The Wall Street Journal has had a lot of editorials recently on gold or silver backed currencies, so I thought that I'd revisit the topic of Electricity backed currency from a prior post (which happens to be the most viewed of the posts I've written.) So, it must be a hot topic (unlike a post at roughly the same time on the Source of exergy in the early universe.)
As I mentioned in the prior post, I think that we should ground our currency with something that has value. The only thing that I can think of that has true, measurable value is electricity.
There are a couple of different ways in which an electricity-backed currency could be implemented:
Method#1: The Easiest Method
Every couple of months, the Federal Reserve takes a look at the average price of electricity paid by all customers (industrial, commercial and residential) in the US, and then shifts their monetary policy in order to keep the average price of electricity a constant at the average price of electricity at time that the US decided to switch to a electricity-backed currency. The Federal Reserve could do this by some combination of: 1) Printing or Removing Dollars (depending on whether the prices were dropping or increasing); 2) Increasing or Decreasing the borrow costs (depending on whether the electricity prices were increasing or decreasing); or 3) Increasing or Decreasing the percentage of bank deposits that must be held in cash (depending on whether the electricity prices were increasing or decreasing).
This method is very similar to the process we have today, except for the fact that we would be forcing the Federal Reserve to maintain a 0% inflation rate on the average price of electricity. This is the easiest method, and could be implemented today! However, in this case, your money is not convertible into electricity because there is nobody guaranteeing to sell you electricity for a certain amount of your dollars.
Method#2: Middle of the Road
This method is similar to the method described on the Energy Backed Money website. In this case, the US Federal Reserve acts very similar to Method #1. The difference now is the the US Department of the Treasury (or perhaps the Department of Energy) will guarantee that you can buy electricity at a certain price. This means that your money actually has value that doesn't change with time! For example, if the Federal Reserve tries to maintain an average electricity price of, let's say, 8 cents per kW-hr, then the US government could promise that you can always exchange perhaps 20 cents for 1 kW-hr of electricity. So, anytime the price of electricity on the grid goes above $200 per MW-hr, then it would make sense to buy electricity at the government's rate. To implement this, the government would probably have to invest in spare electricity generation or invest in electricity storage in order to keep from having to pay people when electricity prices go above the set point of 20 cents / kW-hr, in this example.
This method has some intrinsic value because you know that your money can't deflate and that your money can be converted to something of value. However, it is more difficult to implement because the US government would want to make sure that it could keep electricity prices below the set point before implementing this policy. My guess is that this policy of guaranteeing a ratio of money-to-electricity could be implemented within 10 yrs of the government making a law to enact this policy. Obviously, the Federal Reserve part of the this method could still be enacted today.
Method#3: The Hardest to Implement
In addition to the steps in Method#1 and Method#2, the US government could build electricity transmission lines to other countries, and negotiate with those countries a price of electricity at which it can sell electricity in order to repay its debt (or just to collect money.) For example, the US might want to build a superconducting wire across the Pacific Ocean in order to sell electricity to China. In this case, the US and China might agree that the US has the right to reduce its debt to China by 5 cents for every kW-hr of electricity that China receives from the US (after accounting for transmission losses.) So in this scenario, anytime that the US borrows money from the Chinese government, the US is allowed to pay back the Chinese government in electricity or in dollars.
This method of implementing an electricity backed currency looks like a promising way of reducing the size of the US government debt. But it could take a long time to implement, and there's no guarantee that, once we create the electricity transmission lines, the electricity might not come towards us, and make us more in debt to other countries. (unless this language were added somehow into the agreement.)
So, to conclude this section of this post, I think that it's fairly easy to implement the first method of creating an electricity-backed money supply. However, as mentioned earlier, there's no guarantee in this method that you can convert your money to something of value. To do so would require implementing the second method (in which the government guarantees that you can always convert your money into a certain amount of electricity.)
This topic continues as a Question & Answer in next post.