I recently read a book that discusses the idea of energy backed currency: "Power Currency" by James Rogers. [Note: this is not the James Rogers who is the CEO of Duke Energy.]
The book is a mix of interesting ideas along with good old fashion paranoia (and there's some real paranoia in this book that I'll discuss at the end of this post.) In general, the ideas in the book are extremely naive because the author occasionally assumes that all electricity can sell at the same price; he makes no mention of the 'time value of money' or the return on investment of any of the electricity generation or electricity storage concepts discussed in his book; and he often mistakes the units of power with the unit of energy. The only reason that I decided to read the whole book is that it covers a topic that I find interesting: the connection between electricity generation and currency. It also does a good job of telling the history of various currencies that we've had in the US since the founding of the country. For example, I learned a lot about the gradual growth in the money supply, the gradual increase in debt-backed currency, the gradual decrease in gold-backed currency, and the evolution of the US central banks through US history.
So, I'd like to point out some of the interesting ideas in the book, then I'll point out some of the errors in the book, and finally, I'll discuss the shear level of paranoia and how we can avoid succumbing to paranoia. We can't solve our problems if we start with fear, especially fear of death. But I will save this discussion to the end of this post, and focus now on places where I agree with the author of "Power Currency."
As James Rogers states, Electricity meets the theoretical requirements of money:
1) Medium of exchange -- widely used by nearly everybody
2) Unit of account -- indisputable and recognized value
3) Standard value -- consistent over time in terms of other items
This is one location where I agree with James Rogers. I think that it is possible and highly desirable to base the amount of currency in circulation on the amount and the price of electricity. I'm in favor of the US Federal Reserve printing or removing currency in order to maintain a constant average price of electricity in the US. This means that the Federal Reserve would look at the average price of electricity over the last, let's say 3 months, and then would either lower 'interest raises / print money' if electricity prices fell over the last 3 months or 'raise interest raises / remove money' if electricity prices increased over the last 3 months. The goal is to maintain a zero percent inflation in the price of generating mechanical and electrical work. This maintains a constant purchasing power for our dollar bills. [Author Note 9/16/2012: see more recent posts on Energy & Currency to see other proposals I've made as far as linking the amount of currency to the production of useful electrical and mechanical work.]
I also agree with James Rogers because he believes that returning to a gold standard is a bad idea, though I disagree on the reasons why it's a bad idea. He states, "If we go back to the gold standard for our money, it will be too easy to manipulate and would provoke war in some extreme cases." Instead of invoking fear of World War III, let's state the reason why returning to a gold standard is a bad idea in terms that don't provoke fear: Returning to a gold standard is silly because gold has virtually no intrinsic worth. It's a luxury item. Why should we base our economy on a luxury item? It's like backing our currency with fancy cars and houses? No sane person would propose to back a currency with fancy cars and houses, so why do people propose backing it with gold and silver? Instead, we should base our currency on that which keeps us alive (useful electro-chemical and mechanical work.) There is no way to live without electro-chemical and mechanical work; it's the common biological currency, and that's why we should have a currency that's backed by what drives society: electro-chemical work and mechanical work.
Instead, as shown on pg50 of Power Currency, our US Federal Reserve dollars were backed in 2009 by $36 billion in gold and $777 billion in US Securities. This means that we could (hypothetically) go the Federal Reserve and have them convert our dollar bills into a small amount of gold and a lot of US government securities. That's great (not!), but how does that help us drive to work and feed our kids?
Why not sell the gold and US Securities on the open market and use the money to build electricity storage and to buy/store fuels required to generate mechanical work? We could use the money from selling the gold and US Securities to build batteries, hydroelectric dams, flywheels, or compressed-air storage stations. (Provided that the money from selling the gold is invested into energy storage projects with higher real rates of return on investment than gold or US Securities.)
If the US Federal Reserve has to hold assets that balance with their liabilities (such as currency notes in circulation), then why doesn't the Federal Reserve use electrical and mechanical work as its assets. This means storing electricity as well as fuels required to generate mechanical work, such as natural gas and oil. Storing gold is a waste of time and space, but storing electricity can be useful and productive because it can prevent black-outs. Storing gold, silver or US Treasury Bonds doesn't help prevent black outs.
The question is: what is it going to take to get us to move from a fiat currency to a currency backed by electricity? I think that this will happen when is 50% of the US population realizes that our money is currently backed by debt (i.e. future taxes) rather than assets (such as electricity, natural gas and oil, or even food.) How did we move from a currency backed by luxuries (gold and silver) to a currency backed by debt (future taxes)?
