Oct. 23 (Bloomberg) -- During the sharp recession of 1921-1922, Thomas Edison turned from making innovative consumer products to reinventing the U.S. monetary system.
He was driven to economics by a sincere desire to be useful in a crisis and by his friend Henry Ford. Ford had proposed that the federal government issue paper dollars -- effectively zero-interest bonds -- to finance the completion of the Wilson Dam on the Tennessee River, which he would then buy from the government. Ford took Edison to the dam site, and Edison was impressed with the proposal.
Responding to Ford’s plan, Edison searched for new ways to stabilize the dollar, the value of which had fluctuated widely during World War I and its aftermath. His goal was to “cast the variable out of money.” Distrusting bankers -- the “money brokers,” he called them -- and a monetary policy based solely on gold, Edison called for a system that used a variety of other commodities as backing for the nation’s paper money supply. (He would have eliminated gold entirely, but he knew that switch-over costs and international economic ties required retaining it, at least temporarily.)
His plan called for the federal government to build warehouses across the country where farmers could bring their wheat, corn, sugar, cotton and other crops and commodities and receive an immediate cash payment of 50 percent of each item’s average price over the past 25 years. The farmer would also receive standardized, marketable certificates indicating ownership of specific quantities of the crop. For example, if the average price of wheat was $1 per bushel, and the farmer brought 1,000 bushels to the warehouse, he would receive $500 and 10 ownership certificates for “100 Bushels of Wheat.”
The government would store the crops for as long as a year for a nominal fee. The farmer could sell the certificates or use them to redeem the wheat. To redeem 100 bushels from a warehouse would require paying $500 and surrendering the ownership certificate. The ownership certificates would fluctuate in value depending on spot prices, but the farmer could sell them at any time short of one year and cash out.
Edison thought the plan would reduce risk to farmers and give them a guaranteed amount of cash to pay off their loans. Gone was the gold monopoly, or so he thought. With 36 commodities backing money, in addition to gold, farmers would no longer have to dump their crops on the market at harvest time. They would have a price floor they knew with certainty, and -- if they wished -- they could try to gain from rising prices by holding their ownership certificates. Meanwhile, the government was warehousing the crops.
To test the soundness of his ideas, Edison sent an involved questionnaire to 17 economists and businessmen. The list included O.M.W. Sprague of Harvard University, Edwin Kemmerer of Princeton University, and William P.G. Harding, the chairman of the Federal Reserve. The questionnaire didn’t present Edison’s plan formally; he asked questions about various elements of it, so the respondents had to intuit the overarching scheme. This approach frustrated some to the point of rudeness. (Edison scrawled “punk” across a prickly response from Henry Parker Willis of Columbia University.)
But some responded at great length. They weren’t sanguine about the gold standard, in the main, but they were even less so about Edison’s plan. They thought it was costly, impractical, subject to political manipulation, inflationary and generally inferior to the existing monetary system. Edison thought that they were “in a rut” and couldn’t see beyond the glitter of gold.
Unintentionally, the questionnaire went “viral.” Farm newspapers, playing on the populist sentiments of their readership, touted the idea of “Ford-Edison” money. The news brought the investor Bernard Baruch to Edison’s door. Edison also had meetings with Irving Fisher of Yale University and corresponded extensively with Roger Babson, a technical market analyst. Despite mild encouragement from all three, and enthusiasm from farmers across the country, Edison made little headway with Congress or Secretary of Commerce Herbert Hoover, whom he had been lobbying behind the scenes.
In July 1922, the New York Times, and its financial writer Garet Garrett, gave Edison’s plan wide exposure and analysis. Garrett was respectful, but no more supportive than the research team. In a letter to the newspaper, Edison said that Garrett, “although an extremely able man, has not got my scheme entirely right in his mind.”
Edison soon returned to running his entertainment empire. Although chastened by the experience, he still claimed that in 30 years his scheme would be in place and gold would be a relic of the past as a backing for paper money.
He was right about gold: Just a decade later, President Franklin D. Roosevelt removed it from monetary circulation. And though Edison’s monetary scheme was never seriously considered, well-known economists including John Maynard Keynes, Friedrich Hayek and John Nash have suggested some form of commodity-backed money over the years. Today, with the Federal Reserve buying a wide variety of assets to prop up the balance sheets of private financial companies, perhaps Edison’s proposal doesn’t look that outlandish.
(David L. Hammes is a professor of economics at the University of Hawaii at Hilo and the author of “Harvesting Gold: Thomas Edison’s Experiment to Re-Invent American Money.” The opinions expressed are his own.)
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