- Charles P. Kindleberger is a hugely influential figure in the world of economics. He was a prolific writer, a professor at MIT and an architect of the Marshall Plan, as well as an expert on financial crises and the leading proponent of hegemonic stability theory.
- Boston University economics professor Perry Mehrling’s new book “Money and Empire: Charles P. Kindleberger and the Dollar System” is a biography of Kindleberger as well as a history of the American dollar.
- Perry joins cohost Kevin Coldiron to discuss Kindleberger’s life and legacy, particularly his influence on global monetary policy.
Charles P. Kindleberger was a bit like the Forrest Gump of economic history.
He was born in 1910, just before the establishment of the Federal Reserve in 1913. He earned a master’s and a Ph.D. during the Great Depression, working in the international division of the U.S. Treasury while writing his dissertation. He worked for the Federal Reserve Bank of New York and the Bank for International Settlements in Switzerland before joining the Office of Strategic Services (OSS) during World War II.
After the war, the young economist served in the State Department, where he became one of the architects of the Marshall Plan.
In 1948, Charlie — as his friends called him — launched his academic career at MIT, not long after the Bretton Woods Agreement established the International Monetary Fund and what later became the World Bank Group, as well as the global system of currency convertibility that lasted until 1971. He wrote 30 books over the course of his career and lived until age 92.
Charlie’s remarkable life, and its many serendipitous moments, inspired economist Perry Mehrling to write “Money and Empire: Charles P. Kindleberger and the Dollar System,” a (nonfiction) “bildungsroman” of sorts and a compelling history of the American dollar in the 20th century.
“When I want to learn something, I look around for someone who already seems to have a good handle on it,” writes Perry in a blog post about the book.
“For global money, that person was … Charles P. Kindleberger. This book is my attempt to learn what Charlie knew and how he knew it, in order to use that knowledge for present-day problems.”
Perry, a Professor of International Political Economy at Boston University and a frequent guest on Bloomberg’s Odd Lots podcast, “may have unwittingly founded a new genre of economics books … [a] particular economic history through the life of the key participants,” says my co-host Kevin Coldiron, who interviewed the author for an Ideas Lab episode of Top Traders Unplugged. Perry’s 2005 book, “Fischer Black and the Revolutionary Idea of Finance,” recounted the emergence of qualitative models and financial engineering; 2011’s “The New Lombard Street” explored the birth and evolution of the Federal Reserve.
He likes to choose a subject who is “like a spider in the middle of a web; who has contacts with everybody,” Perry explains.
Read on for just a few highlights of Perry’s wide-ranging conversation with Kevin about Charlie’s “key currency” approach, why and how the world’s key currency became the dollar, the Fed’s use of quantitative easing and swap lines, what Charlie would have thought about the seizure of Russian bank funds after the Ukrainian invasion and more.
A ‘key’ economist
If you haven’t heard about Charlie, it’s probably because he shaped his intellectual worldview before World War II, long before the modern economic approach of mathematical and statistical modeling. His “key currency” theory of international monetary economics was a minority view in the postwar period.
If you are familiar with him, it’s likely because Charlie wrote “Manias, Panics and Crashes,” a popular history of financial crises reprinted in 2000 after the dot-com bubble burst — and that is still required reading in many MBA programs.
Perry’s own interest was piqued when he discovered a treasure trove of correspondence between Charlie and fellow MIT economist Franco Modigliani, a Nobel laureate who pioneered the “life-cycle hypothesis” of saving money.
While Charlie was a scholar and a government staffer who never sought the limelight (or won the Nobel prize), Perry knew he was “kind of perfect” for telling the story of the dollar.
Economics is about “confronting the major problems that are confronting us — with whatever tools we have,” Perry explains. “As I say in the book, I really think of him more as a kind of intelligence analyst.”
In for a pound
Perry’s characterization isn’t hyperbole: Charlie was literally an intelligence analyst for the OSS in London during World War II.
“His job was to tell the [Allied] generals where to bomb to wipe out the German V-2 rocket capabilities, to impair their economy and to prevent resupply after D-Day,” says Perry. “He had to do it without the help of mathematical models or satellite technology.”
That formative experience gave Charlie lifelong confidence in analog methods. And London was still a major banking hub, even decades after the demise of Pax Britannica.
Prior to the first world war, London was the center of the financial world and the Bank of England was its most powerful institution. The pound sterling was still legal tender in its many colonies and territories and “the reserve used by the rest of the world,” Perry explains. It remains the oldest continuously used currency on the planet.
However, the pound sterling’s status as an international currency “grew organically,” says Perry. “It was built on the domestic bill market, inside Britain, for financing local trade. But the rest of the world started to use this bill market to finance international trade, even if no part of the trade was in London. The sterling bill market was the way you did international trade by the end of the 19th century.”
Gold, silver, sterling and surplus
Back then, the pound sterling was convertible into gold (its tie to silver ended around 1816), owing to the reach of the British Empire — in particular, “the role of India as a big trade-surplus country that held its surpluses at the Bank of England in London, which therefore financed the British deficit in the trade,” Perry says.
World War I upended all that.
In 1914, the U.K. suspended the gold standard, and Bank of England and Treasury notes became legal tender. After the war, the nation was in debt and the government reinstated a version of the gold standard in an effort to stabilize the economy (one could only exchange currency for gold bullion, not for coins). Meanwhile, other countries returned to the gold standard, increasing the “pressure” on the pound.
By 1931, the “Bank of England was basically forced off of gold,” Perry says. The pound sterling became a fiat currency, with its value determined by the global economy.
Perry notes that the late Italian economist Marcello De Cecco wrote a book about the sterling system, also titled “Money and Empire,” in 1975.
