More on Libra and monetary policy22nd June 2019
The FT has a new piece by a Facebook co-founder Chris Hughes, which argues that the proposed Libra cryptocurrency could undermine the power of central banks. I’m generally skeptical of that view, but in this case Hughes does make a respectable argument:
Let us imagine that Libra works as planned. Hundreds of millions of people around the world will be able to send money across borders as easily as they send a text message. The Libra Association’s goals specifically say that ability will encourage “decentralised forms of governance”. In other words, Libra will disrupt and weaken nation states by enabling people to move out of unstable local currencies and into a currency denominated in dollars and euros and managed by corporations.
The Libra Association promises to choose stable currencies and assets unlikely to suffer inflationary crises. The sponsors are right that a liquid, stable currency would be attractive to many in emerging markets. So attractive, in fact, that if enough people trade out of their local currencies, they could threaten the ability of emerging market governments to control their monetary supply, the local means of exchange, and, in some cases, their ability to impose capital controls.
This is the most plausible argument for the claim that Libra could undermine monetary policy. If Libra were so successful that local currencies stopped being the medium of account, then Libra could completely take over the monetary system, effectively dollarizing the local economy. In that case, it would not be Facebook that controlled local monetary policy, it would be the Fed.
I’m still skeptical that Libra could be successful enough to make currencies like the India rupee or the Turkish lira disappear, but to the extent that Libra is a threat to monetary policy independence, it’s in the developing world, not the USA.
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