Seven Crashes: The Economic Crises That Shaped Globalization

by Harold James
(Yale University Press, 2023)


You may have heard history described something like this: the stories of wars and their outcomes. And when it comes to economic history, you may have heard much of the same. Of course, you don’t have to know much about history to know how these two do often overlap. But they’re not always so intertwined. 

Economic historian Harold James, who holds an endowed chair at Princeton University where he has taught since 1986, describes an economic crisis as a “turning point” or “a moment of decision.” One way to understand the world economy is to look at how these seismic events have led to each other.

In his new book, Seven Crashes: The Economic Crises that Shape Globalization, James traces seven economic crashes and how they contributed to the globalized economic world. In May, he talked through each of them with Common Good. 

1845 to 1852 

The Great Famine 

Also called the Irish Potato Famine, the Great Famine occurred when Ireland’s potato crop caught a disease and failed in successive years. 

The Great Famine demonstrated that Europe couldn’t feed itself. It also demonstrated the revolutionary concept of using existing technologies such as the railroad and the steamboat to produce big networks across national borders. If there hadn’t been the global expansion of trade, the famine would’ve been an old style demographic, Malthusian crisis. Every pre-modern society went through these cycles, and the 1850s was the moment we broke away from Malthus. The famine launched the idea that countries need to open up globally. And if you do, you also need to have agreements, conventions, and regulations about many, many different things, you need something in order to manage this more global connectedness.

1873 to 1879 

The Financial Crisis of 1873 

Also called the Panic of 1873, this crash triggered an economic depression in Europe and North America. (This is the event from which we get the term krach, anglicized as “crash.”)

This is probably the least obvious of the seven crises I discuss, but it’s important because it’s the world’s first simultaneous, purely financial crisis. It’s a crisis that has an Austrian beginning, followed by a big American echo. Why I included it was that it produced a different kind of economic thinking and response. What the 1870s did was to push a new kind of economic thinking that is the basis of modern economics, marginalist thinking. Prices are determined at the margin, relative prices move against each other very sharply, and there isn’t a simple aggregate, just-price system that defined the thinking of the world before the 1870s. I find it striking that simultaneously in Britain, in France, and in the French-speaking world and in the German-speaking world, there are these great economists who invent marginalism. The transformation of the 1870s is really about the way in which we understand financial crises and their interaction with the world. In this case, and in contrast to the shock of the 1840s, it isn’t a negative supply shock, but a positive supply shock, because this is when the price-reducing effects of globalization are beginning to show.


1914 to 1918 

The Great War

The Great War, the First World War, was fought across the world between two massive coalitions: the Allies and the Central Powers. 

The interest for me in the First World War was that it’s a mixture of a supply shock and a demand shock. It has similarities with the supply shocks in the 1840s and in the 1970s. Because there’s an overwhelming national priority in wartime, governments have to pay out more money, and they use central-bank money creation. There’s a fiscally driven inflation in every belligerent that differs in extent. In this case, it’s more pronounced the further east you go: It’s worse in Russia than in Austria and Germany, less so in France than in Britain, and even less than that in the United States. The German experiment produces the world’s most famous hyperinflation, and the person who’s really responsible for it is Germany’s foremost monetary economist Karl Helfferich. He was an economist who then became a banker, who then became a civil servant and was the treasury secretary during the First World War. He had a simple philosophy that you can make someone else pay for war — if you win the war, you impose the costs on the loser. This is the big example of thinking we can deal with our problems by punishing others.

1929 to 1939 

The Great Depression

The Great Depression was an economic shock, a period of economic depression that followed a major fall in stock prices in the United States.

The Great Depression is a simple demand shock. There’s plenty of supply, but the problem is that demand has crashed, fundamentally because of financial panics. The lesson — at least in retrospect — is quite obvious: You have to think in terms of macro aggregates. No longer can the world rely on the kind of marginalist thinking. It’s no longer Leon Walrus or William Stanley Jevons or Carl Menger. The big figure of the depression, and the man who has the answers, and also the person who sells those answers on an international stage in 1944, is the British economist John Maynard Keynes. It’s important to see that demand shocks have this characteristic, that the solutions to them are really big, big macro policies.

1965 to 1982 

The Great Inflation

The Great Inflation was an extended period of economic inflation, the defining macroeconomic period of the second half of the 20th century. 

In the ’70s, the U.S. government thought that it could insulate the American people from the consequences of the oil price increases. What began as a nationally oriented approach  started fundamentally with Nixon, with the price ceilings and price controls, but the same measures also occurred in Britain. You have a parable for responses to crisis in that Japan and Germany behaved very differently: they allowed the higher oil prices to translate domestically into higher prices that hit consumers in a way that the United States didn’t. The consequence was that Japanese and German automobile producers produced fuel efficient cars, while in the United States for a long time the big automobile companies were still turning out gas guzzlers. There was no U.S. incentive to have a fuel-efficient car, because the gasoline prices were still low. And then when the second round of price increases happened after the Iranian Revolution in 1979, it’s clear that the first American response, holding down consumer prices, had failed. 

It’s worth noting that this is not a particularly partisan story in that the Carter administration starts deregulation and Ronald Reagan really pushes deregulation further. They’re both seeing that attempts by governments to insulate from the world economy just can’t work.

2007 to 2009 

The Great Recession

The Great Recession was a global economic downturn that devastated world financial markets as well as the banking and real estate industries. 

Policy makers reacted, on the whole, sensibly to 2008. There was a coordinated fiscal push across the world in the early stages of the global financial crisis, and when that lapsed there was a monetary policy action by the major central banks. Governments basically got it right in the global financial crisis, but they discovered something rather painful: Coordinated fiscal policy expansion became very, very controversial because the problem started as a banking crisis, and then, in order to stop the collapse of the financial system, you need to support the banks. What taxpayers see is governments supporting the people who are responsible for the crisis, and they’re very angry about that. And they’re not just angry about that — that was probably one of the greatest surprises in 2010 — people were also angry about support for other big industries. Support for the automobile industry was unpopular. Everything to do with fiscal expansion becomes poisonous after that.

2020 to 2022 

The Great Lockdown

The Great Lockdown is an ongoing global economic recession caused by the shuttering of economic activity in response to the COVID-19 pandemic. 

I’m arguing for what is sometimes called techno-optimism. What the pandemic did was to push some kinds of development that had been there already for quite some time. For instance, you could certainly do video calls before 2020, but now that has become commonplace. The application of the mRNA technology to the vaccine, again, was older technology. Suddenly you discover that it can be developed very quickly against, in this case, the coronavirus. Then you see it can actually be used against common cancers. Fundamentally, the lockdowns gave a tremendous push to everything digital, including artificial intelligence. By now we can really see the extent to which this is a deeply productivity enhancing crisis. When we’re thinking about why middle-class Americans are squeezed — because of increased housing costs, increased education costs, increased medical costs — in a way, what happened in the pandemic offers an answer to all three of them. The medical technology is revolutionized. Education is also being transformed by digital technology. And in terms of housing, you actually don’t need to live in New York City or San Francisco in order to be productive.