About a year ago I received a phone call from an
entrepreneur named Bernard von NotHaus. He was eager to tell me about a
new private currency, backed by silver, that he had designed and that
his nonprofit organization is issuing. I was naturally skeptical, but
being a student of private money, I agreed to get together with him at a
local pub when he came through town. (It's often easier to argue
monetary economics over a beer.) His outfit is called NORFED - short for
the National Organization for the Repeal of the Federal Reserve Act and
the Internal Revenue Code - and von NotHaus is an affable spokesman for
the project.
Since October 1998, NORFED has been issuing American
Liberty Currency (ALC) as a private alternative to Federal Reserve
notes. The business magazine Forbes (April 3, 2000) has publicized the
project, reporting that $230,000 in ALC is already in circulation.
NORFED also sells one-ounce Silver Liberty pieces (for legal reasons,
these are not called "coins," but for all practical purposes they are
privately minted coins). Von NotHaus also calls his product line "the
New American Dollar ' " which seems appropriate enough given that the
original dollar was a silver coin. He likes to call today's government
fiat dollar the "Federal Reserve Accounting Unit of Denomination." You
can figure out the corresponding acronym.
NORFED's currency project offers an innovative approach
to monetary reform. For most of us, the Federal Reserve's unlimited
discretion over monetary policy is like bad weather: we complain about
it, but few of us do anything about it. Why don't we do anything about
it? Largely because we imagine that securing a better money means trying
to rally massive political support for fastening a constitutional or
legislated rule on monetary policy. Personal sacrifices in that
direction seem unlikely to have a big personal payoff. Your expected
personal payoff seems higher from taking the policy regime as it is, and
simply trying to shelter your own assets from the vagaries of inflation
and business cycles.
A silver-backed currency with widespread acceptance
would provide a useful alternative to the Federal Reserve's product.
Then, if you don't like the way the federal government manages (or
mismanages) the value of the fiat dollar, you aren't limited to
complaining. You can switch to the private alternative.
A Monetary FedEx
In a news story in Coin World (October 19, 1998), von
NotHaus compared his organization's effort to the introduction of
private alternatives to the U.S. Postal Service: "Federal Express
brought competition to this heavily subsidized government agency that no
one thought could change.... NORFED emulates this model by bringing a
superior product to America's monetary system, its currency." A similar
statement appears in NORFED's brochures and on its Web site (www.norfed.
org). Apart from having a beer with von NotHaus, the Web site is the
best place to get all the operational details of the project. There is
also a lot of what I consider theoretical nonsense on the site about the
supposed horrors of "debt-based" currency and "usury," but we can ignore
all that for the sake of focusing on the prospects for the currency
project.
Does the American Liberty Currency have any chance of
gaining widespread acceptance? Good question. It's prudent to be
skeptical, but it's not prudent to be too skeptical or skeptical for the
wrong reasons.
One wrong reason for dismissing the ALC is the notion
that something identical has been tried before and failed. In the 1980s
a Kansas City firm called the Gold Standard Corporation, in addition to
selling gold and silver pieces, issued notes denominated in units of
gold, and even offered transferable deposit accounts denominated in
gold. Its advertising slogan was "put yourself on the gold standard."
But the marketplace did not move to embrace the
gold-denominated media of exchange, and it's easy to see why. As Carl
Menger's well-known theory of the origin of money teaches us, any seller
prefers to be paid in the medium of exchange that is the most popular
with other sellers. When the monetary unit that everyone uses is the
fiat dollar, sellers of goods want to receive dollars, not gold, because
it is only dollars that they know they can turn around and re-spend. The
first Gold Standard Corporation customers who tried to spend
gold-denominated notes around town in 1988 would have discovered almost
no stores willing to accept them in payment. Customers of a firm
currently offering gold-denominated accounts transferable through the
Internet, E-gold (www.e-gold.com), face the same problem.
The problem is one of achieving critical mass. Unless
an alternative currency is regarded as a much more stable store of
value, people will be reluctant to accept it knowing that it just isn't
as spendable as the incumbent currency here and now. (When the incumbent
currency approaches hyperinflation, however, as in Russia today,
alternative currencies do gain acceptance.) Gold-denominated payments
are incompatible with the prevailing dollar-denominated payments
network. A critical mass does not exist until the network of traders who
do accept payments denominated in gold is large enough to make paying in
gold about as convenient as paying in dollars, and therefore to make the
network self-sustaining. Doesn't a new silver-backed currency face the
same problem?
The American Liberty Currency cleverly avoids the
obstacle of unit-of-account incompatibility by denominating its
certificates in U.S. dollars. NORFED currently offers ALC certificates
of $1, $5, and $10 denominations, and Von NotHaus has shown me a $20
proto-type.
But wait: How can a currency denominated in U.S.
dollars have its value "backed and guaranteed" by silver? At first
glance, this is the most perplexing feature of the American Liberty
Currency program.
