Tagged: gold standard
Perhaps it’s time to back the dollar with energy.
Every time you turn on the TV or surf the Internet, you are bombarded with news ofthe current economic crisis. Although the media has portrayed an abysmal future for us, President Obama has declared that he will fix it. Despite President Obama’s New Deal-like policies, it is still clear that the US dollar has not recovered from the financial meltdown. The idea that the dollar could be undervalued or considered weak seems preposterous. After all, wasn’t the US Dollar (USD) backed by solid gold at some point in time? How has the USD reached a point where its value fluctuates based on people trading the dollar instead of being valued at the same price as gold?
The Dollar – Off the Gold Standard
Unfortunately, the dollar is not backed by gold today. Despite starting off as a specie currency that is supported by equally valued goods or services, the USD has not been backed by precious metals since 1971. Facing a mountain of economic issues, President Nixon took the USD off the gold standard. At the time, he faced a trade deficit of $4 billion as well as unemployment and inflation rates of about 5%. In the face of these issues, the gold-backed currency was deemed too inflexible.1 His action removed the last fixed link between paper money and real goods. Since then, the US dollar has been a fiat currency, which is a type of currency that is not backed by any item of value. Instead, its value lies in a government’s order (fiat) and people’s trust that it must be accepted as a means of payment.2 As long as the government continues to guarantee this currency, the banking system is functioning properly, and most members of the general population agree to accept the fiat currency as a form of payment, the economy and daily life continue. Should any one of those conditions change and cause the currency to lose value – such as a weakened banking system – the entire economy may collapse.
The economic crisis we now face can partly be attributed to the USD’s valuation by agreement. Despite Nixon’s attempt at fixing the deleterious financial situation he was in and making the money supply less inelastic, he may have made the situation worse. Freeing the dollar from a physical standard has allowed it to be subject to wild inflation and fluctuation. In fact, Richard Douthwaite, an economist and co-founder of Feasta, The Foundation for the Economics of Sustainability, argued that our current economic predicament is caused by the fiat nature of not only the dollar, but of most global currencies as well. The world currency market, now detached from a concrete reality, fluctuates from day to day and causes economic misery.1
Let us examine how the USD’s value has changed since it was detached from the “concrete reality.” The value that dollar bills have is almost purely theoretical. Wouldn’t it then seem logical that the US can solve this situation easily by backing our currency with real goods (such as gold and other precious metals) once again? Although it may seem practical, the idea is not feasible. There is simply not enough gold or any other precious metal in the government’s possession to back all the currency in circulation. In other words, it just costs too much. When the dollar’s value was set in 1873 (the first time the USD was gold-backed), it was equated to 1.505g of gold. Though this seems like a small amount of gold, it is quite valuable. In reality, an 1873 US dollar would be worth much more today than the current dollar: $31.96 current USD/g gold * 1.505g = $48.10 current USD.3 This enormous depreciation of the dollar demonstrates why a precious metal system is not practical – it is simply too expensive.
Its impracticality aside, precious metal valuation is an illogical system, since it simply places an extrinsic value on the dollar. The pre-1971 dollar was based on gold, primarily because humans have placed such a high value on it. In truth, gold’s actual value to society can be debated. Although gold is useful today in industrial applications, research, and medical equipment, it is used in such small amounts that its high value cannot be justified. Furthermore, the gold industry is a major ecological polluter. Isolating gold has disastrous ecological consequences. In countries like Ghana, where gold is mined, toxic cyanide and acids leach into ground water, poisoning it and subsequently harming the nearby inhabitants. Despite all this damage, the gold really serves little purpose besides taking up real estate in vaults.4 The relative rarity of the metal thus cannot justify the inflated valuation of the metal or its use in backing currency.
Uranium – the Next Gold?
Perhaps, the dollar’s value would stabilize if its valuation were changed to one that is neither arbitrarily backed by agreement nor backed by a material of mostly extrinsic value. In 1947, the idea of using uranium to back currency was proposed by many
proponents of atomic energy.5 The idea was that atomic fission can convert a part of any mass of uranium directly into energy. Although it would be ludicrous to carry around uranium coins, which would likely be radioactive, a uranium-backed currency would result in a useful, real-world goods aspect to the value of the dollar. Unlike gold, uranium is useful by nature, resulting in a greater intrinsic value. Thus, energy, which is the ability to do work, could prove to be of more economic value than precious metals.
One of the most obvious reasons for considering an energy-backed currency is that energy is highly valued today. Nearly every part of daily life requires some sort of power input, especially after the advent of computers. Thus, the need for energy is ubiquitous. It is only logical that we consider basing currency on one of the most valuable modern commodities – energy.
