An ongoing debate in complementary currency circles is whether money can be based entirely on trust, or needs some objective standard or even physical back-up.
In this context, Open Capital advocate Chris Cook explains his ideas on using energy as a “Value Standard”, in the form of the “Petro”.
Chris Cook:
“First, there is a requirement for a Unit of Measure or “Value Standard”, as I prefer to call it.
This is purely an abtract Unit (ie “One”), but in my opinion it must necessarily be something to which people can relate. ie the question is, One What? A metre is a Unit of measure of length: a kilogram is a Unit of measure of weight, and we need a Unit of measure of Value in order to enter into exchange transactions at a price measured in that Unit.
Value, like Beauty, is in the eye of the beholder, of course, but I think there are three universal sources of Value.
(a) Location (space) – which has a Value in use, and in fact over two thirds of money in existence is backed by the use value of land, since it was created as interest-bearing loans secured over land/location and the buildings built on it.
(b) Knowledge – also has a value in use, whether the inherent intellectual capital we accumulate over time (ie experience, training, knowledge) and which dies with us,or the timeless objectified Intellectual Property which we may leave behind us;
(c) Energy – has a value in use, and on the one hand, is routinely invested in Location/Land (often in very profligate ways eg cement/concrete) and is also the “Unqualified Labour” which an individual may bring to bear, and which he uses his “Intellectual Capital” to deploy to best advantage.
I believe that Energy is the Value Standard to which most people will be able to relate and by reference to which they will exchange Value objects aka “Currencies”.
But of course, it’s not a matter of “either/or”: people always have used, and always will use, the Standard that makes most sense to them, and the evolution of a Standard will be an “emergent” process, I think. ie it’s about “What Works”.
The Value Standard involves the relationship between Subject (me) and the Object – the Value or “Money’s Worth” which I exchange by reference to the Value Standard.
A Currency is a Value Unit which people regard as acceptable in exchange ie it is “fungible”. The question then is what is the extent of that fungibility.”
The Petro, a Proposal by Chris Cook
“I believe that the “Global Reserve Currency” will be a Unit redeemable in energy value – lets call it an “Energy Dollar”.
Energy Dollars will be exchanged by reference to an Energy Standard I call the “Petro”.
The platform on which this exchange takes place will the “International Energy Clearing Union”, and transactions will take place on credit terms subject to a mutual guarantee.
Both holders of positive energy balances (energy creditors) and negative energy balances (energy debtors) will pay an amount into an “Energy Pool”, and this Pool will constitute a fund available to make the necessary investment in energy savings and renewable energy production to rectify the imbalances. This is of course exactly parallel to Keynes’ International Clearing Union, and his Gesellian approach to the (centrally issued “fiat” currency) Bancor.
The “Global Reserve” I am referring to will be an “Energy Pool”, constituting the Pool of future global energy production, both renewable and non-renewable.
My strategy for Iran, and indeed other countries who are (temporarily) rich in non-renewables and are profligate in their use, is to monetise this energy and issue it as an Energy Dividend to the population. In this way they will have to pay the “Global market price” (in a new global market not dominated and manipulated by middlemen) but will be compensated with the issue of units redeemable for energy (denominated in Petros) which they will be able to exchange for something of value – from anywhere in the world.
Note that these fungible Energy units cover only a part of the value in circulation.
There is then a question of “National Reserve Currencies”.
As I have outlined here:
I believe that the only viable solution to the Credit Crunch is to “unitise” the rental value of property. The effect of this will be to create Currencies redeemable in land rental value and the creation of a “Land Rental Pool” which may be monetised in order to develop and maintain economies. These, of course, have “exchange control” built in, since while they may be acceptable in other countries because they may wish to use them to acquire godds and services form the issuing country in due course, they are redeemable only in the country of issue.
Finally, there is the individual as source of Value, and he (individually) or they (collectively within “enterprises” defined by a protocol) may also issue Units redeemable in Value, being a combination of unqualified Labour value (energy again), Intellectual Capital, and Intellectual Property.