“I’m deliberately signaling with my title that I am trying to bring that story up to date — and to pay homage to him,” says Perry.
The United States, and the dollar, evolves
In chapter three of “Money and Empire,” he describes Charlie’s first job at the Fed: “staff support” for the U.S. during the negotiations of the Tripartite Agreement of 1936, which stabilized the dollar against sterling and the franc.
At that time, the Fed itself was just 23 years old. The fundamental rationale behind its founding in 1913 was to unify the dollar system inside the U.S., which didn’t (then) have a central bank.
But the U.S. had developed a system of clearing (domestically) that didn’t need a central bank.
“There were money-clearing systems in different regional centers,” Perry explains. “Basically, J.P. Morgan in New York City was, in effect, the central banker for the United States, at least for the elite New York banks. But whenever there were agricultural crises (and they were periodic), they would draw on the gold stores of London.”
In that sense, London was the central bank of the United States, “and London didn’t like this very much, because the U.S. was becoming a very large country and these imbalances were a problem,” he adds.
To Charlie, going to work for the Bank for International Settlements in 1939 seemed like “an opportunity to join, maybe, the possible future central bank of the world,” although later he came to think New York would replace London as the global finance capital, says Perry.
Open markets and interventions
Even in the late 1930s, the U.S. did not have a large bill market — “it was a developing country,” Perry says. “Really, long-term capital was what was needed — government railroad bonds and mortgages for farmers.”
Banks did provide short-term credits, but they were actually just “credits that were expected to be rolled,” like five-year interest-only mortgages.
“That, of course, is a rather vulnerable form of finance,” says Perry. “The important point to appreciate is that the domestic money market [in the U.S.] was not at all of the kind that was in London. So we were going to have to build a different kind of system on top of that.”
In the 1920s, the Fed was figuring out how to be a central bank in spite of the fact that it couldn’t operate in the “real bills market,” he explains. “They invented open market operations because there were all these treasury bills that were left over from World War I.”
Benjamin Strong, the head of the New York Fed in the ’20s, “basically … invented that way of intervening in markets,” Perry notes. He characterizes this time as one in which the Fed was “still learning how to be a domestic central bank.”
Politics versus circumstances
In that era, “to get a central bank in the U.S. at all was a great political challenge,” says Perry. “Americans hate the government, and they hate Wall Street. What is a central bank? It’s the government plus Wall Street.”
Plus, Americans weren’t all that fond of the rest of the world (even then). The U.S. becoming the central bank for the whole world wasn’t exactly a popular idea.
The original text of the Federal Reserve Act itself was “very explicit that [the Fed would] be lending to manufacturing and to farming, not to the government, and that it has no international responsibilities,” Perry says.
But the onset of world war meant that “almost immediately, the Fed violated the first of those because of World War I finance,” he adds. “It wound up having to lend to the government to support the treasury bill market to finance World War I. It wound up, after the war, stuffed full of treasuries when it wasn’t supposed to have any treasuries at all.”
In that way, the Fed evolved quickly from the start. It was “responding to circumstance,” Perry says. ‘I’m telling a story of growth, of development, of responding to crises — and World War I was a formative crisis for the Fed.”
The Marshall Plan and the postwar boom
Charlie’s grad school professor and mentor, H. Parker Willis, was one of the Fed’s architects. In the ’30s, Charlie began to envision organizing the international monetary system in a manner similar to the Fed’s unification of the dollar system inside the United States,” Perry says. “It was not much more complicated than that: saying that’s the future that we should work toward.”
A decade later, the U.S. “emerged from World War II as the only developed country that was not war-damaged [in an economic sense],” he adds.
If America didn’t take responsibility for reconstruction after the war, “there wasn’t anybody else to do that. … At Bretton Woods, everyone appreciated that the U.S. was going to be a surplus country in trade for quite a while — because everyone else needed to rebuild and they needed U.S. help.”
The postwar economic boom Stateside was a surge in demand after the spartan wartime years, and (enabled by American recovery funds) Europeans began spending again.
“The Marshall Plan was a demand infusion to the U.S. economy,” Perry says, noting that the plan “was unilateral … the United States operating on its own as a leader.”
The global dollar system
The dollar as “key currency” — coupled with the need for the U.S. to take on the mantle of financial leadership — are at the core of Charlie’s work as an economist. He became a leader in developing what came to be known as “hegemonic stability theory,” outlined in his 1973 book “The World in Depression 1929-1939”: The idea that a hegemonic power is necessary to maintain a stable international monetary system. (A classic liberal interpretation of this theory is that the hegemon acts in “enlightened self-interest.”)
Although various strains of realism (as an international relations theory) came into fashion in the decades since “The World in Depression,” Charlie is still thought to be a master of historical economic analysis, particularly of financial crises. And arguably, today “the Fed’s role on the world stage is very similar to what Charlie would have wanted or imagined,” Kevin points out.
In the 21st century, we have a “global dollar system,” in which there are several “centers of dollar intermediation in the global banking system that are not inside the United States,” Perry replies.
“They do not show up in the U.S. balance of payments because they’re in other countries. That’s how we sort of solved this political problem, in a way — by pushing it offshore. Similarly, the Fed … is not really the central bank of the world. It’s a cooperation between central banks. The offshore elements of this are as important as the onshore elements and are the line of ‘first resort’ if you look at what’s happened to the balance sheets of the European Central Bank, the Swiss National Bank and of the Bank of Japan. Those are the buffers for the global dollar system.”
Charlie may have never imagined that, but the world is quite likely better for it.
This is based on an episode of Top Traders Unplugged, a bi-weekly podcast with the most interesting and experienced investors, economists, traders and thought leaders in the world. Sign up to our Newsletter or Subscribe on your preferred podcast platform so that you don’t miss out on future episodes.