Charles Kindleberger, the Dollar System, and Financial Crises

When Ben Bernanke, Chairman of the Board of the Federal Reserve, opened the September 16, 2008 meeting of the Federal Open Market Committee in the wake of the collapse of Lehman Brothers, he tabled a new procedure for liquidity provision. It concerned the Dollar Swap Lines program allowing the Federal Reserve to grant credit facilities to other central banks—notably the European Central Bank, the Bank of England, and the Swiss National Bank—which pay an interest rate and use their own currency as collateral with no foreign exchange risk for the Federal Reserve. The proposal on September 16 was to transform the Dollar Swap Lines procedure in such a way that the quantity of dollars provided would henceforth be unlimited, for a given interest rate. Without knowing it, Ben Bernanke and the staff of the Federal Reserve Bank of New York were proposing to implement the rule that Charles Kindleberger had enunciated thirty years earlier in the final pages of his book Manias, Panics, and Crashes—a rule specifically applicable to swap lines between central banks. More generally, the global financial crisis of 2007–2009 illustrated Kindleberger’s analysis of nearly half a century of research into international monetary and financial economics. Although an outstanding achievement, it has received little attention in the literature on financial crises.

Perry Mehrling’s Money and Empire: Charles P. Kindleberger and the Dollar System contributes to righting this state of affairs. The title explicitly echoes that of Marcello De Cecco’s book (1974) on the international gold standard under British financial dominion. The book does not propose a monetary and financial history, but an intellectual one, that of Charles Kindleberger (1910–2003). The Life of an Economist (1991) is his autobiography and, according to Perry Mehrling, it is an “unreflective and impersonal book, perhaps reflecting the WASP’s ingrained reticence to talk about oneself” (page 5).[1] For this reason, more extensive documentary sources have been explored: the archives of the Massachusetts Institute of Technology (MIT)—where Kindleberger was professor of International Economics from 1948 to 1976—and those of the Truman Library—which reveal aspects, notably political ones, of Kindleberger’s life. The book’s ten chapters are arranged into three well-balanced parts.

Kindleberger and the dollar system

The first part (1910–1948) deals with Kindleberger’s intellectual background. His studies at Columbia University led him to follow the teachings of Henry Parker Willis, who was one of the drafters of the Federal Reserve Act of 1913 and then a member of the Board of the Federal Reserve System, and to complete his PhD under the supervision of James Angell. Kindleberger’s thesis (1937) dealt with international short-term capital movements and was written at a time when the center of the international monetary and financial system was shifting from London to New York. John H. Williams (1934) had analyzed the transition from the pound sterling to the dollar system and coined the notion of the key currency (page 57). He was Chief Economist of the Federal Reserve Bank of New York when Kindleberger was appointed there in 1936. Later, Kindleberger became an economist at the Bank for International Settlements in Basel. Military conflict in Europe precipitated his return to the United States and he took up his post as economist to the Board of Governors of the Federal Reserve System.

At this time and with Alvin Hansen’s encouragement, Kindleberger published an essay for the National Planning Association (1941) covering a theme that would later be developed in The World in Depression (1973): “The United States is learning for the second time in a single generation that she is unable to escape from the impact of world forces. She is therefore compelled to assume world responsibilities and to concern herself with policies designed to promote world security and world prosperity” (quoted on page 74). These issues were related to his administrative activities when, in the aftermath of the United States’ entry into the world conflict, he joined the Office of Strategic Services and when he became Chief of the Division of German and Austrian Economic Affairs—a division of the Department of State responsible, among other things, for implementing the Marshall Plan and steering the German Monetary Reform of 1948.

The second part of the book (1948–1976) begins with Kindleberger’s academic appointment to the Massachusetts Institute of Technology (MIT) and focuses on his research into international economics in general and the balance of payments in particular. Two levels of analysis—one contextual, the other theoretical—are superimposed. At the contextual level, following the Bretton Woods agreements, the international monetary and financial system was now centered on the dollar (the dollar system), to the detriment of John Maynard Keynes’s plan (the clearing union). As Perry Mehrling mentions on several occasions (pages 135, 153, 232), Kindleberger was particularly interested in the establishment, from 1961 onwards, of the swap line arrangement between the Federal Reserve and the European central banks. It may be outlined that these swap lines served two possible purposes. The first one is monetary: under the Bretton Woods regime, they were mainly used to ensure parity between the dollar and the official price of a gold ounce, and between the pound sterling and the dollar. The second purpose is financial: the Federal Reserve swap lines ensure the liquidity of the financial system and can serve as the instrument of the lender of last resort internationally. With the dismantling of the Bretton Woods regime, the first (monetary) purpose fell into disuse. As illustrated by the global financial crisis of 2007–2009 and as a result of the internationalization of banking and the globalization of capital in the Western world, the second (financial) purpose is now crucial.

