Forces that undermined globalization:

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  "The End of Globalization: Lessons from the Great Depression," by Princeton Prof. Harold James, provides a wealth of facts and detail about the final collapse of 19th century globalization during the period between the two World Wars. He compares the reactions to 19th century globalization with the reactions to the current period of globalization - recognizing both the startling similarities and the profound differences.
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  The period between the great wars is the main emphasis of this book, but the author also sketches relevant pre WW-I economic developments and crises.
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Even beneficial change can result in resentments and losers - and globalizing periods result in great acceleration in the pace of change.

  The disturbing aspects of change are stressed by James. Even beneficial change can result in resentments and losers - and globalizing periods result in great acceleration in the pace of change. He considers three theories explaining the processes by which globalization is undermined and disintegrates.

1. Limitations of international regulation: The inadequacy of international arrangements and the national agencies dealing with the problems of globalization after WW-I are stressed by James. Along with the backlash forces, he identifies these as primary causes of the ultimate collapse of 19th century globalization. International bodies like the League of Nations and the Bank for International Settlements - the leadership of Great Britain greatly weakened by WW-I - the series of treaty arrangements - the gold standard - and international lending - were international problem solving elements that failed. National agencies and policies like central banks, tariff systems, and immigration controls failed to protect national interests from the stresses of globalization and the consequences of its breakdown.

2. Backlash: Various resentments and the opposition of the losers in the process of change - and the opposition of those simply ideologically opposed to capitalism - generates political efforts to obstruct the flows of international commerce.

3. Self destruction: The Marxist - Keynesian theory of inherent capitalist instability and internal contradiction remains widely popular even today, especially in left wing intellectual circles.

The problems encompassed a set of expectations about what states and societies should do to limit the impact of globalization that put on the political process an increasingly insupportable burden of expectations.

  Today, all three of these theories continue to find intellectual support - pertinent international organizations are under increasing fire - and periodic crises sweep across the financial and economic world. James concludes:

  "that the pre-1914 international economy, prosperous and integrated as it was, contained severe flaws. Such flaws include those identified by O'Rourke and Williamson [in "Globalization and History"], in particular the increased demand for trade protection and the growing hostility in recipient countries to emigration. But the problems went wider, and encompassed a set of expectations about what states and societies should do to limit the impact of globalization that put on the political process an increasingly insupportable burden of expectations."

  James recognizes that the noxious economic and financial impacts of WW-I were major factors in the Great Depression, but he favors the view of O'Rourke and Williamson that the collapse would have occurred anyway, even if there had been no WW-I.

  This view is clearly plausible, but doesn't undermine the view - set forth in FUTURECASTS "Great Depression Chronology" series - that, along with the second and third factors identified above, those WW-I impacts existed and were among the basic causes of the Great Depression as and when it actually occurred. Because of the magnitude and pervasiveness of the WW-I impacts, it is simply unknowable - in the absence of the Great War and its passions - how long the Great Depression would have been delayed and whether international responses to it might not have been more effective and capable of preventing the vast collapse of international commerce that actually occurred.
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  Moreover, it was WW-I that greatly weakened Great Britain and left the United States as the world's primary creditor nation and thus in a position where its protectionist policies could be as devastatingly damaging as they in fact became. The United States - clearly unready for a world leadership role - was undoubtedly the most culpable actor among the many culpable actors in the Great Depression tragedy.

Backlashes and reactions were almost immediately unleashed as powerful vested interests sought the protection of their governments from the processes of change coming from abroad.

Then (as now), the protection of politically powerful agricultural interests played a major role in limiting and undermining globalization.

  The similarities between the 19th century globalization and that of today are striking. So are the backlashes and reactions almost immediately unleashed as powerful vested interests sought the protection of their governments from the processes of change coming from abroad. Increasingly, "social defense" was added to military defense as a primary role of the state. It is indeed arguable that - absent some such protection - the changes of globalization would not have been tolerated at all.
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  During the 19th century period, the gold standard was relied upon to  stabilize currencies, while today, weaker nations use relatively hard but floating currencies - principally the dollar, the euro and the pound - for that purpose. Central banks were established to manage currencies and guide capital flows in desired directions.
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  As it was, trade, capital and migration restraints proliferated, reaching stifling proportions during the Great Depression. Then (as now), the protection of politically powerful agricultural interests played a major role in limiting and undermining globalization. Then (as now), immigration reached proportions that proved socially disruptive, and restrictions were sought. Then (as now), capital flows were influenced by periods of exuberant expectations and suffered from periodic panics that produced economic output collapses comparable in scale to those of the recent Asian Contagion crisis. Short term capital flows, then (as now), were particularly suspect.
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  Then (as now), left wing propaganda myths of incredible stupidity gained widespread favor in intellectual circles, and were invoked in support of anti globalization policies. They believed that a "powerful national and political bulwark alone could contain the evils of an unstable world."

