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.
#30#