Every time we add our own labour to a product or perform a service we expend energy and increase the overall entropy of the environment. Every time we exchange money for product or service, the legal tender we use represents payment for previous energy that we expended. Money, after all, is nothing more than stored energy credits. – Jeremy Rifkin, Entropy: A New World View, New York: Viking Press, 1980
Money can be anything that people in a community will accept as carrying on its basic functions, which are to provide a unit of value, a medium of exchange, and a store of value. Throughout history many different forms of money have been created with a number of forms being used simultaneously within the same community. Each form has various advantages and disadvantages. These need to be reassessed with modern technology and in the context of the objective of creating for individual communities an autonomous banking and monetary system.
Historically, units of value have been defined in terms of the weight of a given commodity of specified quality. Ideally, the commodity selected as a unit of value should also provide a stable value over time. As scarcity creates value and abundance reduces value, we need to select a commodity, the availability of which remains relatively stable in relation to all the other goods and services traded for money in the community. This requirement is described as the quantity theory of money. Simple stated this theory says that, other things being equal, prices will vary directly in proportion to the quantity of money in circulation.
Scarce, durable and dense metals, such as gold, silver, and copper, have been popular choices as hand-to-hand money. The selected metal would represent the currency in specie. When paper claims to such metal were created to become hand-to-hand money, the metal was referred to as the “hard’ or “reserve” currency, as it represented the physically commodity into which the paper money could be converted.
If our objective is to create an autonomous community financial system, the community should produce the commodity chosen. If a community cannot produce the commodity used as its specie or reserve currency, then the stability of its financial system will depends both upon its trading activities with other communities and the relative abundance of the chosen commodity in the eternal communities.
A classic example of how the value of money and so prices can be changed within a community by external and distant activities is provided by the Spanish conquest of South America in the 16th century. The importation of vast amounts of gold and silver form the new lands had the result of decreasing the value of European money by up to five times. This example also illustrates how the stability of a community monetary system might still be affected by outside factors even if the community could produce the commodity used as a basis for it money system from its own resources.
The inflationary effect caused by an eternal increase in the availability of the commodity used as a currency can be very much reduced with certain types of commodities in the form of services, which will be considered later. There are two other important lessons of history, which are worth noting.
One is that different communities have used different commodities as money at different times and often there has been more than one type of commodity in the same community at the same time. The other and related lesson is that in many cases the commodity used as money has been consumable rather than durable.
Throughout history gold, silver, copper and sometimes iron competed with each other in the same communities as money. In the United States during most of the 19th Century, both silver and gold were accepted as specie and/or hard currency for note issue. Congress established the parity value of gold and silver by specifying the weight of each metal required to be worth a dollar. But the market value of commodities changed at different rates. Such a situation required new legislation by Congress to recognise the realities of the market place in determining the relative values between the competing currencies.
Congress eventually overcame the problem by eliminating silver as an alternative currency at the end of this century. An alternative approach would be to do what national governments have done recently. They have allowed the relative value of their currency in relation to other currencies to be determined by market forces by allowing the exchange rate to float.
Before major discoveries of gold and silver were made in North America during the 18th Century, a number of other commodities were also used as money. Two interesting things about many of these commodities were that they were locally produced and had relatively limited lives as they were produced for the purpose of consumption. Grain, rice, tobacco, and cattle were common examples. Tobacco in specie was made legal tender in Virginia in 1642, and in 1727 became the reserve currency when tobacco notes were made legal tender. The notes promised to deliver to bearer on demand a specified weight of leaf of specified quality.
The idea that money should have a limited life was put forward during the Great Depression in both Germany and the U.S.A. on the assumption it would force people to spend and so generate economic activity. An advantage of using a consumable commodity as a basis for a currency system is that is that it could provide a way of controlling the volume of money created and so inflation.
In ancient and simpler times the durability of gold, silver and copper was a highly desirable attribute in using these metals as money. The use of gold for purposes other than money in the modern world is very limited except for jewellery and there are those who speculate that it may again be used as money. The current non-speculative commercial value of “consumable” value of gold is determined by the cost of competitive materials.
