Chapter 7

Energy Backed Money vs. Gold Standard vs. Fiat Currency

In this chapter I compare energy backed money with both the current system of fiat money and the former system of the gold standard. In particular I focus on the suggested implementation of energy backed money discussed in Chapter 6 which is to have the dollar backed by a guaranteed amount of electricity.

For each section I assign a grade to each of the three monetary systems being compared. The purpose of the grades is to quickly state my opinion and then provide some justification for my perspective.

Physical Limits on Inflation

Gold Standard: A
Fiat Money: D
Energy Backed Money: A-

Backing money with something of value such as gold or energy puts physical restrictions on how much the money supply can be inflated by governments. With the gold standard you need gold to create new money and there are definite physical limitations on gold mining. Similarly, there are physical laws of nature that put constraints on energy production. With fiat money there are no physical limits preventing excessive inflation.

Long Term Financial Planning

Gold Standard: B
Fiat Money: C
Energy Backed Money: A

It is difficult to make long term financial plans if you don't know the value of money in the future. For example, it is difficult to know how many dollars you will need to retire because you can't accurately predict the purchasing power of a dollar in the long term future.

With the gold standard you would have a pretty good idea about the long term purchasing power of dollars backed by gold because there are plenty of historical relationships between gold and things associated with standards of living.

Energy backed money would be even more connected with standards of living than gold. Keeping the purchasing power of the dollar stable relative to energy would benefit retirement planning.

Keeping the long term value of the dollar stable relative to energy could also help with business development. For example, consider the thought process of someone trying to decide whether or not to build a solar power array. They know how many dollars it costs to build the array and they know how much electricity the array will produce per month. They also know how much it costs to insure and maintain the solar power array for 15 years. The only missing bit of knowledge necessary to move forward with the project is the relationship between the dollar and electricity over the next 15 years. With fiat money there is no way to know. With gold backed money it is difficult to estimate. However, with energy backed money you would be able to make a very informed business decision about whether or not to build the solar array. Obviously not every business decision will be as closely connected to the price of energy as the solar power array example. However, energy is connected with lots of industries that would benefit from knowing the long term relationship between dollars and energy.

Flexibility with Monetary Policy

Gold Standard: D
Fiat Money: A
Energy Backed Money: A-

With fiat money there is tremendous flexibility to adjust monetary policy to try and solve financial problems because the money supply can be inflated or deflated at will since fiat money isn't forced to maintain a relationship with anything of real value. This flexibility does not always lead to good things. However, the criterion being graded is flexibility of monetary policy and therefore fiat money gets an "A".

With the gold standard there is very little control of the money supply because the money supply is determined by the amount of gold production as well as the supply and demand of gold among individuals and nations.

With energy backed money there is plenty of flexibility with the money supply as long as the price of electricity does not go above or below the desired range.

Mechanism for Increasing the Money Supply

Gold Standard: D
Fiat Money: A-
Energy Backed Money: A

I may be a bit harsh on the gold standard here, but I really don't like the mechanism by which the money supply is increased with the gold standard. I elaborate on this in Chapter 4, however, a short summary of what I take issue with is how new money is used to dig up gold and bury it in vaults. Whenever new money is created it is like a "tax" because it devalues existing money, and with the gold standard this "tax revenue" is spent paying people to dig gold out of the ground which then benefits nobody as the gold is buried away in vaults.

With energy backed money the new money won't be spent mining gold but instead could be used to reduce the tax burden or to fund useful things like repairing roads, bridges and schools. Also, with energy backed money the new money wouldn't be loaned into existence like fiat money but instead would simply be created with the goal of keeping the long term value of the dollar stable relative to electricity.

Helping the Dollar as a Reserve Currency

Gold Standard: A-
Fiat Money: C
Energy Backed Money: A-

Currently the dollar is slowly being replaced as the primary reserve currency of the World. This demotion of the dollar is likely to have significant negative impact on the overall standard of living in the US. The fiat monetary system of the US is not helping to reverse this trend because the fiat system enables excessive government spending and inflation of the money supply which devalues the dollar making the dollar more and more undesirable as a reserve currency. If the value of a dollar were stabilized relative to something of value such as energy, then the dollar would be more desirable to the world as a reserve currency.

The Common Sense Test

Gold Standard: B-
Fiat Money: D-
Energy Backed Money: A+

I give fiat money a "D-" on the common sense test because it makes no sense to back money with nothing. Money is supposed to represent value! The only reason I don't give our fiat money system an "F" is because for some strange reason people have bought into this fiat money concept for the past few decades.

I give the gold standard a "B-" on the common sense test because I don't think gold can accurately represent the purchasing power of the entire money supply over time. I don't see any way for the intrinsic value of a pile of gold in a vault to keep pace with the innovation and progress of what people are able to create. The only reason I was kind and gave the gold standard a "B-" instead of a "D+" in the common sense test is because the gold standard has centuries of successful history and the wisdom in that fact is definitely worth more than a letter grade.

This whole book is about how much sense it would make to back money with energy so energy backed money gets an "A+" in the common sense test.

» Continue to Chapter 8: Energy Backed Money FAQ
« Back to Chapter 6: Electricity Backed Dollar