The days of wampum are over. The roller coaster of the last 65 years should be telling us that we're on the wrong ride.
Currency grew out of the need to make goods and services portable. You didn’t need to carry the side of beef from the farm around with you to pay for debts, you sold it to the butcher who gave you some silver and let you walk away with currency. Gold and silver are comparatively rare, so attaching scarcity and value to the minerals meant that you abstract the value of items but keep it consistent.
The Gold Standard
The gold standard was not designed, but came from acceptance that gold was useful as a universal currency. From the days of the Byzantine Empire forward, the gold coin has reigned. Discovery of gold and silver brought wealth: the Spanish discovery of the great silver deposits at Potosi and in Mexico led them to work from the silver standard into the nineteenth century.
The gold specie standard began to sunset for the British Empire at the outbreak of World War I. Treasury notes replaced the circulation of the gold sovereigns and gold half sovereigns. Though the gold specie standard was not repealed. The end of the gold standard was successfully effected by appeals to patriotism when somebody would request the Bank of England to redeem their paper money for gold specie. Britain closed the gold standard in 1925, in conjunction with Australia and South Africa.
The British Gold Standard Act 1925 both introduced the gold bullion standard and compelled the authorities to sell gold bullion on demand at a fixed price.
During the first half of World War II, the UK depleted much of its gold stock to pay for the war effort.
That depletion of the UK's reserve convinced Winston Churchill of the impracticality of returning to a pre-war style gold standard. John Maynard Keynes opposed the gold standard and proposed that the Bank of England hold the power to print money. The same model he championed came with a warning, "By a continuous process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method, they not only confiscate, but they confiscate arbitrarily; and while the process impoverishes many, it actually enriches some". This describes the onset of inflation and the careening path of global economics since World War II.
With the path of World War II heading towards an imminent Allied victory, the Bretton Woods Agreement of 1944 established the ways nations would trade, the ways their currency would interact and thereby, the way their economies would run. The architects established the International Monetary Fund (IMF).
The IMF built an international monetary system based on convertibility of the various national currencies into a U.S. dollar that was in turn convertible into gold. The problem with one nation’s currency being the standard is that their sovereign policies influence their currency and thereby influence other nations. The best example came in 1971 with something known as “The Nixon Shock.”
The Nixon Shock
To stabilize the economy and combat the 1970 inflation rate of 5.84%, President Nixon imposed a 90-day wage and price freeze, a 10 percent import surcharge, and, most importantly, "closed the gold window", ending convertibility between US dollars and gold, effectively decoupled the gold standard established by the IMF. They made that decision without consulting the members of the international monetary system. On August 15, 1971, these moves were announced in a speech and the price-control plans proved very popular in the US and raised the public's spirit. Nixon was credited with finally rescuing the American public from a foreign-caused exchange crisis. Looking at that day from 40 years later, it seems like he only delayed the decline. War is pricey. The British Empire’s sun set because of their war debt. Nixon’s economy had to carry the cost of years in Vietnam and the Cold War build up. Bush sold off America to China to invade Iraq.
The US Dollar became the global currency because of the IMF. If you spend in Rupees, Yuan or Francs, it all converts via the US Dollar. When the US screws up their economy, the world at large seizes up. By making the currency of one country the standard it means our fates are tied to its fate. If we dump the US Dollar as the standard, then we’re going to stick some other country with the cheque.
When one nation gets to wield control of the world’s economy, every other nation is a vassal state. Countries cannot opt-out of the IMF approach without turning their bank notes into toilet paper.
The Kilowatt Standard
When we hinged our old economies gold there was a key problem. There is a finite amount of gold. In other words, only so much money is available. What happens when our population climbs and each dollar is hooked to a gold nugget somewhere? By decoupling the gold standard, we got onto a more dangerous ride. The stroke of a pen can evaporate millions of dollars. Currency is artificial and it doesn’t follow patterns found in nature. Humans create services. Humans convert items they find into goods (ore in metals; sun and dirt into crops; cat videos into Internet riches). Renewable materials regrow and get converted into new goods.
Our economy shouldn’t be hinged on a finite resource, it needs to be adapted to follow a fluid commodity because that’s what money is: it’s the conversion of labour into a portable benefit. Labour is the expenditure of energy. So why don’t we hinge our economy on energy?
We have accidentally had energy as a large part of our currency system. But that energy is tied to the US Dollar. Does $150 barrel of oil take you further down the road than a $75 barrel? The price different often doesn’t reflect demand but opportunists gaming the system. The first $100 barrel of oil was traded by a broker who did it to see if he could do it.
Oil is valuable because it replaces so much human labour. This is why we’ve seen our population growth: volumes of food, heating and construction were made cheap and possible by oil.
