New Private Monies. Kevin Dowd

the Liberty Dollar existed in specie, paper and digital form, and all forms of the Liberty Dollar were denominated in units of Liberty Dollars.

      5 In private correspondence, Mr von NotHaus informs me that the Liberty Dollar organisation was always extremely careful never to refer to any of its specie pieces as a coin because issuing coins for monetary purposes in the US would have been in violation of 18 USC §486, which states:

      Whoever, except as authorized by law, makes or utters or passes, or attempts to utter or pass, any coins of gold or silver or other metal, or alloys of metals, intended for use as current money, whether in the resemblance of coins of the United States or of foreign countries, or of original design, shall be fined under this title or imprisoned not more than five years, or both.

      I shall therefore use his terminology for reasons of legal precision, but readers are free to interpret the terms ‘coin’ and ‘medallion’ interchangeably if they wish.

      6 The digital version of the Liberty Dollar was launched in November 2002 and users could email digital Liberty Dollars to each other or use them in online trade. The system was highly secure, audited monthly and charges were very low (zero for transactions under $10 and 37 cents for other transactions) and much lower than was being charged, for example, by Visa or Mastercard. This system was highly successful and a large amount of the Liberty Dollar gold and silver that was eventually confiscated by the government in 2009 backed the digital warehouse receipts.

      Trading Liberty Dollars for greenbacks

      The designers of the Liberty Dollar faced a major technical problem: how could the Liberty Dollar trade at par against the US government dollar, the greenback, when the value of the Liberty Dollar is based on the values of the precious metals, but the value of the US dollar depends on Federal Reserve monetary policy? The way in which the Liberty Dollar handled this problem is very interesting.

      Consider that a silver Liberty Dollar medallion with a face value of $10 was minted in 1998 with an ounce of silver at a time when the current market price of silver was about $5 an ounce. The difference between the $10 face value and the $5 cost of the silver input covered costs of production and any minter’s profit, and the medallion itself would be sold for $10 or $7.50 to distributors. Other things being equal, if the market price of silver then remained below $7.50 an ounce, the organisation could continue to mint such medallions indefinitely – and it would keep retailing them for $10, which means that the Liberty Dollar and the US dollar would trade at par, one dollar for the other.

      However, if the US dollar price of silver rises – due in the long run to expansionary monetary policy by the Federal Reserve – the profit from minting falls and there comes a point – before the silver price hits $7.50 – beyond which it is no longer economic to continue minting Liberty Dollars. So, if the Liberty Dollar organisation continued to mint such medallions, it would eventually be bankrupted. If the price of silver were then to rise beyond $10, the Liberty Dollar medallions with a face value of ten dollars would have a silver content worth more than $10 and their price against the US dollar would rise: i.e. the Liberty Dollar medallion with a face value of $10 would trade for more than $10.

      To forestall such an outcome and maintain parity against the US dollar, once the price of silver hit $7.50, the standard one-ounce silver Liberty Dollar was rebased upwards to have a face value of $20. This entailed the following:

       The Liberty Dollar organisation would now issue one-ounce silver medallions with a face value of $20 rather than a face value of $10 as before, and these were sold for $20 (note that this means that the new $20 Liberty Dollar medallions had the same metallic content as the old $10 Liberty medallions).

       Any holders of the old $10 face value one-ounce silver medallions would be entitled to exchange them for the new one-ounce silver medallions with a face value of $20, since the two have the same content.

The net result is that the Liberty Dollar would remain trading at par7 against the US dollar and, in the process, people holding Liberty Dollars would have doubled the value of their holdings against the greenback. As von NotHaus explained:

The first move up (rebasement) was a big WOW for the Liberty Dollar as the currency actually moved up [against the greenback] as the model called for. And when it did, DOUBLE WOW … people rushed to exchange their $10 Silver Libertys for new $20 Silver Libertys and double their money … it was a smashing success.8

      7 Strictly speaking, it would be more accurate to say that ‘in print’ or newly minted $20 one-ounce silver Liberty Dollars would now be trading for $20. However, the older ‘out of print’ $10 one-ounce silver Liberty Dollars would now trade at a new price – approximately US$20 – reflecting the rights of their owners to trade them in for the new $20 silver Liberty Dollars which are now selling at $20. Speaking more generally, since they are also collectibles, the prices of out-of-print issues are also affected by how many of any particular issue are available and the scarcer issues would trade at a premium. Indeed, some were trading on eBay at very considerable prices before the government banned eBay from trading Liberty Dollars on the grounds that they were counterfeit currency.

      8 Personal correspondence.

      Liberty Dollar notes

      The paper certificates had Liberty Dollar face values of $1, $5 and $10 that were claims for a specific amount of silver. For example, early certificates contemporary with the $10 one-ounce silver Liberty medallion would have a face value of $10 and entitle the holder to redeem one ounce of 0.999 fine silver from the organisation’s warehouse. These certificates were not notes akin to those of a silver- or gold-standard bank operating on a fractional reserve, but were actually warehouse receipts backed by a 100 per cent reserve of silver. However, when the medallions were rebased, certificate holders could trade their old $10 certificates for new certificates with the new face value: for example, when the one-ounce silver $10 Liberty was rebased to a one-ounce $20 silver Liberty, the holder of one-ounce silver certificates with a face value of $10 was invited to exchange them for one-ounce silver certificates with a face value of $20, redeem it for silver or hold it for future rebasements. Holders of eLibertyDollar, the digital equivalent, could have their holdings rebased in the same way. These arrangements protected holders’ silver and gold content claims and meant that the face values of their certificates or digital holdings over time kept roughly in sync with the values of the precious metals.

      The Liberty Dollar in exchange and as a store of value

The Liberty Dollar was specifically designed to function in parallel with the US dollar and never marketed or represented as official US currency. Indeed, its whole marketing campaign was based precisely on the fact that it was not US official currency but, rather, superior to it.9

      The Liberty Dollar was backed up by a persuasive marketing pitch. To quote from one of its brochures:

      Now you have a clear choice of money. Are you ready to grow and protect your money or will you continue to lose your purchasing power as the US dollar depreciates?

      Just as FedEx brought choice to the US Post Office, the Liberty Dollar brings choice to the US dollar and protection for your purchasing power.

      The Liberty Dollar is 100% inflation proof. It is real gold and silver that you can use just like cash where it is accepted voluntarily for everyday purchases at your grocery store, dentist or gas station…

      When you are paying, ask the cashier, ‘Would you like plastic, paper or Silver?’ Then reach out and drop the Liberty Dollar in the cashier’s hand. Join the fun by simply offering the Liberty Dollar for all your goods and services.

The Liberty Dollar was highly successful and became the second most popular currency in the US. From 1998 to 2007, Liberty Dollar issues totalled up to perhaps $85m in value. Over this same period, the company issued over 350 different specimens in paper or gold, silver, platinum or copper specie that were distributed