Farming Magazine - June, 2009

COLUMNS

Opinion: Graham Cracker?

Some readers (only a few, I hope) will find my title for this piece a reach too far, conflating, as it does, English-born Economist Benjamin Graham (1894-1976) with Connecticut-born Minister Sylvester Graham (1794-1851) on the grounds that both innovators focused on wheat. The economist used the crop in his commodity-reserve plan as the major basis for a commodity-based dollar proposal, and the minister used it in his “Graham cracker” as the major basis of a wholesome lifestyle prescription/ objective, which started out with a grain, but no meat diet and extended into areas ranging from sex and cleanliness to potable alcohol and race relations. The minister first marketed his rough-milled wheat biscuit in 1829; the economist wrote his now-classic book on the commodity-based dollar in 1937. Commodity-based dollar proposals have always been a nonstarter in U.S. economic-policy circles, the closest American currency has come to this has been the mirror-image pair of curved wheat ears and stalks on old-style Lincoln pennies, but graham crackers were an instant consumer hit, and are still on the market, presently under the corporate bakership of Nabisco, which began producing and retailing them in plain form in 1898 under its earlier National Biscuit Company title, added honey in 1925, and other sweeteners such as chocolate even more recently.

There was, and still is, a lot I didn’t and don’t know about the products of both Grahams, but now the fiscal-design proposal of the economist is of more interest than the munchie-design proposal of the minister, maybe because, in contemporary circumstances, answers to more-pressing fiscal questions demand a higher priority than answers to less-pressing diet questions. Ironically, my ignorance of the economist, Graham, matched my ignorance of the minister/baker, Graham, even though I had a bit of a formal undergraduate education in economics. Some of what I was taught in Economics 101, presented as meta-physical fact, turned out not to be so. The whole notion that Keynesian-theory government-stimulus of the economy cured the Great Depression, for example—while some actual historical fact—like the invention of the ever-normal granary (designed to ensure food availability and prevent cost fluctuations) first happening in ancient China, not in Biblical Egypt or 1930s era Washington, D.C.—wasn’t even in the course outline.

Instead, I first learned of the connection between commodities and cash in Jason Goodwin’s 2003 book “Greenback,” in which he writes, “In 1691, three years before the founding of the Bank of England and the earliest 5-pound note, faraway Massachusetts became the first state since medieval China to issue its own paper currency.” On the same page he describes the mid-17th century London silversmith sideline business of offering safe storage for customers’ silver and giving them hand-written receipts in return, thereby creating, albeit informally, the first precious-metals-backed paper money. Curiously, he doesn’t describe the invention of paper money, backed by gold and silver, by the Knights-Templar in the mid-13th century, or their first-ever design for fractional-reserve banking, a logical extension of paper money. Goodwin doesn’t say so, but I’d guess that gold or silver has historically trumped grain as a backing for paper money simply because the rare metals are scarcer, worth more per pound and, although more lucrative as thievery-targets, are less bulky and easier to move around as the symbolic money representing them is spent. But, Graham points out in his 1937 book, “Storage and Stability,” that there’s a long and mostly ignored history of food commodities used as actual money or the back-ups for symbolic money, illustrated by the Latin word “pecus” meaning cattle as the base for the English word pecuniary meaning monetary. Similarly, government-owned tobacco was used as the back-up for Dominion paper money in 18th century Virginia, he notes.

Distant history aside, Graham also writes, the 19th-20th century New Jersey inventor Thomas Edison preceded him in arguing for a food-commodity-based dollar, which at the time was backed by Federal silver available on demand by any holder of a Silver Certificate, a practice that the Feds ended in 1964. Earlier, they had ended the availability of on-demand gold to U.S. citizen paper-money holders in 1933, although both gold and silver were available to foreigners until 1971.

Graham’s construct of a U.S. paper currency backed by the value inherent in a variety of commodities—mostly food, but some nonfood items, as well—is transparent in principle. Suppose, for example (in a somewhat oversimplified example, because Graham envisions price–movement of a basket of commodities, not just a single one), that wheat, the basic component of his proposed commodity-basket, against which the other 22 are indexed, declines in price because of oversupply or under-demand, as happened during the Great Depression when Graham was writing his book. The Fed would then be required to buy wheat (and pay producers a small per-unit stipend to store it on their farms) thereby reducing supply until its price rose to the preset level. In so doing, it would be creating new money, thereby decreasing its value, back down to par, while raising the wheat proportionately. The same, in reverse, should wheat spike in price, when buyers would step in to purchase it from government stocks and sell it into the agri-business market, by which action they would, of course, reduce the supply of money (raising its purchasing power) and increase the availability of wheat, thereby decreasing its value in the marketplace. No wet-finger-in-the-economic-wind decision by the Federal Reserve Board governors needed; the self-adjusting process would proceed automatically, just as 18th century Economist Adam Smith described “the invisible hand” of the marketplace reflecting the sum of uncountable thousands of individual purchase or sale decisions. Graham carefully avoids criticizing Fed “success” (or not) in its assigned role of stabilizing the value of the dollar, but he knew that, as of the year of his book publication (1937), the Fed had already managed to reduce the purchasing power of American currency by 50 percent compared to 1913, the year of the Fed’s establishment. It would go on, with similar policy decisions, to further devalue the dollar, until, by 2008, it required $22.43 to buy what $1 could have bought in 1913. That’s a 95 percent loss. In contrast, when the dollar was pretty much a private-bank sort of currency from 1789 to 1913, it went from full value to $1.12, a relatively slight shrinkage of 12 percent over 124 years compared to the Fed’s record of 95 percent over 95 years. If you start with 1774 instead of 1789, you get a double shrinkage, 23 percent, giving a numerical basis to the “not worth a continental” phrase. You can investigate any such secular dollar-value trends for yourself on the Economic History Web site.

1937 is now 72 years in the past, and some (not many) of the commodities in Economist Graham’s 23-item basket of storable wealth wouldn’t be there today, like natural rubber, tobacco or tallow; most would, like wheat, corn, oil and copper. There would also be some new ones: maybe synthetic rubber or computer chips or powdered milk (his list excludes perishable commodities like cheese or hog bellies) and there wouldn’t be some old ones: precious metals, which he likewise excluded, although some of his contemporary commodity-based-dollar enthusiasts didn’t. If the list were mine, uranium and thorium would be on it.

There would be non-enthusiasts as well, most likely the bulk of the Federal Reserve professional-economist staff, economists in academia and, if history is any indicator, a good many farmers as well, at least post-Civil War farmers, who, unlike their antebellum predecessors, have often been deeply enough in debt to welcome monetary inflation (the William Jennings Bryan free silver campaign, for example) about as much as crop-value stabilization. For almost the last century, farmers have focused on the parity concept, which relates commodities to purchasing power, and at least at the outset was promised by politicians as a mathematical pricing mechanism to keep the two in stable balance. I’d add two other groups of enthusiasts as well: one would be the Founding Fathers, who wrote a specific requirement into the Constitution for Congress (which then slickly avoided it) to regulate the value of the currency; and the other would be the many 20th century economists who, before and after Graham, enthusiastically researched the same commodity-based dollar concept. And one lone 21st century congressman, Rep. Paul Ryan, R-Wis.

The author is an architect and former farmer.