Money and Empire: Charles P. Kindleberger and the Dollar System
By Perry Mehrling
Cambridge University Press, 2022
Money makes the world go round, or as Karl Marx put it, Geldgespräche, Quatsch-Spaziergänge. How does this work at the global or international level? Perry Mehrling’s elegantly written biography of the MIT economist Charles Poor Kindleberger illuminates the relationship between money and the global structure of economic and political power. Kindleberger, a distinguished economic historian, was in many ways, and to his own surprise, a central and founding figure in the political science subfield of International Political Economy (IPE). Breaking with the emerging abstract economic models of his time, he developed an empirical and practical approach that emphasized the importance of the political infrastructure underpinning global financial markets, and the ever present possibility of crisis. Lurking in the background of this biographical narrative is a greater story about empire, left whispering in the softest possible voice—a Straussian sotto voce.
Servant of empire?
Empires run on money. In durable empires, that money pays bureaucrats who run the empire, so empires need people as well. Kindelberger’s early life trajectory was well suited to the bureaucratic needs of the mid-twentieth century American empire. As Mehrling repeatedly notes, Kindleberger was a WASP through and through. WASPs—White Anglo-Saxon Protestants—were the original ethnonational core of the Thirteen Colonies, in a definition that expanded enough to encompass the initially “foreign” German and Dutch settlements in the mid-Atlantic colonies but never enough to include the subsequent wave of immigrant Irish Catholics, let alone enslaved Africans.
WASPs dominated New England and New York politics and finance, and through that the American state. The pinnacles of American higher education—a small set of private schools for secondary education and Harvard, Yale, and Princeton for tertiary—were WASP enclaves well into the twentieth century. In both novels and reality, the archetypical employee biography in the World War II Office for Strategic Studies (OSS) (the predecessor to the Central Intelligence Agency (CIA)), runs something like this: WASP New Englander attends Phillips Academy, goes to Yale, adds formal foreign language study to complement a childhood of summers spent in Europe, is recruited through his father’s network into the OSS, and moves smoothly up the CIA hierarchy as the US state routinized a global diplomatic, military, and intelligence presence. Empire building, in short.
But seemingly minor factors diverted Kindleberger from becoming a more overt servant of the external empire the American state built after World War I.1 He attended the relatively less prestigious Kent School (motto: “an elite school, not a school for elites”), the Quaker-founded University of Pennsylvania (WASPs at core are Episcopalian or Presbyterian), and had the bad taste to associate with people who may or may not have been actual communists while he worked for the US government. The first two combined with his innate ability to secure him positions in, among other government agencies, the OSS, putting Kindleberger on what looked like a predictable, and to him desirable, track into the core imperial apparatus. But the latter blocked his security clearance at a key moment in 1951, pushing him off that track and instead into academic employment. If the 1950s Red Scares hadn’t intervened, Kindleberger might have transitioned smoothly from his work on the Marshall Plan back to one of his former positions at the State Department, Treasury or Federal Reserve rather than ending up as a professor in the Economics department of MIT.
Kindleberger as economic historian
This off kilter transition moored Kindleberger in a liminal space. The MIT department was hardly the periphery of the imperial apparatus, given its disproportionate role in training economists for the US and other central banks, but actual policy levers were out of reach for Kindleberger. At the time, MIT economics faculty were influenced by MIT’s own engineering orientation and the US government’s efforts to quash any social science that spoke of class conflict, instead promoting methodologically individualistic approaches like rational choice. Economics took off in an unempirical and impractical direction: highly abstract mathematical models in which money and finance played no part. MIT’s own Paul Samuelson helped repackage Keynes’ explicit call for full employment through aggressive government fiscal support and direction of investment into a tamer call for monetary policy. Ironically, the MIT department perceived Samuelson as a leftist because he championed even this mild form of Keynesian economic management.2 Meanwhile, on the other coast, the US Air Force was helping Douglas Aircraft to stand up the public policy think tank later called the RAND Corporation. RAND supported the early rational and public choice economists—for example, Kenneth Arrow and James Buchanan—whose work argued that a group of individuals could never rationally generate the values needed for an efficient planned economy.
