Storage and Stability

Foreword (1997)

Very few books in the field of economics are republished after a lapse of 61 years. This book is the exception that deserves reprinting.

Those who have lived through the Depression years of the 1930s can recall the heavy costs both financial and in human terms that our nation suffered. Storage and Stability was the result of the indelible impression made on the young Benjamin Graham. He lived through the wild swings of prices and currencies following World War I and their dramatic effects on the state of the world. Over the next seventeen years, Graham analyzed many solutions proposed by economists resolving them into the then-revolutionary recommendation that important currency benefits are achieved by basing the currency on a basket of readily saleable commodities. These stored commodities limit the peaks of inflation and deflation. Building reserves of real assets also supports higher employment. The "commodities basket" will become wider economic policy, and become influential at the start of the twenty-first century as it was at its beginning.

Historically, paper money has had many different kinds of backing - mostly backed by precious metals like gold and silver. But the vast growth of paper currencies have made the use of these metals no longer physically possible. Since the 19th century, many economists have tried to construct adequate reserves for backing their country's currency. Thinkers like Adam Smith, Jevons, Marshall, Hobson, and Keynes have contributed to the search for an ideal currency reserve.

Graham realized that peaceful existence depends on the promise of adequate distribution of food and lands which grow foods; further, that the three basic human drives for food, clothing, and shelter are always measured in some local currencies. Normally people accumulate their savings which are the bases for home and equipment ownership. Most currencies feel modest annual effects of some price inflation. But some, like in South America, Asia, and Southeast Asia, have experienced currency swings that are far wider. Without stable purchasing power, savers are denied the benefits of improving their own standard of living. The victims of local inflation grow increasingly limited in their ability to improve their own living standards. Currency swings can lead to wider crises, revolution, and big changes in a country's structure.

The risks of such instability have become greater today. Modern instant communication makes currency trading a 24-hour game with serious social dislocations. One glaring example was Bank of England's loss of over 1 billion pounds trying to support their own currency. While speculators got richer, many English taxpayers got poorer. Currency losses related to normal trades in goods or services are a serious factor in effecting the profitability of normal trade. Currency changes can eliminate all profits made in producing or delivering goods without reference to the value of the goods themselves.

Graham contrasted the conventional savings that individuals and families normally practice and the typical spending practices of central governments. Most countries create or borrow money while their credit is good. They run deficits rather than reduce national debt.

In Storage and Stability, Graham sought to make governments behave more consistently by building reserves rather than deficits. He showed how he can increase demand beyond current needs by producing for storage and ultimate use, thus accomplishing two substantial benefits. These benefits include a cut in unemployment and a substantial accumulation of tangible goods for domestic or international use. Graham constructed his reserve based upon the total value of twenty-one major world commodities selected by their prominence in world trade. Their total unit or "basket" is representative of total price levels around the world even while individual fluctuations of one or more among the twenty-one could be substantial, the total is more stable and representative.

Graham's first public effort was a group called the Economic Forum, which met at the New School for Social Research in New York. The school's president, Alvin Johnson, had already attracted prominent economists who had fled Germany and Austria. One, Frederick Hayek, subsequently received the Nobel Prize in economics. Graham's group was joined by men like William McChesney Martin, then president of New York Stock Exchange and later the chairman for twenty-one years of the Federal Reserve Bank in Washington and Congressman Howard Buffett of Omaha, whose constituents had suffered so many losses of farms and bankruptcies in the midwest.

Roosevelt's farm secretary, Henry Wallace, supported Graham, but his department wanted to limit production so prices might rise. The New Deal accomplished many important economic improvements, but was not successful in the area of agriculture or farm products.

Finally, in 1996, the U.S. Treasury issued a new type of treasury linking its interest payments with the Consumer Price Index. The buyer receives higher interest if the CPI increases. Having stable currencies, makes the present disorganized world currency markets far less able to spread to the local currencies.

Our own economy is substantially influenced by its relation to the Consumer Price Index (CPI) as computed by the U.S. Labor Department. A rise in the Index can increase everyone's social security payment and can raise wages when they are tied by contract to the CPI. Another advantage of commodity reserve currency is its ability to limit or even to eliminate the trade cartels which occasionally attempt to monopolize a given raw material. Although cartels inevitably collapse, their effect on the world economy is clearly anti-social.

In the year 1937, when this book appeared, the traditional Commodity Reserve Board (CRB) index was at 194. In 1997, the number of the index was 295, or roughly 100 points higher. This increase is more modest than the actual index for finished goods and services in the same interval of time. At the same time, the population of the world has increased by about 60% (in the U.S., the figure is about 26%). According to the World Bank, 1.3 billion humans exist today on $1 per day. The minimum wage is $40 per day. Narrowing this range is one of the challenges we must solve in the 21st century. The economic issues Graham sought to improve have grown even more critical in both economic and human terms over the sixty years since he published Storage and Stability.

Benjamin Graham was a successful businessman as well as an outstanding teacher and writer. In his twenty-five-year career at Columbia University School of Business, Graham instructed and inspire thousands of young finance and corporate students, many of whom have since become prominent. Warren Buffett of Omaha is probably the best known, but he is joined by a long list of other successful partners of banks and investment firms - all of whom freely acknowledge how much Graham's teachings have helped make their own careers so successful.

Benjamin Graham was always open to critical approaches different than his own. He was flexible enough to realize that conditions change, and that his plan should be modified to meet new conditions. With the reintroduction of his classic, today's readers can now re-examine his recommendations in the light of our own world. We hope that this new edition of Storage and Stability will be widely read so that different groups in government, academia and the marketplace will review Graham's plans, and then explore how they can modify and use its advantages for our own and other nations' future well-being.

Irving Kahn
New York, NY
November 1997

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