Facebook is attempting to create an online currency for the internet, the libra, which I find enormously entertaining because Libra is my astrological sign. I’m sure some branding consultant figured that the symbolic meaning of the sign – it being the sign of the scales, the historical symbol of money changers, perhaps appropriate given that I am proudly a banker – would subconsciously resonate, thus earning themselves a hefty fee (to be paid, surely, in dollars). This may be because I’m a Libran, but the name struck me as being pleasingly non-“crypto”: in a world where blockchain solves all the worlds problems, but comes at a cost of bearing up with newspeaky words like “bitcoin” or “ethereum” or the like, the idea of using libras to buy in-app purchases seems, well, vaguely adorable.
The mainstream press coverage of the libra concept has focused, naturally, on the incongruity of placing trust in a store of value managed by perhaps the world’s least trustworthy individual, Mark Zuckerberg, who seems convinced that maintaining a menacing, narcissistic public face as a kind of youngish cyber James Bond villain is a good idea. Financial writers have had a field day describing this as the beginning of the end of money as we know it, the dawn of a new era of money, the initiation of the live world of blockchain taking over every nook and cranny of our lives. My favorite financial columnist, Matt Levine, has basically summed it up as “blockchain blockchain blockchain blah blah blah.” An old colleague of mine has tried whipping up a scare wave on LinkedIn, describing the financial distortions that will evolve as the Libra Foundation – the organization which will manage the libra currency, again named by Zuckerberg with his usual flair for the sinister; the libra as unit is cute, but the Libra Foundation as manager is awfully close to being SPECTRE – periodically buys or sells trillions of dollars or euros or yuan of government bonds which will back the currency – more on that in a bit. Central bankers, meanwhile, have started to focus on what, exactly, this does mean, with Mark Carney – the George Clooney of central bankers – stating that if well-designed, the Libra Foundation which will manage the libra will have access to pound sterling deposit facilities at the UK central bank.
First, a quick explanation of what I understand as the theory behind the whole shebang. Libras will be backed by a pool of central bank deposits (to the extent central banks allow it), government bonds, and short-term bank deposits in a basket of currencies representing the rough balance of what people buy into when they purchase libras. Libras will then be used to denominate purchasable goods and services on Facebook and other platforms that buy into the Libra Foundation instead of, or alongside, purchases denominated in dollars or euros or rubles or leks or what have you. The Libra Foundation will allow individuals to buy libras with their local currency, which will then be usable on any platform which accepts libras for payment, with the real-world money that’s used to purchase libras then being used by the Libra Foundation to buy said low-risk central bank deposits, government bonds, et al. I haven’t read the whitepaper yet to understand how the basket of currencies will be managed, but I’m assuming it will be something similar to how the IMF manages special drawing rights (SDRs) – some kind of a formula based on the relative weights of the currencies used to purchase the libras, subject to some overarching balancing equation based on liquidity, blah blah. Of course, libra transactions will be blockchain registered – which for those of us in the real world means nothing, because blockchain is just a handshake mechanism which isn’t terribly different in a metaphysical way from how any wire transfer works in the current world, only it uses some nifty programming to distribute the verification of the transactions which are currently subject to centralized verification in modern central bank systems and SWIFT, the existing private sector standard for institutional payment transfers. But because it’s “blockchained”, it’s now meta-officially blessed. Blockchain, after all, is the new metaphysical endorsement of moral certainty. Right – to quote Matt Levine, blah blah blah.
In any event, what’s interesting is that the libra will be, in effect, a currency not tied to a state, and thus value becomes disconnected from the state in an essential way: in theory – or rather, on Facebook and on other sites which join the Libra Foundation – individuals will buy and sell things to one another with “value” defined by the number of libras, which themselves have “value” equal to an increment of a floating collection of governmental value. The Libra Foundation will fund itself via the float – the interest paid on the collection of interest-bearing very low risk securities and deposits it holds, although it’s not clear what will happen if the trend towards negative interest rates which already sucks in a good portion of OECD country debt continue to accelerate. People will be able to convert their libras to the underlying currency basket at a rate which will float based on the underlying currency basket that the Libra Foundation manages, presumably with some bid-offer which again will be a source of income for the Libra Foundation (seriously, the more you say it, the more evil it sounds).
For financey-types among the readership, this will probably sound like an amalgam of several concepts. To my ear, it feels a lot like the original concept of the Bank of England, which most people forget was a private corporation – not an instrument of state – for most of its existence. They accepted deposits in specie – gold or silver – and used that specie to buy government bonds bearing a rate of interest. Depositors then could use “bank notes” – essentially promises of the Bank of England to convert the note back into a given amount of specie – to exchange value amongst themselves. In a physically defined world, this was much more convenient than carrying around sacks of coins or gold bars, and thus most people came to prefer exchanging notes. Meanwhile, the Bank of England had to make a profit for its shareholders; just sitting on gold didn’t earn anything (and, indeed, it cost money to store the gold safely: visit the Bank’s building on Threadneedle Street and think about what it cost to build that pile). So the Bank took most of the gold and bought interest-bearing bonds issued by the English crown, or by buying the notes of other banks at a discount and redeeming them at maturity for par.
