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13/August/2002

The peso is a ‘derivative’ of the dollar

Hugo Salinas Price

All the currencies of the world, are simply “derivatives” of the U.S. dollar. Perhaps I should qualify this statement, with an exception: Possibly, the euro of the European Union is not a dollar-derivative, for the European Central Bank that issues the euro, does maintain a – very modest – reserve of gold.

What is a “derivative”? A “derivative” – a word much in use today in financial circles – is a financial instrument that derives its value from another financial instrument, to which it is related by a contract.

The Mexican peso, the Argentinian peso, the Brazilian real, the Venezuelan Bolivar, the New Zealand dollar, the Australian dollar, the Canadian dollar, etc., all these currencies are not real currencies that belong to the countries where they are issued and circulate. They are simply derivatives of the U.S. dollar. The Mexican peso, for example, just like all the other currencies I have mentioned, and those of the rest of the world, with the possible exception of the euro, have no existence of their own, they derive their value from the American dollar, through the dollar reserves owned by the Bank of Mexico, Mexico´s central bank. Mexican pesos are substitutes for dollars.

The proof is that the value of the Mexican peso, depends on the reserves of the Bank of Mexico. As long as the contractual relationship and the prospects of redeemability of the peso with regard to the dollar seem to be stable, we have stability in the peso/dollar parity.

What lends credibility to the peso, is confidence in its present and future redeemability in U.S. dollars. The peso is worth something, not in itself, but due to the possibility of redeeming it in dollars at a rate that is not expected to change. Thus it is clear that the peso is nothing more than a derivative of the dollar, and this is a situation which prevails with regard to all Latin American currencies.

In other words, Latin America specifically only has one currency, the dollar. What we know as the currencies of Latin America are only more or less trustworthy substitutes for the dollar.

All of Latin America is deprived of a currency of its own that is worth something on its own.

We must discard all notions of “national sovereignty”. We absolutely can have no national sovereignty when we use the currency of another country, as our own. It is specially serious that we are in fact using the dollar as our currency, as I am stating, when the dollar itself is not a real currency, but only an artificial unit, lacking any intrinsic worth. The dollar is nothing more than a number. It is not redeemable in anything tangible.

The dollar: form without substance

Aristotle stated that everything that exists incorporates matter and form. The dollar, since it became irredeemable for gold at $35 dollars an ounce in August of 1971, is an abstraction that only maintains form, without matter. Therefore, it is nothing.

The whole financial edifice of all Latin America is constructed upon these units of nothing, dollars. Our Mexican pesos are derived from…nothing.

Can we possibly believe that we can look forward hopefully to an economic future built upon pesos which are derived from dollars, which in turn are nothing? If, someday in the future the history of the Twentieth Century is written truthfully, it will have to record as one of its most important characteristics, the progressive elimination of the “substance” factor from money all over the world.

As long as money incorporated matter, or substance; as long as money was gold or silver, and bills were redeemable in silver or gold coin in strictly fixed amounts, the world was anchored to economic reality by means of a money that also incorporated a reality. The reality of the money of the Nineteenth Century was its substance, gold or silver, together with a strict obligation on the part of those who issued bills, to redeem them in such substance.

When the First World War broke out in 1914, some observers thought that it could not go on for very long, because the reserves of gold would soon run out and it would be impossible to carry on the war for a lack of funds. Little did these people imagine that governments would keep right on warring, without gold, just printing money – counterfeiting money – in the amounts required by the war.

So, 1914 was the first decisive step in the monetary degeneration the world has suffered since then.

Up to August 14, 1971, there was still a very tenuous connection with economic reality: the U.S. were under the obligation to redeem dollars in the hands of  other countries, at $35 U.S. dollars per ounce. But on August 15, the U.S. stopped redeeming dollars, and for the first time in history, there was not a single real money in the whole world.

As of that date, the history of the world has been the history of abuse of the creation of the artificial money we all use. The U.S. is no longer bound by any limit to the creation of dollars.

The U.S. exports inflation

The abuse of money creation by the U.S. is not something that produces bad consequences only in the U.S. Since the dollar is our money, because our currency is nothing more than a derivative of the dollar, the abuses in money and credit creation in the U.S. produce serious shocks in Latin America. We have mentioned before, on these pages of the internet (www.plata.com.mx), how credit expansion (debt expansion) in the U.S. produces the export of monetary inflation to our countries, and forces the devaluation of our currency-derivatives, the destruction of internal savings denominated in such derivatives, the destruction of financial systems with the high interest rates that come about as a consequence of devaluations and the collapse of our productive systems.

