EP 47: Money and Empire (with Perry Mehrling)

Welcome to The Library of Mistakes, changing the world one mistake at a time. This podcast is presented by Professor Russell Napier, Keeper of The Library of Mistakes. To find out more about the library, our events, our course and much more, simply visit libraryofmistakes.com Welcome to The Library of Mistakes podcast and today we are delighted to have with us Perry Merling, author of Money and Empire, Charles P. Kindleberger and The Dollar System. Many people listening to this podcast will be familiar with the names Charles Kindleberger and associate with a famous book he wrote called Minas, Panics and Crashes which is read by just about everybody in the financial markets. That book was written after Charles Kindleberger retired and we will get there, we will discuss it, we will come on to it but the career of the man is much greater than that, much longer than that and I thought I'd set the scene by reading from Perry's excellent book on the early days of Charles Kindleberger to show how much he had achieved even before he became an academic and I begin. Helping himself being a central banker from 1936 until 1942, Charlie worked to assuage the fears of his fellow citizens using education as his main weapon. If people understood how The Dollar System actually worked he thought they would stop trying to destroy it. Having served in the Department of State from 1945 to 1948, first guiding the German reconstruction effort and then coordinating the legislative effort to launch the Marshall Plan, Charlie thought the key was to educate the junior staffers who in his experience actually made the policy that their superiors subsequently announced but education didn't work. One reason was that his fellow economists were feeding the fears of the politicians. Economists such as Robert Triffin wanted to replace The Dollar with a non-national world currency and Harry Johnson wanted to replace the Bretton Woods fixed exchange rate system with a flexible exchange rate system. Even Charlie's MIT colleagues, ambitious Keynesians who found him President Kennedy an eager student were swayed by the arguments of Trifford and Johnson and educating them was an even harder task since their professional economic discourse increasingly took the form of mathematical and statistical modelling, a language that Charlie did not speak. In this I think we have a manifesto for the existence of the Library of Mistakes, Perry, which is why I sort of took so much time to to read it out. Charlie, first of all let's begin the beginning. You knew Charles Kindleberg, tell us something about the man that you knew in his later years. Oh, he was a very affable and lovely man. Everyone loved Charlie. They may not have agreed with him, they may not have even thought that he was a proper economist, but he was friends with really most people and he had, you know, I think he was, this comes from his upbringing as a sort of this sort of very polite, waspy demeanor that he could get along with with anybody. And I think that was rather important too for MIT. You know, it was actually a very, you know, it's an engineering school, but the department was also largely Jewish. And so he was the sort of respectable front, I suppose, of this. And he was willing to play that role, as a matter of fact. And he also became the head of the faculty there. And so he was, he got along with everybody. And he was, he was very kind to his students too. And I was never a student of his, but I first met him when I was writing my first book, The Money Interest in the Public Interest, because that includes a biography of Alvin Hansen. And early in his career, actually when he was at the Fed, he was an assistant to Alvin Hansen. And they wrote a couple of papers together imagining what the post-war world might look like. And so I noticed that there were these co-authored papers. And so I visited him in his assisted living, he was then retired in living, assisted living near here. And I visited him. And we became friends. And every now and then I would go back and, or I would show him some papers or talk to him. And so, and I, when he, when he died, I went to his, I went to his memorial service where all the MIT people were there. And so we became friends, as a matter of fact. And this was kind of typical. People who, who, who met him became friends. He had a wide, wide circle of, of friends and was very open. And so he should be given the jobs that he held even before he was an academic. And what strikes me about this, this was a man who was practically applying economics from a very early age, only became an economist at 35. So Federal Reserve Bank of New York, Bank for International Settlements, implementing the Marshall Plan, stabilizing the German currency all before the age of 35. What was it about these jobs, I think? I've missed one out. I mean, probably missed one out. Yes. He was, he was, he was, he was head of this rather secret, what was the name of it, in London. They were enemy objectives unit, it was called, which was tasked with sort of directing the bombing campaign of Germany. So his job was to take apart the, the, the German economy, and in particularly the German war effort to find out where they were making these V2 rockets and try to destroy it or, or things like that. And so he was the head of that office. And it was an intelligence operation, largely where they're gathering all kinds of little bits of intelligence and trying to put it together into a picture of, well, what is happening with the German war effort? And how can we best dismantle it? So he first tried to dismantle Germany, and then after the war, he got on the other side of the desk, and his job was to reconstruct it. And he, he, he, I think he kind of enjoyed that. But, but the, but the methods, this is what you're raising here, this, his ability to take all kinds of disparate little pieces of evidence and to construct in his mind a picture of like what's happening. So this is not econometrics, where you need like a, a full set of data or time series or consistent, this or that, you know, this is, this is a historian's expertise to take, you know, a letter here, you know, a report