The 2022 Globie: Money and Empire
The 2022 Globie: Money and Empire
by Joseph Joyce
Every year we name a book the “Globalization Book of the Year” (aka the “Globie”). The prize is (alas!) strictly honorific and does not come with a monetary award. But announcing the award gives me a chance to draw attention to a recent book—or books—that are particularly insightful about globalization. Previous winners are listed at the bottom of the column (also see here and here).
This year’s recipient is Money and Empire: Charles P. Kindleberger and the Dollar System by Perry Mehrling, Professor of International Political Economy at the Pardee School of Global Studies of Boston University. The book is an intellectual biography of Charles Kindleberger, who came to MIT in 1948 after having served at the U.S. Treasury, the Federal Reserve Board, the Bank of International Settlements and the U.S. Department of State. He was the author of a number of articles and books on international macroeconomics and economic history that have retained their relevance long after their initial publication date. In his work he often focused on the policies needed to achieve international stability in a world of different national currencies and policies. He had a insightful perspective on the circumstances that led to the Great Depression, and what needed to be done to avoid a repeat of that catastrophic occurrence.
Among the topics that Mehrling covers is the evolution of Kindleberger’s views on the global economic role of the dollar. The dollar became the international reserve currency under the Bretton Woods regime, which was designed to avoid a repeat of the relative chaos of the 1930s. Foreign central banks held dollars to stabilize the value of their currencies, while the U.S. stood ready to exchange these dollars for gold. What had been a dollar shortage in the period after World War II became a dollar glut in the 1950s and 1960s, however, and the stability of the link to gold was questioned by Robert Triffin and others.
Kindleberger, on the other hand, believed that the dollar was serving an important international function as a key currency, as the pound had done in the pre-WWI ear. The responsibility of the U.S. was to set monetary policies that took account of the state of the world economy. In 1966, he joined with Walter Salant and Emile Despres in writing an article for The Economist, “The Dollar and World Liquidity: A Minority View,” which advanced the view that the U.S. served as the “world’s banker,” i.e., as a financial intermediary with respect to Europe that issued short-term deposits and invested long-term capital around the world. The result was an unplanned but functional international monetary system. In that perspective, gold was an unnecessary distraction.
The debate over the architecture of the international monetary system seemed to end when Richard Nixon terminated the exchange of gold for dollars in 1971. The U.S. and the European nations also began the transition away from fixed exchange rate regimes, although the Europeans would move to their own “fixed currency” with the euro. But the dollar did not recede into the mix of the international monies. The end of Bretton Woods also meant the end of the acceptance of capital controls, and capital began to flow more freely, first among the advanced economies and then to the emerging market nations. Private capital flows rose in importance in financing corporate and government debt, and in the cases of external finance these debt instruments (particularly of emerging market economies) were denominated in dollars.
By the 2000s the existence of a “global financial cycle”, based on U.S. monetary policy, became widely accepted. The dollar was indeed the international currency, although this was decided by private markets as much as governmental decrees. Pierre-Olivier Gourinchas of UC-Berkeley and Hélène Rey of the London Business School, in explaining the central role of the U.S., updated the 1966 title given to the dollar by Kindleberger and his associates to the world’s “venture capitalist.”
One of Kindleberger’s most well known contributions came from his analysis of the Great Depression. Previous work usually placed the blame on the outbreak and/or duration of the crisis to misguided national policies. Kindleberger realized that there was an international dimension: the lack of a country that acted as a leader in providing the international public goods needed for stability. These included maintaining an open market for distress goods, providing long-term lending and overseeing a stable system of exchange rates, ensuring the coordination of macro policies among nations and acting as a lender of last resort. In the 1930s Britain was no longer able to act as the global leader, while the U.S. was not willing to accept that roel. Kindleberger’s insight became the basis of a body of work known as “hegemonic stability,” one of the tenets of international political economy.
Kindleberger offered yet another perspective on financial instability in his Manias, Panics and Crashes. As the title implies, the book is an account of financial crises dating back over time and their common elements. The book was first published in 1978. Robert Aliber took over the job of updating the book after Kindleberger’s death, and the latest edition (the eighth) has Robert N. McCauley as the newest co-author.
In the book Kindleberger extended Hyman Minsky’s model of financial instability, which was a domestic model, to include an international dimension. Minsky had proposed that credit expansion and contraction followed a cycle of initial displacement, boom, euphoria, profit taking, and panic. In a global context, this cycle can be amplified by short-term international capital flows, that increase the amount of credit that is available during the early stages of the cycle. But the money is rapidly withdrawn by foreign investors when doubts arise about the solvency of the projects they have financed. The withdrawal of foreign capital exacerbates the instability of the last stages of the cycle. Kindleberger’s adaptation of Minsky’s work proved to be remarkably prescient during the emerging market economies’ crises of the 1990s, such as the Asian crisis, as well as the global financial crisis.
Mehrling, therefore, has done a valuable service in explaining Kindleberger’s contributions to our understanding of the global economy. Because his analyses were not based on mathematical models or econometric testing, Kindleberger did not receive the same degree of respect as did his colleagues at MIT and elsewhere who used these tools. But the passing of time demonstrates that Kindleberger possessed a keen understanding of how capital and credit flows functioned, and the need for some form of governmental oversight. Any lack of attention to this work at the time when Kindleberger was active tells us more about the blindfolds of economics than it does about Charles Kindlberger.
