A Brief History of the Global Monetary System
In capitalism, money is extremely important. As a result, its management must meet stringent restrictions. The current institutional structures that sustain money are the result of an implicit compact between the citizens, state, and private property owners that dates back to the establishment of the Bank of England in roughly 1700. The extent monetary system is flexible and durable because it incorporates ideas from opposing sides in theoretical arguments about the nature of money and the best way to control it. As a result, it has a hierarchical architecture that allows it to make significant claims about the legitimacy of input and output.
The Bretton Woods Conference of 1944, which established the International Monetary Fund and the International Bank for Reconstruction and Development, (presently World Bank) was a watershed moment in global collaboration. However, in the 1960s, the Bretton Woods system came under growing strain due to a lack of a dependable adjustment mechanism to address payment imbalances, as well as chronic imbalances in the balance-of-payments pressures faced by surplus and deficit countries. When the US government banned dollar-to-gold convertibility for other central banks in 1971, the system basically collapsed—a decision that would prove irreversible. The system that supplanted it can be thought of as a “non-system” with a variety of ad hoc configurations. This non-system has proven to be reasonably durable in the aggregate, but some of its key flaws continue to have dire repercussions for the global economy.
Features of the Bretton Woods Monetary System
- A global reserve system predicated on a dual gold–dollar standard, with dollar reserves serving as the most influential component of reserve buildup.
- A mechanism with fixed exchange rates that can be adjusted in the event of ‘fundamental disequilibrium.’ It was referred to as a system of ‘par values’ in the Articles of Agreement, but in economic literature, it was referred to as ‘adjustable pegs.’
- Current account convertibility would be gradually established in countries that lacked it—initially, the vast majority of IMF members. Contrarily, countries maintained their ability to monitor capital flows in order to protect themselves from speculative capital flows, and hence no commitment to capital account convertibility was made (i.e., in current terminology, no obligation to liberalise the capital account).
- Official balance-of-payments support, is funded by quotas, but narrowly tailored because they were only designed to cover current account deficits. Because country quotas were set one-quarter in gold and the rest in national currencies, and countries could initially access their entire quota, this essentially meant that they could use their national currencies to buy international currencies for a limited time—a system that can be thought of as a generalised swap framework.
The Rise of a Non-System System
The massive shocks and failure to reform in the 1970s were merely the starts of a series of dramatic changes in the international monetary system, some of which were closely linked to changes in the worldwide financial system. Three intertwined trends were particularly significant. The first was the substantial current account imbalances of the major reserve-issuing countries, which were part of greater global payment imbalances typical of the fiduciary dollar standard compared to the Bretton Woods years. This also meant that the United States’ net investment position deteriorated, going negative in the late 1980s.
The second was increasing capital tactility, which was aided by the growing liberalisation of capital accounts as well as the drive toward flexible exchange rates. One of the most significant ramifications has been the persistence of exchange rate volatility. The third was a succession of huge crises in emerging and developing nations, which were intimately linked to highly pro-cyclical external funding and made management much more difficult due to the absence of a suitable financial safety net and an acceptable sovereign debt restructuring process.
The international cooperation that was used to manage these changes was far from flawless. In terms of institutions, wealthy countries have emphasized their tendency to manage their coordination efforts through groups of countries with limited membership—now the G7 and its predecessor, the G5. This trend, fused with the fact that industrial countries stopped using IMF resources in the late 1970s, meant that IMF activities shifted to emerging and developing countries.
Features of the Non-System System
Thus, the ad hoc or de facto system that emerged had the following characteristics:
- A global reserve system based on an inconvertible (fiduciary) dollar—a ‘fiduciary dollar standard,’ as will be referred to here—but open to competitive reserve currencies in principle. This was supplemented by intermittent SDR difficulties, which, despite the explicit promise to make SDRs the system’s primary reserve asset, came to play a secondary role after a strong start. Gold was demonetized to a significant extent, but it continued to act as a speculative reserve asset.
- Each country has the freedom to set its exchange rate system as long as it avoids manipulation,’ a term that has never been properly defined.
- Consistent commitment to effective current account convertibility, which developing countries eventually agreed to, but continued freedom to restrict capital flows—albeit with increasing capital account liberalisation.
- Gradual increases in the scale of official balance-of-payments assistance, as well as the development of multi-year programs. The ability to control erratic financial flows necessitated stronger finance. Low conditionality to manage external shocks remained an element of the system, although it was quickly phased out. Quota increases and borrowing arrangements provided the additional money needed to fund larger programs.
- Increased surveillance, which has mostly been ineffectual in relation to industrialised countries, and little macroeconomic policy coordination has mainly occurred outside the IMF.
