Chapter 2: Why Energy?

Work in Progress

This chapter is under development. See Issue A4 and Issue A5 for contribution opportunities.

Overview

This chapter argues that energy is the optimal backing for a global currency — superior to gold, commodity baskets, labor, or pure fiat.

2.1 The Backing Problem

Any currency must answer: What gives it value?

Fiat's Answer

"Trust in the issuing government."

Problem: Governments can (and do) abuse this trust. Inflation, devaluation, and seigniorage extraction are endemic.

Gold's Answer

"Scarcity and historical consensus."

Problem: Gold's value is ultimately arbitrary — a collective agreement to value a shiny metal. And gold supply grows ~1-2% annually while economies grow faster, creating deflationary pressure.

Energy's Answer

"The capacity to do work — the substrate of all economic activity."

This is different. Energy isn't arbitrarily valuable. It's valuable because nothing happens without it.

2.2 Energy as Economic Substrate

The Thermodynamic View

The economy is, at its most fundamental level, an entropy-management system:

Raw materials (low entropy) → Products (organized, lower entropy locally)
This organization requires energy
GDP measures the rate of this entropy management
Energy is the limiting factor

The Correlation Evidence

GDP and energy consumption are tightly correlated:

[TODO: Insert chart showing GDP vs. energy consumption by country]

Country	GDP per capita	Energy per capita	Ratio
USA	$76,000	284 GJ	267
Germany	$51,000	148 GJ	345
China	$12,500	102 GJ	123
India	$2,400	26 GJ	92

The correlation holds across: - Different countries - Different time periods
- Different economic structures

Decoupling Debates

Some argue economies can "decouple" — growing GDP without growing energy use.

Evidence suggests: - Relative decoupling is real: Energy intensity (energy/GDP) falls with development - Absolute decoupling is rare: Total energy use continues rising in most growing economies - Efficiency gains often trigger rebound effects (Jevons paradox)

For currency backing purposes, the key insight is: Energy remains essential even as efficiency improves.

2.3 Comparison to Alternatives

Gold

Criterion	Gold	Energy
Intrinsic utility	Limited (jewelry, electronics)	Universal (all activity)
Supply growth	~1-2%/year	Can grow with investment
Distribution	Geological luck	Producible anywhere
Measurability	High	High (improving)
Deflationary risk	High	Low (supply expandable)

Commodity Baskets

The IMF's SDR and various commodity-basket proposals face:

Weighting disputes: Who decides how much wheat vs. copper?
Manipulation risk: Countries can game specific commodities
Storage costs: Physical commodities require warehousing
Heterogeneity: Commodities aren't fungible

Energy as backing has some of these challenges (weighting different energy forms) but is more fundamental — commodities themselves require energy to extract and process.

Labor

Labor-backed currency proposals (time-banking, etc.) struggle with:

Productivity variation: An hour of surgery ≠ an hour of ditch-digging
Measurement: How do you verify labor claims?
Automation: What happens as robots replace human labor?

Energy sidesteps these by backing the input that makes all labor productive.

Carbon Credits

Carbon credit systems price an externality (emissions). While valuable for climate policy, they're:

Negative backing: Valuing what you don't emit
Verification-heavy: Easy to game
Policy-dependent: Value depends on regulatory decisions

Energy backing is positive — valuing what you do produce.

2.4 The Intrinsic Value Argument

Gold Has No Intrinsic Value

This is controversial but defensible. Gold's monetary value far exceeds its industrial utility. If gold lost monetary status tomorrow, its price would collapse 90%+. Its value is fundamentally a coordination game — valuable because others value it.

Energy Has Intrinsic Value

Energy would be valuable even if not used as currency backing because:

You cannot manufacture goods without energy
You cannot transport goods without energy
You cannot provide services without energy
You cannot sustain life without energy

This isn't circular. Energy is instrumentally valuable for everything else, not just because we agree to value it.

The Philosophical Point

A currency backed by something intrinsically valuable is more robust than one backed by collective agreement alone. Collective agreements can collapse (see: every fiat currency hyperinflation). Physical necessity cannot be collectively agreed away.

2.5 Energy's Properties as Money

Good money has traditionally required:

Property	Energy's Performance
Divisible	✅ Infinitely (joules, kWh, etc.)
Durable	⚠️ Complex — reserves vs. production
Portable	⚠️ Depends on form — this is a challenge
Recognizable	✅ Modern metering is precise
Scarce	✅ Requires real investment to produce
Fungible	⚠️ Different forms — needs basket weighting

The challenges (durability, portability, fungibility between forms) are real but addressable through:

Basket design: Weighting different energy forms
Reserve vs. production: Combining stock and flow measures
Verification infrastructure: Modern IoT and satellite monitoring

2.6 The Supply Expansion Feature

Gold's Fatal Flaw

Gold supply grows ~1-2% per year (mining output). Global GDP grows ~3%+ per year. Under a gold standard, this mismatch creates deflationary pressure:

Not enough money to represent growing economy
Prices must fall
Falling prices discourage investment
Economic stagnation

This is why the gold standard was abandoned — it couldn't accommodate growth.

Energy Supply Can Match Growth

Energy production can be expanded by:

Building new power plants
Developing new oil/gas fields
Installing solar/wind
Nuclear construction
Future: Fusion, space-based solar

Critically, expanding energy supply requires real investment. You cannot "print" energy. But you can grow energy production to match economic growth, avoiding deflation.

The Goldilocks Property

Energy backing is: - Not too rigid (like gold) — supply can grow with investment - Not too loose (like fiat) — cannot be created by decree

This "goldilocks" property is unique to energy among potential backings.

Key Takeaways

Energy is the substrate of all economic activity, not an arbitrary store of value
GDP-energy correlation demonstrates the fundamental link
Energy backing avoids both gold's deflation problem and fiat's manipulation problem
Energy supply can grow with real investment but cannot be "printed"
Implementation challenges (fungibility, verification) are addressable

Discussion Questions

If energy is so fundamental, why wasn't it used as currency backing historically?
How do we handle energy forms with very different characteristics?
What happens to energy-backed currency in a post-scarcity energy scenario?
Is the intrinsic value argument philosophical sleight-of-hand?

Next: Chapter 3: Kardashev Alignment