Chapter 7: Monetary Mechanics Design

"The devil is in the details. Any currency can sound good in theory. The question is: how does money actually get created, distributed, and destroyed? Who benefits? Who loses? These mechanics determine whether a system is just or exploitative."

Overview

Previous chapters established why energy-backing makes sense. This chapter asks how it would actually work. The mechanics determine whether K-Dollar achieves its goals or simply creates a new class of beneficiaries.

This is a design document, not a finished specification. We explore options, trade-offs, and open questions. Some ideas are radical. Some may be wrong. The goal is to think clearly about mechanisms, not to present false certainty.

Chapter Structure:

The Core Problem — Cantillon revisited
Ten Radical Ideas — Money creation mechanisms
The Mars Test — Clean-slate thought experiment
Redemption Mechanics — The energy basket
Currency Relations — K-Dollar and national currencies
Lending Mechanics — Energy-collateralized credit
Open Questions — What we haven't solved

7.1 The Core Problem: Cantillon Revisited

The First-Recipient Advantage

Richard Cantillon (1730s) observed that new money benefits those who receive it first. By the time money diffuses through the economy, prices have already risen. Last recipients experience inflation without receiving new money.

Under the current system: - First recipients: Banks (via Fed lending), government contractors, asset owners - Last recipients: Wage earners, savers, pensioners

The transfer is invisible but real. It's the mechanism behind the seigniorage we quantified in Chapter 4.

The K-Dollar Challenge

Any money creation mechanism must answer: who gets new K-Dollars first?

Options have different distributional implications:

Recipient	Advantage	Problem
Energy producers	Direct, simple	Creates new plutocracy of Shell, ExxonMobil, etc.
National governments	Preserves sovereignty	Enables same deficit financing as today
Citizens directly	Most egalitarian	Hard to verify, implement
Global institution	Neutral	Creates new power center, governance nightmare

There may be no perfect answer. But we should be explicit about trade-offs.

7.2 Ten Radical Ideas for Money Creation

Idea 1: Production-Proportional Direct Distribution

Mechanism: Every verified unit of energy produced creates a fixed amount of K$, deposited directly to the producer.

Example: 1 MWh verified production = 1 K$ created.

Pros: - Simple, direct - Incentivizes energy production - No intermediaries

Cons: - Creates Cantillon effect for energy companies - Large producers (Saudi Aramco, ExxonMobil) become monetary superpowers - No redistribution to non-producers

Verdict: Too concentrated. Creates new plutocracy.

Idea 2: Sovereign Energy Accounts

Mechanism: Each nation receives K$ proportional to its verified energy production. National governments decide internal distribution.

Example: Country produces 5% of global energy → receives 5% of new K$.

Pros: - Preserves national sovereignty - Countries compete on energy production - Existing institutions can handle distribution

Cons: - Governments can still misallocate - Authoritarian regimes benefit equally - Doesn't solve internal Cantillon problem

Verdict: Workable but perpetuates national-level extraction.

Idea 3: Universal Energy Dividend

Mechanism: All new K$ goes to a global fund. Every human receives equal share as dividend.

Example: Global energy creates 1 trillion K$/year → 8 billion people → ~125 K$/person/year.

Pros: - Most egalitarian - UBI without printing money - Direct benefit to all humans

Cons: - Requires global identity system - Massive governance challenge - No incentive for energy production beyond baseline

Verdict: Idealistic. May work for space colonies with known populations.

Idea 4: Split Distribution (Producer + Sovereign + Citizen)

Mechanism: New K$ split three ways: - 33% to producer (incentive) - 33% to sovereign nation (governance) - 33% to citizens of that nation (equity)

Example: 1 MWh in France → 0.33 K$ to producer, 0.33 K$ to French treasury, 0.33 K$ split among French citizens.

Pros: - Balances incentives - Multiple constituencies benefit - Reduces concentration

Cons: - Complex - Requires citizen verification - Ratios become political battleground

Verdict: Promising but complex. Worth developing.