Then (as now), left wing propaganda myths of incredible stupidity gained widespread favor in intellectual circles, and were invoked in support of anti globalization policies.

• But it was governments - not capitalists or evil speculators - that brought on WW-I and its aftermaths - with great war debts and reparations obligations - and the Balkanization of central Europe.

• But it was governments - not capitalists or evil speculators - that brought on the trade war tariffs and other restraints that made it increasingly impossible for the debtor and weaker nations to earn enough from exports to service their debts and finance their imports..

• But it was governments - not capitalists or evil speculators - that incurred vast additional national debts, and failed to maintain the purchasing power of their currencies.

• But it was governments - not capitalists or evil speculators - who were primarily responsible for all the fundamental causes of the Great Depression.

Strenuous international efforts to cope with the resulting financial and economic problems kept proving no better than temporary palliatives

  The financial world was a far less stable place after WW-I than before. As James relates, strenuous international efforts to cope with the resulting financial and economic problems kept proving no better than temporary palliatives during the 1920s - and ultimately broke down in the 1930s.

  "[T]he international political situation in Europe was burdened by an impossible conflict over war debts and reparations. Impossible, because the more credits flowed, the more inextricable the situation became."

The tariffs of the U.S. and its Allies prevented Germany from earning the wherewithal to pay its international debts.

  In the absence of sufficient earnings from foreign trade to service reparations and international debts, it was loans from the U.S. that allowed Germany to pay reparations that funded the war debt payments and recovery efforts of the Allies. However, by the end of the 1920s, this broken financial circle had clearly become unsustainable. It was a broken financial circle in large part because the tariffs of the U.S. and its Allies prevented Germany from earning the wherewithal to pay its reparations and other international debts.
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  Tariffs were not that much higher in the 1920s than before WW-I. However, they were joined by quotas, subsidies and other trade restraints, and they were now imposed on a highly indebted world  - and on behalf of the predominant creditor nation that other nations had to make payments to. Germany fell towards depression as early as 1927.
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  James sets forth his ultimate conclusion - and contradicts it - all in one paragraph.

  "What made the depression the Great Depression rather than a short-lived stock market problem or a depression for commodity producers was a chain of linkages that operated through financial markets. The desperate state of the commodity producers along with the reparations-induced problems of Germany set off a domino reaction (emphasis added). In this sense the depression was directly a product of disorderly financial markets." (But, as James herein states, the disorderly financial markets were directly a product of the problems arising from WW-I financial obligations and the "real economy" collapse of commodity markets and related real estate and bank loan collateral. How could financial panic be avoided or stability be regained under such circumstances without the ultimate default of the unserviceable debts?)

  Indeed, James recognizes that in Canada - where a robust banking system sailed through the Depression without any banking failures - "the depression was transmitted not through the financial system but through trade," and was just as bad as in the U.S. In chapter 3, he recognizes that - repeatedly - falling commodity prices forced commodity exporting nations to devalue their currencies and default on their debts.

  Thus, this is a fine but unfortunately organized book. The detailed account of financial instability, panics and ultimate collapse is related in chapter 2. It extends from p.31 to p.100 and is largely inexplicable until the reader reaches the detailed account of protectionist policies and trade flow and economic problems in chapter 3. The brief mention in the introductory chapter is simply not enough. Reversing the order in which the second and third chapters are read greatly facilitates understanding.

  James certainly does not evade the trade war factors.

  "In the 1930s the world descended into economic nationalism and protectionism. There were competitive devaluations, Autarky and war economy became national goals." (And the international debts were finally removed by the process of default.)

Panic:

The extent of banks' overseas short-term liabilities is now recognized as a reliable early warning sign of imminent financial problems.

  It is a dizzying roller coaster ride, as short term capital - and not so short term capital - desperately searched for places of shelter and opportunity, and then rushed away again - leaving behind collapsed economic activity. Financial instability and monetary collapse repeatedly afflicted various nations and regions.
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  Yet, none of these collapses were irrational. In every instance, these outflows responded to the perception that state and private debts could no longer be serviced and currencies could no longer by sustained - and frantic politicians and financial officials were too inept or simply without the political support needed to deal with the pervasive crises.

