It seems indisputable that a composite commodity standard of value would provide a much more stable measure than a fixed weight of gold, silver, or any other single commodity. It is true that the market prices of all commodities fluctuate according to the levels of supply and demand, which are influenced by many factors including changing tastes and fashions; new technologies; and weather, civil, and political disturbances. Therefore, the averaging process inherent in a composite standard should provide a closer approach to constancy in value measurement over time than any other conceivable measure.
There is an important distinction to be made between using commodities as a standard for defining an accounting unit on the one hand, and using them as backing for the issuance of a currency on the other. It is not necessary that a currency be redeemable for the specific commodities in which it is denominated. So long as the standard commodities are actively traded, they can provide a benchmark for measuring value. If a currency is properly issued on the basis of goods and services changing hands, it should be able to hold its value at or close to par with the standard unit without redeemability. A properly issued currency will always be redeemable in the marketplace for whatever the holder wishes to buy with it. Under monetary freedom, traders will choose to use those currencies that show themselves to be most stable in terms of their purchasing power.
Selection of the Standard Commodities
In 1972, Dr. Ralph Borsodi and a few associates set out to create and circulate a private currency called the Constant to prove that a private currency could (1) gain public acceptance and (2) be denominated in such a way as to hold its value in the marketplace. While the experiment was not carried to completion, the currency did gain a wide measure of public acceptance. Borsodi, in defining his Constant currency, selected thirty basic commodities.
In preliminary studies of commodity prices, I have concluded that twelve to fifteen commodities might be sufficient for defining the standard unit. More importantly, I have decided upon some appropriate selection criteria for the commodities that should comprise the “market basket.” The chosen commodities should be
1. traded in one or more relatively free markets (freely exchanged),
2. important in world trade (high volume),
3. important in satisfying basic human needs (necessity),
4. relatively stable in price (in real terms) over time (stability), and
5. uniform in quality, or standardized quality (uniformity).
Definition of the Unit of Account
Once the commodities have been selected, the definition of the unit of account can be achieved by completing the following steps:
1. Determine the “economic importance” (I) of each commodity by multiplying its average price (P) during the base year in one specified market (e.g., New York) by world production (V) of that commodity in the base year. Thus
Ix = Px • Vx
2. Determine the fractional weight for each commodity in the market basket by dividing its economic importance by the sum of all the economic importance figures. Thus
Wx = Ix /(I1 + I2 + I3 + . . . + In)
3. Selecting the initial value of the market basket arbitrarily to be equal to, for example, $1,000,000, determine the initial value amount (D) of each commodity to be included by multiplying its weight by $1,000,000. Thus
Dx = Wx • $1,000,000
4. Determine the physical quantity (Q) of each commodity to be contained in the market basket by dividing its value amount by its average price (P). Thus
Qx = Dx / Px
5. Adjust the quantities (Q), discarding fractional units in such a way as to not disturb too greatly the relative makeup of the market basket while maintaining its initial value close to $1,000,000.
6. Consider the value of the final market basket to be (arbitrarily) equal to 500,000 (five hundred thousand) standard accounting units (call it a Val). Thus, the Val will be initially equivalent to about $2 U.S., or $1 will equal one half a standard unit, or 50 Val cents.
Determining the Value of Currencies in Terms of the Standard Unit (Val)
Once the standard value unit has been defined as being one five hundred thousandth of the specified “market basket,” the value of any currency (e.g., the U.S. dollar) can be easily determined at any time by computing the current cost of the market basket in dollars using prices reported in actual trading. Dividing by 500,000 will give the dollar equivalent of one standard accounting unit. The reciprocal, of course, would be the value of the dollar expressed in standard accounting units.