The ‘Global Money View’: Perry Mehrling’s reading of Charles P. Kindleberger

Some appreciations on Money and Empire: Charles P. Kindleberger and the Dollar System

In 2022, I reviewed Perry Merhling’s book on Kindleberger and the global dollar system, for Economic Issues. http://economicissues.org.uk/Files/2022/EI_Sept2022_reviews.pdf. Just to fill a bit the empty space in this blog, this the original longer version I wrote.

Money and Empire: Charles P. Kindleberger and the Dollar System, by Perry Mehrling. Cambridge: Cambridge University Press, (Studies in New Economic Thinking, p. I), 2022. Hardback: ISBN: 978 1009158589, £ 29.99, 310 pages.

Since its conception, the dollar was declared dead many times. In Money and Empire, Perry Mehrling tells us, through the writings of Charles Kindleberger, that the dollar -as global money- is alive and well. Using history of thought and financial history, the book recovers a monetary theory of global money as an international public good in a world of national governments (Kindleberger, 1986). Not only to celebrate the life and ideas of a man, but to rethink history, analyse the present, and imagine possible futures for the International Monetary System. Money and Empire is about the dialectic between “the economic logic of the payment system (that) pushes towards hierarchy and centralization, and the political logic of subglobal and subnational groupings (that) pushes towards autarky and pluralism” (p.118). As a compelling analysis of the work, history, and views of Kindleberger, who died in 2003, and a (re) reading of the economic events that shaped his life (as well as the global dollar system’s), this book, along with Kindleberger’s views, are as relevant to the current debates as it is possible to be.

Money and Empire continues a saga of Mehrling’s books that connects history of economic thought with financial history, using them to develop his own monetary theory: The money interest and the public interest (1997), the intellectual biographies of Allyn Young, Alvin Hansen and Edward Shaw that aims to recover an understanding of money that got lost; The New Lombard Street (2010), a biography of the Federal Reserve (and the transformation of central banking in general) to understand how it became a Dealer of Last Resort for the shadow banking system during the Global Financial Crisis; and Fischer Black and the revolutionary idea of finance (2011), another life story that explains the rise of modern finance. This book, a new biography, intends to contribute to our understanding of global money^[1].

As a twelve-year project, it condenses, in less than three hundred pages, tens of books, hundreds of articles, and extensive archive work, delivering the usual quality of Mehrling’s writings. As a biography of the man, it presents a fresh view of an exemplary life (Milanovic, 2019) to complement Kindleberger’s autobiography (1980). Highlighting his systematic way of thinking, Mehrling finds in Kindleberger’s work a common perspective: the view of a central banker who understood the hierarchical nature of the global economic system (p. 118, 151, 215, 227, 253), the balance of payments as a matter of settlement in the international payment system (p. 51, 231), and money as the counterpart of (unstable) credit (p. 189, 205, 215, 220). As a biography of the dollar, the book honours and complements the narrative of the same title book from Marcello De Cecco (1975). In De Cecco’s Money and Empire, the Gold Standard is the myth, the pound sterling is the global money managed by the Bank of England, and London is the financial centre of the world. In Mehrling’s Money and Empire, the multilateral gold-tied Bretton Woods system is the myth, the dollar is the global money managed by the Federal Reserve, and New York is the financial centre of the world (p.1).

Readable as a novel, and with no extensive background knowledge required, the book chronologically narrates these two life stories, while introducing dense theoretical concepts in a simple way. According to Mehrling, A financial history of Western Europe (1984), Kindleberger’s “Chef d’ Oeuvre” (chapter 9) can be read as a biographical synthesis of his life work, his own “treatise”, (p. 7-8). An attempt to “derive theory from accumulated fact (…) to make sense of the financial events of Charlie’s own life” (p. 211). Money and Empire replicates this same structure, presenting the accumulated facts in the history of Kindleberger and the dollar, not only to understand his views but also to grasp how the current global monetary system works. For this, the book tells the story of both lives in an interconnected narrative. Containing a total of ten chapters, it is organized in three sections, each of them associated with a historical event in the shaping of the global dollar system: 1) Intellectual Formation, 1910-1948; and the birth of the dollar as a local and then global money; 2) International Economist, 1948-1976; and the rise and “fall” of the global dollar system; and 3) Historical Economist, 1976-2003; and the rebirth of the (offshore) dollar system.

The story of Charles Kindleberger is one of resilience and adaptation. As a witness and protagonist of the effects of many financial crises, his lifetime project was to replicate the unification of the regional banking and financial systems in the United States (p. 36) on a global level. He wanted to be a central banker, a bridge between policy-making and academia^[2], between economics and political science, to develop an internationalist framework beyond Keynesianism and Monetarism, and to help design the international public goods that an integrated (and cosmopolitan) world needed. But several disruptions pushed him towards constant transformation: the war ended prematurely his position in the Bank of International Settlements. His dream of an integrated world faced the international consequences of the Cold War, while the local consequences made him lose his security clearance and his connection to the government (chapter 5). Once he began working at MIT, his literary style of economics was confronted with the rise of mathematical modelling (p.115, and Chapter 7). Finally, his case for one global money was defeated by the Triffin Dilemma’s narrative and the later embrace of flexible exchange rates in the profession (Chapters 6 and 7). However, in Money and Empire, Kindleberger’s story has a happy ending. Finding new audiences in other disciplines (p.114), mutating into a comparative historical economist, and being convened to be president of the American Economic Association in 1984, he found new ways and places to keep pushing for his life project. More significantly, Mehrling sees that this project has, in many aspects, become a reality with the consolidation of the offshore dollar system, the introduction of permanent central bank liquidity swaps, and the expansion of the global dollar capital market to the periphery (p.4).

