Currency Logic | Dollar, Bitcoin and Facebook Pattern

Facebook released Libra stable currency, Bitcoin broke through tens of thousands of dollars, and digital currency returned to the public.

This Facebook is a big-eyed "orthodox" player, with heavyweight tickets like Visa, PayPal, Uber, Andreessen Horowitz, and Zuckerberg, who has repeatedly hit the "political wall" in the past two years. Controversy and criticism are indispensable.

There are roughly the following arguments:

First, the theory of digital currency warfare (small ambition).

Facebook issues digital currency, challenges US dollar hegemony, ends the rule of legal currency, highlights Zuckerberg's political ambitions, and demonstrates the future dominance of blockchains and digital currencies. This theory is more common in cryptocurrency followers, decentralized believers, and "password punk."

Second, the dollar conspiracy theory.

The United States intends to use Libra's borderless currency and banking system to defeat other countries' legal currency systems, foreign exchange and financial markets, and promote the outflow of capital from other countries to control the currency hegemony in the digital age. This theory is more common in anti-American empires, dollar hegemons, and conspiracy theories.

Third, the theory of digital currency fraud.

Bitcoin, digital currency, and Libra have no value. They are all bubbles and scams. They are the IQ tax charged by smart people to those who believe. Only the country can issue currency, and the non-stateization of money will not work.

The supporters of this theory include traditional technical forces such as Bill Gates, traditional financial forces such as Buffett, traditional academic forces such as Robert Hiller, financial regulators, digital currency victims, labor value theorists, and the general public.

Fourth, neutral observation theory and trial theory.

This is a relatively open attitude: not to exclude new technologies, distributed, blockchain is worthy of attention, if the technology matures and has application space; does not oppose the new currency and the new financial system, thinks that there is a problem with the current international monetary system, the new currency or Can be used as one of the solutions; from digital currency to digital central bank to digital finance, the borderless currency and financial system is worth the trial and error.

This theory is more common in new technology supporters, rationalists, and some people who eat melons.

It can be seen that this matter is very controversial and should not be underestimated. It is not a trivial conclusion. The main reasons are information technology (distributed computing, encryption technology), currency and financial systems, complex and profound. Economists don't understand technology, and engineers don't understand money. They are long-term isolated and difficult to penetrate.

This article follows the tradition of professional, rational, and hard core of Zhiben Society to try to understand.

1

Non-nationalization of money

Can private money be issued in the end?

Facebook's cryptocurrency "Libra" white paper [1] begins with a domineering side: "Libra's mission is to build a simple, borderless currency and financial infrastructure that serves billions of people."

Zuckerberg’s ambition is to issue a borderless super-sovereign digital currency that restructures the global financial infrastructure. In turn, Facebook's cryptocurrency “Libra” is actually challenging the authority of traditional French currency and the financial system.

10 years ago, on January 3, 2009, when the first block of the Bitcoin network was dug up, Nakamoto was embedded in the text: "Times on January 3, 2009, the Chancellor of the Exchequer stood on the second bailout bank. the edge of".

At this time, Federal Reserve Chairman Ben Bernanke is pursuing the first phase of quantitative easing, decided to purchase 300 billion US dollars of long-term national debt, the acquisition of a large number of mortgage-backed securities issued by Fannie Mae and Freddie Mac.

“Upgrading the righteousness” requires a top-level design that captures the weaknesses of the times. Chen Sheng Wu Guang shouted: "Wang Hou will have a kind of relationship with Xiang Ning". "Gaozu python, Pingdi is still alive", Liu Bangyu white snake uprising, won the world.

Today, both Nakamoto and Xiaozha point to the depreciation of the French currency and the hegemony of the dollar, trying to replace it with a digital currency.

After the financial crisis in 2008, the central banks of the world's major countries implemented loose monetary policies, the depreciation of the US dollar and major French currencies, and the global liquidity, which caused dissatisfaction among many people, but it seemed helpless.

At this point, Bitcoin is low-key.

Nakamoto refers to the key to the legal currency: "The fundamental problem with traditional currencies is that they must be fully trusted to function. It must be trusted that the central bank will not depreciate the currency, but historically there is no lack of violation of this commitment… ”

Nakamoto’s approach is to release a currency without borders, Bitcoin, to establish “a peer-to-peer electronic cash payment system” [2]. There are at least three layers of meaning behind Bitcoin:

First, bitcoin is a non-statutory, borderless currency, that is, the non-state of the currency;

Second, the Bitcoin network is a decentralized distributed network, a bank transfer and payment system without borders;

Third, the emergence of bitcoin means a non-nationalized super-sovereign currency and an attempt by a borderless financial system.

The Facebook cryptocurrency "Libra" reinforces the enforceability of these three layers.

However, there is a question here: Can the currency be non-nationalized and privatized?

This is a seemingly simple and very difficult question to answer. According to the laws of the current major countries, the legal currency is protected by national laws and is legally and compulsory, and private currency is not recognized.

However, if we look at the history, nature and future trends of the currency, this problem is not so simple.

"Freedom fighters" Hayek is a representative of the non-state claims of money.

In the 1970s, Hayek carried out the liberalism in the end, aimed at the last bastion of the free economy, the national legal currency, and proposed a shocking proposition – the non-stateization of money, questioning the legality of the government's monopoly of currency issuance. , advocate a competitive currency to break the government's monopoly on money.

To this end, Hayek published the book "Non-State of Money." This book is now the theoretical banner of digital currency supporters. But in fact, few people have read this book. After the book was introduced to China, it was soon out of print, and it was not republished until this year.