“Globies”
2016 Branko Milanovic Global Inequality
2017 Stephen D. King Grave New World: The End of Globalization, The Return of History
2018 Adam Tooze Crashed: How a Decade of Financial Crises Changed the World
2019 Branko Milanovic Capitalism, Alone
2020 Tim Lee, Jamie Lee The Rise of Carry
and Kevin Coldiron
2021 Anthony Elson The Global Currency Power of the Dollar
Jeff Garten Three Days at Camp David
Thanks. Will be adding that to my burgeoning reading list.
For some reason, I am unable to post an excerpt from a NYTimes review of the blogography. I posted carefully to no avail.
Thank you.
Trying to post the reference link:
https://www.nytimes.com/2022/11/16/opinion/dollar-currency-economist.html
November 16, 2022
The Economist Who Foresaw Our Global Economic Order
By Peter Coy
Evidently the NYTimes.com reference link will not post:
November 16, 2022
The Economist Who Foresaw Our Global Economic Order
By Peter Coy
There are well over 100 currencies, from the Angolan kwanza and the Bhutan ngultrum to the Uzbekistan sum and the Vanuatu vatu. Is that the right number for the global economy? Not really. A multiplicity of unpredictably fluctuating currencies discourages trade and investment by injecting uncertainty into business decisions.
Charles Kindleberger thought there should be one world currency, and he had a candidate: the U.S. dollar. He argued that there would be more trade, cross-border investment and prosperity if all nations either adopted dollars (as, say, Ecuador has) or tied their currencies to the dollar at a fixed exchange rate, which has almost the same effect. As we’ll see in a minute, he has at least partly gotten his way.
Kindleberger’s one-money philosophy made him an outsider in academia even though he spent decades teaching at the Massachusetts Institute of Technology and educated a future Nobel laureate, Robert Mundell. He sparred with Milton Friedman, the great monetarist who in 1953 wrote a paper titled “The Case for Flexible Exchange Rates.” He also disagreed with Friedman’s nemeses, the Keynesians, who worried that nations wouldn’t be able to fine-tune spending and taxing policy for domestic conditions if they had to keep their currencies in sync with the dollar.
Any hope for Kindleberger’s vision to come true seemed to be smashed when President Nixon ended the convertibility of dollars into gold in 1971 and abandoned attempts to stabilize exchange rates in 1973. His Treasury secretary, John Connally Jr., told the world: “The dollar is our currency, but your problem.” Kindleberger called Nixon’s abdication of America’s central role in the global monetary system a “crime” and worried that unstable exchange rates would dry up long-term investment by rich countries into poor ones because of uncertainty and turbulence.
Perhaps surprisingly, though, the world today is closer to Kindleberger’s vision than he or his intellectual opponents could have imagined. Although the United States’ share of global domestic product has shrunk since the aftermath of World War II, the dollar continues to play a dominant role in financial flows. “Around half of all cross-border bank loans and international debt securities are denominated in U.S. dollars,” a report by the Bank for International Settlements said in 2020. Not only that, the report said, around 60 percent of the world’s official foreign exchange reserves are in dollars, and around 85 percent of foreign exchange transactions involve the dollar against some other currency.
What’s more, the Federal Reserve has become in effect the world’s central bank: When the Fed raises rates aggressively, as it’s doing now, other central banks tend to follow suit. Yes, there are many more than 100 currencies, but many of them are pegged in one way or another to the dollar, or to a lesser degree the euro, the British pound or the Chinese yuan. The central bankers who oversee those currencies don’t exactly coordinate monetary policy, but they do unofficially seek to avoid destabilizing fluctuations in exchange rates. (Although lately the dollar has been exceptionally strong.)
So Kindleberger, it seems, was ahead of his time. He is the subject of a new book, “Money and Empire: Charles P. Kindleberger and the Dollar System,” by Perry Mehrling, a professor of international political economy at Boston University’s Frederick S. Pardee School of Global Studies….
Directly related:
https://www.nytimes.com/2023/07/07/opinion/dollar-strength-reserve-currency.html
July 7, 2023
Why the dollar is still everywhere
By Paul Krugman
The U.S. dollar is, in a real sense, the money of moneys — that is, in many ways it is to other national currencies what money in general is to other goods and assets. Most of us rarely engage in barter; we sell stuff for dollars, then use those dollars to buy other stuff. Similarly, a large share of international transactions, especially in financial markets, involves payments in dollars rather than in local currencies.
Since the dollar is being used as a weapon to an extent that is unprecedented since the Nixon administration adopted a dollar standard, this retrospective strikes me as especially important. How effective can dollar sanctions be expected to be from here?
“Kindleberger’s adaptation of Minsky’s work proved to be remarkably prescient during the emerging market economies’ crises of the 1990s, such as the Asian crisis, as well as the global financial crisis….”
The exposure to foreign held debt of fast-growing Asian economies in the middle to late 1990s is very important to remember. Keep in mind as well that very, very little Chinese debt is foreign held, for all the worries about Chinese debt. There will be no Chinese debt crisis.