The ILLR and the Hegemon

Modern scholarly interest in the ILLR concept owes much to the work of the US economist Charles P. Kindleberger, who made the issue central to his research on the Great Depression and subsequent contributions to the hegemonic stability theory debates of the late 1970s and

1980s. Kindleberger recognized that when national financial systems are integrated at the global level, financial crises tend to spill across borders. Thus, in order to maintain stability in the world economy, a Bagehot-style mechanism was needed at the international level. Three conclusions are consistently echoed in his body of work on the topic. First, historical evidence from the pre-Bretton Woods era suggested that the ILLR role was something that fell within the purview of the global economic hegemon, or, as he sometimes put it, "the leading financial center of the world.”[1] Kindleberger’s contention was that crisis-prone financial markets generate a social demand for liquidity provision. However, the provision of this public good is undersupplied by markets and, therefore, the responsibility falls on governments. Yet Kindleberger assumed that cooperation among multiple states to provide the good would be difficult if not impossible; thus, the hegemon was the one actor that should be both willing and able to go it alone and stabilize the system.[2]

Kindleberger’s second conclusion was a normative one: ILLR actions are not just good for the dominant economy, they are good for global economic stability. In his master work on the Great Depression, Kindleberger concluded that the severity of the global economic collapse would have been far less severe—perhaps even averted altogether—if Great Britain or the United States had responded with countercyclical lending and the maintenance of open markets for distressed foreign goods.[3] [1] Elsewhere he argued that when the leading economic state is willing to play the role of the ILLR, international crises are far less severe. On the other hand, "when there is no such lender, as in 1973, 1890, and 1931, depression following financial crisis is long and drawn out—this in contrast to episodes when there is one and crisis passes like a summer storm.”11

Finally, Kindleberger reaches a third conclusion: The world economy cannot count on the hegemon to act as the ILLR forever. Over time, the leading economy’s ability and willingness to provide the good declines and eventually vanishes. For example, "after about 1971, the United States, like Britain from about 1890, has shrunk in economic might relative to the world as a whole, and more importantly, has lost the appetite for providing international economic public goods ... [including] last-resort lending.”[5] Kindleberger’s assertion was echoed by other scholars writing on the same subject. Barry Eichengreen notes that, in the aftermath of World War II, the United States had such a preponderance of economic power that it maintained the international monetary system’s stability by "discounting freely, providing countercyclical lending, and maintaining an open market.” However, he also contends that such instances are rare, saying, "For a leading economic power to effectively act as a lender of last resort, not only must its market power exceed that of all rivals, but it must do so by a very substantial margin.”[6]

By the 1990s, interest in the hegemonic stability research program had peaked. Meanwhile, beginning with the Latin American debt crisis in 1982, the IMF had taken on a more prominent role in managing international financial crises. The confluence of these two trends resulted in an intellectual shift within the field of international political economy (IPE). Attention moved away from the role that states play in international financial crisis management and toward the role of multilateral institutions, like the Fund, in providing such global economic public goods.

  • [1] Kindleberger 1996, p. 164.
  • [2] Lake 1993, p. 463.
  • [3] Kindleberger 1973. Eichengreen (1995) disagrees somewhat with Kindleberger onthis point, arguing that an ILLR would have only made a difference if the crisis were theresult of "a temporary loss of confidence in the stability of fixed parities”; no amount of countercyclical lending would have solved the global economy’s problem if the crisis was a resultof a general lack of confidence in economic fundamentals.
  • [4] Kindleberger 1996, p. 164.
  • [5] Kindleberger 1986, p. 9.
  • [6] Eichengreen 1995, pp. 238-239. This line of argument is a central component of theories of hegemonic stability. The basic line of reasoning says that hegemonic systems areinherently unstable as the burden of maintaining the stability of the system ultimately hastens the decline of the hegemonic power. Eventually, the leading economy grows "weary andfrustrated” with free riders as well as the fact that its economic partners gain more from theliberal economic order than it does. Over time, the hegemon is both less willing and less ableto provide the public goods it once did (Gilpin 1987, p. 78; Gilpin 1981).
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