from, from a spy here, you know, and, and put them together and then tell the generals, here's what I think you should do, you know, and the generals really loved him because of that, that he wasn't, he wasn't giving, he was giving them advice. He was saying, here's what I think you should do. That's what the, and the general could decide to do it or not to do it. So the generals really liked him because he was, he was, he was giving them what they needed in a very distilled fashion. So when Truman asked for a one-handed economist, they really should have brought them Charles P. Kindleberg or anything. Maybe, maybe. For those of you, for those of you who are in London, you will know 40 Barclay Square, Charlie was in 40 Barclay Square. Was it really Charlie's decision to target ball bearing plants in Germany? Yes. Yes. Yes. Yes. So as you said, dismantling an economy, let's talk a little bit before that because he has this incredible seat in Switzerland as the war is really accelerating. In fact, he arrives, I think, in the summer of 1939 at the Bank of International Settlements in that incredible period, but, but obviously left, I think, on the, the invasion of, of France. It became clear that more and more of the business going through the BIS was ready to do with, with Germany. And he had to get out. What do you think he learned from this experience? Because he went on to be, and we're going to get there to an international monetary economist. So a seat at the BIS in 1939 would have been a very interesting place to be. Well, it, he intended to, I think, make a whole career at the BIS, you know, when he took that job. He had been his first job after his PhD, which was at Columbia University, was at the New York Fed. So that's also in New York. And he, when the opportunity arose at the BIS, he, he jumped at it. He had always been interested, in fact, even as an undergraduate, he wanted to be an international banker, but nobody would hire him. So then he went to get a PhD. So he thought he was going to have a career at, at the BIS. And, and in fact, the 10th annual report of the, of the, of the BIS, he basically drafted. That was his job there. And I talk a lot about that in, in, in the book. And I think that drafting that was maybe what he, you know, that was his, his first experience of trying to think about the international monetary system and what, and think from the top, you know, he's at the BIS, the central bank for all the, all the bankers, right? And, and to write a report that would be useful to all central banks, that they have some notion of what are the issues in the world at the moment. And, and the issues were about some of the, some of the number of countries moving on to war footing. And so therefore, shifting their, the government expenditures and, and, and increasing debts and monetary expansions, you know, financing war and so forth. I think he, he was planning to stay at the BIS. And as I say, and about halfway through the time, the BIS retreated to their, you know, up, up into the Alps. And he, and he, he left it there, actually. But it was, and he was planning to have hits, all of his children there and everything. But, and I think he did not, many people at that time, did not really realize that this was going to be a world war, you know, that this was maybe just going to, you know, this, that would be the end of it, you know, take the low countries and call it a day. And when he, when, when, when, you know, France was invaded and Paris fell, he realized, okay, the BIS is going to get, is going to get taken over by, by, by the Germans. And I got to get out of here. And his, his, his boss would not relieve him from his three-year contract. Okay. And until he got the Fed to his friends at the New York Fed to send urgent letters that Charlie is needed at home. And so he was able to leave. And he took a bus all the way through, you know, Southern France, which hadn't been taken over yet, and, and found a way to get a passage to, to New York with his wife and a heavily pregnant wife with his firstborn son. And this son was born shortly after they arrived in New York. So that was a very, that was an adventure. This is, this is not the average story of a 30-year-old economist. But anyway, it gets more dramatic. We've discussed his work in Berkeley Square. D-Day comes. He moves to France. I guess the targets become somewhat more tactical than strategic, but he's also involved in this. He ends up in Berlin, 1945, November 1945, as, I mean, he's the chief of German and Austrian affairs. Can you explain what the role of the chief of German and Austrian affairs was? He's now 34. Well, this was, this was the, the principal state department position to give advice and oversight of the general, of the military occupation of, of, of Germany at that time. And the, it's important to appreciate that, that he and his fellow, fellow economists at the state department were trying to avoid the division of Europe. They, the division of Germany and also the division of Europe, they were trying to hold it together. That was his goal. And that failed. That, that, that failed. That was a sad thing for him. The, I would, I want to mention too, that when he was traveling with, during, on the continent, after D-Day, okay, he was, had the highest clearing, you know, for the secret codes that, that are famous, you know, for, so he was seeing all of the intelligence that was, that was coming through from all sources. He didn't see all of that when he was in London. So he got a higher, he had the highest security clearance. So he was, I think, you know, one of the, one of the highest intelligence officers. Most of that was all secret. And so people didn't know about that. And, and they didn't know about it. He didn't boast very much about it. But he was an extremely important person in, in, in, in the war effort. Yeah. What was his role in stabilizing or creating a new and stabilizing the German currency in this process, the new currency post-World War II? Well, he didn't, he didn't do that. That was, but he knew the fellow who did, I'm looking for the book on my bookshelf. Tannenbaum, was that his name, I think? There was a, it was a younger fellow, even