By contrast, Kindleberger’s direct involvement in policymaking left him intellectually pragmatic. Mehrling describes him as at heart an intelligence analyst aggregating facts from the world and filtering them through his own practical experiences with, among other things, employment in the pre-World War II Bank for International Settlements (BIS), the Federal Reserve Board, and the State Department bureau overseeing economic and currency reforms in Germany. Critically, he helped design the extremely pragmatic and production-oriented Marshall Plan, which melded European economic revival with anti-communist politics, while his work at the BIS exposed him to the destabilizing effects of short term international capital flows.
Kindleberger thus sat close enough to the center of power to want to, and occasionally be able to, influence US foreign economic policy. He nonetheless remained an outsider methodologically and at a distance from the actual policy reins. As Jonathan Kirshner’s back-cover blurb accurately puts it, Kindleberger was a sideman in the academic economics jazz band, capable of drawing his own crowd only in smaller venues like the niche academic IPE market. There he figured mostly among those abjuring approaches using formal economic models and even then not until after he officially retired from MIT.
What tunes did he play in counterpoint to the economics frontmen? Here, Mehrling deftly uses Kindleberger’s writing to spotlight the dance between economic theory and actual US international monetary policy from roughly the 1950s to the 1980s. Put simply, two issues mattered, at least overtly in Mehrling’s account. Was money, in the form of credit creation, an independent force on its own or simply a veil over the “real economy”? And, in a world comprised of nominally independent countries, each with their own currency, whose currency would be used to settle accounts? Behind these stood a third issue, most clearly expressed in Kindleberger’s study of the causes of the Great Depression: who would rescue the system in the event of a crisis? That is, whose money sat at the top of the global currency pyramid, giving them power over global credit creation by virtue of being able to bail out the global financial system?
The formal mathematical models of the economy developed at MIT and elsewhere after the 1950s—Real Business Cycle (RBC) models and the Dynamic Stochastic General Equilibrium (DSGE) models derived from them—ignored money. Among the huge simplifying assumptions made to get tractability in these models are—don’t laugh—perfectly competitive markets, perfect information for market participants, and, in most cases, a “representative agent”—that is, a single infinitely lived household representing all consumers.3 Critically, these models also assumed the neutrality of money. Changes in the money supply would not affect any of the real variables in the economy, like productive capital, employment, or growth rates. While later new Keynesian versions assumed sticky prices, this simply delayed adjustment to the underlying real equilibrium state.
Both Kindleberger and even more so Mehrling, whose own work centers on potential imbalances of credits and debits across interlinked corporate balance sheets, find such assumptions untenable. Kindleberger explicitly anchored his arguments in real people facing practical financial problems rather than in RBC’s abstract rational actors.4 He saw the fundamental economic problems of the day as the outcome of structural disequilibria whose existence RBC models explicitly denied.5 Kindleberger’s practical policy experience dealt precisely with the problems created by mismatches between money going in and money coming out for actors and countries involved in international trade. How could a country with a balance of payments deficit—too many imports compared to its exports in value terms—obtain enough financing to tide it over until exports increased (or imports decreased)? How could countries cope with short-term, speculative inflows and outflows by international speculators?
Global credit creation, and the destruction of credit during crises, thus came to the fore. Kindleberger argued that normal business activity cannot occur without credit creation, because most firms must buy inputs and pay workers before they themselves get paid by customers.6 When banks extend credit, they simultaneously create matching sets of assets and liabilities on the bank’s and borrower’s balance sheet. For the bank, the lending creates an asset in the form of the borrower’s debt to the bank, but the deposit the bank creates to fund that loan creates a liability for the bank. For the borrower, the deposit at the bank is the asset matching the liability of its debt. And, critically, credit creation creates money out of thin air, rather than relying on some prior saving.
