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Essays in History: Financial, Economic, Personal
Published by EH.NET (March 2000)
Charles P. Kindleberger, Essays in History: Financial, Economic,
Personal. Foreward by Peter Temin. Ann Arbor: University of Michigan Press,
1999. xvi + 245 pp. $49.50 (cloth), ISBN: 0-472-11002-0.
Reviewed for EH.NET by David Glasner, Federal Trade Commission.
Charles P. Kindleberger, perhaps the leading financial historian of our time,
been a prolific, entertaining, and insightful commentator and essayist on
economics and economists. If one were to use Isaiah Berlin's celebrated
dichotomy between hedgehogs that know one big thing and foxes that know many
little things, Kindleberger would certainly appear at or near the top of the
list of economist foxes. Although Kindleberger himself never invokes Berlin's
distinction between hedgehogs and foxes,
many of Kindleberger's observations on the differences between economic theory
and economic history, the difficulty of training good economic historians, and
his critical assessment of grand theories of economic history such as
Kondratieff long cycles, are in perfect
harmony with Berlin.
So it is hard to imagine a collection of essays by Kindleberger that did not
contain much that those interested in economics, finance, history, and policy
-- all considered from a humane and cosmopolitan perspective --
would find worth reading. For those with a pronounced analytical bent (who are
perhaps more inclined to prefer the output of a hedgehog than of a fox), this
collection may seem a somewhat thin gruel. And some of the historical material
in the first section will appear
rather dry to all but the most dedicated numismatists. Nevertheless, there are
enough flashes of insight, wit (my favorite is his aside that during talks on
financial crises he elicits a nervous laugh by saying that nothing disturbs a
person's judgment so
much as to see a friend get rich), and wisdom as well as personal
reminiscences from a long and varied career (including an especially moving
memoir of his relationship with his student and colleague Carlos F.
Diaz-Alejandro) to repay readers of this volume. Unfortunately the volume is
marred somewhat by an inordinate number of editorial lapses and mistaken
attributions or misidentifications such as attributing a cutting remark about
Pagannini's virtuosity to Samuel Johnson (who died when the maestro was
all of two years old).
As the subtitle indicates, the essays, most of which are drawn from earlier
published work, are arranged into three categories. The financial essays begin
with perhaps the most substantial analytical essay of the collection,
"Asset Inflation and Monetary Policy," though the analytical reflections are
presented in the course of a historical survey of the role of monetary policy
in generating or restraining financial inflation. The notion that monetary
policy has a systematic effect
on the level of asset prices is an old one and generated a considerable
literature in the 1920s when there was a widespread feeling that a) monetary
ease had contributed to the speculation that underlay an irrational boom in
stock market prices, and b)
t hat it was the duty of the monetary authority to counteract such speculation.
This view seems to have been critical in the decision of the Federal Reserve
Board to tighten monetary policy in 1929. The aftereffects of that particular
change in monetary policy are well known and have generally not been
interpreted in a way favorable to the theory linking monetary policy to asset
inflation. But Kindelberger calls our attention to other episodes of what he
calls asset inflation, especially the Japanese real estate and stock market
boom of the 1980s, and questions whether there may not indeed be some
connection between monetary policy and asset price inflation. Originally
published in 1995, Kindleberger's discussion predates the great bull market of
1995-99. One wonders what Kindleberger would make of our most recent (and
ongoing?) episode of asset inflation.
The upshot of his discussion is that given the complexity of the real world, it
would be a mistake to impose a fixed rule on the monetary authority that
precluded it from taking policy actions based on the possibility of a linkage
between monetary policy and asset inflation. But,
in the end, Kindleberger does not persuade me that there is a systematic
relationship between monetary policy and asset inflation that could ever
provide a useful rationale or basis for the conduct of monetary policy.
Certainly there is no compelling theoretical argument for such a relationship.
One fairly well-known theory that might provide such a rationalization is the
Austrian theory of the business cycle, but Kindleberger is not otherwise
sympathetically disposed toward that particular theory. If monetary policy were
to have an impact on the level of asset prices, one possible channel would
appear to be through an effect on
expectations. But to have a significant effect on expectations of real
variables, a pretty sizeable change in monetary policy would seem to be
required. There must be something radically wrong with the conduct of monetary
policy before or after such a change.
