Generalized Commodity Reserve Currency

A generalized commodity reserve currency is a currency issued with the backing of several commodities. It bears a resemblance to the gold and silver standard, but it is based on a wide range of commodities, and it does not presume to keep the price of any one commodity constant. Under the precious metal standards, the price of a precious metal remained constant. A generalized commodity reserve currency resembles the bimetallic standard in that it is based on more than one commodity. Again, under the bimetallic standard the price of gold and silver remained constant. Symmetalism bears a closer kinship to a generalized commodity reserve currency in that it can include a wide range of commodities. Under symmetalism, a composite commodity is created by combining two or more commodities in fixed proportions. Under symmetalism, one-tenth of an ounce of gold and five-tenths of an ounce of silver might be equivalent to one monetary unit such as the dollar. A generalized reserve currency does not combine commodities in fixed proportions. The proportions are free to change. The gold standard, the silver standard, the bimetallic standards, and symmetalism may be regarded as special cases of a generalized commodity reserve currency. Like symmetalism, a generalized commodity reserve currency has only been examined in theory and never been put into practice.

A generalized commodity reserve currency can best be understood in the context of a simple, primitive society. This primitive society is composed of individuals producing goods that they desire to trade. Assume that one member of this society undertakes the role of banker and monetary authority. This banker issues currency or script in exchange for the various goods that the individuals in this primitive society produce. This banker would not be acting much different than a trading-post that pays for various good in script and stands ready to redeem the script in a wide range of goods and not just gold or silver. The members of this primitive society sell their goods to the banker for script and later redeem the script for merchandise of their choice from the banker’s inventories. This script or piece of currency can be interpreted as a receipt for goods stored in a warehouse. The total currency in circulation equals the value of the goods society has stored up with the banker. The banker’s warehouse would become empty the day the last piece of script was redeemed for goods.

The banker may keep only the most popular commodities on hand, but the script will become a generally accepted medium of exchange for all goods and services. Individual goods can be bought from and sold to the banker without restriction. The system can be expanded to allow the banker to buy commodity futures. To complete the picture the banker raises the price of scarce items and cuts the price of abundant items in such a way that he always has the chosen commodities in stock. Although individual prices go up and down, the value of the script always equals the value of the goods stored. The script in some sense retains its value, and inflation cannot occur.

The operation of a generalized commodity reserve currency involves some complications such as storage cost that might render it unpractical in the modern world. Whether it represents a realistic alternative to the current fiat money system is still open for debate.