James Rogers gives a good overview of this gradual transition. It's useful to talk about this transition because it points out that things are never as static as one imagines by looking only at a narrow portion of time. So, let's look at the history of US currency:
1792 -- Coinage Act: George Washington sign a law giving the death penalty for debasing the currency. (It's good to learn that I'm not the only person out there saying that it should be illegal to debase our currency. Zero percent inflation should be the law!) The 1792 law stated that gold and silver coins will have a certain weight of gold or silver, and this will not change. This act also creates a US Mint to create the coins. The gold and silver that go into the coins comes from people who sell their gold and silver to the US Mint. Per Section 14 for the Act, people could bring their gold/silver to the US Mint, and have it converted into coins free of charge (initial, and later there was a small fee.) Under Sec.14, any person could bring gold or silver bullion and have it coined free of charge, or later for a small fee, exchange it immediately for an equivalent value of coin. "Persons may bring gold and silver bullion, to be coined free of expense;"
While I like George Washington's idea that debasing a currency should be illegal, the problem is that this is exactly what happens when you base your currency on gold and silver, and this is why returning to a gold/silver currency is so stupid. There's no rule to follow; it's absolute chaos (as shown by the numerous recessions in the 1800's and early 1900's.) The US Mint was forced to make more coins, even when the economic was shrinking. How can you make business decisions when the value of money is tied to a small commodity that can be cheaply mined from the ground and then minted?
Here's the problem: let's image that the economy wasn't doing well, perhaps due to poor crop yields. But let's imagine that a large deposit of gold is found during this poor economic times. What happens is two fold: 1) some people whose farms are under producing bring their gold/silver silverware to the US Mint and have it converted into coins; 2) the new gold deposits are converted into US coins. Now, there's a lot more coins in circulation, but there's actually less available work (because there's less food available to feed people who can work...the modern equivalent is high natural gas/oil prices.) This is a horrible combination, and will inevitably cause a decrease in the purchasing power of your coins. You worked hard for your money, and you should have the right to know that the US Mint can't make more coins and reduce the purchasing power of the coins who worked hard to earn them. When the economy is bad, that's precisely when we need to remove currency from circulation (or in our modern era, we have the option of raising the Federal Reserve's interest rates or raising requirements on bank reserves.) Another problem with the Coinage Act of 1792 was that it defined a precise ratio between gold and silver. That's the same thing as if the US government today were to define a precise ratio between Hummer's and Ferrari's. Who cares what the ratio of gold to silver is? The prices of luxuries are fickle. Today, the monthly average price of electricity is not fickle because it's the universal form of work.
1862: The Coinage Act remained law essentially until the Civil War, at which point in time, the US began printing paper money. This essentially decreased the purchasing power of the coin money, which meant that people's savings lost value. So, in order for the US government to pay for the Civil War, it decided to print money rather than raise taxes (actually, I think that it tried unsuccessfully to raise taxes, so it ended up just printing money.) This is a common theme throughout US history (including during the latest Bush Presidency.) Politicians are too afraid to raise taxes on luxuries during a time of war, so they instead print money (which taxes everybody, and especially the poor.) President Bush was afraid to tax luxuries and to waste tax, and instead he and the Federal Chairman allowed inflation to decrease the purchasing power of everybody's dollar. My request to future President's: if you need to fight a war to protect our freedoms, then have the guts to pay for it without hurting the poor. Tax waste and luxuries rather than allowing inflation to tax us all.
And here's a look at the three main types of currency throughout US history
1865-1933: Gold Certificates, secured by gold owned by the US Treasury
1878-1962: Silver Certificates, secured by silver owned by the US Treasury
1914-1962: Federal Reserve Notes, secured by gold, silver or "other lawful money" (this really means 'debt' (US Treasury Securities), i.e. promises by the government to give you more money using future tax revenues.
1963-Present: Federal Reserve Notes, secured by "other lawful money" and no longer by gold or silver. As noted above, your money isn't worth anything other than the future money that owning US Treasury Securities can bring. You can't convert it into anything except promises to pay you money in the future. It's a complete faith-based currency. The money is only worth value if everybody else has faith that it's worth money. There's no law guaranteeing that it's worth, let's say, a certain amount of electricity, natural gas or oil. I would prefer to live in a society in which our currency was not faith-based or gold-based, but rather electricity-backed.
