Comments
We welcome your comments and inquiries.
To John
Over the years I've come across this idea several times before. It is fundamentally flawed because a currency has to be exchangeable between one party and another. You can't exchange energy, and it's as simple as that. Indeed, the writer of the website, John Meyer, himself correctly summarizes what money is in one short paragraph:
Money has taken many forms. Basically anything which is representative of value and can be traded for a wide range of goods can be said to be money. From beads on a string (wampum) to sea shells (cowrie shells) to tokens and coupons and lumps of metal.
A large amount of what is on his website is well-written and entirely accurate, but how and why he jumps out of the physical world into energy is beyond me. If every product or service had universal value directly proportional to the amount of energy that went into their production then, I suppose, you could have a banknote currency based on energy. John Meyer is making exactly the same mistake that Karl Marx made when he valued things according to the amount of labour that went into it.
Keith
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Keith,
There are several levels of currency. The one most in need of an upgrade is the international reserve currency which is now effectively the US $. Replacing the US $ with a commodity based system would stabilize world finances and the world economy to a considerable degree. Gold has been used for that in the past and worked well for 4 decades last century until the US blew the system up.
Using energy warrants and then energy based currency for international transactions would bring the system back into some representation of reality. Domestic usages of energy pegged currency can come later but would be invisible to the user.
The most effective currency system in human history was probably that of the Egyptians based on wheat. Energy improves on wheat in every parameter and is even more pervasive, vital and accurately measured than any commodity in human history. By making energy the currency base, we are not representing all output or all assets as energy but for transactions, everything is pegged to energy.
I've had a long discussion with Prof. Bob Blair on this which will be added to the comments page hopefully within a week. Bob makes the case for using an hour of work instead of energy as the elemental base for currency so you might find this interesting.
Your comment "how and why he jumps out of the physical world into energy is beyond me" shows that we have totally different understandings of money as it now exists.
Energy is the real physical world and fiat currency is a promise printed by a system with no hint of how or when it will be redeemed. Fiat currency systems crash continually and this is largely due to the fact they quickly lose any connection to reality and when redemption time arrives, the system folds.
This won't happen with a real commodity based currency, it has never happened in history and it can't happen unless the commodity itself loses value or the supply becomes so constrained as to force an unrealistic contraction of economic activity.
Cheers,
John M.
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John,
I agree with your first statement.
Gold is coming back now, though. The European central banks are not selling it any more (and, according to rumour, are buying it -- certainly Switzerland is). When the new Euro currency started (only 11 years ago) the European central bank made sure that it has plenty of gold in its caults as back-up. The central banks of central banks -- the Bank for International Settlement -- supervises gold movements and gold accounts. China and Russia are buying it as the basis for a new world currency. Emergent countries are now buying gold as a hedge against a weakening dollar. Since Monday this week JPMorgan are accepting gold as collateral for loans -- very significant. All in all, gold is steadily making its way back as a valuable overt currency even though it has really never lost its credibility. It doesn't matter that it is scarce -- price adjusts accordingly -- so long as its supply is dependably low.
Well, Bob Blair will be making the same mistake as Karl Marx.
We don't disagree on what money is currently. As I mentioned before -- in the paragraph of yours I quoted -- you have already correctly defined what money (currency). It has got to be physical, it has got to be instantly transferable at the point of exchange, and it represents the market value of a product or service -- not how much energy was used in its manufacture or supply.
A new world currency doesn't have to be based on gold exclusively -- many other commodities would do. But gold happens to have emerged after several thousand years of trade (initially as status ornaments) as the best single material -- survival of the fittest. Gold became the basis of vastly extended trade between Europe, Islam and China (the whole civilized world) at the time of the Renaissance, and then again at the time of the massive resurgence of trade from about the 1650s and onwards. Without gold as the basic currency, the industrial revolution in 19th century England would never have taken place. It only broke down a few weeks into the 1914 war when England and other countries had to start printing money to pay for armaments.
Best wishes,
Keith H.
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Keith,
Gold and silver have had long runs just as cowrie shells have but they are really not commodities because they are not useful as anything else than currency and ornamentation.
Gold is used over 80% for non-productive applications. Gold prices will adjust to scarcity but this is exactly what you do not want because the scarcity is not related to use of a basic and essential commodity and is highly subject to speculation. We need a currency base which is a vital commodity whose real world use reflects the production of real goods. Any speculation would be very limited in impact and also very controllable.