younger than him. You know, who was the main actor? There's a recent book published by Cambridge University Press that's all about, all of, all about that. So he, anyway, he's, he's involved, he's involved in that. He's involved in that. And he, and he was involved in, he had, by the time there was a, there was a sort of attempt to, most of that happened after he was already in academia. He was out of that position and was in 1948. Okay. So he was not, he was, he was gone by then, but he was there during the immediate post-war period when the Germans were all starving. And it was, and there was, and in fact, the French were starving too. It was the post-war period was very difficult. The transition from total war to, and the, and the economy had been wrecked. And like, how are we going to open it up again and start with light industry? I tell the story about, about that, about the strategy for how to put Germany on, on a, on a peace footing. You may remember, you may remember there were some attempts to, to pastoralize Germany, to prevent it from developing industry. And as an economist, he said, you know, if you, if you do that, then you're going to have to feed the Germans, you know, for the rest of their lives. They're not, because right now they export and they buy, and they buy food from us. And so you need to reconstruct that. He, so he was looking into the future and saying, we got to integrate Germany with Europe. And he was remembering too, the, the, the failure of Versailles after World War I, you know, that, that, that the attempt to impose reparations on Germany just created all kinds of distortions that, that broke, that, that broke apart, you know, in the, in the, in the, in the, in the Great Depression. So we didn't want to do that again. You got to find, you got to learn the lessons of the post war settlement from World War I and do it differently this time. And so he was trying to first deal with Germany. Okay. And then back in the State Department, dealing, also dealing with, with, with, with Europe as a whole. And that's the Marshall plan. And then he, he moved to academia in 1948, his first real academic position at, at MIT in 1948. So it's incredible what he's done as a real world economist. And then he was into academia. I wanted to read a little bit about some, some, I mean, there's some tremendous terms of phrase that Charles Kindleberger had. And I think commenting on MIT academia is probably one of our academia in general. Just let me read it and then you can comment on it. In academia, as he was learning, theoretical priors were much harder to shift. He put it down to what he would call the, and I love this bit, fallacy of misplaced concreteness. For lack of concrete information about actual conditions on the ground, economists fell back on the concreteness of their merely theoretical ideas about how the world works. So he arrives at MIT as a practicing economist and finds that the other, I mean, the department's just beginning, it's just growing, but discovers that in terms of academic economists, they're not really interested in his real world experience. Is that unfair or, or are accurate that his messy real world life was really not acceptable to the people who had, who were in academia composing the theories of economics? Well, I think, I think that that's maybe, that's maybe too, too much to say about 1948. I think that MIT was very happy to recruit him, you know, and because they had an idea that he would also be a link to the real world, that his connections with the BIS, his connections with the IMF, that he would, he would be, bring the, you know, that MIT was supposed to be about giving policy advice or, you know, being, being connected to the real policy issues, and they didn't really have internet expertise in international economics, and he was supposed to fill that bill. And I think the original founders always respected him, meaning Samuelson and so low, and the, it was the second generation that came a little later, that sort of pushed him, pushed him out. And the students who came because they wanted to learn math and statistics and so forth, they wound up, you know, not really respecting him very much, because there was no economic history, really, operation at MIT. And he just had to roll with that. And it was very important, I mentioned in the book, that he lost his security clearance shortly after getting to MIT. And so he was unable to keep a foot in these two worlds that he had in mind. He had in mind that he was going to have one foot in academia and one foot in government or the State Department or the IMF or wherever. And without a security clearance, he couldn't work for the government at all. And so he had to reinvent himself. We should explain, Perry, how he came to lose that security clearance, like so many others did in the post-war war period. Well, it was a McCarthy thing, you know, and he had worked with Harry Dexter White as a graduate student. He had been, he had been in between getting his PhD and getting the job at the New York Fed. He spent a summer, I think, in there. And when he came, so he was linked to these people who were the main targets. And that's basically what did him in. And there was no evidence of any kind that he was ever a Soviet spy. But he was in the State Department, and he was on a list of people who are moderately friendly or something like that, because he was friendly to everybody. But he was not a, he was that he was a loyal American, most definitely. And once you have this, you know, you need, once it's gone, you need somebody in government to support you to get it back again. And it took a long time. It wasn't until the Kennedy administration that somebody, he found somebody who was willing to go to bat for him. And then he got his Freedom of Information file afterwards and found out, you know, he never wrote about that in his autobiography. I write about that in the book. Exactly, you know, I have that Freedom of Information Act, you know, I have his file, his FBI file. And so I was able to reconstruct that in more detail than he did himself in his autobiography. Well, there are lots of little quotes from Charlie in this book. I just want to