Tag: IMF

The General’s Son

In the book “The General’s Son: Journey of an Israeli in Palestine,” by Miko Peled, the General refers to Major General Mattityahu “Matti” Peled (1923–1995), an Israeli military commander who became a prominent peace activist, academic, and politician. A key architect of the Israeli Defense Forces’ (IDF) victory in the 1967 Six-Day War, he later transitioned into a radical advocate for Israeli-Palestinian dialogue and a two-state solution.

Like his father, Miko was also an avid Zionist who believed in peaceful relations with his Arab neighbors in two sovereign states. When Milo’s niece Smadar was killed by a Palestinian suicide bomber in 1997, Miko’s reaction to his grief tells us all we need to know to understand the heart of this book. Rather than expressing hatred toward the Palestinian murderer of his beloved niece, he felt shame and anger toward his fellow Israelis for driving a Palestinian boy to take his own life in this way. The book relays Miko’s journey upto and beyond this tragedy and sets out a more balanced history than you might have heard.

Having settled in San Diego to teach karate, Miko began to participate in mixed Jewish/Arab groups (San Diego Jewish-Palestinian Dialogue Group) discussing their experiences in and hopes for Israel and the West Bank and Gaza Strip (WBGS) and became hopeful for two sovereign states living peacefully next to each other. When Israeli Prime Minister Ehud Barak and Palestinian leader Yasser Arafat meet with President Bill Clinton at Camp David in Maryland, Miko was sure peace was at hand. When the talks fail to achieve agreement and Clinton seems to blame Arafat, Miko is shocked.

“Arafat had been consistent for years. For the sake of peace he was willing to give up the dream of all Palestinians to return to their homes and their land in Palestine. He was willing to recognize Israel, the state that destroyed Palestine, took his people’s land, and turned them into a nation of refugees. He was ready to establish an independent Palestinian state in the West Bank and Gaza—which make up only 22 percent of the Palestinian homeland—with Arab East Jerusalem as its capital.

“He was ready to do all this, but he was not going to settle for anything less. He had always been clear about what he saw as the terms for peace.

“In the end, it turned out that… what the Israelis had demanded at Camp David was tantamount to total Palestinian surrender…. Barak demanded that Arafat sign an agreement to end the conflict forever and in return, he would be permitted to establish a Palestinian state on an area of land that could not be defined clearly because it was broken into pockets with no geographic continuity. Instead of Arab East Jerusalem, he would receive a small suburb of East Jerusalem as his capital. To that Yasser Arafat refused to agree.” (p. 126)

Miko’s love of Israel and increasing exposure to Palestinians (both in San Diego and in the West Bank, which he visited often to teach Karate and promote mutual understanding) exposed him to the shocking mistreatment of Palestinians in their own land. His compassionate heart and wisdom led him to strongly advocate the two-state solution to the struggles between the Arabs and Jews occupying the area.

During a visit to Ramallah to meet Abu Ali Shahin, Fatah commander and leader of the Palestine political prisoners for more the two decades, Miko exclaimed that: “Immediately after the war, while still in uniform, my father said that Israel must recognize the rights of the Palestinian people. He said that if we don’t do this, the Israeli army would become an occupation army and would resort to brutal means to enforce the IsraeliOslo occupation on the Palestinian people. He said this while still in uniform and he never stopped saying it and advocating for Palestinian rights till he died.” (p. 229)

In my own work with the IMF helping to establish the Palestine Monetary Authority called for by the Oslo Accord, I was disheartened to observe Israel’s abusive treatment of the Palestinians. The Oslo Accord itself did not provide for a fully independent and sovereign state for the Palestinians (themselves semitic children of Abraham). It provided what was hoped would be the first trust-building steps toward such a true state. However, Israel carved up the West Bank with highways only usable by Israelis. Palestinians driving to their new capital of Ramallah had to wait hours to enter via the Israeli-controlled check point. With my UN passport I could sail in via the Israeli entrance with no wait. Israel isolated the Palestinian population of the WBGS in every way imaginable.

Though declared illegal by the UN, Israeli Jews increasingly stole Palestinian land to establish Jewish settlements, carving up and often destroying Palestinian farms in the process. The number of Jews living in illegal settlements in the West Bank grew from about 80,000 in 1990 to almost 530,000 in 2025. But this pales compared to the shocking mistreatment reported by Miko.

At the end of Miko’s meeting with the 72-year-old Fatah leader, Abu, Ali Shahin, stated:

“We all belong to this land and need to live together. No one is safe in one Jewish state. Judaism is a religion, and I am speaking of a secular state of all its citizens. That is the only way to live here. Being Jewish or Muslim or Christian or atheist, that is a personal choice, not for me to dictate and not to be dictated to me. I don’t want a priest or a rabbi or a sheikh to govern my life. We belong in this land, and we need to live here as equals.”

Miko then writes: “This was not the first time I had heard someone talk of the ‘one secular democratic state,’ as the right solution. It was the part of the Fatah manifesto to create a secular democracy in all of Palestine. In the past, I could not stomach it, but the more I met impressive, intelligent people like Abu Ali, people who were driven by principle, the more I thought that there was no point, indeed no future, in dividing the people and the land. Not to mention the fact that the settlements and the facts on the ground had succeeded in erasing the West Bank as a viable area in which a Palestinian state could be established.”

In my book on my travels in the area, “Palestine: The Oslo Accords Before and After”, I still strongly supported a two-state solution. But when I asked George Abed, my IMF colleague then Governor of the Palestine Monetary Authority I was there to help create, if he would write the Foreword to my book, he declined, saying the book was unfair to the Palestinians. I have now come to accept that he was right.

This book was published in 2012. From that year (January 2012) until October 6, 2023 Palestinians killed about 300 Israelis, who killed about 3,900 Palestinians. From the October 7, 2023, attack on Israel until now (June 2, 2026), Palestinians killed about 1,400 Israelis (of whom 1,200 were killed during Hamas’s Oct. 7 attack), who then killed about 75,000 Palestinians. The status quo is clearly not working for Israelis or for Palestinians.

The United States, home to about as many Jews as there are in Israel, is a secular state with large populations of Jews, Protestants, Catholics, Muslims and other religious groups. Our constitution forbids the government from adopting any one of them. They have each flourished. I have reluctantly concluded that Israel must annex the West Bank of Gaza and give full and equal citizenship and rights to all Arabs and Jews living there. “A one state solution”,  “A one state solution – 2”.

The wars and ethnic cleansing now underway by the Netanyahu government is not only destroying Israel, but also dragging the United States down with it and I haven’t even mentioned Iran.

Preserving the Global Order

As the number of BRICS member countries grows, the international organizations through which countries cooperate are at risk of fragmenting.  To keep the IMF, World Bank, WTO, WHO, ITU and other international bodies together to perform their financial, standard setting, and coordination functions that have contributed so much to global prosperity, each member must believe that they are fairly represented in such bodies.

Unlike the UN’s one country one vote, members of the International Monetary Fund and World Bank, have votes (quotas) that reflect their economic importance. The fundamental criteria for the financial contribution and voting share of each member country in the IMF and WB are the economic size of its economy and its share of world trade and reserves.

When they were established after WWII in 1944, the total size of the IMF was 8.8 billion dollars of which $2.9 billion was pledged by the U.S. giving it a quota (and vote) of 33% of the total. Any major policy decisions or amendments to the IMF’s Article of Agreement require an 85% support. This gave, and continues to give, the U.S. a veto over any important measure it doesn’t like. At that time the U.K. quota of $1.3 billion was 15% of the total and that of France was $0.65 billion or 7.4% of the total.

