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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.
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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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