read one out now for all the academics listening, quote, be available to students. That is what you are paid for. So we'll move on, we'll move on from that. We'll just leave that one out there. The book, you say, was going to be the story of the dollar or the biography of the dollar, not the biography of an individual. But the two are so inextricably linked post-World War II. Maybe you could tell us about how Charlie fought to create or have an influence on the global monetary system, how he won or lost and, you know, where we ultimately ended up in 1971. There were great theoretical battles going on, which side was Charlie on? I mean, he seems to have a better understanding of the road of capital flows than most people in this situation. But talk us through that intellectual battle and where Charlie stood in it. Well, as I suggest in the book, he was very much influenced by his teachers at Columbia and the creation of the Fed, the creation of the Fed in 1913, which knit all the different parts of the United States into a single clearing union. And he thought that was a very good thing and that the arguments for why that's a good thing are the same arguments for why you should have a fixed exchange rate system globally in his mind. And so that's what he thought Bretton Woods was about, about creating a fixed exchange rate system globally and restoring not just trade flows, which is what Bretton Woods was about, but gradually capital flows too, short-term capital flows, long-term capital flows. Long-term capital flows in particular in order to develop the global south as an engine of world economic growth. And so that vision of the system, it was he had early on before the standard economics grew up, where ISLM was the sort of closed economy model, and then that was extended to international. But always thinking about policy from the point of view of an individual country, he was always thinking about it from a global point of view. What is driving all of this? And he could see, so what he thought was happening, what he thought would happen and was happening organically after the war was that New York was growing up to maybe play the role that London had played in the sterling system before World War I, which he knew very well, that the London bill market was the global bill market. The London capital market was the global capital market, and so New York would become that. And so he saw the bankers trying to build that in New York, and he was in favor of that. He thought that was a good thing. But the politicians, Americans, American political culture, hate big finance, big government, and the big wide world, and basically that's what all three of those wrap together. So it wasn't until 1913 that we got a Fed, which is big government plus big finance. And then to have that all in New York, it was a bridge too far for, and so the government in various steps in the 1960s tried to prevent New York from becoming that sort of global market and tried to stop those capital flows. I thought, and Charlie thought that was a great tragedy. And then, and in his opposition, you mentioned it earlier, you know, they're in the economics profession. Robert Triffin, you know, was a particularly important one, the so-called Triffin dilemma, imagining that the United States necessarily, because it was providing the world currency, had to run trade deficits and that that would weaken it. Okay, and Charlie always put it out. It doesn't have to run trade deficits. It's doing financial intermediation. It's borrowing short and lending long. You know, it's doing banking. The world is a bank. You know, that was his view always, and that it's not really correct to think, to imagine that that necessarily is going to weaken the dollar. And so in 1971, you mentioned 1971, that's August 15th. That's when Nixon gave his famous speech in which he was attacking international speculators. And he put on, by the way, at that time, 10% tariffs on all of our all of our training partners. That may sound a little familiar to you. Yes, so the Nixon shock, but Charlie was very concerned about that. He thought it might be the end of the international monetary system. And so he worried that it was like September 1931, which is when the Bank of England was forced off of gold, you know, and the result of that was a breakdown of the international monetary system that led to world depression in Charlie's mind. So he thought this was a very irresponsible, he called it the crime of 1971, that Nixon should try to blow up the international system as an America first move. But Nixon did not succeed. You know, he wanted to kill the dollar system, but the bankers kind of wouldn't let him. They just built it up offshore instead. Maybe that's a good time for me to interject. So Charlie understands the need and the role of capital flows, perhaps better than others, because he is more internationally focused than other economists, but is surprised by these flows. He was more keen, I think, on developing long term capital flows, which we might characterizes foreign direct investment and short term capital flows. But after the end of Bretton Woods agreement, we get, well, we get both. And they're much bigger scale than anybody even Charlie could have imagined. What was his reaction? Because I think the idea was, when exchange rates were stable, long term capital flows were more likely to flow because the exchange rate risk was lower. And in a world of flexible exchange rates, you'd expect a collapse in capital flows in general, but particularly long term capital flows due to the exchange rate risk. And yet this really proved to be wrong and still proves to be wrong. So what what did he miss? He had lived in a world without capital controls before he had been lived in a world of short term long term capital before, of course, it was a world where there was exchange rate stability. So exchange rate stability turned out not to be as important as perhaps we all would have thought if we'd been living through the same period. Yeah, well, he had lived through the Great Depression, of course, and we're in the era of so-called hot money, okay, where speculators were always trying to think, you know, which currency