However, it is a pity that Hayek did not provide detailed historical data or reliable theory in the book to demonstrate the feasibility of the non-stateization of money. He just raised a number of questions [6]:

In history, gold, silver, and bank vouchers are not legal tenders. The time for non-stateization of money is far greater than nationalization. Why do currencies must be monopolized by the state?

Since we believe that market competition is the most efficient means of resource allocation, why is currency issuance not addressed to the market?

The price, supply and competition mechanism of the market can prevent the currency from being over-suppressed and maintain the price stability. The state monopoly will lead to currency overshoot and currency depreciation. Why not use the market mechanism to solve the inflation problem?

These three questions even stumped the economists of the time, including the founder of the monetarism Friedman.

Keynesians have little in common with neoliberals, but they all insist that money is monopolized by the state. Hayek asked Friedman. Since you are a market liberal, why do you not believe in the market on the currency issue?

Fu Lao couldn’t answer it. He only said that money is very important. It should not be swayed and can only be controlled by the state. In fact, most economists insist on currency nationalization, but there is no reliable theoretical support.

The shells, nails, salt, stone coins, gold and silver, and bank notes used by people in the early days were not nationalized, and they were all formed spontaneously by the market. For example, bank vouchers are “vouchers” issued to customers by private gold shops in cities such as Venice and London.

The earliest central bank, the Bank of England, was founded in 1694 by the Scottish William Peterson. The Royal Chartered central bank was originally private and mainly financed the government and had the right to issue currency.

In 1844, Prime Minister Peel introduced the new banking law, the Peel Regulations [4], which reorganized the Bank of England and set up the issuing department and the banking department.

The launch of the Peel Regulations is a landmark event in the history of money. This regulation stipulates that private currency banks will no longer be added, and the amount of money issued by existing banks is limited. At that time, a total of 279 private banks and joint-stock banks in England had the right to issue currency. If the bank went bankrupt, the issuance quota would naturally expire and its quota would be transferred to the Bank of England.

The issuing department of the Bank of England actually assumes the basic functions of the central bank, including issuing currency; managing government bonds; cooperating with the Ministry of Finance and the Chancellor of the Exchequer, implementing monetary policy; acting as the government to keep gold foreign exchange reserves, and so on.

The Peel Regulations weaken the rights of private banks to issue currency, control the amount of private bank currency, confirm the Bank of England's central bank status and the legal currency status of the Bank of England.

This is a key step in the history of currency and the nationalization of money.

Later, in order to avoid the conflict of “being a referee and an athlete”, the Bank of England gradually abandoned commercial banking and became a veritable central bank. It was nationalized by the Labor government in 1946.

The Bank of England has become the standard template for central banks in other countries, playing the role of “final lender”, “issuing banks, banks of banks, government banks” [3].

However, after the passage of the Peel Regulations, the then British philosopher Herbert Spencer questioned it (seeing that Hayek is not the initiator of the idea of ​​currency denationalization).

Spencer’s reason is exactly the same as Hayek’s. He pointed out [10]: “Since we trust the weight of the tea that the grocery store owner sells to us, we also believe in the weight of the bread that the bakery owner sells to us, then we can trust Heaton and Sons or other Birmingham companies also supply us Shavrin and Shilling based on their risks and profits."

Spencer’s claim angered the famous British economist Jevons. Jevons said bluntly: "Nothing is more inappropriate than currency to be handed over to companies for competition." Jevons moved out of the "Grechen's Law" as the basis, he said: "The good money can not expel the bad money just prove this law."

Later, the economics community generally accepted Jevons's view that the money market is prone to the problem of bad money driving out good money, so the currency issue should be handed over to the country. In the war years, most governments took over the central bank and currency distribution rights. Since then, people have become accustomed to the rules of currency nationalization and fiat currency.

However, Jevons actually overlooked that there is a "Grechen's Law" in any market. The less competitive the market, the worse the bad money drives out the good money.

The government stipulates that only gold and silver can be used to mint coins, or that the distribution market is monopolized, and bad money will be used to drive out good money. If the money market is fully competitive, the bad money will be eliminated if no one receives it. The international money market is actually a relatively competitive market, and no one receives a depreciating currency such as Venezuela Bolivar.

Therefore, the "Grechen's Law" to explain the nationalization of money is actually untenable.

The difficulties here come from our stereotypes about money, or misleading "general equivalents."

Since Adam Smith, economists have believed that money originates from ordinary commodities and belongs to general equivalents. Money that does not condense human labor has no value. This monetary concept has always misled economists and the public.

Since the 1970s, economists have begun to reflect on the nature and origin of money. The idea that money is a contract (contract) is gradually recognized.

The new institutional economists believe that the essence of money is a set of contracts, which is a system arrangement for market transactions that is negotiated by a group of market entities. Modern Monetary Theory (MMT) believes that money originates from bond debt and belongs to debt accounting instruments and debt deeds (owers). However, MMT believes that money must be controlled by the state [9].

For example, the lack of currency trading on an island is not convenient, and the islanders negotiate the use of an intermediary to facilitate the transaction. If they jointly determine the use of stone coins as a trading intermediary, then the stone coins are the currency, and the contract that everyone must abide by – the contract to promote the convenience of trading (see " The Essence of Money | The Island of the Stone Coin, the Mystery of the Dollar" Bitcoin's 殇 ").

Money is caused by transaction costs, and in order to reduce transaction costs, people negotiate a system to solve. In the history of mankind, the Bangladeshis negotiated to use shells to trade, the grassland people negotiated to trade with sheepskin, the Yap Islanders negotiated to trade with stone coins, and prison prisoners negotiated to trade with cigarettes…

Credit currency is a contract of debt and debt nature. “This note is legal tender for all debts public and private” printed on the US dollar, and “Promises to pay the bearer on demand” [8] printed on the Hong Kong dollar, all refer to the debt contractual relationship.