At the theoretical level, Charles Kindleberger was caught up in two controversies. The first was with Robert Triffin—the advocate of the clearing union. Triffin argued that the gold exchange standard that characterized the Bretton Woods regime was unable to adequately resolve the problem of international liquidity supply. The symptoms were either a shortage of international liquidity or a balance-of-payments deficit for the country issuing the international liquidity, namely the United States. Kindleberger countered that the balance of payments deficit was not really a symptom but stemmed from the U.S. banking system’s position as “world banker,” in that it borrowed short-term to lend long-term internationally (pages 137-42). The second controversy was that with Milton Friedman—the leader of the monetarist school. One issue was the defense of flexible exchange rates (Friedman) or fixed exchange rates (Kindleberger) (pages 168-173). Retrospectively, this issue seems outdated insofar as the dollar system that Kindleberger contributed to analyzing has continued to work under the flexible exchange rate regime. Another issue was to determine whether the Great Depression was essentially due to a mistake in monetary policy (Friedman) or was more closely linked to an inherent instability in the banking and financial system (Kindleberger). As detailed below, this issue also prompted discussion between Kindleberger and the New Keynesians, notably Ben Bernanke.

The third and final part (1976–2003) of Perry Mehrling’s book begins with Kindleberger’s retirement from MIT and focuses on his contributions to the field of monetary and financial history, particularly the history of financial crises, which is the topic of his famous book, Manias, Panics, and Crashes, first published in 1978 and that ran to several editions during the author’s lifetime. As a result of this latter period of research, much of the literature considers Kindleberger to be an economic and financial historian. This interpretation of his work misses out on his theoretical approach. And as Perry Mehrling (page 117) underlines, “economic history was for Charlie a method of inquiry more than it was a subject of inquiry.” Another part of the literature points to the theoretical influence of Hyman Minsky’s work on Kindleberger’s. This interpretation is also questioned by Perry Mehrling who warns that “we seriously underestimate Kindleberger if we see him merely as an international extension or adaptation of Minsky” (page 195; see also page 207). There is certainly a common thread between the two authors, namely the theoretical approach that views financial crises as fundamentally endogenous in nature, not merely exogenous. Beyond this framework, both authors developed their own research agendas. Perry Mehrling (2023a) discusses the standard interpretation of Manias and explores further the Minsky-Kindleberger connection.

The final chapter is devoted to the question of leadership. Kindleberger’s contribution to this subject was unfortunately overshadowed by a confusion that Perry Mehrling points out and which needs to be cleared up entirely. Kindleberger’s The World in Depression (1973) inaugurated a field of research articulating political economy and political science: namely, international political economy. Within this field, an inattentive reading (e.g. Keohane, 1984) associated Kindleberger’s contribution with the so-called hegemonic stability theory. As Perry Mehrling twice emphasizes (pages 95, 240), Kindleberger did not propound the concept of hegemony, but rather that of leadership or of being a stabilizer. The interpretation of Kindleberger as a theorist of “hegemonic stability” is particularly erroneous when applied to his analysis of the money question in general. Indeed, according to Kindleberger (1981, p. 69, quoted on page 56), money cannot be imposed by a government within any economic community—“governments propose, markets dispose”—a fortiori at the international scale. In particular, the interpretation associating Kindleberger with the hegemonic stability theory disregards how he addressed the question of international lending in last resort.