is going to depreciate, which one's going to appreciate, and they would hop from one to the other from the from the from the Deutsche Mark to the pound sterling to the dollar. And there was wild volatility of exchange rates. And the international capital markets basically broke down, you know, in that period. So he was expecting that something like that would happen again. And there was volatility, you know, and there was also inflation, you know, worldwide inflation, instead of deflation, which is what we had in the Great Depression. So possibly that's one of the one of the factors, okay, that this was happening in an inflationary world instead of a deflationary world. But I think I would say, I'm not sure if Charlie ever said this himself, another another key feature, okay, is that the there really were no competitors to the dollar. So it was not a matter of finding a safe haven. The dollar was already was already king, okay. And so there was not there, there was a matter of stabilizing some of the other currencies against the dollar. And you had the BIS that was in the back background, providing liquidity swaps, you know, this has become clear now from history, I think that was not well known that the BIS was it was providing dollar liquidity swaps. There was a sort of cut out man for the Fed during during that period. Now we do this on the balance sheet of the Fed. But the but at that time, so there was attempts to stabilize the international monetary system did not break apart. And it take took time for the bankers to develop deep, deep, you know, forward markets and things like that for that if you really are afraid of exchange rate risk, you know, you could hedge it. And it turned out that corporations made much longer term decisions, you know, then so that they were they were willing to make investment decisions based on future profitability, and not worry about about the about about exchange rate instability. So there was there were they were a stabilizing force at the long end, and and the and the bankers backed by the BIS, so forth, and developing forward markets were a stabilizing force on the short end. It took a while to put this thing together. You know, I grew up in the 1970s, and that was not a very, a very good time to be alive economically. Absolutely. So you raise a really important point about the dollar and the BIS under swap lines, and that is the world we're in. And there are standing swap lines between the Federal Reserve facilities, I should say, between the Federal Reserve and a range of banks. And in extreme circumstances, as we have seen in the past, new swap lines are are opened up. I'll ask you a question really about the future, I suppose, more than the past. But can we rely? Can the rest of the world rely upon the United States, its Federal Reserve, and its willingness to provide these swap lines? Or I mean, is uncertainty so high now that the time is coming when we can't rely on the Federal Reserve to be there? Because it may not be seen to be in the national interest to be providing dollar liquidity to people who are not, let's say, 100% aligned with the United States of America. They post this system that's sort of the work, probably country. I mean, it's a horrible period, as you say, in the 70s. But the period that's been working for a long time now behind it, there's something that most people have never heard of called US dollar swap lines. But are we in a very risky period now, perhaps as Charlie would describe the transition from the, from Britain as the lender of last resort to America, the lender of last resort, when one day we might wake up and the new politics of America demand that those swap lines are not just as available as they used to be before. Well, there has been talk about weaponizing these swap lines by the current administration. But but but John Powell has made clear that as far as he's concerned, you know, this is this is a done deal that they're that these are agreements between central banks and he doesn't have to ask for permission to do this. And that they are that they're just as standing as they always were. Just to remind you, the the it was the financial crisis of 2008, 2009, when these these swap lines were were really activated big time, $700 billion or so. And then during the COVID crisis again, and about $700 billion again. So they have provided important backstops at at moments of crisis. But but when you when you say the weaponization of them, it's important to appreciate that these that these standing swap lines, okay, unlimited permanent swap lines, okay, unlimited quantity swap lines are really only with the other major central banks, you know, with with with Japan with the ECB with with with with the Swiss and the Japanese and and with and with the Bank of England, that other countries might have swap lines, but they are limited in quantity. And there they are more geopolitically strategic, you know, that that we have a swap we have swap lines with with, you know, with Mexico or or something like that. And the so so what what the swap lines do is to stabilize the core of the system. I think that's important that the periphery, maybe not, maybe not, you know, and so the it's it's a hierarchical system. And it would it's it's the the and it's relationship between central bankers, not between not between not between governments. And if you go on the website of the of the New York Fed, you can see these agreements, they're there. And they're just, you know, a couple of typewritten pages, you know, they're they're not like commercial swap lines, you know, they're where these are, you know, 40 page documents, you know, of effects swaps. And the idea here is that the swap lines, in general, are not going to be used, that they're a backstop, you know, that the that the that the commercial relationships will will they will backstop the private banking forward exchange market. And in general, that's true. In general, that is what happens that the that the swap lines are really only triggered at moments of of crisis. And they are and they're triggered at a time. So then when the crisis goes away, it's easy, it's easy to just make make the swap lines go away, you know, that