3D printing will get the Moore’s Law treatment. One 3D printer is already capable of making 3D printers. Within 20 years, FabLabs will be as common as dishwashers are today. Your recycling products will fuel the construction of new doo-dads, but the part of the formula we will all need is energy.
Fabricated products, their factories and the stores that sold them will be as common as typewriters are today. We’ll still have a need for some consumer products and some people will not have FabLab access, but the consumer product model is about to undergo a massive shift. We’ll still have groceries and large products (eg. construction materials, cars, FabLabs, etc.); but most of the stuff we used to spend money on will be built in the house.
Retail and manufacturing, like many product models, are about mark-up. Usually, the raw materials for a consumer product make up 20% of the price. Think about that. 80% of the price of that iPhone is mark-up. It’s not just profit taking: they pay for their labour, their R&D and their marketing. 20% of the price is the material. Arguably 10-30% of the price is energy (construction, shipping, etc.). If you took the old consumer model out of the picture, items could half in price. Our economy is eventually heading this way. Before the Internet, you’d have to rummage through libraries to get your facts. Now, they’re a Wiki away. We’ll pulling our activities off of Main Street and making them invisible parts of our home. Typsetting disappeared in the blink of an eye, becoming desktop publishing and then becoming layout in HTML or your favourite word processor. The shelves of WalMart are a generation away from becoming obsolete.
When we can get most of our goods and services from technology, our interface with commerce will be largely for energy. We’ll need it to power our homes and gadgets. We’ll need it to ship food and blocks of polymer. We’ll always need power, just as we always need food and shelter. Food and shelter keeps us on par with animals. Power will give us our nifty digital watches. Like food, we can generate our own power; but like food, it’s easy to let someone else sell you that. What’s the most equitable unit of power? The kilowatt hour.
Current Becomes Currency
The kilowatt is used to measure electricity, but it’s more general than that.
The watt is a derived unit of power in the International System of Units, named after the Scottish engineer James Watt. The unit, defined as one joule per second, measures the rate of energy conversion. Put another science-y way: it’s the force of one Newton moved one meter. All energy use (how far did the cow pull the plow; or how much juice does that laptop use) can be converted into watts. Just as the calorie counts on the backs of cereal boxes are kilo-calories, it’s likely easy to track kilo-watts.
A wind farm that can generate 1.25 megawatts of power could be built for a capital investment of less than $2 million, using 25 turbines that each average 170,000 kilowatt-hours per year. After the gold standard expenditure, the wind farm would yield perpetual kilowatt currency.
If, for instance, an average family needs around 5,000 kilowatt-hours a year to electify their home and its current appliances (eg. no FabLabs yet), the production of the wind farm could provide electricity for 800 families. An investor could aim to make more efficient power generation by building a nuclear plant.
The good news for most of us, is that this system is fair. Labour = electricity = dollars. The bad news is that a segment of our population would lose out. The age of confidence being a big factor in stock prices would be over. Speculators could not use money to earn money.
It’s easy to know much power is being used. We keep track how much gas is in the tank. We read the meter. We all pay for power as it is, but it’s not expressed as watts, but as dollars. Some manufacturers and retailers use arbitrage to make items cheap (eg. factories in India where labour is cheap). But remote construction may fall out of fashion. Things that come from far away will carry the kilowatt hours used in their transit. Shippers that have energy efficient vehicles can ship more items per kilowatt hour. Shippers with solar panels on top of their freighters will have even cheaper vessels to operate.
Dollars are vetted by the global economy and eroded by the same. Your $100 in a bank account could have bought you a nice suit 20 years ago, now that $100 will buy you two pairs of jeans. If you purchased $1,000 of shares in Delta Airlines one year ago, you would have $49.00 today. These stocks are not worth less-- the money didn’t boil off like water in a pot. People traded those shares and took profits from them, discounting them until only $49 was left in the equation. A kilowatt hour will power a gadget for a fixed amount of time. A kilowatt hour isn’t immune to inflation, but the inflation on the kilowatt standard is cool. If an old computer uses 200 kilowatts per hours it’s more expensive to run than a computer that outputs the same amount of work for 100 kilowatts per hour. The new computer becomes more valuable because of its efficiency. Or put another way, your old 200 kilowatt per hour computer is worth half as much now because it’s applied to the new standard. Instead of selling cars with plunging gas mileage, manufacturers will get the competitive edge by selling cheaper to run automobiles. If a truck is cheaper to run, the delivery company can deliver their good for less kilowatts and become that much more efficient.