The Republic of China was an original member of the IMF in 1944, whose seat was transferred to the Peoples Republic of China in 1980 with a quota of 1.2 billion SDR which was 3.1% of the total of SDR 39.0 billion. “What are SDRs?” This was promptly increased to 1.8 billion SDRs (4.6%). The quotas and voting strength of the IMF’s six largest members in 1980 and 2022 were:

                        1980               2022

U.S.           19.83%               16.08%

U.K.             6.94%               4.03%

Germany    5.13%               5.31%

China           4.62%              6.08%

France.        4.57%              4.03%

Japan.          3.96%              6.14%

Over the last 4 decades, China and many other lower income countries have grown significantly. U.S. GDP in 1980 was $9.7 trillion in 2022 dollars while China’s was $1.03 trillion in 2022 dollars.  But by 2022 the US economy had double while Chinas increased almost 14 times. The adjustments in member quotas failed miserably to reflect these changes. The US quota dropped from 19.8% to 16.5% while China’s increased from 4.62% to 6.08%

In 2022 GDPs of the top five were:

  1. United States: $20.89 trillion
  2. China: $14.72 trillion
  3. Japan: $5.06 trillion
  4. Germany: $3.85 trillion
  5. United Kingdom: $2.67 trillion
  6. India: $2.66 trillion

To quote from Wikipedia: “To further rebalance power in the IMF, China appealed for changes that would transfer voting power to developing economies. In 2010, the Chinese executive director of the Fund, Zhou Xiaochuan, addressed the board and asserted that giving more power to the emerging economies was critical for the group’s legitimacy, accountability and long-term health.”

In the IMF/WB annual meetings that just concluded in Morocco have called for an increase in IMF resources but distributed equiproportionately, i.e., with no change in members’ relative voting weight (quotas). This moves member quotas even further away from the basic formula for determining them. Why and what might be the consequence?

The U.S. has dominated the IMFs policies from its inception largely in furtherance of developing and preserving a liberal trading order that has benefited the world. But it is apparently unwilling to give up its veto power (a quota of more than 15%). Such dominance risks corruption over time: “Monopolies”   “The Dollar Again”

But if the governance of the IMF is not seen as fair by its members, they have an incentive to look elsewhere. China understandably wants the status and influence of its increased size. So, Brazil, Russia, India, China, and South Africa (BRICS) have started to go their own way with China’s Belt and Road Initiative, Asia Infrastructure Investment Bank, and other China lead initiatives. More countries are joining the BRICS. The fragmenting of international norms and rules for cross countries relations threatens to harm global prosperity. As an early example, sovereign debt restructuring agreements are now being held up because of China’s reluctance to play ball with the term agreed by the other sovereign lenders.

U.S. and IMF—wake up. “Goodbye unipolar world and good riddance”

A Libertarian Money

The long history of money began to take its modern form with the development of national central banks. “The story of central banking goes back at least to the seventeenth century, to the founding of the first institution recognized as a central bank, the Swedish Riksbank. Established in 1668 as a joint stock bank, it was chartered to lend the government funds and to act as a clearing house for commerce. A few decades later (1694), the most famous central bank of the era, the Bank of England, was founded also as a joint stock company to purchase government debt.”[1] Over time central banks were given a monopoly over issuing their country’s currency and usually for regulating the country’s banks, which create most of each country’s money.

Generally, the currencies issued by central banks (or commercial banks) were claims on, and thus redeemable for, gold or silver. The gold standard oversaw a long period of trade expansion and economic flourishing. A currency’s fixed price for gold regulated the money supply both domestically and between other countries also on the gold standard, keeping its supply consistent with the fixed gold price. Countries, like individual families, cannot buy more that they sell over their live time (whatever the lifetime of a country might be). The gold standard, via the price-specie flow mechanism, preserved such balance of trade between gold standard countries.

Two countries on the gold standard, with fixed prices for gold for their currencies, have an unchangeably fixed exchange rate for their two currencies. But if the domestic purchasing power of each currency changes (inflation or deflation) the real value of the nominal exchange rate will appreciate or depreciate. The real exchange rate adjusts via changes in the domestic prices of one country relative to the other.  If a country buys more abroad than it sells abroad, the outflow of its money to pay for its trade deficit will reduce its money supply if gold standard rules are observed (gold flows out and the supply of currency backed by that gold contracts). The reduction in its money supply will reduce domestic (and thus foreign) prices in that money. This adjustment in domestic prices relative to foreign prices, which make foreign goods relatively more expensive domestically and domestic goods cheaper abroad, will reduce and eventually eliminated the trade deficit.

When the United States established the Federal Reserve System, its central bank, in 1913, it continued to fix the price of the currency it issued in gold. But it only adhered to gold stand rules loosely and in 1971 no longer had enough gold to honor its commitment to foreign central banks to redeem its currency for gold. Thus, on August 15, 1971, President Richard Nixon “closed the gold window.” The era of the value of currencies anchored by (fixed to) gold or some other hard anchor was over. The Federal Reserve and other central banks needed to develop other criteria for determining the supply of their currencies.

Following the inflationary experience in the U.S. in the 1960s and 70s, there were more and more demands for clear rules for the Fed’s regulation of is money supply, now that it was no longer constrained by a hard anchor (e.g., the price of gold). The objective of monetary policy was broadly accepted around the world to provide a stable value for the currency, though the Federal Reserve was shackled with the dual mandate of price stability and maximum employment. The short-term demand for money was not sufficiently stable for a Friedman rule (fixed growth rate for base, narrow, or broad money – M0, M1, or M2). Inflation forecast targeting (IFT) has evolved to become the state of the art of fiat money supply rules.

In IFT regimes, the central banks’ policy instruments (primarily the interest rate at which it lends to banks) are transparently set on the expectation (based on model forecasts and judgement) that in one to two years in the future they will produce (or maintain) the central bank’s target for inflation. While this approach has performed relatively well, its management of the money supply has been far from perfect and central banks are experiencing increasing government pressure to relax their price stability mandates. And then there are a few countries whose central banks have caved to fiscal dominance and behaved terribly.

Would some cryptocurrency, ala Hayek, provide a better monetary system? Some people claim that libertarians like cryptocurrencies like bitcoin because they do not rely in any way on government. Perhaps those people meant “anarchists” because libertarians accept the critical importance of government in defining and protecting property rights and personal safety. Cryptocurrency providers have been lobbying the U.S. congress (and others) to set out the rules for their legal operations. Are they money or speculative assets?  Bitcoin and most other cryptocurrencies do not satisfy the requirements for a good libertarian money because they do not satisfy the requirements for good money. This article explains why this is so and defines properties of a good libertarian money.

Are Cryptocurrencies the Answer?

Economists note the incredible power of markets and market prices in directing our scarce resources (our labor, capital, and technology) to their best uses. But prices are expressed in terms of money, the common unit of account that facilitates comparing relative values.

The presumption, and actual reality, is that within each market prices are expressed in terms of the same money. It would not facilitate our choices if apples were priced at $6 per bushel and oranges at 3 bitcoin per bag. Presently, virtually nothing is priced in bitcoin. In addition, sellers don’t generally accept payment in a currency other than the one in which the good’s price is expressed, thus very few sellers will accept bitcoin in payment. Moreover, you can only accept bitcoin in payment if you have a bitcoin account together with the software required (a bitcoin wallet).