Idea 5: Energy Staking

Mechanism: Anyone can "stake" claims on energy production capacity. K$ created proportional to your stake. But you must maintain the capacity—if production falls, your stake is slashed.

Example: You invest in a solar farm, stake your claim. As long as it produces, you receive K$. If it stops producing, your stake is burned.

Pros: - Incentivizes investment in capacity - Distributed ownership possible - Self-correcting (non-producers lose stake)

Cons: - Advantages capital owners - Complex verification - Gaming potential

Verdict: Interesting for investment layer. Not primary mechanism.

Idea 6: Energy Labor Credit

Mechanism: K$ created for human labor in energy production, not just energy output. Workers in energy sector receive K$ directly.

Example: Solar panel installer receives K$ for hours worked, in addition to wages.

Pros: - Values human contribution - Distributed to workers, not just capital - Addresses automation concerns

Cons: - Labor is becoming automated (Chapter 4) - Hard to verify "energy labor" vs other labor - Doesn't scale with productivity

Verdict: Backwards-looking. Fights the automation trend rather than adapting.

Idea 7: Consumption-Based Creation

Mechanism: K$ created when energy is consumed, not produced. Distributed to consumers as rebate.

Example: You use 1 MWh electricity → you receive 0.5 K$ (the other 0.5 K$ covers production costs).

Pros: - Benefits consumers directly - Incentivizes energy use (drives growth) - Harder for producers to capture

Cons: - Incentivizes waste - Measurement at consumer level is hard - Rich consume more → rich get more

Verdict: Perverse incentives. Rejected.

Idea 8: Auction-Based Creation

Mechanism: New K$ are auctioned to highest bidder. Revenue from auction distributed equally.

Example: 1 billion K$ created monthly. Auctioned. Revenue of X dollars distributed to all citizens.

Pros: - Market determines K$ value - Revenue goes to public - No first-recipient advantage (everyone gets auction proceeds)

Cons: - Rich can buy more K$ - Auction mechanics complex - Why would anyone buy K$ with dollars?

Verdict: Interesting hybrid but bootstrap problem.

Idea 9: Energy-Backed Demurrage

Mechanism: K$ depreciate over time (demurrage) unless backed by energy production. Producers receive "freshness credits" that prevent depreciation.

Example: K$ lose 5%/year unless you can prove you produced energy. Producers get full value; holders slowly lose.

Pros: - Incentivizes production over hoarding - Natural velocity increase - Producers advantaged but not via creation

Cons: - Punishes savers - Complex accounting - Demurrage currencies historically unpopular

Verdict: Novel but likely politically toxic.

Idea 10: Mars Protocol (Clean-Slate Design)

Mechanism: Designed for a closed economy (Mars colony, space station, new city-state). Energy is the literal constraint on survival.

Rules: 1. Central authority (Mars Authority) operates all energy production initially 2. Energy is priced at cost of production (no profit margin) 3. K$ created equal to energy produced, held by Authority 4. Citizens receive K$ for labor (any labor, not just energy) 5. Citizens spend K$ on energy and goods 6. K$ returns to Authority when spent on energy → destroyed 7. Net K$ in circulation = labor value not yet converted to energy

Example: Mars produces 1000 MWh/month. Authority creates 1000 K$. Workers receive K$ for labor. They spend K$ on energy/goods. K$ spent on energy returns to Authority and is burned. Money supply reflects outstanding labor claims on energy.

Pros: - Closed-loop, logically consistent - Labor valued, energy backed - No accumulation by Authority (K$ burned on energy purchase) - Works for space colonies, special economic zones

Cons: - Requires central Authority (not decentralized) - Labor-based creation may not scale - Transition from Earth systems unclear

Verdict: Excellent for greenfield design. Use as reference model.

7.3 The Mars Test

Why Mars Matters

Earth-based monetary reform faces entrenched interests: central banks, reserve currency holders, financial institutions. Any proposal must either co-opt or defeat these interests—neither is easy.