Because gold is both durable and little consumed the quantity of gold available in the world relative to other goods and services may be little affected by changes in economic activity. It is thus not well suited to be used as a basis for money. Ideally, the commodity used as a unit of monetary value should be subjected to market forces rather than government decree to maintain the stability of its value. In a similar manner market forces should maintain a constant ration between the quantity of the commodity produced and all other goods and services traded as money.
Commodities, which have intrinsic value are those produced only for the purpose of being consumed. The integrity of such intrinsic consumption values is ensured by the commodity having a limited life. In agricultural communities the use of produce such as grain, rice, tobacco, cattle, hogs, meat, etc., as currency also has appeal because the quantity of the local currency created will reflect to some greater or lesser extend the volume of economic activity in the community. However, the production of agricultural produce can vary widely and so suffer wide changes n value.
The development of modern commodity markets with paper claims to such produce has created a de-facto alternative currency system for those commercially involved as producers or processors. For others trading in the commodity market, the volatility of such commodities is of greater concern as they are exposed to the considerable costs of delivery and storage.
Another option for basing a currency system is provided by services. Generally, these can only be produced as they are consumed and so avoid wide changes in value and the cost of storage associated with physical commodities. The most obvious service to consider is human labour. An individual could create a contract note to provide specified hours of a specified service. If these services were deliverable to the bearer of the note, then the note could be exchanged (sold) by the creator of the note for other goods or services.
The number of situations where such arrangements could be practical is quire limited. As one hour of one person’s time may not be worth one hour of another’s, a currency based on labour hours does not provide a useful unity of value. There is an additional problem created in modern societies where the output of goods and services produced by an hour of human labour depends very largely on the technology employed. The level of technology thus determines the value of labour.
However, to increase productivity, improved, and so generally more expensive technology will be required. This in turn will require a greater volume of money to finance the purchase of the improved technology. Price stability can thus be maintained by having a financial system which will automatically create more money to finance improved technology which increases output so as to maintain the ration of the volume of money to the volume of goods and services. This illustrates one element of the very intimate relationship between technology, money and the financial system, which needs to be recognised in designing an autonomous banking and currency system. The volume of goods and services produced in modern communities is determined more by the technology than by the labour hours expended. As the volume of goods and services increases, the volume of money will also need to be increased to avoid prices decreasing.
With much modern technology the volume of output is quite independent of human labour except that required for repair and maintenance. The automatic elevator is an example of labour in the form of attendants being entirely eliminated. These examples are becoming more and more common as machines replace people and robots replace and repair machines and even run factories. Today there now exists the opportunity for any community in the world to produce electrical energy without any human labour on a continuous basis by the use of wind, solar, hydro, or wave generators.
The production of electrical energy has now become a basic activity for all modern communities. Modern technology, using renewable energy sources, has made the cost of production relatively constant throughout the world. The technology of power production from renewable energy sources has diseconomies of scale and so favours small discrete autonomous communities. For this reason, the unit of electrical power, the Kilowatt-hour (Kwhr) has much appeal as a universal unit of value for an autonomous community banking and monetary system.
The owners of the power generator would create money. It would be in the form of a voucher or contract note to supply a specified number of Kwhrs at a specified time in the future. These notes would be created and issued by the owners of the generator to pay for its purchase and installation. The value of notes that could be issued for redemption in any given time period would be limited by the output of the generator. The notes with a specified maturity date would represent the “primary” currency. Such currency notes would mainly be held by investors, investment banks, and banks.
Commercial banks would hold the primary currency notes as a reserve currency in like manner to a bank holding gold or a merchant banker holding grain or other commodities. Similarly, the commercial bank would issue its own “secondary” notes, which would be based on the primary notes and which the holder could convert cash in to the primary notes or reserve currency (to be used to pay his power bills at the time specified). The secondary notes could be denominated in Kwhrs but without any specified redemption time. They could be used as hand-to-hand money in the community.
