Book Project
Linking Currencies to the Real Economy: Benjamin Graham’s Commodity Reserve Currency
Tied to my 1999 website bufferstock.org - one day I will get around to updating this.
Edited by Leanne Ussher
The proposal is for an edited collection of essays on the following topics:
Ben Graham’s macro policy in historical context
the international monetary order and commodities
linking the financial and real sides of the economy
commodity price stabilization and inflation targeting
long term valuations and the issuance of private money
food security, strategic reserves and humanitarian assistance
global imbalances and global expansion from a commodity multiplier
stabilization schemes for commodity prices as instruments for mitigating the excesses of agricultural protectionism
the shortcomings of existing arrangements for hedging commodity prices.
greening the international commodity bufferstock
Ben Graham’s promotion of ethics in the financial community
This project aims to publish a book of essays by renowned economists and market practitioners who will each re-examine Benjamin Graham’s (1937 and 1944)[1] policy proposal to create an international commodity reserve currency to promote robust and stable economic growth. While Security Analysis (1934) was Graham’s microeconomic advice to investors, Storage and Stability (1937) was his macroeconomic advice to policy makers. Both books emphasized the intrinsic value of assets behind the short run market price. The macro policy proposal for a US commodity backed currency, was extended to the global arena in World Commodities and World Currency (1944). Written in part as a proposal to modify the Bretton Woods 'dollar' or 'bancor' proposals. The policies were strongly supported by Frank Graham and praised by Hayek in 1943.[2] The creation of a buffer, and the removal of excess commodity stocks from the market place while injecting international reserves was was based on an international real bills doctrine of counter cyclical monetary policy. Its aim was to elicit greater flexibility in private holdings of commodities and stabilize economic growth and prices through non-discretionary international monetary policy.
The envisaged format of the book will have each author identify different key elements of the Graham plan that could be used or adapted to reform the international market architecture in money and commodities. In some cases an author will show case their own proposal for reform. Authors will offer a constructive discourse on the requirements for sustainable and balanced economic growth, especially by developing countries, the need for international counter cyclical monetary policy, a valve for financial volatility and excess speculation, resource security, and a fairer allocation of the raw materials, all necessary for world economic growth.
The final publication of this proposed book will first be a tribute to Benjamin Graham who was a founding member of the CFA Institute. Graham’s Memoirs[3] reveal his belief that this policy was his most important contribution to posterity. It was one which he ardently endorsed from 1922 up until his death in 1976. Secondly It will also be a tribute to his teaching assistant and friend Irving Kahn who continued to pursue this work up until his death in 2015. Thirdly, it will track other followers of these policies, which are limited in number but not in reputation: John Maynard Keynes, Nicholas Kaldor and Albert Hart. While these economic luminaries have also supported Graham’s plan (expanded on below), it has been off the radar in the past 30 years since the deregulation international capital flows and a focus on market reform and micro policies that institute flexible commodity prices. This book of collected papers challenges the reader to consider ideas that may otherwise be described as ‘impractical’ or ‘out of date,’ and to see them in a new light, as insightful solutions for the 21st century.
World Commodities and World Currency in the 21st Century
Graham’s proposed international monetary policy is a grand idea that puts financial markets back into the role of servant to the real side of the economy, rather than the other way around. The observed disconnect between finance and the real economy inspired Graham to build on his famous work in Security Analysis to link intrinsic fundamental value to a financial security; he also wanted to connect fundamental value to the long run, smoothing out short run volatilities. The collected papers in this book will critique Graham’s original plan to give intrinsic value to money, while offering their own proposals for promoting international trade, even economic growth and building a stronger, more stable international monetary order for the 21st century.
Concern over the growth and persistence of global imbalances has been cited as the main threat to global systemic sustainability.[4] Due to a pro-cyclical international financial order and the US dollar as the sole international reserve currency. In contrast a minority of economists have claimed that we are in a ‘Brave New World’ where global imbalances do not matter.[5] Some of the papers included in this volume will assess the current financial architecture and point to reasons why we should or should not be concerned. Graham offered his commodity reserve currency proposal to the Bretton Woods committee in 1944, and envisioned it as a global automatic stabilizer that would promote sustainable and balanced growth across countries. It would not only tie the issuance of liquidity to economic growth but it would allow the production of reserves to be disseminated across different regions.
A new international currency, less volatile and more robust to inflation than current alternatives, might be attractive to businessmen for global contracting or payment purposes world wide. A private consortium headed by a former central banker and money innovator, Bernard Lietaer, attempted to offer a commodity basket backed currency as a private issuance,. It is estimated that 15 per cent of all global trade is countertrade, or international corporate barter. Such contracts avoid problems with currency fluctuations and counterparty contract risk. A private commodity currency would not require international agreements and yet if it became popular it could still act as a counter-cyclical mechanism reducing booms and busts of the business cycle, reducing the contagion of financial crises across markets, and promoting balanced growth between industrialized and developing countries.[6]
Commodity price stabilization is important. Growing concerns over energy and mineral supplies and security[7] are expected to intensify in the future, and this concern will be extended to farm production with the expansion of bio-fuels. Primary commodities represent 25 per cent of merchant trade, global warming and the industrialization of India and China has put increased pressure on ensuring the continuity of sustainable raw material supplies at realistic prices. The business cycle of these 2 countries, volatility in oil prices, and movements in the USD, create swings in commodity prices that are persistent and destructive to long term investment. The existing arrangements for hedging commodity prices are far too short term oriented. In many commodity markets speculators outweigh hedgers in number. This has led to numerous commodity market bubbles. The importance of schemes for achieving more stable commodity prices and instruments for mitigating the excesses of agricultural protectionism will also be addressed in this book. These discussion points are relevant if we are to avoid the instability and political jostling over national resources.