  "Fiscal and financial crises reinforced each other: fiscal difficulties led to capital flight, and the withdrawal of capital weakened banks and created a potential or actual fiscal burden."

  But James does not ignore the agricultural policies that caused so much trouble during those years.

  "As in central Europe, Germany, and also the United States, agricultural policy introduced a crucial element of destabilization into [French] fiscal policy."  (Those agricultural policies - including subsidies and trade restraints - caused a hell of a lot more trouble than that!)

  Just as in recent times, as different kinds of weaknesses in different nations were similarly exposed by a contagious financial panic that spread widely outwards from its nation of origin, these panics arose from unsuccessful efforts to maintain fixed exchange rates. But in the 1920s and 1930s, these panics ultimately also involved the major European states - and the United States itself.
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  There are benefits and weaknesses in both fixed and floating exchange rates. Fixed exchange rates enable weaker economic systems to attract capital, but any threat of devaluation exposes them to capital flight and the collapse of the afflicted nation's banking system. The extent of banks' overseas short-term liabilities is now recognized as a reliable early warning sign of imminent financial problems.
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Renewed prosperity depended on quickly and convincingly ending inflation. The fixing of currency exchange rates became an essential - and temporarily successful - part of that effort.

  After WW-I, vast inflationary surges became essential as a means of paying off public and private debts that had reached unserviceable levels during the war. These debts, plus such expenditures as pensions for war widows and crippled soldiers, forced governments to either slash budgets for other services or inflate their debts away. Most of Europe chose inflation.

  "No country could finance a total twentieth-century war through taxation. In every state, the major source of war finance had been borrowing -- either through bond issues or, as governments became increasingly desperate, through short-term issuing of treasury bills."

  But, renewed prosperity depended on quickly and convincingly ending inflation. The fixing of currency exchange rates became an essential - and temporarily successful - part of that effort.

  Efforts to defend a currency weakened by overextended borrowing or other fundamental economic and financial problems is always futile unless the underlying fundamental problems are dealt with. Devaluation may become an essential - but will never even nearly be a sufficient - prescription for recovery.
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  Recovery always depends on reforms aimed at the fundamental weaknesses that undermined the fixed currency. As Argentina has recently discovered, whether under fixed or floating exchange rates, currency stability is an essential - but not nearly a sufficient - precondition to financial stability and economic prosperity. Regardless of whether a nation has fixed or floating exchange rate systems, the reform of fundamental policy weaknesses and the resumption of fiscal and monetary discipline is similarly essential for financial stability and economic prosperity.

Political ineptness:

They resorted to palliative efforts at monetary expansion and budgetary deficits that initially provided some limited relief but that ultimately became contributing factors in the collapse of national finances and currencies.

  There were reparations, war debts, rapidly increasing international debts, trade war levels of trade restraints, agricultural subsidies, and other domestic programs that drove taxes higher and budgets into increasing deficit. As economic activity contracted from a continuous series of interrelated economic and financial hammer blows, political leaders were still unable to bestir themselves to deal with these fundamental causes of the debacle. Instead, they resorted to palliative efforts at monetary expansion and budgetary deficits that initially provided some limited relief but that ultimately became contributing factors in the collapse of national finances and currencies.
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  By 1932, capital was being driven by fear rather than by ambition. As capital sought secure havens rather than profits, interest rates became ineffective as a means of deterring capital outflows. (In a rapidly deflating economic world, profits are no longer necessary. Just preventing loss brings substantial gains in purchasing power.)
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International intervention:

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Debates about whether the gold standard was an optimal system of management of international payments often miss the point that investors demanded such a system.

  Faced with losing primacy to the dollar as the world's principal trading and reserve currency, Britain was forced to stabilize the pound sterling - and did so at the pre WW-I level of $4.86. This effectively brought an end to the post WW-I period of financial chaos, as other nations quickly fixed their currency exchange rates.

  "The gold-exchange standard represented the best way of providing such guarantees of stability as might allow large international capital flows to occur. Debates about whether the gold standard was an optimal system of management of international payments often miss the point that investors demanded such a system, with its stability and its constraints on the operation of sovereign monetary and financial policies. Its attractions lay precisely in the limitations it imposed on policy options."

  The gold-exchange standard forced some semblance of budgetary discipline on political leaders (something that is always in short supply).
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The pernicious influence of Germany's unmanageable reparations and other international debt obligations ultimately undermined all efforts.