those borrowings go back to zero again. And so and that's that's what's happened in those two examples that I that I that I gave you. Well, for much of his career in that period after the war, he was speculating on how to make a better system. But eventually, that system, the Bretton Woods system, and that we, I think, are now back in the same situation, we're trying to visualize what a new global monetary system, actually, two monetary systems may look like if we were in a Cold War, I wanted to read a piece that you wrote in this book and discuss it in the light of perhaps how that may or may not work and what we learned from the old system. So I quote, the fatal flaw of the Bretton Woods system, however, was price stickiness, not only wages, but especially output prices due to widespread monopoly, widespread monopoly rings a bit of a bell at the minute. The result was that over time, price levels in different countries drifted away from each other, causing some currencies to come overvalued and others undervalued. The resulting payments and balances that eventually exhausted the capacity of short term capital flows and reserve flows, leading to more serious intervention in the form of tariffs and capital controls. Do you have a vision for if we are moving to a, let's say, a post China monetary system with America at its core high on earth? This time, we can create a system without this stickiness that led to these imbalances and crises. Well, let's back up a little bit. As I said, Charlie's original vision was of a fixed exchange rate system, and that if you don't have fixed exchange rates, you're not going to have an international system. He was wrong about that because the system that developed after 1971 was not a fixed exchange rate system, but it was a managed exchange rate system. And so it allowed countries that exchange rates to move against each other, so to absorb this problem, that the different price movements in different countries had to be accommodated by exchange rate movements. And that was allowed. And then there were forward exchange. So he was surprised at how well a flexible exchange rate system was able to work, but it was able to work that way because it was managed, okay? Not because the price was determined in markets. It was managed. So we are at a moment, I think right now, which you point out. I think the Trump shock is analogous to the Nixon shock of 1971, and we're working it out. I think we don't really know to what extent these tariffs are really going to stick or whether, as Trump's 10%, those 10% tariffs basically were attempt to get our trading partners to the table in the Smithsonian agreement in December of that year. And maybe that's what's going on here, that these are just bargaining chips. And my concern, okay, is that the people who are advising Mr. Trump, like Myron, for example, is if you read his work, it's trippin'. It's just reheated trippin'. So it's as if we hadn't learned any lessons from the 1970s. I think you've got a great quote here, which I shall read on this very subject. And it is, "In the real world, everything depends on everything else. And viewing that real world through the lens of a model in which some things are taken as exogenous can seriously mislead." Sometimes the balance of payments is driven mostly by the current account and sometimes mostly by the capital account. So no single partial model will fit all cases. The art of economics is knowing which to choose when. The Myron approach is that the current account seems to be everything from what I can read. The capital account is largely irrelevant. We'll just adjust to the current account. That seems to fly in the face of most of what we know about international monetary economics. Is that fair or unfair? I mean, you say we should know which one to look at. So which are you looking at? The current account or the capital account? Oh, I'm noticing that capital flows are still seem to be relatively unfettered. And I think that means the international monetary system is not breaking down. That it seems to me that the dollar system is actually in good shape. There are geopolitical pushing and pulling. But the notion that we're moving toward a multipolar system in money, I think there is no evidence of that. We may be moving in a multipolar system sort of in geopolitics or something like that. And there's going to be shifts in supply chains and things like that on the real side. But I don't see evidence that the dollar system itself is shaky. And partly that's because the supports of it seem quite strong. If those supports went away, things might get a little dodgy. So the things that are happening now that I'm watching are the attempt to-- Stablecoin, for example, dollar stablecoin, a crypto world. And now maybe you saw just last week in the FT, there seems to be some administration is floating this idea that we want to kind of force our allies to dollarize or something like that. And that the first step on that is Argentina. This seems to me wrongheaded from the point of view of Charlie's view was that the dollar system was not imposed on anybody. This arose from business practice. It's a business thing, not a government thing. And so now if you're trying to impose it on people, I don't know. It is interesting, though, because when Scott Besant talks about the stablecoin, he talks about opening the dollar world economy to foreign investors. Now, I live in the United Kingdom. It's completely open to me. I think if I lived in France or Germany, it's completely open to me. So we must have in mind some other people when he says this. And it doesn't seem as if-- That's what I would agree with that. I would agree with that entirely. The off-shore dollar system is a thing. It is a robust thing. And it did not exist in 1971. And that's why the '71 shock was so much more-- it was a big shock. Whereas the Trump shock, the euro dollar system exists. It already exists. We have all these institutions. We don't have to build them. You can only be referring to people who can't access the US dollar system. And those are people who are behind a barrier of capital controls. And there are many of them. They're basically emerging markets. But