None of these are insurmountable barriers to growth in the use of bitcoins or other cryptocurrencies, but they do require strong incentives for putting up with and/or overcoming them. I explained the basics of bitcoin’s value in the linked blog in 2014: “Cryptocurrencies-the bitcoin phenomena”[2] One incentive would be to replace the established currency in a market (a country’s legal tender) that has very unstable value (think Zimbabwe, Venezuela, Argentina, Brazil at various times in their histories). Another would be the need for anonymity (as is achieved with paper currency) that an illegal drug dealer or a political dissident in a repressive regime might require and find convenient.

Some mistook Fredrick Hayek’s “Competition in Currency” as an endorsement of what we now call cryptocurrencies. In the Preface to that book Arthur Seldon explained “The requirement is not to deprive government of the power to issue money but to deny it the exclusive right to do so and to force the citizenry to use it at the price it specifies. It is thus the government monopoly of money that is objectionable, and history is full of examples of governments that have attempted to enforce their power by extreme measures, including the ultimate sanction of death. The solution is therefore to allow people to use the money they find most convenient, whether the money issued by their own government or by other governments.”[3]

When the Zimbabwean dollar became worthless, reaching annual inflation rates of 10,000 percent in 2007 and exploding in 2008 with an estimated peaked rate in September 2008 of about 500 billion percent per annum, the Zimbabwean government legalized the use of foreign currencies and the country immediately dollarized (priced and paid in U.S. dollars flown in from South Africa). This was the remedy Hayek proposed and it ended inflation almost instantly.[4]

Later in 1976 Hayek followed up his Competition in Currency proposal with the more radical broadening to private currencies in his AEI pamphlet Denationalization of Money, An Analysis of the Theory and Practice of Concurrent Currencies.[5] Most money these days is privately produced by your and my banks (our deposits), but they are fixed in value to and ultimately exchangeable for the U.S. dollars created by our central bank. They are part of the U.S. dollar money supply. Bank deposits are not alternative, private units of account. In this second book Hayek was broadening his call for currency competition to the bitcoins of the world. Hayek was proposing that inflating central bank currencies should face competition from privately produced units of account and monetary assets (medium of exchange and payment).

Otmar Issing, Chief Economist of the ECB and member of its Executive Board from 1998 – 2006, concluded that adopting Hayek’s proposal “We would ‘discover’ that private currency competition – at least nowadays – would not work and would not serve the people affected.”[6] I made the same point to Hayek directly in a debate at the 1976 Mont Pelerin Society meetings in St. Andrews, Scotland. Competing private units of account would undermine an essential function of money in market economies (communicating the relative value of things). In high inflation countries, such as Venezuela, many things are priced in U.S. dollars. However, the Venezuelan government has made payments in dollars illegal. In such cases, Bitcoin and other cryptocurrencies are used to some extent to make dollar denominated payments. But as the value of Bitcoin is so unstable, holding on to then is very risky.

In El Salvador, which had successfully dealt with inflation by dollarizing a decade ago, President Nayib Bukele added Bitcoin as legal tender as of September 7, 2021. Though this legally obliges merchants to accept Bitcoin in payment, “few ordinary folk use…. Bitcoin, which has lost 70% of its value since November, is far too volatile to be a good store of value, especially in a country where GDP per person is $4,400.” according to a June 16, 2022, article in The Economist.[7] No one prices in Bitcoin.

Cryptocurrencies that use a Block Chain or Distributed Ledger Technology suffer from other problems as well. Bitcoin’s claim to eliminate the trusted third party (bank accounting systems) required by existing electronic (digital) payments with bank deposits, is particularly attractive to libertarians.  But this claim is a gross exaggeration. To prevent the double spending of the same bitcoin, each transaction must be verified by so called miners (third parties you don’t need to trust) which takes five to ten minutes and very large amounts of electricity to process as miners race to solve increasingly difficult mathematical puzzles. Also, all transactions are very public on block chains, though accounts may be held under pseudonyms and are thus described as pseudo-anonymous.

Though actual bitcoin transactions have been made easier via the development of software wallets, many assign their bitcoins to exchanges (trusted third parties).[8]  The loss of a bitcoin owner’s password to his account is fatal and final. Those bitcoins are lost forever. But more deadly to the use of bitcoin as money (unit of account and medium of payment) is the volatility of its value.  The price of a bitcoin has ranged from just under $30,000 to over $67,500 over the last year. It fell to $18,958 on June 18, 2022. Thus, payments of bitcoin generally involve temporarily purchasing them with dollars or some other stable currency and then exchanging them back to dollars as quickly as possible after receipt. The costs of these exchanges are often overlooked when claiming that bitcoin transfers are cheaper than traditional means of electronic payments. Of equal importance is that for an asset to function as money, it must be generally or at least broadly accepted for payments. Bitcoin fails this requirement miserably. Most buyers and sellers of bitcoin are indulging in a form of gambling rather seeking a “good” medium of payment.

Bloomberg exposes a false “libertarian” attraction to Cryptocurrencies on blockchains:

“An app running on, say, Ethereum, can’t easily be taken offline, since there’s no particular host or entity that can take it down.

“This architecture is inherently oppositional to governments and large corporations, and it’s for this reason that crypto has so much embedded politics. The whole space traces its roots back decades to hippies and hackers in Northern California, who anticipated that in an online world, pure cash-like peer-to-peer transactions would be impossible. When you pay a friend using Zelle or something, the payment goes through a series of intermediaries. You can get kicked off Venmo for buying a Cuban sandwich. Bitcoin can’t kick you off the network for anything.

“Take away the uncensorability of crypto, and all you’re left with is Ponzi schemes, dog coins, and drawings of monkeys. (Wait! That’s basically all that exists right now in the space, so ignore that thought.)”[9]

Unlike bitcoin, which are not redeemable for anything, so called stable coins have a fixed price for some other legal tender currency or even, potential, gold. The quality of the assurance of a stable price, and redemption at that price, vary considerably. Appropriate regulation that required transparency and external audit would be good. But the payment technology that has emerged in recent years such as PayPal, Venmo, or Zelle to transfer U.S. dollars (claims on bank accounts and ultimately on the Federal Reserve) have already introduced efficient, low cost, and fast payments of legal tender currency. The Federal Reserve is also modernizing its interbank settlement system. FedNow, which will operate real time 24/7 began testing in September and is expected to be operational in the summer of 2023. It is hard to see any further advantages introduced by so called stable coins.

The Libertarian Alternative

There are monetary regimes, however, that satisfy libertarian preferences for minimal government involvement and manipulation while satisfying truly valuable needs. The Constitution of the United States provides the authority for such a regime in Article I Section 8 “To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures;” The classical gold standard was such a system. However, its “rules” were diluted when taken over by central banks. Moreover, the practice of actually buying and storing gold distorted its market price and was costly, flaws that are avoided in the system I propose below.

In the U.S. today, as well as every other country in the world, there are thousands of private companies that create and offer their own currency. Most of them are banks. While that would seem to make libertarians happy, thousands of individual bank producers of money would not constitute an efficient monetary system without rules and mechanisms for linking them into what we think of as one currency–in our case the U.S. dollar.

While the dollars deposited in my bank are my bank’s liability, I am protected from the bank’s failure by deposit insurance. Your bank accepts my deposits in my bank because my bank credits your bank’s account with the Federal Reserve (by debiting its account with the Fed). In short, the deposits at thousands of different banks are accepted by every other bank because they are all ultimately claims on the Fed. This is similar to the gold standard in which the money created by thousands of banks were accepted everywhere because they were redeemable for a well-defined amount of gold.

