Growing Pains: Charles P. Kindleberger and the Dollar System

Tbilisi, Georgia. Photo by Evgeny Ndn via Unsplash.

By Perry Mehrling

I wrote Money and Empire: Charles P. Kindleberger and the Dollar System to learn about global money: where it came from and where it’s going. For me, when I want to learn something, I look around for someone who already seems to have a good handle on it, and for global money, that person was esteemed 20th century economist Charles P. Kindleberger. This book is my attempt to learn what Charlie – as his friends called him – knew and how he knew it, in order to use that knowledge for present day problems. The book tells the story of Charlie’s life in parallel with the story of the dollar.

Born 1910, Charlie came into the world at just about the same time as the Federal Reserve (the Fed), which was founded in 1913. Starting graduate study of economics in 1933, he cut his teeth on the international monetary chaos that followed after sterling was forced off the gold standard in 1931, and he wrote his dissertation trying to make sense of it all, International Short-term Capital Movements (1937). A student of Henry Parker Willis, who had been one of the founders of the Fed, Charlie from the very beginning conceived the life ambition to do for the world what Willis had done for the United States: namely, to join the disparate regions into a single integrated monetary and financial system (discussed in Chapter 2).

Fifty years later, he memorialized that life ambition in his Marshall Lectures, International Capital Movements (1987): “The model for the world should be the integrated financial market of a single country, with one money, [and] free movements of capital at long and short term.” In 1937, global money was not much more than a pipedream; by 1987 it had become a concrete reality. Money and Empire tells the story of how that came to be, which was not an easy road at all.

In fact, Charlie himself played a not insignificant role in creating that concrete reality, right at the beginning. His first job at the Fed was as staff support for the US role in the Tripartite Agreement of 1936 which stabilized the dollar against sterling and the franc (Chapter 3). That foundational effort collapsed under the pressure of World War II, but after the war, it was revived and expanded in the Marshall Plan for reconstruction of Europe. Significantly, Charlie was there as well, serving as chair of the State Department committee that put together the enabling legislation for Congressional approval (Chapter 4).

“When markets don’t work, don’t use markets” was Charlie’s mantra during those years of strong government intervention. “Governments propose, markets dispose” would be his mantra thereafter as gradually private capital markets were rebuilt, both short and long term—first in the US, then in Europe and then expanding to the rest of the world. In Charlie’s view, the global dollar system was created not at Bretton Woods by the deliberations of finance ministers, but rather subsequently by the constructive efforts of market participants, bit by bit over many decades. Indeed, the actions of the US government were more of an obstacle than a help in that construction, culminating in what Charlie called The Crime of 1971, President Nixon’s unilateral closing of the gold window on August 15. The Bank of England had been forced off gold in 1931, but in 1971, the US deliberately chose to torpedo the dollar system, abdicating its de facto responsibility.

Fortunately, albeit unexpectedly for Charlie, 1971 turned out not to be a repeat of 1931—no return to Great Depression—and the reason is that the international monetary system did not collapse. Capital flows, both short and long term, continued, even as exchange rates fluctuated within a backstop of central bank cooperation behind the scenes using liquidity swaps. It wasn’t pleasant, but the US muddled through, and eventually, the experience of unpleasantness led, under Paul Volcker’s leadership of the Fed starting in 1979, to the US rejoining the global dollar system and affirming its responsibility to lead. Following after and for similar reasons, everyone else affirmed their responsibility to follow in the Plaza Accord of 1985. That explains the valedictory quality of Charlie’s 1987 lecture quoted above. After much trouble, his 1937 pipedream seemed to be coming to realization.

Charlie’s own road from 1937-1987 also had its challenges, challenges that would have sidetracked most of us, and I tell that story in parallel with the story of the dollar. Loss of security clearance in the McCarthy witch hunt was the first such challenge, this for a man who had spent the war as a top intelligence officer for the Office of Strategic Services, based first in London and then after D-Day traveling with General Bradley on the Continent. The book that earned Charlie tenure at MIT, The Dollar Shortage (1950), was intended as an economic justification of the Marshall Plan, and he planned further work in this vein, bridging the divide between government economist and academic economist. After 1951, that life plan became impossible.

There were other challenges as well: MIT’s embrace of a particular mathematical and statistical approach to economics which Charlie, as a product of prewar American institutionalism, could not follow (Chapter 5); Robert Triffin’s mediatic campaign against the global role of the dollar (Chapter 6) and widespread economist enthusiasm for so-called flexible exchange rates which enabled the Crime of 1971 (Chapter 7). This is the context for understanding why Charlie experienced mandatory retirement in 1976 as a moment of relief, when finally he was able to go his own way, unfettered by loyalty to the home team.

This is also the context we need in order to read Charlie’s three great “economic history” books:  The World in Depression (1973); Manias, Panics, and Crashes (1978) and A Financial History of Western Europe (Chapters 8-9). Many do not realize that these are products of his third career—his first being the Fed and State Department, and his second being MIT—a new venture begun in anticipation of mandatory retirement in 1976. Even more, it is probably a mistake even to count Charlie as an economic historian, except for honorary reasons. For a while he insisted on “historical economist” instead, and in his final collection of greatest hits, he adopted the title Comparative Political Economy: A Retrospective (2000). To understand his greatest books, we must understand the man who wrote them.

In 1987, Charlie thought that the dream of his youth was finally coming true, but subsequent events shook that confidence, even as no clear alternative to the dollar system was in sight. “Muddling through in Darwinian fashion is my preferred solution,” he would say, mainly because that was the only road forward that he could see. Today, in the aftermath of the Global Financial Crisis of 2008-9 which saw the global dollar system expand to the Global South, and the subsequent COVID-19 crisis of 2020, the international monetary system is perhaps once again entering a period of stress and consolidation. For current times, the dual biography of the dollar and Kindleberger offers valuable perspective, and maybe even reason for cautious optimism that the world will survive to reach calmer waters on the other side. Today, as always, the challenge is not so much economic as it is political. Kindleberger reminds us: “In economics, the worldwide is efficient. In social questions, small is beautiful.”

I wrote this book to learn about global money. Here are some of the things I learned:

  • The institutions of money and finance are no veil, but rather the vital infrastructure of a market economy,
  • The world is the optimal currency area, even as the village is the optimal political area, and this contradiction drives the dynamics of international monetary development,
  • Displacement/boom/crisis/reconstruction is the “seesaw” that characterizes that monetary development at a global level,
  • From this point of view, the grand narrative of global economic history since 1700 is the Darwinian coevolution of the global money system and global lender of last resort, and
  • Under present arrangements, US monetary policy is world monetary policy.
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