This, indeed, is exactly the same as the Libra Foundation proposal. The kicker for libras seems to be that, just as in the 17th century, people were finding that the inconvenience of paying in gold was hampering their ability to accelerate finance and investment in the physical world, people are finding that banking in the 21st century is too inconvenient in the now virtual world of the internet. On a certain level, there may be some merit to that: a recent Financial Times article on the inconvenience of the German banking sector, with the result being that the author found it almost impossible to use a UK bank card to get cash, pay for dinner, or the like, shows that there remain areas of personal purchase power which are effectively prohibitively inefficient. To the extent that people on Facebook and other sites find it challenging to use their existing dollars and euros and rubles to pay for things online, the proposal – in essence, “give me a bunch of your real world cash and I’ll give you a different, but still valuable and convertible, cash that’s completely efficient to use in the virtual world, and I’ll also let you convert back to real world cash in a convenient and seemless (sort of – I’ll still charge a vig) way” – this argument makes sense. Again, it’s no different than what the Bank of England did in the seventeenth century, and the Swedish Rijksbank did even earlier.
So far, so uninteresting. In fact it’s more than uninteresting from a financial perspective. It actually represents a step backward: private currencies are four hundred years old, and over that time, the inherent risks of such a system resulted in the nationalization of those currencies because private banks couldn’t be trusted to buy totally safe instruments. Even when they thought they were – when, for example, the Bank of England bought only British government debt – the government itself would do something like, oh, fight a horrifically destructive war against Napoleon, come close to losing, and people would want their gold back. My ex-colleague on LinkedIn imagined something similar to this, where a stampede of libra holders all seeking to convert back to, say, dollars, would force the Libra Foundation to dump all of its holdings on the market, driving down the value of government bonds and creating a spiral where libras would convert to fewer dollars, the remaining libra holders would panic further and try to convert more, resulting in more government bond sales, etc. Eventually the poor saps at the back of the line would get nothing and would be forced to exchange their now-worthless libras for anything, presumably leaving only Facebook able to accept them for payment against online advertising…
… which gets me to my real point about what makes money reliable as an exchange of value. At some point, every government with a private currency system reaches the point described above. In the US, it happened during the Civil War; indeed, war is the constant theme in the point at which a money system requires transformation. At some point, there is a crisis of confidence in the currency, and people rush to exchange their now-doubtful notes (or bank accounts) denominated in shaky currency X into less-doubtful notes in safe currency Y, or into gold, or into other physical and mobile goods which will retain value.
Interesting but relevant aside: back when I was working for the incompetent global megabank, and has some modest oversight responsibilities for our African treasury operations, I visited Johannesburg rather often, and was struck by the number of really expensive cars – Maseratis, Porsches, and especially Mercedes and Audis and BMWs. Houses, meanwhile, were incredibly cheap on a dollar-adjusted basis. An Audi costs the same for Audi to make no matter where it is sold – let’s say the base model A4, which was everywhere, is $50,000. People were paid much less on a dollar-equivalent basis than in the US – the average bank employee probably made around $25,000 after tax, versus the equivalent in the US of maybe $60,000 – but in the US, they’d drive a Corolla; in Johannesburg, they’d drive a Mercedes C-Class. Then again, their flat in South Africa would cost maybe $40,000, while the US person was buying their house for $250,000 or more. It made no sense until the head of the South African bank’s treasury operation explained it: most people in Johannesburg were anticipating some kind of Zimbabwe like collapse. In that event, the escape plan for everyone was to drive to Botswana – well known as the Switzerland of sub-Saharan Africa – and since at that moment, they’d need to take as much value as possible with them, they put far more of their savings into a fancy car than into their immovable home. It made perfect sense.
So to return to the main thread: every currency (including gold, mind you; gold also has had panic attacks in the past when large quantities of it suddenly hit the market, say when Spain looted the Incan and Aztec stores and dumped it overnight on the market in the 16th century, or when the roughly contemporaneous California, Australian, South African, and Yukon gold rushes did the same in the mid to late 19th century) eventually hits a crisis moment. And when it does, either one of two things happens: either a strong, ideally hegemonic state power forces people to accept the currency as valid, or hyperinflation destroys the currency and it gets replaces by an exogenous alternative. For most of historical time, the exogenous alternative was some form of relatively difficult to corrupt base metal – gold, silver, or electrum, which is just an alloy of the two – but for the past few hundred years first the pound sterling, then the dollar, have emerged as replacements. Uneasy replacements, it should be added: there’s a reason gold is now worth a heck of a lot more than it was twenty years ago. But what I want to emphasize is the role of the power of the state in enforcing the currency as a means of exchange. It comes in two directions: one is taxation, and the other is the naked exercise of violence, of the state’s rough oligopoly on the use of violence without consequence. They are, of course, related. And we’re standing in a moment, due – to repeat a theme of mine – to the emergence of abundance onto the human scene, where violence may not be as relevant as in the past.