So the future as I see it is of a network of networks of communities within which Units of Value are exchanged by reference to a Value Standard on a generic International Clearing Union platform (incorporating a “transaction engine” -an Apache Money messaging server if you will) and decentralised “shared transaction and title repositories” – Riegel’s “Ledger of Ledgers” wherein is accounted who has what obligations to whom, and who has rights of use in what.
I believe that it is the Energy Standard to which most people will be able to relate. Moreover, I believe that the Energy Accounting implicit in the clearing of transactions using an Energy Standard will give us a simple route to transition from a carbon energy economy to an economy based on renewable energy.
Key to it all is the “Not for Loss” consensual partnership-based framework – the cross-border legal XML tying together semantically the disparate jurisdictions and enterprises instead of hardware and software – within which the platform and the participants will operate. There is no “profit” and no “loss” within a partnership -merely creation and exchange of value in all its forms.”
Contribution from Ludwig Schuster (see http://p2pfoundation.net/Schuster%2C_Ludwig), via email:
I like the way you pose the question:
“do cc’s need a physical back-up commodity?”
In a comment field I would like to add the following statement:
Backing a currency by a physical commodity is not nescessary, but it has some advantages.
On the one hand it strengthens the credibility of a currency, as in contrast to legal tender there is no legal compulsion to accept CC’s (so far). People might accept a “commodity backed” CC more easily because they can compare its abstract monetary value to a value that is of real use to themselves or to others.
On the other hand, that “trick” helps to avoid some of the major defaults of our current monetary system: It re-establishes the reciprocity between the monetary sphere and the real world economy.
By following the simple principles of a voucher system, it is much harder if not impossible to inflate such a currency: in energy terms, 1 kWh will always be 1 kWh.
From the business point of view, selling forward their production in advance equates a sales guarantee. Sales volume and prices would be relyable preliminary issues in operation planning and no longer be the speculative result of feasibility or market studies. Business failure will be very improbable.
And thus, more important, commodity backed money is subordinate to the actual need of economic growth and does not provoke growth itself.
It’s people’s demand that leads to the creation of the currency and terminates its extent, and not vice versa. Like Chris Cook put it already in 2005 (http://www.energybulletin.net/6118.html), “this would literally ‘reverse the polarity’ of Money to base it upon value, rather than upon a claim over value created by a bank out of thin air.”
In effect, vouchers beeing issued and redeemed continuously means money “getting born and dying” in one-to-one-correlation to the real economic activities; just like intended by Gesell and others, but much more precise and comprehensible. This could be the key constitution of a sustainable “renewable economy”.
From Thomas Greco, via email:
Dear Chris,
I thought we understood each other better but we keep stumbling over the same point.
You say,
“A Currency is a Value Unit which people regard as acceptable in exchange…”
That is a de facto reality ONLY because legal tender laws have been imposed that make political currencies self-referential. Such laws have obliterated the distinction between the measure of value and the political currency as a means of payment.
As I’ve said before, a currency is NOT a value unit. A currency is a means of payment that is DENOMINATED in a value unit. Just as cloth is measured in yards or meters, a currency is measured in dollars, euros, yen, etc.
To understand this one needs to think back to the time when the dollar, for example, was defined as a specified weight of silver. Any banknote denominated in dollars could then be evaluated in terms of that definition. If a currency issuer were to abuse their note issuance, their notes might pass in the market at a discount from face value, or be refused as payment entirely. Political currencies have been protected from that natural consequence by the imposition of laws that prevent discounting or refusal. Thus the objective standard is obliterated and the currency itself becomes the standard. But this is not the natural state of affairs.
We need to define and use (despite legal prohibitions) a value unit that is based on an objective standard. An energy standard is fine with me but you will need to define it in such a way as to make it operational. A market value is what we’re talking about, so what energetic commodity is actively traded that can be used as a value benchmark?
I dealt with this entire topic in part III and appendices of my book Money and Debt, which is available on my website.
Also, Riegel made some clear statements about valuation.
Chris Cook responds to Tom Greco, via email:
Tom
Riegel’s belief, as I understand him, was that it is the Individual who is the source of all Credit. So his assumption – as with the Neo-Classical economics which have brought us to this mess, and similarly the Marxist economics which therefore offer no practical solution – is anthropocentric.
ie Labour is the source of Value and the Sun of Capital goes around the Earth of Labour. Which is flat wrong, IMHO: Labour is merely one source of value.
