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Friday, July 27, 2007

The Liberty Dollar Scam

The idea of privately-issued money seems attractive to me. However, when I saw Liberty Dollars and how they are implemented, I was deeply offended.

Liberty Dollars are issued both in coins and in paper. A 1-ounce silver coin has a face amount of "$20" stamped on it. This is wrong, because an ounce of silver is currently worth around $13. The coin is not worth $20. It is only worth its metal value.

The trick of stamping a coin with a face amount greater than its metal value only works for the government, because it will use force to back up its money. Further, the Liberty Dollars are made to look sort of like regular money, which is potentially confusing for the average person.

Even worse, you can get a $20 paper Liberty Dollar. This is backed by one ounce of silver, according to NORFED, the corporation that sponsors the Liberty Dollars. However, if the price of silver goes over $20/ounce, they will halve the amount of silver that each liberty dollar represents. In other words, your $20 paper Liberty Dollar, which represented one ounce of silver before, now represents only a half ounce of silver. Who gets the rest of the silver? It is profit for the NORFED corporation!

If you're going to have a paper certificate that represents silver, you should make the amount of silver constant. Devaluing the money when the price of silver goes up defeats the entire purpose. Fortunately, that $20 coin still has an ounce of metal. You can even pay a reminting fee and have it changed into two half-ounce $20 coins. In other words, if you are dumb enough to use Liberty Dollars, make sure you get actual silver rather than paper. Only pay based on the silver content, and not the face amount of the coin.

Besides, carrying around a couple of ounces of silver or gold is not a serious burden. Silver and gold coins actually are usable as money, because the price of the metal is so high! There's no need for paper representing gold or silver; you might as well use the actual metal.

The bottom line is that if you do want to use silver as money, get generic silver coins where you'll only be charged the spot price of silver plus a transaction fee. Paying $20 for $13 of silver is stupid. Further, it's always better to be holding physical silver rather than paper that's a promise for silver. You never know when the issuer will go bankrupt or default. If you did pay $20 for $13 of silver, at least you may have a profit eventually if silver goes over $20/ounce.

Further, Liberty Dollars don't allow you to fully boycott the Federal Reserve. Liberty Dollar transactions are still taxable, and you need to pay income taxes in regular dollars.

I'm so offended by Liberty Dollars. There are legitimate concerns with Federal Reserve Notes, but Liberty Dollars are just preying on people who are mad at the government and ripping them off.


TZ said...

This is the first I have heard of the Liberty Dollar, and I agree that it seems to just be replacing a heavily regulated fraud with a new fraud which is not only open to the same exploitation but misses the point entirely regarding the relationship between FINANCIAL WEALTH and REAL WEALTH!

Why should any currency (which is only a claim to wealth and not wealth itself) require any 'backing' of a precious metal or anything else other than the recognised and agreed capacity for the economic community to provide goods and services?
This Liberty Dollar will only continue to promote the fraudulent assumtion that money is a commodity. It can still be manipulated to cause artificial restrictions and expansions to trade.
This is what the 'gold standard' has been used for for over a century - to obscure reality:
The reality is that the REAL wealth of the community in REAL terms like goods and services themselves, has been expressed in FINANCIAL terms which in turn have been manipulated by private concerns to the point where there is no longer any correlation between the REAL WEALTH of the community and the FINANCIAL WEALTH which is supposed to represent it and enable it to flow from producer to consumer.

FSK said...

TZ lives in Australia. The Liberty Dollar is used primarily in New England.

The reason you need money backed by a precious metal is so that there's an objective standard of value. A metal coin represents a fixed quantity of labor, that used to mine and mint the coin.

You can have money backed by any commodity you wish. If I manufacture shirts, I can issue shirt-backed money. However, metal coins are the simplest common denominator.

I've thought about this carefully. The evil is not fractional banking itself. The evil is that government demands taxes be paid in coins controlled by the bank. The banking system and taxation system need to cooperate to enslave people. Suppose there is no forced taxation. If the bank only offers coins under usurious terms, people will switch to alternate monetary systems. The evil is not the bank. The evil is the bank and government cooperating, with the government forcing people to use the bank's products via forced taxation.

I've thought about this. Without a government, there is nothing intrinsically evil about a fractional reserve bank. The evil is a government demanding taxes that are paid in a certain method, with the valid tax payment medium controlled by a bank. In a truly free market, people who place deposits at a fractional reserve bank are aware of the risk they are taking. People who desire more security can deposit at banks with greater reserves, but offer less interest. People who want better rates of interest can deposit at banks with lower reserves.