Some of the more important issues to be considered in comparing the suitability of Kwhrs or gold as a basis for a monetary system are set forth in the Table Advantages of Kwhrs or renewable energy dollars over gold dollars.
Advantages of Kwhrs or renewable energy dollars over gold dollars
|Evaluation||Kwhr dollars||Gold dollars|
|Unit of value||Kwhrs||Ounces/grams|
|Quality testing||Not required||Density|
|Intrinsic consumable||100%||Say 10%|
|Subjective value||Nil||Say 90%|
|Changes in consumption||Related to total economic value/GDP||Little relation to economic activity/GDP|
|Changes in production||Related to consumption/GDP||Little related to consumption /GDP|
|Rate of change in production||Relatively stable by region and in time||Fluctuates with region and time|
|Cost of storage||Not required||1% of value per year|
|Cost of insurance||Not required||1% of value per year|
|Cost of distribution||Increases with distance||Changes little with distance|
The renewable energy dollar would be far more democratic than gold dollars, as sun, wind, and/or wave energy is available to all communities in the world, whereas gold is not. It is also very democratic within communities since each individual could own his own renewable electrical energy source to supply his own needs and/or to supply to others.
In the United States, legislation known as PURPA (Public Utility Regulating Practice Act) compelled power utilities to buy and distribute power from individuals or groups who invest in generators to produce power from renewable energy sources. In principle, requiring the existing electric utilities with distribution facilities to pay a “fair’ price allows decentralised small producers to sell power on a competitive basis. This legislation provides a mechanism for facilitating the creation of community-based renewable energy dollars.
The total volume of paper primary energy dollars that could be created is directly related to the total installed capacity of electrical generators. The total installed capacity of electrical generators is, in turn, related to the total activity in the community. The volume of primary currency that could be created has physical limitations, which are related to the total volume of goods and services traded for money within the community. No such constraints and relationships exist with a gold-backed currency.
While some communities may have natural advantages over others in their ability to produce cheap electrical power, such differences would neither be as great or as volatile as that with gold or agricultural commodities. The community that produced the cheapest power would have the “hardest” or most valuable dollar in terms of its ability to purchase more goods and services in other communities. While one community could sell its cheaper power to another community, the cost of transmitting energy creates a natural limitation to encourage independent autonomous community production. Gold is not so limiting in this regard because it can be cheaply transported.
The possibility of using electrical energy as a basis for creating money has only emerged in the current century. In recent decades, this option has been considerably reinforced by advanced technology, which permits small renewable power generators to compete with large centralised generators using non-renewable energy sources. Non-renewable power sources are less suitable for defining units of value since a substantial proportion of their costs are fuel and labour, the value of which (relative to the original investment cost) may change over the life of the plant. Further technological advances could make small, decentralised, environmentally compatible energy sources even more competitive and so suitable as a universal democratic basis for defining a unit of value.
The new option provided by electrical power generation to create a unit of value and the attractions it offers are not presented with the idea that it should be the only basis for creating community currencies. A number of other options could also be used simultaneously and in competition. Some individual and/or communities may prefer to create and/or use other commodities as a basis for creating a currency.
However, the renewable energy dollar would appear to present a highly competitive option in providing a reference unit of value, whether or not it is also used to carry out the other functions of money in providing a medium of exchange and a store of value. If a community preferred to adopt a currency system based on gold, agricultural commodities, oil, or labour services, then kilowatt-hours of electricity could provide a universal reference unit of value between communities of the world and within communities.
No doubt other reference units of value could emerge with improved technology, as has happened with reference units of weights and measures over the years. However, it is quite possible that the need for an even more universally stable unit of value may decrease with changes in technology for a number of reasons.
Technology, which creates a more universally stable unit of value, will need to be even more highly decentralised and democratic than technology which converts sunlight, wind, and water energy into electrical power. Such technological improvements will inevitably be relatively marginal, since access to sunlight, wind, or water is as universal as the human species. Any improvements and/or cost reductions in converting environmental energy into electrical power will reinforce the autonomy of communities in establishing their own sources of electrical energy. This will in turn strengthen the unit of value in those communities in competition with all other global bases for units of value.
