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Greenback glory over?

Interest earned on the currencies will be used to cover the costs of the system. This is to prevent Libra from fluctuating excessively stablecoin. However, the currency will not pay out any interest to customers. Currency risks are another risk factor. A problem familiar to us from foreign currency loans. Nevertheless, a promising innovation area of services could emerge involving Libra, says Cocca. Completely new financial services could be developed from the data pool of payment histories stored on blockchain.

As examples, the expert cites automatically generated real-time credit ratings or smart contracts for monitoring the credit rating of retailers. For Cocca, the challenge lies in matters concerning regulation. He cannot imagine that a uniform global regulation will be devised for this model. He anticipates national standards.

Libra users would have to disclose their identity to the provider just as they would do when opening a bank account. This is a measure to prevent money laundering. Which raises another key question for Cocca: namely, how and who enforces the money laundering regulations Know Your Customer — KYC in this ecosystem? According to the white paper, one of the aims of the project is to develop an open digital identity standard. Cocca derives an individual KYC rating for each user from this. Apart from banks, there are other major players missing in the Libra consortium. Cocca points to the absence of the technology giants Amazon and Google and concludes that there may be competing strategies.

The discussion on digital currencies has most likely only reached a temporary peak as far as Libra is concerned. The twelve-page White Paper published by Facebook is not particularly informative. Crucial questions remained unanswered. This also applies to the question of what technology the new digital means of payment should be based on. Experts assume that it will be blockchain technology — which forms the basis of the digital currency Bitcoin as well. To put it simply, a blockchain is a database that is not located on a single server, but is distributed across multiple individual computers worldwide.

Since every participant has the same access rights, misuse and manipulation are out of the question. However, the question must always be asked what is stored within a blockchain.

After all, even the best technology is not immune to the fact that something could be entered incorrectly. The advantage of blockchain is at the same time its disadvantage. The system makes it easier for trading firms to follow the exact path of a coin. Yet this also opens up the way to consumers becoming more traceable, their activities are all the more transparent the more they engage with and pay with the Libra system.

China is already on its way there and is evaluating its citizens according to their social credit rating. Detect fake news automatically, with software from Fraunhofer. Innovation Origins is an independent news platform, which has an unconventional revenue model.

A Monetary System for the Future | Foreign Affairs

We are sponsored by companies that support our mission: spreading the story of innovation. Read more here. On Innovation Origins you can always read articles for free. We want to keep it that way. Have you enjoyed this article so much that you want to contribute to independent journalism? Click here:. Hildegard Suntiger is a writer.

International monetary systems

She lives in Vienna as a freelance journalist and writes about all aspects of fashion production. She is interested in new trends in design, technology, and business. She is particularly excited about discovering interdisciplinary tendencies and the blurring of boundaries between different disciplines. But when the exchange is one of present goods against future goods it may happen that one party fails to fulfill his obligations although the other has carried out his share of the contract.

Then the judiciary may be invoked. If the case is one of lending or purchase on credit, to name only the most important examples, the court has to decide how a debt contracted in terms of money can be liquidated. Its task thus becomes that of determining, in accordance with the intent of the contracting parties, what is to be understood by money in commercial transactions. From the legal point of view, money is not the common medium of exchange, but the common medium of payment or debt-settlement. But money only becomes a medium of payment by virtue of being a medium of exchange.

And it is only because it is a medium of exchange that the law also makes it the medium for fulfilling obligations not contracted in terms of money, but whose literal fulfillment is for some reason or other impossible. The fact that the law regards money only as a means of cancelling outstanding obligations has important consequences for the legal definition of money. What the law understands by money is in fact not the common medium of exchange but the legal medium of payment.

It does not come within the scope of the legislator or jurist to define the economic concept of money. In determining how monetary debts may be effectively paid off there is no reason for being too exclusive. It is customary in business to tender and accept in payment certain money substitutes instead of money itself.

