Even in a multipolar world, the U.S. dollar remains the world’s reserve currency. How did this come to be and why does it matter? Perry Mehrling, Professor of International Political Economy at Boston University and author of Money and Empire: Charles P. Kindleberger and the Dollar System, approaches the story of global money through the life and career of one of the 20th century’s most influential economists.
Charles Kindleberger began his career at the Federal Reserve Bank of New York. During the war, he worked at the Office of Strategic Services (a wartime predecessor of the CIA), both in Washington and abroad. After the war, he remained with the U.S. government at the State Department working on issues related to European reconstruction. Kindleberger served as one of the architects of the Marshall Plan and became a key proponent of the dollar system and the need for an integrated global financial market with one basic money. Moving into academic life at MIT in 1948 and later blacklisted during the McCarthy era, he produced a textbook, International Economics (1953), which became a standard in the field. His best-known work, Manias, Panics and Crashes: A History of Financial Crises (1978), became a classic as have his books The World in Depression (1973) and A Financial History of Western Europe (1984).
Lynn Parramore: Tell me a little about your experience writing this book and what attracted you to the subject.
Perry Mehrling: I wanted to extend my money view to international economics and I was trying to write a follow-up to The New Lombard Street: How the Fed Became the Dealer of Last Resort, which was kind of a biography of the Fed. This time I wanted to write a biography of the global dollar. I got a grant from the Institute for New Economic Thinking and I started on it, and then I discovered Kindleberger and I realized that was the way to tell the story. He’s making life changes at the same time that the dollar system is making life changes. That’s why the book works. It’s the story of the rise of the dollar and a bildungsroman of the rise of a man. I like writing this kind of book. It’s not like standard economics.
LP: You describe how Kindleberger came up in the world, taught at MIT for years, became widely read, and yet today’s mainstream economists often ignore his work. Why did mainstream economics turn away from him?
PM: It’s important to appreciate that his intellectual formation is in pre-WWII American Institutionalism [a philosophical movement focused on the role of institutions and associated with John Dewey and Wesley Mitchell]. It’s not that economics turned away from Charlie in particular, but that economics turned away from American institutionalism more generally.
What did it turn toward? In the postwar period, economics grew up as more about mathematical and statistical modeling — one or the other. That sort of crowded out these older traditions that he was a part of. It took a while. It didn’t happen immediately. MIT hired him in ’48, so clearly the university saw value there. Charlie never pretended to be anything that he wasn’t, but over the succeeding decades, economics grew up to be quite a different thing than what he had grown up with himself.
LP: Kindleberger debated with colleagues about the postwar monetary order. Can you say a bit about those debates and his contribution?
PM: There are a number of dimensions to it, but I think maybe the overriding one is that Kindleberger was an internationalist. He was a cosmopolitan, not a nationalist. One of the other things that happened to economics in the postwar period was that its main client became the nation-state. Economics became about national economic policy, business cycle stabilization, and so forth.
Charlie never bought into that. He always thought that his client was the world. For him, it was the well-being of the world population, not a particular nation. He wasn’t that interested in the policy problems of the U.S. narrowly. He never went to Washington when so many of his MIT colleagues did after Kennedy was elected, or when they all got excited about using the strength of the dollar to improve the conditions of Americans. He was interested in expanding the dollar system to the globe and bringing in other voices, adding European voices to the Open Market Committee, or maybe transitioning to have the BIS [Bank for International Settlements] be the world central bank instead of the Fed. He saw the world as his oyster, not the particular nation that he happened to be in. That was very unusual, particularly for Americans.
LP: So he wasn’t interested in the dollar system giving America global financial power or hegemony.
PM: Correct. In fact, he thought the dollar system was a public good that the U.S. could provide to the rest of the world, and, in fact, should provide to the rest of the world.
LP: You point out that Kindleberger learned Greek and Latin, and though he turned away from classics in favor of economics, his classical training left a permanent mark. How would you characterize that influence?
PM: He studied classics in high school, at the Kent School, and he went to the University of Pennsylvania with the idea of studying the classics but shifted to economics when he took a course and got interested in it. I think one of the reasons he got interested in it was because of things happening in the world.
