The Liberty Dollar: All It's Cracked Up to Be?
If you're interested in physical metals and currencies you've more than likely heard of the so-called "Liberty Dollar". The concept seems well-meaning, that of an alternative currency to US Federal Reserve Notes backed by silver. However, there are some serious flaws in the implementation that need to be pointed out.
I am very much in favor of sound money, and by that I mean money that has some form of backing with something that acts as an undisputed store of value. Gold is a natural choice due to its long status as money in world history, as well as its rarity. Silver has been used as an acceptable substitute, and the US did continue to issue 90% silver coins for three decades after the abolishment of the gold standard. At first glance, the Liberty Dollar program seems to be replicating these earlier times when the physical metals as coins or paper certificates representing a claim on the metal were used as currency.
There are several serious flaws in the program, however:
1. The Liberty Dollar system is based on too many variables.
The face value of a $20 Liberty Dollar "coin" indicates that it trades at the same value as $20 in US currency. However, the "coin" contains 1 oz. .999 silver which fluctuates in value against the US dollar. This was not an issue during the gold standard days, as the value of gold in dollar terms was fixed. In this case, however, the face value does not match the value of the metal that makes up the "coin". Currently the face value is more than the actual value, and at some point the actual value may surpass the face value. The makers of the Liberty Dollar, NORFED, had a plan to redesignate the 1 oz. silver Liberty Dollar rounds to be worth $20 instead of $10 if the value of silver rose near $10 USD, which it has recently. This is a crude system attempting to patch over the flaws in the entire setup - when you base a currency on two factors that fluctuate independently of each other an overly complex and arbitrary system must be implemented to maintain a balance. A true metal backed currency has stability that is not dependent on the whims of a constantly fluctuating market. This leads into my next point:
2. Liberty Dollars aren't worth what they say they're worth.
The Liberty Dollar $20 "coins" are simply silver rounds that have the pretense of having a value other than their metal content. Why would anyone sell $20 worth of goods for 1 oz. of silver, if silver was worth less than $20 per ounce? I understand that the system as implemented is designed to ease conversion and not require constant revaluation, but the Liberty Dollar is truly no different from any other 1 oz. silver round that sells for silver price. NORFED also issues "warehouse receipts" that, similar to old US silver certificates, state that the face value of silver is held in storage and can be redeemed at any time by presenting the receipt. These certificates, however, are 1:1 with the face value on the Liberty Dollar rounds, so a $20 certificate will only exchange for 1 oz. of silver regardless of silver's actual value.
3. "Warehouse receipts" don't bolster confidence.
If there's one thing that I want drilled into my readers' minds, it is if you don't have physical possession of the metal, you don't truly own it. Paper certificates are no substitute for the real thing. However, as this is intended as a circulating currency certain compromises must be made, namely that of using instruments that refer to a store of value rather than being the store of value itself. However, one who has these certificates may find their options limited when trying to convert them into real silver, which brings me to the next point:
4. The Liberty Dollar has very limited avenues of trade.
Partially because of the above flaws in the system, the Liberty Dollar has never really caught on very heavily. As such, attempting to trade silver rounds for more than their actual value or paper certificates indicating a value in silver (yet again, less than face value) may be an exercise in futility. Sound money is not only based on a store of value, it also must be an instrument of equitable trade. Even proponents of gold and silver based money are oftentimes leery of the Liberty Dollar for this very reason.
Although a decent idea in concept, the implementation is lacking. It is an admirable undertaking to try and bring sound money back to people, but as it currently stands the system is flawed and I cannot recommend it. Liberty Dollars are nice silver rounds, but if you paid more than the going price for 1 oz. rounds or have accepted them for a trade at face value, you've been ripped off.
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Hey,
A very interesting post. It was a nice read.