If the law refused to recognize the validity of money substitutes that are sanctioned by commercial usage, it would only open the door to all sorts of fraud and deceit. This would offend against the principle malitiis non est indulgendum. Besides this, the payment of small sums would, for technical reasons, hardly be possible without the use of token money. Even ascribing the power of debt settlement to bank notes does not injure creditors or other recipients in any way, so long as the notes are regarded by the businessman as equivalent to money.

But the state may ascribe the power of debt settlement to other objects as well. The law may declare anything it likes to be a medium of payment, and this ruling will be binding on all courts and on all those who enforce the decisions of the courts. But bestowing the property of legal tender on a thing does not suffice to make it money in the economic sense. Goods can become common media of exchange only through the practice of those who take part in commercial transactions; and it is the valuations of these persons alone that determine the exchange ratios of the market.

Quite possibly, commerce may take into use those things to which the state has ascribed the power of payment; but it need not do so. It may, if it likes, reject them. Three situations are possible when the state has declared an object to be a legal means of fulfilling an outstanding obligation. First, the legal means of payment may be identical with the medium of exchange that the contracting parties had in mind when entering into their agreement; or, if not identical, it may yet be of equal value with this medium at the time of payment. Such an arrangement is merely the legal formulation of the presumable intent of the agreement.

It damages the interests of neither party. It is economically neutral. The case is otherwise when the state proclaims as medium of payment something that has a higher or lower value than the contractual medium. The first possibility may be disregarded; but the second, of which numerous historical examples could be cited, is important. From the legal point of view, in which the fundamental principle is the protection of vested rights, such a procedure on the part of the state can never be justified, although it might sometimes be vindicated on social or fiscal grounds.

But it always means, not the fulfillment of obligations, but their complete or partial cancellation. When notes that are appraised commercially at only half their face value are proclaimed legal tender, this amounts fundamentally to the same thing as granting debtors legal relief from half of their liabilities. State declarations of legal tender affect only those monetary obligations that have already been contracted.

But commerce is free to choose between retaining its old medium of exchange or creating a new one for itself, and when it adopts a new medium, so far as the legal power of the contracting parties reaches, it will attempt to make it into a standard of deferred payments also, in order to deprive of its validity, at least for the future, the standard to which the state has ascribed complete powers of debt settlement.

When, during the last decade of the 19th century, the bimetallist party in Germany gained so much power that the possibility of experiment with its inflationist proposals had to be reckoned with, gold clauses began to make their appearance in long-term contracts. The recent period of currency depreciation has had a similar effect. If the state does not wish to render all credit transactions impossible, it must recognize such devices as these and instruct the courts to acknowledge them. And, similarly, when the state itself enters into ordinary business dealings, when it buys or sells, guarantees loans or borrows, makes payments or receives them, it must recognize the common business medium of exchange as money.

The legal standard, the particular group of things that are endued with the property of unlimited legal tender, is in fact valid only for the settlement of existing debts, unless business usage itself adopts it as a general medium of exchange. State activity in the monetary sphere was originally restricted to the manufacture of coins.

Professor Kevin Dowd

To supply ingots of the greatest possible degree of similarity in appearance, weight, and fineness, and provide them with a stamp that was not too easy to imitate and that could be recognized by everybody as the sign of the state coinage, was and still is the premier task of state monetary activity. Beginning with this, the influence of the state in the monetary sphere has gradually extended. Progress in monetary technique has been slow. At first, the impression on a coin was merely a proof of the genuineness of its material, including its degree of fineness, while the weight had to be separately checked at each payment.

In the present state of knowledge this cannot be stated dogmatically; and in any case the development is not likely to have followed the same lines everywhere. Later, different kinds of coins were distinguished, all the separate coins of any particular kind being regarded as interchangeable.

The next step after the innovation of classified money was the development of the parallel standard. This consisted in the juxtaposition of two monetary systems, one based on gold commodity money, and one on silver.


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The coins belonging to each separate system constituted a self-contained group. Their weights bore a definite relation to each other, and the state gave them a legal relation also, in the same proportion, by sanctioning the commercial practice which had gradually been established of regarding different coins of the same metal as interchangeable.