Currency, a wide variety, but a variety of contractual arrangements.

Why is the last legal currency monopolized by the state?

The emergence of fiat money is essentially the same as the emergence of the state. The state is also a contractual arrangement, but it has an evolutionary process.

The famous American anthropologist Morgan (with "Ancient Society", in the article " Marriage Economics "), Seves and other national group speech. Morgan believes that the country evolved in accordance with the "clan-tribe-tribal alliance-state." Sevis changed the tribal alliance to an emirate.

Enlightenment thinkers such as Hobbes, Locke, Rousseau, and Spinoza proposed the social contract theory, arguing that the state is a group of contracts reached by the nationals to protect their property and life safety by establishing state machines.

The difference from the clan, tribe, and tribal alliance is that the state has a higher level of contract, and its power, obligations, responsibilities, and ability to perform are stronger. In fact, this is also the difference between legal tender and other currencies.

Shells, sheepskin, salt, nails, stone coins, copper coins, gold and silver have all been the currency of some groups to negotiate, that is, the contract. However, after the emergence and strengthening of the country, the nationals negotiated how to set up a violent organ to protect property and security, and negotiated how to determine a trading medium (currency) to promote commodity trading.

Thus, the legal currency was born.

In ancient times, the sooner the country emerged, the stronger the state power, the sooner the legal currency was born and the stronger it was. After Qin unified the world, the currency was unified.

In modern times, as commodity transactions became more frequent, the credit advantage of legal tenders began to play, and various currencies such as shells, sheepskin, salt, and nails disappeared on a large scale and were gradually replaced by legal tenders. In the large-scale commodity trade, the network effect of money is vividly displayed. At the same time, the network effect has strengthened the state monopoly of legal currency.

The above is the legal currency formation process, but there are two details of the study:

1. Commodity currencies and metal currencies such as shells, salt, nails, coins, gold and silver, etc., are more spontaneously formed by the market and belong to the contract formed by the market spontaneously, rather than the result of centralized consultation.

This is the claim of the Austrian school. They believe that the market is a spontaneous order. When there is no currency, everyone's trading objects are guessing and testing what the counterparty wants most in order to trade their own things and get what they want.

After decades and hundreds of years of temptation, the preferences of local people have gradually tended to be the same. For example, the islanders think that the stone coins are the best, the grassland people think that the sheepskin is the best, and the seaside fishermen think that the shells are the best. In this different place, the market spontaneously formed different currencies.

The Austrian school believes that money is not created by a certain individual, but is formed spontaneously and evolved by the market after a long history. In an environment where transaction costs are extremely high, traders are constantly exploring, speculating, and ultimately forming a consensus (contract).

Second, the early (ancient) legal currency is a mandatory contract.

The ancient countries had obvious violent and dominant colors. The nationals could only passively accept everything including the legal currency, and belonged to the object of being ruled. Among them, currency is also a means of state rule.

Only in modern society, after the establishment of a democratic country, the legal currency is a contract negotiated by the nationals.

From the nature of money, money is just a group of market contracts for a group of people. The legal currency is the national market contract. The international monetary system is the market contract signed by all countries, such as the gold standard before the First World War and the Bretton Woods after World War II. system.

Therefore, money is not a privilege of the state, both historically and in essence. Even in the legal currency era, there are a large number of private currencies and illegal fixed currencies as supplements.

Due to the limited dominance of ancient countries, the legal metal currency was unable to penetrate into remote villages due to transportation and cutting, and a large number of illegal currencies were created.

In the book "World History of the Monetary System" [7], Professor Kuroda of the University of Tokyo in Japan has done a lot of historical research on ancient currency. He found that in the remote villages of ancient China and modern Japan, due to the shortage of money, the villagers can only use rice and eggs as the trading medium, and there are still many "bond debt-type currencies" – borrowing rice, borrowing labor, etc. Arrears or verbal commitments.

In the special period of modern times, there was also a non-statutory currency. In "The Scourge of Money" [5], Friedman tells the story after a Great Depression – a market in the state of Washington, Tenerno, negotiated to use wood chips as currency.

Under the impact of the Great Depression, 1055 banks in the town of Tenano stopped all redemption, and the transactions in the city were rampant. However, the Chamber of Commerce and Industry plans to issue a certificate equivalent to 25% of the deposit of depositors. Some of the certificates are issued in the form of printed chips with a denomination of 25 cents and postcard size. The merchants agree to accept the currency and overcome the difficulties. .

Professor Kuroda [7] analyzed this: "It is not based on the actual creditor's rights, no guarantee from the government, but only because it is just a piece of wood or paper scraps. It is entirely based on the looseness of the people in the city. Agreement."

As a top expert in contract theory, Mr. Zhang Wuchang insisted on the idea that money is a contract. He described an example in the book Economic Interpretation [8]: This happened during the war years, tearing 10 yuan notes into two halves, half a sheet of 5 yuan. Tear half the currency, the bank does not accept (unless the new currency is exchanged), the law has not recognized, but the market still recognizes, trading at 5 yuan value.

Professor Kuroda's "World History of the Monetary System" [7] used the famous Maria Trisa silver coin, a common currency that was widely circulated in the countries around the Red Sea in the 19th and 20th centuries. Many economists, such as Keynes, Hayek, and Weber, have paid attention to this historical currency.

Maria Teresa is a free currency that transcends national authority, territory, ethnicity and culture. Maria Teresa was originally the legal currency issued by Austria and was named after the famous Austrian women's crown in the 18th century.

