Metal-backed currency vs. violence-backed currency

The people behind the Liberty Dollar have been arrested for competing with government issued paper currency, by issuing their own commodity-backed currency. Fiat currency is essentially backed by violence, in that if you don't accept it for payments (as a merchant) or try to compete with it, you will get tossed in jail. It is not used because it is superior, it is used because people with guns will stop you if you try to offer an alternative.

This is, fundamentally, how government works. By offering inferior services and threatening to put anyone who competes with them in a cage. (Well, ok, also by occasionally offering genuinely non-excludable / natural monopoly / public goods. Shoddily.)

Here is a blog on the arrests. Also a DOJ Press Release:

Acting U.S. Attorney Edward R. Ryan of the Western District of North Carolina said, “When groups seek to undermine the U.S. currency system, the government is compelled to act. These coins are not government-produced coinage, yet purchasers were led to believe by those who made and sold them that they should be spent like U.S. Federal Reserve Notes. Such claims are in violation of federal law.”

It's absurd to claim that any alternative currency producer says that their currencies will be accepted universally, like violence-backed currency. Alternative currencies come with caveats, including the Liberty Dollar.

The indictment alleges that the purpose of NORFED is to mix Liberty Dollars into the current money of the United States, and further alleges that NORFED intends for the Liberty Dollar to be used as current money in order to limit reliance on, and to compete with, United States currency.

Oh no, we can't have businesses limiting reliance on and competing with US currency! We can't make it compete by being desirable, we have to eliminate competition with violence.

The indictment alleges that members affiliated with NORFED sell the Liberty Dollar coin at a greater price than they pay for it, and that the profit for these individuals is the difference between their discounted purchase price and the price for which they sell the coin. Additionally, according to the allegations contained in the indictment, a person who is not affiliated with NORFED pays the face value minted on the coin.

This is why I wouldn't buy Liberty Dollars - they don't sell for true value. (This is done in order that the conversion to regular dollars not change constantly with every fluctuation of the metal price. It brings a big benefit in convenience, but I still don't like it. I'd rather let a computer convert my purchase price based on current spot prices, and have metal coins that are worth their full weight). But it's comically absurd for the people who print Federal Reserve Notes, and pocket a profit equal to the full face value minus tiny printing costs, to complain about people making a profit from a currency.

And the most absurd statement of all:

“People understand that there is only one legal currency in the United States. When groups try to replace the U.S. dollar with coins and bills that don’t hold the same value, it affects the economy. Consumers were using their hard-earned money to buy goods and services, then getting fake change in return,” said Owen Harris, the Special Agent in Charge of the Charlotte Division of the FBI.

That's right, metal-backed currencies don't hold the same value as violence-backed currencies. The former, everywhere and always, appreciates relative to the latter. Put another way, the former holds its value while the latter dwindles away. What a disingenuous comparison - or perhaps he is so utterly ignorant of the nature and history of money to have meant the reversed meaning.

And people wonder why we want to make government more competitive.

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Patri, This is why I

Patri,

This is why I wouldn't buy Liberty Dollars - they don't sell for true value. (This is done in order that the conversion to regular dollars not change constantly with every fluctuation of the metal price. It brings a big benefit in convenience, but I still don't like it. I'd rather let a computer convert my purchase price based on current spot prices, and have metal coins that are worth their full weight).

These would be better described as barter transactions. Money can't really have a higher-valued alternate use.

What NORFED would really be guilty of is deflation as its silver melt value goes above its face value and the quantity of money is reduced. This is no different than the pre-1965 US half dollars with too much silver content to remain money, even after the silver content was reduced to 40%. Before silver went up, nobody complained about their containing less than 50 cents worth of silver.

I bought 200 $10 face value Liberty Dollars on Ebay several years ago for about $6.50 each and the silver content is now worth over $15, but I'm either too lazy to sell them or I'm holding out for $100.

BTW, I've unloaded all my gold, silver and TIPS ETF's in the last week. Not because there isn't going to be massive inflation, but because I should be able to do much better in the short term with equity dividends and covered calls.

Regards, Don

Money has higher alternate uses

"Money can't really have a higher-valued alternate use."

Commodity money can have higher-valued alternate uses. Otherwise all jewelery would be melted down and converted to currency.

Fiat paper money can also have higher-valued alternate uses. You know like when the Germans used to burn money to keep warm, or people use Zimbabwe currency as wall paper. Have you ever heard of a lucky penny, or seen a "first dollar earned" pinned to the wall of a deli or barbershop. Perhaps you've seen those machines where you insert a penny, turn a crank, and it is flattened and embossed with some emblem, like a penguin at the aquarium. Another example is money jewelery. Yet another is money origami art.

What does occur is a balance between the alternate higher value uses and those of money.

