(Hey, I’m just quoting the person who did the search.)
Liberty Dollars: Not a scam, just really lame
So the whole situation with the liberty dollar has been clarified for me, and I now understand that it’s not a scam, just really lame.
Here is the story:
The liberty dollar people, before november 2005 issued 10 liberty dollar certificates, it would say on it “This warehouse receipt for One (1) Troy Ounce of .999 Fine Silver” Thus you could turn in your silver cert for an ounce of silver. Or, you could get from then a $10 silver “round” (they don’t use the term coin for legal reasons) which contained in it one ounce of silver.
After november 2005, the liberty dollar people started issuing $20 silver certificates. These silver certificates also entitled the bearer to one ounce of silver. They also issued $20 “rounds” containing one ounce of silver.
Now, if you are a normal, rational person, you would think that two 10 liberty dollar silver certificates would be equivalent to one 20 liberty dollar silver certificate. You know, 10 + 10 = 20. Not that hard, right? That’s what I figured, which is why I thought that in November 2005 they had just devalued their currency by 50%. Well, you’d be wrong.
Your old 10 liberty dollar certificates could still be redeemed for an ounce of silver, and the 10 liberty dollar rounds (of course– conservation of mass applies in monetary economics just as much as it applies in physics) still had an ounce of silver in them.
Since the liberty dollar people continue to honor the 10 liberty dollar silver certificate, you can give them your 10 liberty dollar certificate, turn it in, and get an ounce of silver. Just like with the 20 dollar silver certificate. Or if you want to think in terms of physical metal, note that the 10 liberty dollar round has the same amount of silver in it as the 20 liberty dollar round.
So if I have two 10 liberty dollar rounds, how much money do I have? 20 liberty dollars? Well, no, because the 20 liberty dollar round has half as much silver in it as two 10 liberty dollar rounds. Do I then have forty liberty dollars? Well, I suppose, because I can exchange them for two twenty liberty dollar rounds. So is 10 + 10 = 40?
Suppose I went to the store and I had a 20 liberty dollar. I wanted to buy something, which would cost me 20 liberty dollars if I wanted to buy two. But I only want one. The seller only wants to sell me one. (In a normal world, we’d say that one item cost 10 dollars. But we can’t, because liberty dollars are so screwed up.) What do we do? Well I could give him my 20, and he could give me back a 10. But the ten is worth the same as a 20. So, maybe he should give me a 5? But if the 10 isn’t worth half as much as a 20, how do I know that the 5 is worth half as much as a 10? What if the five is worth 1/4 as much as a 10? (5 is 1/4 of 20, so it makes sense that a 5 should be worth 1/4 of a 20. But then if a 10 is worth the same as a 20, then the 5 is worth 1/4 of the ten!)
The solution to this conundrum, of course, is to just say well let’s realize that since two of the item I want costs 20 liberty dollars (or 10!), which is equivalent to one ounce of silver, buying one item will cost me half an ounce of silver. I give the merchant my 20 (or 10!) and he takes his hacksaw, cuts it in half, keeps half, and gives me the other half. Problem solved.
Why, oh why, did they set up such a crazy system?
So basically the number stamped on a liberty dollar round or certificate is just decorative? It has no bearing to the real world?
Well, no, not exactly. They set this crazy system up because they thought that there should be a “fake peg” between the liberty dollar and the us dollar. Before November 2005, the us dollar price of silver was under $7.50/ounce. So they figured, well, we’ll stamp “10″ on each of these one ounce rounds, so people can think they are worth ten us dollars. That will make life easier. People can buy stuff and not have to do exchange rate conversions in their head.
After November 2005, the us dollar price of silver went above $7.50, so they said, well, let’s stamp “20″ on our one ounce rounds from now on. That way we can try to convince people that they are each worth about 20 us dollars.
Apparently, the rocket scientist who came up with this thought that people were too stupid to understand what an exchange rate is, so we’ll stamp some arbitrary number on our rounds to let people think that the liberty dollar is pegged to the us dollar. Of course it would be really stupid for someone to trade 20 us dollars for a 20 liberty dollar round, because the usd price of one ounce of silver is about 13 usd.
In writing this up, I have realized that there is a scam here, just one that’s completely different than the one I thought existed in the first place. Yesterday I thought the scam was that the liberty dollar actually represents real silver. Today, I have realized that the liberty dollar does actually represent real silver, but the scam is that the liberty dollar is pegged to the us dollar.
It’s sort of a “bad scam,” though. Because if you’re concerned about usd inflation, then you don’t want the currency you use to be pegged to the usd. But the liberty dollar people are trying to make people think that it is.