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Speculation and Regulation in Commodity Markets: the Keynesian Approach in Theory and Practice

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Speculation and Regulation in Commodity Markets: the Keynesian Approach in Theory and Practice Munich Personal RePEc Archive Speculation and regulation in commodity markets: The Keynesian approach in theory and practice Marcuzzo, Maria Cristina Sapienza University of Rome 2012 Online at https://mpra.ub.uni-muenchen.de/44131/ MPRA Paper No. 44131, posted 02 Feb 2013 14:36 UTC Speculation and Regulation in Commodity Markets: The Keynesian Approach in Theory and Practice edited by Maria Cristina Marcuzzo TABLE OF CONTENTS Introduction vii Maria Cristina Marcuzzo I. Keynes as speculation theorist and practical speculator 1. From speculation to regulation: Keynes and primary commodity markets 3 Maria Cristina Marcuzzo 2. Keynes’s activity on the cotton market and the theory of the ‘normal backwardation’: 1921-1929 25 Carlo Cristiano and Nerio Naldi 3. Keynes’s speculation in the London tin market: 1921-1930 57 Nicolò Cavalli and Carlo Cristiano 4. An analysis of Keynes’s investments in the wheat futures markets: 1925-1935 79 Tiziana Foresti and Eleonora Sanfilippo II. A methodological problem 5. Keynes and Sraffa on the concept of commodity rate of interest 109 Nerio Naldi III. The theory of storage 6. Kaldor and the relationship between ‘normal backwardation’ and the theory of storage 129 Carlo Cristiano and Paolo Paesani iii 7. A new test of the theory of storage comparing historical and contemporary data 151 Giulio Cifarelli and Paolo Paesani IV. From commodity markets regulation to the reform of the international monetary system 8. Keynes’s commodity and currency plans for the post-war world 177 Luca Fantacci 9. Richard Kahn and the stabilization of commodity prices 207 Annalisa Rosselli 10. Back to which Bretton Woods? Liquidity and clearing as alternative principles for reforming international finance 225 Massimo Amato and Luca Fantacci 11. Reforming the International Monetary System. A stock-flow-consistent approach 243 Sebastian Valdecantos Halporn and Gennaro Zezza iv CONTRIBUTORS Massimo Amato Bocconi University, Milan Nicolò Cavalli Bocconi University, Milan Giulio Cifarelli University of Florence Carlo Cristiano University of Pisa Luca Fantacci Bocconi University, Milan Tiziana Foresti University of Rome, La Sapienza Maria Cristina Marcuzzo University of Rome, La Sapienza Nerio Naldi University of Rome, La Sapienza Paolo Paesani University of Rome, Tor Vergata Annalisa Rosselli University of Rome, Tor Vergata Eleonora Sanfilippo University of Cassino Sebastian Valdecantos Halporn Université Paris Nord, France Gennaro Zezza University of Cassino, Levy Economics Institute v Introduction The eleven papers presented here are the outcome of the research activity undertaken by the participants in the project—The return to Keynes. Speculation and stabilization policies: money and commodities—financed by the Italian Ministry of 1 Education in 2010, whose aim was: to carry out philologically accurate analysisof Keynes’s views regarding regulation of the raw material and money markets—to assess how relevant they are today in the light of the proposals to regulate the financial markets and the international economicr orde consequent upon the crisis that has broken out over the last few months, atein aof clim opinion where the ‘back to Keynes’ spirit is gaining ground. More specifically, we intend to examine, not separately, as soten ofhappens, but in close connection, two issues which preoccupied Keynes throughout the whole of his theoretical and practical activity: monetary reform and the stabilization of commodity prices. From the methodological point of view we will confinenot our attention to Keynes’s published writings, but also take into account the unpublished material, at the level not only of theoretical reflection but alsoof Keynes’s concrete experience as a speculator, mainly on the futures markets for raw materials and money. 2 In accordance with the guidelines describedabove the research of the last two years focussed on four main areas of investigation: Keynes’s ideas on speculation, case studies of Keynes speculative activity inselected commodity markets, measures of commodity price volatility and proposals forabilizing st commodity prices in the context of a wider macroeconomic framework. In her paper Marcuzzo analyses Keynes’s‘extremely wide practical acquaintance’ with organized market as a way to understand practicehis as speculator and his evolving views on speculation which eventually led him to argue against ‘unfettered competition’ and in favour of regulation of commodity markets. 1 In fact, although launched in 2010, the formal denomination of the programme was PRIN (Programmi di ricerca scientifica di rilevante interesse nazionale) 2008. 