There were arguments from both sides on the coherency of both systems, making a case for or against them. Still, the fact remains- they are not adapted to an incredibly changing world economy that has been expandingly sucked into the black hole of technology. What can technology do? As the Seventh Kingdom of Life, complicatedly dubbed the ‘Technium”, technology has accelerated the maturation into what we now call cryptocurrency. But what does cryptocurrency have to do with energy? Everything- energy is the progenitor of cryptocurrency, particularly made famous by Bitcoin. But, is the former the “energy currency” dreamed of by the American industrialist Henry Ford in 1921?
An Energy Currency
At the most fundamental level, basing a currency on nature is not a far-flung thing to imagine. Why? The universe and all it contains is energy- it is the core of existence, it is the Original form factor, without it, there is none. Language is not enough to fully capture the essence of what energy is, indeed without veering into the realm of esotericism and paradoxical syntax. However, for the purposes of our discussion, we will restrict our understanding within the scope of sustainable energy and the monetary system.
The planet is in the midst of an ecological disaster. Our economic system fails to account for the natural resources that are essential to the flourishing of the human experiment. However, attempts to solve the problem, such as through environmental taxation (Cryptocurrency Could Help Transition the World to Green Energy talked about carbon offsets), ignore the tank in the room: the monetary system. Energy-related money provides a way to strengthen the monetary system’s attributes while also promoting the low-carbon energy transition that we desperately need.
In the rush towards net zero, one or more stable reference units of value for the planet’s natural sustainable resources are required on a global basis. Renewable energy, for example, is utilised to generate kilowatt-hours (KWH). This would aid in the ‘pricing of nature into markets,’ thereby increasing the economy’s ecological efficiency. Similarly, explicitly tying money to natural resources would demonstrate that such resources cannot be replaced for other inputs (labour or capital in the form of productive assets), a common misunderstanding in traditional economics. These models will almost certainly require top-down monetary reform to achieve systemic change in order to be effective. More research is needed, both on the concepts and on the practical implications of these notions.
Debit-energy currencies, in which units of energy are kept in a pre-paid form similar to bank deposits, could be useful at the local or regional level to promote more sustainable usage and protect against growing energy costs. ‘Credit-energy currencies,’ on the other hand, appear to be a potential way to support renewable energy investment.
These ‘self-financing’ currencies would be redeemable in local participating businesses as well as, in the long run, directly with local renewable energy suppliers. The Cryptocurrency Could Help Transition the World to Green Energy mentions XRP, Melanin, and the Whive protocol on how local and more narrowly focused energy currencies might be used to engineer a low-carbon energy transformation from the ground up.
A separate research focus is needed for these: how can we best capture knowledge gained, communicate said knowledge, reproduce and scale-up success, and transfer paradigms across national borders and institutional infrastructures? Distinct but interrelated currencies could be created as a form of payment without needing to be backed directly by energy if they are referenced to an energy standard, perhaps by the same ‘energy banks’ or at a national level. In this approach, the long-standing historical contradiction between using one type of money as both a store of value and a method of exchange may be resolved.
Distinct but interrelated currencies could be created as a form of payment without needing to be backed directly by energy if they are referenced to an energy standard, perhaps by the same ‘energy banks’ or at a national level. In this approach, the long-standing historical contradiction between using one type of money as both a store of value and a method of exchange may be resolved.
An energy standard? Yes. A universal global energy money system may be achievable and desired in the long run, but the most likely path will be through iterative experimentation, invention, and the creation of a variety of new energy currencies. Energy money has the ability to fix some of the world’s greatest structural problems, and it should not be left to academics and policy wonks. A collaborative effort is needed towards an energy standard- this state of affairs can be defined by what H.G. Moulton in 1935 called “procreative property”, “the processes by which society expands its power to make nature yield its resources more abundantly”.
We may consider this the ultimate test of any money system – whether it encourages or inhibits such activities – therefore, does cryptocurrency mining fulfill this point of view? The current system is shown to be ineffective. Energy-related money has a lot of room for improvement and hence deserves to be given more attention. The concept of combining energy and money is not new, but it may be one whose time has come.
Economic activity is inextricably related to the ecological system on which it relies. Nevertheless, the financial system is not. The relevance of this relationship is not adequately captured by standard economic theory, limiting the efficiency of typical policy solutions. Inflation, asset bubbles, and banking instability have resulted as the monetary system has become increasingly disconnected from the economy’s productive capacity. As such, the problem of ecological overshoot is exacerbated. In the shining visage of overwhelming evidence, the linkages between economic activity and nature, as well as between money and economic activity, are still poorly understood. At the national and international echelons, ecological economics and pragmatic monetary economics remain on the periphery of policy and academia. This must be changed.
An energy currency also termed as a metabolic currency has to meet specific design features to begin to make sense. At the very core of it, we might imagine a set of pairwise interconnections seen between economy, nature, and money, where we can express influences in both directions connecting the economy and the natural world, including the economy and money. Energy currencies look into the missing third relationship between money and nature. Wait, what? Did you say metabolic? Yes. In Biology, we learn about the metabolic rate, which is the number of calories required to keep you functioning when the body is at rest. The same applies to the earth.