The core of Kindleberger’s work, particularly his best known work on causes of the Great Depression, considers how this global debt landscape can lead to crises, a theme he explored at length in Manias, Panics and Crashes. There, he argued that the absence of a powerful central actor meant that lesser actors facing the payments mismatches and unserviceable debts that had accumulated by 1929 could find no savior, producing a global crisis. Before World War I, the Bank of England and Britain’s massive overseas assets backstopped the global financial system. After World War I, as Kindleberger famously put it, Britain couldn’t and America wouldn’t provide system stability.7 Following World War II, America became much more willing to act as the system stabilizer, or as later IPE scholars put it, a hegemon. The 1944 Bretton Woods Conference essentially established the US dollar as the key currency for the post-war global monetary system. Other currencies were indexed against the dollar while the dollar was indexed against what Keynes called the “barbarous relic” of gold. 8 In principle this solved the problem of stabilizing exchange rates so payments could be made more easily, and, if needed, in gold. In practice it created one immediate and one future problem. Kindleberger’s work largely addressed the immediate problem and anticipated the issues around the future problem.
The immediate problem was the tension Robert Triffin identified between global liquidity needs and foreign actors’ confidence that they could indeed redeem dollars in gold. Expansion of world trade required that more and more dollar-denominated trade credit be available in global markets. But if the supply of dollars in overseas financial markets exceeded the volume of gold held by the US Federal Reserve, could anyone trust that dollars were actually redeemable in the event of a crisis? Moreover, unless world trade grew in sync with US growth, money supply growth would be out of sync with one or the other. In reality, global trade grew considerably faster than the US economy, and banks increasingly evaded regulatory controls to fund that growth, contributing to global inflation in the 1960s and exacerbating the overhang of dollars relative to gold. Rightly or wrongly, some accused the United States of abusing its exorbitant privilege—the ability to fund its current account deficits in its own currency and seemingly without any penalty—and thus exporting inflation to trade surplus countries that had to accept dollars of diminishing value.
What to do? Triffin proposed using an artificial currency built on a basket of the major currencies, what we now know as the Special Drawing Rights (SDRs) held by the International Monetary Fund, to resolve the liquidity problem. Kindleberger, by contrast, saw that this was in essence a political problem of coordination among the central banks. Regular banks netted out transactions daily, funding shortages with overnight loans from other banks or, in extremis, the central bank. In the absence of a formal global central bank, Kindleberger proposed that central banks agree to fund each other’s deficits by holding excess dollars (or whatever) rather than forcing daily settlement. In effect, he proposed the swap lines that now anchor responses to global financial crises. In the event, SDRs came too-little-too-late to be effective and the early version of swap lines failed to stabilize the value of the dollar against gold.
Kindleberger was sanguine about the overhang of dollars. He saw the US financial system as essentially operating like a bank for the world, taking in short term deposits, recycling those deposits as long-term lending, and, on the strength of its economy, accepting the risks that ensued from this maturity mismatch. What mattered, as he argued after Nixon freed the dollar from gold, was that there be some leadership, and that the leader accept the costs of being the lender, broker, and commodity buyer of last resort in order to prop up the value of assets in a crisis. The International Political Economy subfield translated this insight into Hegemonic Stability Theory.
Hegemony, debt, and empire
Mehrling’s own claim to fame comes from going one level deeper than Kindleberger and elaborating the interlocking balance sheets that make up the global financial system and determine its stability. In his framework, assets are sustained by debtors’ payments and thus are vulnerable to failure to pay. The central bank plays a central role in dealing with the systemic crises that arise from a collapse of collateral value when debtors cannot pay. In short, the same problems getting payments to line up not just day to day but, like those that Kindleberger handled while at the BIS, globally, with different currencies, and over extended time periods. Mehrling, following Hyman Minsky, precisely reverses RBC’s assumptions: capitalism is a financial system first and foremost, and the financial dog wags the real economy tail. This “money view” uniquely suits him to parse Kindleberger’s arguments about disequilibria and central banking. Mehrling explicitly and Kindleberger implicitly share the same perspective that credit (and thus debt) creates money, not the other way around.
