and the Liberty Fund for the invitation to participate in this conference, and I thank Steve Baker MP, Maneck Bodhanwala, Dave Campbell, Martin Hutchinson, Doug Jackson, Gordon Kerr, Duncan Kitchin, Matthias Klaes, Bernard von NotHaus, Frederick Roeder, Lawrence H. White, Basil Zafiriou and two referees for many helpful inputs that have much improved the draft. The usual caveat applies.
1 IntroductionThis monograph examines contemporary private, or non-governmental, 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.1 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.2 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.3 A second form of private money is private coinage, which also has a long and successful – not to mention, colourful – history.4The 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.
1 Timberlake (1987) provides a classic study on private scrip money.
2 Again, Timberlake provides the definitive study: Timberlake (1984).
4 There are many studies of private coinage. Examples include those by Brough (1898), Barnard (1917) and, more recently, Selgin (2008).
1 The Liberty DollarThe 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’5 – 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’,