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,

has also

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).