In the previous posting on this subject, we discussed the single most important precondition to returning a currency to a fixed standard, which is returning the reserve currency to full asset backing. This naturally leads into today’s topic, which is what standard is best to use, and when to institute the chosen standard.
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| Okay . . .how do I make change? |
We can handle the first of these questions very easily. A standard for a currency can be somewhat arbitrary, as seen from the fact that such things as cattle, elephants, human heads, and lumps of gold and silver have been used successfully as measures of value.
We must understand, however, that a currency standard cannot be completely arbitrary. Since a currency — like all money — is a measure of value, what is chosen as a standard obviously must be something that has value.
Further, the value of the standard must be something inherent in the standard, not something that is imputed to the standard by some authority or other. That is why government debt (next to nothing at all) is the worst thing with which to back the currency as its value depends on the soundness of the credit of the issuing government. That is also why the current situation throughout the world is so dangerous to economic stability, for there is no fixed standard for most currencies and the value of the backing of most currencies is also not fixed.
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| Now yer talkin' |
Another essential characteristic of a monetary standard is that it is something in constant and stable demand. For example, using bottles of whiskey as the monetary standard (as has been done, along with tobacco, knives, shirts, and ingots of copper and bronze), while no doubt of recognized value and in constant demand in many areas would be of little use in Saudi Arabia or a “dry” city or county in America.
That is why we think that the kilowatt hour of electricity — the energy standard, a measure of electrical energy equivalent to a power consumption of 1,000 watts for one hour — may be the optimal monetary standard. Nevertheless, even though we think that the kilowatt hour (which we will abbreviate Kwhr) is optimal, there is still a problem associated with using it as a standard that must resolved before it can be implemented successfully. That is the fact that absent an imposed and often subsidized price, the price of electricity varies from region to region, even within the same country — and that translates into a non-standard standard, which does not make sense.
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| Power is money . . . |
We can illustrate this using the following charts. The first chart lists 1. some products with 2. different prices in Dollars, 3. the price of a Kwhr in Dollars, 4. the price of the product in Kwhrs, and 5. The price in Dollars if the fixed standard is implemented defining the Dollar as the value of ten Kwhrs. This last, Column 5, is the “control” column, as it will show what happens to each product price if an across-the-board standard of one Dollar to ten Kwhrs is imposed, regardless of the existing price of Kwhrs in Dollars in a particular region. Column 6 shows how the Dollar would have to be defined in each region that has a different existing price of Kwhrs in order to avoid chaos in the local pricing system.
We begin with a region where the price of a Kwhr is 10¢ and the Dollar is defined as the value of ten Kwhrs:
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REGION WHERE PRICE OF KWHR IS 10¢ |
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|
1. |
2. OLD PRICE |
3. PRICE OF |
4. PRICE IN |
5. NEW PRICE IF |
6. NEW PRICE IF |
|
PRODUCT |
OF PRODUCT |
KWHRS |
KWHRS |
$1 = 10 KWHRS |
$1 = 10 KWHRS |
|
A |
$ 0.05 |
$ 0.10 |
0.50 |
$ 0.05 |
$ 0.05 |
|
B |
$ 0.10 |
$ 0.10 |
1.00 |
$ 0.10 |
$ 0.10 |
|
C |
$ 0.25 |
$ 0.10 |
2.50 |
$ 0.25 |
$ 0.25 |
|
D |
$ 0.50 |
$ 0.10 |
5.00 |
$ 0.50 |
$ 0.50 |
|
E |
$ 1.00 |
$ 0.10 |
10.00 |
$ 1.00 |
$ 1.00 |
|
F |
$ 2.00 |
$ 0.10 |
20.00 |
$ 2.00 |
$ 2.00 |
|
G |
$ 5.00 |
$ 0.10 |
50.00 |
$ 5.00 |
$ 5.00 |
As you can see, defining the Dollar as the value of ten Kwhrs in a region where the price of a Kwhr is a tenth of a Dollar (10¢) means that there is no disruption in the local economy. Let’s see what happens, however, if we impose a standard of one Dollar is defined as the value of ten Kwhrs where the price of the Kwhr is 12.5¢, or an eighth of a Dollar:
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REGION WHERE PRICE OF KWHR IS 12.5¢ |
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|
1. |
2. OLD PRICE |
3. PRICE OF |
4. PRICE IN |
5. NEW PRICE IF |
6. NEW PRICE IF |
|
PRODUCT |
OF PRODUCT |
KWHRS |
KWHRS |
$1 = 10 KWHRS |
$1 = 8 KWHRS |
|
A |
$ 0.05 |
$ 0.125 |
0.40 |
$ 0.04 |
$ 0.05 |
|
B |
$ 0.10 |
$ 0.125 |
0.80 |
$ 0.08 |
$ 0.10 |
|
C |
$ 0.25 |
$ 0.125 |
2.00 |
$ 0.20 |
$ 0.25 |
|
D |
$ 0.50 |
$ 0.125 |
4.00 |
$ 0.40 |
$ 0.50 |
|
E |
$ 1.00 |
$ 0.125 |
8.00 |
$ 0.80 |
$ 1.00 |
|
F |
$ 2.00 |
$ 0.125 |
16.00 |
$ 1.60 |
$ 2.00 |
|
G |
$ 5.00 |
$ 0.125 |
40.00 |
$ 4.00 |
$ 5.00 |
Now we see a serious problem crop up. If we implement a standard of one Dollar equals ten Kwhrs when the actual value is one Dollar equals eight Kwhrs, one of two things happens. Either all prices have to be lowered to be the equivalent of prices before the standard was implemented (in which case the seller loses 20¢ on the Dollar in every transaction), or a different standard — meaning a different currency — is implemented just for that region and every other region where the price of a Kwhr is higher than a tenth of a dollar to keep prices at the same level (in which case the buyer loses 20¢ on the Dollar).