In this respect, it may be specified that two arguments intertwine in Kindleberger’s work, but remain distinct. The first is that international economic and financial stability is a public good, and as a public good it is vulnerable to the problem of free riding. The dominant country must then take on more than its share of the burden in order to alleviate coordination problems between nations. The leadership should therefore be “benevolent” and subsidize other countries. Kindleberger’s second argument is that money is fundamentally hierarchical in nature—whether on a national or international scale. The country issuing the international liquidity must then set the rules for intervention of last resort to adequately counter global financial crises. The leader must be the stabilizer. The question that Kindleberger did not fully address (which would explain in part, but only in part, the confusion surrounding his analysis) can be framed as follows: Is the stabilizer necessarily benevolent? In documenting the program of the Dollar Swap Lines during the global financial crisis of 2007–2009, it has been possible to show that: (a) the Federal Reserve was the stabilizer of the Western financial system, (b) without subsidizing the other central banks, quite the contrary (Carré and Le Maux, 2020). Thus, this episode in financial history lends greater weight to Kindleberger’s second argument—an argument that gives a better account of his work as a whole.

Another caveat regarding Kindleberger’s approach to the international monetary and financial system is worth noting. As observed above, Kindleberger advocated the fixed exchange rate regime and started to analyze the dollar system under the Bretton Woods agreements. However, it would be misleading to infer that his advocacy of fixed exchange rates (at the normative level) determined his theory of monetary leadership (at the positive level). Actually, the two outlooks must be carefully disentangled. In the first step, the dismantling of the Bretton Woods regime and the introduction of flexible exchange rates led Kindleberger to question the future of the dollar as an international currency. Hence, Kindleberger (1976, p. 35) came to consider that “the dollar is finished as an international money, but there is no clear successor”—meaning that the dollar would prevail by default. Later, Kindleberger (1982, p. 47) conceded that he was wrong about the dollar being finished—one reason being that the dollar was not and is still not challenged by another currency. In the second step, Kindleberger (1986, p. 289) came to incorporate the role of leadership under the flexible exchange rate regime in the revised and enlarged edition of The World in Depression. Perry Mehrling (page 199) accurately compares the two editions as follows: “The biggest substantive change in the second edition [Kindleberger, 1986] was in its conclusion, where the original three stabilizing functions are now extended to five, and printed as a numbered list: (1) Maintaining a relatively open market for distress goods; (2) Providing countercyclical, or at least stable, long-term lending; (3) Policing a relatively stable system of exchange rates; (4) Ensuring the coordination of macroeconomic policies; (5) Acting as a lender of last resort by discounting or otherwise providing liquidity in financial crisis. The new stabilizing functions are (3) and (4), added by Kindleberger to take account of the experience with flexible exchange rates in the years after the first edition [Kindleberger, 1973].”

Conclusively, Kindleberger’s leadership theory in general and international-lender-of-last-resort theory in particular is independent of the monetary regime—with fixed or flexible exchange rates. In other words, the fact that Kindleberger had advocated the fixed exchange rate regime does not undermine his overall analytical framework concerning the need for an international lender of last resort. Kindleberger simply adapted his analytical framework to the new institutional environment. As an illustration, Kindleberger predicted in Manias, Panics, and Crashes how the Federal Reserve actually did intervene from September 2008 onwards as the international lender of last resort—under the flexible exchange rate regime.

The three-part organization of Perry Mehrling’s book as outlined above enables us to grasp more fully the life and work of Charles Kindleberger. Given its periodization, the book does not reconstruct a posteriori the theoretical debates in the light of the global financial crisis of 2007–2009. This is not a shortcoming of the book, but a choice centered around the biographical approach. Beyond this historical framework, Perry Mehrling offers a theoretical approach to financial crises in developing the “money view” which attributes importance to the inherent hierarchy of money, the daily settlement constraint, and the market-making activity (Mehrling, 2010, 2013, 2023b). In addition, given the periodization of his book, he did not use all the archival material at his disposal, in particular the correspondence between Charles Kindleberger and Ben Bernanke written in 1982 (Mehrling, 2022b). In this correspondence, Kindleberger commented on an early version of the article by Bernanke on the Great Depression—probably Bernanke’s 1982 version, the better-known being the 1983 version. This correspondence is now available online on the Institute for New Economic Thinking (INET) website.[2] In order to understand the substance of Kindleberger’s letter to Bernanke, let’s take a look at the theory of each of the two authors, in particular concerning two important topics: (1) the nature of financial crises, and (2) agents’ rationality.