  Then, it was the turn of the central banks of the major nations - Britain, the U.S., Germany and France - to attempt the stabilization of international finance. By the 1930s, they were - ineffectively - aided by the under funded and impractically restrained Bank for International Settlements ("BIS"). However, the pernicious influence of Germany's unmanageable reparations and other international debt obligations ultimately undermined all efforts.
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  This first effort to achieve international financial stability through the cooperation of independent central banks thus ultimately failed. This mechanism was not resurrected until proven feasible by the success of the independent German Bundesbank towards the end of the 20th century. (The U.S. Federal Reserve Bank also was finally permitted to exercise true independence by the Reagan Administration.) In the late 1920s, this system had many weaknesses.
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  The central banks had multiple - and increasingly inconsistent - objectives. There is some credible evidence that the raging economic surge and bull market in the U.S. during 1928 and early 1929 was at least in part caused by Fed efforts to lower interest rates to meet needs in Europe, rather than just concentrating on the needs of the U.S.
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  The BIS was quickly overwhelmed by the Great Depression - which also overwhelmed the possibilities of central bank cooperative intervention. For investors, "a growing skepticism about sovereign loans" arose from the multiple currency devaluations and sovereign defaults that began in October, 1930.

  But it was the United States, during the last year of the Hoover Administration and the first year of the FDR Administration, that crucially snubbed belated international efforts led by Britain and France to recognize that WW-I reparations and war debts were not collectible and had to be largely written off.

The collapse of the pound:

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  This demonstrates the extent to which globalization had already ended - replaced by trade war levels of protectionist measures by the middle of the 1920s.

As export prices and asset values declined, loans went bad and collateral became inadequate. Inflows of fresh funds - especially from the U.S. - dried up during 1929, and defaults became widespread.

Because of international ties, as James emphasizes, contagion quickly spread across national borders. Each period of panic was a cascade of financial disaster.

The devaluation of the pound was accompanied by an austerity program that succeeded in restoring confidence, stability and economic activity.

  The growing problems of the various banking and financial systems during the 1920s and on into the Great Depression are reviewed by James. Inevitably, as export prices and asset values declined, loans went bad and collateral became inadequate. Inflows of fresh funds - especially from the U.S. - dried up during 1929, and defaults became widespread. In one nation after another, banking systems collapsed, with disastrous impact on currencies and tax receipts. Foreign debts and German reparations obligations became unmanageable.
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  Because of international ties, as James emphasizes, contagion quickly spread across national borders. Each period of panic was a cascade of financial disaster.
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  James challenges the view - most notably identified with John Kenneth Galbraith - that Britain's decision to peg the pound sterling at the pre WW-I rate of $4.86 was a mistake. (France recognized the financial costs of WW-I by pegging the franc at about 20% of its prewar level.) James refers to analyses based on purchasing power parity that indicate that the pound was actually undervalued by about 60 cents. (It is always wise to be skeptical about any concept arising from the ideologically twisted scholarship of John Kenneth Galbraith.)
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  Instead, he reasonably traces the ultimate collapse of the pound to a tidal wave of banking difficulties flowing from the financial collapses in Central Europe and Latin America. These, in turn, had been undermined by the combined influences of WW-I reparations and war debts, the growing foreign indebtedness subsequently assumed in vain attempts to stay afloat, and the increasing restraints on world trade that made it increasingly impossible to earn the foreign exchange needed to finance international obligations.

  Nevertheless, it remains true that Great Britain was in trouble much earlier than 1931 - losing reserves to France and the U.S. through much of 1929 - and playing a much diminished role as a source of international financing. This is precisely what one would expect from an overvalued currency. James is undoubtedly correct about the major cause of the collapse of the pound, but perhaps Galbraith was not completely wrong on this point.

  Thus, in 1931, Britain ultimately was forced to allow the pound to sharply devalue. Crucially, it was accompanied by an austerity program that produced balanced budgets and currency stabilization at levels low enough to be perceived as sustainable. Thus, confidence was soon restored and funds began flowing back into the City's banks. The result was a restoration of economic activity much earlier in Britain than in the U.S.
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The Great Depression in the U.S.:

Government was hemmed in by the widespread perception that further indebtedness and monetary expansion was actually worsening the problem. Currency devaluation then became an essential - but not nearly a sufficient - solution for the problem.