This has not been possible before 1950 or so. But now energy is the lifeblood of every measured economy and it offers, for the first time in human history, the opportunity to have a liquid, scientifically defined, almost omni-present commodity act as a currency base. Witness the wheat currency of Egypt (probably rice currency in Japan and SE Asia) as well as the commercial commodity notes traded between merchants. Air would also be a good commodity base except it is free. Our greatest source of energy -- solar -- is also 'free' in that sense. But solar energy needs a great deal of work doing on it before it is usable.
Unlike energy, time input is not representative of real output but is a great measure of equality.
A gold revival is highly predictable given the debasement of the previous reserve currency (US $) but gold is just a fiat currency with a long time and geographical base, it doesn't reflect real output and changes a great deal in value.
Cheers,
John M.
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John
Cowrie shells (of a very particular type and size -- rare, and thus valuable, when collected by human divers off the coasts of Africa) have been in use as currency for many thousands of years following on from their use as ornamentation 100,000 years ago. As recently as about 1650 the banks of Amsterdam kept cowrie shells in their vaults as a valid currency alongside gold coins. Cowrie shells as a currency came to an end dramatically when European fishing boats started dredging them in their hundreds of thousands from sea bottoms. Gold, silver, precious stones, because of their geology, have always been rare.
I came to my views about gold not via economics but via anthropology. Human males (and Neanderthal man and Homo erectus) always have some form of bodily ornamentation to denote status ranking in their group or tribe. About 5,000 years ago, in several civilizations throughout Eurasia, gold emerged as the supreme ornamentation for high status and then, 2,500 years ago almost "naturally" became valuable currency also (because it could easily be chopped up into coins). Until last year, India was the largest importer of gold in the world, but still largely stuck at the ornamentation use of gold (mainly for family rankings within castes when parents choose marriage partners for their sons and daughters). Being an agricultural culture India never really needed much gold for currency purposes. China became the largest importer last year (as well as being the largest home producer) on two fronts -- official (for foreign currency reserves) and private. It is the latter which is the more interesting because here we are seeing the historical sliding over of gold for ornaments (for family status) into gold as currency (at present, slim 25g,50g, 100g gold tablets) taking place because its elite coastal class is becoming prosperous very quickly, and their paper currency is inflating. The Chinese have not had the 'benefit' of official propaganda as the West have had that gold is a 'barbarous relic'.
A currency base using a vital commodity has always been critical -- from the first flint axe-head onwards -- as a necessary factor of production.
No, gold is not a fiat currency! Governments can make gold an official currency, if you like, but can't manufacture it ad lib. Ever since 1914 gold has had an artificial value because Western governments have denied it a free market. Prior to 1914 gold had a rock-steady valuation. It always has, except for a period when the Spaniard plundered Aztec gold (where it was used as status ornamentation, not currency) and a vast amount of gold suddenly arrived in Europe. This huge inflation (devaluation) of gold in Europe largely stopped significant European-Arabic-Chinese trade in its tracks until about 1700-1750 by which time gold had become more widely distributed and gold was only available again from mining. From then until 1914 gold was rock-steady in its value. Today, gold is now finding its way back to the valuation it ought to be -- probably $20,000/ounce at least -- considering the vast inflation of banknote currencies since 1914.
Best wishes,
Keith
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Keith,
Gold's value is mainly as ornamentation and a means of exchange. It is relatively unimportant as an industrial commodity. Its price is largely a factor of its scarcity not its contribution to real goods output nor its cost of production. Although gold is not printed or issued by governments and therefore does not meet the conventional criteria for a fiat currency, it is, in effect, a fiat currency. Its value has been set by the world financial order as a currency. It's value is highly volatile over time but compared to individual national fiat currencies it is a model of stability hence its value as a reserve and worldwide trading currency.
As our economic and financial systems evolve, it is necessary to move beyond a currency system with the limitations inherent in gold. In the 21st century, energy is an improvement on gold as a currency base in very parameter. Gold has served its purpose just as cowries, wheat and knife blades have in the past.
We live in an ocean of low grade energy flows but only high grade deliverable energy is a commercial economic commodity. And it is now the most vital and pervasive economic commodity. 150 years ago, most energy was either locked into natural systems or only sold locally. It is now a base commodity traded in many forms worldwide. It is time for the world monetary system to recognize and take advantage of this new and permanent reality.
Cheers,
John M.