A well-governed state ought to set aside as the first article of its expense a regular sum for contingent cases. It is with the public as with individuals, they are ruined when they live up exactly to their income.

—Montesquieu. The Spirit of the Laws, 1748.

When a business or family suffers a severe financial setback, its long-term plans can be crippled. A business may have to lay off highly skilled staff who cannot be quickly replaced. For a family, the results can be even more tragic—missing the opportunity to raise additional children. Often the amount of money needed to get through the crisis is tiny compared to the long-term damage of not having it available when it is needed. Thus, an interruption to business cash flow that ends up costing $10 million could have been reduced to nothing if only the business had held reserves of $500,000 to get through a rough patch. To guard against such disproportionate setbacks, prudent businesses and farsighted families maintain contingency reserves.

Nations likewise should maintain contingency reserves. The purpose of such reserves is to ensure that for want of $1 trillion in the short term, a nation is not destroyed or caused $100 trillion worth of damage in the long term. The other purpose of a contingency reserve is to deter aggressors. Just as business competitors are deterred from starting a price war if a company has a strong balance sheet, so too are tyrannies deterred from attacking a nation with ample contingency reserves. By contrast, socialist countries, like all spendthrifts, live from hand to mouth, and typically carry a vast public debt. The result of such short-sighted behavior for a nation is the same as it is for an individual: instead of a man of straw, the result is a nation of straw. This was the shameful condition Britain found itself in during the Suez Crisis when the United States was able to force it into complete capitulation simply by threatening to sell reserves of British currency.

Cash component of the contingency reserve

Cash has no intrinsic value. If the government removes significant amounts of cash from circulation by taxation, the effect is the same as if the money was burned. The taxpayer’s wealth is simply transferred to the holders of circulating currency (monetary deflation occurs). When the government spends cash reserves in time of war, the effect is the same as if it had printed the money—monetary inflation ensues and the holders of the circulating currency find its value has been debased. Accordingly, large domestic cash reserves are useless as a store of wealth for the contingency reserve.

Foreign cash reserves can, to a limited extent, be spent purchasing from foreigners without causing problems. However, while a small war like the Falklands War could be paid for this way, large wars like the Korean, Vietnam, or Iraq wars would cause inflation in the foreign countries whose currency was held. By way of self-defense the foreign country could inflate its currency, rendering the savings worthless. Accordingly, reserves of foreign currency should only form a small part of the contingency reserve.

Gold component of the contingency reserve

Gold has the advantage of maintaining its value. However, gold is still a currency and still suffers from the limitations of being a medium of exchange rather than having intrinsic value. People cannot be fed or clothed with gold. Moreover, a country the size of the United States is unlikely to gain much utility from gold reserves, given that the value of all the gold ever mined is a mere fraction of America’s annual GDP.

Share component of the contingency reserve

The government should not buy shares in companies as a method of storing wealth or for any other purposes. This applies equally to foreign shareholdings as it does to domestically listed companies, the main concerns being corruption, malinvestment, and market distortion.

Industrial component of the contingency reserve

Suitable commodities to stockpile include those which:

  • Are labor intensive (labor being in short supply in a total war).
  • Are energy intensive.
  • Are likely to be needed in high volumes in time of war.
  • Represent an industry which has been run down domestically for competitive reasons and in time of war will take a long time to re-establish (for example the steel industry in the United States).
  • May be cut off in time of war (for example, crude oil).
  • Are diversified enough so as not to flood the world market if they are used to help recover from a natural disaster.
  • Where possible store indefinitely, keep their utility indefinitely, or keep their relative value best.

The following are examples:

  • Aluminium, copper, chromium, nickel, lead, zinc, and steel. (During World War II a huge amount of work was carried out in mines and foundries in the United States by men who could have joined the armed forces and brought about the end of the war more quickly)
  • Glass, plastics, carbon fiber, steel, and chemicals.
  • Rolling stock, locomotives, concrete railway sleepers, tracks.
  • Carefully chosen industrial electric motors, dynamos, generator sets, ship engines, truck engines, trucks, truck tires, ball bearings, machine tools, and other manufactured goods that are not liable to be quickly superseded by technological advances and which maintain their utility even when superseded.
  • Cement, gravel, asphalt, rebar, galvanized corrugated iron, electrical and telecommunications cabling, girders—all the crude ingredients for building factories, hangars, warehouses, roads, bridges, etc.
  • Prefabricated utility housing, factories, offices, bomb shelters.
  • Underground factories and shelters. The German experience in the World War II shows that industrial manufacture can continue, even with the loss of air supremacy, if underground factories and bunkers exist. However, their construction during wartime, once air supremacy has been lost, in the age of pinpoint bombing, is impossible. Accordingly one of the best and most durable investments a nation can make during peacetime is to carve out a vast network of interconnected caverns, many miles beneath the surface, suitable for use as wartime factories and shelters. These need not be fitted out, but their excavation ahead of time will prove a boon. Such bunkers can also be used to store elements of the contingency reserve. These bunkers should be fitted with nuclear, chemical, and biological air filtration systems.

Care should be taken to disperse the reserves so that no one cache is sufficiently large to warrant a nuclear missile. Caches should be constructed and rigged so they can be quickly destroyed if they are in danger of being overrun.