Libertarians want a currency and monetary system that can’t be manipulated by the government (central bank).  The dollar is now a fiat currency, redeemable for a deposit with the Federal Reserve, and very importantly, acceptable by the government for the payment of taxes. Thus, its supply is determined by the Fed’s judgement of what is needed for “price stability and maximum sustainable employment.” We libertarians want a currency that we each individually control the supply of. In short, we want a currency with a hard anchor (which was the case for the gold standard) supplied according to currency board rules (which historically were violated by central banks nominally anchored by gold).

Currency board rules require the currency issuer to sell or repurchase its currency at its fixed price in response to public demand. Any number of private producers of dollars redeemable at an officially fixed price for a well-defined anchor (gold, aluminium, a basket of goods, etc.) would result in a money supply determined by the public that was consistent with and appropriate for its fixed price to the anchor and that was fully interchangeable. The central bank would be passive. It would have no monetary policy (beyond the fixed price for the anchor). This seems like libertarian heaven.

In addition to being anchored to a single commodity whose relative price could vary more than would the price of a basket (portfolio) of commodities, the gold standard was flawed by central banks actually buying and storing gold and thus distorting its market price. An ideal regime would use the anchor for setting the currency’s issue and redemption price but the anchor itself would not be purchased and stored by the central bank. Instead, the central bank would issue its currency for assets (such as treasury bills) of equivalent market value to the anchor. The arbitrage mechanism works just as well with this “indirect redeemability”[10]

I led the IMF teams that established the Central Bank of Bosnia and Herzegovina, which follows currency board rules. I have written a book about that experience.[11]  I also participated in Bulgaria’s central bank’s adoption of currency board rules. The currencies of both countries are anchored to the Euro and their currency experiences have been outstanding. Their money supplies are basically regulated by market arbitrage. If the market exchange rate of the Bulgarian lev to the Euro rises above its official rate, it would be cheaper for the banks that issue lev to buy Euros from the Bulgarian National Bank thus reducing the supply of lev in the market and lowering its market price for Euro. See my article on Bulgaria’s experience.[12]

A Libertarian International Reserve Currency

What about cross border payments? In brief, cross border transactors have found it economical to price and settle transactions in a vehicle currency, usually the US dollar. The increasingly frequent deployment of sanctions enforced by restricting the use of the dollar has intensified the search for alternatives. See my more detailed discussion in “The Empire and the Dollar”[13]  The search for alternatives to the dollar as proposed by Russia’s Sergey Glazyev[14] risks fragmenting the global market place.

The International Monetary Fund has already created such an alternative. An internationally established unit (anchor) is much less likely to be abused for national political purposes, but the IMF’s Special Drawing Right (SDR) suffers from some serious defects. However, these can be fixed.[15] [16]  

The SDR can be “fixed” in two stages. The first is to develop the private sector’s uses of the SDR unit of account (invoicing oil and other globally traded commodities in SDRs, borrowing and lending denominated in SDRs, SDR bonds and bills, and digital SDR deposits–eSDRs). See my more detailed discussion in “Proposal for an IMF Staff Executive Board Paper on Promoting Market SDRs.”[17] As with national currencies, where hundreds of individual producers of the national currency are made interchangeable by being claims on the central bank, the market SDRs of many competitive producers would be interchangeable as the result of being redeemable for the official SDR of the IMF.[18]

The second stage would require a reform of the IMF’s official SDR. Rather than allocating them from time to time to all IMF members, they should be issued according to currency board rules. In addition, the valuation of the official SDR should be changed from its current basket of five currencies to a small basket of homogeneous, globally traded commodities. The IMF’s existing rules for periodically adjusting the SDR’s valuation basket are transparent and appropriate and should continue to be used. In one sense, this would re-establish an improved international gold standard like system. It would be improved on the gold standard by replacing a single commodity anchor with a small portfolio of commodities and its supply would be improved by adopting the market driven rules of a currency board. Such a Real SDR issued by the IMF would bring to international payments the same hard anchor and currency board rules favored by libertarians for domestic currencies.[19]

[1] Michael D. Bordo, “A Brief History of Central Banks” Federal Reserve Bank of Cleveland, Dec 2007 https://core.ac.uk/download/pdf/6670255.pdf

[2] Warren Coats: “Cryptocurrencies—the Bitcoin Phenomena,” Feb 14, 2014, https://wcoats.blog/2014/01/25/cryptocurrencies-the-bitcoin-phenomena/

[3] F. A. Hayek: Competition in Currency, A way to stop inflation, The Institute of Economic Affairs, Feb 1976, London

[4] Warren Coats: “Hyperinflation in Zimbabwe” Jan 25, 2014, https://wcoats.blog/2009/05/29/hyperinflation-in-zimbabwe/

[5] F. A. Hayek: Denationalization of Money The Institute of Economic Affairs Oct 1968 London

[6] Otmar Issing: “Hayek’s Suggestion for Currency Competition: A Central Banker’s View,” Chapter 8 of Stephen F. Frowen (editor): Hayek: Economist and Social Philosopher, A Critical Retrospect, Macmillan Press, 1997, London

[7] The Economist, “El-Salvador’s Government is Gambling on Bitcoin” June 16, 2022. https://www.economist.com/the-americas/2022/06/16/el-salvadors-government-is-gambling-on-bitcoin

[8] Warren Coats: “The Future of Bitcoin Exchanges, March 3, 2014,
  https://wcoats.blog/2014/03/03/the-future-of-bitcoin-exchanges/

[9] Bloomberg: https://www.bloomberg.com/news/newsletters/2022-08-18/five-things-you-need-to-know-to-start-your day?cmpid=BBD081822_MKT&utm_medium=email&utm_source=newsletter&utm_term=220818&utm_campaign=markets  Aug 18, 2022

[10] R. L. Greenfield and L. B. Yeager, 1983, “A Laissez Faire Approach to Monetary Stability”, Journal of Money, Credit, and Banking 15: 302-15.

[11] Warren Coats, 2007: “One Currency for Bosnia – Creating the Central Bank of Bosnia and Herzegovina” Jameson Books, Chicago Ill.   https://wcoats.blog/2008/08/13/one-currency-for-bosnia-creating-the-central-bank-of-bosnia-and-herzegovina/ or  “Amazon– One Currency for Bosnia”

[12] Warren Coats: “Bulgaria and the Chicago Plan” Central Banking Vol. XXX Issue 3 (2020)
Available at: http://works.bepress.com/warren_coats/51/

[13] Warren Coats, “The Empire and the Dollar”, John Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise, Studies in Applied Economics, SAE./No.207/March, 2022, https://www.dropbox.com/s/7bnvejb5zhqzatj/The-Empire-and-the-Dollar-by-Warren-Coats.pdf?dl=0

[14] Pepe Escabar, “Exclusive: Russia’s Sergey Glazyev introduces the new global financial system” The Cradle April 14, 2022

[15] Warren Coats. “Time for a New Global Currency?” New Global Studies Vol. 3 Iss. 1 (2010)
Available at: http://works.bepress.com/warren_coats/1/

[16] Warren Coats, Dongsheng Di and Yuxuan Zhao. “Why the World needs a Reserve Asset with a Hard Anchor” Frontiers of Economics in China (2017)
Available at: http://works.bepress.com/warren_coats/34/

[17] Warren Coats: “Proposal for an IMF Staff Executive Board Paper on Promoting Market SDRs” The Bretton Woods Committee Feb 19, 2019 :  “Promoting Market SDRs”