Ten dollars in an ordinary checking account has its
dollar value (though not its purchasing power) "backed and guaranteed"
by being redeemable for a $10 Federal Reserve note (or a $10 entry on
the books of the Federal Reserve, which is how one bank pays another
when a $10 check is written against the account and deposited into
another bank). Any bank that issues a checking account balance is
obliged and stands ready to redeem it dollar for dollar. ALC redemption
centers, by contrast, are under no obligation to buy back ALC
certificates in U.S. dollars; they only offer redemption in silver.
The face of the $10 American Liberty Currency
certificate reads: "Silver Certificate. This is a receipt for Ten
(US$10.00) Dollars given in exchange for Title to One (1) Troy ounce of
.999 Fine Silver.... Redeemable by Bearer on Demand." The back declares
that the certificate is a "warehouse receipt for one (1) troy ounce of
.999 fine silver." Thus a $10 certificate is redeemable for one ounce of
pure silver. It is redeemable for silver at any of NORFED's 300-plus
redemption centers around the country. The text of the certificate does
not specify in what form the ounce of silver will be provided, but let
us suppose (in line with what the NORFED Web site suggests) that the
redemption centers stand ready to give a one-ounce Silver Liberty piece
in exchange for a $10 ALC certificate.
Of course, a one-ounce silver piece is not necessarily
worth $10 in the market, in the sense of what coin dealers stand ready
to pay for it. From March 1999 to March 2000, the spot price of silver
on the metals exchange (the wholesale price for un-minted silver in
bulk) largely stayed in the neighborhood of $5.00 to $5.50 per ounce. On
the day this is being written the highest transacted price was $5.09 per
ounce. Internet coin dealers on that day were offering to sell single
one-ounce round silver pieces minted by private firms like Englehard and
Sunshine for $5.49, or spot plus about 40 cents (they offered spot plus
29 cents in bulk), plus shipping and handling fees. They were bidding
(were ready to buy them back for) an amount less than that. How much
less? The dealer Web pages I looked at did not specify the bid prices
for privately minted silver pieces (instead they said "call for price").
But clearly $5.49 is an upper bound for the current bid price of
one-ounce private silver pieces.
Why Demand the Certificates?
Does NORFED then have any hope of maintaining a $10
value for a certificate redeemable for a one-ounce piece of silver? To
answer the question fairly, we need to consider why such certificates
might be demanded. There are basically three possibilities.
(1) If the certificates are demanded only as tickets to
obtain pieces of silver, then they simply can't be maintained at a $10
value in the market when the silver pieces are selling for under $6.
Recognizing this, NORFED forthrightly says to its potential clients: if
your objective is to invest in silver, then buy silver, not our
certificates.
It should be mentioned that the certificates promise
one-ounce redemption at par for the next five years (fees may be imposed
after that), so they do have some "option value." That is, they have an
additional value over the current price of silver based on the
possibility that a one-ounce piece of silver might go above $10 at some
point in the near future, at which point it would clearly pay to redeem.
But as a practical matter, the market currently considers this event so
unlikely that the market value of the option is negligible.
(2) If only numismatic collectors demand the
certificates, or people disgusted with the status quo who want to make a
personal statement in favor of the hard money cause, NORFED faces a
limited demand. The quantity of certificates demanded by collectors
naturally declines with the size of the premium over the spot price of
silver. It follows that the only way to keep the certificates at $10 is
to keep them sufficiently scarce as collectibles.
The same logic applies to the possibility of keeping
the Silver Liberty at $10 when other private one-ounce pure silver
pieces are going for $5.49. By being the only seller of new Silver
Libertys, NORFED can maintain the selling price at $10 easily enough,
though it means selling very few Libertys when similar round pieces
carrying the Englehard or Sun-shine imprint sell for far less. But
maintaining the selling price at $10 is not sufficient to maintain the
resale value or market bid price of the pieces at $10.
A very different organization is pursing the
carce-collectible-plus-good-cause strategy in marketing its own
dollar-denominated notes. The Antarctica Overseas Exchange Office, Ltd.
(www.bankofantarctica.com), promotes its "Antarctican Dollar" notes as
colorful collectibles and promises to contribute its profits toward
preserving the continent of Antarctica. Although the NORFED's brochures
and Web site do mention the collector value of its certificates, and
although the face of each certificate does declare "the Bearer's First
Amendment right to petition the Government for a silver based currency,"
this is clearly not the primary strategy NORFED wants to pursue. It is
primarily promoting the certificates as an alternative currency, an
instrument potentially useful as a medium of exchange. (The Antarctican
Overseas Exchange Office, by contrast, frankly warns that its notes may
be difficult to spend even in Antarctica.)
(3) Consumers living in our current
fiat-dollar-denominated economy will demand American Liberty Currency as
a medium of exchange only if the malls and grocery stores where they
shop will accept the $10 ALC certificate at face value. The larger the
group of such accepting retailers, the more useful ALC certificates are
as currency, and the more consumer demand the ALC will attract. But
typical retailers will accept the $10 ALC certificate at face value only
if they can be sure of getting $10 worth for it in turn. Because nobody
is obliged to redeem the certificate for $10, and because banks won't
accept it, this means finding ways to spend it where it will be accepted
as $10. Although the "informal" cash economy is large, deriving value
from the certificates by spending them poses a serious logistical
problem for "formal" retailers, who seldom use currency to pay wages or
purchase supplies. Retailers routinely deposit most of their currency
receipts in a bank account at the end of the day, and pay their workers
and suppliers by check. If banks won't take ALC, neither will most
retailers.