The Maria Trisa silver coin, which was originally the legal currency of Austria, was widely circulated in Africa and West Asia, far from Austria, and became a cross-border settlement currency, equivalent to an international regional currency.

In 1854, the Maria Teresa silver coin was abolished in Austria and was also banned in the Ottoman Empire, becoming a "illegal currency." However, this kind of silver coin from Vienna has not been reduced, but it has been widely distributed for a long time. The trade of leather, petroleum, sugar and fiber products of British companies in the Red Sea area is settled by this silver coin.

In order to support international trade, Vienna, Rome, Italy, London, France, Paris, British India, Mumbai, Belgium and Brussels joined the casting of Maria Teresa.

Therefore, money is actually an "invisible agreement" that is spontaneously recognized by the subject in the market exchange.

After understanding the history and essence of money, we can easily understand that the non-state and nationalization of money is an agreement. The US dollar is the American contract, the euro is the contract of the euro zone countries, and the digital currency is the contract of the digital currency holder. Essentially, all currencies are agreement standards.

Contracts, digital currency supporters are generally understood as "consensus" and execution contracts are called "bookkeeping." Use the "consensus algorithm" to issue digital currency, such as bitcoin's proof of work (POW). The so-called "consensus algorithm" is the specific powers, obligations and rules in the agreement. For example, the workload proof is to compete for the accounting rights according to the efficiency of the hash operation.

Bitcoin is a contract between Bitcoin supporters, Ethereum's contract with Ethereum supporters, and Libra Stabilizer is a contract for Facebook supporters (2.7 billion potential users worldwide).

Ethereum is a typical contract – smart contract, developers can use smart contracts to develop Dapp, supporters can use Ethereum to invest, consume Dapp. This is the application scenario of this consensus currency.

Visa, PayPal, and Uber will become credit nodes for Libra stable coins. It is expected that Libra stable coins will also have a fairly broad application scenario. This will constitute a strong competition for Ethereum and EOS.

Since they are all currencies, Libra stable coins are born in the “Grandeur”. Bitcoin is the originator of digital currency and blockchain. Can they challenge the US dollar?

2

Contractual arrangement of currency

Why is currency overshoot equal to default?

According to the nature of money – the currency is the contract, the non-stateization of money is historically and theoretically sound. Bitcoin, Ethereum, Libra stable currency and private currency are at least "reasonable" and legal. Sex applies to national laws.

However, Bitcoin, Ethereum, EOS and most digital currencies have lost their currency trading functions and become speculative digital assets because of their fatal flaws (contract defects).

This view is extremely important.

The above currency is the contractual claim, which demonstrates the rationality of the non-state of money, but we did not discuss the specific content of the contract.

All currency contracts have a “mission nature” obligation: currency prices are stable.

Whether it is an agreement formed by the market spontaneously or a contract negotiated by a group or a country, the purpose is to determine a reliable and credible transaction medium (currency). What is reliable and credible?

In addition to uniform texture, non-perishable, easy to carry, and easy to cut, the most fundamental price (value) is stable. No country or group uses an unstable medium as a currency. Historically, no unstable currency has lasted for a long time. All currencies collapsed in large devaluations, or relative values ​​were unstable.

Therefore, the most fundamental obligation of the monetary authorities (issuers) is to maintain the stability of the currency price.

Conversely, if the currency price is unstable, especially a large depreciation, it is equivalent to a monetary authority breaching the contract and abandoning the promise.

Mr. Zhang Wuchang pointed out in the Economic Interpretation [8]: "It is important to look at the currency from the perspective of the contract. In this way, the occurrence of inflation or deflation is a breach of contract… The sound we have heard demanding to stabilize prices is actually It is a requirement to keep the contract."

From the perspective of the nature of money, the monetary authorities issue too much money, which means two fatal problems:

First, the state violated the currency contract, did not fulfill its obligation to maintain the stability of the currency price, and did not provide a reliable, credible, and stable price of the transaction medium to the nationals. Western countries value the personal credit of the head of the monetary authority.

Second, the state has issued too many "debt". When the country does not have enough assets to "exchange", it means that the country's credit is bankrupt and the currency is depreciated.

In 1971, the United States issued too many dollars and did not have enough gold reserves for member governments to exchange, so it announced the closure of the gold exchange window. This means that the United States unilaterally tore up the Bretton Woods system, an international monetary agreement.

Looking at Bitcoin, Ethereum and EOS, the price fluctuations of these three digital currencies are very large, and the price is extremely unstable. In essence, it violates the currency contract, causing it to lose the trading function of the currency. From then on, they gradually drifted away from money and turned into speculative digital assets.

From the perspective of currency issuance, there are huge loopholes in the contract for digital currency, the “white paper”:

First of all, Bitcoin, Ethereum, and EOS emphasize decentralization, and there is no responsible entity for currency issuance. In other words, there is no institution similar to the central bank to maintain the stability of currency prices.

Second, Bitcoin is a closed, market-independent distribution mechanism that cannot maintain the stability of currency prices.

Satoshi Nakamoto expressed dissatisfaction with the traditional banking system and the dissatisfaction of currency overspending, trying to maintain the bitcoin's non-depreciation by means of fixed issuance (21 million pieces). In fact, this approach is mechanical and ineffective.

Currency is not issued for distribution, and the function of money is to serve market transactions. Money should not be issued on a fixed basis, but on a market basis.

Nakamoto used a fixed-rate issuance mechanism to try to make Bitcoin continue to appreciate. In fact, the appreciation of the currency, like the depreciation, is a violation of the contract and is not conducive to commodity trading. The duty of money is stable, not appreciation or depreciation.

Finally, Ethereum and EOS focus on currency application scenarios, but ignore the importance of price stability.

