Friedman’s second point against commodity money is his claim that the need to store a sufficient amount of commodity stuffs would make the entire system infeasible and wasteful. On the surface, it does seem as though locking away useful commodities just to be used as money would be a massive waste of production. However, looking at how commodities are actually handled, one realizes that the additional cost is not as high as this critique would indicate.

The key here is that commodities are already stored for non-monetary purposes. The production and exchange of commodities is a major logistical challenge, requiring thousands of warehouse and storage sites just to match supply with demand across time and geography. The consequence of these logistical needs is illustrated in the table below. At any time, we can expect between $150 and $200 billion worth of energy goods, food staples, and metals to be held in storage just for US based exchange and contract fulfillment.

Quantity and value of major commodities held by US storage and warehouse facilities

Although it’s a strong start, the $170 billion worth of commodities shown here does not come close to the at least $500 billion monetary base required by an economy as large as that of the US.

Where can we find $330 billion?

In order to fully rebut Friedman’s claim that a commodity currency brings with it wasteful storage of otherwise useful goods, we must discover a way to create $500 billion worth of commodity backed money without devoting substantial resources to storage or holding useful goods idle. Let’s assume that we begin to construct our commodity basket using the $170 billion in commodities that are already sitting in storage waiting to be bought and sold. This leaves us to address a $330 billion shortfall. Looking first at commodities in storage (table above), we see that we are rather light on precious metals. Given that the storage of precious metals could hardly constitute waste (since being held is an essential function of precious metals), we decide to add $110 billion to our gold, silver, platinum, and palladium holdings, which will give us a final basket consisting of about 25% precious metals. We’re now up to $280 billion, only $220 billion left to go!

Typically, we tend to think about commodities as discrete goods like those we have already discussed here — energy goods, food staples, and metals. But what about utilities? Utilities such as electricity, water, and even computing power and storage, all meet the core criterion for a commodity, fungibility. One kW-h is equivalent to any other kW-h and clean water is clean water. Historically, the problem with treating utilities as commodities is the fact that utilities are consumed as they are produced and not stored for extended periods of time as with other commodities. Because they cannot be owned (only purchased and consumed), utilities themselves are not capable of underpinning a currency. However, the means of utility production can be owned.

The combination of blockchain and smart devices (IoT) means that the ownership of utility production can now be easily bought and sold (more on this in a future post). Including the means of utility production in our basket of commodities allows us to more than cover the $220 billion gap between the value of traditional commodities and the required size of our monetary base, all without devoting resources to the wasteful storage of commodities for monetary use.