Prima-Zintum Perez is China. I mean, is this the stablecoin and an attempt to-- you say, look at the current account or the capital account. Is this an attempt to undermine China's capital account? It is illegal to buy stablecoins in China. But are we now weaponizing-- is the stablecoin a form of weaponization of capital flows? I don't really know what they have in mind. I'm not sure they know what they have in mind. I think there is some idea that stablecoin might provide fiscal space for the government in the sense that the stablecoins are backed 100% by treasury bills or something like that. And so that would be a purchaser. So that if Argentinians want to flee the peso and they buy stablecoins, essentially they're buying treasury bills. And so I think that the fiscal space is something that I think the current government is very interested in, as a matter of fact. And that would only be important, as you say, if you can't buy treasury bills already, which of course you can. And many, most of the developed world can. That these are liquid assets that are bought and sold in global markets. And so I'm not sure that this is good policy for the world to allow the oligarchs in the South to fund the US government instead of their own government and their own development practice. But we're in early days. It's important to remember, as we're recording this, that the Trump shock was just last summer. It was a couple of months ago. We're in very early days and we don't know how it's going to play out. Yeah. Well, Jordy is finally forced to retire in 1970 at the age of 65 from MIT. You have a little description, I think, of his long career there. And the problems in economics, the big difference was methodological. When Jordy first joined MIT, the kind of economics that he did, so-called literary economics, as opposed to modeling, whether mathematical or statistical, was already old fashioned. But 14 years later, it was barely even recognizable as economics by a new generation reared on the technique. And that went all the way to his retirement. We'll talk about his post-retirement world as a financial historian. Did you sense any bitterness that that long spell in the profession really didn't make many breakthroughs in terms of moving towards what he himself described as literary economics? Well, I think he did feel sort of pushed out. And he was a man of great team loyalty, I think you need to appreciate, so that MIT had taken him in. In 1948, he had been in a government economist for 12 years, so they took a risk on him. And he always appreciated that. He had tried to get other academic jobs and he was shot down by the standard academic people. He tried to get to Yale, he tried to get to Princeton, and he was not considered an academic, and they wouldn't hire him. But MIT did hire him, and he always appreciated that. And the old guard, he dedicated, if you look at the dedication of Mania's Panic and Crashes, he dedicates it to the old guard of MIT. These were his friends. These were the people who respected him and knew that knew what he was able to do. And that went away with the new generation. And so he kind of felt pushed out. And of course, these new generation was hired by the old generation, but they were trying to build MIT. They were trying to make MIT into the world center of economics, and that was their objective. I don't know that that was particularly Charlie's objective. I remember when I was talking to Bob Solo for this book, he said, you know, there is no Kindleberger School of Economics. He wasn't trying to be a guru. He kept moving on to the next problem. He was interested in doing the work himself, not developing a stable of people who used his models or something like that. So the Mundell Fleming model, so Mundell was a student of his briefly at MIT. And I tell some stories about the relationship between them. But Mundell wanted much more, he played the academic game much more than Charlie did. And so he got the Nobel Prize. Charlie did not really do that. He was interested in the next problem and writing the next book. And that's what made him happy. So the fact that he kept him from being bitter, because as long as he feels like he's learning, you know, and making intellectual progress himself, okay, that's what made him happy, is writing his books. He was not unhappy. A brief mention of many Hispanics crashes and another name that everybody who listens to this will be familiar with, which is Hyman Minsky, you're right, it will be observed that in this account of his central argument of many Hispanics and crashes. I have yet to mention Minsky. The reason is that Charlie himself is at pains to insist that the pattern he finds in these historical examples is not so much a validation of the specifics of the Minsky model, but more generally a vindication of an entire tradition of economic thought, quote, held by many economists prior to 1940, that has unaccountably slipped into disrepute during the Keynesian Revolution, and then monitorous counterrevolution. A notable up-to-date exception is Hyman Minsky. So it's like there's a lost thought, there's a whole lost canon in economics that has been rejected that becoming a financial historian, in some extent, he was seeking to excavate and lay out as a financial historian. Do you think he saw his foundations in a different economic thought, and is he right to say that that was effectively extinguished in the post-World War II period? Yes. Well, this tradition goes back a long way to Badget, to Hotry, the idea that there's something about credit systems that are inherently unstable, that they build on each other, and that's why we have central banks. So central bankers all believe that. So this is a sort of practitioner's wisdom that got pushed out of academic economics, basically at the time of Badget, when economics decided to go in a little different direction with Jevons and so forth, but this is a history of thought sort of argument. I have on my web, I actually have looked into this post, after writing this book, I also have another paper about the Minsky and Kindleberger connection that is published, that's open source that you can go have a look at, to really sort this out. What