Commodity-price pegging
Pegging the price of a broadly defined commodity basket would be an almost perfect means to achieve price stability. An adjustable commodity-based dollar was formally laid out in 1920 by the American economist Irving Fisher, who suggested adjustments in the number of resource units in the dollar to achieve price stability. If prices fell below a specific target by 1 percent, for example, the dollar value of the resource unit would be raised by 1 percent at the same time automatically lowering the number of resource units in the dollar. But the larger the number of commodities involved, themore difficult it is to assign their relative weights. A single commodity price target would be more feasible than Fisher’s system; however, it would be desirable only if this single commodity price were well correlated with the aggregate price level.
The principle that governments should intervene in commodity markets to maintain supplies and stabilize prices was endorsed by Confucius in China during the sixth century b.c., and stabilization of grain prices became an important part of early imperialChinese policy. Communist anti-inflation policy during and after the Chinese CivilWar also involved the buying and selling of surplus stocks. In this case, the state established trading companies to undertake large-scale commodity sales in the cities and bring prices down. Later, these same state trading companies used commodity purchases to offset deflationary pressures in 1950 and 1952. On a smaller scale, President Clinton employed the U.S. Strategic Petroleum Reserve (SPR) in a similar fashion in 1996, ordering the sale of a portion of these reserves in an attempt to combat rapidly rising gasoline prices.The SPR was subsequently tapped for limited interventions by the George W. Bush administration as well.
More recently, the economist Jeffrey Frankel suggested that policymakers in smaller commoditydependent nations use a more dominant form of commodity-price pegging: specifically, policymakers should undertake monetary expansion whenever they face declining demand for that nation’s key commodity (Frankel 2003). Under a pure commodity peg, oil producers would simply tie their monetary policy to the price of oil, expanding when oil prices fall and contracting when oil prices rise. Such a strategy has strong intuitive appeal given that it is almost inevitable that an oil-dependent country will face deflationary pressures if oil prices plunge and inflationary pressures if oil prices surge upward. Less specialized producers might enjoy analogous benefits by fixing the price of a basket of export commodities in terms of local currency. Once a target price range has been set, open market operations involving purchases or sales of foreign exchange or domestic securities could be used to keep the export price index within the band (Frankel 2005). Even larger economies could gain froma commodity-based strategy, at least in comparison to the more popular alternative of pegging to the U.S. dollar. For example, had Argentina adopted awheat-peg rather than a dollar-peg during 1991 2001, the Argentine peso would have depreciated instead of appreciating as it did over the latter part of the period (Frankel 2003).
The dollar peg was deflationary for Argentina just as the gold peg was deflationary for theUnited States and many other countries in the late 19th century and during the Great Depression and the authorities in each case ended upmaintaining a fixed singleasset price while almost all other prices declined. Faced with very low interest rates and persistent deflation on a global scale during the Great Depression of the 1930s, a number of economists laid out proposals for a ‘‘commodity reserve standard’’ and intervention that would pull commodity prices up from their depressed levels. Some proponents saw this as an alternative to the old gold standard but others saw intervention in commodity markets as simply a means of achieving the desired expansionary end as in, for example, theU.S. silver purchase programthat began in 1934 under President Roosevelt.
Other Commodity-Based Proposals
Although economists have argued that government warehousing of the commodities involved would not be necessary (see, e.g., Hall 1982), commodity-based proposals have more often been based on government stocks and direct government intervention in commodity markets. For example, one prominent proposal was for a commodity reserve currency to be established. Under this scheme, Federal Reserve banks would buy warehouse receipts for the chosen commodity units so as to ‘‘redeemtheir liabilities, on demand, in commodity units or gold at the option of the holder’’ (Graham 1941). The premise that a commodity reserve currency could be adopted as an alternative to the old gold standard received serious consideration in the 1930s and 1940s. Critics have pointed to the impracticality and cost of the proposed commodity-market interventions; the relatively narrow range of suitable standardized commodities, as well as high elasticity of supply, could force excessively large fluctuations in the stock of money under such a scheme (Friedman 1951).
Although few economists today would advocate an actual commodity-based monetary standard, commodity-price pegging may nonetheless merit consideration as a possible guide formonetary policy. Targeting commodity prices could provide for quantitativemonetary easing in the face of deflation, for example, whereas pure interest-rate pegging soon runs out of room as interest rates cannot be driven below zero. In this case, implementation of commodity-price pegging could help secure an inflation or price-level target or, at the very least, offer a complementary policy goal. See also currency board arrangement (CBA); dollar standard; exchange rate regimes; Federal Reserve Board; gold standard, international; impossible trinity; money supply