Tuesday, May 13, 2008

Fake money

Last week I had sort of a funny experience at Rudy's Barbecue that I thought I'd share.

After a successful dentist appointment, I thought I'd reward myself (and punish my teeth) by getting some delicious breakfast tacos. At the counter, I pulled a five dollar bill out of my wallet, and noticed that the number five was... pink.

I said, "Huh, that's weird. When did they become pink?"

The cashier laughed and said "Oh, about a month ago. The first time I saw it I thought somebody was trying to hand me Monopoly money!" (She was pretty close in guessing the date.)

We had a good laugh and I went to get some hot sauce. The guy standing next to me abruptly said: "It practically IS Monopoly money, anyway!"

At that point my BS detector immediately started to ping quietly. All I replied was a non-commital "Yeah, really."

The stranger persisted: "You know, our money isn't even backed by gold!"

My BS detector went from a quiet ping to a full-on klaxon siren. Strangers may start up some small talk as friendly chit-chat, but nobody attempts to strike up a conversation on such an off-the-wall subject unless they have an agenda to push.

I smiled cheerfully and said, "Oh, you're one of THOSE people."

He protested, "I'm not one of those people, I..."

Still smiling, I cut him off: "Look, I've had some pretty extensive arguments over some of these fake currencies that have been going around, so let's not even get into that, okay?" I took my tacos and left.

In retrospect, the only thing I regret is that I didn't pause to warn the cashier that she should carefully scrutinize any cash he may try to give her.

I guess I should explain. Several years ago, a friend of mine got involved with this unusual movement to replace the U.S. dollar with something new called "Liberty Dollars." They are minted by a company formerly called NORFED, now "Liberty Services." The gimmick is that the coins are made from real silver. Now, the argument about whether it is better to use fiat currency (currency which has no fixed value) vs. commodity-based currency (such as silver or gold) goes way back, certainly. The famous "cross of gold" speech by William Jennings Bryan (of Scopes Monkey Trial fame) was all about switching to the silver standard because gold was too expensive for most people to afford.

But that's not the issue here. Whatever your feelings may be about "fiat currency," Liberty Services is running a very transparent con game. What they do is, take an ounce of silver, mint it into a coin, and stamp a dollar denomination on it, i.e., "$10". Then, sell the coins to people at a "discounted rate" -- say, $8.50. Along with the coins, sell them a load of amateur political philosophy about the evils of fiat currency, and encourage them to go "spend" the silver coins at participating businesses. If no voluntary participants can be found, then give them the coins to unsuspecting merchants and be prepared to spout the same political philosophy as an explanation.

Here's the trick, though. Those coins with $10 stamped on them? They were worth $5 at the time. The price for an ounce of silver fluctuates just like stocks and other commodities, but you can check the spot price online at any time. When the spot price of silver was around $5, Liberty Dollars were imprinted with "$10." When the spot price of silver started drifting up toward $10 per ounce, the coins "doubled" in value, and were all restamped to say "$20." Now that the spot price is about $17 per ounce, they are now being re-issued yet again to say $50.

Get it? Today, you can buy (or in LS double-speak, "exchange") $17 worth of silver for $50 in cash -- or a mere $36 if you are an "associate." The coins aren't worth $50. They aren't worth $36. They are worth $17 at market prices, plus the small amount that it costs to mint them into a cute little round design with pictures stamped on it. But they SAY "$50" on the face, so supposedly you are acquiring something that is worth $50.

How do you get this value out of the coin? Well, the company's literature encourages people to "spend Liberty Dollars into circulation" by trying to pass them off as authentic money. Then if someone calls you on it ("what the hell is this thing"), you explain how the coins are all pure, solid silver, and therefore they have intrinsic value, unlike real American dollars. The fact that the intrinsic value is actually much less than the face value? Uhhh... don't bring that up.

To me, this has always seemed like a combination of counterfeiting, pyramid scam, and cult. Counterfeiting? The coins don't actually say they are worth fifty American dollars; they are fifty Liberty Dollars. But they have dollar signs printed on them, which is generally recognized to mean American dollars, and the web site certainly makes it sound like you are supposed to "spend" the liberty dollars on goods and services which are worth the equivalent amount of American dollars.

Pyramid scam? Joining the "associate program" to get bulk coins at a discount (though still much more than the intrinsic value!) smacks of MLMs in which you buy overpriced goods for yourself and then attempt to recoup your losses by selling them (or in this case, "spending") to an even bigger sucker for an even greater amount. Clearly it shouldn't matter all that much to Liberty Services whether you succeed in "spending" them, because they've already gotten YOUR money, and made a significant profit on the cost of the raw silver plus minting overhead.

