The Energy Standard
In my last post I mentioned the idea of a energy backed currency. This in an interesting meme that I think deserves more attention, especially given the current global financial climate.
I saw a news article today on Zimbabwe’s introduction of a $50-billion note, which is currently enough to buy about two loaves of bread. This hyper-inflation is the inevitable end result of any fiat currency. With the US pumping trillions of new dollars into existence, we can be sure that the long term result will be high inflation.
For a time, the dollar was backed by the gold standard. The dollar had an intrinsic value because it was guaranteed to be exchangeable at any time for a fixed amount of gold. This was abolished in 1971 as they had far too little gold to back the money in circulation. With nothing to constrain growth to match physical reality, things have since spiraled out of control.
Eventually, we will need to return to a more sane system of currency, I don’t think the gold standard is the best choice. Gold is valuable because it is scarce, shiny, and durable. But it is a fairly arbitrary choice with which to back a currency.
Energy strikes me as something far more fundamental. Energy literally powers our economy and life itself. The immense amounts of energy that have been released from fossil fuels have driven our population, productivity, technology, and luxuries. Energy grows our food, transports goods, powers our cars, our computations, communications. Everything we do, need, and love can be reduced to energy. It has an essential value. Equating money directly to energy seems natural.
Money, after all, is but a symbolic token to exchange work of one type for another. When you buy an apple, you are not paying for the apple itself. You are paying for all the energy that went into growing, picking, and transporting that apple to you, so that you didn’t have to do it yourself.
Money would be directly exchangeable with the reserve for a specific amount of energy in some standard form — for example kilowatt-hours or mega-joules. Thus the amount of money in circulation would directly equate to the energy production available. The growth of the economy would be constrained by the growth of energy production. Since energy is so fundamental to the economy, this ensures the economy stays aligned with reality. If a wind farm or coal plant is constructed, this energy can now be exchanged with the reserve, enabling the circulation of more currency.
The government would set official conversion rates for different forms of energy — the energy from a coal-fired plant would convert at a rate first calibrated to the physical output, then adjusted for the depletion rate of the non-renewable resource, as well as any added pollution taxes on the conversion.
An energy backed currency could have unintended side-effects difficult to anticipate. This might help stabilize prices of things like oil, as the price would better reflect the EROEI. It could positively influence the generation of renewable energy, or it could trigger a gold-rush mentality to produce as much dirty energy as possible. It could force us all to live within our means.