Discussion — Reading 8: Charles P. Kindleberger

This session covers Reading 8: The Dollar and World Liquidity: A Minority View, a 1966 article by Charles P. Kindleberger, Walter Despres, and Walter S. Salant, which originally appeared in The Economist.

By viewing the United States as a bank to the rest of the world, Kindleberger tries to allay concerns about a U.S. balance-of-payments deficit. He points out that the U.S. was supplying the world reserve currency primarily by lending rather than spending dollars into the global economy. He calls into question the appropriate definition of a payments "deficit."

From the course website:

"This reading contrasts with Mundell, and much of the contemporary economic debate, by taking a banking view of international money and balance of payments. According to Kindleberger, the US should be understood as bank of the world, borrowing short-term and lending long-term, thus providing both liquid assets and long term capital funding. The US is different from other countries insofar as the dollar is the world reserve currency and dollar money markets are the world funding markets. Thus the Eurodollar rate is actually the world rate of interest. Kindleberger worries about misguided attempts to 'correct' deficits since they may wind up inhibiting the free flow of capital on which world growth depends."

Kindleberger's perspective is an alternative to that of Robert Triffin who believed that a U.S. trade (current account) deficit was needed to supply the world with dollars, and that such a deficit would eventually destabilize the dollar by causing a gold drain.

Mehrling's latest book, Money and Empire: Charles P. Kindleberger and the Dollar System (2022) tells the story of the rise of global dollar system through the lens of an intellectual biography of Charles Kindleberger. Chapter 6 of the book gives some context for this particular paper.

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