International monetary and financial systems may not be immutable, but nor do they change often. That is why the upheaval spurred by US President Donald Trump’s trade and tariff war is so remarkable – and difficult to decipher. To figure out what is going on, it is worth revisiting Charles P. Kindleberger’s theory of hegemonic stability, which he spelled out in his book The World in Depression: 1929-1939. Kindleberger’s theory essentially states that an open and stable international system depends on the presence of a dominant world power.In the nineteenth century, that power was Britain. As the world’s financial hegemon – leader of the global economic system and issuer of the dominant international currency – Britain supplied critical public goods. These included, as Kindleberger put it, a “market for distress goods, provided by British free trade,” and a countercyclical flow of capital, produced by the City of London. Britain also supported “coordination of macroeconomic policies and exchange rates,” through the “rules of the gold standard,” which were “legitimized and institutionalized by usage.” Finally, the Bank of England served as a “lender of last resort.”
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