Storage and Stability

Foreword (1937)

THIS study of the problem of surplus and unstable prices leads to the proposal that an excess supply of primary commodities be impounded on a composite basis, and that currency be issued backed by and convertible into the stored commodity units. The plan for basing money upon a store of stable commodities is frankly an invention. This would have been sufficient to condemn it in the prewar sound-money epoch. Most economists and solid citizens of that epoch were firmly convinced that no improvements could be made upon the Golden Rule or the Gold Standard. The most daring practical innovation of that time was the gold exchange standard, prescribed in desperate cases by good Doctor Kemmerer; the boldest theoretical venture was Irving Fisher's compensated or stabilized dollar.

Today we are living in the midst of monetary inventions. The pound sterling, the franc, the mark are pure inventions. The mark, indeed, is a whole nest full of inventions: blocked marks, tourist marks, export marks, propaganda marks, and whatever else conscripted financial ingenuity may devise. Our American dollar is an invention: paper backed ultimately by gold, which no one can get at except by consent of a government which has no intention of consenting.

All these inventions have one feature in common to distinguish them from the standard money of an earlier time. Their value and their stability depend upon the wills of men, mortal men, more certainly consistent than the rest of us. The dollar, the pound, the mark, the franc could be given a higher or lower purchasing power by administrative fiat. The financial authorities who bear this responsibility mean honestly to hold the value of money to a fairly definite level, but muscles tire and nerves falter. One may compare their case to that of a Los Angeles crank, picked up as an anarchist because he had constructed a bomb. He declared indignantly that he was not an anarchist but an inventor, inventor of a wholly new type of bomb. Every other kind of bomb, he said, depended on a trigger device that would have to be pulled or otherwise disturbed to set the bomb off. His bomb had three triggers, and you had to hold them all back with all your strength, if they were not to go off on their own account. Schacht has just such an invention on his hands.

We are all fairly agreed as to the qualities we wish to see realized in our standard money A dollar should buy about as much of the necessities of life in 1977 as in 1937. We want this stability to be maintained by impersonal forces, not by the will of any official or group of officials. The gold standard currency was stronger in the latter quality but weak in the former. Our various managed currencies may exhibit for a time greater stability in purchasing power than gold, but they depend on the personal will of legislators or administrators, Mr. Graham's invention is designed to meet both requirements.

The invention is of such startling simplicity that everyone who examines it must feel that he once had the idea himself. Base the money on the commodities themselves, safely stored away in warehouses. You put in commodities and take out money, or put in money and take out commodities just as formerly you exchanged gold for gold certificates, or gold certificates for gold. Gold and the paper based on it fluctuated in their value as measured by the power to purchase staple commodities. Mr. Graham's standard cannot fluctuated in purchasing power because it consists of the commodities themselves.

Of course it is not possible to attain the desired results with absolute accuracy, because you cannot store all commodities and if you could, some of them would become obsolete. But there are enough staple commodities to ensure an approximation to justice in the relations of creditor and debtor, and in other transactions involving time. Adam Smith pointed out that long-term contracts written in terms of corn were more likely to prove fair than those written in terms of money. A fixed amount of wheat would under any circumstances bear a positive relation to human life, while the value of a fixed amount of gold might conceivable dwindle to nothing. Mr. Graham's group of staples, being basal to the production of the chief necessities of life, must always carry a substantial weight in the standard of living.

One particularly attractive feature of Mr. Graham's invention is its modesty. Mr. Graham does not ask us to abandon our gold certificates, silver certificates, greenbacks, Federal Reserve notes, etc., and go straight over to his commodity reserve notes. If the plan were authorized by law today, the reserves could begin to accumulate in existing warehouses tomorrow, and little by little commodity reserve notes would be circulating among us. They would command the same value as other money unless inflation sapped the value out of government paper. The commodity reserve notes would then command a premium, having real values behind them. Gradually, they would reverse Gresham's law and drive out the bad money.

In economics no stone ever kills a single bird. Mr. Graham, like all economic inventors who know their job, kills several birds with one stone. He not only gives us a money of stable value but he finds a highly desirable use for the surplus production which in present circumstances breaks our backs. Whenever there is overproduction, wheat and cotton, copper and tin and rubber and the other commodities making up his monetary units will flow into the reservoir and corresponding amounts of money will be turned loose in the community. If the reservoir gets too full, the amount of purchasing power set loose in the community will stimulate consumption and set in motion forces that will syphon the surpluses out again. Here we have a new kind of elasticity, the expansion or shrinkage of currency as production expands or shrinks.

One who reads Mr. Graham's book with a critical attention to detail will note that there are minor problems which the author has deliberately skimmed over for the sake of concentrating attention on the major issue. How would such a form of money work in international trade? What would happen if a great war drew out all the commodity reserves, after a nation had become habituated to this form of money? Mr. Graham has reflected much on most of these problems, but he has wisely and considerately left it to the reader to do some thinking for himself.

Alvin Johnson
New York
October, 1937.

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