Chapter 6

Electricity Backed Dollar - Suggested Implementation in the United States

In this chapter I provide details about how energy backed money could be implemented in the US. There are many ways to implement the concept of energy backed money and what I present below is just something that makes sense to me. The plan I am about to describe would be quite easy to implement as it would basically require some legislation and some research to establish the actual numbers to use.

A Basic Implementation with Made Up Numbers

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. A lot of thought must go into deciding the actual number but for illustrative purposes I just picked a dollar to equal 5 kWh. This translates to a guaranteed price of $0.20 per kilowatt-hour. Let's also suppose the newly defined objective of the US monetary policy is to keep free market price of electricity between $0.10 and $0.15 per kilowatt-hour. It is important to clarify that this is NOT a price fixing operation but rather it is a total money supply management operation. Also, although a dollar would guarantee a certain amount of electricity, the reverse is not necessarily true because electricity would be sold at free market prices which would typically be lower than the guaranteed price.

As you will see below, the proposed energy backed money implementation is a simple control system. The control mechanism is similar to the cruise control in an automobile. Just like the car's cruise control uses the current speed of the car to determine how much to push down or let up on the car's accelerator, the proposed electricity backed dollar system mentioned below uses the free market price of electricity to determine how to inflate or deflate the money supply.

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.

Inflate the Money Supply When Electricity Below $0.10/kWh

As discussed in Chapter 3, progress and innovation combined with a fixed money supply will act to bring prices down. Therefore, in theory, a natural and ongoing component of the proposed energy backed money system would be to address how to increase the money supply so the free market price of electricity remains up in the desired range $0.10/kWh to $0.15/kWh.

I realize many people may be skeptical about the price of electricity decreasing because we are all accustomed to the price of electricity increasing. However, if the money supply is held fixed then history tells us that the price of electricity should drop. For example, from 1971 to 2008 the money supply increased by a factor of 13 whereas the price of electricity only increased by a factor of 5.[12] In other words, relative to the money supply the price of electricity has decreased by a factor of more than 2.5 which equates to an average price drop of more than 2% per year.

How Should the Money Supply Be Increased?

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. With a basic gold backed system a gold miner might mine new gold and the government could print up money to give the miner in exchange for the new gold. In the energy backed money scenario presented in this chapter the money creation would be similar except the ability to back more money doesn't come from new gold but rather 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. Of course I am sure there would be plenty of other ideas about how to introduce newly created money.

One needs to proceed with great caution whenever allowing the government to create money out of thin air. With the gold standard the government is kept honest by the actual amount of gold in vaults. With the proposed energy backed monetary system the government is kept honest by the free market price of electricity. If the government overinflates the money supply the price of electricity will go above the desired range and force the government to reduce the money supply.

Deflate the Money Supply When Electricity Above $0.15/kWh

In theory the natural trend is for the price of electricity to decrease so dealing with prices going above $0.15/kWh should be an unusual occurrence. Nonetheless it is still a possibility so the proposed energy backed money system needs to handle this type of situation.

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.

Energy Backed Money Meltdown (EBMM)

What if deflating the money supply doesn't prevent the free market price from moving all the way above the guaranteed conversion price of $0.20/kWh? Well this is something to avoid because this would mean the government would have to convert dollars to electricity at the official conversion price at a loss to the taxpayers. If the price of electricity rises above the conversion price then it should be considered an emergency situation. In theory this should never happen. However, the possibility does exist so let's address an Energy Backed Money Meltdown, referred to below as an EBMM.

The best way to avoid an EBMM is to never over inflate the money supply. Another way to avoid an EBMM is to encourage the production of things that generate energy such as windmills, solar panels and nuclear power plants. Another way to avoid an EBMM is to promote efficient use of energy. Another way to avoid an EBMM is to encourage economic progress which will bring fourth the natural trend in price deflation discussed in Chapter 3. Of course, another good way of avoiding an EBMM is to make it so neither industry, government, or people benefit from an EBMM. In spite of all these efforts to avoid an EBMM there may still be some shock to the economy that results in an EBMM so there needs to be a containment plan.

Energy Backed Money Meltdown Emergency

When the price of electricity goes above the official conversion price a state of emergency should be declared. The emergency sets in motion a system that impacts consumers, the government and also companies producing and distributing energy.

Under emergency conditions consumers of electricity will be required to pay the free market price for electricity with the understanding that they will be reimbursed for the difference between what they paid and what they should have paid. For example, if the price of electricity increased $0.03/kWh above the guaranteed conversion price of $0.20/kWh then people would pay the free market price of $0.23/kWh with the understanding that after the EBMM emergency is over they would be reimbursed $0.03 for every kWh they bought at $0.23. This is a temporary imposition on the consumer, but it still manages to uphold the guaranteed convertibility of the proposed energy backed dollar

If an EBMM were to happen the government would need to ramp up efforts to reduce the money supply such as additional tax increases and additional spending cuts. During an EBMM, the voting population should be very unhappy with their political leaders because they would be paying more taxes, getting fewer services and would be outlaying more for electricity than what the dollar guaranteed.

Something must also be done to make it so electricity producers and distributers don't have incentive to try and artificially create an EBMM. I'm not sure what the best approach should be but maybe have an EBMM trigger an immediate audit of their books to make sure no impropriety is taking place.

Summary of 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.

» Continue to Chapter 7: EBM vs. Gold Standard vs. Fiat Currency
« Back to Chapter 5: Introduction to Energy Backed Money