Brian, If money comes to

Brian,

If money comes to have an alternate higher-valued use, it ceases to be money.

Regards, Don

There is a common mistake

There is a common mistake among creationists where they claim that a chicken couldn't come from a prior creature because only chickens lay chicken eggs and chickens only hatch from chicken eggs. They fail to understand that the boundary between chicken and non-chicken is not so clearly delineated. I think you are making a similar mistake here.

The example of the dollar being folded into origami is one where the object is both art and money. There is an alternate use in the hand of a master artist for the money that is more valuable (to some) than the dollar itself. Were any particular instance of said origami found by a child (or uninformed adult) he might just spend it as money.

Money is just a very marketable commodity that has certain properties. There can be uses for such a commodity that is more valuable than the money itself, but there is nothing to say that those uses have to be so numerous as to consume all the money.

Remember that these alternate uses are not uniform. Some are highly valuable but need small quantities of the commodity like a gold coating providing corrosion protection. The most valuable of the uses will tend to be serviced first, then less valuable ones, until the value falls to the point where the marginal use of the commodity as non-money matches the marginal use of the commodity as money.

Nor does the commodity cease to be money just because it is in some alternate form. Not only can it be used as money but other commodities can be used as money at any time. Thus you have situations like cigarettes being used as money during a war.

Wampum was both money and jewelery.

Just because coin is being melted down for other uses doesn't mean the underlying commodity is no longer money. It just means that there are alternate uses that are considered more valuable.

As an example where this might happen consider a country on 100% gold reserves that moved to a fractional reserve system. Gold coin would tend to drop in value under this scenario and therefore alternate uses for that gold that were marginally excluded would become viable. The alternate use could even be consumptive in that it actually tends toward loss of the metal, such as silvers use in photography.

The boundary between what is money and not money is not as sharp as you seem to think.

Commodity money can have

Commodity money can have higher-valued alternate uses. Otherwise all jewelery would be melted down and converted to currency.

It doesn't follow that jewelry is a higher-value use... you know those pesky jewelers insist on being paid for their work :)

Mariginalism not intrinsicism

I didn't say jewelery in general has a higher use value. I am a marginalist when it comes to value.

If there were NO alternate higher-valued alternate use for the money under a gold commodity monetary system that would imply that all jewelery would be more valuably used as money than as decoration. I wasn't claiming the reverse that there are NO alternate uses for gold more valuable than as jewelery. As a matter of fact I don't think this way at all.

In fact what actually occurs is that individuals value they own commoditiy holdings differently, do so differently based on how much they have, do so differently based on what other goods are available for trade, and there are all sorts of issues of knowledge differences, transaction costs, etc. that come into play.

So in the case of the origami money one person could value it more as money at the same exact time that someone else values it more as art. Who possesses it will determine what use value has the higher value. Certainly if a person who values it more as money learns that others value it more as art he would trade it for more money and thus it would tend to remain as the more valuable (to others) art form.

There is however a limit to how many such pieces of art collectors are willing to buy. For example, I possess a few bar puzzles but I'm not in the market for more at current prices. I certainly value them more than their iron content. If iron goes to $1000 an ounce (with no other inflation in other prices) then I would immediately sell them for scrap.

counterfitting

It is against the law to manufacture anything that could be mistaken for US currency.

Mistaken by a National

Mistaken by a National Bureau of Standards approved monkey.

Regards, Don

And most people support this

And most people support this kind of action by the government. This is why the view that everyone will get behind the idea of competitive political system is absurd. Competition and choice is not a widely shared value.

I'm breaking ranks on this one...

Patri,

After the original seizure back in 2007, I wrote this post discussing my thoughts.

Legal issues aside, I see a fundamental flaw with their marketing strategy encouraging ALD holders to "spend them just like US Dollars". Your point here is the key:

I'd rather let a computer convert my purchase price based on current spot prices, and have metal coins that are worth their full weight).

1 oz of silver is not $20 USD, and should not be spent as if it is equivalent. There should be a floating exchange rate between the two, and prices should be adjusted based upon the exchange rate.

But that's not what von NotHaus and the Liberty Dollar folks were doing. They were deliberately keeping the face value above that of the worth of silver, and encouraging people to spend it as if it were 1:1 parity. In fact, their marketing materials suggest you should buy the coins "at a discount" and then "spend them at a profit".

This is not an alternative currency. This is a method to try to pay for goods and services priced in US Dollars with a non-equivalent-value bullion piece.

My thoughts :) I once

My thoughts :)

I once said

To be sure, I think that the liberty dollar is crappy, it relies on shady multi-level marketing tricks and their idea to create an implicit parity with the greenback is just retarded.

As long as it happens via

As long as it happens via consensual interactions, it may be slimy, but it should still be legal.