[18] Warren Coats: “Real SDR Currency Board” Central Banking Journal Vol. XXII Iss. 2 (2011)
Available at: http://works.bepress.com/warren_coats/25/

[19] Warren Coats. “Free Banking in the Digital Age” Banking & Finance Law Review Vol. 33 Iss. 3 (2018) p. 415 – 421 ISSN: 0832-8722 Available at: http://works.bepress.com/warren_coats/45/

BearingPoint Afghans

Sometime around 2004 or 2005, the US Agency for International Development (USAID) contracted BearingPoint (now part of Deloitte Consulting) to recruit and mentor approximately 80 young Afghan college graduates into Afghanistan’s central bank (DAB) and Finance Ministry. These young Afghans worked in DAB and the Finance Ministry for two years while being trained and mentored by BearingPoint experts. Following these two years they were offered regular jobs in these two institutions. While some moved on to higher paying jobs elsewhere most of them stayed with DAB and the MOF. Over the years that followed they rose within these institutions, and in DAB headed many of the departments including the position of Second Deputy Governor. Working with and watching the progress of these young Afghans was one of the most enjoyable and gratifying assignments in my career with the International Monetary Fund. They were smart, honest, and dedicated to improving life in their country (including their own). They were, and I hope still are, the hope for a better future for Afghanistan.

The elected Afghan government under which these BearingPoint Afghans worked has now been toppled by the Taliban, a group that harshly ruled Afghanistan from 1996 until displaced by an American-British invasion in November 2001.  Back in 1996: “Gaining control over most of the country, the Taliban impose their rule, forbidding most women from working, banning girls from education, and carrying out punishments including beatings, amputations and public executions. Only three countries officially recognize the Taliban regime: Pakistan, Saudi Arabia and the United Arab Emirates.”  “Afghanistan conflict timeline”

The Taliban in 1996 claimed to impose Sharia Law on Afghanistan. “Sharia” translates to ‘the way’ in Arabic and refers to a wide-ranging body of moral and ethical principles drawn from the Quran and from the sayings and practices of the Prophet Muhammad. The principles vary according to the interpretation of various scholars who established schools of thought followed by Muslims who use them to guide their day-to-day lives. Many Muslim-majority countries base their laws on their interpretation of the principles of Islamic law but, despite this, no two have identical laws.”  “Taliban and Sharia Law in Afghanistan”

The Taliban imposed a very severe version of Sharia that has not been embraced by very many Muslims. It was particularly restrictive on the activities and rights of women. Twenty years later Afghanistan is a different place, and the Taliban sounds like a different organization.

“KABUL, Afghanistan (AP) — The Taliban vowed Tuesday to respect women’s rights, forgive those who fought them and ensure Afghanistan does not become a haven for terrorists as part of a publicity blitz aimed at reassuring world powers and a fearful population.

“Following a lightning offensive across Afghanistan that saw many cities fall to the insurgents without a fight, the Taliban have sought to portray themselves as more moderate than when they imposed a strict form of Islamic rule in the late 1990s. But many Afghans remain skeptical — and thousands have raced to the airport, desperate to flee the country.

“Older generations remember the Taliban’s previous rule, when they largely confined women to their homes, banned television and music, and held public executions. A U.S.-led invasion drove them from power months after the 9/11 attacks, which al-Qaida had orchestrated from Afghanistan while being sheltered by the Taliban.”  “Afghanistan Taliban Kabul”

So, what should American policy be toward the forthcoming Taliban or Taliban lead government? What does the Taliban pledge to “respect women’s rights consistent with their version of Sharia Law actually mean? We should deploy every diplomatic tool possible to encourage/pressure the new government to live up to its promises. Former President Karzai, current CEO Abdullah Abdullah and others are currently in discussions with the Taliban leadership over terms for an inclusive government.

The alternative of nonrecognition, once there is a government to recognize, is to encourage and even support civil war. Or, God forbid, to send our troops back (there is not much chance that our NATO allies would be conned a second time into join us there again). And how did that work out for us last time? Our over used weapon of economic sanctions harms the public we should be trying to help. Our inhuman sanctions on Cuba and Venezuela are imposing horrible pain on the their citizens with little impact on their governments. “Evidence-costs and benefits of economic sanctions”

In a recent Washington Post oped Nikki Haley argued that we should not recognize the Taliban government no matter what. “Nikki Haley-America must not recognize Taliban” I respected Ms. Haley when she was Governor of South Carolina but I eventually got over her when she embarrassed us while Ambassador to the UN. “The future of Israel and Palestine” Her unqualified attack on the Taliban firmly ties her to those who were responsible for our Afghan disaster in the first place. The new Afghan government may turn out to be as bad as the previous Taliban government, but we should do everything possible to prevent that.

The U.S. has suspended currency shipments purchased by Afghanistan’s central bank. Afghan assets (foreign exchange reserves, etc.) deposited abroad have been frozen including “its” access to reserves at the IMF. These may appear to be rejections of a new government, but they are not. There is no new government yet and those holding Afghan assets must keep them safe until their new owners are clearly and properly identified. The situation is much like the bank in which you have deposited money, freezing your deposits when you die until the new lawful owner is determined. There is an unavoidable, awkward period of uncertainty. It is not too late to reverse our mistake in closing our Embassy and running out while at the same time accusing the Afghan Army of behaving the same way.

It is also not true that nothing was accomplished these past 20 years. Our military leaders may have failed in their task of building a reliable Afghan Army, but many others, myself included, did not waste our time by helping Afghans build better institutions (see the story of the BearingPoint Afghans I started this article with above). See the discussion of this issue by Jonathan Rauch: “The  Afghanistan war was a partial success”

No one knows what the Afghan government will look like or which way it will go, but we all (except for the war mongers) have an interest in promoting its success, especially the hopeful, new generation of Afghans. “Can US work with Taliban”    “What do Taliban’s really want?”

And we must resist the siren calls of those who think that we can and should impose our vision and institutions on the rest of the world. We must keep our Army home to defend our homeland rather than messing with other people’s business. Our defense industries have profited enough.

A shift in monetary regimes?

By Warren Coats[1]

This Sunday, August 15, is the 50th anniversary of President Richard Nixon’s closing of the gold window as part of the “Nixon Shock.” “Fifty years later Nixon’s August surprise still reverberates”  He announced on that day that the U.S. Treasury would no longer redeem its dollars for gold at $35 an ounce. Over the subsequent few years, the world moved from national currencies whose values were anchored to the market value of gold, to currency values determined by central banks’ regulation of their supply relative to the market’s demand. The value of one currency for another floated in the foreign exchange market. Central banks have deployed various approaches to determining the supplies of their currencies and most have now settled on targeting an inflation rate (often 2% per year) in one way or another.

With the rapidly increasing interest in cryptocurrencies, some have asked whether we are on the brink of another monetary paradigm shift? Specifically, might the dollar be replaced as the dominant international reserve currency. To explore that question we need to understand how the existing monetary systems work and how the widespread use of cryptocurrencies might add to or change these systems.  

