The Problem With the Liberty Dollar

I’m not going to talk about their underlying quest to end the Federal Reserve (with which I wholeheartedly agree), or about their multi-site raid by the FBI last year where all of their current inventory and all of the metals backing the Liberty Dollar warehouse receipts (paper currency) were confiscated.  No, I’m not going to talk about any of their politics or their legal troubles; what I am going to talk about is their currency model.

First, I want to state that I’ve been a proponent of the American Liberty Dollar (ALD) for many years, and still am.  Even with the flaws in their currency model that I’m about to outline, they are in my opinion still, by far, the best model for an alternative currency to the U.S. Dollar (USD) on the market today, and they have by far the largest market share.  I currently have a number of Silver Liberties (the bullion round “coin”) from the original $10 silver base.  With all the politics and legal trouble surrounding the Liberty Dollar, why do I still have these you ask?  Well, the Silver Liberties are still each 1 troy ounce of .999 fine silver and still worth their weight, which is largely the entire point of the Liberty Dollar; regardless of what happens to the Liberty Dollar organization itself, or the Federal Reserve, or our U.S. Government, you still hold something of real value.  Unfortunately I also still have a number of the ALD warehouse receipts (the paper currency), which are now essentially worthless except for their collector’s value, at least until the FBI is forced to return the metals confiscated in their raids that back the warehouse receipts, if that ever happens.

The primary flaw that I see in the current Liberty Dollar currency is that in an attempt to make it easily exchangeable in a USD denominated economy, they tied the face value of the coins and warehouse receipts directly to the USD.  If you’re unfamiliar with the Liberty Dollar, let me explain how this works.  The formula and system for moving the silver base up or down is well documented and openly published, which is a good thing.  In a nutshell however, the face value of the Liberty Dollar is based upon the amount of metal contained or represented, and loosely on how much that amount of metal is currently worth in USD.  When I purchased my Liberty Dollars way back during the $10 silver base period, an ounce of silver was going for about $6.50.  As the value of silver in USD increased, and the thirty day moving average (30DMA) stayed over $7.50 an ounce, the Liberty Dollar “moved up” from the $10 silver base to the $20 silver base.

What this means is that, immediately, all Liberty Dollars in specie, paper, and digital forms doubled in face value.  If you had Liberty Dollars before the move up you essentially profited because the underlying commodity increased in value.  If you had digital Liberty Dollars (eLD), your amount of eLD in your account doubled the next day.  If you had paper warehouse receipts, you could redeem them for the new $20 Silver Liberties. If you had $10 Silver Liberties in specie form, you were offered a special re-minting rate to exchange them for new $20 Silver Liberties.  At this point, all of my Liberty Dollars doubled in face value, but of course retained their original minted face values.  Since then, the Liberty Dollar has “moved up” once again to the $50 silver base, again increasing my Liberty Dollars’ face values an additional 150%.  Essentially, all my $10 face value, one ounce coins are actually $50 face value, I just never had them re-minted (which is an issue I’ll discuss below).

Subsequent move-up and move-down points adhere to this schedule:

Move Up Points:

  • $10 to the $20 Silver Base is 30DMA over $7.50 for 30 consecutive days. Note: The Liberty Dollar moved up from the $10 base to the $20 base on Thanksgiving Day, November 24, 2005. Holders of the Liberty Dollar doubled their money.
  • $20 to the $50 Silver Base is 30DMA over $16.00 for 45 consecutive days. Note: The Liberty Dollar Moved Up to the $50 Silver Base on March 23, 2008.
  • $50 to the $100 Silver Base is 30DMA over $41.50 for 60 consecutive days.
  • $100 to the $250 Silver Base is 30DMA over $84.00 for 75 consecutive days.
  • $250 to the $500 Silver Base is 30DMA over $211.50 for 90 consecutive days.

Move Down Points:

  • $20 to the $10 Silver Base is 30DMA under $6.50 for 90 consecutive days.
  • $50 to the $20 Silver Base is 30DMA under $15.00 for 135 consecutive days. Note: This is where we currently are with a Move Down point of January 16, 2009.
  • $100 to the $50 Silver Base is 30DMA under $40.50 for 180 consecutive days.
  • $250 to the $100 Silver Base is 30DMA under $83.00 for 225 consecutive days.
  • $500 to the $250 Silver Base is 30DMA under $210.50 for 270 consecutive days.

Now, obviously, my one ounce Silver Liberties are not worth their current $50 face value in the underlying metal, and never were.  This is the first flaw with the ALD currency model that I’d like to address.  As you can see from the schedule above, regardless of however much silver you hold and it’s actual value in USD, it’s minted USD face value is always more than the value of the underlying silver.  This does indeed make the ALD a “value-backed currency” as advertised, and it is definitely better to have some backing of value to your currency than what you have in the USD, which is none.  The biggest flaw that I see here is that the move values are exponentially lower than the silver base value that they trigger a “move up” to or “move down” from.  While short-term spikes in value tend to be volatile, and this would seem to make sense, longer-term stable value increases in the underlying metals essentially create an over-valuation of what the currency is really worth in the underlying metal.  The much longer periods of time that the higher silver bases require to trigger a move down versus the periods of time required to trigger a move up  also tend to lock in these higher valuations during market fluctuations, essentially promoting move ups and delaying move downs.  Just look at the current valuation of silver;  My Silver Liberties have only been worth around $10 in silver for months now, however the ALD silver base doesn’t move back down to the $20 base until mid January.  If set to the same time periods as the move up schedule, the move down would have already happened and the silver base, and thus the face values, would currently be much more in line with reality.