Kindleberger and financial crises

Many economists consider Kindleberger to be one of the economists who have made a significant contribution to the analysis of financial crises.[3] According to Kindleberger, a financial crisis is the result of a long and endogenous process and cannot be reduced to a sudden event or an exogenous shock. The spiral of liquidity illustrates such a process: on the upside, price dynamics on certain financial and real estate asset markets lead to an extension of credit which, in turn, feeds the upward price dynamics; on the downside, the shift in agents’ market expectations leads to a “race for liquidity,” a collapse in asset prices and a net destruction of credit. To examine further the endogenous process analytically, Kindleberger (1978, p. 107) made the following distinction: on the one hand, “causa remota of the crisis is speculation and extended credit” (ibid) as can be illustrated with the spiral of liquidity; on the other hand, “causa proxima is some incident which snaps the confidence of the system, makes people think of the dangers of failure, and leads them to move from commodities, stocks, real estate, bills of exchange […] back into cash. In itself, causa proxima may be trivial: a bankruptcy, […] a refusal of credit to some borrowers” (ibid). Causa remota corresponds to the endogenous process and causa proxima cannot be strictly identified with an exogenous shock—which explains why Kindleberger remained uncomfortable with the latter term. Indeed, exogenous shock corresponds to an unexpected event, whereas causa proxima makes sense insofar as causa remota is in motion.

Turning to the question of rationality, Kindleberger (1978, p. 41) considered that “markets can on occasions—infrequent occasions, let me emphasize—act in destabilizing ways that are irrational overall, even when each participant in the market is acting rationally” (emphasis added). Financial speculation, which is initially determined by the rationality of agents seeking capital gains, can lead to an equally rational strategy of fire sales when agents now anticipate that rising asset prices and debt levels are no longer sustainable. Put differently, rational behavior such as speculation or fire-sale strategies, far from helping the banking and financial system to return to equilibrium, exacerbates the instability of the system as a whole—which might appear “irrational overall.” Kindleberger (1978, p. 162) concludes: “Each participant in the market, in trying to save himself, helps ruin all.” Kindleberger hence departed from the so-called rational expectations hypothesis, not because he subscribed to vague notions like “agent irrationality” or “irrational exuberance,” but because he believed that rational expectations theory overlooks the destabilizing forces at work in the market of financial assets and credit, and consequently overestimates the capacity of the financial system to return promptly to equilibrium.[4]

Having set out Charles Kindleberger’s theoretical framework, let’s now turn to Ben Bernanke’s, which views financial or banking panic simply as sudden events. In other words, there is no endogenous process explaining the financial crisis (no causa remota or even causa proxima, as the latter cannot be understood without the former) but simply an exogenous shock. This is what Bernanke (1983, pp. 271-2) recognized in his first article on the Great Depression: for him, banking panics do not depend on agents’ expectations; put differently, there are no agents’ expectations that would take into account the state of the economy and the level of firms’ indebtedness. Therefore, Bernanke provided no explanation for banking panics and aimed only to examine their effects. In the 1982 correspondence, Kindleberger pointed out the prism chosen by Bernanke, which was fundamentally similar to that of Friedman and Schwartz (1963): “The necessity to demonstrate that financial crisis can be deleterious to production arises only in the scholastic precincts of the Chicago school”—a strategy that abstains from any explanation of the causes of financial crises. Kindleberger would therefore not have been surprised to read the conclusion of Bernanke’s speech (2002, p. 18) in honor of Milton Friedman: “as I have always tried to make clear, my argument for nonmonetary influences of bank failures is simply an embellishment of the Friedman-Schwartz story.”

With regard to the question of (ir)rationality, Bernanke addressed it in a way that might seem a priori contradictory. On the one hand, Bernanke (1983, p. 258) believed that the assumption of agents’ irrationality was not “the best research strategy.” He attributed such a strategy to Kindleberger, who “argued for the inherent instability of the financial system, but in doing so [had] to depart from the assumption of rational economic behavior” (ibid).[5] On the other hand, Bernanke endorsed the “logical possibility” of irrationality in an article co-authored with Mark Gertler (1999). They reiterated the belief that financial crises are exogenous in nature and specified that shocks could either take place in the real sphere (productivity shock), or in the financial sphere (shock to financial asset prices). Then, Bernanke and Gertler (1999, p. 19) supported the idea of “irrational behavior by investors, for example, herd behavior, excessive optimism, or short-termism” and they concluded that “episodes of ‘irrational exuberance’ in financial markets are certainly a logical possibility” (emphasis added). It can be stressed here that, according to Bernanke, the notion of “irrational behavior” applies to agents (more specifically, financial “investors”), at the individual level, and not only at the market level as a whole.