>>
As Riegel says, a currency is redeemable in the market for anything the holder wishes to buy.”
>>
I disagree with Riegel, then.
A currency is redeemable for whatever the issuer backs it with. It is exchangable for anything the counterparty to the transaction may have for which the issuer agrees a price with him, by reference to a Value Standard. It may then be that the issued Unit enters general circulation, but it (or another from the “Pool” within the system) will always be subject to redemption by the Issuer.
In the case of a redeemable Unit issued by an individual or an enterprise (group of individuals connected by a protocol/agreement) this is either:
(a) the individual’s capacity to work (ie the individual’s work power – or “unqualified labour”); or
(b) the use value of his “Intellectual Capital” ie his accumulated knowledge, experience, gumption & innate talent, which is what makes his time valuable. So, someone qualified as a dentist is “worth” the same $5.00 per hour as me for pushing a broom around, but the investment by Society (or by the dentist himself) of $250,000 in educating and qualifying him as a dentist is a form of Intellectual Capital in respect of which I must pay another $100.00 an hour for the use; or more likely,
(c) both.
Where Riegel, the Neo-Classicals, Marx and all the rest (but not Binary Economists like Kelso) go wrong is that Labour is not the sole source of value.
The Commons of land/ location, the Commons of energy (renewable and non-renewable), and the Creative Commons of knowledge (objectified within “Intellectual Property”) are all sources of Value.
The exclusive use of a Square Metre of land/location for a year has a value in exchange. Moreover, it is this location/land value which backs more than two thirds of the deficit-based but land-backed money in existence, which was created through interest-bearing mortgage-backed loans by intermediary credit institutions. Note, as you know, that the burden of the financial claims represented by these loans was mathematically unsustainable (as has been the case throughout History), and I believe that we reached a point of “Peak Credit” in mid 2007, where the straw that broke the camel’s back was the fact that we ran up against finite energy resources.
I digress.
The use of energy also has a value in exchange, and moreover, it is a value which is not location-specific and – through electricity, and also through carbon-based and other fuels or “energy vectors” (hydrogen, ammonia) – may be transmitted across borders.
The innovation I am observing is the potential of emerging partnership-based protocols such as US LLC’s and UK LLP’s as “Open Corporate” frameworks for the creation of units redeemable in location value, and in energy value.
Such “Unitisation” will replace the conflicting claims of:
(a) Equity – being shares with a Par Value in fiat currency in the sociopathic enterprise known as a “Corporation”which “owns” producive assets;
(b) Secured Debt – created by a credit institution and secured by a claim or charge over the same productive asset.
with new, continuous, classes of Unit redeemable in location value (georaphically restricted in redemption, albeit potentially acceptable anywhere) or energy value (acceptable, and potentially redeemable, anywhere).
The source of these Units will be “Rental Pools” in common (not State) ownership and “Energy pools” in common ownership, and these Pools will be funded by payments (“Smart Taxes”) made by the users of the Commons for exclusive use:
(a) a Location Benefit Levy – or Land Value Tax;
(b) a Carbon Levy – analogous to a Carbon Tax.
In addition, payments will be made by users of the collective guarantee of mutual credit (the “Guarantee Society” mechanism) – by both seller and buyer. ie a charge is made on both positive and negative credit balances (a Gesellian approach).
A redeemable Unit, is of course an un-dated, or “open-ended” credit. A banknote issued by a bank as a credit intermediary is similarly open-ended, but the difference is that while a banknote issued by a Central Bank is acceptable in exchange generally by fiat, it is redeemable only for another banknote. We do not realise this, but the actual value provided by credit institutions is in fact the implicit guarantee of the borrower or buyer’s ability to pay. ie a framework of trust. I am proposing new community protocols I call “Guarantee Societies” as a framework of trust.
Sorry to have gone on at such length, but to address money in isolation, and not to address both the capital and fiscal systems with which money is integrated, would be to provide only part of the necessary holistic solution.
