Economic history offers many cautionary episodes, but none quite so striking as the one pictured here: Beginning in 1929, the value of world trade started to contract until, four years later, it amounted to a mere one-third of what it had been. An unlucky constellation of global events--deflation in commodity prices, the October stock market crash, and bank failures in the U.S. and Europe--had set the global economy on its downward course. But it was a series of policy mistakes--too-tight money, competitive devaluations, new and onerous tariff barriers--that plunged the world into depression and made the struggle for recovery so long and painful. Ever since, generations of economists and policymakers have vowed that never again would world trade implode and output shrink as happened in the 1930s.

So why the graphic reminder? Let's be clear. Global depression is not even on the horizon, much less an immediate prospect. But within the past few months, emerging Asian markets and their economies have tumbled like dominoes, the Russian economy has cratered, and now Latin countries are suffering capital flight. The once mighty Japanese economy remains comatose. In Washington and Moscow, leaders are under fire. Around the world, investors have gone on strike, dumping high-risk paper and, more recently, trimming their sails on Wall Street. Commodity prices are at 20-year lows. It has been several years since the global economy seemed quite so vulnerable. There's little room for error at times like these. A few missteps, and problems can turn into disasters.

FOUR POINTS. Here's what needs to happen. First, the Group of Seven nations should coordinate a cut in short-term interest rates in an explicit move to bolster the global economy. This won't mean much in Japan, where already-low rates are pushing on a string. It won't delight the Canadians, who are trying to prop up their currency, or please the Germans, loath to appear undisciplined. Several regional Federal Reserve chiefs still fret that inflation might rear its head in the U.S., while some folks think lower rates would merely be a sop to Wall Street. But all this is myopia, pure and simple. Growth is stalled in one-third of the global economy. The G-7 should demonstrate leadership and cut rates now.

Next, some working solutions must be found to alleviate the strains on global finance. This means Congress should provide the $18 billion in funding owed to the International Monetary Fund, pronto. But it also means remaking the IMF. The organization stumbled badly over the past year in recommending painful austerity programs to its borrowers. It needs to change its tune. Instead of plumping for largely unachievable macroeconomic goals, a reconstituted IMF, stripped of its bureaucracy and populated by a few more green-eyeshade types, should be actively reviewing and assessing the balance sheets and risk factors of developing nations. Lending could then be directly linked to creditworthiness.

This would attack the global capital problem at its source by making it harder for emerging nations to issue short-term debt at will, which in turn would give the hot-money types fewer outlets. Interventionist solutions for dealing with the tidal waves of global capital are not especially desirable. Capital controls are subject to abuse and circumvention, while foreign exchange controls, such as those Malaysia recently announced, amount to an opting out of the global financial system.

Third, the temptation to roll back the market-opening moves of the past two decades must be squarely resisted. Thanks to the slowdown in Asia, the U.S. trade deficit is already widening as America loses export markets. In Europe, preoccupation with monetary union could easily spill over into a more inward-looking stance, one that's far less amenable to trade with Asia and Latin America. The U.S. still possesses an extraordinarily healthy and well-balanced economy, and it can easily play the lone locomotive of the global economy for a while if it must. But it cannot do so indefinitely, and as the trade deficit climbs, protectionist sentiment is sure to grow.

Finally, policymakers have to jettison their worries about inflation. The only inflation the U.S. has suffered is in stock prices, and that froth appears to be subsiding. So here's a recommendation that's simple but of overarching importance: Before they make a move, leaders around the globe should put every policy initiative to a growth test. Does the proposal promote economic growth, or is it restrictive? Will it have deflationary consequences? As history so amply illustrates, it's policy mistakes that turn slowdowns into depressions.

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