Money and Empire is another chapter in Mehrling’s search for intellectual ancestors of his own economic framework, “the money view” (Mehrling, 2017). Developed in the classroom^[3], the money view understands the economy as a payment system of connected balance sheets, ordered by the settlement (survival) constraint of maturing promises to pay money. This constraint is relaxed through the alchemy of bank’s elastic credit and money creation, which enables the allocation of credit and the realization of surplus and deficits. These promises are valuated with crucial help from the dealers’ market-making, which use their own balance sheets to provide market liquidity. Money is hybrid, part private and part public, and as credit, is ordered hierarchically. Finally, credit is unstable, as not all promises get fulfilled. According to Mehrling, all these concepts are present throughout Kindleberger’s work (p. 216, 232-233). But he then uses these writings to extend his own money view, incorporating an international political economy dimension of the hierarchy of credit and money, with a key currency as global money, which needs an international lender of last resort behind it^[4].

As a book about global money, it discusses policy making at a global level. For Kindleberger the hierarchical structure of the international system was an outcome of a market-driven process, “a story of financial development in support of economic development, both processes advancing together in Darwinian evolutionary fashion by means of boom and bust” (p. 233). But this hierarchy requires leadership, endorsement from emerging structures, and willingness to act and stabilize the world economy when markets fail (or are closed). From this perspective, and from what can be called a gramscian view of crises, where the “old is dying and the new cannot be born” (Gramsci, 1971: p. 275), Kindleberger explains that the Great Depression was “fundamentally caused by a failure of world leadership, Britain no longer able to lead, and the United States not yet ready or willing to lead” (p. 4. See also p. 42, 59-60). The recipe for stabilization includes an International Lender of Last resort, to provide liquidity under turbulent times, international macroeconomic coordination, exchange rates stability, and countercyclical or stable long-term lending (p. 152, 195, 199). “(T)he historical task of the emerging dollar system was the economic development of what we now call the Global South, a task requiring long-term capital flow from the Global North” (p.2). To fix the Dollar shortages. However, leadership is not enough. Followership is required. The final interpretation of Kindleberger about Nixon’s abdication of leadership and unilateral devaluation in 1971, is of a world that did not want to follow the United States. And here it is, in the last chapter, where political science brightens the most, discussing the conflicts of a monetary area that differ from the political ones. However, this subject is underexplored to some extent, as the unstable and cyclical nature of leadership itself. Those interested in the political science dimension will be demanded to complement this reading with additional material.

International finance scholarship will find many of its pressing subjects in the book, as well as in Kindleberger’s writings. The literature that studies the role of the banking system in the creation of money and credit, and how these operations are affected by cross-border flows (Kumhof et al., 2020; Lavoie, 2021), will discover an application under a “key currency” approach (Williams, 1934; Ito and McCauley, 2019). Here, with a focus is on gross financial flows, is the elastic balance sheet of the world banking centre, expanding, and contracting with the ebbs and flows of the international payments, which stabilize the effects of movements in global money (p. 132). Critical Macro-Finance (Gabor, 2020; Dutta et al., 2020), will identify the role of financial innovations and the creation of shadow monies in the evolutionary changes in the financial system (p. 205, 207, 211-212). The international dimensions of financial cycles and vulnerabilities (Aldasoro et al., 2020; Bonizzi and Kaltenbrunner, 2021) are obviously key in a book about Kindleberger. The most recent literature on the international monetary hierarchy (Kaltenbrunner, 2015; Fritz et al., 2018; see Murau et al., 2022 for other examples) will find a provocative but insightful reading on both its consequences and what needs to be done about it. One repercussion of such integrated financial system, is the lack of independence of the domestic monetary policies, even with flexible exchanges rates (p. 166, 181; see 1999; Rey, 2013), which can have destabilizing effects (p. 220, see Kohler and Stockhammer, 2022; Maggiori, 2022). Researchers interested in the balance of payments constraints, can recognize a systematic and money-focused view on the subject and the need for cooperation to avoid global contractionary policies (p. 96, 130). Finally, the everlasting debate on the sustainability of global (im)balances can benefit from an analysis that sees the United States as the banker of the world, providing liquidity, and receiving a return differential in exchange (p. 147, 177, 248, see Gourinchas et al., 2019). In this way, access to this liquidity should be a focal point to study other countries’ external balance sheets (Patrício Ferreira Lima, 2022).