A Mars colony (or Moon base, or orbital station, or seasteading community) offers a clean slate:

Closed economy: Limited trade with Earth, at least initially
Known population: Every colonist is identified
Energy-critical: Survival literally depends on energy production
No legacy institutions: No central banks to dissolve

The Mars Economy

Consider a Mars colony of 10,000 people. They need:

Energy: Solar, nuclear, or imported fuel
Life support: Air, water recycling (energy-intensive)
Food: Greenhouses, hydroponics (energy-intensive)
Manufacturing: Tools, parts, construction (energy-intensive)
Communication: Data, entertainment (energy-intensive)

Everything requires energy. Energy is the binding constraint. A currency backed by energy makes obvious sense here.

Mars Monetary Design

Creation: K$ created equal to verified energy production. Held by Mars Authority initially.

Distribution: Authority pays K$ for: - Labor (all forms) - Goods sold to Authority - Services rendered

Circulation: Colonists spend K$ on: - Energy (returned to Authority, burned) - Goods from each other (circulates) - Services from each other (circulates)

Destruction: K$ returned to Authority for energy purchase → destroyed.

Steady State: Money supply = labor claims + goods/services inventory. Energy-backed at all times.

What This Teaches Us

The Mars model reveals several principles:

Energy as unit of account makes sense when energy is the critical constraint
Central distribution can work if there's a trusted authority
Burning money on energy purchase prevents accumulation, ensures backing
Labor claims are legitimate if labor produces value

The question is: how do we adapt this to Earth's messy reality?

7.4 Redemption Mechanics

The Energy Basket

K-Dollar is redeemable for a basket of energy goods. Not a single commodity (like gold), but a diversified basket reflecting global energy production.

Basket Components:

Component	Unit	Initial Weight (example)
Crude oil	barrel	30%
Natural gas	MMBtu	20%
Electricity (grid average)	MWh	25%
Uranium	kg	5%
Solar capacity	kW installed	10%
Battery storage	kWh capacity	5%
Hydrogen	kg	5%

Weight Adjustment

Basket weights are updated annually based on:

Global production share: If solar grows from 5% to 10% of global energy, its weight increases
Market prices: Relative prices influence redemption ratios
Technology shifts: New energy forms added, obsolete forms removed

Redemption Process

Holder requests redemption: Submit K$ to designated redemption facility
Basket calculation: Current weights determine how much of each component per K$
Physical delivery or credit: Receive physical goods OR energy credits usable at participating providers
K$ destroyed: Redeemed K$ removed from circulation

Market Influence

Redemption ratios for individual items are influenced by market:

If oil price spikes, fewer barrels per K$ (basket weight stays, but relative redemption adjusts)
If solar becomes cheap, more solar capacity per K$
This prevents arbitrage and maintains basket integrity

Energy Futures Option

Instead of spot redemption, K$ can be exchanged for energy futures:

Contract for delivery at future date
Locks in redemption value
Creates forward market for energy

This adds complexity but provides flexibility for industrial users who need delivery planning.

7.5 Currency Relations

Nations Persist

Despite globalization pressures, nations will continue to exist. Tribalism is real. Cultures matter. Borders provide governance boundaries.

K-Dollar must work with this reality, not pretend it away.

The EU Lesson

The Eurozone demonstrates risks of unified currency with divergent economies:

Same currency: Euro
Different economies: Germany vs. Greece
Different fiscal policies: Surpluses vs. deficits
Result: Transfers from strong to weak, political tension, austerity, crisis

K-Dollar must avoid this trap.

Proposed Architecture

Layer 1: K-Dollar as Global Reserve

International trade settled in K$
National reserves held in K$
Replaces dollar as reserve currency

Layer 2: National Currencies as Local Medium

Countries maintain national currencies
Local transactions in local currency
Exchange rate to K$ floats (or pegs, country's choice)

Layer 3: Interest Rate Variation

No global interest rate dictated
National rates determined by market
Three-month rate (or similar) as reference
Central banks constrained but not abolished

Central Bank Constraints

Under K-Dollar, central banks cannot:

Print money unbacked by energy
Quantitative ease indefinitely
Monetize unlimited deficits

Central banks can:

Set interest rates (within market bounds)
Regulate banking sector
Manage local currency exchange rate

This is a significant reduction in power. Central banks will resist. The transition must address this political economy.

