To create a governmental monetary system, I think it must be agreed that some form of reserve in actual commodities must be used as a redemption system. Many economists are beginning to recognize that there is a need for a redemption system so long as governments continue to control the monetary system. On a radio broadcast, an economist who is also managing editor of Business Week recently stated that a few years ago, he would have denied the need for a redemption system-as have most economists since the 1930s. The recent experience of inflation, however, changed his mind, he said. He is now convinced that in order to keep governments honest, a redemption system is necessary. If such a redemption system existed and governments could be counted on to honor it, perhaps a governmental monetary system would be feasible without inflation.
In his most recent book, Denationalization of Money, well-known economist F. A. Von Hayek (author of Road to Serfdom) argues that “convertability is a safeguard necessary to impose upon a monopolist (i.e. governments) but unnecessary with competing suppliers who cannot maintain themselves in the business unless they provide money at least as advantageous to the user as anybody else.” He calls for competition (among banks) in “providing good money,” which he thinks would eliminate the need for a reserve system. Any reserve system other than gold, which he dismisses because” there just is not enough gold about,” would require a storage system too expensive to be practical.
This argument of “too expensive” has been the conventional argument used against establishing any redemptive system other than gold. It was used, for instance, against the commodity reserve system proposed at the Bretton Woods conference in 1946 as the alternative to John Maynard Keynes’s proposal to establish the present International Monetary Fund without any reserve backing. Von Hayek’s proposal on the other hand, calls for a simultaneous development of competing currencies as the mechanism for insuring honesty among issuers. He admits, however, that his proposal is unlikely to be acted on in the near future, partly because of the difficulties and the complications of such a widespread simultaneous development. It would seem more likely that a practical beginning would have to be made through a single issuer acting as a model and inspiration for the possibility of an independent or private currency system. If this is true, then it also seems necessary that in order to develop confidence, a reserve, or redemption system be established.
Not only is such a redemption system necessary in order to create confidence for a private system of money issue, but the protection against inflation that such a system would create could be, in itself, the force that would bring about the denationalization of money. Once an available instrument for the investment of present, add-valuing currency could be created, the public would-in all likelihood-flock in great numbers to invest. They would do so to relieve themselves of the fear of devaluing dollars. Thus a mechanism would be created for the gradual transfer from a national money system to a private money system.
Problems and Obstacles to Creating a System for the Private Issue and Redemption of Money
In the past, the public has used two primary commodities for investment as a hedge against inflation: gold, and/or silver; and land, or natural resources. Gold traditionally has been the primary commodity used in private banking systems for redemption. Since the early 1930s, however, gold has lost its function for this capacity. Nevertheless, in today’s world of rapidly increasing inflation, private investors see gold as protection against inflation and, consequently, its price has been soaring in international markets. Consideration is now being given to restoring gold at least as a partial redemption commodity in the International Monetary Fund. Nevertheless, the primary reasons economists argued against gold as a single redemption commodity in the past are as true today as ever: there is a shortage of gold on a world basis, and world production of all commodities bears no relation to the world production of gold. Few economists would argue for a return to the gold redemption system. Yet very few economists have come up with any alternatives for a world desperately seeking to keep money honest.
Land has been used very little as a redemption commodity. This is true for obvious reasons-the only case of which I know was in France with the “Assignats.” As could be expected, it didn’t last very long. Nevertheless, as an investment medium for protection against inflation, land is widely used around the world. In periods of increasing inflation, such investment has the effect of exacerbating inflationary forces, and tends to absorb vast amounts of capital into land, which by and of itself has no productive value. Thus land speculation is both caused by inflation and is a cause of inflation.
Moreover, investors who place large amounts of money in land find themselves in a nonliquid financial condition. For while the value of land may be appreciating as fast or faster than the inflationary rate, investors are unable to utilize the dollars invested without a long period of waiting for the sale of the land to take place. In the meantime, other investment opportunities may be missed due to the nonliquidity of the land. Moreover, land investment usually is in large units and must usually be sold as a unit, no matter whether the investor’s need for funds is large or small. Thus, once sold the investor may have to find another (less favorable) place to invest the bulk of the funds released by the sale of his real estate. This nonliquidity, and nonflexible factor in land investment, is the major drawback for investors who are seeking to find a safe place to invest.
Renewable and Non-Renewable Commodities as the Basis for a Reserve System
Another factor which enters into the consideration of a monetary reserve system is the question of a limited resource. In order to provide a redemptive system which is expandable and capable of theoretically meeting total world needs, a renewable resource would be a better choice than a non-renewable resource. Agricultural and forest resources are, therefore, more logical than non-renewable resources, such as gold, silver, and other finite resources which are in demand for other uses in industry and, as they become scarcer, more valuable for use rather than as a reserve commodity.
