Commodity and Fiduciary Reserves

All forms of international liquidity may be classified as either commodity reserves or fiduciary (fiat) reserves.

Commodity reserves are those which have some intrinsic economic value quite apart from their value as money; the most prominent example of course is gold.

Although in the past, other precious metals have also served as international reserves.

Technically, commodity reserves also include paper assets that are generally accepted as international liquidity because they are based on and freely redeemable in a commodity or commodities of some kind.

Fiduciary reserves, by contrast, have no intrinsic economic value apart from their value as money: their general acceptability as international liquidity rests upon the confidence of governments rather than upon any promise or redemption in commodities.

Prominent examples of fiat reserves include national currencies that are formally or informally inconvertible into precious metals such as gold.

Special Drawing Rights are also fiat reserves.

Alternative possible mechanisms for the creation of international liquidity--- also known as 'standards'--- are distinguished by the type of reserve asset(s) that each would employ.

Pure commodity standards include the gold standard and the so-called 'commodity reserve-currency' standard.

Pure Fiduciary standards include a reserve-currency standard, a multiple-reserve-currency standard, and an international-reserve-currency standard.

Mixed standards are also possible--- and have existed.

These include the gold-exchange standard, employing gold plus one or more national currencies convertible, directly or indirectly, into gold.

Pure commodity standards imply a relatively small amount of seigniorage, because of the comparatively high real-source cost of producing and storing commodity reserves.

Nevertheless, some net gain is implied, even if the commodity or commodities employed are produced under conditions of perfect competition, to the extent that producer income is increased over and above.

Additional gain would accrue to producers to the extent that the commodity was produced under conditions of imperfect competition (monopoly).

Thus, it is not surprising that pure commodity standards have been most enthusiastically advocated by the producers of the commodities that would be employed.

The primary producers of gold were South Africa and the Soviet Union.

They were not only the first and ranked second to produce gold in the world and stand to gain the most in seigniorage.

In addition, they were also ardent believers of getting gold back to dominate the international reserve asset.

Likewise, the primary producing countries had been the most consistent supporters of proposals that had appeared from time to time for a commodity-reserve-currency standard. One express purpose of such proposals is to use the liquidity-creation mechanism to provide efficient price and income support to exporters of primary commodities.