So, now that I have discussed the good points of the book, I'll get into the problems:
Problem#1) in the Chapter titled "Moving Power Plants" James Rogers wants us to buy hybrid-electric vehicles and then use the vehicles to generate electricity when we're not driving them. There are multiple problems with this thinking: a) the price of oil/ethanol/biodiesel/whatever liquid fuel is greater than the price of electricity that can be obtained from the fuel combusted in the vehicle (i.e. this is a negative rate of return on investment), b) even if the price of oil were to plummet compared to the price of electricity, this will generate a lot of pollution, c) the DC electricity from the car's battery has to be converted in the 60 Hz AC electricity of the grid. This requires purchasing another piece of equipment. The money required to purchase the DC/AC converter will make the economics even worse.
Problem#2) in the Chapter titled "Introduction" James Rogers wants people living in towns that are economically depressed to starting using 'kWh' currency printed by the town. This currency will be backed by electricity generated in the town by solar panels and wind turbines. And then, some how, this will help rejuvenate the town, and make the town self-sufficient. This is crazy talk. Where does the money to buy and build the solar panels and wind turbines come from? (Taxes or printing money...which is effectively taxes) Solar panels on people's homes have a negative rate of return on investment. And the IRR for wind turbines into competitive markets (i.e. with no feed-in tarrifs or subsidies) is low to negative, except in a few markets in Texas. Here's the problem with the idea above (similar to other forms of socialism.) They are paying people to be unproductive, and via subsidies, they allow projects that would have negative rates of return on investment look as if they have positive rates of return on investment.
There is only one way to get out of an economic rut: invest your money into high rate of return on investment projects. That's it. There's no magic trick. You can't print your way out of the problem, you can't 'stimulate' your way out of the problem, and you certainly can't consume your way out of the problem. (This reminds me of the Demitri Martin video on being addicted to buying diamond rings. Check out the De Veers spoof...and the "We are deep in Ring Debt" Ring.) You can't dig yourself out of debt by buying luxuries; this will not stimulate the economy. It just drives you further into debt, and means that you will have less money to spend in the future.
Instead, the hypothetical town could try to convince a company to drill for natural gas, and then convince a company to build a natural gas combined cycle power. Both of these projects will lead to the town overcoming its economic rut because both of these projects have large, positive rates of return on investment. (Depending on the town's proximity to natural gas deposits, of course.)
Problem#3) Through out the Book James Rogers uses the wrong units through out the book. He uses kWh for both a unit of energy (correctly) and as a unit of power (incorrect). For example, on page 99, he writes "One KWH = 1.24 Horsepower One MWH = 1340 Horsepower." This is incorrect, and I'm not sure how this mistake was made over and over again. For example, pg101 (equating MWH with horse power again) , pg102 calling a turbine a "2 MWH turbine" instead of "2 MW turbine", pg109 "in 2009 we had 1,000 GWH of generating power." p136 "13 GWH of power plant capacity", p137, p140, p141,
I'm sure that there's a reason for the typos, but I wanted to highlight these errors so that those of you how aren't in the electricity generating community don't get confused.
And now, I'd like to discuss the shear level of paranoia in the book. For example, on pg 40 and pg 63, he states that he thinks that J.F.K. was shot because he wanted to change the Federal Reserve, and print silver currency. He's also afraid that a small cartel of bankers will kill members of the news media if they talk about how the Federal Reserve actually works. (This is some deep rooted paranoia. Like back in the days of 9/11 conspiracy theorists.) But let's follow James Roger's thoughts and see where they lead. If Kennedy was shot for wanting to print money, why hasn't every President since JFK been shot for printing money? Why hasn't Gov Perry or Congressman Paul been shot for trash talking the Fed? How can we have a serious discussion about the Federal Reserve system when there's so much paranoia on both sides of the discussion?
I think that there is a difference between paranoia, conspiracy and lying. We all lie. We lie to ourselves, to our friends, and to our families everyday. Politicians lie. I lie. Businessmen and women lie. Kids lie. Dictators especially lie, and will kill you if you catch them in the act.
Most of what we read everyday is probably a lie in some form or another. And part of our job is to figure out what the truth is. (Both the truth within and the truth without. And as Nietzsche said, "Remember that when you stare into the abyss, the abyss is staring right back at you.")
But there's a huge difference between thinking that somebody is lying to you (purposely or inadvertently) and thinking that there is an entire organized agency that is specifically out to kill somebody (even a president) just because they don't like a particular action. I think that the only way to combat severe levels of paranoia is through figuring out what the goal of life is. (For me, I believe that the goal of life is to grow life and expand it to other planets. Other people may have other beliefs that work for them.) Once you realize what the goal of life is, then you can stop being a paranoid android and start being a happier, fitter, more productive person. And I'm not being sarcastic, even though I'm quoting Radiohead!