was the relationship between Minsky and Kindleberger? Exactly. And I think it's, as you say, that Kindleberger really had developed his understanding of international capital flows and so forth, from an older tradition that was much closer to the practitioner literature. And then when he was writing this book, somebody said, "Oh, you should really meet Minsky. He's sort of on your wavelength." And so he then did meet Minsky, and he used him as a sort of foil for the book. But I don't think that it's right to understand many of his panacea crashes as the application of Minsky to international markets. I think it's not true. It grew from Minsky's own I would say from Kindleberger's own long study of the international system. And then he thought, you know, you can't beat a model without a model. So let me just say, okay, here's Minsky. Why don't you go have a look at Minsky? So I think that's more the nature of it, that it was a rhetorical device, not something that Kindleberger himself actually used. And I've gone through basically all of the additions of many of his panacea crashes and shown how the new additions, by the way, after he died, he revised that book twice. There was a one, two, three. And you can see where he mentions Minsky. And then you can see the person who took after him made it much more feel like he was building on Minsky, you know, so that people who read modern revisions, it looks as if he is building on Minsky. But in fact, he was not, he was not, if you do the actual tracking back. And that he was in fact building on an older, this older tradition, as was Minsky, as a matter of fact. But Minsky, as you may know, was largely a closed economy guy, you know, because he was building his intuition from post-war, when post-war the United States, you know, not international, it was basically closed economies, mostly. And it was about business credit, you know, not about international capital flows or anything like that. So they were really not, they were really not talking about the same thing. I was once discussing Heim and Minsky with a friend at a conference and somebody who knew him walked past and said, did you guys know Heim? And we said, no, we never met him. And he said, his comment was boy, that man could drink. And that was the, that was his entire comment on Heim and Minsky. I wanted to finish on another quote from Charlie, because I think, as I said, there's much in his life, which is inspiration for what we do at the Library of Mistakes. But this quote, perhaps, more than others sums up what he was trying to do and persevered with for his entire life. He said, my interest is not in producing economic historians, but rather in diluting the rigor of modern technical economics through exposure to a fairly broad range of human economic experience. It's a model worth, I think, pinning up in the Library of Mistakes. Maybe we should do that. Do you think there's a legacy here? Do you think the pendulum is swimming back? I look at the three past nobles for economics and see in it people who have, let's say, one foot in economic history. Is the pendulum beginning to sway? Well, I don't know. I, myself, left an economics department, which I had been for 30 years, seven years ago, and moved to the School of Global Studies, which is more interdisciplinary, and also practitioners. There's former CIA, former, you know, Navy, former ambassadors, and I really enjoyed that. And that's where I finished this book. And so I think that moving to Boston University, to the School of Global Studies, gave me the sort of environment that was necessary for writing this book without feeling like I am, I'm feeling pressure to make it acceptable to economists. And because these are people who Charlie would have had a good time talking to them. So we have sociologists, we have historians, we have political scientists. He was, I say that in the book too, he was very interested in trying to get economists and political scientists to work together, you know, that he, at the very beginning, and he found that that didn't work. You know, he wrote a whole textbook, you know, an attempt to say on the one side, on the other side. So it's not just, you know, with practitioners and outsiders, but even inside academia. And that was his mission. And I think that's basically right, that the silos, these intellectual silos, make no sense. You know, when you're trying to deal with real world, you know, real world problems, do not come in intellectual silos. They are problems in the world. Okay. And you should use whatever helps you. I think that's, that's American pragmatism. You know, that's the, that's the philosophical underpinning of American institutionalism, which is the kind of economics that Charlie was raised in, in the, in the 30s, which before it got narrowed down, and it was a sort of neoclassical orthodoxy, it was, it was a largely pluralist operation. It was kind of messy, you know, and it maybe didn't look very scientific, but it was that that gave him the chops to do what he did, you know, during the war, you know, at the BIS, that he just, oh, he just had confidence, like, okay, let me just look at the facts. Let's look at the world. Let's figure this thing out. We're smart people, you know, and then, and then once we understand what's happening, maybe we can have an idea about how to make it better, how to tweak it or something like that, that sort of pragmatic, you know, empirical approach, you know, was he, it worked so well for him. He saw it in, in, in the New Deal. He saw it, you know, in, in, in reconstruction, in the, in, in fighting the war. It worked so well that he couldn't imagine why anybody would ever abandon it, you know, that it really works. He wanted to, he wanted to keep telling people. None of us are expecting revolution here, but evolution perhaps has, has begun. The dial may be moving. I think your book might help with that. Let us think more greatly about economics in the real world, as opposed to the theory. Barry, many thanks for writing Money and Empire, Charles P. Kindleberger and the Dollar System, and many thanks again for joining me today. It's good to be here. Thank you for having me. www.LibraryOfMistakes.com