When I discovered that the classics training was important to his formation, I began to ponder that influence. He eventually found a home in economic history and I think that’s maybe why. When you’re learning classics, you’re not just learning a language. You’re learning a different world. You’re learning about the world of the Greeks and the Romans which is rather different to the world that you’re living in right now, and so you have a standpoint, a perspective from which to look at current events. You have a standpoint in the past and a standpoint in a different culture. That gives you a perspective on the human dilemma, I think, that is broader than the narrow rational economizing man. There’s war, there’s drama, there’s marriage, there’s courage, there’s heroism. That’s what the classics training is about. Not maximization.
LP: Do you think the classics training provides a perspective on ethics and morality that is useful to the economist?
PM: I suppose it does, though I don’t have enough training in the classics to say much about that. But in Charlie’s case, he was considering why students came to study economics at MIT. He said that there were two different categories of people. There are people who are trying to make the world a better place, so they’re driven by ethical and moral concerns. And then there are people who are motivated by curiosity about how the world works. In his experience, it’s the latter that is the more sustaining motivation. I think he’s speaking about himself. He was really motivated by curiosity, and it turned out that he lived in a time when he could be very useful in the Marshall Plan and other things like that. But when he wasn’t useful anymore, or he didn’t feel he could be, he was quite happy to go into academia and sit in his chair and write books. He was extremely content with that.
LP: You write that after 1971, when Nixon declared the abandonment of the dollar peg to gold, Kindleberger thought the dollar system was doomed. Instead, we saw a revival. Does that point to any flaws in his thinking or something else?
PM: His thinking was fine, and history proved his thinking to be right, but when you ask, was it something else, that makes me think that yes, it was something else. I hazard a guess that it was his experience growing up in the Great Depression. He was analogizing 1971 to 1931 when the Bank of England was forced off gold, and that ushered in the global depression. The sterling standard, which had been the standard before WWI, was what everyone expected to be put back in place after WWI. It sort of chugged along for ten years before it collapsed, but when it did collapse in 1931, it left a vacuum.
Fast forward to 1971 and remember that the U.S. was not forced off gold but instead chose to abdicate its responsibility as the world reserve currency. Charlie thought, first of all, that this was incredibly irresponsible. He called it “The Crime of 1971” and worried that it would very possibly have the same kinds of deleterious effects as 1931, and he didn’t want to live through that again. So I think it was possibly that emotional scarring from 1931 that made him forget what his own theory said – that the international monetary system emerges from practice, not from the decisions of our political overlords. So Nixon might have said, “we don’t want the dollar to be the world’s reserve currency anymore,” but the businesses and banking interests said, “uh, we do” and they found a way to make it work again. Eventually the United States, after this experience of the seventies, which was not a pleasant experience with stagflation and so forth, put the system back together again with Volcker in ’79 [when Volcker raised interest rates to combat inflation] and the Plaza Accord in ’85 [a joint agreement among the G-5 nations to manipulate exchange rates by depreciating the dollar relative to the Japanese yen and the German Deutsche mark]. So the politics got sorted during this chaotic period of the seventies and then put back together again. In the end, Charlie was right, but in the short run, he didn’t believe his theory enough.
LP: Your book discusses Kindleberger’s loss of security clearance in the McCarthy era, a blow to a man who had been an intelligence officer during WWII. How do you think this affected his development as an economist?
PM: As I reconstruct his biography in the book, I think that he moved from the State Department to MIT imagining that he would be doing more or less the same kind of job in a different location. He would have a foot in academia and a foot in global economic policy. The first book he wrote at MIT, the one that he got tenure for, was essentially an economic justification of the Marshall Plan. So you can see he’s got a foot in both of these worlds. He had been building the Marshall Plan while he was at the State Department, and now he’s writing an economic justification for it. He thought he was going to do more work like that, but when he lost his security clearance, it meant he couldn’t get hired by the government to do anything at all.
So he had to then find another road. Now he was stuck in academia and couldn’t have a foot in that other world and I think it crippled him. His way of adjusting to that, his resilience, was to embrace economic history, starting with his engagement with historians up the river at Harvard. It took a while. In a sense, it only emerged twenty years later in his great books. But he did write this book on economic growth in France and Britain in 1964. I don’t think he would have become an economic historian if he had not lost his security clearance, so maybe we are beneficiaries of that, but it was certainly a big setback for him at the time.
LP: Do you think it made him more cautious?