2 The preliminary findings and early versions of the papers collected here were presented in five Workshops held at Bocconi University (October, 2010, October 2011, January 2012), University of Rome, La Sapienza (April and September 2012) and in various conferences and seminars: at the European Society for the History of Economic Thought Conferences (ESHET 2011, 2012), Storia dell’Economia Politica Conferences (STOREP 2011, 2012), History of the Economic Thought Society Conference (HETSA 2011), World Economic History Conference (WEHC 2012); seminars at Paris I Sorbonne and London City University. We are indebted to our discussants and commentators for helpful suggestions and criticism. vii He relied heavily on information relative to each individual market and commodity, weighing up the quality and reliability of that information through calculation of the relevant data, the advice of experts, and his own assessment of market conditions and of other participants’ opinions. The grasp of ‘business psychology’ became an increasing important element both in his investment strategy and in his views on speculation His own investment philosophy seems to have changed in the early 1930s, following heavy losses in the commodity market, the 1929 crash and possibly progress in his new theoretical developments which culminated in the General Theory. The role of informed opinion about the relevant data gave way to evaluation of market sentiment, conventions and herd behaviour. In the end the ability of the speculator rested, for Keynes, on individual judgment, as opposed to the average market view. In the case of the commodity markets, which played an important role in sustaining or depressing the level of effective demand worldwide, Keynes became increasingly worried about the effect of adverse or excessively optimistic market opinions and ever more apprehensive of the dire consequences of trusting them to ensure the smooth working of the economic system. In 1923, Keynes published the first formulation of the theory of futures contracts, often labelled ‘normal backwardation theory’, which he later incorporated in his Treatise on Money. This theory hinges upon theea idthat speculators provide a protection against price fluctuations and, on average, earn risk a premium determined by the working of the market. In their paper, Cristiano and Naldi assess to what extent Keynes, or any other speculator, could ever have used this theory as the guiding principle of his investment strategy and how such an analysis may illuminate speculative behaviour. They focus their attention on the case of the cotton market, reaching the conclusion that: During the period considered in this paper, the cotton market went through two main periods, one of relative scarcity until 1925 and one of abundance afterwards, with a peak of excessive supply in 1926-27. Throughout these two periods, Keynes very rarely abandoned his strategy of staying long. However, it is only from 1921 to the spring of 1923, when the Manchester Guardian article appeared, that Keynes’s behaviour can be taken as a good representation of the idea ofroutine speculation as risk-bearing as well. When the scheme of sales and repurchases was abandoned after 1923, it seems that Keynes made some attempts at using the information he had, adapting his strategy to a changing outlook. From 1921 to 1930 Keynes was also active in the London tin market and drew up seven Memoranda on Stocks of Staple Commodities which included a section on tin. viii Cavalli and Cristiano argue that both Keynes’s analysis and his market behaviour bear witness to a highly specific context for speculation, characterized by limited sources of supply and a small number of agents, imperfect information and information asymmetries, frequent attempts at manipulating prices (including one in which Keynes took part), and no clear separation between the cash and the futures markets. At least until the tin cartel was formed in 1931, the tin branch of the London Metal Exchange had looked very attractive to well-informed and well-connected speculators. However, making money with tin proved to be a difficult endeavour, even for a speculator placed in a privileged position. They conclude by stating that Keynes certainly was a competent and relatively well-informed speculator, and could also avail himself of good connections in the industry and the London Metal Exchange. Nonetheless, his decisions about when to step in or out of the market were frequently ill-timed, and he was continually exposed to heavy losses even when his outlook proved on the whole correct. Foresti and Sanfilippo reconstruct Keynes’s investments in the wheat futures markets in the decade 1925-35, on four different market places (Chicago, Winnipeg, Liverpool and Buenos Aires). They find that Keynes adopted a completely different strategy when operating on the North-American markets from the line he followed
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