COMMODITY BUFFER STOCKS
Introduction
bufferstock.org
What are Commodity Buffer Stocks?
"Commodity Buffer Stocks" refer to the use of commodity storage for economic stabilization. Specifically, commodities are bought and stored when there is a surplus in the economy and they are sold from these stores when there are shortages in the economy. The institutional buying, storing and selling of commodities by a large player (e.g. a government) can take place for one commodity or a "basket of commodities". The stock of commodities stored act as a buffer against price volatility. If a basket of commodities is stored, their price stabilization can in turn stabilize the overall price level.
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What was Benjamin Graham's idea?
B. Graham, 1894-1976
The more general proposition of using a basket of commodities to stabilize output and prices as a whole was set forth by Benjamin Graham in his 1937 Storage and Stability and elaborated later in his World Commodities and World Currency in 1944. In the height of the Great Depression, when there was a "general overproduction of goods", or a "general glut", Benjamin Graham felt that it was paradoxical that these surpluses of goods which should be regarded as greater wealth, could also cause so much damage and be feared so much. Commodities, after all, are an asset not a liability. Instead of laying off workers, cutting back production and reducing prices - all of which can cause terrible economic and social damage - Graham resurrected the old idea of an "ever-normal granary" and proposed instead that firms could maintain steady levels of production and that any general overproduction can be eliminated by the storage of commodities. Conversely, during periods of "underproduction", when inflationary pressures are high, the shortage of commodities as a whole can be eliminated by releasing previously stored commodities onto the market. Thus, in Graham's proposition, an economy-wide "ever-normal granary" could stabilize output levels and prices, and thus smooth out the business cycle, and thus eliminating unemployment and inflation.
A Commodity-Reserve Currency
Benjamin Graham also proposed the adoption of a "commodity-reserve currency". This would work effectively like a Gold Standard, except that backing up currency would not be that single volatile commodity, gold, but rather an entire basket of commodities. Gold and money fluctuate in their purchasing power of staple commodities. The "gold reserves" which previously determined the supply of money in the Gold Standard would be replaced with the very "commodity reserves" of the ever-normal granary, thus anchoring the money supply to real purchasing power, impervious to political manipulation (as in the modern system) and far more stable than a single commodity (as in the Gold Standard). |