Acceptance is problematic even with the sort of
retailer most likely to accept a non-bankable currency, a small business
proprietor who can pocket and spend the currency that ties in his cash
register at the end of the day. His decision on whether to accept the
certificates at face value depends on whether he can find ways to spend
the certificates at face value, which depends on how many other
businesses are willing to accept the certificates at face value, and so
on in a self-feeding circle. We have returned, in a slightly different
context, to the problem of establishing a critical mass.
The NORFED Web site provides a list of small businesses
that accept ALC; many of them are also redemption centers. Even if the
list represents only one-tenth of the businesses that currently accept
ALC, there are fewer than one thousand acceptors. Of course, even a
growing network has to start somewhere. The challenge facing NORFED is
to get the network of acceptors to grow.
The problem of establishing critical mass in a new
market network, where the value of the good to each user depends on the
number of other users, is not always insurmountable. After all, the
world is filled with fax machines, even though there was very little use
for the first two fax machines (their owners could only fax each other).
The world is filling with DVD players and DVD-format movie discs, even
though the incentive to buy a DVD player depends on the number of DVD
movie titles available, and the incentive to make a movie title
available in the DVD format depends on the number of DVD players bought.
Because of the advantages their technologies offered, fax machine and
DVD manufacturers were able to persuade early adopters that their
networks would achieve critical mass. (For discussion of how
entrepreneurs can jump-start new networks, see John Hagel III and Arthur
G. Armstrong, Net Gain, Harvard Business School Press, 1997, or Kevin
Kelly, New Rules for the New Economy, Viking, 1998.)
No Significant Advantage
NORFED's problem, to restate it, is to convince people
to accept a $10 ALC certificate at face value on the supposition that
other people will do the same, when most other people do not yet do the
same. Does the ALC certificate offer any significant advantages over the
established currency, the Federal Reserve note, the way the DVD format
offers advantages over the videocassette? The fact that it is
denominated in dollars (to provide unit-of-account compatibility) means
that the ALC certificate offers no great advantage in prospective
purchasing-power stability. For the foreseeable future, the purchasing
power of ALC certificates is tied to that of Federal Reserve notes. The
ALC certificate does have the one-ounce silver redemption option setting
a lower limit to how far its purchasing power can fall - unlike a
Federal Reserve note, which has no lower bound - but given current
prices and expected inflation the silver redemption option seems
financially irrelevant at present. (The futures market in silver is
forecasting a spot price in the neighborhood of $5.40 per ounce in
December 2000.) To become relevant, the price of silver would have to
rise much closer to $10, or expected inflation rates rise sharply, so as
to make "$10 silver in the near term" distinctly probable.
NORFED's literature emphasizes the superior
anti-counterfeiting technology of its certificates. But the odds of
being stuck with a counterfeit Federal Reserve note are small enough
that few are likely to regard that as a large practical advantage.
I admire the courage of Bernard NotHaus in launching a
private alternative to the federal government's currency. Economic
theory and economic history indicate that currency is in fact best
provided by private enterprise. But theory and history also indicate
that, among private firms, banks are the most advantageous issuers of
currency. Private bank-issued currency predominated around the world
until government-sponsored central banks gained exclusive note-issuing
privileges. Private banknotes still predominate today in Scotland and
Northern Ireland.
Bank-issued currency provides full compatibility with
the bank payment system. Unfortunately, the federal government has made
bank-issued currency illegal in the United States. I have been told that
the legal restriction has been lifted in the last few years, but (except
for some very tentative trials of "prepaid cards" like Visa Cash) no
bank has yet stepped forward to see whether the Federal Reserve will
allow direct competition with its notes.
American Liberty Currency is fully legal, but
unfortunately is not accepted by banks, and won't be so long as it is
not interchangeable for Federal Reserve dollars in the ways that
checking account balances are, and so long as the Federal Reserve runs
the inter-bank payment system. ALC certificates are thus at a serious
disadvantage as a medium of exchange under the payment institutions that
presently prevail. Because they don't presently offer a
purchasing-power-stability advantage over Federal Reserve notes large
enough to offset this disadvantage, I see little prospect of the
American Liberty Currency catching on in a big way any time soon. But
the situation could change. High inflation is not currently in the
forecast (to judge by long-term interest rates), but nothing guarantees
that it won't return. If it does, we might then find a very practical
advantage in a silver-backed alternative to the free-falling Federal
Reserve note.
At the time of the original publication, Lawrence
White was professor of economics in the Terry College of Business,
University of Georgia, and a contributing editor to Ideas on Liberty.
His most recent book was The Theory of Monetary Institutions
(Blackwell, 1999).
Reprinted with permission from THE
FREEMAN, a publication of the Foundation for Economic Education, Inc.,
July 2000, Vol. 50, No. 7.
Yourname@libertyhaven.com