Issues and Truths

Patri writes, "This is done in order that the conversion to regular dollars not change constantly with every fluctuation of the metal price. It brings a big benefit in convenience"

No that is NOT the reason for the base pricing (read http://www.scribd.com/doc/16198084/DOJ-Complaint-Civil-Forfeiture pg.14), the base, which always rises in advance of the POS moving over it, is there to keep a profitable spread in the sale of LD and it's associated products. The spread between the cost of manufacturing a piece and the sale price is what paid Bernard's salary and funded the day to day operations on the business. It was always explained to users, myself included, that the base moved up to keep things working when the POS moved up, but that is false. The ONLY reason, there was an arbitrary base price set and moved from time to time was to build in a profit to run the business. That's it, if you believe anything different based on past experience, that belief is simply wrong. This is also the reason that there was no back and forth exchange from LD's to USD at any home office (like for example a liquid e-gold secondary market), they did not want them back and did not have the cash to buy them.

This is also the center of the DOJ's case, I can't believe that anyone is going to convict this group for counterfeiting or attempting to overthrow the US currency system. LOL.

You can't do a currency backed by a commodity with a dollar face value, dollar peg or link in price to dollars, euro or any currency unit, it does not work. Just like an e-gold account, the units must be denominated by weight.

I have an experimental community currency backed by silver coming later this year, here is the draft pics, http://www.moneyart.biz/cc-news.html

However, unlike the LD, there is NO dollar sign, notes are by weight only and each ounce can at any time be exchanged for one ounce of silver locally. There is 100% exchange to and from silver at all times. There is a QR code for scanning at the time a merchant accepts the note for the daily exchange price. This is a community currency only, for small local use along side the dollar, not unlike Berkshares

Mark Herpel
Skype IM 'digitalcurrency'

ALD's at a discount

I buy ALD's at a discount and sell them as collectibles for the price I pay for them.

The Base 50 1/10 oz ALD's are great sellers at Christmas time as stocking stuffers.

From the BerkShares page

"Beginning Wednesday, February 11, 2009, 100 BerkShares can be purchased for 95 federal dollars and vice-versa."

How is this different from the American Liberty Dollars?

>However, unlike the LD,

>However, unlike the LD, there is NO dollar sign

And I suspect that not even the most ignorant person would confuse it with official US govt money ergo the govt will ignore it.

Say you wanted to pay your employees in Canadian cash. As long as you met US minimum wage requirements and paid your taxes with US money, the govt will not care.

Say GM decided to pay its employees with one new car a month. I think This would be legal as long as the withholding and payroll taxes were paid but the bookkeeping would be messy.

Time-backed currency better

Jct: They deserve what they got. All they had to do is like Ithaca Hours or LETS and not create their money to look like government money. Why do you think they did to incur the government's wrath?
Regardless, metal-based currencies are dinosaurs in a world of new community time-based currencies.
Best of all, when the local currency is pegged to the Time Standard of Money (how many dollars/hour child labor) Hours earned locally can be intertraded with other timebanks globally!
In 1999, I paid for 39/40 nights in Europe with an IOU for a night back in Canada worth 5 Hours.
U.N. Millennium Declaration UNILETS Resolution C6 to governments is for a time-based currency to restructure the global financial architecture.
See my banking systems engineering analysis at http://youtube.com/kingofthepaupers

Isn't that implicitly based

Isn't that implicitly based on the Labor Theory of Value?

Berkshares and CCs

Berkshares are only good in a small area of Massachusetts. CC's can only be used in their home local region as defined by that program. Outside of this area, if you were to present one to a store clerk they would laugh, but in their local area they work just like cash.

Shop at Walmart and $.80 of each dollar you spend leaves the area to their headquarters or regional office in another state and eventually back to China to pay suppliers. Use a CC, like Bershares and the money literally is no good outside of the area so it is recycled and spent again locally. Susan Witt who runs that operation, says that each note is used on average in 4 separate transactions locally before it makes its way back to the credit union and into dollars again.
One Berkshare = Local commerce and jobs
One $ at Walmart = Great for China
Mark

Eventually this leads to a

Eventually this leads to a rise in prices. It "benefits" the community only insofar as you subsidize commerce by paying higher prices. Hey! You don't need an alternate currency to do that, you could also tip everyone, same effect.

Mark, Your understanding of

Mark,

Your understanding of the economics of money and trade is largely upside down. A community isn't richer because of an increase in the quantity of the mediumn of exchange unless it can be used to outbid outsiders for imports. Whether it's real money, counterfeit money or any substitute,the only people who benefit are the producers.

It is a benefit when China is willing to accept pieces of paper for actual goods. When money leaves a country or a community, the remaining money is left with a higher unit purchasing power.

Exports are the cost of imports, necessary only when a foreign country starts to get tired of accepting pieces of paper. Exports use up valuable, scarce resources, such as labor, copper, etc., that could otherwise be used to increase the domestic standard of living at lower prices.

