Talk:Energy Unit of Account

A reply by Thomas Greco, to http://cashwiki.org/en/Energy_Unit_of_Account

Chris,

Definitions are essential to proper communication. We agree that a currency is a credit instrument and that a credit instrument is a promise.

The word "currency" derives from the phrase "to pass current," which means to circulate (http://legal-dictionary.thefreedictionary.com/pass+current) or to pass from one to another. That means it is (more or less) generally accepted in payment within some domain.

The promise is made by the currency issuer when he uses it to pay for value received from someone who voluntarily accepts it; then the promise is fulfilled when the issuer accepts it back in payment for goods or services he typically makes available to the market.

Thus, a unit of currency is created when a provider of real value accepts it from the issuer as payment, and that unit of currency is extinguished when the issuer accepts it back as payment from the holder in payment for value he provides.

E. C. Riegel provided a great deal of clarity on the nature and purpose of money. He generally used of the term "money" where we would use the word "currency."

One of Riegel's clearest insights about money/currency was his statement that, A would-be money issuer must, in exchange for the goods or services he buys from the market, place goods or services on the market. In this simple rule of equity lies the essence of money. I would add that to have a viable currency it is not enough for the issuer to simply place goods or services on the market, but that those goods or services must be the sort that are in everyday demand. Thus I cannot agree with you that "the only generally acceptable currency on this basis is an energy currency." Surely, energy can be a sound basis of issue, but so can anything else that is valuable and in general demand. Many scholars in free banking have articulated this point, speaking of "shop foundation" or "goods foundation" or "service foundation" or even "tax foundation" as being proper bases for currency issuance. See for example, the writings of Ulrich von Beckerath and Heinrich Rittershausen at https://reinventingmoney.com/library/.

The rental value of land (and buildings) would also qualify as a proper basis of issue under the service foundation rubric.

Regarding the units in which a currency is denominated, we also have a range of options, which includes units of energy like joules of kilowatt hours but the basic criterion is that it be something that is freely traded in some established market. That is what provides the ongoing value benchmark. I have outlined in my books a few other criteria to be used in the selection process. But my preference is to base the unit of account on a market basket of basic committees. See Part III  Segregated Monetary Functions and an Objective, Global, Standard Unit of Account at  https://reinventingmoney.files.wordpress.com/2014/09/money_and_debt_part3_lo.pdf

Yes, clearly "the acceptance of such an instrument (currency) requires trust in the promissor." As I have expressed it, the acceptor must believe that the issuer is first of all solvent, and also ready, willing and able to deliver valuable goods or services in exchange for his currency. The use of some guarantor is surely one possible approach to grounding that trust. In a mutual credit clearing association, the risk of default by any one issuer, (i.e., a member who has been granted a line of credit or overdraft privilege) is spread around to the entire membership group. This is a sort of self-insurance by the group.

A note about frequent flyer miles. I do not consider frequent flyer miles to be currency because they do not circulate. They are vouchers that airlines (and associated businesses) provide to customers either as rebates on purchases or as incentives for doing something (like accepting a credit card of a designated bank). Further, since they are denominated in units other than legal tender units, and the prices of the services for which they can redeemed are changeable at the whim of the airline, there is an added measure of uncertainty about the value of frequent flyer miles.

Regards, Tom

Further exchanges :

Chris Cook to Thomas Greco

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I have been researching in three directions: firstly, at the 'macro' level an international review of policies, legal structures and instruments in relation to resilience; secondly, a historical review, to establish iif there are any lessons to be learned from the past; and finally -on the premise that networking resilient 'micro' gives rise to resilient 'macro' - to prototype new community level infrastructure at local level; on the basis of insights gained

Credit Instruments The key insight I have gained is into the nature of credit itself and the possibility of new (in fact, ancient) risk/production sharing protocols as a framework for credit issuance.

I define (and I think Tom agrees, since this is consistent with Riegel's approach) a credit instrument as a promise issued in exchange for value received by the promissor which the Acceptor (or assignee) may return to the Promissor in payment for goods and services supplied in the future.

