Wednesday, November 3, 2010

Electricity backed currency: The new gold standard

I've mentioned in previous posts that I believe that the US currency should be grounded in something real that has value.
Before 1971, our currency was tied to an amount of gold, which seems silly right now because you can't do anything with gold, other than wear it and look cool.
Since 1971, we've been living in a world in which our currency isn't grounded. The Federal Reserve can pretty much just print money whenever it wants. Though, the people at the Fed should have a healthy amount of fear of being pitchforked by the masses if they were to print money to the extreme.
There's a certain amount of unease that I feel because the printing of money isn't tied to anything that's grounded.

This has made a lot of other people uneasy as well.
For example, check out:
This website mentions that famous engineers, such as Henry Ford and Thomas Edison, were in favor of backing the US currency in energy, such as electricity. Though, it seems as if the idea of energy backed currency has never really gotten off the ground, kind of like how a lot of people question who wrote the plays that are attributed to Shakespeare, but none of us are picketing bookstores demanding that the true author's name be placed on the books. (Though, after I wrote this post, I found a link to a new movie called Anonymous on this topic. I'm definitely going to have to see this movie, even though I'm already ~95% sure that Edward De Vere wrote 'Hamlet.')

The "Energy Backed Money" website does a good job of going through the details of the plan, so I suggest you read through it if this is a topic that interests you. Though, here's a quick summary:

The government would maintain the price of electricity between a certain range (such as 12 to 15 cents per kilawatt-hour). It would also guarantee that its currency could always be exchanged for a certain amount of electricity (such as 20 cents per kilawatt*hour.) If the economy is doing well and the price of electricity starts dropping below $0.12/kWh, then the government can do one of two things to maintain the average price of electricity: either lower taxes and print money to make up for the loss of income, or increase the size of government spending.
If, however, the economy is not growing, and in fact contracting, then the government has to keep the price of electricity at $0.12/kW-hr even though the price is starting to increase in this contracting society. To do this, the government has to take money out of the economy, either by increasing taxes or reducing government spending.

Notice how this is exactly the opposite of Keynesian economics. According to Keynes, the government should spend money during a recession and reducing spending during a economic boom. This is exactly the opposite of what we should be doing.
Stimulus spending during a recession is therefore the worse thing you can do during a recession. Instead, the government needs to remove money from the economy because there's actually less electricity available because it became either: more difficult to make it or the electricity was being wasted too much. Keysenian economics tells us to waste the electricity even more, but this is silly. If electricity (or gasoline, natural gas, etc.) is more expensive, then we need to be cutting back in our use of it until there's a technological breakthrough that lowers the price of electricity.

Notice also that the idea of lowering taxes during a recession is equally stupid. If you lower taxes, then you will go into debt, which will force you to print money, but then the electricity prices just keep on going up, and the recession continues. Here's an analogy I created.

Imagine that you're the sound man (a roadie) for a famous band. You notice that some feedback is developing between the singer and the microphone. So, you turn one of your knobs in order to increase the amount of negative feedback.
But it turns out, that you're actually turning the knob for positive feedback, and a horrible screeching sound it heard through out the venue. At first, you think that you didn't turn the knob far enough, so you turn it some more...but now the noise is even worse. The singer is now no longer anywhere near the microphone, but the noise is still there. Eventually, you momentarily kill the power to the stage and let the singer back to the microphone, but it starts up again.

We didn't realize that we've been turning the wrong knob. We've been turning the positive feedback dial instead of the negative feedback dial!

Right now, both political parties are living in a dream world. The solution to solving the recession is neither tax cuts or wasteful stimulus.
The solution to the current recession is some combination of 1) reduced government spending, 2) waiting for a technological break-through, and 3) selling government capital. All the while, we can't print more money during a recession. Printing money during a recession is like turning the positive feedback knob.

