Libra: Economics Of Facebook’s Cryptocurrency

Facebook last week announced plans for Libra, a new global cryptocurrency. The name seems to be a marriage of the words “livre”, the French currency throughout the Middle Ages based on a pound of silver, and “liber,” which is Latin for “free.” Facebook claims that Libra will give the freedom to easily transmit funds across borders to the 1.7 billion adults in the world without access to traditional banks.

Money is defined by three attributes. It is a unit of account (prices of most things you buy are quoted in dollars), a medium of exchange (you can deliver payment for those items by transferring your dollars to the seller), and a store of value (you can hold your wealth in the form of cash dollars until you want to spend it).

Why do the pieces of paper we call dollars have value? When paper currencies are introduced, the sovereign often gives them initial value by promising to redeem a one-pound note for a pound of silver. But eventually, the pieces of paper come to be regarded as having intrinsic value even in the absence of such promises. This value stems from the fact that having a common unit of account, medium of exchange, and store of value greatly facilitates transactions. We can do everything much more efficiently– and therefore, we can all be richer– if we live in a world where we can pay for oranges using dollars instead of delivering to the seller the physical item that the orange-grower happens to want. A social agreement to use paper dollars as money allows us to enjoy that benefit, so it’s in everybody’s interest to keep it going.

As a result of money’s value as a facilitater of transactions, governments obtain an extra source of revenue just by printing seemingly worthless pieces of paper, essentially appropriating for the government some of the social value that the existence of money helps generate. Governments use this power to get things of real value, such as pay the soldiers or acquire interest-earning assets. This revenue source is known as “seigniorage.” Seigniorage in the form of interest earned on investments by the Federal Reserve and turned over to the Treasury contributed $62 billion in revenue for the U.S. government in 2018.

1 2 3
View single page >> |

Disclosure: None.

How did you like this article? Let us know so we can better customize your reading experience. Users' ratings are only visible to themselves.

Comments

Leave a comment to automatically be entered into our contest to win a free Echo Show.