Concerning the Nation's Currency

The Value of a Currency

There is much ignorance and confusion regarding money. So, I want to clear things up a bit.

Money is a medium of exchange. When a currency is the official currency of a nation, it is the currency that must be used by a citizen to pay any tax or other debt the citizen may owe to his or her nation's government. Additionally, a government may require by law that all commercial entities must also accept the nation's currency as payment for any goods and services they offer for sale; however, it is the payment of taxes that ultimately makes acquiring the nation's currency an absolute necessity.

Money has value. In ancient times, its value was typically based on the value of a physical commodity. Such commodity could be a precious metal like copper, silver, or gold. It could also be a vital commodity, such as salt or wheat. In fact, anything of value, even coveted seashells, can be used to define the value of a currency.

When a currency's value is based on a commodity, its value is known with certainty; We can say that the value of the currency is explicit. When a currency's value is not based on a commodity, its value is uncertain; In such cases, the currency is known as a fiat currency, and the currency's value can be described as implicit.

Note that the value of a fiat currency depends on the current market price of all goods a person might wish to purchase. Because the basket of goods a person might purchase varies from person to person, the currency has no absolute value; it depends on the individual. Furthermore, within any person's own basket of goods, various goods within the basket may be seen by the person as being overpriced or underpriced; consequently, the perceived value or purchasing power of a currency might be measured by different people using different commodities that they perceive as being "fairly priced".

The "Gold Standard"

Gold has long been used to define the value of currencies. Gold was preferred by kings because there was a relatively finite supply, and so it could be horded. Gold, unlike many metals, also did not rust, its purity could be determined, and it could be formed into rectangular bars that could be neatly stacked. By hording gold, a king could establish his financial dominance over all his potential rivals. And as long as jewelry covered with gold was lusted for by women and men, gold could be used to purchase goods, services, obedience, and loyalty.

While gold has long been preferred by monarchs, who wanted to be able to exercise absolute financial control over their kingdoms through their ability to tax and horde gold, it is not the best commodity for the average person. The best commodity for the average person in ancient times were things like wheat, salt, and cattle. The value of such commodities was well understood. Such goods could also be created by anyone, which meant people could easily create wealth for themselves. In contrast, when the currency required to purchase goods and services was controlled by a monarch, peasants had to sell their goods and services to the monarch at whatever price the monarch demanded.

Currencies Today

Most currencies today are fiat currencies. Governments prefer fiat currencies because the value of the currency is impossible to precisely pin down as it varies from person to person. And because the value is poorly defined, it is less likely that people will complain when the currency is devalued by actions taken by the government and/or the central bank. That is because people tend to blame "greedy" merchants and producers for price increases, not the government. However, when markets are highly competitive, all inflation can be traced back to those who have a hand in regulating the value of the nation's currency.

The Ideal Currency

Again, to be absolutely clear, fiat currencies, while preferred by governments and central banks worldwide, are not the ideal currencies for a nation's citizenry. Nor is a currency that can be used by a king to impose his financial dominance over his subjects through hording and taxation. The ideal currency for the citizens of a nation is one that is precisely defined relative to an essential commodity that cannot be horded but can be produced by anyone.

And today that commodity is electricity.

Electricity is literally power. It is an essential input in the production of virtually everything we own and consume. It is used to heat and cool homes, cook meals, power vehicles, provide light, transmit information, and operate computers. And virtually anything and everything one might possibly want can be valued relative to a kilowatt of electricity.

A Need to Scale

Like blood in the body, the amount of currency in circulation can stunt the ability of an economy to grow. The quantity of money issued and its "velocity" as it passes from one party to another imposes a limit on the total number and size of the commercial transactions that are possible in any given period of time. Consequently, the quantity of currency issued should ideally scale with the economy.

Note that a currency defined by the amount of gold that someone has horded cannot be expanded. And that limit on the amount of currency in circulation will inevitably slow if not halt an economy's expansion. That is in fact one of the reasons why countries abandoned the gold standard.

In contrast, the production of electricity scales with an economy. The more an economy grows, the greater its demand for electricity. And the greater the demand, the more electricity a healthy market will supply. That's because the supply of electricity is not finite; it can be increased. And what that means is that, if a currency is defined in terms of a unit of electricity, the amount of the currency in circulation can be increased by the government as an economy expands.

The Implementation

A nation's treasury can issue its currency either by lending it out and/or through government expenditures. And, when the value of a currency is defined in terms of a specific commodity, its value can be maintained if the government freely buys back its currency by providing the currency holder (i.e., the seller of the currency) with the promised amount of the specified commodity.

Thus, if the currency is defined in terms of electricity, the value of the currency can be maintained if the government buys electricity at a discount from producers and then sells it to consumers of electricity (including residential, industrial, and commercial entities) at the currency's stated value.

Note too that the government could also offer low interest loans to producers of electricity to finance capital investments. That would then help to guarantee an adequate supply of electricity at all times.

Because the currency would be defined as a quantity of electricity, the value of such currency could also be gradually reduced over time (e.g., by one or two percent per year). That would help to discourage any hording of the currency that might lead to instability. The government could also issue bonds at a slightly higher discount rate (e.g., three percent) to sop up any currency not returned to the treasury through taxation.

In an economy where the currency is defined as a quantity of electricity, "reserves" could literally be stored in the form of gasoline, coal, and fissionable materials. Renewable energy resources--like hydroelectric, wind and solar--would further guarantee that no long-term shortages would ever likely occur. Other valuable commodities, such as wheat and silver, could also be held "in reserve" by the government as their market prices would in theory be highly correlated to the price of electricity.

The Benefit

A precisely defined currency is ultimately the key to a nation's long-term prosperity. It contributes to stability in financial and other markets. It makes reliable long-term forecasts and planning possible for consumers and businesses. It eliminates the need for negotiated COLAs and complicated measures of price change. And it allows buyers of bonds and stocks to be more confident that the investments they are making today will not be undermined in the future by monetary decisions made either by the government or by a privately held central bank.

The Future

The only true roadblock to implementing an electricity-backed currency is ignorance and confusion. People like tangible things; things they can touch and hold in their hands. And shiny things; things they immediately associate with wealth. Most people also do not understand what makes a piece of paper money; they only know it is something that they can use to buy stuff with.

Of course, there may also possibly be some people who profit from chaos. They may like uncertainty. They may like pulling the carpet out from under people and watching them fall. And they may want to be able profit at other people's expense. But if such people do exist--and I suspect a few do--I would hope they would eventually realize that gaming the system in order to be able to sow chaos is a fool's game that no one truly wins.

In the final analysis, then, perhaps all that is required is that we provide everyone with a basic understanding of what money is and what makes for an ideal currency. And, if we do that, then perhaps we may eventually be able to redefine our currency and, in so doing, unlock our nation's full economic potential.