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Overview
Product Details
| ISBN-13: | 9780255366946 |
|---|---|
| Publisher: | London Publishing Partnership |
| Publication date: | 04/01/2015 |
| Series: | Hobart Papers |
| Edition description: | New Edition |
| Pages: | 1 |
| Product dimensions: | 5.10(w) x 7.70(h) x 0.30(d) |
About the Author
Read an Excerpt
New Private Monies
A Bit-Part Player?
By Kevin Dowd
The Institute of Economic Affairs
Copyright © 2014 The Institute of Economic AffairsAll rights reserved.
ISBN: 978-0-255-36661-8
CHAPTER 1
INTRODUCTION
This monograph examines contemporary private, or nongovernmental, monetary systems. At one level, mention of a private monetary system has still not lost its capacity to shock: it raises connotations of individuals printing their own banknotes and putting them into circulation, or even minting their own coins. yet, at another level, privately issued money is familiar and commonplace, and all kinds of private money already circulate widely. Examples include gift certificates, grocery store vouchers and Chuck E. Cheese tokens. Bank deposits are another example. In fact, most of the outstanding money in circulation is privately issued. However, my focus of interest is not on these familiar, sometimes regulated and frankly boring forms of private money but rather with unregulated or loosely regulated varieties of private money that emerge spontaneously via market forces and operate outside government control: individuals printing their own currency or minting their own coins are perfect examples.
Most private monetary systems consist of local paper currency or credit systems such as local economic trading systems (LETS), community mutual credit systems, time banks, local paper currency and company scrip, which was often issued as a means of payment when regular currency was unavailable, such as in remote mining towns or on long voyages. They also include local private bank currency, such as the clearing house loan certificates and other forms of private emergency currency issued by US banks in the period before the founding of the Federal Reserve. Well-known contemporary examples in the US include Potomacs, Ithaca Hours and BerkShares. Innumerable instances of these systems have been recorded over the years, and one would imagine that there must be many thousands of them operating in the US today. In fact, there are so many across the world that there is even a research journal devoted to them, the International Journal of Community Currency Research. A second form of private money is private coinage, which also has a long and successful – not to mention, colourful – history.
The subject of private money raises an important definitional issue: what exactly is private money? In this monograph, the term is used to refer to a widely accepted medium of exchange or payment issued by a non-governmental body in the absence of any legal privileges. The term 'widely accepted medium of exchange' is used rather than the more standard definition of a 'generally accepted medium of exchange' because no private money – apart from bank deposits which often are backed by some form of legal privilege or guarantee – can be regarded as generally accepted.
This working definition also requires that the money in question is not just issued by a non-governmental body – after all, the Federal Reserve is technically a private organisation, as was the Bank of England until 1946. The money must also be issued in the absence of legal privilege or state guarantees. The latter qualifier rules out Federal Reserve currency as private money. We can therefore think of private money as generally operating on the fringes (at least) of the official monetary system, competing with official money, although some private monies have the potential to displace official money altogether.
A persistent and complex theme of historical private money systems is their often uneasy relationship with the state. The state has typically had a dual role towards them. In most cases it has been a destroyer. But, in other cases, it has been a creator of sorts, or at least an unwitting midwife. On the one hand, the typical response of the state has been to stamp out private money. The usual motive was the obvious one: private monetary systems were often seen as a threat to the ability of the state to raise seignorage and an affront to the prerogatives of the state itself. On the other hand, though the state never set out to do so, it was often the state that enabled these private monetary systems by creating the circumstances that led them to emerge in the first place. The system of clearing house loan certificates mentioned earlier is a good example: this was a direct consequence of the note issue restrictions of the National Banking System legislation of the 1860s. Another example is the bills of exchange system in early nineteenth-century Lancashire: this arose to fill a gap created by the refusal of the Bank of England to service the area properly combined with the legal inability of other banks to do so (see, for example, Baxendale 2011). In these and many other cases, private money emerged to fill a market niche that the state itself had created.
This monograph focuses on three contemporary (and predominantly US) cases of private monetary systems that have received a lot of recent publicity:
• The Liberty Dollar: this is a dollar-denominated gold-and-silver-based monetary system that can function in an environment where the values of the precious metals have fluctuated greatly against the dollar.
• Digital Gold Currency (DGC) with the focus on the best-known such system, e-gold: these are gold-based payments systems that proved to be particularly useful for international payments.
