Will Facebook’s Libra Create The Next Brenton Woods System?
By shardul aeer on ALTCOIN MAGAZINE
This article does not dwell on the technical aspects of Libra but considers its economic ramifications. For those who have not heard of Libra, do read OneZero’s excellent piece here.
Facebook’s announcement of the Libra coin has revived interest in the cryptocurrency discourse. Libra coin is a stablecoin proposed by Facebook to solves the problem of cryptocurrency volatility. This is done through the backing of a real currency reserve contributed by a consortium of companies. However, Facebook may have triggered the proverbial hornet’s nest by interfering the exclusive domain of central banks. I feel that the initiative may attract intense backlash from governments who fear that a handful of companies have started issuing their own currency from a Swiss Bank. The governments may have dismissed the Bitcoin as a garage project. But fundamentally, Libra coin challenges the entire world’s financial system that is based on the Bretton Woods Institutions- the IMF and World Bank. To make my point clear let us go into a little bit of history.
This ecosystem will offer a new global currency — the Libra coin — which will be fully backed with a basket of bank deposits and treasuries from high-quality central banks. -Libra white paper
The Gold Standard And Its Collapse
Till the 1930s most currencies in the world were pegged to gold. The central bank was the guarantor of convertibility of currency into gold. This created problems since the circulation of currency could not be increased without increasing the supply of gold. The USA had acted as a lender to the allies in WW1. The “roaring twenties” were initially a period of high economic growth. How it works is that the monetary value of a currency is directly proportional to its demand. The market value of the dollar far exceeded its pegged value. But the supply of currency could not be increased. Finally, the system broke down with the stock market collapse of 1929 and the beginning of the great depression. The gold standard was $35 per ounce, yet the higher value of dollar meant the market rate was around $20. The gold standard had to be abandoned.
The point is that even if currencies are pegged to a commodity, markets are run by sentiment.
For a moment lets compare the humble bitcoin with gold. Bitcoin just as gold has a limited supply. Transactions take place due to sentiment, in the belief that the currency will carry some value in the future. It would not be wrong to term Bitcoin as a commodity in itself, traded for its own intrinsic value. Just as gold was a hundred years ago, back when the iPhone and microchips were not invented. Gold was valuable for its own sake.
When the world’s food runs out your gold will be of no use.
The Bretton Woods System
The thing is that governments love stability. Even though the USA controlled the majority of the world’s gold reserves and debt after WW2, countries were unwilling to immediately give up the gold standard. The Bretton Woods conference of 1944 created the World Bank and International Monetary Fund(IMF), two institutions that wield significant power even today. All major governments accepted the US dollar as the medium of exchange while maintaining the gold standard ($35 per ounce) was ‘the pain of the USA’. The IMF’s reserves would help keep currencies stable.
In 1944 the United States government chose the Mount Washington Hotel as the site for a gathering of representatives from 44 countries. This was to be the famed Bretton Woods Monetary Conference. The Conference established the World Bank, set the gold standard at $35.00 an ounce, and chose the American dollar as the backbone of international exchange. The meeting provided the world with a badly needed post war currency stability.
Theoretically, the US was to be the guardian of the gold standard and maintain the needed reserves. But this did not happen in practice. Its reserves became over-leveraged and the system finally had to be abandoned. One must understand this. The dollar became free float, but it remained the currency of international exchange.
The similarity cannot be more obvious. The Libra coin is a stablecoin, backed by real assets. It would not be wrong to term the Libra Association as a crypto-IMF, pooling funds to create a currency that would “act as the backbone of international exchange”.
Don’t Mark My Words But Consider This
The structural power wielded by the USA through the Dollar is enormous. We know how the markets are sent to a tizzy when the US Federal Reserve announces a change in rates. World Bank is the remains the banker of the world and IMF the lender of last resort. In all these institutions countries have an unequal vote share based on their contributions. As you have guessed the USA has the most voting power in these institutions.
Further, the US can impose economic sanctions on any country by freezing its dollar transactions, as seen with Iran and North Korea. The US will not let go of this powerful weapon.
Now lets come to the ‘lesser powers’. It's worthwhile to consider that Russia and China want the dismantling of the US dollar as the currency of international exchange. But it is important to see that the Libra Association is comprised of Silicon Valley companies. Cisco’s former nexus with the NSA is too well known to be repeated here. Further, every country wishes to have a sovereign monetary policy and not leave things to MNCs. Besides, there are genuine concerns over money laundering and the proverbial Swiss Bank.
Libra Coin- An Idea Ahead Of Its Times
Facebook’s past pet project internet.org faced opposition from civil society. This time the backlash may be from governments.
Simply said, governments have a vested interest in status quo. It is true that Libra coin can reduce transaction costs and cut barriers, but this comes with profound implications. Governments have various reasons for imposing sanctions on enemy states to preventing money laundering, and they will be unwilling to give up this power.
Further, while the Libra Association has the participation of 27 big companies, the governance structure is very similar to the IMF i.e. based on proportional votes based on monetary contribution. It is up to anyone’s guess who will be the elephant in the room.
Imagine your favorite Facebook meme here.
A neo-Bancor- A Possible Compromise
Not to be confused with your cat or a similarly named cryptocurrency
John Maynard Keynes, one of the minds behind Bretton Woods had originally proposed a supranational currency named Bancor, backed by an International Clearing Union. As a compromise, an international cryptocurrency backed by multiple states or at least multiple global corporations could be created. The participation of non-Western corporations(Russian, Chinese, Indian, etc) in the Libra Association can also make the government more representative.
Conclusion- Fingers Crossed
Again I am no Paul the octopus who predicts the future. History is known to throw surprises so it will be too early to dismiss this revolutionary concept. In Bob Dylan’s words the Times They Are a-Changin’.
