{"id":16895,"date":"2020-08-03T22:06:06","date_gmt":"2020-08-03T22:06:06","guid":{"rendered":"https:\/\/davidgerard.co.uk\/blockchain\/?p=16895"},"modified":"2024-10-21T08:58:03","modified_gmt":"2024-10-21T08:58:03","slug":"libra-book-cutting-room-floor-previous-basket-based-currencies","status":"publish","type":"post","link":"https:\/\/davidgerard.co.uk\/blockchain\/2020\/08\/03\/libra-book-cutting-room-floor-previous-basket-based-currencies\/","title":{"rendered":"Libra book cutting room floor: Previous basket-based currencies"},"content":{"rendered":"

Facebook’s Libra 2.0 plan<\/a> moves away from the main on-chain currency being the Libra token backed by a currency basket, to their fall-back national currency stablecoin plan,<\/a> where the “Libra” is calculated in real time from the national stablecoins. And the new version won’t include the Singapore dollar.<\/p>\n

This means that for the prospective Libra book, I probably<\/em> won’t have to add a short history of currency baskets before I can talk about why the\u00a0 original plan for the Libra reserve was ridiculously terrible.<\/p>\n

This is just as well, ‘cos I couldn’t quite work out where to put the fragment below. But I did this homework \u2014 mostly cribbing my references from the illustrious J. P. Koning \u2014 so you may enjoy it anyway.<\/p>\n

Please comment with any corrections \u2014 I might end up using this stuff somewhere!<\/p>\n

I haven’t been blogging so much because I’ve been trying to write book words \u2014 where 200 book words is about as much work as 1000 blog words. I’m tweeting word counts daily \u2014 feel free to cheer me along. [Twitter<\/em><\/a>]<\/p>\n

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Previous basket-based currencies<\/h3>\n

With the end of Bretton-Woods in 1971 \u2014 the final collapse of the gold standard \u2014 major currencies started floating in value against each other.<\/p>\n

This caused problems for international financial markets \u2014 they couldn\u2019t reliably price long-term bonds in foreign currencies. Multiple organisations, public and private, came forward with basket-based artificial currency units.1<\/sup><\/a><\/p>\n

The International Monetary Fund (IMF) launched the Special Drawing Right (SDR) in 1969, to compensate for a shortage of international liquidity due to tight US monetary policy \u2014 it was a paper substitute for gold. The SDR was created with a value of one dollar, or 0.888671 grams of fine gold.<\/p>\n

When the gold standard was finally abandoned, the SDR’s value was calculated as a basket of currencies. The SDR\u2019s basket is reviewed every five years; since October 2016, the SDR has been 41.73% US dollar, 30.93% euro, 10.92% Chinese yuan, 8.33% Japanese yen and 8.09% pound sterling.<\/p>\n

The SDR is a way of keeping the accounts for a reserve \u2014 not a currency as such. The IMF and the Bank of International Settlements (BIS) give all their accounts in SDRs \u2014 though BIS used to use 0.29032 grams of fine gold as its unit of account. Some international agreements state financial limits in SDRs, such as the Convention on Limitation of Liability for Maritime Claims.2<\/sup><\/a><\/p>\n

The European Unit of Account (EUA) was first defined by the European Payments Union in 1950 as 0.888671 grams of gold \u2014 one dollar \u2014 and first used outside the EPU in 1961, when Kredietbank Luxembourgeoise issued a bond denominated in EUA.3<\/sup> The EUA switched in 1975 to a basket of currencies from the European Economic Community. The EUA was replaced by the European Currency Unit, another basket, which in 1999 became the euro \u2014 a proper stand-alone currency.<\/p>\n

Private currency baskets in the 1970s included the Eurco for European bond issues, the Arcru (Arab Currency-Related Unit) for oil-producing countries in the Middle East, Barclays\u2019 B-Unit for international commercial transactions, and Cr\u00e9dit Lyonnais\u2019 International Financial Unit (IFU). None of these ever had much uptake, and none exist now.<\/p>\n

Libra seems to be the first proposal to use a basket-calculated unit of account as the actual currency<\/i>.<\/p>\n

There\u2019s an issue of demand here \u2014 we\u2019ve had internationally-recognised currency baskets since the SDR in 1969. In that time, nobody has started a currency based on SDRs, businesses don\u2019t trade in SDRs, and banks don\u2019t offer accounts denominated in SDRs \u2014 the one attempt at such a banking product, by Chase Manhattan in 1975,4<\/sup><\/a> failed for lack of customer interest, when the dollar got stronger.5<\/sup><\/a> The private basket currencies all failed as well. The synthetic unit that survived is the one that transmuted into the euro, an ordinary general currency.<\/p>\n

It\u2019s not clear that anyone wants<\/i> a basket-based currency \u2014 any more than they learn a synthetic international language to do business (such as Esperanto), instead of whichever natural language is most useful at the time (such as English). Libra may have miscalculated market demand for such a thing.6<\/sup><\/a><\/p>\n

