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Will!

The ‘Energy Standard’: A thought experiment in energy-backed money.

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I’m a reader of Dr Tim Morgan’s Surplus Energy Economics blog. One of his central theses is that economies are energy systems, not monetary ones, and thus money is a claim on energy.

A post by @tomandluabout a currency pegged to the price of energy on the The Bubbly Bitcoin Thread led me to try the following thought experiment:

Imagine a monetary unit backed by a central bank which promises to provide the bearer on demand with a kiloWatt hour of energy in a previously specified form or forms. The value of this energy-backed monetary unit (EBMU) would therefore be fixed at 1kWh. The price of this EBMU in any fiat currency would be the price of 1kWh in that fiat currency.

The principle advantage I see is price stability:

As the capability of a state’s economy to produce energy and thus to produce energy-intensive goods and services increases so the capability of the state’s central bank to back EBMUs with energy increases. In effect, as the productivity of the economy increases so the monetary supply increases, avoiding deflation.

The price of energy is fixed in EBMUs, avoiding energy-price inflation. If the price of energy in a fiat currency rises then the price of the EBMU in that fiat currency rises too.

The EBMU would also offer independence from the petrodollar, which could be appealing for oil-rich countries such as Russia and Iran.

The principal disadvantage (from some perspectives) would be that there would be no ability for a state to devalue its money while on the ‘Energy Standard’.

Any thoughts?

Edited by Will!

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Energy backed currency was proposed by ecological economist Richard Douthwaite in his book "the ecology of money". One problem with it is that it could encourage more energy carrier production and therefore fossil fuel exploitation in order to expand / maintain the money supply, as gold exploitation was encouraged under the gold standard. Another is that of energy descent (peak oil, coal and gas), which would imply money supply falling as fossil fuel extraction rate falls.

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That looks like an interesting book, although Douthwaite has his Energy-Backed Currency Units valued in terms of Special Emission Rights with that value guaranteed by some international organisation, whereas I was thinking of EBMUs being valued in energy itself and guaranteed by a state's central bank.

I think we will continue to exploit energy resources for their utility regardless of the money supply.

A falling money supply would be desirable as Energy Return on Energy Invested falls. 

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