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monetary policy

Central bankers around the globe are itching to diversify out of U.S. dollars. Brazil, Russia, India, China and oil producers are looking for alternatives. Even World Bank president Robert Zoellick acknowledged this month that the U.S. dollar is losing its status as the dominant reserve currency.

But what can central bankers diversify into?

Besides gold, the closest thing the world has to a generic unit of account is the International Monetary Fund's Special Drawing Rights (SDRs). But they're not a currency, just a claim on the currencies of IMF members.

Diversification to multiple currencies can spread risk, but ultimately, SDRs share the same problem that all national currencies have, namely that they are all based upon nothing more than the hope that debts denominated in those currencies will be repaid.

The last time the world was forced to fundamentally re-think markets and money was during the 1930s and 1940s. In that period, Benjamin Graham wrote four books. The best known ones are Security Analysis with David Dodd (1934) and The Intelligent Investor (1949), which have remained prominent as the foundations of "value investing" - the identification and purchase of stocks at a discount to their intrinsic value.

The two other books that Mr. Graham wrote, however, have received less attention. They are Storage and Stability (1937) and World Commodities and World Currency (1944). In them, Mr. Graham explored methods to maintain the integrity and value of national currencies by linking currencies to a basket of commodities in order to maintain and stabilize the purchasing power of money. According to Mr. Graham, the currencies the central and commercial banks deal in should be genuinely liquid in the sense of being reliably convertible into useful physical commodities. So he proposed a new international unit representing a weighted basket of 30 commodities.

In Mr. Graham's design, a federated network of commodity-reserve banks would buy and sell standard commodity bundles to maintain the average price of a standard composite commodity unit.

When the average market price of the basket of commodities reaches a low threshold, reflecting a shortfall in demand, the Treasury or commodity-reserve banks will purchase commodities for storage. They will purchase in sufficiently large quantities in order to stop the average price from falling further, issuing the commodity-reserve currency as payment.

When the average market price of the basket of commodities reaches a high threshold, the Treasury will sell commodities from storage in exchange for any type of money - this, according to Mr. Graham, would enable replacing unbacked or gold-backed currency with the commodity-unit-backed currency. "Such an arrangement would amount simply to putting the State in the role of a shrewd long-term operator in basic commodities, blessed with an unlimited bankroll."

In Mr. Graham's mind, inventories of useful commodities are the most liquid of assets, and therefore the logical basis for a currency.

Instead, the Bretton Woods Conference made other national currencies convertible into U.S. dollars and the dollar convertible into gold at a price managed by the U.S. Federal Reserve.

It did not address commodity price stabilization, nor did their adopted plan conform to conservative banking principles of convertibility and self-liquidation. The gold-only system began to falter in the 1960s, and was unilaterally abandoned by the U.S. government on Aug. 15, 1971.

It is the 30-commodity version of Mr. Graham's reserve currency proposal that Zhou Xiaochuan, governor of the People's Bank of China, recommended to the world in March, 2009. He said: "Back in the 1940s … [it was]already proposed to introduce an international currency unit … based on the value of 30 representative commodities. Unfortunately the proposal was not accepted. The collapse of the Bretton Woods system … indicates that the … [commodities]approach may have been more farsighted."

Mr. Zhou's interest reflects China's long history with commodity-based money. Ancient China tied money to the assets of the "ever-normal granary," to which Mr. Graham referred to as an example. In June, 1949, the new People's Bank of China introduced the "parity deposit unit" to denominate retail bank deposits and bonds in four basic commodities: rice, wheat flour, cotton cloth and coal.

It has long been common for producers in China to obtain bank loans mortgaged against commodity reserves. Outright purchase and storage of commodities or control of commodity-producing companies by China over the past few years are intriguing when viewed through these lenses.

Now that the world is again looking for a reliable international reserve currency, in light of the major changes under way in the global economy, it is time to reconsider Mr. Graham's proposal to reduce uncertainty about the value of money by coupling it with intrinsic value in the physical economy.

George Athanassakos is a professor of finance and holds the Ben Graham Chair in Value Investing at the Richard Ivey School of Business, University of Western Ontario. He can be reached at

Joseph Potvin is an economist who works for the Canadian government. The views expressed are his own. He can be reached at