Ethereum's smart contract promoted the development of Dapp, and also found a good application scenario for the Ethereum currency. Many people buy Ethereum investment projects, and the project parties are happy to collect Ethereum. However, when the price of Ethereum fell sharply, this wonderful application scenario collapsed.

In the second half of last year, whenever Bitcoin fell, Ethereum fell even more fiercely. Especially when Bitcoin fell below the key support of $6,000, Ethereum fell sharply. The reason is that a large number of project parties sold collective embarrassment in Ethereum, and they abandoned Ethereum in exchange for US dollars to stabilize the wealth value.

Ethereum set up the stage, the protagonist is not reliable, and the play is interpreted.

In fact, there are technical obstacles in the current Ethereum platform. Ethereum is as crowded as Bitcoin, and a slightly hot game can block Ethereum. Ethereum tried to improve with fragmentation technology (group accounting), but the technology is estimated to take two years to mature. This is the drawback of the current blockchain technology.

EOS chose the super node (Facebook's Libra also uses this approach) to solve the congestion problem in Ethereum. In order to maintain the super node, EOS has developed a community “constitution”, which is actually a currency contract. Some people think that the super node is not really a decentralized center. It violates the distributed spirit and belongs to the giant game of super players.

In fact, although the EOS super node has expanded the application scenario and improved the efficiency of accounting, the essential problem is the same as Ethereum, and there is no way to maintain currency price stability.

How can we maintain currency price stability? What kind of currency contract is credible?

From the perspective of human currency history, there are roughly several solutions:

The first is the use of reliable commodity (metal) currencies.

This is the simplest, most primitive, and most common method used in modern times. For example, islanders prefer stone coins, fishermen prefer shells, nomads prefer sheepskin, and bitcoin fans prefer bitcoin.

Later, metals, especially gold and silver, stood out from many commodity currencies and became the metal currency of most countries. Metal currency is just a special commodity currency with a higher credit.

The currency is equal to the most reliable commodity, which is in full compliance with the labor values. Because of the large historical records, coupled with the deep-rooted labor theory of value, economists and the public have misunderstood the nature of money:

1. Money originates from commodities and is generally equivalent;

Second, the currency must condense human labor, and the currency (banknote) without labor value has no value.

Third, convinced of gold, and even called for the restoration of the gold standard.

In fact, the value of money has nothing to do with commodities or gold. Commodities and metals are only the simplest solutions to historically solve the problem of currency price stability and guaranteeing currency credit. The value of money has nothing to do with the labor of human beings. The value of money comes from the trading function of money, and the function of trading has value. Just as the value of sunlight is not related to humans and labor, its value comes from its functional attributes.

The second is to use the authority to sign the loan contract.

In ancient societies, due to information asymmetry and surplus materials, there was no condition for barter exchange. At the time, more exchanges were not spatial exchanges, but time exchanges.

For example, if there is no food and no exchange, what should I do? A found the patriarch, the patriarch came forward to let B borrow a leopard leg to feed the hunger, and A promised to return a prey to return a leopard leg or a deer.

This is the exchange of time, an important value trigger mechanism in modern financial markets.

In this kind of transaction, A is equivalent to writing an owe to B, or a verbal commitment. This debt and commitment is a currency, a debt and debt contract. The authority of the patriarch, the customary rules, and the credit of A are the guarantees of this currency contract. This is the bond debt type contract.

How can this currency not depreciate?

A promised to return a leopard leg or a deer on time and in full, indicating that the currency did not default, and the "deficiency" did not depreciate.

The third is to use the national mechanism to maintain currency prices.

When the tribe evolved into a state, national credit replaced the patriarch's credit and became a stabilizer for currency prices.

In the beginning, the government used the country's credit to combine the first approach, namely the thinking of commodity currency and the theory of labor value theory, to construct the gold standard currency.

Governments directly cast metal currencies, such as gold, silver, and copper. Later, after the bank vouchers were born, there were gold-based banknotes, such as the pound before the World War I and the dollar after World War II.

However, the banknotes at this time cannot be issued casually, but are issued in gold as an asset reserve. The biggest benefit of this issuance mechanism is to maintain currency price stability.

As early as the founding of the Bank of England, the bank adopted a balance sheet approach – one side of the gold asset and one side of the Bank of England vouchers liability to determine the issuance mechanism. This became a model for central banks to adhere to the gold standard system and stabilize currency prices.

The 1844 Peel Regulations [4] provide:

The English issuance department can issue the same amount of bank notes with the 14 million pounds of securities and precious metals as the issuance preparation. The maximum issuance limit for preparing for securities is £14 million. To exceed this limit, gold and silver should be prepared, and the preparation for silver should not exceed 25%.

Anyone can exchange gold for the exchange at a price of £17, 17 shillings, 9 pence to 1 ounce of gold.

Therefore, the Bank of England is equivalent to establishing two major standards of currency:

First, gold and securities are used as asset collateral to issue currency, mainly gold;

The second is rigid redemption, that is, the gold standard banknotes can be exchanged for gold at any time.

The essence of the contract of the gold standard currency is whether the banknote can be exchanged for gold at a fixed price. This is the credit of the gold standard.

After the Second World War, the Bretton Woods system established by the United States was also an international monetary system based on the gold standard. In this system, $33 is exchanged for one ounce of gold, which is limited to member governments, and individuals do not have the right to redeem.

However, the governments of France, Spain and other countries continue to exchange US dollars for the Fed to exchange gold, resulting in the continuous decline of US gold reserves, the continued rise in gold prices, and ultimately unable to maintain the gold price and close the exchange window.

The gold exchange window was closed, marking the complete entry of the era of credit currency and floating exchange rates.