In describing the existing and potential future monetary systems, we need to distinguish “money” from the “means of payment.” Money is the asset that people accept in payment of debts or for the purchase of goods and services. The U.S. dollar and the Euro are “money.” The means of payment refers to how money is delivered to the person being paid. Do you personally hand dollar bills and coins to the Starbucks cashier, write out a check (bank draft) and put it in the mail, or electronically transfer “money” from your bank account to an Amazon merchant via eWire, Zelle, Venmo, PayPal, or some other digital payment service? Or perhaps you purchase goods and services with borrowed money (Visa, MasterCard, American Express) that you pay back at the end of each month or over time. Or if you don’t have a bank account (a form of digital money) you might hand-deliver physical currency to a Hawala dealer or a MoneyGram or Western Union office to be electronically transferred to their office nearest to the person you are sending it to, potentially anywhere in the world. If you are paying in a currency that is different than the one the payee wishes to receive, your currency will be exchanged accordingly along the way in the foreign exchange market.

Discussions of cryptocurrencies include both the latest and evolving means of payment (digital payment technologies) as well as new, privately created moneys such as bitcoin, Ethereum, or Ripple.  Private currencies vary enormously with regard to how their value is determined. By private currencies I do not mean privately created assets redeemable for legal tender, such as our bank accounts. When we speak, for example, of the U.S. dollar, we invariably include dollar balances in our bank accounts, dollar payments made via our Visa card, etc. These are all privately produced assets that are ultimately redeemable for Federal Reserve currency or deposits at a Federal Reserve Bank. They are credible claims on the legal tender of the United States. Most U.S. dollars are privately created.

The value of all money is determined by its supply and demand. The demand for money arises from its acceptability for payment of our obligations and the quantity of such obligations (generally closely related to our incomes). Within each country, its legal tender money (e.g., the U.S. dollar in the U.S.) must be accepted by payees. In particular, it must be accepted by the government in payment of taxes.  Truly private currencies (those not redeemable for legal tender, of which there are over 11,000 at last count) have a serious challenge in this regard. Very few people or businesses will accept bitcoin, or any other such private cryptocurrency. As a result, the demand for such currencies for actual payments is very low. The demand for bitcoin, for example, is almost totally speculative–a form of gambling like the demand for lottery tickets. Such private currencies are more attractive in countries whose legal tender is rapidly inflating or has unstable value (e.g., Venezuela). 

The acceptability of a currency in cross border payments raises special challenges. My currency is not likely to be the currency in general use in other countries. Someone in Mexico paying someone in Germany will generally have Mexican pesos and the recipient in Germany will want Euros. The pesos will need to be exchange for Euro in the foreign exchange market. It would be very costly for dealers in the FX market to maintain inventories of and transact in every bilateral combination of the world’s 200 or so currencies. It has proven more economical to exchange your currency for U.S. dollars and to exchange the U.S. dollars for the currency wanted by the payee. The dollar has become what is called a vehicle currency.

The economy of a so-called vehicle currency can be illustrated with languages. Two hundred and six countries are participating in the 2021 Olympic Games in Japan. To communicate with their Japanese hosts participants could all learn Japanese. It is unrealistic to expect the Japanese hosts to learn 205 foreign languages. But what about communicating with their fellow participants from the other 205 countries. For this purpose, English has become the default second language in which they all communicate. Unlike more isolated Americans, most Europeans speak several languages, but one of them is always English. English as the common language is the linguistic equivalent of the dollar as a vehicle currency.  

The rest of the value of money story focuses on its supply. Bitcoin has the virtue of having a very well defined, programmatically determined gradual growth rate until its supply reaches 21 million in about 2040. The supply today (Aug 2021) is 18.77 million. See my earlier explanation: “Cryptocurrencies-the bitcoin phenomena”  The other 11,000 plus cryptocurrencies each have their own rules for determining their supply, some explicit and some rather mysterious. The class of so called “stable coins” are linked to and often redeemable for a specific anchor, sometimes the U.S. dollar or some other currency. The credibility of these anchors varies.

The highly successful E-gold (from 1996-2006) is an example of a digital currency that had well-defined and strict backing and redemption for a commodity at a fixed price. “E-gold”  The supply of such currencies is determined by market demand for it at its fixed price–what I have elsewhere called currency board rules. I describe how currency board rules work in my book about establishing the Central Bank of Bosnia and Herzegovina:   “One currency for Bosnia-creating the Central Bank of Bosnia and Herzegovina”

The dominance of the U.S. dollar in cross border payments reflects far more than its use as a vehicle currency. Many globally traded commodities, such as oil, are priced in dollars and thus payments for such purchases are settled in dollars. Pricing a homogeneous commodity trading in the global market in a single currency makes that market more efficient (the same price for the same thing).  Making cross border payments in dollars (or any other single currency) also avoids the costly need to exchange one for another in the FX market. The dollar is most often chosen because its value is relatively stable, and it has deep and liquid securities markets in which to hold dollars in reserve for use in cross border payments.

So, what are the chances that current cryptocurrency developments might precipitate a shift from the dollar to some other currency and means of payment. Several factors of U.S. policy have heightened interest by many countries in finding an alternative.  Specifically, from my recent article in the Central Banking Journal on the IMF’s $650 billion SDR allocation:

“Cumbersome payment technology. Existing arrangements for cross-border payments via Swift are technically crude and outmoded.

The weaponization of the dollar. The US has abused the importance of its currency for cross-border payments to force compliance with its policy preferences that are not always shared by other countries, by threatening to block the use of the dollar.

The growing risk of the dollar’s value. The growing expectation of dollar inflation and the skyrocketing increase in the US fiscal deficit are increasing the risk of holding and dealing in dollars.”  “The IMF’s 650bn SDR allocation and a future digital SDR”

Most central banks are upgrading their payment systems. But the Peoples Bank of the Republic of China (PBRC) is one of the most advanced in developing a central bank digital currency (CBDC), the e-CNY. However, it has little potential for displacing the dollar for several reasons. The Federal Reserve is also modernizing its payment technology, including exploring the design of its own CBDC, and can match China’s payment technology in the near future if necessary. More importantly, China’s capital controls, less developed Yuan financial markets, and less reliable rule of law make the Yuan an unattractive alternative to the dollar. These latter impediments do not apply to the Euro, however. “What will be impact of China’s state sponsored digital currency?”

Rather than looking for another national currency to replace the dollar, there are several advantages to using an international one. These include greater ease in making cross border payments and the reduced risk of political manipulation, or a national currency’s domestic mismanagement.  Bitcoin, for example, can make payments anywhere in the world without being controlled by any one of them. The serious drawbacks of Bitcoin’s blockchain payment technology might be overcome with one or another overlaid technology. But to become a serious currency, bitcoin must be dramatically more widely accepted in payment than it is now. Widespread acceptance in payments could generate the demand to hold them for payments, which would tend to stabilize its very erratic value. This seems very unlikely. A digital gold-based currency, such as the earlier E-gold, would enjoy the advantage of an anchor that is well known and that has enjoyed a long history. However, gold’s value has been very unstable in recent years. Aluminum has enjoyed a very stable price and elastic supply and will be the anchor for Luminium Coin to be launched in the coming weeks: https://luminiumcoin.com/

But the world has already established the internationally issued and regulated currency meant to supplement if not replace the dollar, the Special Drawing Rights of the International Monetary Fund. The IMF has just approved a very large increase in its supply.  “The IMF’s 650bn SDR allocation and a future digital SDR”  The SDR’s value is determined by the market value of (currently) five major currencies in its valuation basket. While all five of these currencies have a relatively stable value, the value of the basket (portfolio) of these five is more stable still. The rules for determining the SDR’s value and supply, as well as its uses, are well established and transparent and governed by the IMF’s 190 member countries. In short, the SDR is truly international. However, it can only be used by IMF member countries and ten international financial institutions such as the World Bank and the Bank for International Settlements.

