There are well over 100 currencies, from the Angolan kwanza and the Bhutan ngultrum to the Uzbekistan sum and the Vanuatu vatu. Is that the right number for the global economy? Not really. A multiplicity of unpredictably fluctuating currencies discourages trade and investment by injecting uncertainty into business decisions.
Charles Kindleberger thought there should be one world currency, and he had a candidate: the US dollar. He argued that there would be more trade, cross-border investment and prosperity if all nations either adopted dollars (as, say, Ecuador has) or tied their currencies to the dollar at a fixed exchange rate, which has almost the same effect. As we’ll see in a minute, he has at least partly gotten his way.
Kindleberger’s one-money philosophy made him an outsider in academia even though he spent decades teaching at the Massachusetts Institute of Technology and educated a future Nobel laureate, Robert Mundell. He sparred with Milton Friedman, the great monetarist who in 1953 wrote a paper titled “The Case for Flexible Exchange Rates.” He also disagreed with Friedman’s nemeses, the Keynesians, who worried that nations wouldn’t be able to fine-tune spending and taxing policy for domestic conditions if they had to keep their currencies in sync with the dollar.
Any hope for Kindleberger’s vision to come true seemed to be smashed when President Nixon ended the convertibility of dollars into gold in 1971 and abandoned attempts to stabilize exchange rates in 1973. His Treasury secretary, John Connally Jr., told the world: “The dollar is our currency, but your problem.” Kindleberger called Nixon’s abdication of America’s central role in the global monetary system a “crime” and worried that unstable exchange rates would dry up long-term investment by rich countries into poor ones because of uncertainty and turbulence.
Perhaps surprisingly, though, the world today is closer to Kindleberger’s vision than he or his intellectual opponents could have imagined. Although the United States’ share of global domestic product has shrunk since the aftermath of World War II, the dollar continues to play a dominant role in financial flows. “Around half of all cross-border bank loans and international debt securities are denominated in US dollars,” a report by the Bank for International Settlements said in 2020. Not only that, the report said, around 60 percent of the world’s official foreign exchange reserves are in dollars, and around 85 percent of foreign exchange transactions involve the dollar against some other currency.
What’s more, the Federal Reserve has become in effect the world’s central bank: When the Fed raises rates aggressively, as it’s doing now, other central banks tend to follow suit. Yes, there are many more than 100 currencies, but many of them are pegged in one way or another to the dollar, or to a lesser degree the euro, the British pound or the Chinese yuan. The central bankers who oversee those currencies don’t exactly coordinate monetary policy, but they do unofficially seek to avoid destabilizing fluctuations in exchange rates. (Although lately the dollar has been exceptionally strong.)
So Kindleberger, it seems, was ahead of his time. He is the subject of a new book, “Money and Empire: Charles P. Kindleberger and the Dollar System,” by Perry Mehrling, a professor of international political economy at Boston University’s Frederick S. Pardee School of Global Studies.
Mehrling told me he set out to write a sort of biography of the dollar itself. “Then I found Charlie and I realized I could hang the whole book just on him. That allows me to find a mind to enter and see the world through his eyes.” He added: “I’ve learned from him.”
To the general public, Kindleberger is known for one book he wrote, “Manias, Panics and Crashes: A History of Financial Crises,” which was published in 1978. But that was just a sliver of his long career. He was born in 1910, served in government during the Depression and was a military intelligence analyst during World War II. Afterward he was an architect of the Marshall Plan, which helped Western Europe rebuild. He taught at M.I.T. full-time from 1948 to 1976. Mehrling describes him as a gentlemanly character who was lauded on his 80th birthday as “the most lovable economist.” He died in 2003.
The “empire” in Mehrling’s title refers to the days when Britannia ruled the waves and the pound sterling played roughly the role the dollar plays today. The difference, of course, is that the British Empire really was an empire; London bankers were happy to extend loans to British companies operating in the colonies because they were subject to British law. That enabled the colonies to develop somewhat, albeit under Britain’s thumb.
The United States has less control over borrowers in emerging markets. Kindleberger’s goal was “to get the economic boost of imperialism, but without the political and social downside of actual imperialism,” Mehrling wrote.
Kindleberger was a progressive New Dealer, yet President Franklin Roosevelt, the progenitor of the New Deal, comes across badly in Mehrling’s book. Mehrling writes that Roosevelt worsened and extended the Depression in 1933 by torpedoing central bankers’ efforts to stabilize exchange rates between currencies. (One of the central bankers involved in that abortive effort, John H. Williams, was among Kindleberger’s intellectual forefathers.)
In contrast, Paul Volcker, who chaired the Fed from 1979 to 1987, comes across as a hero in the book for working with other central bankers and finance officials to resume international cooperation after the Nixon shock of 1971.
I asked Mehrling what he thinks of the current Fed chair, Jerome Powell. As I’ve written, Powell has repeatedly said that the Fed’s mandate from Congress is to focus on just two objectives, full employment and stable prices, not the welfare of other nations. But Powell understands that Fed actions that harm the rest of the world will come back to bite the United States eventually. “This is the way you smuggle in caring about global conditions,” Mehrling said. He said the Fed’s rate hikes are painful, especially in emerging markets, but will set the stage for healthier growth in the long term: “I think Powell has done a good job.”
There’s a concept in economics of the optimal currency area. In theory, the area of a shared currency, such as the euro, should be big enough to encompass a lot of economic activity but not so big that it includes nations that are disparate and require different economic policies. To Kindleberger, no area could be too big. He thought the whole world was an optimal currency area.
In essence, his goal was to duplicate on the world stage what was achieved in the United States by a mentor of his, Henry Parker Willis, who was a designer of the Federal Reserve System that knitted the nation together financially. (Before the Fed came into being in 1913, someone with a check drawn on a Midwest bank would get less than face value if she tried to cash it in New York.)
Kindleberger was realistic enough to observe that nationalist politics was an obstacle. “While the optimum scale of economic activity is getting larger and larger, the optimum social scale appears to be shrinking,” he once wrote. Elsewhere, he wrote: “Whereas the economic logic of the payment system pushes toward hierarchy and centralization, the political logic of subglobal and subnational groupings pushes toward autarky and pluralism.”
He once wrote that the world “needs strong leadership, best when it is disguised.” The dollar system he envisioned would not run on autopilot, nor would it be free of travail. “Such a world will be full of ambiguity, paradox, uncertainty and problems,” he wrote. “Such it seems to me is the human condition.”
The New York Times