Introduction to Energy Backed Money
"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
As evidenced by the 1921 quote above, Henry Ford proposed a form of energy backed money almost a century ago.
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. However, it is also a little discouraging to realize that two of the most successful people in the history of the world couldn't get more recognition for the concept.
Of course energy backed money was a much tougher sell back then for a number of reasons. For starters, the general population didn't really understand the importance of energy in their daily lives. Also, the US had been on a gold standard for a long time without too much to complain about. Now, however, things are quite different. For starters the US population is extremely familiar with how important energy is in their daily lives. Also, the general population is becoming increasingly aware that there is something inherently dysfunctional with our current fiat monetary system. People might now be more receptive to the concept of energy backed money.
Brief Overview of US Energy Statistics
The energy statistics for this section are all taken from the 2008 Annual Energy Review.
Energy is a large component of the United States GDP. For example, from 1970 to 2006 energy consumption averaged around 9% of GDP. In 2008 the primary sources of energy consumed in the US were petroleum (37%), natural gas (24%), coal (23%), and nuclear (8%).
Petroleum is used to produce things like gasoline and diesel fuel and is consumed primarily by the transportation sector. Very little petroleum is used in the generation of electricity. The US is heavily dependent on foreign imports of petroleum and in 2008 imported $338 billion worth of petroleum from primarily Canada, Saudi Arabia, Mexico, Nigeria, and Venezuela.
Natural gas has various industrial and residential uses and is also used for electricity generation accounting for 20% of all the electricity generated in the US. The US does not currently rely heavily on foreign imports of natural gas.
Coal is used primarily for electricity generation and accounts for nearly 50% of all electricity generated in the US. The US has vast coal reserves and does not rely on imports of coal.
Nuclear power plants account for around 20% of all electricity generation in the US. This sizable statistic is especially interesting when you realize the most recent construction permit for a nuclear power plant was issued way back in 1979. There are currently only 104 nuclear power plants operating in the US.
Hydroelectric power is the most dominant renewable energy source in the US even though hydroelectric power only accounts for 6% of all the electricity generated by the US. Other renewable energy sources such as wind energy and solar power are a small but growing portion of electricity generation.
The Ideal Energy Backed Money Representation
What would be the most desirable energy backed representation for the dollar? Obviously petroleum would be completely out of the question because the US is dangerously dependent on other countries for oil. Coal seems like strong candidate to consider because we have plenty of coal reserves, but people don't associate value with lumps of coal. People are familiar with the usefulness of natural gas but, similar to oil and coal, natural gas is a non renewable resource. Uranium isn't a good candidate because uranium is of very little value to an individual, and also the price of uranium is just a small faction of the costs associated with generating nuclear power.
It seems difficult to choose an energy resource to represent the dollar. A basket of energy resources could be considered but there are problems with fixing ratios of commodity baskets. Fortunately, all these energy resources can produce electricity, the most usable form of energy. 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. Also, renewable energy sources such as solar and wind, which will inevitably become more important over time, naturally result in electricity production.
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. It is divisible into smaller units and these units are equivalent to any other unit. The only major characteristic of money the kilowatt-hour doesn't excel at is that is isn't easy to store electricity. 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.
It is worth pointing out that the intrinsic value of energy backed money would slowly grow over time in terms of purchasing power because history has shown us that technology will continue to give you the ability to achieve more with the same amount of energy. For example, today's light bulbs can produce more light for less electricity. Getting more for the same amount of energy will continue with all sorts of things like transportation, electronics, farming, home appliances, and almost everything related to our standards of living.
It is also worth pointing out that the costs associated with many things in our lives are closely linked to the price of energy. Producing food requires energy. Purifying water requires energy. Transporting products requires energy. Getting to work requires energy. Manufacturing products requires energy. Keeping your home at a comfortable temperature requires energy. Cooking requires energy. Refrigerators and freezers require energy. It would be difficult to find something more closely connected to our standard of living than energy.
If the dollar were backed by energy then the dollar would represent something of real value. Backing the dollar with energy would also provide physical limits on the government's ability to irresponsibly inflate our money supply. An energy backed dollar would be globally recognized as a meaningful store of value with purchasing power that actually improves over time.
» Continue to Chapter 6: Electricity Backed Dollar
« Back to Chapter 4: Pros and Cons of the Gold Standard