Crime and Responsibility

Money and Empire: Charles P Kindleberger and the Dollar System, Perry Mehrling, 2022.

Manhattan, Georgia O’Keeffe, 1932.

On occasion, historians praise a book as a ‘grand synthesis’. This is common when the author has written an exceptionally erudite, far-ranging thesis that draws together much previously distinct material. It is generally not when the author has melded two rather different books into one.

This, however, is what Perry Mehrling has done in Money and Empire: Charles P Kindleberger and the Dollar System; a book which, as the subtitle divulges, is both a biography of a man (the economist Charles Kindleberger) and a history of the dollar. This is not quite unprecedented. Serious biographies often make the argument that the life and work of their human subject sheds light on the essential features of the historical period which produced them. But rarely is this made as explicit as it is in Money and Empire.

My last review — of Mehrling’s The New Lombard Street — was a detour from the international monetary history I have been preoccupied with of late. But it was not an unjustified one. This is because Money and Empire brings us right back into the international monetary story that I have previously looked at through the lenses of Eric Helleiner and Barry Eichengreen, among others. But it is also a follow-up to The New Lombard Street. Mehrling picks up many of the same threads, in particular the struggles between academic monetary economics and the practical ‘money view’ of central bankers, ‘old-fashioned’ economists like Kindleberger, and of course, Mehrling himself.

I have to admit, however, that I found it difficult to get behind this synthesis of two books. I enjoyed learning about Kindleberger — his wartime career as an intelligence analyst, the intellectual battles he fought at MIT, and how his relationship to government changed over time. But I was less keen on all the strictly biographical details, about his youth, school-years, and so forth, that Mehrling makes you work through — it is the history of Kindleberger and the dollar system that is the true point of interest. This becomes less of an issue as the book progresses and Mehrling’s biography becomes predominantly an intellectual one. But it does make the first few chapters rather tiresome.

The dollar system in Money and Empire has a positive and a normative aspect. On the one hand, it refers to the period which runs from Bretton Woods until the present — the ongoing era of dollar hegemony, broken up perhaps by only a few years in the seventies. In this sense, it is a framework which has more in common with Giovanni Arrighi’s longue dureé than Helleiner or Eichengreen’s analysis. But the normative component is where Kindleberger comes in, since the economist was not just a cosmopolitan proponent of the dollar system — he held a certain aspiration for its development; which, while he did not see it realised in his lifetime, informed his analysis of nearly the full span of postwar monetary history.

The starting point of Kindleberger’s vision for the dollar system was what he perceived, according to Mehrling, to be its “historical task” — enabling long-term capital flows from the developed to the underdeveloped world, in order to facilitate the economic development of the latter. How to realise this? The complete integration of global markets under a single currency, Kindleberger thought. This belief was informed by history (an understanding that financial integration benefited the United States in the early twentieth century) and by his own lived experience of the Second World War, during which the US was further integrated by virtue of the demands of war finance. As Kindleberger wrote in 1987, long after this postwar ambition had slipped away, “the model for the world should be the integrated financial market of a single country”.

As a result, Kindleberger was unhappy with the Bretton Woods ‘style’ of dollar hegemony. While it had made progress towards liberalising flows of goods, it had not managed to do the same regarding flows of capital, for all the reasons Helleiner explains in States and the Reemergence of Global Finance. The world needed renewed international capital movements, led by states, and followed by private capital. The best way to accomplish this, he argued, was via the US dollar becoming an international currency able to fulfil the liquidity needs of the entire global community. Thus, Kindleberger believed, internationalising the dollar should have been the goal of international monetary policy during the Bretton Woods era. And, to an extent, he believed it was. For as Mehrling writes, “so far as Charlie could see, the actions of practical men [i.e., bankers and central bankers] had by 1966 moved quite far towards creating an integrated international monetary and financial system”.

Where things get interesting, however, is what happens when Bretton Woods starts to fall apart in the sixties. The key story here is the shift of the US from a country with a persistent balance of payments surplus to a country with a persistent balance of payments deficit. This jeopardised Bretton Woods, as it put pressure on the ‘$35 per ounce’ gold price — the threat of Europe cashing in its dollars for gold loomed. We know how this ends. First the suspension of convertibility by Nixon —"it’s our dollar, but it’s your problem” — and then the slow unwinding of all the key Bretton Woods tenets.

But Kindleberger not only rejected this outcome (describing Nixon’s decision as the “Crime of 1971”) but the logic which had produced it. As he saw it at the time, the collapse of the fixed-exchange dollar system was unnecessary since the US was not actually in a balance of payments deficit. As Mehrling puts it, Kindleberger believed that “an international financial centre needs a different balance of payments account than other countries in order to take proper account of its role as financial intermediary”. The anxieties over money were not legitimate, but an artefact of macroeconomic accounting.

Kindleberger’s argument was based on the fact that by the sixties, the global monetary system was essentially a dollar system, the gold peg giving only the illusion that anything other than a dollar standard existed. New York was the place where deficit countries settled with surplus countries. US dollars were the unit of account. Crucially, this meant that the US not only was the source of loans for foreign enterprises, but also supplier of liquidity to foreign asset-holders. The key source of international liquidity was dollar balances. The so-called balance of payments deficit, therefore, was in fact a product of the US performing the function it should in a truly international dollar system: it was fulfilling the liquidity preferences of other countries. The gold peg should be abandoned, Kindleberger thought, but only because it never really existed in the first place (as there was nowhere else to run but to the dollar). Unilateral devaluation — what Nixon did in 1971 — led instead towards flexible exchange rates, the antithesis of integration under an international dollar. The crime of 1971 amounted to the failure of the United States to take responsibility for its dollar.

Mehrling does not go into details about to what extent this thesis is correct — a casualty of his ‘grand synthesis’. While Money and Empire is no hagiography, it is certainly kind on Kindleberger. Mehrling is not sycophantic, but certainly sympathetic. The extent to which this derives from agreement or respect is at times ambiguous.

But was Kindleberger right? Yes and no seems to be the answer. Eichengreen finds an element of truth in both Kindleberger’s ‘financial intermediary’ story and the conventional tale of declining competitiveness. Contra Kindleberger, the US was facing a shift in trade — the current account balance was indeed deteriorating as the competitiveness of Japanese and European industry increased. The balance of payments deficit was ‘real’. But the unique position of the United States as ‘banker to the world’ was also real. A substantial piece of the payments deficit is attributable to the liquidity provision Kindleberger emphasised. However, where he was wrong is that this phantom problem was not benign. As a bank for the world, the US was vulnerable to a depositor run. This, Eichengreen argues, is precisely what happened in 1971.

So Kindleberger’s benevolent international dollar system was finished. Or was it? While Kindleberger did not live to see the 2008 crisis, Mehrling suggests it is possible that he would have viewed the outcome of that crisis positively, for much the same reasons as Mehrling does in The New Lombard Street. Central bank swap lines allowed the post-2008 Fed to bring the world much closer to the dollar system' Kindleberger had envisaged. But, I believe, it is equally true that Kindleberger would despair at how far the new politics of the post-2008 world have pushed his dreams of a globally integrated financial market from realisation. However we characterise the international dollar system of today, it is hardly ‘benevolent’ — let alone working effectively to channel great flows of investment from North to South.

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