This volume hopes to offer not only an ambitious and unique orientation to international monetary reform but it should appeal to a diverse audience. Firstly, it offers the many followers of Benjamin Graham, in both the academic and investment world, an awareness of a little known yet important area of Graham’s economic thought. Secondly it provides a policy that could be supported for different reasons by libertarian, conservative and liberal leanings who would like to return to a gold standard. Libertarians will be excited by the proposition for a private currency issued alongside national currencies. Conservatives may favor an international currency with 100 percent reserve backing, and a benchmark for pegging domestic currency values. The international counter cyclical policy will appeal to progressives that feel that the laissez faire capitalist system is inherently destabilizing. Keynesians will support the bolstering of effective demand through an international incomes policy for commodity producers. Environmentalists, while opposed to the promotion of monocultures, might be swayed if there was a ‘green’ requirement on the basket. In addition to these political groups, this policy may offer a method of return for Islamic oil exporters who can lend their oil stocks and receive a return in accordance with the Koran.[8] Raw material producers should have relatively stable prices for individual commodities, supporting long term financial planning and more efficient production. This should augur well for easier negotiations on free trade in commodities. Developing countries that export primary commodities will benefit enormously: the stabilization in their terms of trade and the power to produce their own reserves to pay for capital imports, rather than devalue their currency, will reduce the cost of capital imports and promote industrialization. For the United States it would have to relinquish its “reserve currency” status, blamed by many economists to be the reason for its current account imbalances, loss of their manufacturing base, and domestic saving problems.
Although this list of possible supporters could be extended, a commodity reserve currency is far from a panacea. There are many, indeed most economists, who will disagree with such a policy including some of the authors in this volume. The primary goal of this book is to create an intellectual debate on the topic of international commodity buffer stocks linked to an international currency, without the prejudices that overwhelm this research area. Learning by doing was Keynes solution to this topic:
“I have no quarrel with a tabular standard as being intrinsically more sensible than gold. My own sympathies have always fallen that way. I hope the world will come to some version of it some time. But … the right way to approach the tabular standard is to evolve a technique and to accustom men's minds to the idea through international buffer stocks. When we have thoroughly mastered the technique of these, which is sufficiently difficult without the further complications of the tabular standard and the oppositions and prejudices which this must overcome, it will be time enough to think again” (Keynes 1944, 429-430).
Rather than mastering the technique of international commodity buffer stocks, the world rejected and has now forgotten this tool. And yet problems with commodity price instability has gotten worse. Most prominently, oil prices continue to face radical swings due to glut or scarcity. But commodities do as well, with most of the world's poor dependent on commodity income.
“[I]f surplus stocks do operate as a national liability rather than an asset, the fault must lie in the functioning of the business machine and not in any inherent viciousness of the surplus itself…Some means must be found to restore the Goddess of Plenty to the role of benefactress-in-chief that was hers without question under a simpler economy.” Graham (1937, 16-17)
Benjamin Graham is well known in the investment community for his micro policies of “value investing” and his ethical concerns over financial reporting and regulation requirements. But few know that Graham had a macro policy, based substantially on the same belief of intrinsic value, ethical trade, and the need for efficient and fair markets. This book of collected papers proposes to not only explain Graham’s macro policies in historical context, but elucidate their relevance for today’s modern financial world, and in the process examine the weaknesses of the present monetary order.
[1] (1937) Storage and Stability, McGraw Hill; (1944) World Commodities and World Currency, McGraw Hill. New York.
[2] Hayek, Friedrich A. (1943) “A Commodity Reserve Currency” The Economic Journal, Vol. 53, No. 210/211 (Jun. - Sep.), pp. 176-184.
[3] Graham, Benjamin (with Seymour Chatman). 1996. Benjamin Graham: The Memoirs of the Dean of Wall Street. New York: McGraw-Hill.
[4] See Izurieta and McKinley (2006) Addressing Global Imbalances: A Development-Oriented Policy Agenda IPC working paper #23, for a sobering forecast on “world trade and income” if global imbalances continue on their current trend.
[5] www.GaveKal.com
[6] The international commodity transmission mechanism between industrialized and commodity producing countries was elaborated by A.G. Hart, N. Kaldor and J. Tinbergen (1964) in their proposal at the United Nations Conference on Trade and Development (UNCTAD) “The Case for an International Commodity Reserve Currency.” Reprinted in N. Kaldor, 1964, Essays on Economic Policy II: Vol. IV of Collected Economic Essays of Nicholas Kaldor. 1980 edition, New York: Holmes and Meier.
[7] At the G-20 summit in Australia, November 2006, this was the primary theme for the conference.
[8] The suggestion that this currency may be Islamist friendly comes from Lietaer’s Terra proposal (attached) of negative interest or demurrage, which is payment for storage costs.