PM: I don’t know that it made him more cautious. In fact, I think it made him a little angry about McCarthy. Even when a colleague at M.I.T. got dinged as a Red, he contributed to his legal defense fund, which showed up in his FBI file as another strike against him. But he had a high moral sense of his own responsibility. He thought that it was shameful, this behavior. He was a war hero. He had been cleared for Ultra.
LP: Could you say a bit about Ultra and what this particular clearance meant during the war?
PM: During WWII he traveled with General Bradley after D-Day. The U.S. had broken the code of the German high command and it was a big secret. The Germans thought they had complete cryptographic security, so they would say anything on these channels. Charlie was one of the top intelligence analysts at the time and he was reading that intelligence. It didn’t do them much good once the war went onto the European continent because the communication was more local, but it was very important for D-Day that the allies were able to read the Ultra traffic and know what the Germans were expecting and try to surprise them by landing in Normandy. He was possibly insufferable at the breakfast table with his children – “how I won the war and how I won the peace with the Marshall Plan”! But there’s actually some truth to that.
LP: So much trust had been placed in him. What was the justification for removing the clearance?
PM: Yes, and he lived up to it. Charlie also had a Bronze Star. It’s just shameful that his government would treat him that way by revoking his clearance. Not just a shame for him, but for his friends, too, who got caught up. Many people’s lives were hurt much more than his. He was a tenured faculty member at MIT so he was going to be okay and he thought of that as a relatively protected position.
I don’t think he had any reason to be careful because he had nothing to be careful about. He was not a spy. He didn’t know why he lost his security clearance until much later in the late sixties after the Freedom of Information Act and he discovered what was in that file and it was just not much at all. All of it had been known when he was working for the Marshall Plan. They had done a security clearance on him and he had been cleared in spite of those facts. But later on, when he wasn’t working for the Marshall Plan, other people read those files and they didn’t clear him. Really, there were no “facts.” It was just the life experience of someone who grew up in the time he did, who worked in the Treasury when Harry Dexter White was the head of it. Because Harry Dexter White was considered suspect, an internship there – a summer job as a graduate student – was a strike against you. There wasn’t any actual evidence of disloyalty or anything like that.
LP: What do you think contemporary economics still has to learn from Kindleberger?
PM: The big idea he had was that there are underlying forces operating in the economy that tend toward a globally unified monetary and financial system and that we need to take these forces seriously and not fight against them but work with them. So if you look at the long sweep of history, you’ll see that what he was imagining back in 1937 when he wrote his Ph.D. dissertation, “International Short-term Capital Movements,” is more or less the world that has come to be. This is not the world that the economists were ever analyzing or imagining. They were thinking about individual nation-states. But the dollar system, despite being counted out, even by Kindleberger himself after 1971, has expanded geographically, and, after the Global Financial Crisis, really much to the global south, and that system right now is being tested. We’re coming into a period of monetary tightness and discipline and so some things will break. It’s two steps forward and one step back. He always spoke about the see-saw pattern.
What is most impressive about him as a person is his psychological resilience. Even with these setbacks in life, he found a way. But for me, it’s the American Institutionalist pragmatic tradition that shows up in economics. That way of dealing with problems says that we just need to confront them and think them through using whatever is available to us, not rely on a high scientific stance, saying that if it’s not econometrics or calculus, it’s not science.
Remember, the people who saved us from WWII, from the Great Depression, the New Dealers, none of them were mathematicians. They came out of this school, the American Institutionalist tradition. It worked. This was Charlie’s point. This way of approaching the world, as far as he was concerned, seemed to work. It worked for him as an intelligence analyst, and it worked for him in the State Department, and so he saw no reason to change. He remained that way for his life, and that may be an object lesson and a way to do economics. It could work today, too, but there’s no room made for it.
LP: Would you say Kindleberger was an optimist?
PM: I think he was sort of an optimist. He grew up in a very privileged childhood, an early safety that was completely destroyed by the Great Depression by the time he was in graduate school. But that meant that he had this psychological resilience. He never had any money, really, until he wrote a bestseller after retirement. But I think he also simply decided to be optimistic. It’s a personality trait but it’s also an effort of the will. Do we sit and wallow in our despair? What else can we do? Let’s try to do something about it. Wouldn’t that be more fun?