I am not, of course, ridiculing the idea of investing in silver. Obviously, the very fact that the price of silver used to be under $10 and is now as high as $17 means that it may have been a good idea to just buy silver at a reasonable price. (Although, like any investment, past performance is no guarantee of future results.) You can get silver bars in bulk for as little as 19 cents per ounce over the spot price. But when you buy these "Liberty Dollars," you are in effect paying about double the price or more for the privilege of having the words "$50" stamped on your ounce of silver.

And hey, now that Liberty Dollars are being "converted" from $20 to $50 in value, you can get them restamped for the low, low price of $4 each! So not only do you pay an absurd premium to get the silver coins in the first place, but also when it "increases in value" -- remember, it's still the same ounce of silver with a fake dollar amount printed on it -- but you also pay an 8% premium (or 20%, depending on when you count it) to perform this "value increasing" operation.

If you think this makes sense, consider that Liberty Services could just as easily stamp "one MILLION dollars" on each coin, and it would have about the same meaning. They're only worth the face value if you can find somebody else dumb enough to believe they're worth that. Otherwise, they're only worth the price of silver. And don't forget that Liberty Services takes all their payments in good old American Dollars, backed by the full faith and credit of the United States government, which is supposedly worthless fiat money that nobody wants to use. Tricky.

The kicker is that this pretty much IS counterfeiting, and there's a very real chance that you will be arrested for trying to pass off Liberty Dollars as real money. Trying to "put the coins in circulation" often amounts to nothing more than badgering innocent merchants to give you discounted goods and services in exchange for an object that is not really worth nearly what you claim. And if they do accept it, then you've just handed THEM the responsibility of finding an even bigger fool to take the overpriced hunks of metal off their hands.

If you want to invest in silver, then buy some silver from a reputable merchant, and perhaps the value will increase over time. If you want to pay for something using a universally accepted currency, the American Dollar (whether it's pink or not) is taken absolutely everywhere in this country. With Liberty Dollars, you get to combine the convenience of carrying silver with the investment value of carrying cash, which is to say, the worst of both worlds. The vast majority of merchants will wonder what you're smoking when you try to hand them a $50 coin that is worth $17, and you're paying an obscenely high fee to obtain and continually re-stamp the coins in the first place.


  1. Perhaps the guy who was saying that was a Ron Paul supporter - that's one of their big things.

  2. I realize that -- and Ron Paul is in some loose way connected to Liberty Dollars, because they started printing LD's with Paul's face on them.

    I suppose it's possible that the guy never heard of Liberty Dollars and might have simply wanted to strike up a political discussion. Still, when a stranger assaults you with some random pointed comment like that, I think it's more likely that he's trying to sell you something than just making small talk.

  3. hi, couple months long reader, first time poster...

    I was explaining supply and demand with regards to the american dollar on the skeptoid email list, specifically what would happen if all the oil companies decided to go on the Euro and traded in the American dollars currently in their banks. I made some off handed comment about the price of the dollar being determined only by how much people wanted the dollar, and that is was not "backed by anything hard." I immediately after hitting send regretted that comment, and sure enough, I got a response from a libertarian saying it was bad that the dollar was not backed by anything hard. This annoys me. gold, for example, operates under the same principle of supply and demand that the dollar operates under, in that both are worth only as much as we desire it and neither has any true "intrinsic" value. If the Ron Paul types are so concerned about the dollar being back by something "hard" that has intrinsic value, why don't they suggested backing the dollar against bread, rice, or water? When my chips are down and I need to be able to trade my dollars in for something "hard" I would much rather do it for something that actually has value to my life, like clean water or food, than fragile, useless gold.

    Good Post!

  4. Dollars have no intrinsic value without a societal agreement that they are accepted currency. Gold and silver barely have any intrinsic value either, though. You can use them for a few practical things, like tooth fillings. In general, though, you can't eat them, wear them, or live in them. They have value because they are in limited supply, and because people believe they have value.

    Not that different from worthless fiat money, except that an irresponsible government can print more money and generate inflation. But on the other hand, new gold can be discovered, or the market can be cornered, leading to similar unpredictable effects.

  5. They're only worth the face value if you can find somebody else dumb enough to believe they're worth that.

    You mean, if you and the merchant both agree that the coin is worth its face value, kind of like fiat money on a small scale?

  6. I agree with Robert. When, not if, things go terribly wrong in this world, gold will mean nothing! Food, water, shelter, and personal safety will be everything.

    Let me suggest a book here. It's called "The Road" by Cormac McCarthy,and it will give the reader an all too real depiction of what it will be like when humans or a super natural disaster destroy our way of living.

    Believe me, you read that and you'll laugh at the concept of money having any value what so ever in such a climate as depicted in the book.

  7. To me, the most humorous aspect of this is the folks selling the Liberty Dollars are willing to take your fiat dollars. So, apparently, they are willing to participate in the social agreement about their value. Can anyone say: hypocrisy?