WoW Has Shown Us The Way
They turn their effort into cash. With the dollar and gold standards, we have to get people to buy our stuff for them to have value. Supply and demand make the value of your money and your goods float on a sea of uncertainty. When times are tight, you can’t eat gold. You can’t put a quarter in the power outlet to electrify your house (I really don’t recommend trying). Kilowatts convert into usable items (power to run appliances, to power your trip to work, etc.).
In Word of Warcraft (WoW), gold farmers are players living in the Third World, using their Internet access to play WoW. They carry out mundane work to get money in the game and then sell that gold via eBay to get real cash. In game, vendors will not turn down your money and you can convert it into food or weapons. Outside of the game, the currency conversion is subject to the whims of eBay buyers.
The trick of generating electricity has become easy, but we’re always going to be energy hungry, so energy will always be in demand, as it as been since the days when people traded beans for oxen. Usually home owners can only discount their power consumption through solar panels and wind turbines. As the efficiency of those generators climb, the power yield can improve. On a large scale though, power generation can become an impressive economic driver. That is happening already, but kilowatts are at the mercy of currency sways. People who had high hopes of selling $120 barrels of oil are likely moaning when the price drops to $90. If you knew that today’s 10 megawatt hours was worth as much today as tomorrow, there would be more incentive to generate it.
Conversion to the kilowatt standard could begin any time. It may taken the courage of governments to be forward thinking. It may take a financial catastrophe (like the removal of the US Dollar as the IMF standard). How many kilowatt hours did it take to get this potato to the table? Look it up. Until people ran the math, there would have to be established kilowatt indexes like the calorie counts on grocery items. Communities can adopt a competing currency system based on gold, agricultural commodities, oil, or labor services, then kilowatt-hours of electricity could provide a universal reference unit of value between communities of the world trying monetary and energy policy into one coherent model. It would become a model based on the utility of the commodity (power) as opposed to its potential scarcity (like gold).
Winners and Losers
The energy efficient would be the clear winners. If you could deliver your products for little energy, the cost would be smaller than that of a competitor. Labour intensive work would be more expensive, but the same work carried out in a more efficient way would be cheaper or have a wider profit margin.
There would be many losers with this model, unfortunately, much like those slave owners at the end of the US Civil War who had to let their emancipated slaves leave. Since World War II (and the inception of the IMF), the best way to make money was with money. Socking it into stocks and mutual funds for a long time was the way to make huge amounts of cash. What a travesty. Because of inflation, a carefully handcrafted wooden box dives in value but IBM’s stock climbs and climbs? Three generations of people have made their money off of this scam. It fueled America’s war debts. It fueled the children of the Depression who have retired to live 30 years off of savings. It was supposed to fuel the Boomers, but that population swell is too big a burden. If I don’t work, I don’t earn. If a gas turbine does turn, it doesn’t generate energy and earn its keep. The gold standard is based on moving wealth from spenders to savers. If you use your money, you fall behind someone who lets it sit and accrete in an RRSP. The kilowatt standard would be about generation and human maintenance. If you don’t have a means to generate kilowatts, you won’t earn. Conversely, if you are good at setting up generation (directly or through abstraction) you could generate a lot of kilowatts for little direct effort. This isn’t about grandpa climbing on a roof and screwing in a solar panel. Generation can amount to funding something that creates power or earns a profit from efficient use of energy. What it does mean is that inflation would almost cease to be. 100 kilowatt-hours purchased today would do as much work as 100-kilowatt-hours in five years.
Where Do We Start?
We start at home with energy efficiency. Treat the gold standard like a car crash. The first thing you do is hit the brakes. You try to steer out of the way.
The first thing you do is hit the brakes.
Suck money out of the gold standard and convert to the kilowatt standard. If you buy less, you become less exposed to the gold standard impacts. Buy from the edge of the super market (vegetables, meats, dairy) and use your own personal energy to convert that inexpensive food into good edible food. If you can’t cook, you can likely cut up fruit or rip up lettuce.
Don’t buy the newest electronics. Just use your gadget until it stops working, then find a way to repair it. Don’t let peer pressure or marketing force you to buy the next iPod.
Go Digital. Think about how much energy goes into packaging and shipping DVDs and CDs. Find a media strategy that works for you (Amazon, iTunes, Netflix) and use it.
Go passive. Use awnings, open windows and white paint to abate the heat in summer. Go the other way in winter: keep the heat in as much as possible. Make salads in the summer and cook in the winter.
Go solar. If you can afford solar lights, solar panels and solar heating units, go for it. Make the commitment to keep those units in play until they’ve paid for themselves according to the gold standard. After that, they’re earning kilowatt hours for you and you’ve turned current into currency.
Collect The Rain - Don't fixate on scarcity.
Energy Alternatives - A great site full of products and how-tos on energy generation.
How about a kilowatt hour based currency?
The Atlantic is getting the idea...