the contrary, there is much to be worried about. Past financial crises have often not been limited to stock market crashes and the bursting of Ponzi schemes, but have metastasized into beggar-thy-neighbour trade wars and xenophobic immigration policies.

The first thing one appreciates upon opening this book is James’ rare mastery of both economic principles and financial history, and his equally rare ability to articulate complex issues in a way easily accessible to the uninitiated reader. The book begins by questioning the conventional wisdom that the Great Depression began with the stock market crash of 1929, colloquially referred to as ‘Black Tuesday.’ Indeed, the facile reference to 1929 often made by academic economists and journalists misses the point that the Great Depression was not in fact a consequence of the financial crisis of 1929, but rather of the banking crisis of 1931 that began in Austria and Germany.

Far from being a sterile academic debate, James’ interpretation has important implications for public policy. While policymakers understand quite well how to use monetary and regulatory policies to fight against financial crashes, much less is known about how to prevent a banking crisis from degenerating into a full-blown economic meltdown. This perhaps explains why central banks reacted quickly and effectively to the drying-up of liquidity markets in 2007, while governments acted in such a hesitant and haphazard manner when it came to bailing out large financial institutions in the fall of 2008.

Many commentators have limited themselves to discussing how the recent financial troubles are affecting the real economy, be it the significant decline in growth rates or the massive increase in unemployment that has plagued many countries over the past few months. James, however, stresses that the economic fallout from past crises was often exacerbated by subsequent sociopolitical shocks. Depressingly, the ‘Buy American’ provisions originally included in the US federal stimulus pack- age, together with the recent tide of anti-immigration policies proposed by European governments, suggests that policymakers have learned frighteningly little from past mistakes. Contrary to what the cynics may say, James argues that while we can do little to tame the irrational mood-swings of Wall Street traders, there is nothing unavoidable about the short-sighted and counter-productive policies put forth by populist legislators.

Ironically perhaps, the last chapter of the book is in many ways the weakest. In it, James argues that the fundamental danger facing our international economic order is a collapse of the values supporting global integration and international political cooperation. However, when one considers the recent diplomatic spat concerning China’s exchange rate policy, and the secular shift of economic power away from the industrialized West in favour of the emerging BRIC countries, one is left thinking that geopolitical considerations will outweigh any trend towards moral decrepitness for the foreseeable future.

Ultimately, despite emphasizing many worrying similarities between the current financial crisis and past episodes of economic collapse, the book does not adopt an apocalyptic tone. Instead, much like Voltaire’s Candide, James’ invites us to take history seriously, rather than relying blindly on a misplaced optimism. As the author himself writes, ‘analyzing what went wrong is the key to learning from a cathartic crisis, as well as to preventing a Carthaginian one.’