While the SDR has played a limited useful role in augmenting central bank foreign exchange reserves, it has failed to achieve a significant role as an international currency because of the failure of the private sector to invoice internationally traded goods and financial instruments (such as bonds) in SDRs and the absence of a private digital SDR for payments. If the IMF is serious about making the SDR an important international currency it should turn its attention to encouraging these private sector uses of the unit. “Free Banking in the Digital Age”

In the long run the IMF should issue its official SDR according to currency board rules and anchor its value to the market value of a small basket of commodities rather than key currencies: “A Real SDR Currency Board”

[1] Warren Coats retired from the International Monetary Fund in 2003 where he led technical assistance missions to the central banks of more than twenty countries (including Afghanistan, Bosnia, Egypt, Iraq, Kazakhstan, Kenya, Kyrgyzstan, Serbia, South Sudan, Turkey, and Zimbabwe). He was a member of the Board of the Cayman Islands Monetary Authority from 2003-10. He is a fellow of Johns Hopkins Krieger School of Arts and Sciences, Institute for Applied Economics, Global Health, and the Study of Business Enterprise.  He has a BA in Economics from the UC Berkeley and a PhD in Economics from the University of Chicago.

A New SDR Allocation

On March 23, the Managing Director of the International Monetary Fund, Kristalina Georgieva, reported that: “I am very encouraged by initial discussions on a possible SDR allocation of US$650 billion. By addressing the long-term global need for reserve assets, a new SDR allocation would benefit all our member countries and support the global recovery from the COVID-19 crisis.” “IMF Executive Directors discuss new SDR allocation” The SDR is the international reserve asset and unit of account created and issued by the IMF to supplement the U.S. dollar in those roles. There are important advantages to replacing or reducing the dominance of the U.S. dollar in global commerce with an internationally issued currency with a more stable value than the dollar or any other single currency. “Returning to currencies with hard anchors” Real SDR Currency Board

The IMF’s Articles of Agreement require a long-term global need for additional reserves to justify an allocation. Thus, the Managing Directors call for a new allocation is “based on an assessment of IMF member countries’ long-term global reserve needs, and consistent with the Articles of Agreement and the IMF’s mandate.”  “IMF Executive Directors discuss new SDR allocation”  While I think an allocation is justified and useful at this time, the underlying motivation of aiding IMF members to fight the economic impact of the Covid-19 pandemic is unfortunate.

The aid motivation is revealed in a Wall Street Journal editorial on March 24, 2021, which unfortunately misrepresents important features of the SDR. “Special dollars for dictators”

Setting aside for a minute that I have long proposed replacing the SDR allocation system described in this article with issuing SDR under currency board rules (i.e., only and to the extent demanded by the market and purchased by the market at market prices), there are a lot of mistakes in this article. Allocated SDRs are in effect a line of credit for which any country using them pays the market rate of interest (on three-month t-bills). If a country does not use its allocated SDRs the interest rate it pays on its allocation is matched and offset by the interest it earns on its SDR holdings. SDRs are allocated in proportion to member countries’ quotas in the IMF. Quotas are based on each country’s economic size and importance in global trade and determined a country’s financial contribution to the IMF, its borrowing limits and its voting strength. This is an objective and sensible basis for allocations and does not and should not take into account the nature of each country’s government.

The WSJ also misrepresents the implications of the proposed allocation for the U.S. treasury, which like every other recipient of an allocation pays nothing unless it uses some of them. If the U.S. buys SDRs from another holder (only IMF member countries and ten International Financial Institutions such as the World Bank and the BIS), it earns interest to the extent that its holding would then exceed its allocation. If Greece uses its SDRs, it will not necessarily sell them to the U.S. Treasury. Greece could sell them or pay obligations with them to any other IMF member country willing to buy or accept them.

The IMF Articles of Agreement in which SDRs and the rules for using them are established are not the legislative product of the U.S. Congress (though the U.S. needed to support the adoption of these Article) and thus these rules cannot be changed by the U.S. Congress as suggested by the WSJ.

As noted in the WSJ editorial the size of the allocation seems to have been chosen to stay under the cap over which Congressional approval is required for U.S. support for the allocation. As allocations require 85 percent support of the IMF members by quota and the U.S. quota is 17.44%, an SDR allocation cannot be approved without U.S. support. The editorial is right (implicitly) that SDR allocations are not meant as aid and the current scheme proposed by the IMF seems to be a non-transparent work around the need for congressional approval to provide aid. My IMF colleagues Leslie Lipschitz and Susan Schadler explore this aspect more fully in “A New Global Plan to Help Struggling Countries Misses the Mark” http://barrons.com/articles/WP-BAR-0000029758  Sadly this undermines the legitimate purpose and role of SDRs in augmenting international reserves.

My travels to Afghanistan

Afghanistan: Rebuilding the Central Bank after 9/11 — My Travels to Kabul

By Warren Coats

Kindle and paperback versions available at:  “Afghanistan-Rebuilding the Central Bank after 9/11”

Watching the collapse of the twin Trade Towers in New York on September 11, 2001 on the TV in my hotel room in Bratislava, I never imagined that I would be in Kabul several months later and spend 212 days there spread over 19 trips from January 2002 to December 2013 to help modernize Afghanistan’s central bank–Da Afghanistan Bank (DAB). I learned more than I taught and share the highlights in this book. I became friends with many wonderful Afghan people, and bonded with my IMF team members. DAB was almost completely rebuilt. Watching its eager young staff mature into effective managers was a joy. Whether it will last in Afghanistan’s uncertain political and cultural environment is an open question.

I learned as much as I could about Islam and its internal struggle to denounce Islamism (radical Islamic fundamentalism). I share details of the collapse of Kabulbank, Afghanistan’s largest bank, and the corruption surrounding it and its resolution. The IMF’s presence and work in Afghanistan was not without tragedy. The IMF’s resident representative, in whose guest facilities we stayed, was killed in a terrorist attack. And I learned much about walls.

Previous Books

One Currency for Bosnia: Creating the Central Bank of Bosnia and Herzegovina

by Warren Coats (2007)   Hard cover: One Currency for Bosnia

Zimbabwe: Challenges and Policy Options after Hyperinflation

by Warren L. Coats (Author), Geneviève Verdier (Author)  Format: Kindle Edition

Zimbabwe-Challenges and Policy Options after Hyperinflation-ebook

Money and Monetary Policy in Less Developed Countries: A Survey of Issues and Evidence

by Warren L. Coats (Author, Editor), Deena R. Khatkhate (Author, Editor)  Format: Kindle Edition

Money and Monetary Policy in LDCs-ebook

Nation Building in Afghanistan

Ambassador Crocker rightly calls the American role in “rebuilding” Afghanistan, “complicated.”  “I-served-in-Afghanistan-no-its-not-another-Vietnam”  I first met Ambassador Crocker in January 2002 when he was servicing as America’s chargé d’affaires to Afghanistan. We met in the American Embassy that had just been reopened after a decade or so of abandonment.  A decade’s worth of dust still covered the embassy floor several inches deep. Its newly returning employees were sleeping in cots along the hallways.

