Charles P. Kindleberger
1912-2003
Another of the great economists of the post-World War II era left us when Charles P. Kindleberger died on July 7th at the age of 92. He was the recipient of NABE’s Adam Smith Award in 1983 and addressed NABE with the question: “Was Adam Smith a Monetarist or a Keynesian?” He began his long career as an economic historian with some very practical experience. He worked at the Federal Reserve Bank of New York during the Depression, was part of the Office of Strategic Services during the War itself and “played a significant role in the formation of the Marshall Plan for European Recovery.” (The Financial Times, July 11, 2003.) Joining MIT in 1948, he enlightened generations of students in the intricacies of international trade and finance. Along the way, he wrote 30 books, including my graduate school textbook, International Economics (1953); an important work on financial crises, Manias, Panics and Crashes: A History of Financial Crises (1978, revised 1989); and the thought-provoking World Economic Primacy 1500-1990 (1996). His work seems particularly relevant today. As an historian, he reminds us that markets can become irrational and are not necessarily self-correcting. Further, his practical experience during a time of great economic stress made him an eloquent exponent of the idea that there are times when government has to play a leading role in solving economic problems. Moreover, his observation that governments can learn from their mistakes is heartening, especially since the pendulum seems to be swinging toward more government involvement in the U.S. economy.
Refreshingly non-mathematical, his arguments are easily understood by a wide audience. As Daniel Altman put it in his article (The New York Times, July 9, 2003), Kindleberger was drawn to economics by curiosity, by the question of “how does the economy work and what has gone wrong.” This approach naturally leads to history and an open mind. I remember him for his kindness when I was applying to MIT for graduate work in economics in 1957. With some trepidation, I said that, as a physics major, I had taken only two semesters of economics. With a smile he said, “that’s all right, you won’t have to unlearn anything.”
Manias, Panics and Crashes has become a classic for its common sense description of how bubbles develop and end. It is especially relevant in the aftermath of the dotcom experience. According to Kindleberger, each financial cycle begins with some “displacement” that alters the economic outlook—such as a sharp rise or fall in the price of oil. Investors and firms respond to the new opportunities for profit or loss. Bank credit expands to finance the new investments. Psychology pushes more and more people into the game. As Kindelberger puts it, “There is nothing so disturbing to one’s well-being and judgment as to see a friend get rich.” (Manias, p.19). The speculative boom continues until, at some point, the wise or lucky ones begin to withdraw from the market. Prices stabilize and more speculators decide that it is time to sell. Prices plunge and panic ensues. Unless checked by the intervention of a “lender of last resort,” the financial crisis can easily have a severe impact on the real economy.
Kindleberger clearly believes that markets can become irrational at times and that intervention by government is sometimes necessary. As he says, “the implementation of the Marshall Plan after World War II, instead of the tangle of war debts and reparations after World War I, suggests that governments can, on occasion, learn.” (Manias, p.248) Also, on the issue of rationality, I particularly like his quotation from Isaac Newton: “I can calculate the motions of the heavenly bodies but not the madness of crowds.” (Manias, p.38) During the South Sea bubble, Newton sold early at a profit but then re-entered the game and ended up losing a serious amount of money.
Since financial crises tend to spread from one country to another (e.g. the October 19, 1987 stock market crash and the Asian financial crisis), the question arises as to who or what is to be the lender of last resort in international markets. In Kindleberger’s view, this is the responsibility of the world economic leader. In the 19th century, Britain was the primary economic power; and, in the immediate post-World War II era, the United States was the unquestioned leader. In the 1930s, Britain was no longer able and the United States was not yet prepared to assume this role. Hence the financial crisis of the 1930s was deeper and more protracted than earlier crises.
Concern with the importance of economic leadership led him naturally to study the rise and fall of economic leaders from the Italian city-states in the 1500s to the United States after 1945. He perceived that there was a national life cycle in each case. The classic illustration of this concept is Britain: “great vitality gradually evolving into rigidity and resistance to change.” (World Economic Primacy, p.148) This led to relative decline, as other countries—France, Germany and the United States—caught up. Kindleberger, writing in 1996, was clearly worried that the United States was following Britain’s example. Rising current account deficits, poor productivity growth and a weak dollar were, to him, all signs of decline. It would be interesting to know if the events of the years since then might have allayed his worries. Increased immigration—both legal and illegal—has helped to revitalize many American cities. Stronger productivity growth offers the potential for rising real wages and low inflation. Finally, the U.S. dollar—which is the most visible symbol of our economic primacy—has proved more resilient than many expected, even if this is due to our creditors buying U.S. Treasuries in massive quantities so that we will continue buying their goods.
Kindleberger concludes his book on world economic primacy by predicting that the world will muddle along without an explicit challenge to U.S. economic leadership, since such potential challengers as Germany and Japan have serious problems of their own.
“In sum, muddle is indicated. In due course a country will emerge from the muddle for a time as the primary world economic power. The United States again? Japan? Germany? The European Community as a whole? Perhaps a dark horse like Australia, Brazil or China? Who knows? Not I.” (p. 238).
Thomas W. Synnott, III
Chief Economist, Emeritus
U.S. Trust