This stage was reached without further state influence. All that the state had done till then in the monetary sphere was to provide the coins for commercial use. As controller of the mint, it supplied in handy form pieces of metal of specific weight and fineness, stamped in such a way that everybody could recognize without difficulty what their metallic content was and whence they originated. As legislator, the state attributed legal tender to these coins — the significance of this has just been expounded — and as judge it applied this legal provision. But the matter did not end at this stage.

For about the last years the influence of the state on the monetary system has been greater than this. One thing, however, must be made clear; even now the state has not the power of directly making anything into money, that is to say into a common medium of exchange. Even nowadays, it is only the practice of the individuals who take part in business that can make a commodity into a medium of exchange. But the state's influence on commercial usage, both potential and actual, has increased.

It has increased, first, because the state's own importance as an economic agent has increased; because it occupies a greater place as buyer and seller, as payer of wages and levier of taxes, than in past centuries. In this there is nothing that is remarkable or that needs special emphasis.

The Domestic Monetary System: Banking and Central Banking

It is obvious that the influence of an economic agent on the choice of a monetary commodity will be the greater in proportion to its share in the dealings of the market; and there is no reason to suppose that there should be any difference in the case of the one particular economic agent, the state. But, besides this, the state exercises a special influence on the choice of the monetary commodity, which is not due to its commercial position nor to its authority as legislator and judge, but to its official standing as controller of the mint and to its power to change the character of the money substitutes in circulation.

The influence of the state on the monetary system is usually ascribed to its legislative and judicial authority. It is assumed that the law, which can authoritatively alter the tenor of existing debt relations and force new contracts of indebtedness in a particular direction, enables the state to exercise a deciding influence in the choice of the commercial medium of exchange.

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Nowadays the most extreme form of this argument is to be found in Knapp's State Theory of Money ; but very few German writers are completely free from it. Helfferich may be mentioned as an example. It is true that this writer declares, with regard to the origin of money, that it is perhaps doubtful whether it was not the function of common medium of exchange alone that sufficed to make a thing money and to make money the standard of deferred payments of every kind.


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Nevertheless, he constantly regards it as quite beyond any sort of doubt that for our present economic organization certain kinds of money in some countries, and the whole monetary system in other countries, are money, and function as a medium of exchange, only because compulsory payments and obligations contracted in terms of money must or may be fulfilled in terms of these particular objects. It would be difficult to agree with views of this nature. They fail to recognize the meaning of state intervention in the monetary sphere.


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  4. By declaring an object to be fitted in the juristic sense for the liquidation of liabilities expressed in terms of money, the state cannot influence the choice of a medium of exchange, which belongs to those engaged in business. History shows that those States that have wanted their subjects to accept a new monetary system have regularly chosen other means than this of achieving their ends. The establishment of a legal ratio for the discharge of obligations incurred under the regime of the superseded kind of money constitutes a merely secondary measure which is significant only in connection with the change of standard which is achieved by other means.

    The provision that taxes are in future to be paid in the new kind of money, and that other liabilities imposed in terms of money will be fulfilled only in the new money, is a consequence of the transition to the new standard. It proves effective only when the new kind of money has become a common medium of exchange in commerce generally. A monetary policy can never be carried out merely by legislative means, by an alteration in the legal definitions of the content of contracts of indebtedness and of the system of public expenditure; it must be based on the executive authority of the state as controller of the mint and as issuer of claims to money, payable on demand, that can take the place of money in commerce.

    The necessary measures most not merely be passively recorded in the protocols of legislative assemblies and official gazettes, but — often at great financial sacrifice — must be actually put into operation. A country that wishes to persuade its subjects to go over from one precious-metal standard to another cannot rest content with expressing this aspiration in appropriate provisions of the civil and fiscal law.

    It must make the new money take the commercial place of the old. Exactly the same is true of the transition from a credit-money or fiat-money standard to commodity money. No statesman faced with the task of such a change has ever had even a momentary doubt about the matter.