Looking at agriculture and forestry resources, then, as better alternatives, let’s examine them for their potential.
Grains are the obvious choice among agricultural products because of their value and worldwide common use and need. Grains, however, have two problems connected with them which make them difficult to use as a reserve unit:
- Uncertainty of production due to weather conditions, etc.
Due to their perishability and relatively low value (on a per pound basis) storage of grains for redemption is very difficult and expensive and this factor has always been used as an argument against their use for redemption as part of a commodity currency unit. In recent years governments have created large storage capacity for grains as a means to create a reserve for world food supply in case of drought, etc. Such a reserve could conceivably be used for a monetary reserve — if governments decide to do so. However, even if they did, such a reserve could be wiped out by a year or two of food shortage on a world basis. Many experts are predicting such a possibility and, indeed, it is the primary reason for the reserve.
Forest production, however, has neither of the disadvantages of grain as a commodity reserve. In fact, not only do forests (trees) store themselves, but they automatically increase in quantity over time as they grow. Moreover, their growth rate is virtually constant almost regardless of weather due to their deep root systems and ability to withstand cold or hot weather. Only fire and wind are a source of natural danger to trees and in most parts of the world damage to forests from fire and wind constitutes only a small percentage of loss—certainly no where near the rate of growth which varies between 8-15% depending on the climate, soil conditions, etc. The primary danger to trees are human beings who destroy forests in their need for energy and timber. In spite of the rapid development of improved methods of forest management and increased knowledge of the ecological importance of forests for the survival of human life, the depletion of forests by man has increased on a world wide basis, to the point where a recent World Bank report suggests that at the present rate of depletion, within twenty years the major world forests will be in danger of extinction.
Would the Use of Forests as a Reserve Currency Help to Stop and Reverse the Depletion of the World’s Forests?
The use of forests as a reserve currency would increase the value of standing trees considerably and help to bring about an increased awareness of their value and require ecologically sound long term forest management including planting of trees. While this is essentially a psychological factor, its significance and importance cannot be ignored. Trees would gain respect in people’s eyes, and more care would be taken of them once the transfer of value had taken place in people’s consciousness. In fact, such a consciousness would do a great deal to restore a proper recognition of trees in their perspective and value to the human race. For without sufficient forest areas to breathe in the carbon dioxide, human beings cannot continue to live on this earth. The same cannot be said of gold, for instance.
Reasons Why Forests are Naturally Becoming More Valuable in Today’s World
The rapid increase in the cost of oil has produced a situation in which trees (wood) can be converted to energy at a price which is about half the cost of oil. The only thing preventing the rapid conversion of our forests into energy is the lack of widespread technology (the technology is available but not widespread) for conversion and a system for combining land owners of small forest plots in a program of efficient forest management. However, this very fact is both a danger and an opportunity. The opportunity consists in using the wood waste available from the forests (cutting dead, diseased, over-mature, and overcrowded trees) and at the same time improving the timber stands for their more valuable use as lumber. Over 40 billion tons of wood is going to waste and rotting in the U.S. forests. Of this amount at least 5 billion tons could be removed with the present technology and converted into energy. This would be the equivalent of 8.5 billion barrels of oil— more than the total oil consumption in the U.S. (about 5-6 billion barrels a year).
Aside from the technology problem, the major factor preventing this fact from becoming an opportunity is a system of private land ownership which opens the door to inflation or speculation. This system also tends to encourage landowners to cut their woodland for fuel wood without either attempting to use selective cutting practices or to replant in case of clear-cutting.
Therefore, any system for private monetary issue which utilizes forest land as a reserve system, must take into account the danger of speculation in forest land which could result—as well as the danger of increased indiscriminate cutting. For this reason such a private monetary system must incorporate into its development a method or mechanism for converting private forests into community held Land Trusts which, in the public interest will manage forest land on a community wide basis in much the same manner as town forests in Europe or private trusts in this country have managed forests for many years.
The Forest Land Trust and “Energy Notes”
In order to accomplish this purpose, powerful incentives must be created for private landowners to convert their forest holdings into a trust for the public benefit. The Institute for Community Economics is presently creating such a mechanism in the Forest Land Trust. However, a second mechanism is needed to offer land owners who may want to exchange their fee simple title for a legal Instrument which has both a protection against inflation and is also a highly liquid instrument. In other words, an instrument which has the attribute of land as an inflation hedge but is also a flexible and highly liquid instrument.
Such an instrument we call a “timber note” or an “energy note” and we foresee it as being a means for conversion of large acreages of private land to Community Land Trust—or Forest Land Trusts.
