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ECONOMY: Money and Energy

Sadly, Richard Douthwaite died on November 14th following a long illness. This essay by him comes from the Post Carbon Reader to which he contributed two pieces. The other The International Response to Climate Change is available here.


EXCERPT:

Money and energy have always been linked. For example, a gold currency was essentially an energy currency because the amount of gold produced in a year was determined by the cost of the energy it took to extract it. If energy (perhaps in the form of slaves or horses rather than fossil fuel) was cheap and abundant, goldmining would prove profitable, and a lot of gold would go into circulation enabling more trading to be done. If the increased level of activity then drove the price of slaves or coal up, the flow of gold would decline, slowing the rate at which the economy grew. It was a neat,natural balancing mechanism which worked rather well. In fact, the only time it broke down seriously was when the Spanish conquistadors got gold for very little energy—by stealing it from the Aztecs and the Incas. That caused a massive inflation and damaged the Spanish economy for many years.

Gold rushes were all about the conversion of human energy into money, as the thousands of ordinary people mining in the Amazon basin show. Obviously if supplies of food, clothing and shelter were precarious, a society would never devote its energies to finding something that its members could neither eat nor live in, and which would not keep them warm. In other words, gold supplies swelled in the past whenever a culture had the energy to produce a surplus. Once there was more gold available, using the precious metal as money made moretrading possible—enabling the conversion of whatever surpluses arose in future years into buildings, clothes and other needs.

Lots of other ways of converting human energy into money have been used as well. For example, the inhabitants of Yap, a cluster of ten small islands in the Pacific Ocean, converted theirs into carved stones to use as money. They quarried the stones on Palau, some 260 miles away, and ferried them back on rafts pulled by canoes. But once on Yap the heavy stones were rarely moved, just as lots of gold never leaves Fort Knox.

The last fixed, formal link between money and gold was broken on August 15, 1971 when President Nixon ordered the US Treasury to abandon the gold exchange standard and stop delivering one ounce of gold for every $35 that other countries paid in return. Some people think that this link between the dollar and energy was replaced by an agreement that the US then made with OPEC that “backed” the dollar with oil. Supposedly, OPEC agreed to quote the global oil price in dollars and, in return, the US promised to protect the oil-rich kingdoms in the Persian Gulf against threat of invasion or domestic coups. If it exists, this arrangement is currently breaking down...

 

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