That answers a question you posted elsewhere. Suppose that people agree that silver coins are the best form of money. If there is a shortage of silver, people will place their deposits at sound fractional reserve banks for the interest. If there is a surplus of silver, people will place their silver in warehouses; they won't risk their silver for a paltry rate of interest. With no government intervention, the free market will automatically provide the appropriate quantity of silver or silver certificates.

Rich said...

However, if the price of silver goes over $20/ounce, they will halve the amount of silver that each liberty dollar represents. In other words, your $20 paper Liberty Dollar, which represented one ounce of silver before, now represents only a half ounce of silver.

Completely wrong. The paper "liberties" are always redeemable in the exact amount of SILVER printed on them. The "$20" (now "$50") printed on the 1-ounce warehouse receipts is no different from a SUGGESTED RETAIL PRICE, as printed on any other product. The purpose is to make it easier for people who actually use LDs in transactions, because most people who use LDs still also use Federal Reserve Notes, and most things are priced in FRNs.

When the price of silver remained above about $7/oz for 30 days, the LD was moved up to the $20 base; when it was above about $17/oz for 60 days, the LD was moved up to the $50 base.

During the 10->20 transition period, those with 10LD coins (1oz silver) could trade them in and receive the new 20LD coins (1oz silver) for a small reminting fee; or they could keep the old coins, as I did. The same thing took place during the 20->50 transition period. If they used them to exchange for things priced in FRNs, getting the new coins would be a good idea but it was not required.

During the 10->20 transition, those with the old 10LD warehouse receipts (1oz silver) could trade them in for the new 20LD warehouse receipts (1oz silver), or they could keep the old receipts, and still redeem them for the same 1oz of silver they were worth before the base change, anytime they wanted. The same thing took place during the 20->50 transition.

In fact, up until late last year, when the FBI raided the warehouse and seized everything, those with the original 10LD 1oz silver receipts could still redeem them for 1oz of silver, even though the LD had already gone through two base changes since those receipts were issued. As a result of the raid, a class action lawsuit is now in progress, filed by the customers of NORFED (now Liberty Services) for the retrieval of their property, which is what the FBI stole during its raid; most of the metal seized belonged to NORFED's customers, not NORFED, because it was the backing for the warehouse receipts. Even if NORFED wanted to do what you claim, they couldn't because the warehouse has always been regularly independently audited to ensure 100% reserves are kept, in the metal amounts printed on the receipts, for all the warehouse receipts issued.

The base changes do NOT have, and have never had, any effect on the amount of silver you own, either as coins or in the warehouse.

As for the FBI's raid, the charges were all based on supposed counterfeiting, yet despite your (and the FBI's) assertions to the contrary, LD receipts and coins look NOTHING like FRNs and US coins. There's no possible way anyone with an IQ above 50 could mistake them for something the government or the FR made. The warehouse receipts have a different design, different size (actually sizes, since each denomination has a different length, which is especially helpful for the blind), and different texture compared to FRNs, and the LD coins have a different design, different size, and different weight compared to any US coins.

Rich said...

Paying $20 for $13 of silver is stupid.

Yes, though a 1oz silver round or warehouse receipt is worth more than just a formless 1oz lump of silver. I also highly doubt anyone was paying that much for the 1oz 20LDs when they first came out. The prices the regional currency offices and LD associates get is based on the spot price, so they get them for significantly less than the suggested retail price; the SRP is supposed to last for several years, because base transitions are costly for everyone, hence the low starting point after each base change.

The FRN "face value" is just a suggestion; most people who use LDs in transactions treat it as such. It's a convenience to help bridge the gap between the existing system and the one fans and users of the LD are trying to promote and create (a free market for money).

You also mistake LDs for merely an investment in silver. That may be part of the reason to use them, but the main reason is as a hedge against inflation and to get people off of their dependence on FRNs. LDs are mostly used as local currencies, in direct competition with FRNs, and because only local businesses are likely to accept them, they provide local merchants with a bit of mutual protection and promotion against the encroachment of large state protected and subsidized corporations.

Anonymous said...

If NORFED is so against Federal Reserve Notes then why do they accept them as payment for minting. Shouldn't they be accepting silver or gold as payment.

Anonymous said...

"Without a government, there is nothing intrinsically evil about a fractional reserve bank."
I couldn't disagree more with that statement. Fractional Reserve banking is fraud, pure and simple. It is a pyramid scheme. No one is legally allowed to do what the banks do in this scenario. How can 10 of anything be loaned, when only 1 actually exists ?

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