I originally wrote this in October 2007 and it was first published in OVO: Money. It has become increasingly relevant.

Since the colonial period, the United States has been fighting to control currency. In fact, this battle was part of the foundation of the country. Prior to 1764, colonists issued “Bills of Credit” to deal with a shortage of hard currency. Some were issued by “land banks” and backed by the value of land. Others were merely promises of credit. [1] In 1764 the British Parliment passed the Currency Act, which prohibited the use of these Bills of Credit. This caused significant economic hardship for the colonies, and helped set the stage for the Revolution. [2]

In an 1883 paper called “Ideas for a Science of Good Government,” Peter Cooper wrote (emphasis mine):

After Franklin had explained this [the use of paper money] to the British Government as the real cause of prosperity, they immediately passed laws, forbidding the payment of taxes in that money. This produced such great inconvenience and misery to the people, that it was the principal cause of the Revolution. A far greater reason for a general uprising, than the Tea and Stamp Act, was the taking away of the paper money. [3]

Although Cooper was in favor of government issued currency, he saw the British outlawing of the Bills of Credit as a problem. He opposed the use of these local currencies, but saw them arising out of a failure of the government: “Jefferson, the author of the Declaration of Independence, raised his voice against the curse of the local banks, which were allowed to come into being by the neglect of the Government in the performance of its duty.” [3]

Today, a host of independent currencies are available: from small and local to big and global, and they are all issued to solve perceived problems with government issued currency. But it appears that the government is none too pleased with this competition.

Indie currency

Activists on both the far left and far right of the political spectrum work to create government independent currency solutions, but it seems that the left tend to prefer local currencies. “Community currency is a tool that can help revitalize local economies by encouraging wealth to stay within a community rather than flowing out,” Susan Meeker-Lowry wrote for Z Magazine. “In many communities around the country people are taking control by creating their own currency. This is completely legal and, as organizers are finding, often very empowering.” [4]

The Local Exchange Trading System (LETS), developed in British Columbia in the 80s, is one widely used system. LETS does away with the need for a printed money, acting instead as an interest free credit system. Michael Linton, a computer programmer, created LETS to solve a simple problem: community members “had valuable skills they could offer each other yet had no money. He also saw the limitations of a one-on-one barter system. If a plumber wanted the services of an electrician, but the electrician didn’t need plumbing help, the transaction couldn’t take place.” [4]

LETS solves the problem by issuing credit within the system. In the above example, the plumber would owe a debt to the LETS system, and electrician would be issued credit from the system. The electrician would be able to redeem the credit from another LETS member who is either in debt or wanted credit, and the plumber would be required to make his services available to other LETS members. [4] Many variations of Linton’s original system have been created, and several “how to” kits and manuals are available for purchase, or to download for free from the Internet. [5]

Shifting the focus away from the US for a moment: during the Argentine financial crisis, the national currency of Argentina became practically worthless. [6] To help meet their needs and keep the economy working, many people turned to barter or to local currencies such as the “credito.”  [7] The credito was based, amongst other things, on LETS materials translated into Spanish. Transactions were originally recorded in a notebook, as in LETS, but eventually paper certificates were needed. By 2000, circulation of this currency had reached the equivalent of about $5 million a year. [8]

Argentina illustrates the usefulness of independent currencies when central banks fail. Local currencies, which tend not to cross state lines, seem not to get much attention from the government. I don’t know of any cases of local currencies being shut down by the government.

Towards a more perfect capitalism

Right wing proponents of alternative currencies, however, tend to favor more global forms of exchange. Advocates of “free banking” propose the dissolution of central banks like the Federal Reserve in favor of private banks issuing competing currencies. [9]

The founder of the Internet payment solution PayPal, Peter Thiel, envisioned PayPal as a way to create a more free exchange of currency globally. Thiel hoped people in foreign countries with restrictive money export laws could use PayPal to hold their currency in dollars or other more stable foreign currencies, such as the US dollar [10]. But the proprietors of precious metal backed digital currencies like e-Gold and the Liberty Dollar are more even more ambitious.

Thinkers ranging from Ron Paul [11] to Alan Greenspan [12] advocate a return to the gold standard. But some entrepreneurs act directly by issuing digital currency backed by gold, silver, or other precious metals.