Electricity backed currency is what keeps the fire to the feet of the politicians and members of the Federal Reserve. They can only print money when the economy is growing. And if the economy is shrinking, then they have to raise taxes or reduce government spending.
Because politicians don't like having to either raise taxes or reduce government spending, then it forces them to keep the economy growing. And I believe that the government has a large role in keeping the economy growing, such as investing in cheap sources of energy, ensuring a national defense, maintaining a strong legal system, enforcing patent rights, enforcing pollutions laws, and maintaining critical infrastructure.

So, what I'm interested in is: how do we get to the point at which electricity backed currency is actually a possibility?

Right now, the problems are: 1) electricity is not a freely exchangeable item; 2) the cost of electricity is different from state-to-state; 3) it's difficult to store large quantities of it right now.

I think that the main goal of the Department of Energy should be to address the problems that are keeping us from realizing an electricity backed currency.

We need to:
1) Figure out how people can get paid for selling electricity, and vice versa, figure out how people can buy electricity even if they aren't at home. This needs to happen soon because I want to have an electric car, and I expect to pay people for using electricity to charge the car when I'm away from home. I also expect to be able to sell that electricity in the car's battery if there's a brown-out in the city.

2) Find cheap ways to connect the West Coast's and East Coast's electricity grids (and Texas's grid). We need to eliminate the price difference between the different parts of the country. Perhaps, the price of superconducting wires will drop to the point at which we can lay these wires from one coast to the next.

3) Invest in electricity storage technologies that match the scale of its use. I mean large scale energy storage, like what we do with natural gas for the winter or for gasoline at the Strategic Petroleum Reserve.

So, in summary, in a recession:
Don't increase government spending
Don't decrease taxes (unless you more than compensate for it with decreased spending)
Don't increase the size of the petroleum reserve

Do cut wasteful government spending
Do sell government rights to oil/natural gas/minerals/coal
Do sell un-needed reserves of gold and silver

John M. Keynes had it completely wrong and so do most politicians. We've been turning the wrong knob this whole time. We've been increasing positive feedback while all the while thinking that we were turning the negative feedback knob.


  1. Hey, nice Blog. Dallas Electricity Prices acknowledge these needs and have created the most streamlined process for meeting these needs in an independent and un-biased manner.

  2. H.G. Wells first proposed an electricity backed economy in "The world set free' (1915)

  3. Thanks for the note about the H.G. Wells book. I did a wiki search and it looks like a good book. I'm looking forward to reading it.

    In some of my other posts, I've traced 'energy backed currency' or 'electricity backed currency' to Thomas Edison and Henry Ford in 1921, but this H.G. Wells book is even before their idea of having the government print money to pay people to build dams (rather than requiring the gov't to obtain loans to finance the project.)
    There are a lot of different ideas on what an energy backed currency would look like.
    What I'm hoping with this blog is to get more people talking about 'energy backed' or 'electricity backed' currency so that we can find and then can implement a better form of currency than the one we have right now.
    Our present form of currency promotes: 1) insider trading within the Fed, 2) price inflation, and 3) wasteful gov't spending.

    The goal of any energy or electricity backed currency should be to fix the three problems above.

    Here's a link to the post on Thomas Edison's idea on electricity backed currency.

  4. Buckminster Fuller was another proponent of an energy backed monetarily system. One of the first steps he proposed to accomplish this was the linking of the worlds electricity grid.

  5. Thanks for the comment.
    I checked out the wiki site on Bucky.
    He's an interesting person. There's a lot to learn from him and a lot to watch out for.
    For example, do you have any clue how he came up with the number $1,000,000 USD as the environmental cost of a gallon of gasoline? This just seems absurd and biased.

    I think that it's important to be skeptical of any project that calls itself sustainable or renewable. There is no such thing as sustainable or renewable. Because of the second law of thermodynamics, there's only one direction to time. The idea of basing a currency only on renewable energy is dangerous, but the idea of basing a currency on energy (work)is sound.

    So, while I'm skeptical of some of Bucky's ideas, I think that linking our electricity grid with other countries is important. Though, as a first step, let's link the three separate grids in the US together before we consider linking with other countries. And also, before we link to other countries, let's implement an electricity auction (like the PJM) through out the US, not just in the area covers covered by the PJM.

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