  Indeed, bold government initiatives during the Hoover Administration all proved ineffective (as did all the later New Deal initiatives - the command economy measures which substantially worsened and lengthened the crisis). Ultimately, government was hemmed in by the widespread perception that further indebtedness and monetary expansion was actually worsening the problem.
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  Thus, ultimately, the dollar was undermined and devaluation became inevitable and necessary. By floating the dollar and other measures, James states, FDR "made a major contribution to ending the bank runs, and with them the U.S. depression."

  This is an obvious overstatement. Banking stability was restored, but the Depression had six more devastating years to run. There was some intermediate pickup in industrial activity, but the entire huge agricultural sector remained blighted as wheat exports - previously over 25% of the market - remained near zero through 1936. Unlike in England, monetary devaluation was accompanied by counter-productive command economy experiments rather than appropriate reforms of the fundamental underlying problems.

   In one nation after another, with economic conditions contracting and national budgets moving inexorably deeper into deficit, banks were undermined and monetary stability could not be maintained. By 1937, all national currencies had suffered substantial devaluations.
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Lessons from the past:

Efforts to maintain fixed currency exchange rates can transmit financial problems among weak nations.

  Maintaining fixed currency exchange rates requires budgetary and monetary discipline - the same discipline required to avoid inflation and devaluation under floating rates.

  During the 1930s, bankers claimed that monetary policy was not to blame for the Depression because it was not capable of affecting economic conditions. James properly criticizes this view. Today, of course, monetary policy has proven very powerful.

  However, James ignores the context of those statements. What was really meant was that effective monetary policies and monetary stability are essential to prosperity - but they are not sufficient. The colossal stupidity of protectionist trade policies and political policies affecting international obligations had caused such contraction of international trade and domestic commerce and loss of asset values, that monetary expansion was rendered helpless even as a temporary palliative. 

Tariffs, trade policy, and the collapse of international trade:

  Pres. Wilson's efforts to remove trade barriers and facilitate international trade is properly commended by James. This provided an island of enlightened self interest amidst a rising sea of tariffs, quotas, hygiene requirements and other protectionist measures. Succeeding Republican administrations quickly undid all Wilson's good work.
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  Here, James notes that "Britain suffered far more than any other exporter in the 1920s from the consequences of import substitution." 
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  There are three types of tariffs: Those designed like ordinary taxes to obtain revenues - those designed to encourage import substitution in favor of particularly desirable industrial sectors - and those that broadly respond to domestic protectionist pressures. James notes the argument that - in a protectionist world - all major economic powers are forced to play the protectionist game at least to provide bargaining chips for trade negotiations, while small nations are so dependent on international trade that they have no choice but to remain open.
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  James notes the failure of international efforts to reverse protectionism - most notably in 1927 and 1933 (but does not mention the special culpability of United States policy in those failures). Bilateral trade agreement efforts initiated after 1934 by Sec. of State Cordell Hull were "painfully slow."
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World War I:

Foreign nations reasonably accused the U.S. of hypocrisy "in failing to open American markets while insisting that the rest of the world service debt by exporting."

  Agriculture - a much bigger economic factor then than now - was an even more powerful protectionist force on continental Europe. Agricultural interests readily joined forces with protectionist manufacturers.
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  Germany joined the tariff-raising game in 1925 after Versailles Treaty restraints on its trade policy ended. It quickly adopted significantly higher tariffs than before WW-I. However, agriculture tariff and non tariff restraints really took off in 1929 and thereafter (when the world was awash in grain as a result of record 1928 grain harvests). By early 1930, Europe was self sufficient in grain. (This caused a collapse in world commodity prices in the Spring of 1930 that played a major role in the aborting of the promising business revival in the U.S.)
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  Then, there was the Balkanization of Central Europe. "The extension of sovereignty to new states - - - stimulated already latent protectionism." Poland and the Danubian states "Balkanized" central European commerce. Once restraints were raised in one state, others had to follow to provide bargaining chips for "Most Favored Nation" trade agreement negotiations.
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  However, the picture James presents is that - by the Fordney-McCumber Act of 1922 - the U.S. became especially culpable. Foreign nations reasonably accused the U.S. of hypocrisy "in failing to open American markets while insisting that the rest of the world service debt by exporting." Most major European powers did not move above pre-WW-I tariff levels until later in the 1920s or after the start of the Great Depression. (While the U.S. levels after 1922 were also similar to pre WW-I levels, they were clearly too high for the world's only major creditor nation.)
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  James supports the view that free trade depends critically on the active support of a dominant nation - Britain before WW-I, and the United States after WW-II. After WW-I, "international relationships lapsed into anarchy."
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Perversely, widespread use of Most Favored Nation ("MFN") clauses in trade agreements blocked bilateral efforts to reduce restraints because any individual agreement would automatically extend benefits to nations that had made no concessions.