The Solution: Energy-Backed Currency
Since nuclear energy has many problems associated with it (e.g., waste disposal), uranium is probably not the best commodity with which to back a currency. What if currency were based on energy in general, rather than uranium? The currency could be based on the Joule, which is the scientific unit of energy. This currency would, of course, have to be calibrated so that prices are reasonable. For instance, assume that 1 dollar is defined as the potential for receiving 1kJ (1 kiloJoule or 1000 Joules). If a product was priced according to 1 kJ equivalents, a gallon of gas (which contains 130 million Joules of energy) would be $130,000 and a candy bar (containing 1 million Joules) would be $1000.6 This is unreasonable, so the system could be accordingly adjusted so that $1 = 1MJ (1 megaJoule = 1 million Joules) instead of 1kJ, resulting in a price of $1 for a candy bar, instead of an outrageous $1000.
There are, however, two problems with this approach. First, if inflation is pervasive in a fiat currency system, it would also be present in an energy-based currency system, since maintaining a stable amount of currency would be difficult. If a nation wants more money, it simply could generate more energy. In addition, energy generation systems may become increasingly efficient in the future and consequently make a larger supply available than ever before. Arguably, this is analogous to a government simply printing money as needed; even though the “extra dollars” would be backed by generated energy, the increased supply of the dollar and the implicit decrease in demand for the dollar would decrease, leading to goods costing more due to inflation. This is better demonstrated by the quantity equation of exchange, MV = PQ, where M = quantity of money in a society, V = the average number of times money changes hands in a year, Q = the quantity of real goods/services created and sold during that year, and P = average price of those goods/services.7 If the amount of goods produced (Q) and the number of transactions (V) does not change drastically, increasing the amount of money available (M) by a significant amount would severely increase price (P), resulting in inflation.
Second, energy is too volatile and it cannot be stored very well. Energy storage technology today is primitive. Even today’s most advanced batteries, such as the lithium-ion batteries, have limited lives. Furthermore, energy is not a solid good: it is highly volatile. According to the second law of thermodynamics, if energy is left un-stored or unused, it dissipates to the surroundings.
Life With the Joule-Backed Dollar
Admittedly, this system is not perfect. Implementing it would require that economists devise strategies for dealing with situations, such as those mentioned previously, that can plague the system. If these limitations can be overcome, it would be advantageous to establish an energy-backed currency. For example, Douthwaite has already proposed a similar system based on the energy-backed currency unit (ebcu).8 In his system, an international body would grant a limited number of ebcus to countries based on their populations. This concept promotes energy conservation and trading. It also reduces fossil energy usage and the resultant green house gas emissions. It could conceivably even bring a sense of stability to the dollar’s valuation.
Energy will always be concretely useful for some purpose, ensuring that the dollar always has some value. Unlike the current fiat currency system, the government cannot arbitrarily decide that it will no longer honor an energy-backed currency (a danger of the fiat currency), because of energy’s utility. Consumer confidence would increase as people realize that their money is backed by something useful and that that their investments would not suddenly drop in value. Almost everything on earth, including life itself, is a product of energy from the sun. Napoleon Bonaparte, the ambitious general who nearly conquered Europe, even noted this: “If I had to choose a religion, the sun as the universal giver of life would be my god.”9 An energy-based dollar would, therefore, accurately – and poetically – be a representation of the lifeblood of our society.
1Douthwaite, R. J. (1998), Short Circuit: Strengthening Local Economics for Security in an Unstable World. New York: Green Books.
2Sullivan, A., & Sheffrin, S. M. (2003) Economics: Principles in Action. Upper Saddle River, NJ: Pearson Prentice Hall. 248.
3“Gold Price USD.” GoldPrice. Retrieved February 20, 2009 from http://www.goldprice.org.
4“Pollution Risk at New Gold Mine in Ghana Exposed.” (2007) Oxfam America. Retrieved 12 March 2009 from http://www.oxfamamerica.org/whatwedo/
5Oransky, I. (2009). Uranium as a Solution to the World’s Economic Crisis? Scientific American. Retrieved 20 February 2009. http://www.sciam.com/blog/60-second-science/post.cfm?id=uranium-as-a-solution-to-the-worlds-2009-01-09.
6Vidali, G. (1996). Rough Values of Power of Various Processes (watts). Retrieved February 20, 2009 from http://www.phy.syr.edu/courses/modules/ENERGY/ENERGY_POLICY/tables.html.
7McClelland, P.D. “A Layman’s Guide to the Keynesian-Monetarist Dispute.” Retrieved 19 March 2009 from http://faculty.tamu-commerce.edu/dfunderburk/572/yesi.txt.
8Douthwaite, R. J. (2000). The Ecology of Money. New York: Green Books.
9Boneparte, N. Napoleon Bonaparte Quotes. Retrieved March 2, 2009 from http://www.quotationreference.com/quotefinder.php?strt=1&subj=Napoleon+Bonaparte&byax=1.