It could be inferred from the above that there is a contradiction between Bernanke (1983), who dismissed the postulate of irrationality, and Bernanke and Gertler (1999), who relied on the “logical possibility” of irrationality. In fact, the contradiction is only apparent. Bernanke had to justify the research strategy which postulates that a financial crisis constitutes an exogenous shock. The corollary of such a postulate is that financial crises cannot be explained by economic reasoning or cannot be expected by market participants. Simply, there is no reason to panic—but agents panic. Thus, Bernanke needed to consider agents’ irrationality as a “logical possibility.” By contrast, Kindleberger made the assumption that individual agents are rational in order to come up with an explanation for the endogenous process generating a financial cycle and leading to the financial crisis.

In addition to the theoretical differences between Kindleberger and Bernanke, there is also a difference of scope with regard to their topics. From his thesis at Columbia (Kindleberger, 1937) to the publication of A Financial History of Western Europe (Kindleberger, 1984), Kindleberger’s approach was always international in its scope. It explained that the intensity and severity of financial crises can be understood by studying short-term capital movements, the extension of banking activities beyond national borders, and the absence of an international stabilizer. Kindleberger’s conclusion is that the issuer of international liquidity (e.g. the Federal Reserve) is ultimately led to intervene as the lender-of-last-resort (e.g. on the Western scale), using the instrument of swap lines with other central banks, to stabilize the financial system internationally. Furthermore, Kindleberger (1978) formulated a rule of conduct for the international lender of last resort through the instrument of the central bank swap lines. Kindleberger’s rule can be summarized as follows: the lender of last resort should lend unlimited amounts of international liquidity to other central banks against their own currencies and at a moderate interest rate (Carré and Le Maux, 2022). And it was precisely Kindleberger’s rule that was proposed on September 16, 2008, the day after the collapse of Lehman Brothers (and it was applied from October 13, 2008, once the European Central Bank had agreed to it, given the serious dollar liquidity problems of the eurozone commercial banks).

Bernanke’s analysis is mainly domestic in scope although he addressed the international question on two occasions. The first evocation was in relation to the exchange rate regime of the early 1930s (Bernanke, 1993). He interpreted the gold standard as an exogenous factor in the Great Depression, in addition to another exogenous factor, the banking panic. The second evocation of an international issue was related to financial imbalances in the early 2000s (Bernanke, 2005). He explained that excess savings from Asian economies spilled over into the U.S. market, driving down interest rates and prompting investors to seek out higher-yielding but riskier financial products. This saving glut thesis was subsequently used to explain the global financial crisis of 2007–2009. However, studies by the Bank for International Settlements show that the transpacific saving glut was not very significant, unlike the transatlantic banking glut (Borio and Dysiatat, 2011; McCauley, 2018). The banking glut thesis explains that the activities of European bank branches, which made long-term investments by borrowing short-term on U.S. markets, were a destabilizing factor. The banking glut thesis is consonant with Kindleberger’s approach to the internationalization of banking. In much the same way as U.S. banks entered the Eurodollar market in the early 1970s, European banks borrowed on a short-term basis on the U.S. dollar liquidity market in the early 2000s, to lend massively on a long-term basis. In both instances, the Federal Reserve was forced to intervene in last resort at the international level—for the U.S. banking companies’ branches in London during the 1974 banking crisis, and for European banking companies’ branches in New York during the 2007-2009 global financial crisis.

Kindleberger’s legacy

What does the letter from Kindleberger to Bernanke reveal in retrospect? That, unlike Kindleberger, Bernanke never thought of the financial crisis as anything other than an exogenous shock, nor did he think of it primarily at the international level. That, consequently, he was never in a position to suggest a procedure of international lending in last resort through the swap lines between the Federal Reserve and other central banks, a procedure that would provide an adequate means of resolving a global financial crisis. In the immediate aftermath of the Lehman Brothers bankruptcy, events prompted Bernanke, as Chairman of the Federal Reserve, to put the program of Dollar Swap Lines on the table and to suggest a rule that Kindleberger had suggested thirty years earlier. History has proven Charles Kindleberger right; the Royal Swedish Academy of Sciences awarded the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2022 to Ben Bernanke.