Such a conversion of forest land into the ownership and control of Community Land Trusts wherein the former owners of the land exchange their land for an “energy note” based on the forests as a reserve would be the initial step in launching such an alternative non-national monetary unit. The key to the success of such an undertaking would be two factors:
- A method for measuring the value of such a monetary unit which would ensure a constant purchasing value. It would, however, require research to refine or perfect, using the Consumer Price Index as a comparative yardstick.
- Creating a market for sale of this instrument in order to insure liquidity. My guess is that such a market would not be too difficult to create once it became known that a stable monetary unit was available for exchange with national currencies.
Such an instrument would be designed from the beginning to correspond with the dollar (one energy unit = one dollar in year and month of 1980), printed on the proper currency paper and scaled to the same size as the dollar for easy use. In this way exchange would be facilitated and any local Community Land Trust (or bank) would always be willing to exchange dollars for “energy notes.”
Once a market has been established daily exchange rates would be published between energy notes and other currencies just as exchange rates are published between various national currencies today. Banks would be encouraged to purchase these notes as a reserve system (in the same way that banks purchase government securities today) because they would provide a more stable reserve than dollars or other currencies. Once this process has been put in motion other privately issued notes would undoubtedly come into the market and the process of competition of which Von Hayek speaks would then come into play. In fact, I think we are already seeing the beginning of this process with private companies issuing securities which are convertible into commodities of one kind or another.
If government issued currencies continued to drop in value relative to such issued currencies, governments, in order to compete could issue new currencies based on government held national forest land or other resources.
APPENDIX I: Possible Formula for Valuing “Energy Notes”
- One acre of forest land = 45 tons (total) of wood
- 40% of this amount is wood waste — or 18 tons
- 18 tons = X kilowats of electricity
- 60% of this amounts to X number of board feet of lumber or X tons of marketable lumber
- Using an average price for soft and hard lumber (perhaps weighted according to national averages), an average value for marketable lumber could be reached for one ton of lumber.
- Using a given year (1980?) the price per ton of waste wood as measured in kilowats, and the price per ton of marketable lumber would be averaged on a 40/60 weighted basis and a value for one ton of wood could be established.
- Energy notes would be measured in pounds (100?) or tons of wood based on the above formula. Redemption could be in terms of:
- Gold, as translated from pounds of wood into dollars and equal to gold in dollars as measured in any given day, month, etc.
- Silver, (same as the above)
- Dollars (or other currency), same as above.
- Wood, board footage of lumber based on translating from tonage formula to wood board footage in any given day, month, etc.
APPENDIX II: Further Explication of Forests (Wood) as a Single Commodity Suitable for Redemption as a Reserve Currency
Exponents of the so-called commodity based currency (Borsodi, Fisher, et al.) have generally advocated a commodity index with 20-30 of the most commonly used commodities in commercial use. Such an index is composed of three types of commodities:
- Energy (oil, gas, coal, etc.)
- Metals (gold, silver, tin, copper, zinc, etc.)
- Agricultural Products (mainly grains, rice, wheat, com, etc., possibly hemp and sisal)
The first two types are non-renewable, the third type are renewable. From an ecological viewpoint we want to encourage the use of renewable resources rather than non-renewable considering the long terra survival factors as well as the pollution associated with non-renewable resources (coal, oil, uranium, etc.).
One of the interesting aspects about wood is not only its renewable quality, but also the diversity of uses to which it can be put. For example: Before the development of the use of steel for structures, wood was the primary structural member in most buildings. Even today wood is used for buildings far more extensively than steel, aluminum, or other metals. Furthermore, with the development of modern chemical processes wood can be converted into plastics of many kinds which can Substitute for metals in many cases—thus reducing the dependency on non-renewable metals.
As an energy source, wood has many advantages over other sources such as oil or coal because it does not contain sulfur the primary source of pollution from coal. Moreover, wood can convert into charcoal (through pyrolosis), oil and gas, none of which have the pollution problems of their non-renewable counterparts. Using waste wood with 85% efficiency, a pyrolytic Converter can produce energy at far below the current cost of oil, coal, or nuclear power.
As a source of food to Substitute for agriculturally grown crops, trees not only have many traditional uses (nuts, fruit trees, etc.) but are potentially a source for vastly expanding the world’s food supply as modern agro-silviculture is exploring (see J. Russell Smith’s Tree Crops). Smith notes that certain trees (honey locust, carob, algaroba, persimmon, etc. produce quality livestock food in spectacular volume — as much as five times the nutrient equivalent of grains on soil or land not otherwise suitable for agricultural crops. Wood obtained from over mature, dead, or cuttings from such trees would be a by-product for the energy or building market.
It would seem, then, that the use of forests (wood) as the redemption reserve and unit of measurement for a privately issued currency could provide many advantages (or overcome the problems) of other commodities and awaits primarily a legal mechanism (or Instrument) for implementation.