Energy Is Money

On today’s show we’re talking about what is money, and what is economic output? On today’s show I’m going to put forward a monetary theory that might be worth considering in today’s environment of rampant printing of money.

In order for something to be considered money, it has to satisfy three criteria.

1. It must be a store of value
2. It must be a means of exchange
3. It must be easily divisible into small units

I think we would agree that the dollar and the Euro, and not even the British Pound are a very good store of value. They’re all depreciating assets.

It seems like we’re trying to make sense of our monetary system with increasing frequency these days. The global dialog on crypto-currency has certainly brought the discussion front and center.

But when we talk about money and go back to the early economists over the past couple of centuries, you will come across the labor theory of value.

Two pre-eminent economists at opposite ends of the spectrum both subscribed to the labour theory of value. Adam Smith was a free market capitalist and Karl Marx was decidedly at the socialist end of the spectrum.

Since most items in the 1800’s were manufactured using human labor in some way, the idea was that the value of a commodity was determined by and could be measured objectively by the average number of labor hours necessary to produce it. In the labor theory of value, the amount of labor that goes into producing an economic good is the source of that good's value.

But today we can easily separate the notion of cost and value. Tying value strictly to labor input clearly misses the notion of value to the end customer. Should a glass of water be free? Or is a bottle of water fairly priced at $1.00? The labor theory of value would suggest that its value should be linked to the amount of time it takes a person to fill the vessel that carries the water.

We no longer link the dollar to gold and silver. Starting in 1878, the US dollar was actually a silver certificate redeemable to the bearer on demand for an ounce of silver.

In 1963, the US congress passed a bill repealing the silver purchase act. The US was running low on silver bullion and the US dollar was no longer linked to silver reserves. Along the way, the amount of silver backed by a silver certificate also changed as the currency was debased.

Today of course the US dollar is no longer an asset. It’s a promissory note, it’s a debt instrument.

Almost 1/3 of the US dollars issued since the declaration of Independence, over 200 years were minted in the past year. 2021 appears to be on track to mirror last year in terms of printing of money. We’re not two weeks into the new year and another $1.9T in spending has been proposed.

With a new administration in Washington, there is a lot of talk about the need to reduce greenhouse gas emissions, something I entirely support.

But here’s another inescapable fact. For every unit of economic output, there is a corresponding consumption of energy.

But simply making it difficult or expensive to burn fossil fuels misses the economic value of energy. If you turn off energy output, you’re reducing the economy by that amount. He who controls energy controls the economy.

Energy is money. You can’t accomplish anything in today’s economy without energy.

So why are we not using units of energy as a means of exchange? Why are dollars not a claim on units of energy?

Now I’m not suggesting that we barter with lumps of coal or a cup of gasoline. That’s about as convenient as a bar of silver. We can still have units of currency that are paper money, or even digital money. But what if we tied the dollar to a unit of energy?

Energy is the great equalizer. Energy is required to produce food. It’s required to transport goods to market. Energy is required to listen to this podcast.