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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. 
<[log in to unmask]> 
 
 
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) 
that 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. But 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). 
 
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