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References

Bernanke, Ben. 1982. “The Real Effects of Financial Crises: Theory and Evidence”, in Federal Reserve Bank of San Francisco, Proceedings of Sixth Fall Academic Conference, November, pp. 134–162.

Bernanke, Ben. 1983. “Non-Monetary Effects of the Financial Crisis in the Propagation of the Great Depression”, American Economic Review, vol. 73, no. 3, pp. 257–276.

Bernanke, Ben S. 1993) “The World on a Cross of Gold: A Review of Golden Fetters: The Gold Standard and the Great Depression, 1919-1939, by Barry Eichengreen (1992)”, Journal of Monetary Economics, vol. 31, no. 2, pp. 251–267.

Bernanke, Ben S. et Mark Gertler. 1999. “Monetary Policy and Asset Price Volatility”, Federal Reserve Bank of Kansas City Economic Review, vol. 84, no. 4, pp. 17–52.

Bordalo, Pedro, Nicola Gennaioli, Andrei Shleifer. 2018. “Diagnostic Expectations and Credit Cycles”, Journal of Finance, vol. 73, no. 1, pp. 199-227.

Bordalo, Pedro, Nicola Gennaioli, Andrei Shleifer. 2022. “Overreaction and Diagnostic Expectations in Macroeconomics”, Journal of Economic Perspectives, vol. 36, no. 3, pp. 223-244.

Borio, Claudio et Piti Dysiatat. 2011. “Global Imbalances and the Financial Crisis: Link or No Link?”, Bank for International Settlements, BIS Working Papers, no. 346, May.

Canova, Fabio. 1994. “Were Financial Crises Predictable?”, Journal of Money, Credit and Banking, vol. 26, no. 1, pp. 102-124.

Carré, Emmanuel et Laurent Le Maux. 2020. “The Federal Reserve’s Dollar Swap Lines and the European Central Bank during the Global Financial Crisis of 2007-09”, Cambridge Journal of Economics, vol. 44, no. 4, pp. 723-747.

Carré, Emmanuel et Laurent Le Maux. 2022. “Kindleberger in Retrospect: Federal Reserve’s Dollar Swap Lines and International-Lender-of-Last-Resort Rules”, Industrial and Corporate Change, vol. 31, no. 2, pp. 448-463.

Carré, Emmanuel et Laurent Le Maux. 2024. “Ben Bernanke and Charles Kindleberger on financial crises, 1978–2003”, Oxford Economic Papers, vol. 76, no. 2, pp. 314-329.

De Cecco, Marcello. 1974. Money and Empire: The International Gold Standard, 1890-1914, Oxford, Basil Blackwell.

Friedman, Daniel and Ralph Abraham. 2009. “Bubbles and Crashes: Gradient Dynamics in Financial Markets”, Journal of Economic Dynamics and Control, vol. 33, no. 4, pp. 922-937.

Friedman, Milton et Anna Schwartz. 1963. A Monetary History of the United States, 1867–1960, Princeton, Princeton University Press.

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Kindleberger, Charles P. 1937. International Short-Term Capital Movements, New York, Columbia University Press.

Kindleberger, Charles P. 1941. Britain’s Trade in the Post-War World, Planning Pamphlet no. 9, Washington DC, National Planning Association.

Kindleberger, Charles P. 1973. The World in Depression, 1929–1939, Berkeley, University of California Press.

Kindleberger, Charles P. 1976. “Systems of International Economic Organization”, in D. P. Calleo (ed.), Money and the Coming World Order, New York, New York University Press, pp. 15–39

Kindleberger, Charles P. 1978. Manias, Panics, and Crashes: A History of Financial Crises, first edition, New York, Basic Books.

Kindleberger, Charles P. 1982. “Assets and Liabilities of International Economics: The Postwar Bankruptcy of Theory and Policy”, in F. Caffe (ed.), Experiences and Problems of the International Monetary System, 1972–1982, Siena, Monte Dei Paschi di Siena, pp. 47- 64.

