Irving Kahn

Irving Kahn, C.F.A.   
Chairman, Kahn Brothers & Co. Inc.   

World Commodities and World Currency

Foreword (1998)

After Storage and Stability appeared in 1937, Benjamin Graham used the seven tumultuous years of 1938 to 1944 to reflect on the pros and cons of his commodity reserve currency plan. World Commodities and World Currency expresses Graham's reaction to that turbulent period, and applies his ideas to the future he foresaw.

By 1938, the long depression was ending and the gathering war clouds were foretelling World War II. Later, from 1942 to 1946, the U.S. economy was strictly regulated: all prices were frozen and controls were applied to currency, goods, and wages.

As the war approached its close, the U.S. Treasury Department began studies on what banking changes would be needed to restore normal economic confidence between ourselves and our allies and between rich and poor countries. The 1944 Bretton Woods conference ended with the Anglo-American consensus to create two new institutions. The World Bank was created for long-term lending and the International Monetary Fund (IMF) was designed to re-open trade with reasonable and stable exchange rates among the world's currencies. Much of Graham's work during that time was shaped by these and other currency developments.

Unfortunately, limited support from Congress precluded creating an institution to develop and manage a commodity-backed reserve currency in the U.S., an action that would have supported the stabilization efforts of the World Bank and the IMF. Nevertheless, the last 50 years have seen creditable performances by both banks. (The IMF today has 181 member countries at the lower end of the Gross National Product scale. Over the years, it has supplied borrowers with over $108 billion of loans in 30 currencies. Only two loans have yet to be repaid.) To no one's surprise, the currency markets and pricing patterns of the last five decades have run parallel with many of Graham's theories.

Recent currency crises have proven the continued importance of help from the IMF. The Southeast Asia currency runs of 1997-1998 saw six countries receive help. These loans were awarded after the borrowers pledged to correct most of the banking mistakes that were largely responsible for bringing about the crises.

Although these countries already had favorable trade balances and high natural savings rates, their excessive leverage combined with dubious land and building speculation created conditions that easily triggered flights from their currencies. Some dropped in value as much as 50% to 80% below their pegs. Had these currencies been backed by liquid reserves such as stored world commodities as this book describes, such declines could have been halted before they went so far.

As Benjamin Graham observed long ago, industries tend to move in cycles. The one traditional exception has been the gold mining industry, which enjoyed steady demand, leading to full production and steady profits. But now this industry too is proving vulnerable. The world's new mines have economic limits. Central Banks are reducing their holdings of gold, and the world is searching for more useful stores of value than that provided by an unproductive metal. If you look back at Graham's theories in this book and in Storage and Stability, an alternative might be found in holdings of storable goods that are related to the basic needs of all humans -- needs such as better food, affordable housing, and dependable jobs. Producing for storage tends to safeguard supplies of foods and raw materials while also generating many new jobs.

According to Graham, the basic theory is that such a storage system serves as a buffer stock. When prices of the goods being stored starts to fall, the managers of the storage system could buy, thus supporting prices. When the prices start to rise, they could sell and drive prices back down. But they would do so only as part of a basket of world commodities, so that stabilizing the prices of goods would be stabilizing the value of the currencies.

A currency application of this theory is the move toward a common European currency, the Euro. The European Community plans to unite from 11 to 15 nations which will use this common currency. Issued in the next few years, the Euro will ultimately replace the national currencies of the member states. Membership in the monetary union is conditional on meeting strict guidelines concerning the ratio of debt to GDP.

It is clearly important to consider the potential advantages of backing the Euro with stored reserves - beginning with the added income from the many jobs that would be required to create and maintain those reserves.

Unfortunately, most of the world's great problems are still unsolved by its nations' economic systems. Hundreds of millions of jobless human beings represent an enormous reservoir of usable potential wealth, yet their needs continue to be virtually limitless. The storage system, as viewed by Benjamin Graham, can help solve this problem, because as the economy weakens and prices start to fall, the storage system will begin to buy. This will increase demand and support jobs. Unskilled workers will be needed to produce -- from factories, offices, laboratories -- the basic materials that are always in demand. This is a central premise of World Commodities and World Currency.

The needs of the depression years spurred the creation of millions of useful new jobs like those of the Works Progress Administration (WPA) and the Civilian Conservation Corps (CCC). These also provided workers with the experiences to learn new skills and generated useful public structures, many of which are still in use. Since we can support the value of money - control inflation - through a commodity reserve system, we must not wait for a depression in order to create useful jobs with private employers as did the WPA and CCC. Today's welfare payments are transfers from taxpayers to jobless persons, yet supply no new products. To have full employment, we must be able to prevent inflation, stabilize prices and allow for expansionist policies.

Free markets work well in the short term, but periodically they need the support of long-term planning. Accumulating usable assets like commodity reserves adds to our wealth. Standard raw materials tend to be stable in value. History shows that the indexes of standard commodities fluctuate in a narrower channel than those of finished goods.

As we approach the next millennium, it is startling to realize that Benjamin Graham's theories, solutions, and advice are as timely as they were when first written. Although all details were not foreseen by Graham, the patterns clearly follow his suppositions. We can expect three major forces, now in evidence and clearly gathering power, to change the economic structures of the 21st Century.

First - Millions of computers have begun to interlink channels of global communication. These will expand worldwide financial transactions and trade. The cost of computing is drastically falling, while its power is rising and its speed increasing. While computing is, for the most part, beneficial, there are dangers: Computer trading can also lead to unstable movements on a vast scale unless the economy is anchored to stable materials in constant use.

Second - Increasingly, the world over, women are now moving into senior and executive posts in governments and industries. Traditionally, women recognize longer-term values and social needs, and in general are more "people-conscious".

Third - Developing nations see how their more fortunate neighbors live, and they also want to acquire those benefits for themselves by working, saving, and reaching a better standard of living.

Computer communications and management must not be allowed, as they can, to destabilize financial markets. The storage plan will help to maintain stability. Limiting the business cycle's extremes while expanding jobs, the storage plan will open the way for the concerns of men and women, and developing countries.

Read Benjamin Graham's original preface to World Commodities and World Currency and the chapters that follow. His reasoned conclusions provide the answers we need.


Irving Kahn, C.F.A.
Kahn Brothers and Co.

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