Regards, Don

http://www.youtube.com/watch?v=KK0-_nNsDO4

Now on the LP YouTube Channel:

Tom Palmer - Free Trade, Protectionism, GM, and Peter Schiff
http://www.youtube.com/watch?v=KK0-_nNsDO4

Fiat currency is essentially

Fiat currency is essentially backed by violence, in that if you don't accept it for payments (as a merchant) or try to compete with it, you will get tossed in jail.

Actually, I don't think the first part is true. All legal tender laws really mean, as i understand it, is that the government won't force someone to pay a debt in anything other than legal tender. In other words, if I owe you $100, and I offer you five $20 bills, you don't have to accept it, but you can't force me to pay in Turkish lira or something like that.

I suspect that this is just the default and that there's probably an exception for contracts that explicitly specify the form of repayment, but since courts can't compel specific performance I don't know how much it really matters.

fiat currency + inflation = invisible tax

If they doubled the circulation of federal reserve notes between last year and this year, your dollar would only buy half as much. It would also devalue nest-eggs, making people's retirement savings worth half as much.

It is an effective, nearly invisible tax. If the US Government came right out and said "hey everyone, we require you to pay an extra 10% taxes this year", and people saw visible confirmation of such coming out of their paychecks - there would be a revolt. But when everyone's life savings is diluted at 5% to 10% a year through the printing of money out of thin air, people don't put 2 and 2 together. Nobody ever stops to think "hey, why does everyone need a cost of living increase?" It's simple, you need a cost of living increase of 7% because between last year and this year, the government printed so much money as to dilute the buying value of a dollar by 7%, requiring you to receive more just to break even.

If you buy $100 worth of gold for $100, you have essentially exchanged items of equal value. Next year (once alot more freshly printed dollars have been introduced into circulation), that $100 simply buys less. You have escaped the devaluation of the dollar by purchasing gold, which stays the same value (it appears to go up in value against the dollar, but in essence this just the dollar going down in value).

The sick part is that the government EXPECTS your property, your nest-egg, to devalue at the rate of approximately 7% per year (arbitrary figure, could be more or less there are alot of factors), right along with the devaluation of the dollar. It is this expectation of devaluation forced upon you which is a significant source of income from the government. When you bypass the devaluation, and your assets retain their value indefinitely (gold holds the same buying power that the dollar doesn't), the government says your bypassing of devaluation is income, and taxes you on the "increase" against the value of the dollar.

This gives the government unlimited power to collect taxes; the more they print, the more value the government receives (at the expense of everyone's nest-eggs).

The government allowing competing currencies would circumvent this significant source of funding of the government. If people were allowed to have extremely liquid commodities that could be exchanged, saved, etc. ... without losing their value from being deflated at the rate of 7% per year, people would like that so much, they wouldn't use federal reserve notes. Liberty dollar notes would retain their value because they're backed by commodities.

This is why the government will never allow competing currencies. That being said, the best anyone can do is purchase relatively liquid commodities and suffer paying taxes on their "income" when the commodity retains its value, but federal reserve notes devalue.

Do currency traders pay income tax on their "profits"?

I understand Jack to make two main points: 1) Government policies foreseeably cause inflation in fiat-based currencies. 2) Because inflation means that assets appreciate relative to the value of the currency, people holding and selling assets will seem to generate "income" even though their wealth has not changed over time, and this fact generates increased income tax liabilities.

I'm doubtful, however, that an alternative currency would permit people to avoid this problem. After all, the world is awash in alternative currencies today. Do currency traders today pay income tax on the "profits" they generate?

I'd be surprised if they didn't. To be sure, the US tax code's sec. 1031 permits non-taxable like-kind exchanges, so perhaps currency traders qualify under that provision. But I suspect that whenever someone can report "realized" gains from trading -- that is, gains not merely anticipated, but actually quantified in a currency -- then the income tax code will require that it be recorded as income.

Does anybody know the tax consequences of currency trading?

It's a mess. This link

It's a mess. This link clarifies it a bit http://www.forex-day-trading.com/forex-taxes.html

Using dollar face amounts was a stupid move

The big mistake was to print these coins with dollar face amounts. What you end up with is going into a transaction with a coin of face value "$1" which is worth four times as much, or perhaps four times as little as the face value. It was a stupid move and the reason why I never bought one.

The only reason I could see for doing so was to make the coins more "marketable" when one was used in a transaction. That's certainly true when the coin has a face value four times less than it's actual value. It gets you in trouble when things go the other direction.

Apparently they minted $20 coins (and notes) at the height of the commodities bubble that are now worth around $13. The coins apparently say they are backed by $20 worth of silver not an ounce worth (or perhaps both which would be a contradiction).