Digital Implementation

K-Dollar as Central Bank Digital Currency (CBDC)-like instrument:

Transactable globally
Programmable (conditions, smart contracts)
Transparent (blockchain or similar ledger)
Interoperable with national digital currencies

This is the "parallel currency" path—K$ circulates alongside national currencies, with market-determined exchange rates. Over time, if K$ proves superior, adoption increases organically.

7.6 Lending Mechanics

Energy-Collateralized Lending

Traditional lending creates credit money—banks lend more than they hold, creating deposits ex nihilo. This expands money supply beyond what backing supports.

Under K-Dollar, lending could be energy-collateralized:

Mechanism:

Borrower pledges future energy production capacity as collateral
Lender provides K$ loan
Borrower's energy production revenues service the loan
If production falls short, collateral (capacity) is seized

Example:

Solar company wants to build 100 MW farm
Pledges future production (estimated 175,000 MWh/year) as collateral
Receives K$ loan to build
Repays from K$ received when production begins
Default → lender takes ownership of farm

Advantages

Tied to real production: Can't borrow against nothing
Self-limiting: Only as much credit as production capacity exists
Productive incentive: Borrowing finances energy infrastructure
Natural backstop: Collateral has real value

Fractional Reserve Under K-Dollar

Should banks be allowed to lend more K$ than they hold?

Arguments for (fractional reserve): - Expands credit, enables growth - Matches current system expectations - Banks can still serve intermediation function

Arguments against (full reserve): - Maintains strict energy backing - Prevents credit bubbles - Simpler, more transparent

Possible compromise: Allow fractional reserve but with energy-production backing requirement. Banks must hold claims on energy production capacity equal to some percentage of loans outstanding.

This remains an open design question.

7.7 Open Questions

Unresolved Issues

This chapter has not solved everything. Key open questions:

1. Initial Distribution

How do we create the first K$? Who receives them? How do we avoid advantaging early recipients?

2. Transition Path

How do we move from dollar hegemony to K-Dollar? What's the sequence? Who goes first?

3. Governance

Who manages the K-Dollar system? How are disputes resolved? How are basket weights decided?

4. Verification

How do we verify energy production claims? What prevents fraud? (This is a separate chapter.)

5. Edge Cases

What about countries with no energy production?
What about energy-negative activities (carbon capture)?
What about energy storage vs. production?

Why These Questions Are Hard

These questions are hard because they involve:

Power: Who controls money creation is political
Transition: Moving from A to B without collapsing A
Coordination: Global systems require global agreement
Trust: Who do you trust to verify, govern, arbitrate?

The technical design is the easy part. The political economy is hard.

7.8 Key Takeaways

Cantillon Effect is the core problem: Any money creation mechanism creates first-recipient advantages. We must be explicit about who benefits.
Ten mechanisms explored: From direct producer distribution to Mars Protocol. Each has trade-offs.
Mars Test reveals principles: Clean-slate design clarifies what's essential. Energy as unit of account makes obvious sense when energy is the constraint.
Redemption via energy basket: Diversified, annually adjusted, market-influenced. Redeemable for physical goods or energy credits.
Nations persist: K-Dollar must work with national currencies, not replace them overnight. EU lesson: unified currency with divergent economies creates problems.
Energy-collateralized lending: Loans backed by production capacity, not thin air. Limits credit expansion to real productive capacity.
Open questions remain: Initial distribution, transition path, governance, verification. These require further work.

For Discussion

Before finalizing this chapter, we invite critique on the ten mechanisms proposed. Which are promising? Which are fatally flawed? What mechanisms have we not considered?

The goal is adiabatic settling—iterating toward the right solution through deliberate exploration and critique.

Next: Chapter 8: Game Theory Analysis