Webinar Summary – Kindleberger and the 21st Century
On Wednesday June 7, the Boston University Global Development Policy (GDP) Center hosted a webinar on “Kindleberger and the 21st Century” featuring Perry Mehrling, author of “Money and Empire: Charles P. Kindleberger and the Dollar System” and Robert N. McCauley, co-author of eighth edition of “Manias, Panics and Crashes: A History of Financial Crises.” The webinar provided a unique view of the contemporary issues facing the global monetary system through the lens of one of the most prominent international economists of the 20th century. The discussion was moderated by Lara Merling and explored equity in the global monetary system, the role of the International Monetary Fund (IMF) as a lender of last resort and debt distress in developing countries.
The first edition of “Manias, Panics and Crashes” was published in 1978 by Kindleberger and has since become a staple in international economics literature. McCauley began by explaining that Kindleberger’s motivation for the first edition stemmed from an earlier publication on the Great Depression and was an attempt to generalize and model international cases of manias, panics and crashes, things that typically didn’t appear in economics textbooks. The first edition of “Manias, Panics and Crashes” explores the “Minsky model,” as Kindleberger termed it, which emphasizes speculative bubbles and crashes in international financial crises, and discussed the major policy conclusion that emerged from this finding: the importance of an international lender of last resort in mitigating the severity of an economic downturn.
Subsequent editions have built upon this framework and updated it. McCauley explained that the latest edition was necessary due to a shift in the US Federal Reserve (Fed), which has served as the lender of last resort in the 21st century through the 2008 global financial crisis and again in 2020 with the COVID-19 pandemic. The Fed’s extension of unlimited swap lines in 2008 and 2020 and support of the corporate security market through outright purchases would have earlier been inconceivable, except perhaps to Kindleberger, who had argued that the international lender of last resort needs to lend without limit. McCauley explained that in the spirit of the first edition exploring the role of the lender of last resort, this changing landscape needed to be addressed.
To follow, Mehrling provided a history on who Kindleberger was, highlighting how an understanding of what shaped Kindleberger’s thinking provides greater context for the framing of “Manias, Panics and Crashes”. Mehrling explained how after earning his PhD during the Great Depression, Kindleberger began his career at the New York Fed and later transferred to the Bank of International Settlements (BIS) in Basel, followed by London during World War II as an intelligence officer and then the US State Department to work on the Marshall Plan. After 12 years in public service, he pivoted to academia at the Massachusetts Institute of Technology, where he worked for nearly 30 years. In his “third career” upon retirement, as Mehrling labeled it, Kindleberger became an economic historian independent of any institution. Beyond a biography of Kindleberger’s life, Mehrling’s “Money and Empire” is a revisionist history of the dollar system and of economic theory though Kindleberger’s perspective of the organization and hierarchy of the global system.
To kick off the discussion, Merling asked both authors to dive deeper into the idea of the monetary system as a global system in a contemporary setting, pulling from the historical lessons of Kindleberger and considering the dynamics of an international system where not all countries are equal.
McCauley explained that the debate over who gets access to swap lines is still an active question, with Fed staff providing rationale of economic size and integration for access to swap and scholars exploring somewhat “sharper” criteria like US alliances and military connections. The latest edition of “Manias, Panics and Crashes” explores the coverage of the Fed’s swap lines from a key currency perspective and finds that the currencies of central banks with unlimited access, and those in the second “circle” with limited access account for a large share of global forward exchange transactions: in market terms, the coverage of the Fed is quite high. Mehrling added that the question raises an important consideration of whether all countries should be presumed equal and sovereign in the international monetary system. He explained that Kindleberger pushed back on the assumption of equality, as he saw the monetary system as hierarchical, and needed to be managed as a reality of the key currency system.
To take a closer look at lessons from a recent and notable case of mania, Merling asked about parallels that can be drawn between the sovereign debt crisis of the 1980s and the debt accumulation that many developing countries are facing today.
McCauley first explained how the explosion of dollar bond issuance by the US corporate sector following the 2008 financial crisis was an intended result of Fed bond purchases while the explosion of dollar bond issuance by the Global South was unintended. McCauley doesn’t see the signs of a broad scale debt crisis among borrowing countries that was apparent when Kindleberger wrote the first edition in 1978. The countries that are in distress, like Ghana, represent the extensive margin of the dollar bond boom, having never had access to the dollar bond market before, but the larger debtors at the intensive margin of the boom retain access to the market. Mehrling added that the Minsky model provides a general framework to understand the evolution of the current system. He explained that it begins with a displacement, like the global financial crisis, which leads to a credit expansion and creates new channels to the Global South, like the expansion of the bond market that McCauley had described. According to Kindleberger, when the global economy settles, these channels will remain even if to a lesser extent. Both Mehrling and McCauley explained that the world is now in a stage of seeing what kind of outcomes will come from the expansion of the dollar system, even beyond the extensive margin and the Global South.
Merling posed another question on the role of the IMF as the lender of last resort, wondering whether as an initial supporter of the IMF, Kindleberger would support the short-term liquidity it provides.
Mehrling clarified that Kindleberger was actually not a fan of the IMF but rather of the BIS, which was supposed to be replaced by the Fund but has remained part of the international financial architecture. He was, however, a supporter of the World Bank and long-term development finance. Mehrling explained that Kindleberger didn’t see the IMF operating as a lender of last resort since it’s not a bank and its ability to respond to crisis is hindered by its governance structure, a characteristic that McCauley emphasized as well. Mehrling explained further that Kindleberger was weary of Global South economies borrowing from short-term markets for long-term needs.
McCauley also added that the IMF’s conditionality hinders its ability to act as a lender of last resort, which Kindleberger saw as an obstacle as well. However, Merling noted that the unconditional emergency credit lines the IMF approved in response to the pandemic, which were in addition to the $650 billion issuance of Special Drawing Rights (SDRs), unconditional loans based on a country’s quota at the IMF. Both McCauley and Mehrling highlighted the lack of uptake of the SDRs, despite them being an unconditional and a cheap financing option, and Mehrling cautioned against addressing the issues facing Global South economies as liquidity concerns. Merling provided additional background on the uptake, which has been very high for developing countries, but an unequal distribution of the SDRs, which is tied to a country’s IMF quotas and are much lower for developing countries, has resulted in an overall lower level of uptake.
Mehrling, McCauley and Merling wrapped the discussion with rapid fire audience questions on the impacts of petrodollars on developing countries struggling to access dollars to import oil, Eurobonds and dollar reserves as insurance for developing countries against global shocks like US monetary policy and the feasibility of blended finance for climate finance. As they had throughout the discussion, Mehrling and McCauley provided insights on how Kindleberger’s historical observations provide lessons on how these new conditions may materialize in the global monetary and economic system and in his mind, could all be seen as progress in the system.
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