And another re-explanation by Chris Cook, provided via email:
The key is to realise that there is a distinction between what I shall call (in search of a common understanding) the Unit of Account, (or Unit of Measure) and the Currency, which I shall call the Unit of Exchange.
The monetary and fiscal architecture I propose and am working to implement is as follows.
Monetary
1/ Unit of Account – a fixed amount of energy which I term the “Petro” – consisting of the energy released in the combustion of 1 litre of n-octane at 20 degrees Celsius.
2/ Currency with global validity/fungibility will be a Unit redeemable in electricity and carbon-based fuels eg gas, gasoline, diesel fuel, fuel oil. While this Currency is not a Petro, it would have a fixed value in Petros. The result would be what the Technocrats called Energy Accounting.
(Note here that even though non-renewable carbon will decline, I believe that renewable bio and synthetic carbon fuels will gradually be introduced, for reasons of energy density and the need for an energy vector – although ammonia is also a perfectly possible energy vector).
3/ Currency with national validity will be Units redeemable in land rental value.
3/ Individuals and Enterprises will also be able to issue Units redeemable in what I might call knowledge value and labour value.
4/ The legal framework for the “Peer to Peer” issuance of all Units will be consensual and partnership-based, and therefore with cross-border application..
5/ Both issuer and receiver of Credit will be charged for the use of a mutual or collective guarantee.
Fiscal
I believe in taxing privilege, not people.
1/ A tax on the privilege of exclusive use of the Commons of land. A tax/levy on Land Rental Values would form the basis for State issuance of a Unit redeemable in Land Rental Value.
2/ A tax on the privilege of the exclusive use of the commons of non-renewable carbon. A tax/levy on carbon use would form the basis for State issuance of a Unit redeemable in Energy which would be redeemable (through energy transmission across borders) internationally.
3/ A tax on the privilege of Limitation of Liability. A levy on the gross revenues of “For Profit” corporations – would essentially form the basis of a Unit redeemable in knowledge value and other value in private ownership.
These are essentially the parameters which inform my advice to any policymakers prepared to listen !
Chris Cook, via email:
My “Carbon Pool” proposal is as follows.
A “Carbon Levy” is collected on carbon fuel transactions at a suitable rate, in say £ sterling.
(a) Renewables
The resulting “Carbon Pool” £ fund is then invested directly in viable renewable energy projects through a “Community Energy Partnership”, with professional assistance in terms of project appraisal.
So £1m invested at 50p for each Unit redeemable for 10 Kilo Watt Hours buys 2m Units, and pays for a 1 Mw turbine.
If the turbine produces 200,000 Units per year (a miserly 23% load factor) then that’s 4m Units. Deduct 10% for maintenance, and you still have 1.6m Units of “free” energy.
The community is receiving what is essentially a loan denominated in energy, which it repays by selling electricity to/through the Pool at the market price.
(b) Efficiency
The Pool makes “energy loans” – ie sterling is paid to do the work, but the liability is in 10 KwH energy Units.
The energy loan made to the property, not the owner, and is repaid through billing by (say) the electricity supplier, at the market price.
Say a loan of £5,000 per house to 100 houses raises £500,000 funds to install a local mini CHP. The liability is not in sterling but in 1m Units at an initial value of 50p.
The householders then pay to the utility at the market price:
(a) their energy bill – reduced by their savings through now having hot water/heating at greatly reduced cost;
(b) energy loan repayments at x Units per year (or sooner, if they like).
So the Carbon Pool is receiving energy (which it uses to redeem Units) from its investments in renewables, and sterling from its investments in energy savings.
(c) Energy Dividend
Community members will receive an “Energy Dividend” as an equal share of the Units flowing through the Pool.
They may:
(a) use these against energy consumed;
(b) use them to repay an “energy loan”;
(c) exchange them in the local shop or anywhere else that might accept them.
The outcome is that those who have above average carbon use make a net transfer to those with below average use, and the transition away from carbon fuels is financed painlessly over time. How painlessly depends upon how great the levy is.
“Deficit-based” carbon credits or emissions trading both attempt to monetise by fiat something with no intrinsic value (sound familiar?) . The Carbon Pool/Carbon Levy monetises the energy value of carbon instead – which has intrinsic value.