Afterword to ‘Manias, Panics, and Crashes’
Robert Skidelsky
Manias, Panics, and Crashes by Robert Z. Aliber and Charles P. Kindleberger | Thursday, January 01, 2015

Charles Kindleberger had a foot in both economic history and politics (One of his many books was entitled Power and Money [1970]). In economics he is known chiefly as the historian of financial instability, the subject of this absorbing book. Following Keynes's lead, he championed the role of governments as stabilizers of the economic system. But there was no world government. How, therefore, could the international economy be prevented from crashing from time to time? Out of his study of the Great Depression (The World in Depression 1929-1939 [1973]) he developed his theory of 'hegemonic stability' - the theory for which he is best known in political science. Broadly stated this is the thesis that “for the world economy to be stabilized, there has to be a stabilizer, one stabilizer.”[4] The hegemon is the proxy for the absent world government.
Kindleberger's contribution here should be coupled with that of Mancur Olson, whose The Logic of Collective Action: Public Goods and the The Theory of Groups, published in 1965, considers how public goods might be provided in the absence of compulsory contributions - that is, without taxes or imperial tribute.
Olson showed how, under specified conditions, the chief of which were the smallness of the group and an initially large inequality of resources, the cost of providing a public good like street lighting might be met by the richest household in the street. Kindleberger applied this insight to the claim that the public goods of a liberal international economy - which he took to be free trade, sound money, and fixed exchange rates - can be provided by a preponderantly wealthy country, which supplies 'sweeteners' - essentially financial and trade facilities - to induce the other countries to follow the 'rules of the game'.
Kindleberger's argument grew out of his interpretation of the Great Depression. The need for stabilizer arises from the existence of contractual uncertainty which, unless offset, will have a deflationary effect through the build-up of inactive balances. The function of the leader or underwriter is to maintain the global level of activity by satisfying the demand for liquidity and maintaining the flow of investment finance.
A key feature of Kindleberger's position was that the provision of public goods has to be centralised. The existence of competing financial centres, as in the interwar years, makes stabilisation impossible.
Four points in Kindleberger's model are worth noticing:
A. It sets up a post-imperial game: there is no international or imperial government.
B. It is a beneficent game: it eliminates the conflict between behaving rationally and behaving well.
C. It remedies the gap in classical free trade theory, which tended to assume that its institutional underpinnings were already in place, and ignored the fact that the general benefit offered by free trade is an insufficient inducement for individual agents (countries) to play by free trade rules.
D. It implies that the system is self-liquidating because the costs of the sweeteners provided by the leader come to exceed the pay-offs. So it gives us a theoretical explanation of the circulation of hegemons, focussing particularly on the rise and fall of Britain, and on those periods of messy transition, in which leadership is being contested.
Although financial history is full of banking excesses leading to crashes, one clear lesson Kindleberger sought to draw (and which chapter 12 of this volume brings out) is that these are not lethal for the economic system if there exists a single 'international lender of last resort'. It is the absence of such a lender which brings economic collapse in the wake of financial collapse. Thus the world depression of 1929-33 was so long and deep because Britain could not, and the USA would not, 'discount in crisis'. The breakdown of the US-led Bretton Woods system in the early 1970s suggested to Kindleberger that the world was about to enter a similarly rocky period.
We are certainly far from having centrally provided public goods in today's global economy. From his internationalist perspective, Kindleberger would have considered the huge global imbalances between the USA and China in the run-up to the US banking collapse of 2008 as the deepest cause of the Great Recession. But unlike in the 1930s, there is no successor hegemon or underwriter waiting in the wings. Germany is in a position to provide Kindlebergian public goods for the eurozone, but it is reluctant to do so. But China is very far from taking the place of the United States.
So we are left with these two questions. Is it necessary for global public goods be hegemonically provided, or can they be provided by cooperation? And if the former is true, is the world economy destined to break up, almost certainly messily, into a world of regional blocs, as Kindleberger predicted it would?1
1) In 'Systems of International Economic Organization', D.P Calleo ed., Money and the Coming World Order (New York: Lehrman Institute/New York University Press, 1976)