Requiem for the Dollar

This weekend's Weekend Journal led off with a story about the death of the Dollar. In some respects, the reports of the Dollar's death are greatly exaggerated. The Euro could be a rival reserve currency but is not in a position to supplant the Dollar. The Yuan cannot be a reserve currency until the Chinese loosen currency controls. And the SDRs issued by the IMF are likely to end in disaster if the IMF attempts to act like a central bank. However, the article does give a persuasive argument for why the long term outlook for the Dollar is so grim.

The article ends with a call to arms:

So our Martian would be mystified and our honored dead distressed. And we, the living? We are none too pleased ourselves. At least, however, being alive, we can begin to set things right. The thing to do, I say, is to restore the nets to the tennis courts of money and finance. Collateralize the dollar—make it exchangeable into something of genuine value. Get the Fed out of the price-fixing business. Replace Ben Bernanke with a latter-day Thomson Hankey. Find—cultivate—battalions of latter-day Hellmans and set them to running free-market banks. There's one more thing: Return to the statute books Section 19 of the 1792 Coinage Act, but substitute life behind bars for the death penalty. It's the 21st century, you know. [emphasis added]

James Grant, the author of the article, writes nostalgically of the gold standard but does not advocate (in this piece at least) a return to the gold standard, which he states is similarly flawed in practice. I am in agreement that fiat currency was a failed experiment, and that there should be some tangible backing to our currency. However, I am not a fan of gold: it can be touched but besides jewelry and a few commercial applications it has no real value either. My collateral of choice is slightly less tangible but of utmost value: energy. Money would be printed at the point of production of energy, whether that would be the right to receive electrical power on a certain grid, or coal, firewood or petroleum products. The specifics would need to be worked out; the ability to print money would need to be regulated and standardized. But in the end our currency would be (in theory at least, sort of like the gold standard) convertible into something with real value.

Eventually, as we move beyond a carbon-based energy system I can envision a blurring of the line between the transmission of energy and information. At some point I think bandwidth will become as valuable, maybe even more valuable, than energy itself.