The importance of economic values, and consequently the need for precision in defining units of value, will likely decrease as the autonomy of communities increases. As a result, more emphasis will be placed on non-economic social contracts and non-economic considerations associated with the quality of life and the environment. This hypothesis could be formulated as a “law” of value in the following form: The need to define a unit of economic value within a community decreases in proportion to the economic self-sufficiency of the community. As a corollary, it could be stated thus: The need to define a unit of economic value between communities increases in proportion to their economic interdependence. As our current highly centralised economic systems create community dependency, there is at present a strong need to define stable units of economic value.
If we define an autonomous community as a modem nation state, then there are more complex forms of money, which can be considered. More complex forms of money can be created by basing a unit of value on a “basket” of commodities and/or services. The basket may well be all the goods and services exported by a country in a given time period to form what is referred to as a trade-weighted value of the national currency relative to other national currencies. This trade-determined basket is used to assess the relevance of the rate at which the national government will convert its currency into the currency of another government. The conversion rate is referred to as the parity value or foreign exchange rate, with the parity rate determined by the government as the official exchange rate.
The value of anything, be it a commodity or a currency can never be determined by the producer or creator of the commodity or currency, but only by the consumer or user. Thus, if the rest of the world does not require any of the goods and services a country produces, no foreigner will need to purchase its currency, and its currency will have no value for foreigners. The nationalised monopoly money created by governments today only has value to foreigners to the extent that foreigners wish to purchase the goods and services produced by the country. No matter what a national government may say, it is foreigners – not the government – who determine the international value of a nation’s currency. National governments may declare a rate at which they will exchange foreign currency into their own, but such official rates are still subject to market forces in the longer run.
The basket of goods and services exported by each country differs between countries and changes over time. The basket of goods and services produced and consumed by the whole world changes only over time and then relatively slowly. For this reason, proposals have been put forward to create a unit of value based on a basket of a specified number of commodities, with the proportion of each commodity in the basket being in proportion to the rate at which each commodity is produced and consumed in the world.
Such a unit of value has many attractions. It would be little affected by excesses or shortages of any one particular commodity but would keep fairly closely in step with aggregate economic activity. If it got too far out of step, then the commodities specified to be in the basket and/or their relative amounts could be changed. However, this is also a weakness. It means that there is no reference unit of value not subject to administrative discretion as to what commodities are used and in what proportions. Another problem may be the need to provide for physical delivery of the specified commodities to allow market forces to exert cheeks and balances on the volume of money created by the banking system. With modern commodity markets, arbitrage dealings, and related “paper” markets involving contracts to deliver commodities in the future, these problems could well be minimised.
Indeed, a very well-thought-out proposal for creating a currency based on a basket of commodities was developed in the United States early in the 1970s by Ralph Borsodi. Borsodi based his proposals on work that he had done with the world-renowned Yale economist Irving Fisher in the 1930s. A number of elements of this proposal were field tested in the small community of Exeter in New Hampshire for 18 months daring 1973 to 1974.
A paper certificate called a “Constant” was created as hand-to- hand money, with the local banks allowing accounts denominated in Constants to be opened. The value of the Constant was based on the market value of a basket of 25 commodities. The commodities and their amounts were listed on each certificate. They included such items as iron, aluminium, coal, oil, wheat, and sugar, with their relative volume reflecting the relative global production/consumption of each community.
The purchasing power of the certificate was based on the value of the specific basket of commodities and so remained constant relative to the average price of these commodities. During the term of the Exeter experiment, the purchasing power of the Constant increased relative to the U.S. dollar as the latter value decreased with the small level of inflation that existed at the time. The vital element missing from the Exeter experiment was the ability to obtain physical delivery of the specified commodities in exchange for surrendering the certificate.
