The “empire” in Mehrling’s title refers to the days when Britannia ruled the waves and the pound sterling played roughly the role the dollar plays today. The difference, of course, is that the British Empire really was an empire; London bankers were happy to extend loans to British companies operating in the colonies because they were subject to British law. That enabled the colonies to develop somewhat, albeit under Britain’s thumb. The United States has less control over borrowers in emerging markets. Kindleberger’s goal was “to get the economic boost of imperialism, but without the political and social downside of actual imperialism,” Mehrling wrote.
Kindleberger was a progressive New Dealer, yet President Franklin Roosevelt, the progenitor of the New Deal, comes across badly in Mehrling’s book. Mehrling writes that Roosevelt worsened and extended the Depression in 1933 by torpedoing central bankers’ efforts to stabilize exchange rates between currencies. (One of the central bankers involved in that abortive effort, John H. Williams, was among Kindleberger’s intellectual forefathers.)
In contrast, Paul Volcker, who chaired the Fed from 1979 to 1987, comes across as a hero in the book for working with other central bankers and finance officials to resume international cooperation after the Nixon shock of 1971.
I asked Mehrling what he thinks of the current Fed chair, Jerome Powell. As I’ve written, Powell has repeatedly said that the Fed’s mandate from Congress is to focus on just two objectives, full employment and stable prices, not the welfare of other nations. But Powell understands that Fed actions that harm the rest of the world will come back to bite the United States eventually. “This is the way you smuggle in caring about global conditions,” Mehrling said. He said the Fed’s rate hikes are painful, especially in emerging markets, but will set the stage for healthier growth in the long term: “I think Powell has done a good job.”
There’s a concept in economics of the optimal currency area. In theory, the area of a shared currency, such as the euro, should be big enough to encompass a lot of economic activity but not so big that it includes nations that are disparate and require different economic policies. To Kindleberger, no area could be too big. He thought the whole world was an optimal currency area.
In essence, his goal was to duplicate on the world stage what was achieved in the United States by a mentor of his, Henry Parker Willis, who was a designer of the Federal Reserve System that knitted the nation together financially. (Before the Fed came into being in 1913, someone with a check drawn on a Midwest bank would get less than face value if she tried to cash it in New York.)
Kindleberger was realistic enough to observe that nationalist politics was an obstacle. “While the optimum scale of economic activity is getting larger and larger, the optimum social scale appears to be shrinking,” he once wrote. Elsewhere, he wrote: “Whereas the economic logic of the payment system pushes toward hierarchy and centralization, the political logic of subglobal and subnational groupings pushes toward autarky and pluralism.”