A credit instrument - which constitutes prepayment - is not a debt instrument (because there is no legally enforceable obligation on the promisssor to pay money to the Acceptor). It is not a Derivative (Forward) Instrument, since there is no obligation to make delivery of 'Money's Worth' of goods and services, and it is not an Equity instrument conferring rights of ownership.

In fact it pre-dates all of them and a negotiable promise (based upon trust in the promissor to provide value) has been a form of trade finance ('working capital') for millennia, and in fact remains in use to this day. In order to be accepted, a promise requires that the acceptor trusts the promissor to provide goods and services at some point in future, and the role of banks came to be as 'risk intermediaries' who put their capital at risk to guarantee the credit of a promissor.

While credit instruments remain in use as working capital/trade finance - to differ from Tom - they also represent a means of funding/investment in streams of value.

The proof that this was so remains embedded in the English language to this day.

UK sovereigns, who typically financed themselves with rentals and taxation based upon land, became accustomed to issuing promises (essentially tax credits) which were returnable in payment for taxation/rentals, and these promises were recorded (in days prior to double entry book-keeping) by split tally sticks. (NB Tally sticks were also used to record payments - 'Memorandum Tallies - to supplement title documents eg Deeds).

In order to fund the sovereign's expenditure the Creditor tax-payer/rent-payer demanded (and received) a discount which enabled him to make a profit on his investment when he paid his tax/rent and there are three linguistic proofs that this was so:

1/ The accounting event when the creditor's half of the tally stick was returned to the Promisssor (Exchequer) to be matched against its counterpart became known as the Tax Return from the physical return of the credit instrument.

2/ The Rate over Time at which the credit instrument could be returned to the Promissor became known as the Rate of Return. So if a £10 promise is issued at a £2 discount against an £8 prepayment by the funding creditor this gives rise to an absolute profit of 25% (£2/£8). But the Rate of Return depends on the period over which the instrument iis returnable. So if £10 tax is payable per annum, the rate of return is 25% pa: at £5 tax pa the Rate of Return is 12.5% and over 5 years 5%pa ie simply divide the profit by time.

It will be seen that there is no compound interest in the (prepay) credit instrument funding model: essentially there is a flow of value ('Money's Worth') provided by the promissor over time swapped or exchanged for a flow of value provided by the acceptor.

Finally:

3/ The split tally record held by the Acceptor was known as the Stock (from Norwegian/German etc) and the portion held by the Promissor became known as the CounterStock.

So the 'Stock' (undated) credit instrument actually predated both variable return Equity Instruments (Shares in a 'Joint Stock' Company - also known as Common Stock) and fixed interest (Dated) 'Debt' instruments (Loan Stock or 'Gilt-edged' Stock as UK Treasury Bills became known.

Financing and Funding I define Financing as the short term, relatively high risk 'people-based' (ie based upon the capacity of people individually and collectively to provide goods and services) credit necessary for the circulation of goods and services and creation of productive assets. Funding on the other hand is long termm, low risk credit based upon the use value (utility) over time of productive assets especially land and energu assets.

I have identified and am prototyping simple 'bottom up' protocols and instruments for funding community (and here I do not mean the State) assets - particularly land and energy assets, and if these are funded using (Prepay) credit instruments then the outcome is essentially of an issuance of credits returnable in payment for land use (ie currency which is local by definition) and credits returnable in payment for energy use, which are pretty much globally acceptable within the correct 'Energy Clearing Union' protocol, which is a framework I have been exploring with the Iranian and Caspian region governments for several years.

Conclusion I believe that the use of the mutual/consensual production-sharing 'Capital Partnership' protocol, and the risk sharing 'Guarantee Society' (cf Protection & Indemnity Club protocllls for sharing shipping risks) enable 'asset-based' credits based upon land use and energy use particularly of which the outcome will be recogniseed as currencies.

The Unit of Account may be anything we wish and initially will be the existing 'fiat' symbols, but as Shann rightly suggests - and which I have been suggesting for many years - in order to make the transition to a sustainable economy, these symbols will in due course have to be fixed against a constant/absolute unit of energy. In this way we will come to make - as the Danes have mandated for 40 years - 'least carbon fuel cost' economic decisions, rather than the 'least $ cost' decisions predicate on a deficit-based unit of account.