The development of a monetary system based on the Borsodi experiment could provide a highly attractive, non-government-controlled, and competitive alternative to the existing government funny money systems to provide a choice of currencies within a nation. It could thus underpin financial stability by providing a fall back system for the present monopoly systems of national governments. However, because the Borsodi system is dependent upon advanced commodity markets, it may not be practical to set it in place during a collapse of the existing system, since commodity markets, in particular, and the economy, in general, could be in turmoil. The Borsodi system may also have less relevance to less well-developed economies and smaller communities seeking a simple, stable, and independent monetary system.
For these reasons we need to explore further the renewable energy dollar concept and other simple, commodity-based monetary systems, that could be used by most communities – on their own initiative – in the event of a collapse of the government monopoly money system. Such systems could well be developed and tested as a community alternative in competition with existing government funny money, as was done in the Exeter experiment.
Even in countries where governments jealously and assiduously protect the monopoly status of their bankable currency, there may exist many forms of non-bankable quasi-currency, such as food stamps, green stamps, rent vouchers, store currency, and various sorts of business tokens and vouchers. So development of local alternative currency systems could be quite legal in many forms and permit quasi-banking functions to be established.
The ability to create appropriate banking arrangements is possibly the most important consideration in selecting the basis for defining local, autonomous community currency systems. Even in small communities, it may be appropriate to have a number of competitive types of local currencies. While this introduces the need for moneychangers, there are many precedents to illustrate how such complications can be managed.
There is a number of offsetting benefits in having a number of competitive concurrent currencies in a community. It introduces market forces to provide checks and balances on the competing currencies. People will seek to keep using the currency with the best purchasing power and try to pass on the currencies that lose their purchasing power over time. In this way, both unsound banking practices and/or currency inflation are inhibited as the less sound currency will be less used. It is for this reason that people stop using government money when it rapidly loses its value, such as the instances mentioned above in Germany, Poland, and Argentina.
There are other, more parochial and practical reasons for using more than one currency in a community. This arises from the diverse needs of a community to obtain credit to finance the production of the different goods and services and use a currency, which is best, suited to perform. A currency based on each of the principal goods or services may be required to create the credits to finance their production. By creating paper money backed by the goods or services required by a community, the means for financing the production of such goods and services is also created.
Tobacco-growing areas could create and use tobacco dollars; other areas might create and use wheat, oil, coal, timber, or wool dollars, according to those commodities important to the area. Credit notes/money could also be based on manufactured goods or services. It is not uncommon to find bus, railroad, or airline organisations creating promissory notes to deliver travel service in the future for payment today, that is, an advance-payment ticket. If these were made negotiable, they could be used like money. The notes created would provide the finance to produce the goods and services required. Financing the means of production by such means also keeps the ability of a community to produce in step with its ability to consume and/or export. It also means that it is the private sector rather than the public sector that determines what type and how much of each type of currency is required in the community. This would eliminate the intrinsic inflationary structure of the present arrangement, where it is the government sector that determines the volume of money created. Governments will always find it easier to print money than either to increase taxes or reduce their spending.
Not all products and services will be suitable to provide the basis for a widely used currency. While the natural economic endowment of a community or neighbourhood will provide a basic constraint, other constraints are introduced by the need to provide banking facilities. Some commodities and services are better suited than others for banking functions are.
This article was prepared for a series of six day seminars organised by the E.F. Schumacher Society on “Tools for Community Economic Self-reliance” presented in various US States commencing in 1982 . Bill Mollison attended the third seminar held at Bard College, Annadale, NY in June 1983 where he coined the phrase “Earth Bank”. Shann Turnbull was a core faculty member for all the seminars and had first met Bill in Hobart in 1950. The article was first published by ultra right Australian Adam Smith Club in their Options, monograph series in June 1983 after having published another Schumacher seminar reading by the author in May 1983 on “What everyone should know about banking and money: Especially Bankers and Economists”. Most of the lecture notes for the seminars became chapters in a book: Building Sustainable Communities: Tools and concepts for self-reliant economic change that can be downloaded from https://ssrn.com/abstract=1128862. The concept of creating Kwhr dollars was first published in The Australian as an Opinion article ‘Let the Market Correct Itself’, p.8, May 25, 1977, Sydney.