Thanks
All the best,
Stefan
Canadian Investments
Posted by
Anonymous |
2/11/2006 9:22 PM
Hmmm. I have to comment on these four "flaws" in the Liberty Dollar system:
#3 is, IMHO, rather subjective. While some folks are wary of not possessing their silver in tangible form, they are free to leave these warehouse receipts alone. The receipts are only a part of the system, and could be dropped tomorrow without much impact--except that mailing the actual rounds (or carrying a large number) is then made more inconvenient. I fail to see how the warehouse receipts make the system look bad (except maybe to those who feel e-gold and the like are tools of the antichrist.)
#4 is true. However, this is due to it's newness more than anything. It's not even 10 years old, and has far greater circulation than Ithaca Hours (and is probably better-received in most cases than generic silver rounds.) I think it prudent to let time determine how it plays out, especially after the recent moveup.
#1 is true of any alternative currency that's backed by silver/gold. The variables are there in every case, but the methods of handling them can vary. With e-gold, for example, the US gold price is given to you, and you can convert on your own. The LD, however, simplifies the process for the end user by just giving them one base number. How this is inherently bad (or worse than, say, having a small LCD on each round that updates with the spot price of silver in real-time) is beyond me. I'd be interested in hearing alternatives which require significantly fewer "variables".
Finally, #2 (which is usually the real criticism--covert or overt--people generally have with the currency) simply shows a lack of understanding of markets and of money. Which, again, is where most people are, but which requires education.
ALL money is put into circulation at a profit. If you're going to have an alternative "hard" currency at all, it must be spendable at a value above what it was produced at. Otherwise, you go broke manufacturing the currency (or find a dearth of people willing to distribute it.) A merchant expecting people to hand over their silver bullion rounds at exactly spot might be surprised to find that his offer doesn't exactly spur a continuous silver exchange--although he'll doubtless have plenty of people willing to TAKE them at spot.
Most people, at some level, realize all this though. So the REAL issue is usually how much of a "markup" the LD has. Considering that its NOT AT ALL uncommon to have specialty silver rounds sold for $20 (or much, much more); that the ALD is much more than "just another silver round" (remember the warehouse receipts it can be converted into?); that other alternative forms of money (money orders, gift certificates, etc.) have intrinsic values only a fraction of that of the LD; and that the valuation of a silver piece by an individual is largely subjective to begin with--I find it curious that this "issue" can remain as such in someone's mind for any extended length of time.
I believe the market will eventually decide, first and foremost, that the Federal Reserve Note is wanting, and that precious metals are to be desired as money. And, in lieu of a superior system, I believe the market will decide that the Liberty Dollar is the alternative hard currency of choice.
-Wayne
Posted by
Wayne |
2/13/2006 8:00 PM
By asserting that the Liberty Dollar stands at parity with the US dollar, NORFED is declaring an "official" silver price of 20 LDs or US$ 20. But the market presently says that silver is worth US$ 10.75. Given that silver is the only thing backing Liberty Dollars, the market exchange rate is US$ 1.00 = 1.86 Liberty Dollars. And this assumes that the market is confident that NORFED will actually redeem any and all of its "silver certificates." If the market doubted that, then the exchange rate with the US dollar would be even more "unfavorable" to the Liberty Dollar.
Liberty Dollar enthusiasts are on the horns of a dilemma:
If NORFED is going to declare an official silver price (in Liberty Dollars), then the Lberty Dollar must float relative to the US dollar, the exchange rate changing exactly as the US dollar price of silver changes.
Alternatively, if NORFED insists on a 1:1 parity between the US dollar and the Liberty Dollar, then we must accept a non-market price for silver handed down to us by NORFED.
Posted by
Anonymous |
9/16/2006 1:05 PM
When someone purchases a loaf of bread a the store, do they pay the cost of the flour and other ingredients? No, they pay for a finished product which costs more. Same goes for the LD.
The price of silver fluctuates because the value of the dollar varies, the silver is constant.
The Federal Reserve (and other central banks) are simply practicing legalized counterfeiting in their issuance of debt-based fiat money.
Posted by
Anonymous |
11/30/2006 11:59 AM