Gold or Electricity Backed Dollar

Gabriel Kazakias 08/25/11

Summarized from http://energybackedmoney.com/

The United States dollar used to be backed by gold; however, in 1971 the US officially withdrew its promise to convert dollars into gold. The US dollar is now considered fiat money because the value of the dollar is derived from legal tender laws that require people to accept dollars as payments of debt. Since there is no physical limit regarding the amount of un-backed dollars that can be created, there is very little control preventing inflation of the US money supply.

Although our economy has been dominated over the past few decades by inflating prices, we have still experienced glimpses of naturally deflating prices. Consider the price deflation that has taken place in the electronics industry over the past decade.

Regardless of whether or not deflation is evil or a necessary cleansing process, I think an ideal monetary system would be able to avoid excessive deflation as well as excessive inflation. One way for a monetary system to achieve this ideal situation would be to have the money supply increase proportional to the overall level of economic progress.

Like many nations, the history of the US monetary system is dominated by its association with gold. The primary benefit of a gold standard is that the limited physical supply of gold restricts a government's ability to inflate the money supply thereby making it difficult for the government to abuse its population with inflation.

"Henry Ford's conception of displacing gold money by a unit of energy stumbles and falls headlong on the threshold of its proposal." - The New York Times, December 6, 1921

Henry Ford in 1921 proposed a form of energy backed money. Thomas Edison was also interested in issues of monetary policy and "the energy dollar".  It is inspiring that these two highly gifted individuals who both brought fourth tremendous economic progress sensed potential with energy backed money.

Electricity is a well defined quantity that is currently sold by utility companies in the US in units of the kilowatt-hour (kWh), a well defined unit of energy. The US is not dependent on imports for its electricity needs. The kilowatt-hour has many characteristics that would make it an excellent form of representative money. A kilowatt-hour has real value that people benefit from every day. It is a well defined unit of account that can easily be measured and can not be counterfeited. However, the ultimate goal of storing anything is to be able to retrieve it when you want it and kilowatt-hours can easily and reliably be retrieved instantly from almost anywhere.

Let's suppose it was decided that each dollar should be backed by exactly 5 kilowatt-hours of electricity. In other words, for every dollar you own, you are guaranteed at least 5 kWh of electricity. This translates to a guaranteed price of $0.20 per kilowatt-hour.

As you will see, the proposed energy backed money implementation is a simple control system. Let's suppose the system is first implemented when the free market price of electricity is $0.12 per kWh. Since this is within the desired price range of between $0.10 and $0.15 per kWh no changes would be required in the money supply. However, if the free market price of electricity went higher than $0.15/kWh then that would indicate the money supply should be deflated. On the other hand, if the price of electricity went lower than $0.10/kWh then that would indicate the money supply should be inflated.

Increasing the money supply with an energy backed monetary system could be similar to how the money supply would be increased with a basic gold backed monetary system. In the energy backed money scenario the ability to back more money comes from economic progress with regard to electricity production.

Perhaps the best way to introduce this new money into the economy would be to reduce taxes. For example if the default amount of tax revenue necessary was $4 trillion and the free market price of electricity was such that it were justified to add $1 trillion to the money supply then you would reduce the taxes to $3 trillion and use the newly created $1 trillion to make up the difference.

If the price of electricity rose above $0.15/kWh then it would be desirable to deflate the money supply in order to bring all prices down in general which should result in reducing the price of electricity back to within the appropriate range. Basically the government would be pulling dollars out of the economy by some combination of reducing government spending and increasing taxes. In both cases the objective would be to keep the unspent money and the additional tax revenue outside of the economy until the price of electricity eventually goes down to an appropriate level.

Let us now summarize the Proposed Energy Backed System. The proposed plan would back the dollar with a fixed amount of electricity. The new role of the US monetary system would be to manage the money supply so the free market price of electricity does not exceed the guaranteed conversion price. It is a fairly simple plan that could be implemented right away.