Thursday, January 03, 2008

The Power of Money

I have been thinking about hard currencies lately, and particularly the gold standard. The gold standard is inherently deflationary, because there will almost always be more things which people wish to buy with money than gold with which to purchase it. So what if we sought some other means of backing wealth. It should something widely, if not universally, accepted. It should have inherent value. It should be something that doesn't require storage (the "Dig in up in Johannesburg to bury it in Fort Knox phenomenon"), and something easily transmitted. I propose backing currency with electricity. Don't link your currency to the dollar--link it to the kwh.

5 Comments:

Blogger Philosopher Poet said...

However wouldn't different areas of the world/country/state/even city have widely differing values for electricity? The further away from a power station you are, the higher your "exchange" rate.

"It should be something that doesn't require storage"
*cough* Batteries?

If you have a chunk of gold, you will have a chunk of gold forever, it doesn't dissipate like electricity. How do you store/save electricity?

What if I build a (theoretical) lightning farm in my back yard. Can I essentially "print" free money?

The price of electricity fluctuates to widely to be used as a standard. Say you have solar power, your currency value changes according to how sunny or cloudy it is: wind farms for how windy it is ect....

An ice storm doesn't affect a bank vault full of gold. But now all your power lines are down: electric recession?

Need I go on?

10:10 PM  
Blogger Octavo Dia said...

However wouldn't different areas of the world/country/state/even city have widely differing values for electricity?

All monetary standards require the "enforcement" of the law of one price. Whether it is between states or between nations, the same problems apply. If you transmit power in large direct current cables over long distances, the loss is marginal.


"It should be something that doesn't require storage"
*cough* Batteries?


*cough* Generators?


How do you store/save electricity?

*cough* Generators? Norway, for example, stores excess wind power by damming up fjords and pumping sea water into them, only to send it back through generators when peak power is needed.


Can I essentially "print" free money?

If your cost is less than whatever the currency is linked to, you'd have an incentive to produce more until (a) the currency dropped and (b) your costs rose.


The price of electricity fluctuates to widely to be used as a standard.

The price of electricity fluctuates widely because markets are artificially separated. If transmission across state lines was permitted freely, the law of one price would prevail.


But now all your power lines are down: electric recession?

There are parts of Alaska that are isolated for so much of the year that people's personal checks are used as currency and traded around, with no impact on the value of the dollar. This argument is facetious. It is a small scale, temporary problem.

6:44 AM  
Blogger Philosopher Poet said...

Hmm, valid arguments, but something still seems not quite right to me.

Is not the value of gold directly linked to it's rarity? In theory a if one found an enormous amount of gold it's value would drop tremendously. Since the production of electricity in theory can become cheaper with advances in technology, would it not eventually devalue itself to a large extent? One kwh today would not be the same as one kwh three years from now. (Not that gold is any different, but it still has the appearance of greater lasting power.) Course the more I think about it the more I sense that it's all a shell game anyway, no matter what your standard is.

I like the theory, but I still question it's potential benefits and general acceptance. What would we actually gain by using the kwh vs gold? Would such a massive switch (with all the costs and obstacles to implementing such a system)be worth it?

12:37 AM  
Blogger Philosopher Poet said...

I was thinking about his again today. Perhaps instead of the KWH it should be the joule?

9:43 PM  
Blogger Octavo Dia said...

Is not the value of gold directly linked to it's rarity?

Somewhat, but also to its utility. Platypus dung is rare too, but nobody's trying to make more of it.


In theory a if one found an enormous amount of gold it's value would drop tremendously.

This happened only once historically, which was when Spain appropriated the gold of the New World. They suffered a bout of severe inflation, which, I might add, is considerably more rare than bouts of severe inflation in fiat currencies. The main problem with the gold standard is that it is inherently deflationary. Economies grow faster than the gold supply, so gold will naturally be more and more valuable. Electrical production can (and does) grow with the economy, so it will remain much more stable.


Would such a massive switch (with all the costs and obstacles to implementing such a system)be worth it?

The main advantage of a fixed currency is that it eliminates inflation risk. It drives up the costs of borrowing all around. If we suddenly managed to have a fixed currency, interest rates would drop 3% across the board. Plus, letting governments ticker with currency value as it suits them is rather dangerous.

8:00 PM  

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