Dr. Douglas Jackson founded e-gold, the first Internet currency backed 100% by precious metals, in 1996. Jackson cites gold’s stability as a currency and the Internet’s natural openness as the reasons for creating an Internet based gold currency. He believes e-gold is currency perfected: stable and market driven. In an interview in Wired in 2002 he called e-gold “probably the greatest benefit to humanity that’s ever been thought of.” [13]

The Liberty Dollar, backed mostly by silver but by other precious metals, is sold by National Organization for the Repeal of the Federal Reserve Act and the Internal Revenue Code (NORFED). Founder, and former mint master of the Royal Hawaiian Mint Company, Bernard von NotHaus conceived of the currency to compete head-on with the Federal Reserve:

“For years America was saddled with a slow, poor postal service. Finally, Federal Express brought competition to this heavily subsidized government agency that no one though could change. And it responded and improved noticeably. NORFED emulates this model by bringing a superior product to America’s monetary system, its currency.” [14]

NORFED offers coins, certificates that look like something like dollar bills, and an Internet backed currency. Coins and certificates are available through “Regional Currency Offices,” and NORFED actively encourages Liberty Dollar enthusiasts to open their own RCOs and recruit others. [15]

Financial Jihad

Outside the western left/right political spectrum is the another global cultural force: Islam. While the founders of Pay Pal, e-gold, and NORFED believe themselves to be perfecting capitalism with their digital services, the Islamic founders of e-dinar, who formed a partnership with e-gold and at one point hosted 50% of e-gold’s reserve at their vaults in Dubai, believe they are destroying it. [13]

The founders of e-dinar are members of the Murabitun movement, a peculiur form of Sufism. Murabitun followers believe that paper money is haram, unlawful, according to Islamic faith. The founder of the Murabitun movement, Sheikh Abdalqadir, says: “A true study of the Qur’an and the Sunna shows us that capitalism will not be abolished on the battlefield but in the marketplace where it is practiced.” [13]

“Fatwa Concerning the Islamic Prohibition of Using Paper-Money as a Medium of Exchange,” a Murabitun text by Umar Vadillo, states: “After examining all the aspects of paper money, in the Light of the Qur’an and the Sunna, we declare that the use of paper money in any form of exchange is usury and therefore haram” because paper money (and, by extension, credit and debit cards) is “nothing but a pure symbol with no reality attached except the imposition of law.” [13]

Vidillo says: “You want to be radical? You don’t need to blow up the bank, just burn your bank account. For that you need an alternative. What is the alternative? E-dinar.” [13]

The current status of e-dinar is a bit mysterious. e-gold used be partners with e-dinar [[13], but according to e-dinar’s web site e-dinar officially split with e-gold in 2004 after being acquired by an unnamed “Large International Corporation” in 2003. [16]

The state responds

It would seem, though, that the larger reach of global alternatives lead to larger interventions by the government. Of all the major players in independent currency game, e-gold has probably had the worst legal trouble. “In December 2005, the Secret Service and FBI raided the company’s headquarters and seized roughly $800,000 in assets,” according to the Washington Post. [17] This lead e-gold to beef up their security measures, even creating new software designed to detect e-gold customers committing crimes. [18] The new security measures didn’t stop a federal indictment from being leveled against the company in April of 2007. The company was served with 4 indictments, including operating an illegal money transfer operation and money laundering. [17]

Then, on Wednesday May 9th, 2007 the United States government seized the holdings of 58 e-gold accounts, forcing 48 bars of gold to be redeemed for approximately $77 million dollars. As of this writing, all the funds are still in in the US government’s control pending the outcome of lawsuit filed against e-gold’s parent company. [19] However, e-gold and its subsidiary Omnipay maintain business as of this writing.

In 2006 The United States Mint issued a press release stating that circulating Liberty Dollars is a federal crime. The press release implies that Liberty Dollars are deceptively similar to US currency, and that NORFED intends them to be used as legal tender. [20] As of this writing, I am unaware of any case against any persons in the United States for using the Liberty Dollar.

NORFED responded with a civil lawsuit. On March 20, 2007 von NotHaus filed against the US Mint, asking “the court to declare that the use of the Liberty Dollar is not a ‘federal crime,’ as claimed by the U.S. Mint. And the organization further asked the court to enter a permanent injunction against the U.S. Mint requiring it to remove any reference that the use of Liberty Dollars is a federal crime from its website.” [21 As of this writing, the case remains unsettled. But on November 14th, 2007 the situation took another turn: the FBI raided Liberty Dollar on charges of circulating illegal currency, mail fraud, wire fraud, and money laundering. The affidavit also described Liberty Dollar as a “multi-level marketing scheme.”  [22]

Von NotHaus has described the raid as “a direct assault against the US Constitution and your right to own and use gold and silver in any way you chose”  and dismissed the mail fraud, wire fraud and money laundering charges as fantasy. [23]

Pay Pal, eventually burdened with legal problems, banned the use of PayPal for gambling, pornography, and several other uses in 2004. [24]

Conclusion

It is important to note that e-gold and NORFED may well be guilty of the crimes it has been charged with, it remains to be seen how they will come out in court. NORFED and e-gold have many competitors, so the international, gold back Internet currency business continues. However, the struggles of these companies, and the fact that they are being held liable for what their customers use their services for, is illustrative of the control the US government exerts over currency. If the Federal Reserve were held accountable every time legal tender were used in criminal transactions, surely the Fed would have been shut down by now. Why are companies like e-gold held to a different standard? Why are they asked to act as de facto law enforcement?