Following al-Qaeda’ 9/11 attacks in the U.S., I supported NATO’s UN sanctioned attack on Afghanistan’s Taliban regime as a necessary measure to deprive al-Qaeda of its sanctuary there. I wept when we abandoned that objective unfinished in order to pursue another war in Iraq, which I strongly opposed. The Washington Post just published Defense Department documents evaluating America’s 18-year war in Afghanistan and finding it a costly failure. https://www.washingtonpost.com/graphics/2019/investigations/afghanistan-papers/afghanistan-war-nation-building/

“Former defense secretary Jim Mattis defended American efforts to rebuild Afghanistan as part of the 18-year-old U.S. war there, saying Friday that ‘we had to try to do something in nation-building, as much as some people condemn it, and we probably weren’t that good at it.’  Speaking to journalists at The Washington Post, he cited an increase in the number of Afghan women who are educated, the development of Afghan diplomats and the inoculation of civilians against disease.

“Mattis, who oversaw the war as the four-star head of U.S. Central Command from 2010 to 2013, said violence in Afghanistan is ‘so heartbreaking that it can blind you to the progress,’ and he acknowledged that the United States made a strategic mistake by not paying enough attention to the country as the administration of George W. Bush launched the war in Iraq in 2003.  ‘That we didn’t do things right, I mean, I’m an example of it,’ Mattis said, recalling that as a one-star general, he was pulled out of Afghanistan in the spring of 2002, promoted and told to prepare for war in Iraq.

“’I was dumbfounded,’ he said. ‘But we took our eye off of there.’” “Mattis-Afghanistan-papers-we-probably-werent-that-good-nation-building”

But should we have remained as military occupiers and then as peace guarantors for another 18 years and counting?  I have spent a lot of time in Afghanistan over those 18 years, most intensively as a member of the IMF team addressing the Kabul Bank scandal from 2010-14 (22 visits after that first one in January, 2002).   “The Kabulbank Scandal–Part I” Cayman Financial Review, January 2015  “The Kabulbank Scandal–Part-II” Cayman Financial Review, April 2015  “The Kabulbank scandal–Part-III” Cayman Financial Review, July 2015

I have worked with many wonderful, mainly young, patriotic Afghans and have grown to care a great deal about their conditions and their future. We (the U.S., IMF, World Bank, EU) have a lot to teach them about the institutions of capitalism and they have been very eager to learn. However, the United States has rarely been very good at “building” modern nations that it conquered militarily.  Our Generals and Ambassadors, who rotate in and out every two to three years, rarely understand the cultures and histories they are trying to deal with.  With our military on the ground it is too easy to attempt to impose our institutions on societies unfamiliar with them without more patiently growing more modern institutions from what is in place that are thus better adapted to their traditions and thus more likely to function successfully.

Nation building at the point of a gun has not and is unlikely ever to work for us or for them. https://wcoats.blog/2009/11/16/afghan-national-army/.  https://wcoats.blog/2012/10/23/our-unsupportable-empire/.

My hope for the future of Afghanistan rests with its young, dedicated and increasingly well-educated young people. Our advice can be valuable, especially if filtered and adapted by Afghans themselves. After centuries of relative isolation, the modern world of the Internet, offers them the knowledge of the world. We need to get our troops and our billions of corrupting dollars out of their way.

Whither Libra?

Every other day, it seems, we witness the launch of a new crypto (digital) currency.  Each combines a medium of exchange (a currency) and a means of payment (a technical process of delivering the currency—of making a payment with it). While many of us have watched the ups and downs of bitcoin and its imitators with amusement, none of us (hopefully) take it seriously as a currency. Bitcoin is a speculative vehicle for gambling.  Processing bitcoin payments is too slow, and its value is too volatile to succeed as a medium of exchange or as a means of payment. Only about 1% of bitcoin transactions are actual payments.  Many new means of payment do not involve a new currency.  Thus, debit and credit cards, checks, wire transfers, PayPal, Popmoney, Zelle, etc., are means of payment of US dollars, or Euros or other sovereign currencies.

Unlike the bitcoins of the world, Libra is a currency and means of payment that is designed to ensure that its tokens will have a stable value.  The legacy members of Facebook, Visa, Uber, and other partners in the Libra Association promise the possibility of rapid adoption. Libra’s value will be fixed to that of a basket of major currencies, its supply will be regulated by market demand at that fixed price (issued via currency board rules), and it will be fully backed by assets of the same value ensuring that holders of Libra can redeem them for the same value at any time.

Suddenly potential regulators are on high alert such as witnessed in the recent Congressional testimony of David Marcus, head of Facebook’s Calibra, to Congress.  By whom and how should Libra be regulated?  Obviously, it will need to comply with Anti Money Laundering (AML/CFT) requirements and whatever else each jurisdiction in which its participants reside (holders of “accounts” with Libra or of its tokens) require of money service providers. Banks take deposits and lend, so Libra would not be a bank. While its tokens might be treated as deposits, it will not lend (its purchases of government debt and other securities with the money paid to buy Libra are investments not loans).  In this short note I will explain why Libra—the coin/token/currency—is not a claim on a mutual fund and thus should not be regulated in the US by the Securities and Exchange Commission.  I will not, however, examine its claim to be a more efficient means of payment.

The nature of Libra’s claim of stability rests on how its value is determined.  Its value is to be fixed to the market value of a basket of currencies yet to be determined. But how does that work exactly?  The world already has an internationally determined and managed unit of account, the Special Drawing Right (SDR) of the International Monetary Fund.  Rather than introduce yet another, competitive unit the case for Libra to fix to the SDR is so overwhelming that I will illustrate the difference between a currency basket as a unit of account and as an investment portfolio with the SDR. The composition of the SDR’s valuation basket is established by international agreement following a well-specified and transparent process.  Fixing the value of a Libra to that of the SDR would remove any risk of its value being manipulated by Facebook or other Libra shareholders. That would strengthen the status of the Libra but also contribute to enhancing the IMF’s SDR as a supplement or substitute for the dollar in international reserves, as called for in the IMF’s Articles of Agreement.

The SDR’s value is determined by a basket of five currencies (the dollar, euro, pound sterling, yen and renminbi).  The IMF computes the dollar value of one SDR (and thus the value in every other currency) daily on the basis of the market exchange rate of each of the five currencies in the valuation basket into dollars.  The dollar values of each currency are added up to determine the dollar value of the basket.  By fixing the value of one Libra to one SDR it sets the price at which Libra can be purchased and the currency value that would be returned if Libra were redeemed.

This might seem similar to, but is in fact very different than, the value of one Libra being determined by the value of the portfolio of investments that back it.  The “Reserve” backing Libra would consist of SDR denominated assets (e.g., SDR bonds) or assets in each of the five basket currencies in the same proportion as in the SDRs valuation basket. Thus, it would bear no exchange rate risk.  However, the investment would have other risks, specifically interest rate and default risks.  To the extent that some of the Reserve’s investments are relatively long term (say ten-year Treasury bonds), changes in market interest rates would change the current market value of these investments. While Reserve investments would presumable be made only in the safest assets and would be limited to relatively short-term instruments, the risk of default or loss in value would not be zero.  So, if one Libra is a claim on its share of the Reserve, its value could differ from the daily dollar value of the SDR valuation basket.

Libra wishes to include the unbanked in its market, thus opening financial and payment services to this broad group now unable to enjoy them. If Libra’s value is fixed to the value of its Reserve, and thus regulated by the SEC (in the US), consumer protection investment regulations would likely exclude the very people Libra is most interested in serving. Thus, Libra should fix its value to that of a unit of account and not to the value of its Reserve.

 

Central Banking award

The Central Banking Journal annually awards central bankers (best governor, best central bank, and providers of services to central banks) for their performance.  This year’s ceremony was held in London on March 13 and I was awarded Outstanding Contribution for Capacity Building. Here is a video of my acceptance speech.