This problem gets worse the greater the differential between the standard price of the Kwhr and the local price of the Kwhr. Take, for example, a region where the actual price of a Kwhr is 25¢ but the new standard is a Kwhr is 10¢:
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REGION WHERE PRICE OF KWHR IS 25¢ |
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|
1. |
2. OLD PRICE |
3. PRICE OF |
4. PRICE IN |
5. NEW PRICE IF |
6. NEW PRICE IF |
|
PRODUCT |
OF PRODUCT |
KWHRS |
KWHRS |
$1 = 10 KWHRS |
$1 = 4 KWHRS |
|
A |
$ 0.05 |
$ 0.250 |
0.20 |
$ 0.02 |
$ 0.05 |
|
B |
$ 0.10 |
$ 0.250 |
0.40 |
$ 0.04 |
$ 0.10 |
|
C |
$ 0.25 |
$ 0.250 |
1.00 |
$ 0.10 |
$ 0.25 |
|
D |
$ 0.50 |
$ 0.250 |
2.00 |
$ 0.20 |
$ 0.50 |
|
E |
$ 1.00 |
$ 0.250 |
4.00 |
$ 0.40 |
$ 1.00 |
|
F |
$ 2.00 |
$ 0.250 |
8.00 |
$ 0.80 |
$ 2.00 |
|
G |
$ 5.00 |
$ 0.250 |
20.00 |
$ 2.00 |
$ 5.00 |
If losing 20¢ on the Dollar when the standard is defined as ten Kwhrs to the Dollar when the real value is eight to the Dollar was disastrous, losing 60¢ on the Dollar when the actual value is 4 Kwhrs to the Dollar is catastrophic. The only question is who you stick with the loss, not whether there is a loss. And if the real value of the Kwhr is two to the Dollar?
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REGION WHERE PRICE OF KWHR IS 50¢ |
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|
1. |
2. OLD PRICE |
3. PRICE OF |
4. PRICE IN |
5. NEW PRICE IF |
6. NEW PRICE IF |
|
PRODUCT |
OF PRODUCT |
KWHRS |
KWHRS |
$1 = 10 KWHRS |
$1 = 2 KWHRS |
|
A |
$ 0.05 |
$ 0.500 |
0.10 |
$ 0.01 |
$ 0.05 |
|
B |
$ 0.10 |
$ 0.500 |
0.20 |
$ 0.02 |
$ 0.10 |
|
C |
$ 0.25 |
$ 0.500 |
0.50 |
$ 0.05 |
$ 0.25 |
|
D |
$ 0.50 |
$ 0.500 |
1.00 |
$ 0.10 |
$ 0.50 |
|
E |
$ 1.00 |
$ 0.500 |
2.00 |
$ 0.20 |
$ 1.00 |
|
F |
$ 2.00 |
$ 0.500 |
4.00 |
$ 0.40 |
$ 2.00 |
|
G |
$ 5.00 |
$ 0.500 |
10.00 |
$ 1.00 |
$ 5.00 |
As you can see, when the standard is 10¢ per Kwhr but the real price is 50¢ per Kwhr, the loss to either buyer or seller increases to 80¢ on the Dollar. That’s more than catastrophic, that is ludicrous to think that anyone, whether buyer or seller, would accept it.
To drive this point home, let’s look at it from a different angle. Let’s see what happens to the standard price of an item when the value of a Kwhr varies across regions
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WHEN PRICE OF KWHR VARIES BY REGION |
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|
1. |
2. OLD PRICE |
3. PRICE OF |
4. PRICE IN |
5. NEW PRICE IF |
|
REGION |
OF PRODUCT |
KWHRS |
KWHRS |
$1 = 10 KWHRS |
|
A |
$ 1.00 |
$ 0.100 |
10.00 |
$ 1.00 |
|
B |
$ 1.00 |
$ 0.125 |
8.00 |
$ 0.80 |
|
C |
$ 1.00 |
$ 0.250 |
4.00 |
$ 0.40 |
|
D |
$ 1.00 |
$ 0.300 |
3.33 |
$ 0.33 |
|
E |
$ 1.00 |
$ 0.400 |
2.50 |
$ 0.25 |
|
F |
$ 1.00 |
$ 0.500 |
2.00 |
$ 0.20 |
|
G |
$ 1.00 |
$ 0.750 |
1.33 |
$ 0.13 |
As you can see, no matter what adjustment you make, there is going to be a serious problem if you try to impose a standard price of anything when there is no uniform price in reality. The greater the value differential of the Kwhr from region to region as measured in a Dollar price, the greater the loss to somebody on each transaction, and the more opportunities for speculators profiting from price arbitrage.
The conclusion is inescapable. Not only must there be a 100% asset backing of the reserve currency before implementing any fixed standard, but there must also be uniformity in the value of the standard in all regions where the reserve currency is used. The problem is how to achieve this uniformity of value of Kwhrs.
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| The original "My way or the |
The easiest — and most expensive — way to achieve uniformity is simply to impose the standard or official price of a Kwhr. By setting the standard at an average or median price across all regions, producers whose price is higher than the average will have to be subsidized to bring their price down where their price is equal to the standard price. At the same time, producers whose price was lower than the average price will be subject to a special tax or surcharge to take away the unfair advantage. Obviously, both situations are politicly unworkable.
The only realistic solution we can see is implementing electricity generation systems that result in a naturally uniform market price everywhere the standard is to be implemented, or at least varies within a very small range.
Alternatively, the standard could be set at the highest price anywhere the currency is used, and the surplus profits that result in regions where the real market price is lower are either taxed away or distributed to local residents as rebates or non-taxed dividends, if the producer is owned by everyone.
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