As Mehrling himself highlights, many of Kindleberger’s ideas might not be easily accepted by the critics of financial globalization: his endorsement of the United States’ leadership and the benefits of a key currency system, the embracing of the “Global Reach” of American Corporation through Foreign Direct Investment as a way to boost world economic integration (p. 112-113), or his support to free mobility of goods and capital (p. 126, 128, 129), but also labour. Nevertheless, Mehrling attributes those as a reflection of his cosmopolitanism. In this sense, Mehrling shares Kindleberger’s optimism (p. 207), highlighting positive aspects of the evolution of the global dollar system (Mehrling, 2016). The book presents an intendedly deep but partial analysis of the geopolitical role of the United States in the 20th century. For those readers looking for a more holistic reading of economic history, dialogue with other material will become necessary. The weaponization of the dollar infrastructure (Farrell and Newman, 2019; Ali, 2022; de Goede and Westermeier, 2022) is not an element present in this book either. Finally, Finance-Fictions authors; as Tooze (2022) calls them; that are set to imagine different futures for the dollar (Murau et al., 2020; Pozsar, 2022) will find in Money and Empire the lens that Mehrling uses to say that there is no threat to the dollar for now, but will also feel an unsatisfied desire for more, that will have to find in Mehrling’s papers and presentations. In summary, Money and Empire is an important contribution to current debates and monetary theories, as well as financial history, that provides valuable and provocative insights to think about policy-making. All that, delivered within the celebration of life and ideas of Charles P. Kindleberger, who probably, thanks to this book, will be rediscovered once more.

References

• Aldasoro, I., Avdjiev, S., Borio, C.E. and Disyatat, P. (2020). Global and domestic financial cycles: variations on a theme.
• Ali, M. (2022). Regime Change? The evolution and weaponization of the world dollar. Phenomenal World.
• Bonizzi, B. and Kaltenbrunner, A. (2021). A Minskyan framework for the analysis of financial flows to emerging economies. Emerging Economies and the Global Financial System. Routledge, pp.43-55.
• De Cecco, M. (1975). Money and empire: the international gold standard, 1890-1914. Rowman and Littlefield.
• de Goede, M. and Westermeier, C. (2022). Infrastructural Geopolitics. International Studies Quarterly, 66(3), psqac033.
• Dow, S. (1999). International liquidity preference and endogenous credit creation. Foundations of International Economics. Routledge, pp.163-180.
• Dutta, S.J., Kremers, R., Pape, F. and Petry, J. (2020). Critical macro-finance: An introduction. Finance and society, 6(1), pp.34-44.
• Farrell, H. and Newman, A.L. (2019). Weaponized interdependence: How global economic networks shape state coercion. International Security, 44(1), pp.42-79.
• Fritz, B., de Paula, L.F. and Prates, D.M. (2018). Global currency hierarchy and national policy space: a framework for peripheral economies. European Journal of Economics and Economic Policies: Intervention, 15(2), pp.208-218.
• Gabor, D. (2020). Critical macro-finance: A theoretical lens. Finance and society, 6(1), pp.45-55.
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• Gramsci, A. (1971). Wave of Materialism, and Crisis of Authority. Quintin Hoare, and Goffrey N. Smith (eds and translated by), Selections from the Prison Notebooks, London: Lawrence and Wishart. pp.275-276.
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• Kindleberger, C.P. (1980). The life of an economist. PSL Quarterly Review, 33(134).
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• Kohler, K. and Stockhammer, E. (2022). Flexible exchange rates in emerging markets: shock absorbers or drivers of endogenous cycles?
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• Mehrling, P. (1997). The money interest and the public interest: American monetary thought, 1920-1970. Harvard University Press.
• Mehrling, P. (2010). The New Lombard Street. Princeton University Press.
• Mehrling, P. (2011). Fischer Black and the revolutionary idea of finance. John Wiley & Sons.
• Mehrling, P. (2016). Beyond Bancor. Challenge, 59(1), pp.22-34.
• Mehrling, P. (2017). Financialization and its discontents. Finance and Society, 3(1), pp.1-10.
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• Murau, S., Rini, J. and Haas, A. (2020). The evolution of the Offshore US-Dollar System: past, present and four possible futures. Journal of institutional economics, 16(6), pp.767-783.
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Notes

[1] Including mini-intellectual biographies of the people that shaped Kindleberger’s thinking, the book presents key ideas from H. Parker Willis (p. 31-39), James W. Angell (p. 42-50, 58), John H. Williams (p. 6, 54, 57-61, 136, 154, 179, 198), Alvin Hansen (p. 6, 71, 74-75, 83, 111, 136, 259), among others.

[2] With 12 years of experience in the official sector, he worked in the New York Fed (p. 52, 56), the Bank of International Settlements (p. 63-67), the Board of Governors of the Federal Reserve (p. 67, 71), the Office of Strategic Services (p. 78, 98), and on Germany’s post-war program and the Marshall Plan in the Department of State (p. 82-94).

[3] Mehrling’s “Economics of Money and Banking” module, used as textbook The Money Market of the Kindleberger’s student Marcia Stigum (1989).

[4] As the author indicates, this extension can be found in his most recent work (Bernes et al., 2014; Mehrling, 2015; 2017).