In the previous post, we explored the dual function of money and why financial and economic stability can only truly be attained by using commodities themselves, instead of money, as the store of economic value. Once commodity-based valuation is agreed, the question arises: Since commodities have different values, how can a universal valuation be attained for use in trade? Adam Smith asked the same question over 200 years ago and came up with an answer:
In other words, the benchmark commodity depends on the length of time of the transaction. The values involved in a very short term trade such as purchasing bread for the day's consumption can be based on money, which in turn is based on a gold standard. The values in a very long term trade such as the non-speculative purchase of land, however, should be based on a more stable commodity such as wheat. This prevents the price inflation of land which affects all other commodities.
Adam Smith advocated wheat as the universal measure of long-term value because of its stability. The chart below shows that long term prices of grain are more stable than those of oil or gold. Of the major commodities, oil has the highest price extremes while gold has the most volatile prices:
Adam Smith explained that the relative stability of grains over oil and metals is due to the fact that grains can be grown and known by more people than other commodities. The drilling of oil and the prospecting for gold, in contrast, can only be known and done by people who have the required capital and expertise.
The stability of long term wheat prices is the major reason why Smith advocated land (or at least land rent) to be valued in wheat. Since all economies rely on land, the stability or fairness in the valuation of land will, in turn, lead to more stability in all other commodities, helping to prevent the severity of bubbles and crashes.
In the next post, we shall explore how this commodity-based valuation can free companies from the reliance on money using barter trade through multilateral clearing