Credit currency cannot rigidly redeem gold and become a real banknote. The US dollar, the euro, and the Japanese yen issue a complete "debt". You mortgage the house to the bank, and the bank only gives you an "Irrigation" that cannot be exchanged for gold. Therefore, many people feel that they still have to return to the gold standard.

In fact, the elimination of commodity currency, metal currency, and gold standard currency is an inevitable choice in history. As international trade continues to increase, the Fed must print more dollars, but gold growth is very limited, so the dollar will depreciate, the price of gold rises, so the dollar can not anchor gold, and eventually the gold standard contract collapses.

The replacement of the gold standard by the credit standard actually returns to the essence of the currency – a pure contract-based currency that does not require commodities or gold, and relies solely on institutional arrangements.

However, the problem with the credit standard that is not anchored or exchanged for gold is how to ensure that the system does not default and ensure that the credit currency does not depreciate?

The credit standard currency is actually a highly institutionalized currency and is a contractual arrangement with significant performance obligations. Since the 1970s, the central bank has strengthened the contract system in three aspects:

The first is to strengthen the independence of the central bank. The currency is not controlled by the government and any organization. It promotes the simplification of monetary policy objectives. It usually aims to control inflation and aims to stabilize currency prices and fulfill currency contracts.

Second, the central bank's innovative market operation tools, interest rate regulation and open market operations.

Third, the central bank's asset replacement: securities, bonds, and foreign exchange instead of gold became the main assets of the central bank.

In addition to adjusting interest rates and reserve ratios, the central bank's most commonly used regulation and control method is open market operations, that is, through the purchase and sale of securities, government bonds, foreign exchange reserves and other assets to recover and release the local currency, in order to maintain the stability of the local currency price.

3

Hegemony analysis of the dollar

How likely is Bitcoin and Libra?

Let's take a look at the contractual arrangements for Bitcoin, Ethereum, and Libra:

Bitcoin lacks an institution like the central bank's open market operations committee, and there is no asset for buying or selling to regulate prices.

Read the Bitcoin white paper carefully and you will find that the core purpose of Nakamoto's design of Bitcoin at the time was to establish a “peer-to-peer electronic cash payment system”, which established a banking system without borders. Digital currency (bitcoin) is only a by-product of this system.

Why is it a by-product?

The Bitcoin network is a decentralized distributed system that is completely opposite to the technical logic of Alipay and commercial banking systems. If A transfers $1,000 to B, there will be some problems, such as the balance, the verification of the payee's account matching, and the double payment problem. Usually we introduce a third-party authority to deal with these issues, such as the banking system, Alipay system.

However, Nakamoto believes that third-party authority is not credible. He wrote in the white paper: "But the problem with this solution is that the fate of the entire monetary system depends entirely on the company that operates the mint, because every transaction is confirmed by the mint, and that A coin factory is like a bank."

Nakamoto's solution is to hand over these issues to everyone (nodes) to prevent them from being controlled. Everyone chooses a person to operate and then supervises him to complete. This is the distributed computing as opposed to centralized.

Who is it to choose?

It is not a democratic vote, but a free competition. Nakamoto took a math problem and solved the hash function, that is, "find a proof of the workload with sufficient difficulty in his own block." Of course, this work is done by a computer. The computer with the stronger computing power has a greater chance of winning the competition. Such a professional mining machine with superb power is born.

Once the entire network broadcast and other nodes have confirmed, you can record these transfers in the block and then "follow the end of the block, create a new block to extend the chain." This process is called "bookkeeping" and this chain is the blockchain.

This bookkeeping process is open, equal, and irreversible and is considered to be more credible. This is the value of the blockchain.

However, if there is no benefit, who is willing to do the bookkeeping work?

Satoshi Nakamoto thought of a way, who remembered an account, that is, dig into a block and reward a number of bitcoins (now about 12). This is a reward mechanism.

Therefore, mining is actually for competing for billing rights. Bitcoin (as currency) is actually a reward mechanism designed to drive the Bitcoin blockchain network.

Bitcoin supporters believe that this incentive mechanism is the most fair according to the proof of work (POW), that is, the more labor-efficient approach.

Looking at the currency issuance mechanism, no house mortgage can't get money. Once the currency is over-represented, the tide of money flows to the rich and the big companies, while the enterprises and the poor who do not get the money are inflicted. The central bank does not abide by the excessive currency of the currency contract. In fact, it is to collect the coinage tax from the poor and increase the gap between the rich and the poor.

However, from a currency point of view, Bitcoin's workload proves to be fatal. This currency issuance mechanism means pure consumption of labor. No assets are accumulated. The result of no assets is not bitcoin, but cannot pass. Buy and sell assets to maintain the price of Bitcoin.

Some people think that Bitcoin consumes so many electricity and mining machines, and it is worthwhile to maintain a cross-border distributed banking system. This is true, but from a currency point of view, this has caused Bitcoin to completely violate the currency contract. Bitcoin prices fluctuate drastically and lose their monetary value.

From the white paper, Nakamoto's wish is not to build a borderless currency, but a global distributed banking system.

Where is the future value of Bitcoin?

After losing the monetary value, Bitcoin only has the value of speculative digital assets. Is speculative assets worthwhile?

In many speculative markets in the United States, speculation is only a neutral word. In general, the futures speculative market has the value of price discovery, namely the barometer, the wind vane, and the value of risk transfer – low risk appetites transfer risk to high risk appetites.

Bitcoin does not have the value of risk transfer, only the value of "barometer". Since Bitcoin is a distributed transfer system without borders, once the international situation is tense, such as the situation in Iran and the monetary inflation of the legal currency, the value of this system will increase – capital outflows and money laundering.

