The E-Cat as Currency: An Economist’s View

E-Cat World invites readers to submit articles for consideration for publication. This is a response by Paul Bennett, PhD Candidate at George Mason University, to Raymond Aitken’s recent article, “Energy=Money? A Proposal for a New Currency Based on Rossi’s E-Cat Technology”

Raymond Aitken raises some interesting points.  There is a lot of somewhat fuzzy discussion of centralized power and centralized finance, which I will comment on further down, but the concrete proposal that he ends up with is quite interesting.

Could a currency be based on energy? Would it be a satisfactory currency?

The answer to the first question is a definite “yes”.  All sorts of things have been used as currency including sea shells, tobacco, coal, and worthless paper as well as gold and silver, copper and, yes, even nickel.  Some economists have discussed how money came about.  The most popular theories run as follows:

  • People wanted to exchange goods
  • It was difficult to exchange a chicken for a cart because the current owners would have to agree that they were worth precisely the same or find some combination of things that they could agree gave equal value (actually value is a subjective opinion and there is no such thing as an objective value, but it would take too long to elucidate that here)
  • Some goods were seen to be more tradable than others
  • After a time those goods were adopted as a currency
  • Still later, standard amounts of these goods were “coined” to represent known values to avoid the necessity to weigh the good for every transaction
  • Only later did the government step in and “declare” that certain things were “legal tender”.  They basically achieved this by declaring that this was the only form of payment that would be accepted in payment of taxes.

I agree that governments like to control the currency and have made a habit of declaring all other forms of payment as illegal.

I also agree that decentralized currencies would work very well.  In Italy, banks were permitted to print their own money until about 1980.  The notes they circulated were used as money by the local population and indeed were accepted by foreign banks – although the exchange rate was often very biased.  There is a whole literature on how such systems are self adjusting to achieve zero inflation or otherwise depending on the particular economist who is writing.

Would energy backed paper be a good currency?  On the plus side, it is very tradable.  Everybody needs energy and it can be subdivided easily.  It is clearly very liquid (in the financial sense).  On the negative side, it is not easily stored and it would probably not have a very stable value.

You have to realize that you cannot hand a person 15 Kwhrs of electrical (or heat) energy.  The paper currency would be a promise to provide that amount of energy.  Who could deliver such a promise?  If everyone owned their own E-Cat, they could dedicate the output of their E-Cat to anyone who presented them with a note drawn on their supply.  Even if people were all completely trustworthy, how much energy would it be reasonable to promise?  If I owned an E-Cat with a capacity of 10 Kw, would I be allowed to spend a day’s worth of production? A week’s worth? A year’s worth?  I wonder, if I wrote a note saying “I promise to pay the bearer 15Kwhrs of electrical energy” would anyone be prepared to give me something valuable in return? I doubt it.  IOUs are not very often traded – unless the signature on them is widely accepted as trustworthy.  This is where the banks come in. We are back to the discussion of centralization again.  But we have progressed.  Now we understand that if a currency is to be accepted, it must be issued by a trusted organization.

On the stable value issue, we have two problems.  The first is that the cost of energy with the E-Cat is expected to be about 1 cent per Kwhr.  This is a fraction of what it costs today.  So if we had an energy based currency today, we would expect a devaluation of perhaps 80% over the time it takes to introduce widespread use of the E-Cat.  It is likely that as the technology evolves the real cost of E-Cat based energy will continue to drop – possibly by a factor of 100.  Compare this to the cost of computing power.  If we had had a currency based on computing power we would have had inflation of ~75% per year for most of the years between 1970 and 2000.  This is not a very comfortable economy to live in.  Ask someone who has lived with hyperinflation.  The second problem is that demand is highly dependent on price.  Under this regime, the price of energy would always be constant.  All inputs to the production process would be priced in Kwhr equivalents.  It could work, but I think it would be not very convenient.

The fact that an enormous proportion of the commodity on which the currency is based is consumed in real time need not be an issue.  In colonial America, they managed to use tobacco without any problems and the example given in the article by Raymond Aitken (coal) worked pretty well until declared illegal.  On the other hand, the commodities that have been most widely chosen by civilization so far have been things that were prized for their beauty, those for which the proportion that was actually “consumed” was very small, and those that were rare.

On the whole, I think gold makes a much better basis for a currency than energy, but this in no way means that an energy based currency would be unworkable.

Would it have the effect that Raymond Aitken wants?

Unfortunately, I fear it would not.  As discussed above, the currency would not be the actual energy, but would be a piece of paper or digital certificate promising a certain amount of energy, and this piece of paper or digital certificate would only be worth anything if it were issued by a trusted organization.

Governments have managed to control currency whether it was based on gold or silver, or just fiat money.  This is not going to change just because we base our currency on energy.  I have more faith that the E-Cat is really a cheap source of energy than in the forecast that its use as a currency base will reduce the power of central government.

Paul Bennett

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