Mehrling thus picks up on the importance Kindleberger assigns to banks in money creation. He complements this with the Minskian insight that bank credit creation is inherently pro-cyclical, feeding on itself until it generates unsustainable levels of debt. Each new extension of credit puts more money and thus more aggregate demand into the economy. More aggregate demand validates prior extensions of credit and the collateral that backs that credit, because those debtors now have money to make interest and principal payments. Yet this process is self-destructive. Each validation of prior borrowing encourages not only more borrowing but riskier borrowing, so adventurous borrowers willing to pay a higher price for an asset eventually crowd out prudent borrowers. Those adventurous borrowers ultimately need to realize capital gains via sales to “greater fools” in order to repay their debts. But as Minsky argued, and as 2008 showed, we do eventually run out of greater fools. When that happens, either the banking system crashes, as in 1929–1931, or the central bank steps in to rescue the banking system, as in 2008.
Mehrling also builds on Kindleberger’s observations that the stability of the global financial system depended on a buyer of last resort for both impaired assets and any commodity overhang. Indeed, his career has been built on the idea that the Federal Reserve Bank is now not only the lender of last resort for banks, but also the dealer of last resort for the entire US securities market and much of the global financial market. Kindleberger, largely living in simpler times, came to much the same conclusion about the global financial system. That system has the same problems around payment mismatch and excessive credit creation as do domestic financial systems but with the added problem of multiple currencies. Here, Minsky’s dictum that anyone can create money, but the problem is getting other people to accept it, matters.9 Debts owed in foreign currency must be serviced and validated with that foreign currency, and your own central bank may not be able to help you by simply extending emergency credit in your own currency.
But perhaps because Mehrling himself sees private credit creation and private money as a slightly more powerful force than state money, his treatment of Kindleberger’s work leaves the nature of power in the world economy largely unexplored. Kindleberger clearly sought language and organizational formats that drew a veil over the real hierarchy present in his preferred solutions to monetary instability. 10 He was, Mehrling notes, ultimately a believer in the efficiency of markets who tempered that belief by observing that those markets needed some degree of political interference for stability.
His proposal for expanding the Federal Reserve Bank’s Open Market Committee was a case in point. Kindleberger argued that the FOMC ought to accept representation from the central banks of the nine other major free market economies. Thus, the Group of 10 would have representation on what would in effect be the world’s central bank, setting the world’s interest rate, backstopping currencies under speculative attack, and intervening during a financial crisis. Yet this was not the kind of global clearing house cum central bank that Keynes proposed at Bretton Woods. It was clearly still the central bank of a single nation—one where, as the 2008 global financial crisis and the 2020 Covid-19 crisis showed, the Federal Reserve and the dollar sit at the top of the global financial system. In 2008 the Federal Reserve bailed out the other major financial systems via their central banks. The bailouts used nominally symmetrical swap lines, but US banks did not receive help from foreign central banks, revealing the essential asymmetry of power. By 2020 the swap lines were firmly institutionalized, and peak drawings during Covid-19 ran at about three-fourths of the 2008–2009 level.
That said, as Mehrling also notes, Kindleberger still ended up at quite some distance from mainstream economists for whom any political interference threatened to disturb rather than stabilize markets, even if he did not see financial markets as expressions of political power around the question of how to create and allocate credit. But credit markets are both manifestations and expressions of that power, as another of IPE’s founders, Susan Strange, argued. This power has structural, tactical, and practical aspects.