Of course, asset inflation may be viewed as a bubble (a phenomenon usually
presumed to be a manifestation of irrationality but which can also be
reconciled with strict rationality), a topic about which Kindleberger has
written extensively. But if asset inflations are bubbles, especially
irrational ones, what is the mechanism that links monetary policy with
irrational exuberance? Presumably, the expectations on which asset prices are
based are influenced by monetary policy. But it is hard to see what role
monetary policy might have in accounting for irrational exuberance.
The problem with all theories of asset prices is that they are so profoundly
dependent on inherently subjective expectations. There are no fundamentals only
perceptions. It is misleading to suppose that there is or can be a single
correct rational expectation of the present discounted value of the future net
cash flows associated with a particular asset.
There may be some expectations that are irrational because there are no
conceivable states of the world in which those expectations would be realized.
there may be a whole range of expectations that are potentially realizable. And
the realizations may (indeed, likely do) in turn depend on the distribution of
expectations at large about that asset.
Expectations often do tend to be self-fulfilling, and actual outcomes are
rarely independent of expected outcomes. As we become increasingly attuned to
the pervasiveness of network effects in economic life, we may well come to view
large swings in asset values as reflecting something other than excess
volatility -- perhaps the inherent volatility of asset values in which
expectations about the future are mutually interdependent and reinforcing.
In two other essays, Kindleberger evinces an unexpected (to me) interest in
the theory of free banking, a topic about which I have written on occasion.
Kindleberger is none too sympathetic to the theory, and attempts to discredit
it by recounting the widespread currency debasements in the Holy
Roman Empire in the late sixteenth and early seventeenth centuries. The Empire
set up a large number of independent local mints that were authorized subject
to some degree of imperial oversight to mint coinage more or less without
restriction. Kindleberger views the historical record as a conclusive
refutation of the free banking theory that competitive issuers compete not by
depreciating their monies but by maintaining their values. However,
Kindleberger fails to take any note of a fundamental factual issue that is
critical to his argument, which is whether it was possible to identify the
specific mint from which any particular coin had been issued. The fundamental
argument of the free banking school is that issuers compete to maintain the
purchasing power of their moneys if there is a mechanism by which an issuer's
misconduct could be related to the coin or money it had issued. Kindleberger
simply ignores the point. On the other hand, he properly observes that there is
an externality associated with maintaining a stable unit of account, so that
money issuers do not necessarily have the appropriate incentive to assure the
optimal variation over time in the value of the unit of account. But this is an
issue different from and more subtle than whether free banking is inherently
disposed to inflation or debasement. It is at least as likely that the free
market would generate excessive deflation as excessive inflation. But as I have
argued in a book on free banking (Free Banking and Monetary Reform,
Cambridge University Press, 1989, chapter 10), there is no inherent reason why
a free banking system could not be coupled with a governmentally supplied unit
of account whose value over time would be constrained to vary in a socially
optimal manner. There may
be compelling arguments against free banking, which would involve questions
about banks' propensities to take ill-advised risks and the necessity for a
lender of last result to prevent a cumulative breakdown in the payments system
and in the financial infrastructure generally. Kindleberger has provided
valuable historical and theoretical insights into these issues in his
voluminous past writings.
Unfortunately, Kindleberger in this volume seems to have concluded that the
case for free banking can be dismissed just a bit too easily. Both supporters
and opponents of free banking would have been better served if he had not
approached the subject quite so casually.
Other readers, I am sure, will find nits of their own to pick with
Kindleberger. We all like to find fault with our elders and betters. But that
will be just one of the enjoyments gained by reading this volume.
(The views expressed in this review do not necessarily reflect the opinions of
the Federal Trade Commission or the individual commissioners.)
David Glasner has published widely on the history of monetary thought,
policies and institutions. He is editor of Business Cycles and Depression:
An Encyclopedia (Garland Publishing, 1997).