Libra\u2019s basket is roughly in the proportions of the SDR as of 2019 \u2014 but with the Singapore dollar, and without the Chinese yuan. (Libra told the US Senate Banking Committee in September that it would not include yuan in its basket.7<\/sup><\/a>)<\/p>\n

The Singapore dollar is not quite a fiat currency \u2014 it\u2019s fully backed by a reserve of assets, held as a basket of various currencies, maintained by its central bank, the Monetary Authority of Singapore (MAS). The MAS\u2019s goal is to keep the exchange rate as stable as possible compared to Singapore\u2019s main trading partners \u2014 given that Singapore is a tiny country, whose gross imports and exports are more than three times GDP.8<\/sup><\/a><\/p>\n

The Libra Reserve would need to be managed very like the Singapore dollar. Libra has a similar goal of maintaining steady and predictable exchange rates.<\/p>\n

The Singapore dollar is small, and not very liquid on foreign exchange markets \u2014 it\u2019s a strange choice for the Libra basket.<\/p>\n

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1<\/a>.<\/a>\u00a0See<\/i> Joseph Aschheim, Y. S. Park. \u201cArtificial Currency Units: the formation of functional currency areas.\u201d<\/a> Essays in International Finance, no. 114, April 1976.<\/p>\n<\/div>\n

\n

2.<\/a>\u00a0J. P. Koning. \u201cDoes anyone use the IMF\u2019s SDR?\u201d<\/a> BullionStar, post, 4 October 2019.<\/p>\n<\/div>\n

3.\u00a0Ivo Maes, Ilaria Pasotti. \u201cThe European Payments Union and the origins ofTriffin’s regional approach towards internationalmonetary integration.\u201d<\/a> NBB Working Paper, No. 301, National Bank of Belgium, Brussels, 2016.<\/p>\n

\n

4.<\/a>\u00a0Ann Crittenden. \u201cChase Plans Loans and Deposits In Dollars Indexed to S D. R.’s.\u201d<\/a> New York Times, 22 August 1975.<\/p>\n<\/div>\n

\n

5.<\/a>\u00a0Orrren Merren. \u201cThe SDR as a Unit of Account in Private Transactions.\u201d<\/a> International Lawyer Vol. 16, No. 3 (Summer 1982), pp. 503\u2013520.<\/p>\n<\/div>\n

\n

6.<\/a>\u00a0See<\/i> J. P. Koning. \u201cA fifty-year history of Facebook’s Libra.\u201d<\/a> Moneyness (blog), 23 September 2019.<\/p>\n<\/div>\n

\n

7.<\/a>\u00a0Joe Light. \u201cFacebook Sees Libra Tied to Dollar, Euro, Yen But Maybe Not Yuan.\u201d<\/a> Bloomberg, 9 September 2019.<\/p>\n<\/div>\n

\n

8.<\/a>\u00a0\u201cWhat is MAS\u2019 monetary policy framework and its rationale?\u201d<\/a> Monetary Authority of Singapore, 10 October 2018.<\/p>\n<\/div>\n

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The Libra book probably won\u2019t have to include a short history of currency baskets before I can talk about why the original plan for the Libra reserve was ridiculously terrible. So I’ve posted it here.<\/p>\n","protected":false},"author":1,"featured_media":17430,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"inline_featured_image":false,"jetpack_post_was_ever_published":false,"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[1],"tags":[738,1906,902,1353,1328,2011,1905],"class_list":["post-16895","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-uncategorised","tag-bis","tag-chase-manhattan","tag-imf","tag-jp-koning","tag-libra","tag-libra-shrugged","tag-sdr"],"jetpack_featured_media_url":"https:\/\/davidgerard.co.uk\/blockchain\/wp-content\/uploads\/2020\/09\/libra-white-elephant-header.jpg","jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/davidgerard.co.uk\/blockchain\/wp-json\/wp\/v2\/posts\/16895","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/davidgerard.co.uk\/blockchain\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/davidgerard.co.uk\/blockchain\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/davidgerard.co.uk\/blockchain\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/davidgerard.co.uk\/blockchain\/wp-json\/wp\/v2\/comments?post=16895"}],"version-history":[{"count":21,"href":"https:\/\/davidgerard.co.uk\/blockchain\/wp-json\/wp\/v2\/posts\/16895\/revisions"}],"predecessor-version":[{"id":16916,"href":"https:\/\/davidgerard.co.uk\/blockchain\/wp-json\/wp\/v2\/posts\/16895\/revisions\/16916"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/davidgerard.co.uk\/blockchain\/wp-json\/wp\/v2\/media\/17430"}],"wp:attachment":[{"href":"https:\/\/davidgerard.co.uk\/blockchain\/wp-json\/wp\/v2\/media?parent=16895"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/davidgerard.co.uk\/blockchain\/wp-json\/wp\/v2\/categories?post=16895"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/davidgerard.co.uk\/blockchain\/wp-json\/wp\/v2\/tags?post=16895"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}