The primary concept behind metabolic currency is that if people tied currency, inflation, and economic growth to Earth’s metabolic rate, economic growth would be organically established at a rate that is both environmentally friendly and human-sustainable. This is a rational and buildable answer to some of our largest economic and environmental dilemmas, consisting of a gentle and graceful economic transition. Rather than having debt and an interest rate as the foundation of our economy (which demands exponential growth), perhaps we should construct our economy on Earth’s metabolic rate. Wouldn’t this be better? Alas! Since when have humans done what is best for them?
In 1969, R. Buckminster Fuller officially suggested the Global Energy Grid, a metabolic currency based on electricity. According to Fuller, “Because energy is wealth, the integrating world industrial networks promise ultimate access of all humanity everywhere to the total operative commonwealth of earth.” In further response to an 11-year-old curious boy, he said:
“I always try to solve problems by some artifact, some tool or invention that makes what people are doing obsolete so that it makes this particular kind of problem no longer relevant. My answer would be to develop a world energy grid, an electric grid where everybody is on the same grid. All of a sudden there would be no problems anymore, no international troubles. Our new economic basis wouldn’t be gold or dollars; it would be kilowatt-hours.”
Brian McConnell presented a Joule Standard, a notion for a currency backed by energy, in 2013, and wrote an essay about how it may work. He claims in his post The Joule Standard on Resilience.org that- “Metabolic currency, money denominated in or pegged to energy reserves, may make more sense in a highly mechanized economy because it’s rooted in the same physics that governs the machines.” It is interesting to note that his essay came in a time of history for Bitcoin. Bitcoin’s price surged from $13 at the start of the year to about $250 in April before falling by more than 50%. The price remained stable for almost six months before a record rally in November and December of that year when it hit $1,100.
The pervasiveness of energy makes it an appealing alternative for an environmentally friendly and ubiquitous measure of value. For the relationship they made between energy and money, visionaries like Richard Buckminster Fuller, Herman Daly, and Nicholas GeorgescuRoegen have gotten only sporadic acclaim. Howard T. Odum, an ecologist, expanded on the concept by utilsing global energy content as an ecological and economic benchmark.
In complex systems, Odum looked at the linkages between energy input and output. A specific amount of energy input is required in order to obtain energy in a useable form and quality. Extraction of oil from tar sands, for example, necessitates more than two-thirds of the energy that is effectively extracted. Renewable energy’s global availability may be theoretically boundless, but it is effectively a scarce resource when it comes to utility. This ‘relative scarcity’ of energy use (or ‘work’) is economically even more crucial because it serves as a bottleneck for many restorative and productive processes, including the conversion of salt water to fresh water, chemical synthesis, mineral and resource extraction, and environmental cleanup.
If investments were made with a positive energy return on the energy invested (EROI), rather than a profit in money terms (as an abstract value with no relation to planetary resources), those with a positive energy return on the energy invested (EROI) would be prioritised, while less energy efficient projects would be rendered less profitable. In terms of methodology, a monetary unit that represents the energy dimension might decide a resource allocation mechanism that is similar to traditional markets but quite different in terms of outcomes. If efficient energy production is the goal, coupling energy production on the one hand and allocation of production and investment on the other via an energy currency looks to be a reasonable next step.
So, how would we go about designing an energy-related currency? Identifying our objective is a crucial first step. Are we striving to reform and ameliorate the money system in a more holistic way, or are we attempting to transform energy systems by more concretely tying energy to money? Are we ‘monetising energy’ or ‘energising money’? The second option would be preferable.
Energy-related money can be divided into two categories: energy-related money and money. The spectrum of possible associations between money functions and other energy notions hinges on the properties of money and energy. Energy-related currency can either be created to reference a certain sort of energy or be physically backed by it. In the latter situation, the currency may be redeemable or non-redeemable against its backing.
Certain monetary functions are founded on specific energy features and qualities, while others are elevated and may be applied to almost any form of energy, whether it’s for a universal accounting value or a specific kWh unit of generated power. Thus, when analysing or creating energy-related money, we must consider three key design elements:
- What energy should be used?
- What monetary functions should be deployed?
- How should they be combined?
Of course, the above-mentioned aspects warrant further discussion far beyond the breadth of this article, perhaps a part 3 would be in order. Energy money, in contrast to our existing monopolistic monoculture of money creation, might shape a component of the “ecosystem of currencies” or an “ecology of money”. The premise here is that, if constructed appropriately, certain forms of energy money might lead to the establishment of not only decentralised energy systems, but also distributed economic and financial systems. Therefore, the emergence of peer-to-peer banking and money models, as well as other decentralised systems, holds promise.