Shifting Liquidity Preference from Money to Goods: Hayek and Keynes on a Commodity Reserve Currency

The outbreak of World War II brought a major disruption to global commodity markets. The blockade and the obstruction of trade channels caused producing countries to experience difficulties in selling their entire production and consuming countries to ensure adequate supplies. Such disturbances aggravated the disorder of markets that, already in the interwar period, had suffered from erratic price fluctuations. It was one of the objectives of the post-war order designed by Roosevelt and Churchill with the Atlantic Charter of 1941 to address this issue by promoting “the enjoyment by all states, great and small, victor or vanquished, of access, on equal terms, to the trade and to the raw materials of the world which are needed for their economic prosperity” (art. 4). Several authors, variously engaged in post-war planning, came to believe that the ability to pursue this aim depended crucially on the design of the international monetary system. In particular, the stabilization of commodity prices was at the core of various plans separately sketched out between 1942-43 by such diverse authors as Friedrich Hayek and John Maynard Keynes. The discussion on the adoption of a commodity reserve currency or of a tabular standard to stabilize international prices was inaugurated by the two economists in the pages of the Economic Journal, and eventually involved other authors, such as Frank D. Graham and Benjamin Graham. The discussion, which extended to the nature and operation of money, in its relation to gold and other commodities, as a reserve asset and as a means of international settlement, found an echo also in Keynes’s correspondence with government officials concerning his commodity and currency plans for an International Commod Control and Clearing Union. This debate represents a significant, yet relatively neglected contribution to the understanding of how the theoretical conception and the institutional design of international money should respond to the systemic disruption produced by war, and how emergency wartime measures (such as capital controls, clearing systems, and buffer stocks) could be adapted for the purpose of establishing an international monetary order capable of promoting peaceful and balanced economic relations after the war. Building on partially unpublished documents, this paper reconstructs the debate, putting it in the context of the wider discussion of those years concerning the theory and institutions of international money.