While I obviously disagree with the particular move-triggering value amounts, as I’m inclined to believe a schedule with move points of values between the actual face values being moved between would be more value-realistic (such as a move point of  $15 to move up from the $10 silver base to the $20 silver base, and then perhaps a move up point of $35 to move from the $20 sliver base to the $50 silver base).  At least the USD face value of the ALD does indeed fluctuate alongside the USD value of the underlying metal, which is much better than just stamping a completely made-up face value onto a coin as is done with the one ounce silver American Eagle ($1???).  “But Dustin,” you say, “under your scenario, what would prevent someone from selling a $10 face value Silver Liberty for the $14.50 it’s worth in it’s underlying silver, then buying another $10 face value liberty with $10 of that $14.50?”  At the point that you have a more realistic valuation of your alternative currency versus the USD based on it’s underlying metals, it’s face value would essentially represent an ALD face value, not a USD face value, and you’d essentially be dealing with a currency exchange which hopefully no one would be ignorant enough of the value of their currency to give you such a sweet, sweet deal.  Essentially, with more value-realistic move points, $10 USD would no longer equal $10 ALD.

The obvious problem that this fluctuation of the ALD’s face value creates is that as the silver-base moves up and down, the face value on minted specie may or may not be out of date.  My Silver Liberties, for example, were minted during the $10 silver base, and thus have a $10 face value on them even though the ALD is currently at the $50 silver base and should have a $50 face value, had I had them re-minted (wait for it…).  Ironically, they’re currently each actually worth about $10 due to their underlying silver, but a mere few months ago their actual value was fluctuating between $17 and $19, nearly double their minted face value. Were I to go and spend these at a merchant who accepts ALD, I would obviously want to use their supposed $50 value rather than their $10 face value.  Either the merchant must recognize the silver-base value that the coin or warehouse receipt was issued at and do the value conversion themselves, or I would have had to have my coins re-minted at the move point.

Which brings me to the third flaw I see in this model; the cost of re-minting.  If you intend to use your Liberty Dollars as currency, which is the supposition of owning them in the first place (silver bullion is much more attractive as a metals investment), you likely need to have any of your existing coins exchanged for the newly minted coins with the new silver-base face values on them, your warehouse receipts redeemed for the same or for new warehouse receipts with the correct face values, etc.  In the case of metal specie, this involves shipping costs based on weight.  The more coins you have, the heavier and therefore more expensive that is going to be.  The Liberty Dollar organization also charges a fairly hefty re-minting fee, currently at $3.25 per ounce… ouch!  That’s currently nearly 35% of the actual value of the metal.  Luckily that includes return shipping, but you likely now understand why I never re-minted my $10 base Silver Liberties.  Note that this is a service fee, and is paid any time you re-mint, likely removing any kind of value increase you achieved from the value increase of the underlying metal.  Granted, a move between silver base values doesn’t happen often, but it has happened twice in the nearly seven years that I’ve owned Liberty Dollars, and is about to happen a third time in a move back down to the $20 silver base.  In a more volatile market, as we’re likely to see in the future due to the recession we’re entering and increased meddling in the market by our ever-so-wise Federal Government and their ridiculous private-sector bailouts, these moves up and down could easily happen more and more often.

So, because these three primary (and inter-related) flaws that I’ve outlined above spawn entirely from the Liberty Dollar’s USD-based face value, it has become my opinion that an improved Liberty Dollar model, or any competing model, should not tie itself directly to the USD in any way and truly be an “alternative” currency.  I understand why the Liberty Dollar’s monetary architect chose to do this in order to create an easily understandable environment and method for exchange with the current currency denomination of the land, but I believe it has ended up causing more problems than it has solved.

What I believe is generally needed is a return to a just weights and measures based economy where products and services are priced in weight of another commodity, in this case gold and silver, and payment for such is measured fairly and justly.  The Liberty Dollar and other alternate currencies are a step in the right direction, but as mentioned they all generally tie themselves back to the USD.  Accomplishing such a change unfortunately requires a complete paradigm shift in point-of-sale when dealing with “cash”; cash registers would need to be able to accurately weigh any metals provided for payment, and pricing would obviously either need to be priced in weights or priced in multiple currencies such as USD and silver.  Merchants and service providers would likely need to regularly change their prices, either the USD prices or the silver prices, as the exchange rate (value of silver in USD) fluctuates.  I would tend to believe that, over time, the currency with real value’s prices (silver) would stabalize and the USD prices would be the ones changing regularly.  One upside to a model like this is that .999 fine silver rounds  and .9999 fine gold rounds are fairly plentiful and could be used as “cash”, whether they be American Eagles, Liberty Dollars, generic bullion rounds or bars, etc.  Minted face values in USD no longer matter, because products are priced based in weight of the metals which have intrensic value.  The cooresponding down-side is that half-ounce, quarter-ounce, tenth-ounce, etc. specie are much less common and these would be needed to make change for less valuable products.  One ounce of silver is currently worth around $10, so my frequent trip to Whataburger would likely start costing me $10 (one ounce silver) until the merchant could readily make change with half, quarter, or tenth ouce silver bullion.  Fortunately we’re rapidly moving into a paperless and cashless world where exact amounts of commodities such as metals can be digitally represented and exchanged without this physical barrier through your bank or metals warehouse.  Banks and metals warehouses could also issue warehouse reciepts in small denominations of silver for use as paper currency as the Liberty Dollar attempted to do.  You would essentially get pre-printed bank-specific warehouse reciepts for various weights of silver from your bank’s ATM.  These advancements in technology should theoretically make it even easier to move from a debt-based fiat currency like the USD to again using metals commodities as currency.

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