Shipping component of the contingency reserve

The mothballing of merchant and naval vessels is vital as a practical measure and as a deterrent. The Japanese would have perceived no profit in attacking Pearl Harbor if they knew any destroyed ships could be replaced within weeks from the Naval Reserve. With the bulk of world shipbuilding now occurring in Asia, the retention of a substantial shipping reserve in the West is now more important than ever. Governments should consider keeping disassembled Liberty-type ships in the deserts of North America. Removed from the corrosive environment of the sea, these could be stored indefinitely and would compensate for the lack of a shipbuilding industry during wartime. The concrete foundations of shipping yards could be laid out along the coast, then covered in sand and topped off with parks or housing.

Clothing component of the contingency reserve

Nothing is nowadays quite so cheap, compared to what it was, as clothing. Yet in a major war, clothing is always in short supply. A prudent government will therefore ensure it holds abundant reserves of warm utility clothing and sleeping bags for the entire populace, sufficient to last ten to twenty years. A warm jacket properly stored in an airtight toughened glass drum should be able to adequately do its job in 500 years’ time. It would also be prudent to stockpile nuclear-biological-chemical suits sufficient to protect the entire population. In the event of a cataclysmic war, such precautions could mean the difference between survival and death for millions.

Food component of the contingency reserve

Famine makes greater havoc in an army than the enemy, and is more terrible than the sword. Time and opportunity may help to retrieve other misfortunes, but where forage and provisions have not been carefully provided, the evil is with out remedy. The main and principal point in war is to secure plenty of provisions and to destroy the enemy by famine.

—Vegetius. Epitome de re militari.

Regardless of how ‘iron’ their will is, both the civilian population and the military will surrender when their food is cut off. Therefore, it is vital to ensure that the entire populace can be fed for at least ten years from reserves alone. Such counsel might seem alarmist when we live in such an age of plenty. However, reason requires that in preparing for the future we should consider the past. The siege of Leningrad (1941–1944) and the terrible turnip winter in Germany (1916–1917) make clear the importance of maintaining an adequate food supply in modern times. Even Winston Churchill conceded that if the Nazi U-boats had been able to cut the Atlantic lifeline, the British home islands would have been forced to capitulate. If it was unwise in the twentieth century to fail to make provision against interruptions in the food supply, it is much more so in the twenty-first century. The industrialized world, with its vast populations fed and supplied by an intricate logistical network totally reliant on peace, is now far more vulnerable than it has ever been in the past.

Several months’ supply of food should be in a form that allows for quick distribution and consumption (at the expense of shelf life), such as canned food. The greater part of the reserves, however, should be in a form that allows it to keep for decades. Thus, milled freeze-dried wheat, corn, rice, and other cereals should be kept in vast quantities underground. Forty-four-gallon air-tight drums made of toughened, darkened glass sealed by twisting and melting the nib of the glass should be preferred over gigantic silos. These will be safer from rodents, damp, and disease, and provide a greater degree of survivability if the storage facility is damaged or neglected. Moreover, in the event of a catastrophe, when improvization is required, they will provide greater portability. Prolonged sieges, nuclear fall-out, and the like, may prevent food stores in one part of the country from being moved to another. To guard against this, multiple underground silos should be constructed in major cities to eliminate the need for extensive logistics.

Subsidizing farmers

Food security should never be sought by subsidizing farmers. The taxes, tariffs, and other costs of propping up domestic farmers drag the economy backward, hindering one of the most important elements of war preparation—the maintenance of high economic growth. It is far wiser to buy food from countries that can make it cheaply and store it in silos.

Exclusive contracts with foreign countries

It is futile to arrange exclusive contracts with foreign countries or to buy foreign farmland, as the Chinese are doing, to provide food security. In times of shortage, such contracts will be ignored, and food will be sold to the highest bidder or retained domestically. There will not be two markets for food any more than there are multiple markets for crude oil.

Energy component of the contingency reserve

The oil shocks of 1973 and 1979 (made worse by government interference in the market system) alerted the industrialized world to the dangers of its dependence on imported oil. This brush with reality led to the creation of the U.S. Strategic Oil Reserve and its counterparts in other nations. These reserves are large enough to prevent economic dislocations due to fleeting, partial restrictions in the supply of oil. However they are far too small to be of any use during an interruption lasting more than a few months. The Russia-Ukraine pipeline dispute shows that no country can afford to be dependent on energy sources outside its own borders. Those nations that consider themselves self-sufficient, like Britain, should consider that their offshore oil rigs would be among the first targets of enemy submarines and their domestic refineries the first targets of enemy missiles and plan accordingly.

While there is nothing wrong with importing energy, structural reliance upon a single source of supply is reckless. Disruptions and extortion can be expected whenever a customer places himself at the mercy of a single supplier. The danger increases where the supplier in question has an unstable government or an uncivilized culture. The solution is for industrialized countries to achieve energy self-sufficiency.

Foreign component of the contingency reserve

By storing tangible reserves in foreign countries the government can:

  1. Purchase from the foreign countries without having to export goods. This turns the productive capacity of neutrals toward the war effort.
  2. Provide war aid by granting permission for the reserves to be tapped (Lend-Lease without the convoys or the drain on domestic production).

This article is an extract from the book ‘Principles of Good Government’ by Matthew Bransgrove