  The Geneva trade conference in 1927 called for reductions in trade barriers that were already recognized as too high. Perversely, widespread use of Most Favored Nation ("MFN") clauses in trade agreements blocked bilateral efforts to reduce restraints because any individual agreement would automatically extend benefits to nations that had made no concessions. Perversely, MFN clauses were a powerful incentive for increased restraints even against MFN partners.
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  Then, the Hawley-Smoot Tariff of 17 June, 1930, instigated a vast smothering round of trade restraint increases. In 1931, the financial crisis in England forced devaluation of the pound and pushed Britain sharply into the protectionist camp. Favored was trade with the Empire. France followed a similar course. Quota systems began to gain in importance, and became pervasive throughout Europe in the early 1930s. Government-created monopolies were also widely used, as were exchange controls that discriminated against specific imports.
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  James concludes that the devaluation crisis of Sept., 1931, and the economic depression provided all the political support needed for the triumph of internal protectionist forces in the British Empire. The U.S. Smoot-Hawley Tariff was just a makeweight in the argument. (However, U.S. trade policy played a major role in the economic conditions that resulted in the Great Depression and devaluation of the pound.)
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Protectionists in Britain blocked consideration of trade liberalization, while the U.S. would not even consider either formal or informal discussion of war debts or disarmament. Germany was totally committed to agricultural protection.

  At the Lausanne reparations conference in 1932, and in 1933, trade agreements were blocked by the failure to reach agreements on debt relief and currency stabilization - while agreements on debt relief and currency stabilization were blocked by inability to reach agreements on trade liberalization. Actually, protectionist political pressures in the U.S. and in Great Britain and its Empire doomed these efforts.

  "The conference resembled nothing so much as an Agatha Christie novel in which there are too many suspects in a murder -- all with highly plausible motives and unconvincing alibis." (But, without leadership from the U.S., success was not possible.)

  By the time FDR became President, protectionists in Britain blocked consideration of trade liberalization, while the U.S. would not even consider either formal or informal discussion of war debts or disarmament. Germany was totally committed to agricultural protection. FDR abandoned debt and trade negotiation efforts in favor of New Deal command economy experiments (almost all of which were dismal failures). 
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Sec. Hull and reciprocal trade agreements:

Hull asserted that "airtight" protectionism was the principal cause of Depression unemployment.

  "American foreign policy can no longer ignore the fact that since 1914 we have changed from a debtor and small surplus Nation to the greatest creditor and actual or potential surplus-producing Nation in the world."

  In 1934, he asserted that "airtight" protectionism was the principal cause of Depression unemployment.
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European trade agreements:

  Exchange controls and managed trade produced a vast hodgepodge of complex and inconsistent results. International trade declined in absolute terms, and became concentrated within economic blocs. "Both moves are associated with welfare losses, since the substitutions are more costly than the preferred options expressed in the free system."
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  By 1938, the German "Reichsmark bloc" was defined by 25 bilateral agreements, mainly with poorer and less developed producers of raw materials and commodities. Britain and France had their imperial systems and monetary blocs. Exchange controls and even barter arrangements played major roles in trade management schemes.
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  Of course, the Soviets pursued an entirely different course. Stalin's brutal collectivization program provided the Soviet Union with two years of substantial grain exports in 1930 and 1931 - at the expense of widespread famine. These two years were the peak years of Soviet imports of industrial equipment for their industrialization program. Afterwards, these imports declined precipitously and the Soviets increasingly depended on their own resources for industrialization.

  James omits that, by 1932, collectivization had so savaged Soviet agriculture that even Stalin had to begin importing substantial amounts of grain. Soviet industrialization was sufficient to support the major armaments industry with which it fought of the Nazis in WW-II, but there was little capacity left over for the benefit of the Soviet people - and its agriculture never recovered.

The "trade impasse" that had developed from increasingly protectionist trade restraints had to be resolved if there was to be any "hope of restoring better financial relations."

  James clearly gets it right when he concludes this third chapter.