On an American dollar, it quaintly states “This note is legal tender for all debts, public and private.” What that means is that the state – with all the power it has, of police, of war, of violence – will recognize the use of the dollar to extinguish tax obligations to the state, and just as importantly, it will recognize its use in the world of law, which has behind it the threat of the application of the state’s ability to compel via force, to extinguish private obligations as well. That is to say, if someone gives you notes with face value of $10,000 to pay off a contractual obligation that has a reasonable and legally demonstrable value of $10,000, the state will compel you to accept those notes as payment to extinguish the liability. You don’t have a choice. You might want something else – libras, euros, cows, cowrie shells, Green Stamps, frequent flier miles – but the US government and its agents will compel you to accept the notes that are imprinted with that statement – “This note” etc etc – and will then cease to recognize any further obligation of the person who paid you using the currency. It’s a political statement: this is government imposing itself at the most primal root of human relations, of basic exchange and definition of value. You might want to value things differently, but the power of the state – with the gun, with the weight of tradition and history but most and, really, only importantly with its relative oligopoly of violence – will compel you to accept its definition of value.
Weak states can’t do this – Weimar Germany couldn’t; Mugabe’s Zimbabwe couldn’t – but strong states can. A victorious Union could in the wake of the Civil War, when “greenbacks” were forced into circulation as a means of paying the government’s debts incurred in winning the war. A victorious United Kingdom could do so in the wake of finally defeating the Napoleonic empire, as it suspended payments of specie against presentment of Bank of England notes until it finally had accumulated enough specie and, more important, prestige and trust to make such exchanges irrelevant. I have a sense that Zuckerberg – I’m sorry, I mean Facebook – whoops, I mean the Libra Foundation will be a test state, much like all sorts of startup countries (the US in 1789, England in 1694, Canada in 1934) who test their ability to enforce a notion of value.
What’s fascinating is the idea that this startup will not be a state, but it will simply be a collection of online exchange platforms. I suppose there is a kind of compulsion available to such a platform, namely the dreaded “network effect”: once a network is used by a critical mass of the population, the rest of the population can’t avoid it. The compulsion now becomes not something of violence, but something of, for lack of a better word, virtual shaming. Either accept libras or be shunned from the network; since being shunned from the network is akin to the ancient Greek notion of exile, containing at once the loss of identity and meaning, it is so horrid to contemplate that nearly all will accept the value proposition, as it were. It makes the name “libras” even more compelling: fundamentally, this is a return to the ancient idea of membership as the only means of creating identify, and thus of creating value. It rejects the medieval but inherited into modern notion of identity being linked to nation, nation being the primal source of violence and control and, thus, of enforcement of value.
But I return in my mind to South Africa. I have a sense that what will really happen will be an inefficiency. There will be some good that will be viewed as portable across borders – in this case the border between the virtual and the real, the real being maybe more porous and in flux than before, but still an “other” relative to the virtual. Some kind of good will emerge as the online equivalent of the Maserati in Johannesburg: a mobile object into which the citizens of the online world can have an escape hatch into an alternative world of value. Goods in the Libra Foundation would will trade at a discount to those goods which have the capacity to cross the border. And in the real world, as the threat or lack thereof of violence of the state varies and changes, and as the value of dollars and rubles and pesos and rands and gold varies, even these will become simply markers of relative violence, of virtual versus real violence.
One of the smartest bankers I ever worked with once pitched a capital raise to the bank I worked for which failed (excuse me: the bank that I know failed. I’ve worked for other banks since, all of which retain the option of failure). My CEO, who was incompetent to a rather extraordinary degree, advised by the guy who has been spinning up LinkedIn panic about libras, listened to the pitch, and at the end said, well, if the world is as bad as you think, what would we use all the equity we raise to buy? The smart banker said, in the best line I’ve ever heard in my career – “well, easy: shotguns and canned goods.”
I’m not sure I’m that pessimistic. And I think we have constructed a world of truly human proportions, with human resiliency, and I’m amazed at how resilient we really are, even when we’re damaged by traumas ranging from divorce, to war, to suicide, to emotional homicide. I look to the goods that can cross worlds, of the virtual, the real, the worlds of the mind and of the heart. I’m investing in relationships. I’m investing in people. You, my son, I’m investing in you.
And despite my sun sign, I’ll refrain for the time being from any accounts denominated in libras.