(Translated from Chinese by Sherwin Lu)

As Marx pointed out in Capital, the storage of products is common in all societies. But that in the West has been no more than a “precaution against rainy days”, i.e., “store grains for famine relief”. So, Western thinkers have had widely different opinions on this issue. John Lalor, a 19th century British economist, said that storage would decrease with the development of capitalist production. Marx held the opposite view, arguing that the three forms of storage, i.e., production capital, savings for personal consumption, and commodity storage or commodity capital, can increase simultaneously in their absolute volumes, but the storage of one would relatively decrease with the increase of another. Sismondi thought of storage as a defect with capitalist production. Adam Smith looked at it as characteristic of capitalist production as, according to him, in an agricultural society people never bother about the next meal so long as they have enough for the moment.

In the history of human civilization, only the Chinese placed storage in the central position of their thoughts and practices regarding economic and financial matters. Storage played its pivotal role basically in two aspects: the storage of basic products, and the issue of Commodity Reserve Currency (CRC). Theories on these two topics had been developed to a mature stage no later than the Spring and Autumn Period.

The author finds that what had confined Westerners’ attention to the production-to-consumption process and caused their negligence of the role of storage is their way of thinking (which had also led them to believe that negative numbers are unthinkable until as late as 19th century while the idea of negative numbers had occurred to the Chinese as early as 3000 years ago). Before the appearance of systems theory, Westerners had lacked the capability to look at things from a holistic point of view. Western economics has always tried to solve economic problems from one single side alone, either of production or of consumption, but not in terms of balance between the two as from the holistic point of view. Not until the 1930s when the Chinese Regulatory Storage system was introduced into the West had the two institutions of commodity storage and CRC entered their economists’ range of vision.

Anecdotes of Zhou Dynasty • King Wen’s Antemortem Remarks (Chap. 25) says: There might be four kinds of natural disasters: flooding, drought, famine, or poor harvest. The time of their arrival is unpredictable. If nothing is reserved, how shall we handle the situation? Teachings of King Yu of Xia warns us: “If there are not enough grains stored for two years’ consumption but famine happens, then the common people will lose their wives and children; officials their concubines, servants and carriages; and the state its people.” Watch out! If you do not think and act, disasters will be imminent.…

Records of the Grand Historian • Famous Traders records how Ji Ran handled state storage and used it for market regulation. JI pointed out that the state should not hoard commodities for profiteering like speculators, but for balancing commodity prices as they fluctuate on the market. He is quoted as saying: When storing up commodities, make sure that they be in good conditions lest they should rot away and that no pecuniary resources be left sitting there doing nothing; when trading things, keep aware that no corruptible or perishable ones are to be stored for long and avoid taking risks for high profits. By studying the excess or shortage of commodities, one can learn how prices fluctuate. When prices soar to the extreme, they will fall back shortly; when they drop to the bottom, they will come back up soon. When the price of a certain commodity reaches an extreme height, sell it promptly as if dumping junk; when a product dips to its lowest price, buy it in time as if grabbing jewelry. Both merchandise and money should be kept circulating like water flowing.

According to Records of the Grand Historian, by adopting Ji Ran’s policies and tactics in state management, King Goujian of Yue successfully made his state a rich and powerful one within ten years and render it possible to conquer the state of Wu, thus avenging himself and becoming the dominating power over central China.

As to the theory on issuing CRC, Duke Mu of Shan made it quite clear when admonishing King Jing of Zhou in 524 BC against the making of high-value coins. His central idea was to weigh the value of the currency based on a statistics of all existing goods and all the currency being used; if the currency is low in value, then issue some currency with a higher value (“heavy coins”) and make sure that the “heavier coins” and the “lighter coins” be circulated at a proper rate of exchange. As recorded in Guoyu • Duke Mu of Shan’s Admonition  to King Jing of Zhou, in the remote past, when natural disasters befell, the ruler would make a statistical survey of goods, weigh the value of coins, and decide how to relieve the people. If the people felt that the currency was too low in value as compared with goods, he would make “heavier” coins for use side by side with “lighter coins” to benefit the people. If the existing currency was too “heavy”, then make more “lighter coins” to supplement the heavier ones. Thus, people would not suffer losses whether heavy coins or light ones were being used.

About practical operation of the above mechanism, Guan Tzu • Value Weighing (in 16 Chaps.) (《管子• 轻重》十六篇) contains a detailed elaboration. It points out that whoever is in charge of the state economy should first of all get the statistical data on social goods and on the currency so that the market can be regulated according to the value-weighing principle and the state strength be built up. The statistical data should include: How much land is there in a Xiang (乡, an administrative division within a county)? How much is the cost for managing it on the average? What is the total value of all the grains produced? Then, what is the population of a county? How much land? How much currency needed for circulation within the county? What price of grains would match the amount total of currency in circulation? How much grains would be left after laying aside what is needed locally for the whole year? Then, how much textile goods can be produced within a year by the female population in a Xiang? What is the value total at the current prices? How much would be left after laying aside what is needed by the local population for the whole year? And there should be another set of data about land.

With the above statistical information at hand, regulation of economic activities can be done through the use of financial credit, operation of the market, and administrative directives. During the whole process the state should always take the initiative in storing commodities. Although some of the details in the book Guan Tzu might not be accurate historical facts, or might be somewhat exaggerated, the general principle for the regulation of market it elaborates is still relevant today.

In classical Chinese economic theory, the commodities in the state storage played the special role as capital reserve, which served as the physical backing for the issue of CRC. State control of massive commodity reserves was the prerequisite for issuing CRC, or otherwise the state would not have the power to regulate the market. In Guan Tzu • Contingency Financing Strategies (Chap. 75) (《管子 • 山权数第七十五》), state control of grain storage is called “the Heavenly power”. If this power were lost, economic management would be out of the question.