  "Tariffs in the 1920s had reduced the rate of growth of international trade, but the availability of capital flows to finance major trade imbalances removed some of the most acute constraints on development [during the 1920s]. These constraints became immediately apparent once capital flows were reduced [in 1929], and the push to protection gathered momentum because the unavailability of new capital made the costs of protection for the national economy very much less damaging." (Those 1920s capital flows came principally from the U.S. Why pay your Wall Streets debts if you can no longer raise money on Wall Street, anyway?)

  He notes the initial link between debt crisis and exchange controls. Tariffs distorted trade patterns in the 1920s, and bilateral trade agreements and barter arrangements were the primary distorting factors in the 1930s. But these would not have existed without the protectionist tariffs and debt defaults. James agrees that the "trade impasse" that had developed from increasingly protectionist trade restraints had to be resolved if there was to be any "hope of restoring better financial relations."
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  On the other hand - typical of the chain of causations in economics - the collapse of world finance then in turn resulted in a further substantial collapse in the world commerce that took place outside the systems of bilateral agreements, quotas, exchange controls and other means of preventing imbalances in trade accounts. "The need to balance external accounts brought governments directly into the regulation of trade relations."
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  James concludes this segment of his book with a brief overview of post WW-II globalization developments.
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Immigration:

Nationalism supplants international capitalism:

  It is always easier to use the speculators as scapegoats than to accept blame and correct the policies causing the capital flight.

  As autarky replaced internationalism as a guideline for policy, central banks shifted from facilitating international capital flows and commerce to implementing increasingly complicated schemes for exchange control.
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  As an example, James sets forth in considerable detail the pertinent events in France. First, the central bank was inundated by flight capital seeking safe havens from elsewhere, and then struggled with massive capital outflows fleeing the increasing political, social, economic and military instability in France. Ultimately, France had to choose between military preparedness in the face of the growing German threat and financial weakness that made her increasingly vulnerable to German financial influence.
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Economists thus - frequently - provide prime illustrations "of how the economic lessons of the Great Depression were mislearned, with often disastrously inappropriate conclusions." In the years and decades that followed, many continuously predicted economic collapse and return to Depression, completely missing the post WW-II surge in recovery and prosperity.

  France tried capital controls - which of course failed quickly and led to devaluation - which also failed to restore stability. The burdens of rearmament had been added to the existing policy weaknesses which had still not been addressed.

  "The fundamental cause of French instability, the massive public deficits, partly the result of armaments spending, remained. and consequently there was little chance of a long-lasting stabilization."

  By the second half of the 1930s, European nations were being driven into bankruptcy (persistent currency devaluation) by war preparations. On the eve of WW-II, France was forced to cut defense spending.

  "It was only after two devaluations and the removal of the Popular Front's major social legacy [that stability returned and] greater sums could be devoted to armaments without causing an immediate panic. But this was in 1939, and it was then rather late."

  In the 1930s, "unstable capital flows" were blamed for transmitting depression from one nation to another. Today, economic historians place the blame on fixed exchange rates as providing "the chief systemic vulnerability."

  Both of these explanations are, of course, correct in the shallow sense of playing a role in the mechanisms of instability. However, they were and are profoundly wrong because they fail to explain the fundamental causes that set these mechanisms in motion.

  Economists thus, frequently, provide prime illustrations "of how the economic lessons of the Great Depression were mislearned, with often disastrously inappropriate conclusions." In the years and decades that followed, many continuously predicted economic collapse and return to Depression - completely missing the post WW-II surge in recovery and prosperity. James gets it right.

  "At this time the nation-state with its control mechanisms was supposed to provide guarantees against threats from the world economy. But was not the protection more dangerous and destructive than the threat?"

Prospects for today's globalization:

 "Experiments in heterodoxy are ever-shorter lived."

 Today, globalization continues and spreads -- because there is no alternative.

  "Experiments in heterodoxy are ever-shorter lived. While the Mitterrand government experimented for two whole years from 1981 to 1983 with a French alternative to Reaganomics and Thatcherism, a similar experiment in a new ideology of demand management lasted only five months in Germany in 1998-99 with the brief tenure of Oskar Lafontain as finance minister."

The difference, today, is not the absence of periodic financial crises, but the strength of internationalism.

Today, globalization undermines state controls, people despair of the effectiveness of state intervention, there is "a reduction in the space for political self-assertion and for privileged elites."

