A new kind of money

Posted by Julian Darley at 1:01 PM on July 20, 2006.

The decline in the availability of cheap energy is likely to be accompanied by an equally ominous possibility of world financial meltdown. That we are facing both of these threats now is not an accident: energy and financial stability are intimately linked. I believe the solutions for dealing with these twinned threats are equally linked. To build an environmentally sustainable, monetarily stable world, we need to create an economy in which locally produced energy provides the backing for local currencies.

Let's start with energy first. Energy decline will soon challenge just about every common notion of life that we have developed during the industrial era. Most of what we have built in the globalizing world of the last half century depends on cheap energy, particularly oil and natural gas.

After years of oil-industry financed obfuscation, there is a broad scientific consensus that our profligate use of fossil fuels is producing global warming. And despite similar oil industry denials, there is a growing consensus that we are rapidly approaching Peak Oil, after which world oil output will go into permanent decline. (The United States experienced Peak Oil in 1971.) After global Peak Oil, oil will still be available, but at ever increasing prices.

To lessen the impact of global warming and the inflationary pressures of Peak Oil, we should be moving as rapidly as possible to an energy system based on locally based renewable energy production. (Go here for more details about why cornucopian schemes like nuclear power or oil from tar sands will not solve our energy problems).

Accepting the limits of locally produced renewable energy flies in the face of one of the basic assumptions behind the current energy system, that there is an endlessly increasing, supply of cheap fossil fuels, especially oil.

And here's the link to money: we have made the same limitless assumption about money, that the world monetary supply could grow without end as well. In both cases, we assumed that the growth in energy-use and in money supply was an unmitigated good.

There have been a growing number of voices warning us that both of these assumptions were wrong, that the notion of unchecked growth was leading us toward environmental and financial meltdowns. And while we have been making some progress in understanding the energy problem, there is virtually no mention of the role of money.

I admit that thinking clearly about money can be difficult. Money has been around far longer than the oil age, the industrial era, and may even pre-date civilization itself. But though we may take money for granted, it is neither simple nor solid nor reliable -- far from it. Money is a complex and fragile construction, and as history has shown over and over again, money can become worthless almost overnight. In the long run, money has proven very difficult to manage -- it's a tricky and strange invention.

The original driving force behind money was our need for specialization as we grew from hunter-gatherer societies to settlements of a few thousand, and now cities of millions. Money helped us to increase our carrying capacity -- the number of humans a given area will support at a certain level of technology -- but it has also helped us to become largely disconnected from the real material world.

Today's global monetary system is based on currencies controlled by national banks, and the global trading system is mainly based on one of those currencies: the US dollar. This system leaves communities and individuals vulnerable to the fluctuations of the global market. The level of trade in a locale is heavily dependent on money that flows in from external sources. Any disruption to that flow can restrict trading activities locally. This potential shortage leads people to try and obtain more and more money, a quest which is ultimately unsustainable.

Money can be "backed" by all kinds of physical substances, like precious metals. Or money can be "fiat" ("let it be made") like most national currencies today, backed by nothing except faith and confidence -- or sometimes just confidence tricks.

Unlike a backed currency, a fiat currency can at least in theory quite literally expand for ever. There is no direct link to material reality to impose limits, only economic theory, which is devoted to eternal growth and doesn't like to deal with limits -- or reality -- at all. An unlimited currency along with unlimited growth and (so far) unlimited energy has allowed us to do almost unlimited damage to the planet. However, as the availability of cheap, abundant energy declines, energy will soon become the dominant partner in the relationship with money, and money's true dependence on energy will finally become apparent for all to see.

As energy becomes increasingly expensive and scarce, the colossal size and scale of our infrastructure, which has characterized the rise of industrialism, will selectively crumble and become unserviceable. It is only the energy subsidy from hitherto ever-increasing use of cheap fossil fuels that has allowed our current grandiosity. If this argument is correct, national currency reform will become an oxymoron. It will become apparent that local currencies must be created, currencies based on the resources of the locale -- be they abundant or austere.

Communities can further insulate themselves by de-monetizing as many goods and services as possible and try to produce as much of their vital needs as locally as possible, especially food (from local farms and processors) and renewable energy. Demonetizing means taking a product or service out of the market so that it does not need a monetary value. Hence the need either to stop using a product or to produce it yourself.

When you take a potato from your garden, if you are fortunate enough to have one, you don't pay yourself a dollar for the privilege -- you just clean it, cook it, and eat it. Demonetizing can also be done via barter, and this is in fact quite common in business, including in the industrialized world. But demonetizing flies in the face of globalization and the Industrial Revolution.

Communities that create such local or regional currencies will have a much better chance both of riding out the coming energy decline and of being buffered from any monetary or economic collapse that may happen for whatever reason. The sooner such systems are created, the more ready that region will be to withstand shocks and to avoid the terrible unemployment which severe monetary instability invariably brings.

Backing money with local renewable energy would cause the material economy to be constrained by the amount of energy available from the sun -- just like all other living things, which have been around far longer than we have. This limitation would undoubtedly mean that some places would be more suitable for human habitation than others. But since nature is now starting to teach us this lesson anyway, it would surely be a much better idea to plan for constraint than to wait for the energy and climate avalanches to hit us broadside, especially as we can now hear increasingly ominous economic and environmental rumbling.

In our forthcoming book, Relocalize Now! Getting Ready for Climate Change and the End of Cheap Oil, we discuss strategies for how communities can create local currencies. Making the transition to an ecologically sustainable world is going to be the most difficult task which our species has ever undertaken. We have a much better chance of success if we develop strategies that incorporate an understanding of the unavoidable linkage between energy and money.