And all of this raises the question: why is there such a demand for alternative currencies? Shouldn’t the state be spending its time trying to correct the problems the Fed (or shutting it down), instead of trying to shut down those who are trying to solve problems the government is not?

References:

1. ushistory.org “Currency Act,”  http://www.ushistory.org/declaration/related/currencyact.htm Retrieved 10/30/07.

2. u-s-history.com “Currency Act,”  http://www.u-s-history.com/pages/h1212.html Retrieved 10/30/07.

3. Cooper, Peter. “Ideas for a Science of Good Government,”  http://www.u-s-history.com/pages/h1212.html Retrieved 10/30/07.

4. Meeker-Lowry, Susan. “The Potential of Local Currency,”  Z Magazine, July 1995. http://www.zmag.org/ZMag/articles/july95lowry.htm Retrieved 10/30/07.

5. Wikipedia. “Local Exchange Trading System,”  http://en.wikipedia.org/wiki/Local_Exchange_Trading_System Retrieved 10/30/07.

6. Ballvé, Marcello. “Silent Revolution,”  Orion Magazine, July 2006. http://thetake.org/media/The%20Silent%20Revolution.pdf Retrieved 10/30/07.

7. Katel, Peter. “Argentina: the Post Money Economy,”  Time, February 2002. http://www.time.com/time/world/article/0,8599,199474,00.html Retrieved 10/30/07.

8. DeMeulenaere, Stephen. “Reinventing the Market: Alternative Currencies and Community Development in Argentina,”  International Journal of Community Currency Research, 2000. http://www.uea.ac.uk/env/ijccr/pdfs/IJCCR%20Vol%204%20(2000)%203%20DeMeulenaere.pdf Retrieved 10/30/07.

9. Greaves, Bettina Bien. “Market Money and Free Banking,”  The Freeman, October 1999. http://www.fee.org/publications/the-freeman/article.asp?aid=4946 Retrieved 10/30/07.

10. Bodow, Steve. “The Money Shot,”  Wired, September 2001. http://www.wired.com/wired/archive/9.09/paypal_pr.html Retrieved 10/30/07.

11. Ludwig von Mises Institute. “The Case for Gold.”  http://www.mises.org/store/Case-for-Gold-The-P386C0.aspx?AFID=1 Retrieved 10/30/07.

12. Greenspan, Alan. “Gold and Economic Freedom.”  The Objectivist, 1966. http://www.321gold.com/fed/greenspan/1966.html Retrieved 10/30/07.

13. Dibbell, Julien. Wired, January 2002. http://www.wired.com/wired/archive/10.01/egold.html Retrieved 10/30/07.

14. Orzano, Michele. Coin World Magazine, October 1998. http://www.libertydollar.org/news-stories/pdfs/1164902714.pdf Retrieved 10/30/07.

15. Liberty Dollar web site. “Regional Currency Office.”  http://www.libertydollar.org/ld/rco/index.htm Retrieved 10/30/07.

16. e-dinar web site. “History.”  http://www.e-dinar.com/html/3_4.html Retrieved 10/30/07.

17. Krebs, Brian. washingtonpost.com, “U.S.: Online Payment Network Abetted Fraud, Child Pornography,”  May 2007. http://www.washingtonpost.com/wp-dyn/content/article/2007/05/01/AR2007050101291.html Retrieved 10/30/07.

18. Zetter, Kim. Wired News, “E-Gold Gets Tough on Crime,”  December 2006. http://www.wired.com/science/discoveries/news/2006/12/72278 Retrieved 10/30/07.

19. “US Government Forces E-gold Redemptions – Seizes Gold,”  Money Net News, May 2007. http://www.moneynetnews.com/articles/54/1/US-Government-Forces-E-gold-Redemp Retrieved 10/30/07.

20.US Mint web site. “Liberty Dollars Not Legal Tender, United States Mint Warns Consumers.”  http://www.usmint.gov/pressroom/index.cfm?flash=yes&action=press_release&id=710 Retrieved 10/30/07.

21. Liberty Dollar web site. “Legal Updates.”  http://www.libertydollar.org/ld/legal/updates.htm Retrieved 10/30/07.

22. Taylor, Jeff. Reason Magazine web site,”Your Liberty Dollar Raid Update.”  November 2007. http://www.reason.com/blog/show/123553.html Retrieved 7/24/07.

23. Liberty Dollar web site. “FBI Raid on the Liberty Dollar.”  November 2007. http://www.libertydollar.org/ld/legal/raid.htm Retrieved 7/24/07.

24.Balko, Radley. Reason Magazine,”Who Killed Pay Pal?”  August 2005. http://www.reason.com/news/show/33114.html Retrieved 10/30/07.