Posted by: clholoman | November 18, 2011

In Search of a Leader

(Caution, economics ahead.)

Way back when, when I was in graduate school, one of the popular theories was “hegemonic stability theory,” which posited that the international system worked better when there was one dominant power which took upon itself to perform certain tasks to stabilize the system. My Master’s thesis was actually a critique of one aspect of this theory. Anyway, like many theories in IR (and social science generally?) it either explained too many cases or too few, and was eventually absorbed into a better strand of theory.

But one of the central pieces of evidence remains and has just resurfaced in an article in Foreign Affairs, the work of the great economic historian, Charles Kindleberger.

In The World in Depression: 1929-1939, Kindleberger argued that “the 1929 depression was so wide, so deep, and so long because the international economic system was rendered unstable by British inability and U.S. unwillingness to assume responsibility for stabilizing it.” Indeed, Kindleberger’s critique of the United States’ role in that era’s crisis summitry might well have been written about Germany today: “The World Economic conference of 1933 did not lack ideas … [but] the one country capable of leadership was bemused by domestic concerns and stood aside.”

In order to guarantee the strength of any international economic system, Kindleberger explained, a stabilizer — only one stabilizer — needs to provide five public goods: a market for distress goods (goods that cannot find a buyer), countercyclical long-term lending, stable exchange rates, macroeconomic policy coordination, and real lending of last resort during financial crises. The United States did not supply these things in the 1930s. Germany fails the test on all five items today.

This is a tremendous article and a really good primer on the issues in the crisis in Europe, which seems really complicated because there a lot of factors involved, including both policy and institutional design (my own special interest), but really isn’t, because the solutions are pretty obvious, if not easily attained.

And make no mistake, this is really, really serious. I was pointed to this article from Dan Drezner’s  blog (which I was pointed to from his tweet–hooray social media) where he  notes how much this is still “[d]eveloping…. in a way that truly scares the living crap out of me. ”

The Euro monetary system was a development much more momentous than many people understand, since nations voluntarily gave up one of the defining characteristics of sovereignty. Seeing how this plays out is fascinating.

A post in a lighter vein coming soon.



  1. Great stuff.

    What would be an historic example of providing a market for distressed goods?

  2. Good question, I think it’s probably one of those things that’s more evident in the absence. I guess the most obvious example is the willingness of the US to run persistant trade deficits in the post-WWII period (although many would argue that did not extend, esp. by the 60s and 70s, to the countries that needed it most–the producers of primary products in the 3rd world.) Most analysts think the US played the role again in the Asian crisis of the late 90s, but I am less familiar w/ that. There’s probably an example from the Pax Brittanica of the 19th century. I’ll consult my Kindleberger when I’m back in the office.

    Thanks for reading and commenting!!

    • As promised, here’s the British example from World in Depression (p. 291):
      “By holding firm to free trade during depression at some short-run cost to resources in import-competing lines, [keeping import markets open in times of stress] provides a market for surpluses accumulated abroad. Britain clung to free trade from 1846 (or some year thereafter, such as 1860…) until 1916. After 1873, although not growing rapidly, it continued to adhere to free trade…”

      He does go on to note “Britain’s tenacity in adhering to free trade in depression may have been born of cultural lag and the free trade tradition of Adam Smith rather than of concious service to the world economy” but I don’t think that changes the argument.

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