• Bitcoin: this is the first successful example of the most recent form of private currency, cryptocurrency, and is path-breaking in a number of ways. It is a radical new type of currency based on the principles of strong cryptography; it has a novel production process – a form of digital 'mining' for want of a better description – that we have never seen before; it offers users the potential for anonymous and untraceable transactions; it runs itself and is the first ever private monetary system that is completely decentralised; it is not so much unregulated as 'unregulatable' and it apparently cannot be shut down. Bitcoin is truly revolutionary.
As with their historical predecessors, all three cases illustrate that the US government still remains hostile to private money. Though both the Liberty Dollar and e-gold prove that there is a strong public demand for gold-based private money and were successful in providing it, they were attacked by the government and, after highly questionable legal processes, their founders were convicted of criminal activities and their operations closed down. One can safely infer that the government would even more readily attack Bitcoin if it could, but it currently lacks the means to do so. Whereas the Liberty Dollar and e-gold were produced by identifiable individuals that the government could apprehend, Bitcoin is an altogether different proposition: it is an apparently unbreakable cryptocurrency issued by an anonymous user network, widely used on anonymous hidden exchanges that the government cannot locate. It was promoted and designed by cyber (or, should I say, cypher) anarchists who openly aspire to shut down the government itself. The issues raised by contemporary private monetary systems are, thus, far-reaching.
This monograph is organised as follows. Chapter 2 examines the Liberty Dollar and Chapter 3 examines digital currency, with the emphasis on DGC systems and the case of e-gold. Chapter 4 describes Bitcoin and other cryptocurrencies and then Chapter 5 discusses one of the most remarkable features of cryptocurrencies: their ability to protect individuals' financial privacy and the profound implications that follow from that. It means, for example, that people are able to operate beyond government control and there are, of course, ensuing issues that are raised by a newly emerging anarchic social order. Chapter 6 concludes.
CHAPTER 2THE LIBERTY DOLLAR
The Liberty Dollar was designed by Bernard von NotHaus, the founder of the National Organization for the Repeal of the Federal Reserve and the Internal Revenue Code (NORFED). It was launched on 1 October 1998. At its inception, von NotHaus announced that his objective was to 'be to the Federal Reserve System what Federal Express was to the Post Office' by providing a private voluntary barter currency as an alternative to Federal Reserve currency. The new Liberty Dollar was to be based primarily on gold and silver coinage – though strictly speaking they should be described in law as 'medallions' – and its precious metallic basis was to provide protection against the inflation to which the inconvertible dollar has been prone since World War II, thanks to the Federal Reserve's predilection for expansionist monetary policies.
The Liberty Dollar consists primarily of coins in gold and silver; a second component consisted of warehouse receipts redeemable on demand in specie stored securely in an audited warehouse in Idaho; and a third component, the 'eLibertyDollar', consisted of digital warehouse receipts. Thus, the Liberty Dollar existed in specie, paper and digital form, and all forms of the Liberty Dollar were denominated in units of Liberty Dollars.
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 often 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 par 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.
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.
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 to around 250,000 customers. The Liberty Dollar was also accepted as a means of exchange. Indeed, while von NotHaus encouraged supporters to use the Liberty Dollar at 'mom and pop' merchants, one supporter produced a list of all the major brand names that had accepted it. The company that accepted it most was Walmart, where it was used in hundreds of their stores.
Since the Liberty Dollar was periodically rebased to keep its value in line with the precious metals, its value rose substantially over time against the depreciating dollar. For example, as already noted, a silver Liberty medallion with a face value of $10 minted in 1998 contained one ounce of 0.999 fine silver worth approximately $5 at the time of minting and sold then for $10. However, with silver valued at about $20 per ounce, this same medallion would have an intrinsic bullion value of about $20 and would typically trade for considerably more than this on eBay. Someone who bought such a medallion in 1998 would have had an investment that more than kept up with inflation, whereas someone who held onto a $10 banknote would have seen their investment lose about half its value over the period since 1998. Moreover, investors who bought gold Liberty Dollars rather than silver ones would have benefited considerably more.
(Continues...)
Excerpted from New Private Monies by Kevin Dowd. Copyright © 2014 The Institute of Economic Affairs. Excerpted by permission of The Institute of Economic Affairs.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
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Table of Contents
Contents
The author, vii,Foreword, viii,
Acknowledgements, xii,
Summary, xiii,
List of figures, xvi,
1 Introduction, 1,
2 The Liberty Dollar, 7,
3 Digital currency, 25,
4 Cryptocurrency: Bitcoin, 38,
5 Broader implications of cryptocurrency, 64,
6 Conclusions, 83,
References, 89,
About the IEA, 94,