It takes no large step to observe that inviting representatives from subordinate central banks is like the extension of partial citizenship from the Roman Republic to its Latini neighbors.11 Empire is rarely a purely command and control relationship. In the nineteenth-century British empire, London extended considerable domestic autonomy to the richer, European settled colonies that became Australia, Canada and New Zealand. But sterling backed the monetary systems of those colonies, the Bank of England effectively determined interest rates for them, and their debts were sterling-denominated.
Equally, today two-thirds of global credit is dollar denominated, and almost all of that is extended by non-US banks. Foreign banks’ enormous overhang of dollar-denominated assets and liabilities on their balance sheet ties them to the Federal Reserve as surely as the old colonial banking systems were tied to the Bank of England. Banks must turn to the Fed for help if those assets are impaired, as the 2008 crisis showed.
Tactically, dollar centrality means that most global transactions flow through a dollar-denominated financial plumbing in which the New York Fed controls the critical shut-off valves. The US state’s power to impose financial sanctions flows from control over the plumbing. Efforts to build alternative pipelines have had only minimal success.
Finally, the British and American metropolitan cores drew enormous volumes of unrequited physical resources from their respective formal and informal empires. The United States accounts for half of cumulative global current account deficits from 1992 to 2020—mostly oil, autos, electronics, and clothing. The equivalent British figure is more difficult to calculate, but Britain imported roughly half of its food consumption and the bulk of the cotton and wool feeding its enormous textiles industry. Neither could do this if they had to pay for those imports in something other than their own currency.
But even if you don’t want to go as far as describing the global economy and its financial architecture as an empire centered on the US state and a small number of firms, that economy and its financial system is far from neutral. As Yakov Feygin and Dominik Leusder have argued, and as Matthew Klein and Michael Pettis put it in their recent book, supplying the key currency imposes costs, but not in any equitable way. Rather, workers in the US traded sector, which means mostly manufacturing, suffer losses as their jobs migrate overseas, while workers in export surplus countries receive a much smaller share of what they produce than they otherwise would. The US financial sector and foreign export firms are the beneficiaries of the nominal $11.6 trillion in current account deficits the US economy accumulated from 1992 to 2020. A slice of the US population enjoys the real resource transfer implied by the current account deficit, but its corresponding liabilities fall on US workers and taxpayers. Export surplus economies stand on the other side of that deficit. Foreign firms get to hold dollar-denominated assets—paper claims, not real resources—generated by the US financial system, but only because their employees’ consumption is limited, enabling their export surpluses.
Here, the contours of empire become visible. Kindleberger and Mehrling might stop after noting the payment risks and imbalances inherent in a global economy where non-US banks generate 90 percent of dollar-denominated cross-border lending and where more than half of global trade is invoiced in dollars. But the transfer of real resources to the center, and the adhesion produced by having one’s nest egg denominated in the center’s currency suggest a profound asymmetry in power. For those reasons, the book might better have been titled Money as Empire.
The internal empire, of course, extends from the Appalachian Mountains to the Pacific Ocean, built systematically on land purchases, war, and population displacement.↩
Mehrling, Money and Empire, 101-102.↩
Later versions of RBC did introduce monopoly firms and the 2008 financial crisis prompted an effort to incorporate financial variables.↩
Mehrling, Money and Empire, 22-23.↩
Mehrling, Money and Empire, 126-129.↩
The exceptions are firms like Amazon, which collects payment immediately and then remits payment to its suppliers after delays often lasting more than a month.↩
Charles Kindleberger, 1973. The World in Depression, 1929-39, (Berkeley: University of California Press) p. 289.↩
John Maynard Keynes, 1925. Monetary Reform (Harcourt, Brace and Company), p. 172.↩
Hyman Minsky, 1986. Stabilizing an Unstable Economy (New Haven, CT: Yale University Press), p. 255.↩
Mehrling, Money and Empire, 245.↩
Latini enjoyed a kind of Roman semi-citizenship that set them above Rome’s socii or foederati neighbors, who were simply allies until Rome extended citizenship to all of Italy in 87 BCE.↩