A man who knew maniacs well

My Oxford tutor, the late Ken Straw, used to insist that if I wanted to really understand international economics, there was no better source than Charles Kindleberger's landmark text, International Economics. Prof. Kindleberger, a long-time economics professor at the Massachusetts Institute of Technology and author of 30 books, died of a stroke on July 7 at the age of 92.

Prof. Kindleberger played a key role in the Marshall plan that bank-rolled the postwar recovery of western Europe. He also acquired a formidable reputation as an academic. His erudition was backed by a sound understanding of the human factors on which he built his often abstract theorising.

Prof. Kindleberger's 1978 book, Manias, Panics and Crashes: A History of Financial Crises, was a scholarly, yet witty account of how money and credit mismanagement has led to economic disaster in global markets through the centuries.

For those who think of economics as "the dismal science", this book provides evidence to the contrary. It traces the history of financial bubbles from the famous Dutch tulip mania of the 17th century through the coffee and sugar scandals in the 18th century and the South Sea Bubble, to the Great Depression.

Through all these episodes, Prof. Kindleberger finds knaves and tells a gripping story of how lack of sheer critical thinking by investors has repeatedly been turned into disasters.

He weaves his narrative towards his own solution to recurrent crises. As each scandal explodes, causing widespread reductions in the market value of ownership assets, there is a credit contraction.

Banks and other lenders call in loans, business shrivels and depression follows. Prof. Kindleberger would have supranational agencies act as lenders of last resort, a plan that would only be as good as the agencies that do the lending.

On the way to this historical imperative, which not all authorities would accept, Prof. Kindleberger provides a sumptuous tapestry of financial foolishness, scandal, heartache and brilliance.

He argued that facts may change over time but the basic story is more or less the same: investors get over-excited about some new development and bid prices up in a speculative orgy to levels that do not make sense.

When reality eventually sets in, investors panic, prices plummet, and disaster ensues. This is a sequence of events which also floored Maltese investors who took the local stock exchange to heart and, more so, those who thought they could become millionaires overnight at the height of the dot-com bubble on foreign stock exchanges. "His point was that what goes on in people's heads has important economic effects on life,'' said Robert Solow, a colleague of Prof. Kindleberger at MIT.

Manias, Panics and Crashes went through several reprints, most recently in 2000 after the rise and fall of dot-com stocks, a development that could have come straight from the pages of Prof. Kindleberger's book.

The Enron and WorldCom scandals, for instance, would not have surprised a reader of the book. Such swindles, Prof. Kindleberger wrote, were a staple of all financial bubbles.

Prof. Kindleberger wrote Manias at 67. He was writing articles, reviewing manuscripts and revising books until very recently, according to his other colleague, Prof. Paul Samuelson.

At the age of 90, he wrote a piece about investing. His advice: do not put too much money in the stock market. Many wish they had followed his advice.

At the end of the Second World War, Prof. Kindleberger was asked to make a preliminary assessment of the shattered German and Austrian economies in the context of allied plans for war reparations. But bitter disputes between Stalin and the other victorious powers threw doubt on the scheme. While America's representative was concerned to avoid the retributive excesses that had marred the 1919 Versailles settlement, the Russians were seizing whatever industrial assets they could lay their hands on. Prof. Kindleberger later calculated that this political restraint cost his country $400 million in Germany alone (about $4 billion today).

Such generosity was the shape of things to come. With some 270 million people facing starvation, millions homeless and unemployed in central Europe, and a disastrous 1947 harvest, the political temperature was rising alarmingly. It was against this background that George Marshall, President Truman's Secretary of State, made his historic proposal that America should finance a massive European recovery programme.

Prof. Kindleberger, already familiar with Europe's economic woes, was appointed by the Americans to determine just where the money should go and how it should be deployed. He spent countless hours on Capitol Hill, fighting the necessary legislation through, clause by clause. Congress would only accept it subject to a four-year limit. Completed in 1952, the plan cost US taxpayers $12 billion, an unparalleled international transfer of economic resources.

One of Prof. Kindleberger's crucial inputs was to make the grants and loans available in US dollars, thus giving the impoverished Europeans the international currency they desperately needed to buy goods and services from the US. This imaginative act of self-interest helped fuel an economic recovery that would otherwise have taken decades, even if the commercial pay-off for the Americans was obvious. Britain was easily the largest beneficiary, eventually receiving $3.3 billion. Next came France with $2.7 billion, Italy with $1.5 billion and West Germany with $1.4 billion.

A running theme in Prof. Kindleberger's academic work was his belief that economic man is often irrational and subject to bouts of hysterical greed. The serious side of this thesis, however, was expounded in Prof. Kindleberger's weightier volumes, where he argued that it was dangerous to see global markets as capable of self-regulation. To avert repeated financial crises, he wrote, the world must always look for effective international leadership. He cited Victorian Britain and contemporary America as classic examples. He might also have cited his own part in Europe's postwar recovery.

A fitting, last tribute to Prof. Kindleberger was paid by Jagdish Baghwati, an international trade specialist at Columbia University and one of a number of well-known economists who trained under Prof. Kindleberger. Said Mr Baghwati: ''You learned technique from others. What you learned from Charlie were ideas".

My own tribute is less pungent, but practical. I still thumb through my battered copy of International Economics when I want to fathom some particularly difficult aspect of economic relations.