Because its liquidity is stronger than gold and global transactions are more convenient, Bitcoin may replace the gold index as a “barometer” of the international situation.

Therefore, based on the distributed banking system without borders, the biggest space for Bitcoin should be “digital gold”. Of course, whether Bitcoin can replace gold is still controversial. Both should have their leading position on the line and offline.

The price of bitcoin is actually formed spontaneously by the market, which is really remarkable. Like many blockchain projects, Ethereum started out as a private fundraiser, which was a lot of bitcoin. However, Bitcoin prices are too volatile to be used as an asset to stabilize Ethereum prices. In the same way, other digital currencies can be used to stabilize Taiyuan and EOS, and the latter cannot be used to stabilize their prices.

Of course, at first some blockchain projects attempted to finance the shares as the asset issuance currency, which is actually the securities standard currency.

However, because stock mortgages are suspected of violating the securities laws of major countries, most projects have abandoned this approach. This has led to the lack of valuable asset reserves in blockchain projects and digital currencies, which have become a source of wood and water without waste, all of which have become speculative digital assets.

Due to the low difficulty of digital currency technology and low cost of distribution, a large number of digital assets are listed. Originally, the exchange was free to compete, and there were listings and delistings, which could optimize digital currency assets. However, due to the extremely low cost of the formation of the exchange, the lack of supervision, a large number of exchanges on the line, a large number of digital currency online, resulting in the proliferation of the entire market "currency", flooding.

Bitcoin, Ethereum and digital currency, once lost their currency function and become digital assets, completely lost the qualification to challenge the US dollar and French currency.

Money is the cornerstone of the financial system. The pricing power of any asset is in the hands of the currency, and the price of the digital currency is controlled by the legal currency. For example, China's real estate, stocks and other assets are placed in a basket, and their prices are determined by the price of the yuan. The price of Bitcoin is determined by the US dollar. Especially after the Bitcoin futures are launched, the US dollar forces have formed a dimensional strike against Bitcoin futures and spot prices.

Therefore, the real future and power of digital currency is on the stable currency.

Facebook's stable currency Libra, which circumvents the drawbacks of the Bitcoin currency mechanism, uses the advantages of the EOS super credit node and combines the modern monetary system – a basket of currencies as a reserve asset – a relatively complete digital currency contract.

Libra should have three goals:

One is a stable cryptocurrency without borders;

The second is a global distributed banking system;

The third is a global digital financial system centered on Libra.

From the white paper, Libra is similar to the Special Drawing Right (SDR) issued by the International Monetary Fund, also known as Paper Gold.

In 1969, the dollar crisis broke out and the International Monetary Fund proposed to create a complementary international reserve asset as a supplement to the supply of dollars outside the United States. This is the origin of the special drawing rights. The value of the SDR is currently determined by a basket of reserve currencies consisting of the US dollar, the euro, the renminbi, the yen and the pound sterling.

However, the SDR has a specific scope of use and can be used by member governments (non-private), mainly for repaying IMF debt and compensating for the balance of payments deficit between member governments.

Not surprisingly, Libra's reserve assets should also consist of a basket of assets such as the US dollar, the euro, the pound, the yen and the US debt.

Compared with Bitcoin, Libra has an asset reserve and can maintain its price stability by buying and selling dollars and US debt. In this way, Libra is conditional to fulfill its currency contract and become a real "currency".

So, can Libra challenge the status of dollar hegemony or fiat currency?

We often say that dollar hegemony, what is dollar hegemony? We can use a keyword – the coinage tax to summarize. How does the US dollar collect the coinage tax from the world? There are generally four ways:

The first is to issue the US dollar, and whoever uses the US dollar will be taxed.

This is the same for any country's legal currency, because the legal currency is a credit currency, which is essentially an arrears. You give me assets, I give you a debt, and collect your coinage tax. At present, the most used international settlement is the US dollar, and the US dollar receives the most coinage tax.

From the nature of money, this coinage tax is actually not a "tax." Because money is a kind of "universal" debt, it is a trading solution that provides you with transaction convenience and is actually valuable.

The second is the excessive dollar.

This phenomenon is more obvious. Excessive currency causes the dollar to depreciate, meaning that the Fed is not subject to contracts. This non-compliance has led to a decline in the dollar’s ​​foreign exchange reserves in other countries, eroding the debt burden of the US government. This is in disguise to collect the coinage tax from the world.

The third is to issue US dollars for US debt.

This type of tax collection is extremely concealed and few people are aware of it. Today, the most important asset in the Fed's balance sheet is the US debt. Compared to gold and securities, issuing US dollars for US debt is the lowest cost method (for the entire US).

The US debt itself is an arrears, and the other debts are issued by the arrears – the US dollar. The advantage of this is that the government can only expand the dollar by paying less than 3% interest. U.S. companies have received more than 15% of their global investment in commercial banks from commercial banks.

If the Fed uses gold and securities as assets to expand its currency, the cost of buying gold and securities by the US government is much higher than the cost of issuing US bonds.

Therefore, the so-called dollar hegemony is actually a "double spring" of the US dollar and US debt.

The fourth is the tight cycle of the dollar.

The appreciation cycle of the US dollar has been criticized. Every time the Fed raises interest rates, it will trigger debt crisis and currency crisis in other countries, and even trigger the global financial crisis.

This is the outstanding performance of the US dollar hegemony and the core issue of the current world monetary system. The US dollar as a "world currency" should theoretically be a common contract formed by the global market spontaneously, but it is also the American currency. The US dollar is only responsible to Americans and not to other countries. The responsibility of the dollar is not commensurate with its power. The "small responsibility" of legal tenders conflicts with the "great power" of economic globalization.

