Jonathan Curci has an impressive article, “Liahona: ‘The Direction of the Lord’” in the latest edition of the Journal of Book of Mormon Studies, (Vol. 16, No. 2, 2007, pp. 60-67) which provides fresh insight into the name Liahona. The article is available in HTML format or PDF (best).
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It’s one of those numerous little “plausibility enhancing” details in the Book of Mormon that defy explanation if Joseph made it up based on what he could have known or learned from his environment.