El Petro, Or What We Can Learn From Venezuela's Doomed Crypto-Petrocurrency
Bloomberg Markets|June - July 2019

Shakespeare tells us, “Misery acquaints a man with strange bedfellows.

Aaron Brown

” Venezuela’s 20-year slide from peaceful, prosperous democracy to violent, impoverished dictatorship has caused misery on a vast scale. And it brought together the protagonists in the story of el petro—a mashup of fringe economists and cypherpunks, socialists and libertarians, real-asset fundamentalists and next-generation financial engineers, the “Dutch disease” and exorbitant privilege. Their experiment ended in failure, but their ideas deserve exposure.

Consider the French Revolution in 1789. Its political accomplishments were short-lived: a century alternating among monarchy, republic, and empire. But the metric system it introduced spread throughout the world and persists today.

When revolutionaries took over France, they looked to the cahiers de doléances, lists of grievances. Among the most common demands was one for standard weights and measures. Peasants hated local nobles changing the size of the containers used to measure their obligations. They wanted one fixed local bushel kept where they could see it year-round.

Five brilliant Enlightenment scientists were recruited: Jean-Charles de Borda, Joseph-Louis Lagrange, Pierre-Simon Laplace, Gaspard Monge, and Nicolas de Condorcet. But they misunderstood the problem. 1 They created a good system—though not one the peasants embraced—because it was designed by smart people.

El petro is an oil-backed cryptocurrency designed at an October 2017 meeting at the Venezuelan central bank, where bemused bankers met socialist economists and cryptocurrency zealots. A white paper and official announcement followed in December. But the details kept changing. Since then, Venezuela has produced a confusing series of grand announcements, countered by denunciations from elsewhere. Amid all the debate, there has been too little analysis of the underlying theory.

BENJAMIN GRAHAM is remembered today as the father of value investing and Warren Buffett’s mentor. But he thought his important contribution to finance was his idea for a commodity-backed currency. 2 He came up with it in 1921— long before he lost his money on Wall Street and turned to undergraduate teaching and textbook writing to make ends meet. He promoted it in articles and books throughout his lifetime.

Graham, like many others, noticed that when commodities are plentiful and cheap, the economy is in recession. In prosperous times, commodities are scarce and expensive. As he wrote in his 1937 book Storage and Stability: A Modern Ever-Normal Granary:

[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.

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