  Fears (and ideological hopes?) of a new Great Depression continue to be frustrated.
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  James views the Great Depression as arising from a "contagious financial collapse in a well-integrated world," that culminated in 1931 and led to a "subsequent trade response." Yet, he quickly notes that all this took place in an economic environment dominated by a "backlash against globalization that had been developing progressively since the last third of the nineteenth century." The difference, today, is not the absence of periodic financial crises, but the strength of internationalism.

  This raises the obvious question - raised repeatedly above - of whether the cascading financial panics would even have occurred - or would have been nearly so intensive and extensive - but for the increasing restraints placed on world trade, finance and migration. James does not directly address this question, but at various points, amply recognizes the facts on which the question is based.

  Another difference is that the 19th century industrial revolution greatly strengthened the state, and people thus readily turned to the state for help with their problems. Today, globalization undermines state controls - people despair of the effectiveness of state intervention - there is "a reduction in the space for political self-assertion and for privileged elites" (and the world's market oriented nations obviously prosper).

"The old politics emphasized the doable, the scope for initiative. The new politics is about the limits on action."

  James notes that needed economic reforms have generally been adopted reluctantly and in apparent surrender to global financial and economic pressures.

  However, the demise of "big government" in the U.S. has always been more myth than reality - as the current Bush Administration destructively surrenders to protectionist pressures in favor of outmoded steel mills.

Economic prosperity is threatened in Europe and Japan by politically established rigidities. Palliatives (like Keynesian budgetary and monetary policies) are used to delay grappling with fundamental problems until they become overwhelming.

  Globalization has its enemies - those hurt by rapid change - and various ideologues passionately professing irrational drivel. It also has its many imperfections and crises because of the imperfections in applicable government and private policies. Economic prosperity is threatened in Europe and Japan by politically established rigidities and political and market inertia. Palliatives (like Keynesian budgetary and monetary policies) are used to delay grappling with fundamental problems until the palliatives become a major part of the problem and the problems become overwhelming.

  "These states rely on their credibility -- on the confidence of the markets -- to such an extent that they can prolong the outbreak of severe fiscal crisis for the longest time. This perception stops politicians from reacting and innovating, even when the diagnosis of the malaise is unmistakable. The markets are less inclined to punish deficits and irresponsible behavior because market-makers are conventional and do not like to think the impossible. The result is that when and where crises occur here, they will be late and appear completely insoluble within the confines of the existing political order and current political expectations."
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  "The reserve of confidence in Europe creates a blockage of reforms."

There is no "special rule" for development. The same economic principles apply everywhere - whether in Europe or in Africa, policy can undermine development.

  In the poorest economies, on the other hand, there is a total lack of confidence in government policies -- and a total lack of investment and economic development. There is no "special rule" for development. The same economic principles apply everywhere - whether in Europe or in Africa, stupid political policies can undermine development.
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  Today's international institutions are much stronger and more assertive than in the 1920s. However - as they are increasingly recognized as important players - they become increasingly tempting targets for influence by various ideological and political forces. James warns of the "expectations trap."

  "The more the IMF is seen to extend its mandate, the more it will be expected to do; and inevitably also the less it will be able to live up to the demands. The consequences of this perception of failure is already clear in the mounting skepticism, even in the mainstream of political life, about the continued viability of the IMF. In order to counter such opposition, it will need to resist institutional overstretch: to ensure that its mandate is limited, clearly defined, and subject to an assessment of results."

The depression era offers a grim warning.

  "The international system -- the politics of reparations and war debts, and the mechanisms devised to handle those political problems -- became demonized as the source of international disorder. It was the unilateral protectionism of the United States in the Hawley-Smoot tariff that gave the most powerful of the early warning signals to financial markets in 1929 and helped to precipitate the financial contagion that provided the trigger mechanism in the collapse of globalization."

Today, globalization opponents may influence particular policy initiatives, but they still cannot offer any credible alternatives (because there are none).

  Other problems today include:

• The "moral hazard dilemma." The existence of institutions - and governments - that are too important to be allowed to fail, induces reckless lending.

• International aid all too often rewards and props up noxious despots.

• Conditionality blocks trade liberalization by invoking "fair trade," "labor standards," and "environmental considerations." These are pretexts to discriminate against poor nation exports by raising the cost of their production.

  The fact that a more sophisticated world today has much lower expectations for international agencies like the UN, the WTO, the World Bank, and the IMF offers some protection against overblown expectations, disillusionment, and retreat into national solutions - especially since the same skepticism is directed at the capabilities of national institutions. Today, globalization opponents may influence particular policy initiatives, but they still cannot offer any credible alternatives (because there are none).