Also, classical Chinese economics showed serious concern about import or export surplus, because to keep the prices on a par with neighboring states was one of the basic requirements for a balanced market. If the prices were on the higher side, people from other states would come to make big profits by dumping their products; if the prices were too low, material wealth would drain away like water. Loss of wealth to other states would mean the loss of power; loss of big profits to other states also a management failure.

For instance, within the fourteen years from 1979 to 1993, the exchange rate for China’s currency dropped by 73%, from 1.58 to 5.8 RMB yuan to the US dollar, and it went further down after that till 1998 when the rate was 8.28 to 1 before it began to rally in recent years. At that time, some Americans visiting China’s Zhejiang province said that the prices for socks there were almost zero. Such low prices have caused massive loss of China’s material wealth to other countries whereas Chinese nationals’ consumption rate has been extraordinarily low. Under such circumstances, it has been unthinkable to store commodities in large quantities and use them as a leverage to regulate the economy. Bleeding of wealth is bleeding of power! China should not have forgotten this important lesson in economics from her own cultural heritage.

In the 1930s, while Benjamin Graham’s plan for commodity standard currency was, to his disappointment, rejected by the US government, the same idea came to be implemented in the socialist world. In the USSR under the Stalin administration, state storage was not merely a necessary link in the process of commodity circulation or a kind of reserve or security fund for use in times of mishaps or natural calamities, as viewed by Marx (Critique of the Gotha Program), but served as well as the material backing for a stable ruble, the Soviet currency. Stalin pointed out in 1933: “The stability in value of the Soviet currency is first of all guaranteed by the large quantities of commercial goods in the hands of the state while the same kinds of goods are being circulated on the market at stable prices.” This was truly the case. At the January 1936 conference of the Central Executive Committee, the Soviet financial commissar declared: “The Soviet ruble is stable and no other currencies in the world can bear comparison with it in value.”

Many contemporary researchers, following Khrushchev, whether deliberately or not, have turned a blind eye to the miraculous economic achievements the USSR had made at that time. Stalin’s ideas on monetary matters, however, were not only advocated by the Soviet economists of that time, but was also quoted without prejudice in Graham’s World Commodities and World Currency. Stalin might not have conscientiously pushed for CRC, but his approach in trying to stabilize the ruble with a “reserve fund” in kind was effective.

In China, commodity storage under the Communist government in its early years was on the whole normal, covering the basic goods only. In 1951, there were only 23 kinds of goods and materials under planned management. Later, the number increased to 227 in 1953, which includes 112 kinds of state controlled producer goods and 115 ministry controlled. The total increased to 532 in 1957. The material management system was evolving from one of coexistence between planned transfers and commercial exchanges, between government-set transfer prices and market exchange prices to one of exclusively planned transfers at government-set prices.

The rigidity of the planned economy and the low efficiency and wastefulness it resulted in was obvious. But even more unfortunately, China has overstepped to the other extreme since her adoption of the reform and open-door policy. The state storage institution has been downgraded to a logistics enterprise. In 1993, the government abolished the ministry of commerce and that of material management, and set up a ministry of internal trade, which later in 1998 was transformed into a state internal trade bureau with a material reserve function, but this bureau was finally abolished in 2001. What is left now is the state material reserve bureau under the state development and reform commission and its functions have been shrinking, so that it does not at all have the capability of regulating the macro-economy or issuing CRC.

No later than 2000 years ago, the Chinese civilization had already developed a complete mechanism for national economic accounting and government performance evaluation, i.e., the social and economic report system. This system required that local officials make a comprehensive report annually to the central government about the social and economic conditions in the area under their jurisdiction, covering population, newly-claimed land, financial balance statement, public security, afforestation, etc. Take for instance the annual reports contained in the West Han local administrative files excavated in 1993 in China’s Jiangsu province. These reports also covered, besides the above-mentioned items, relief for the poor, for childless seniors and orphans, and for rovers. For another instance, the Tai Shou (太守, title of a local government administrator ) of Yingchuan (颖川) Jun (郡, administrative division above the county), named Huang Ba (黄霸), at the time of Emperor Xuan of West Han, won the good reputation as “the Number One in administration” and was commended by the royal court for his merits in promoting production (farming, husbandry, tree-planting, etc.), encouraging people to practice economy, urging local officials to help the needy, and educating the people in the law and in morality (Book of Han • Biography of Huang Ba).

It is obvious that the national economic accounting and government performance evaluation system based on classical Chinese economics was much more scientific and complete than the Western model centering round GDP. GDP is only the value total of all final products from all businesses of a society within a certain accounting period and is the volume total of all circulating capital, and, so, it cannot serve as the measuring scale for national welfare, not to say that it fails to count in the huge environmental cost. So, now the idea of a green GDP has been introduced into China, again from the West, i.e., the original GDP minus the environmental resource cost and environmental protection cost. But the problem is that environmental costs are beyond any measure in monetary terms and, so, the concept is not practicable. This view is also shared by China National Statistics Bureau: “It is very difficult to apply the concept of ‘green GDP’ to practice, though it is a good idea.”

To sum up, we have every reason now to stop committing any more follies or putting up any more false fronts and to return to the 8000-years-young heritage from China’s own civilization.  Classical Chinese economics, from environmental to financial, has stood the test of human history and deserves to be, in the foreseeable future, a new starting point for developing an economic theory which can serve the welfare of the whole humanity.