This whole episode seemed to me to be an interesting application of Gresham's law. Gresham's law is the idea that "bad" money chases out "good" money. What that means is that if there are both "bad" and "good" money in an economy, the good money will eventually disappear from that economy. Since anything could be money (as Lew Rockwell points out: shoes, shells, flash drives, or books) and people can assign whatever value they want to that money, how do we define good vs. bad? That's where the government comes in. Instead of the people assigning value to their money, the government has assumed that role (and the authority to occupy that role). Thus, Gresham's law is more accurately stated as (looking again to Wikipedia): bad money drives out good if their exchange rate is set by law.
Let me give you a personal example of how this is so. Just last week, I was cleaning up one of the bedrooms in my home when I came upon a container full of coins. They weren't particularly special in any way; it was just the type of accumulation that occurs when you come home at the end of the night and toss the change in your pocket into a jar. Thinking I might come across some rare coins -- I was hoping for some old pre-1964 silver coins -- I decided to sort through them. I happened to know that pennies used to be made of copper and nickels, of all things, of nickel and copper. A quick Internet search turned up the fact that pennies were made out of copper up until 1982 and that nickels are still made out of copper and nickel. It also revealed that copper pennies are currently worth approximately 3 cents each and nickels about 6 cents. These coins are worth more as metal than the value given to them on their face. You can probably guess what happened next. I put all of the nickels and pre-1982 pennies into a separate pile. The rest are slated to go off to the local Coinstar machine.
Let me give you another, more obvious example. Let's say the government issues two one ounce coins, one in silver and one in gold, and stamps $50 on their respective faces so that each can be exchanged for $50 in goods. Would you spend the silver coin or the gold coin? Hopefully, you answered, "silver". At current spot prices, an ounce of silver is worth just under $40 while an ounce of gold is a bit over $1,400. When a monetary unit's face value exceeds its intrinsic value, as the silver does in the example, it is "bad" money. It will be spent, i.e. stay in circulation, as the spender believes he/she is getting a "deal" since the seller is forced by law to value the unit greater than the worth that would otherwise be assigned to it by the "market". Gold, whose intrinsic value exceeds its face value in the example, would leave circulation as people would hoard it and/or try to sell it for its intrinsic worth (i.e. they could obtain it for $50 but sell it for almost 30 times as much). This would likely remain true so long as the gold's intrinsic worth exceeds the face value, no matter how slight that excess might be. Even if gold was intrinsically worth less than its face value but still more than the silver, you would still find the silver to be in much greater circulation than the gold for the reasons explained previously.
So, what does all of this have to do with Mr. von NotHaus's situation? Let's first (try to) understand exactly what it was he was doing. To the best of my understanding, a silver Liberty Dollar one-ounce coin would be minted with some denomination on it, let's say $10. It would be produced so long as the intrinsic value of the silver in the coin remained under $10 as denominated in official U.S. currency and sold/exchanged for $10 in official U.S. currency. When the intrinsic value of the coin exceeded $10 (in U.S. currency, due to inflation of the U.S. dollar), Mr. von NotHaus would mint one-ounce silver coins with $20 stamped on their faces (and sell them for the $20 in U.S. currency). He would also exchange existing $10 coins for $20 coins. Based on the previous paragraph and definition(s), Mr. von NotHaus was actually creating his own form of "bad" money, with one important difference. There was a limit to how bad his money would get.
Let me explain this with another example. Let's say that you have a $10 bill (official U.S. currency) and a $10 Liberty Dollar which, for the sake of argument, is accepted at the stores at which you shop. Let's further assume that the food you'll eat today costs $10. Now, let's say that you stick both the coin and the bill under your mattress and wait some amount of time, during which the dollar inflates due to the Federal Reserve's money printing processes. You dig your coin and your bill out from under the mattress and go to the store only to find that the $10 worth of food you want to buy now costs $20. The $10 bill will only buy you half of what you want. On the other hand, Mr. von NotHaus will exchange your $10 Liberty Dollar coin for a $20 version, and you can buy all of your food.
As I mentioned before, Mr. von NotHaus's Liberty Dollar is still "bad" money since its face value would always exceed its intrinsic worth. However, at the point at which it becomes "good" money, the holder would actually be able to exchange it for more "bad" money, i.e. when a $10 piece's intrinsic worth becomes worth, say, $12, it could be exchanged for a $20 piece, a much better option than selling the coin for $12. In this way, while "bad" by our earlier definition, this money is a "better" option than the official U.S. currency which always loses value over time.
If the Liberty Dollar was "better", wouldn't it have eventually been naturally forced out by the market via Gresham's law? It's hard to say; that's (unfortunately) the way markets are. Markets are made up of individual actors, or people. People may have seen the Liberty Dollar as a better preserver of their wealth since it could be exchanged for greater denominations as the U.S. dollar fell in value. Had that been the case, the Liberty Dollar may have taken off. And this would not necessarily have been a violation of Gresham's law. It turns out that "good" and "bad" money (under Gresham's law) can only be compared when their values are both fixed by (the same) law. While von NotHaus may be creating "bad" money in an absolute sense, it would likely have been viewed as "better" than the current U.S. currency. Since the exchange rates of both monetary units are not set/fixed by (the same) law, it may have been possible for the "better/good" money to chase out the "bad".
Thus, the U.S. government extended Gresham's law by force. If another monetary system -- one not controlled by the federal government -- took off, the federal government's ability to print money to pay off its debt and fund its operations would have been severely limited, if not outright destroyed. I'm not sure exactly how to sum up the idea that challenges to a government-created fiat money system will be put down with force in a neat "law" like Gresham's, but if you have any ideas, feel free to share them in the comments.
Lew Rockwell wrote about this particular issue and had a few choice quotes:
A nation that is confident about its money’s future would not fear currency competition. A nation with a dying money uses every possible means to crush the competition.and
[...] when the dollar became all paper, there has been a sense that its viability needs the backing of federal guns in order to thrive. This attitude is inconsistent with freedom. The right of private coinage is an essential part of free enterprise. Currency competition, especially in a digital age, is something that every country needs.***
Bill Rounds also wrote about this issue. I think he makes a good case that Mr. von NotHaus drew the ire of the federal government, not necessarily by competing with the government, but by making his coins look a little too similar to real U.S. currency. He points out:
There are all kinds of alternate currencies in circulation in the US. Ithaca Hours, Potomacs, gift certificates, and Chuck E. Cheese tokens can all be used to barter and transact instead of legal tender coins and bills.None of those coins have been or are being forced out of existence by the federal government. Arguably, they aren't trying to compete with the government, either, though.
It's not clear to me, from what I've read, that Mr. von NotHaus intended to defraud people or imply that his coins were legal tender or official U.S. currency. From what I can tell, he was simply trying to give them the same value as U.S. currency to make them easy to understand and trade. In the end, I have to agree with Lew Rockwell when he points out that the U.S. Constitution nowhere prohibits private coinage and even points out that it was commonplace during the settling of the West. Mr. Rounds even acknowledges that the law is, at best, nonsensical:
[...] the state of monetary law is almost nonsensical. Court opinions, federal statutes and the Constitution are logically inconsistent with one another.***
Finally, I hope that the example I gave of a $10 Liberty Dollar round being exchangeable for a $20 round as the U.S. dollar depreciates drives home the idea of the inflation tax. By depreciating the dollar, the government is essentially stealing money from people who hold cash. This is why our economy is driven by consumption instead of saving. If your dollar is worth less tomorrow than today, then it makes sense to spend it instead of saving it.