Therefore, the loosening and austerity of the US dollar will only consider the interests of the United States, and some countries will be harvested. So, how is it harvested specifically?

Open the central bank balance sheet of other countries, you will find that central banks in many countries use the US dollar and US debt as the reserve assets to issue currency. Is there a problem with this?

If the dollar appreciates, it means that the assets of the country’s central bank’s balance sheet are deflated and the currency depreciates. What should I do at this time? Some assets are generally sold to maintain the local currency price. But what about the lack of dollar reserves? The depreciation of the local currency is inevitable, and a large depreciation will trigger a currency crisis or a debt crisis.

The Latin American debt crisis, the Asian financial crisis, and the currency crises of emerging countries such as Turkey and Argentina in the past two years have all been caused by this cause.

Therefore, the currency with the US dollar as its asset reserve may be harvested by the US dollar. The key to fate is whether there is sufficient foreign exchange reserves.

Why are emerging countries, especially Latin American countries, always harvested by the dollar? The main reason is that the economic strength of these countries is not strong, the ability to earn foreign exchange through exports is insufficient, and it is impossible to maintain the price of the local currency. The reason why the Hong Kong dollar can anchor the US dollar for a long time is that the Hong Kong economy is in keeping with the American rhythm and has sufficient foreign exchange reserves.

Let's take a look at Libra's fate.

The Hong Kong dollar is the US dollar standard and is issued in US dollars. Libra is similar to the Hong Kong dollar, anchoring the dollar, and of course the currency of other countries.

However, Libra's fate is the Hong Kong dollar or the Russian ruble, the Argentine peso, and it depends entirely on whether Facebook's international management organization Libra Association (for the time being defined as Libra's central bank) has sufficient foreign exchange reserves.

If the dollar fluctuates greatly, Libra may not be able to maintain its price stability in order to maintain price stability and buy low prices. Where does Libra's foreign exchange reserves come from?

The Libra Association itself cannot be a profit-making institution and conflicts with the functions of the central bank. Therefore, the main foreign exchange comes from the entrance fee of credit nodes such as Visa, as well as Facebook's assistance. However, this should not be enough.

Emerging countries have certain ability to earn foreign exchange, and most of them are unable to fully maintain the stability of their currencies. Libra's main pressure is how to keep prices stable when the dollar fluctuates.

Does Libra anchor a basket of currencies to spread the risk? The so-called basket of currencies is still the dollar, because other currencies are less reliable.

Therefore, Libra does not have any room to challenge the US dollar, and its pricing power is controlled by the US dollar.

There is an opposite view that Libra is a US conspiracy and that the dollar is exerting digital currency hegemony.

This view is actually untenable. The current international monetary system is most beneficial to the US dollar. The US dollar controls the pricing power of global assets and other countries' currencies, but does not need to bear corresponding responsibilities.

There is another point of view that seems more straightforward. The monetary authorities are unable to comply with the fiat currency contract. Why do they believe that Facebook is fully performing?

At present, blockchain technology can be irreversible and more transparent, but it cannot guarantee Libra price stability. What's more, Libra's super credit nodes and licensed blockchains are not completely decentralized. Facebook is more practical and mature in its technology path, but digital currency believers question its credibility.

The problem of distrust will eventually lead to regulatory risks. This is the last question: Will Libra challenge the legal currency authority and the national currency sovereignty, will it be supervised?

The defense of monetary sovereignty in the euro zone and emerging countries is very firm. If Libra threatens the exchange rate of other countries, it will inevitably be regulated and suppressed. As a Facebook company, there are various ways for foreign exchange control countries to regulate Libra, including antitrust investigations against Facebook.

Currently, the stable currency USDT is being investigated by the State of New York for providing loans to an exchange. The USDT plays the role of the central bank in issuing money while doing commercial banking. This is obviously the world’s big deal.

In the United States, Facebook is believed to have communicated with most regulators, and they should have assessed the regulatory risks. The confidence of US regulators comes mainly from their control over Facebook and Libra, which is the pricing power of the US dollar against Libra.

Therefore, the US dollar controls the rules of the game and pricing power. The United States has this confidence to give Facebook a certain amount of space to try. For the United States, this is a strategy to move forward and retreat: if Libra has a performance, the dollar is equivalent to Libra's leadership in digital currency; if Libra fails, it will not hurt.

But this is only a dollar strategy, not a strategy, let alone a "currency war."

As a super-sovereign currency, a global distributed banking system, Libra is still an important attempt.

The white paper emphasizes that Libra's goal is to coexist with legal currency. Libra, don't try to challenge the dollar and the French currency, and living in a low-key way is the biggest benefit.

Trial and error is also an improvement.

references

[1] Facebook Libra White Paper, Libra Association;

[2] Bitcoin white paper, Nakamoto Satoshi, Babbitt;

[3] Bank of England, Dan Konahan, China Friendship Publishing Company;

[4] Lombard Street, Walter Bai Zhihao, Shanghai University of Finance and Economics Press;

[5] The scourge of money, Friedman, the Commercial Press;

[6] The non-stateization of currency, Hayek, New Star Press;

[7] World History of the Monetary System, Kuroda Akira, Renmin University of China Press;

[8] Economic explanation, Zhang Wuchang, CITIC Publishing House;

[9] Brief history of currency (audio course), Qinghe, Zhibenshe classroom;

[10] The essence of money | The island of the stone coin, the mystery of the dollar and the bitcoin, Qinghe, the public number of the Zhiben.

Author | Qinghe Zhiben Society President

Source: Zhibenshe (micro signal: zhibenshe0-1)