An article on these pages - www.plata.com.mx - (a translation of “The Significance and Sanity of Silver as Money) by David Morgan mentions that the dollar is created by debt. When either an individual or a company takes out a loan at a bank, the bank creates money. Runaway creation of money corresponds to runaway creation of credit, and credit increases at a mad pace when debt increases at a runaway rate.

Debts in the U.S. have shown a spectacular growth, not by coincidence since August 1971, and especially in recent years. Lately, growth is uncontrolled. There will come a moment when debt cannot be increased further. At that moment, there will be an implosion and all debt, in the hands of creditors, will want to be liquidated – converted into cash balances. Only a small portion of the debt will actually be liquidated, that is to say, turned into cash. Most of it will be unpayable, or will be paid only partially.

The I.M.F. medicine: more dollar debt

Those of us who live in Latin America feel that we have not known how to manage our affairs correctly, and so we have suffered so many crises. The Argentinians are the ones who have recently suffered most.

The fact is that it has been a disaster to base our economies on currencies that are not more than derivatives of the dollar, momentary substitutes for the dollar, currencies which have no value of their own, currencies that derive their value from another currency which, in turn, is nothing, and issued by a country, the U.S., which is now undergoing extremely severe problems as a result of abusing the creation of its own currency. To lay the foundations of our economies upon such a base, guarantees the failure of every hope for a better form of life. It could not be otherwise.

The I.M.F. lost any purpose, if it ever filled one at all, with the bankruptcy of the U.S. in August of 1971. Bankruptcy, because not to pay a debt, is bankruptcy.

The I.M.F., as it operates today, is totally obsolete and does nothing but further damage upon  past damage, with its only medicine: prescriptions of more debt to the patients. On August 8th it announced a credit – new debt – for Brazil, for the amount of $30 billion dollars.

The I.M.F. serves no purpose. We must think things over, we have to admit the truth: our currencies are nothing more than junk derived from other junk, the dollar.

It is not possible to build prosperity upon junk currency, just as it is not possible to build a skyscraper with mud brick.

The imperative

We have pointed out that it is imperative to introduce real money into circulation, gradually, in parallel with the junk money, so that in time we can reconstruct our economies upon durable foundations. We have not received a favorable response  from those responsible for the welfare of the country. The greatest problem is that those in charge do not understand what is going on, and not understanding leads to fear of making any changes. Of course, we have the enormous interests that want things to remain as they are, until we go over the cliff. The political influence of the U.S. is enormous, and the empire wishes to impose its currency upon us, to its advantage. Thus Larry Summers, who was Treasury Secretary and is now President of Harvard stated in 1992:

“In the long term, finding ways of bribing people to dollarize, or at least give back the extra currency that is earned when dollarization takes place, ought to be an international priority. For the world as a whole, the advantage of dollarization seems clear to me…” (Note 1)

A Chinese proverb says, “It is better to light one candle, than to curse the darkness.”

We insist on the imperative need to have a real currency. We intend to enlighten consciences, one by one. We recall José Ortega y Gasset who said: “Men do not think, really think, until they feel they are done for.” Little by little the ideas we are expressing will filter through, until one fine day, one of those men who can decide matters will say “Enough! We’re not wasting one more day! We’re going to silver.” This will have to happen, because the present course of events is not sustainable and the system is coming down.

Note 1: (1992 “Rules, Real Exchange Rates, and Monetary Discipline. In Nissan Liviatan, editor, Proceedings of a Conference on Currency Boards and Currency Substitution, pp. 32-3.) This suggestion by Larry Summers was quoted at the beginning of a report titled “Encouraging Official Dollarization in Emerging Markets” and prepared by Kurt Schuler, senior economist for the office of Senator Connie Mack, in April 1999. Schuler was in charge of preparing the report, with the title: “Joint Economic Committee Staff Report, Office of the Chairman, Senator Connie Mack.” 
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Hugo Salinas Price, World Riba Conference, Kuala Lumpur, Malaysia, Nov. 26, 2012.
Hugo Salinas Price, World Riba Conference, Kuala Lumpur, Malaysia, Nov. 26, 2012.
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