The whole point of this blog series has been the importance of standards — weights and measures, moral, legal, and (for our limited purposes here) monetary. The bottom line is that the Number One Rule for money within a stable and progressive economy (using “progressive” in its late 19th, early 20th century sense of doing old things in new ways, not today’s sense of doing the worst possible new things in completely insane ways) is that all forms of money in an economy must be measured in terms of, and convertible into, a stable and elastic asset-backed reserve currency.
The institution of the Federal Reserve system in 1913 demonstrated it is possible to switch from an inelastic, debt-backed reserve currency, to an elastic, asset-backed reserve currency without having to demonetize the existing currency. That may be necessary in some cases, as when Hjalmar Schacht stopped the hyperinflation in Germany, but that’s on a case-by-case basis, and only when the existing currency is so badly inflated that it simply doesn’t make sense to continue using it.
It hasn’t gotten that bad in the United States — yet. The productive capacity of the country can still keep up with and support the trillions upon trillions of dollars of debt-backed money that has been poured into the economy to finance the ephemeral “economic recovery” that seems mostly to consist of Wall Street magnates making fortunes on the fluctuations of the stock market.
That cannot go on forever, however. Sooner or later it’s going to hit people that every cent of government debt (over $18.1 trillion as of Thursday, February 5, 2015, when we last looked) represents a cent of taxes that the government has promised to collect to repay that debt, to which must be added the cost of running the government in the meantime.
To restore a stable currency, two things must be done immediately: reform the monetary system, and reform the tax system.
We won’t go into the tax system in this series, except to say that all taxes should be merged into a single-rate income tax, with an exemption from taxation sufficient to cover ordinary costs of living, including education and healthcare, and a tax-deferral to encourage acquisition of capital assets on credit by people who currently have only their labor with which to generate income, and all corporate dividends should be tax-deductible to the corporation, but fully taxed as ordinary income to the recipient, unless used on a tax-deferred basis to acquire capital assets.
We’ve already seen how to shift the currency from debt to asset backing, so the only question there is what standard to use. It’s tempting to recommend gold. People understand it, and it’s been the traditional standard since the latter third of the 19th century. Before that, silver was the most widely used standard, but toward the middle of the 19th century production increased so much and the price fell so far that it became unworkable.
The problem is that gold, too, is subject to sudden price changes. Not because of sudden increases or decreases in supply, but because of speculation; gold is a victim of its own mystique.
Units of energy might be the monetary standard of the future. There are some good reasons for this. Dealing with the convertibility issue first, energy is something everyone buys, so there’s no question whether someone could convert his or her paper or electronic currency into energy, whether in the form of a gallon of gas, an hour of electricity, or a cord of wood.
Plus, the price level (the average of what the currency will buy), absent manipulation of the money supply, rises and falls with the costs of production. Energy is one of the key costs of production. If the price of energy falls, so does the price level, all other things being equal. If the currency were measured in terms of energy, stability would be more likely because only genuine increases in efficiency in production or use of energy would cause the value of the currency to change. Prices could fall, benefiting consumers without harming producers, while a rise in prices would be due to actual increases in costs that would have to be borne by both producers and consumers equally.
Just because the price was easy to find, let’s assume the new standard will be the kilowatt hour, or kWh. The price has been around U.S. twelve cents per kWh recently, so we’ll use ten cents to make our lives (and calculations) easier. Since we’re in the U.S., we’ll also use the U.S. dollar as the currency being reformed.
Obviously, we can’t just say as of January 1, 2016 (or any other date) the dollar will be defined as X number of kilowatt hours. That would simply fix an artificial price of the kilowatt hour, and be one more source of economic and financial chaos and manipulation.
No, we have to do a modified version of what the U.S. federal government did following the Civil War, combined with the reforms instituted (but never fully applied) with the Federal Reserve Act of 1913. This makes the task easier, because the mechanisms to carry out the reforms are already in place. They just have to be put into operation.
The process will be gradual and, under conservative estimates, take approximately sixty to seventy-five years, although the benefits would begin immediately. First, of course, establish the standard. Let’s say we want the dollar to be defined as the value of 100 kWhs.
That would mean a dollar once we’ve established parity between the value of a dollar in money, and 100 kWhs of energy, would be defined as the value of 100 kWhs. In today’s terms, a dollar would be worth ten dollars, while one cent would buy what a dime buys today. (We might even see the return of the half cent, which would buy what a nickel buys today.)
Immediately we realize a benefit. When the U.S. federal government began its program of deflation after the Civil War to restore parity of the paper currency to gold, those who could, hoarded paper currency. The projected returns, after all, were enormous. In 1864, one dollar in gold was worth $2.64 in paper. Officially. If someone really wanted gold, you could get sometimes $5 or more for your $1 in gold.
Someone who used his $1,000 in hoarded gold in 1864 to purchase $5,000 in greenbacks could have waited until 1879, and purchased $5,000 in gold with his $5,000 in greenbacks — and the price level had also fallen greatly by then, giving that $5,000 in 1879 the same purchasing power as $10,000 or $15,000 in 1864. There would be a clear profit in real terms of as much as $14,000, or $15,000, to round up. That was when $300-500 was a good annual income. A speculator could acquire twice as much purchasing power doing nothing as someone else would working his tail off for fifteen years.
So what’s the benefit in establishing parity of the dollar with units of energy? You can’t hoard energy. You can store it for a limited time, but stored energy tends to degrade. Gasoline, diesel, storage batteries, wood, hydrogen, and so on, aren’t as good when they’re aged. Sometimes they become worthless. Coal is better in that regard, but it’s a dirty energy source, and the move has been away from it — and the storage fees would probably eat up any speculative gains from holding it, anyway. You can’t stuff it into your mattress as you could $5,000 in greenbacks.
So the government decrees that, at such time as the price of 100 kWhs is $1, the value of the U.S. dollar will be set at 100 kWhs. We don’t have to worry that the price of the kWh will change in anticipation — no sane person would sell kWhs at one cent when the market price is 10 or 12 cents. Nor do we have to worry that speculators would immediately buy all the energy they can lay their hands on — what would they do with it?
Of course, if only the tax and monetary systems were reformed, we would be back to where we started in a generation. Even the soundest reforms cannot be sustained unless everyone has a stake in it, and that means an ownership stake — and that means an aggressive program of expanded capital ownership along the lines of Capital Homesteading.