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Kindleberger and the lender of last resort


The first edition of Charles P. Kindleberger's seminal work Manias, Panics and Crashes was published in 1978. This timely volume, written with great wisdom and wit, appeared soon after the end of that peculiarly lengthy period of financial stability which ran from the conclusion of the Second World War to the final stages of the Vietnam War. The first economists to read this edition were consequently still reeling from the fringe banking crisis in England, the Franklin National Bank 'bail out' in the United States, the dramatic collapse of Bankhaus I.D. Herstatt in West Germany, and the more general financial distress associated with the early stages of the Great Inflation. With these background disturbances softening the intellectual ground, Kindleberger was able to shake his colleagues' faith in their banal and bastardised interpretations of Keynesian economics, and to help resurrect that rich unorthodox tradition in which financial relationships are made the cornerstone of economic analysis and the capitalist production process is characterised as a dynamic, inherently unstable, enterprise. His research subsequently became partly responsible for a sudden increase in interest in financial manias, panics and revulsions which has yet to subside. As Kindleberger himself states, his work on financial panics "coincided with what may prove to be a bubble in the economic literature on financial crises" (l996:x). Of course, not all of the literature which ensued reflected Kindleberger's unorthodox interpretation of financial crises, and, as time has passed, an ever-increasing number of economists have chosen to worship the classical re-birth, and thereby to deny the very existence of manias, to recast financial instability as a rational (and sometimes even efficient) process, and, ultimately, to impose monetary and financial neutrality on their models. It is nevertheless still of great credit to Kindleberger that these orthodox economists, while electing to worship an alternative religion, find it necessary to cite and politely criticise his research. In this sense he is unusual amongst that curious alliance of 'heretical' Post-Keynesian, Institutionalist, Marxist and 'literary' economists who, as a rule, are rudely ignored by orthodox economists.



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