Kindleberger, Charles P. 1984. A Financial History of Western Europe, London, Allen and Unwin.

Kindleberger, Charles P. 1986. The World in Depression, 1929–1939, revised and enlarged edition, Berkeley, University of California Press.

McCauley, Robert N. 2018. “The 2008 Crisis: Transpacific or Transatlantic?”, Bank for International Settlements Quarterly Review, December, pp. 39-58.

Mehrling, Perry. 2010. The New Lombard Street: How the Fed Became the Dealer of Last Resort, Princeton (NJ), Princeton University Press.

Mehrling, Perry. 2013. “The Inherent Hierarchy of Money”, in Social Fairness and Economics: Economic Essays in the Spirit of Duncan Foley, L. A. Rezai and T. Michl, London, Routledge, pp. 394-404.

Mehrling, Perry. 2022a. Money and Empire: Charles P. Kindleberger and the Dollar System, Cambridge, Cambridge University Press.

Mehrling, Perry. 2022b. “Bernanke versus Kindleberger: Which Credit Channel?”, Institute for New Economic Thinking, New York, October 13. www.ineteconomics.org/perspectives/blog/bernanke-v-kindleberger-which-credit-channel

Mehrling, Perry. 2023a. “The Minsky-Kindleberger Connection and the Making of Manias, Panics, and Crashes”, Œconomia, vol. 13, no. 4, pp. 1029-1053.

Mehrling, Perry. 2023b. “Payment vs. Funding: The Law of Reflux Today”, in Monetary Economics, Banking and Policy: Expanding Economic Thought to Meet Contemporaneous Challenges, P. Hawkins and I. Negru (eds), London, Routledge, pp. 103-118.

Taylor, Lance and Stephen O’Connell. 1985. “A Minsky Crisis”, Quarterly Journal of Economics, vol. 100, pp. 871-885.

Thakor, Anjan. 2012. “Incentives to Innovate and Financial Crises”, Journal of Financial Economics, vol. 103, no. 1, pp. 130–148.

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Notes

[1] In this article, the page numbers refer to Mehrling’s Money and Empire.

[2] Ben Bernanke (who completed his PhD at MIT in 1979 under the supervision of Stanley Fischer) had not taken the courses Kindleberger taught at MIT (full-time until 1976, then part-time until 1981). Once at Stanford, Bernanke sent his article on the Great Depression to Kindleberger, who replied and made several observations. See Kindleberger, Charles P. “Letter to Ben Bernanke, May 1, 1982”, Kindleberger Papers, Box 3, Massachusetts Institute of Technology (published in Mehrling, 2022b). Prior to the publication of Kindleberger’s 1982 letter, Perry Mehrling was generous enough to forward it to Carré and Le Maux (2024) just as they were finalizing a work on the controversy between Bernanke and Kindleberger.

[3] See Taylor and O’Connell (1985, p. 871), Canova, (1994, p. 105), Friedman and Abraham (2009, pp. 923, 936), Thakor (2012, p. 130). See also Mehrling (2023b). Bordalo, Gennaioli, and Shleifer (2022, pp. 236-7) make explicit reference to Kindleberger’s (1978) approach to financial crises, in line with their research program on the “overreaction of agents’ beliefs.”

[4] In line with Kindleberger’s analysis, the work of Bordalo, Gennaioli, and Shleifer (2018, 2022) challenges the “rational expectations” theory. It shows that expectations are systematically biased because agents over-react to the information they receive. As a result, beliefs are too optimistic during the upturn and too pessimistic during the downturn of the economic and financial cycle. In the light of these results, the term “rational expectations” theory can be seen to be misleading. Indeed, the question is not whether agents are rational or not: the question is whether agents, who are rational, react perfectly (no bias) or excessively (overreaction) to information.

[5] However, as we have seen, Kindleberger (1978, pp. 41, 162) insisted precisely on the idea that, at the individual level, agents behave rationally (whether in a speculative phase or a fire sale) even if, at the systemic level, the market may experience unstable trajectories which might appear “irrational.” In the 1982 correspondence, Kindleberger then asked Bernanke: “Would you not accept that it is possible for each participant in a market to be rational but for the market as a whole to be irrational because of the fallacy of composition?”