Mexico’s Central Bank, the Banco de Mexico, has ample reserves of some $50 billion U.S. dollars. Indeed, President Vicente Fox of Mexico declared some months ago, that “we really don’t know what to do with them, they are so large.” Using a small part of these reserves, the Banco de Mexico could purchase silver for coining “Libertad” pure silver ounces.
These coins could be placed into circulation as legal tender money, with a floating value which would be quoted daily by the Banco de Mexico. The floating value would be determined by taking the international price of silver, presently quoted in dollars, multiplying this price by the exchange rate of the Mexican peso for dollars, and adding on a small percentage of seignorage for the Banco de Mexico. This would be the legal tender value for the one ounce, no nominal (engraved) value, pure silver “Libertad” coin.
Banco de Mexico could put these into circulation, by exactly the same means which it presently uses to put bills and coins into circulation. (In 2002, the Banco de Mexico added $39 billion pesos – some $3.7 billion dollars – to the Mexican bills and coins in circulation) Thus, the silver “Libertad” ounce would enter circulation along with other bills and coins, through the banking system.
The reader may object: “But these higher quality coins would never circulate! They would be hoarded.” The reply: Indeed, they would be hoarded. But, let us reflect that there are two types of circulation, active and passive. The active circulation is of those bills and coins we are willing to spend first; the passive circulation is of coins such as the “Libertad”, which we will only spend as a last resort. The silver coins, with full and clearly determined legal tender value, will be circulating passively, as savings, but fully useable by the holder, at any time. This passive circulation is called “hoarding”, but it is still circulating, legal tender money, held in reserve for emergency use.
The value of the “Libertad” coin would be a floating value, and only a coin like the “Libertad” can have a floating value, because it has no nominal value stamped on it. A stamped or engraved value on a silver or gold coin, is an insuperable obstacle to circulation, active or passive, because the actually floating value of silver and gold makes any silver or gold coin with a stamped value obsolete as money, the moment it is coined. Such a coin will usually be issued with a “face value” or nominal value far in excess of its actual intrinsic worth. It offers very little protection from devaluation, to the holder, because of this circumstance. And the final destination of such coinage, is the smelter, to which it is doomed whenever the intrinsic value of the silver or gold, rises above the nominal or face value stamped upon it and expressed in a number of units of paper money.
A silver coin can only endure indefinitely in circulation, if it has no nominal value. And the “Libertad” is such a coin.
It would acquire full legal tender status, by means of a daily quote for such value, by the Banco de Mexico. It would thus be money, along with the paper bills and base metal coins presently in circulation.
If the price of silver rises sufficiently, the floating value of the coin will increase. Two buffers avoid a constant modification of the floating legal tender value: the first buffer, is the seignorage of the Banco de Mexico, who can accept some fluctuation in the cost of the silver being coined; the second buffer, arises from the fact that the legal tender value is to be expressed in round figures ending in zero or in five. That is, $75 pesos, or $80 pesos, or $90 pesos, etc.
If the exchange value of the peso declines, the floating value of the coin will increase. The same buffers avoid a daily modification of the legal tender value.
What if the price of silver declines, or if the peso appreciates against the dollar, as it has in fact been doing? In this case, our proposal is that a floating legal tender value, once established by the Banco de Mexico, shall not be reduced.
It is absolutely necessary that a coin to be used as money – whether actively or passively, whether in trade or as hoarded savings – shall not be reduced in its legal tender value. A $100 pesos paper money bill cannot be turned into a $90 peso bill. And a silver coin, with a quoted value, cannot be subjected to a reduction in its legal tender value, without destroying confidence in that coin as money. A floating quoted legal tender value for the coin, must under no circumstances be reduced.
A stable quoted value of the silver coin, if the price of silver declines, only means that the Banco de Mexico is obtaining a higher seignorage or profit in minting this coin.
If the exchange value of the peso were to rise considerably, then the same amount of pesos would buy more dollars. The purchase of dollars would certainly not arise from the exchange of “Libertad” coins, which would purchase more dollars if the holder wished to purchase them with these coins. The purchaser of dollars will choose to use his paper money to buy dollars, and only use “Libertad” coins to purchase dollars as a last resort, because of the higher quality of the silver money. Lesser quality money is used for trade, higher quality money is kept back as savings.
The Banco de Mexico would never see a “flight from silver” into either the paper pesos it issues, or dollars in its reserves.
The three stipulations which are the key to introducing silver into circulation in Mexico – or anywhere else, for that matter – are:
- No nominal value.
- A floating legal tender value
- No reduction in a legal tender value, once established.
The “Libertad” coin would circulate – actively in trade or passively as savings – with no problem at all, along with the paper money Mexico currently uses, and which Mexico will most probably continue to use for many years to come.
The advantages and incentive to savings provided by a silver coin, are obvious. Holding “Libertad” coins under this proposal, would become true investment in savings, and not speculation regarding future rises in price, as at present, since the silver money would be useable along with paper, for trade, at any moment the holder desired to use it thus. No longer would it be necessary to find a buyer for his silver coins, as at present. The “Libertad” becomes money.
The quantity of silver money that could be put into circulation in Mexico in this way, is practically unlimited.
The great importance of accepting this proposal, is best expressed in the words of Nobel prize winner, Milton Friedman:
“…it is worth discussing radical changes, not in the expectation that they will be adopted promptly but for two other reasons. One is to construct an ideal goal, so that incremental changes can be judged by whether they move the institutional structure toward or away from that ideal. The other reason is very different. It is so that if a crisis requiring or facilitating radical change does arise, alternatives will be available that have been carefully developed and fully explored.” – Milton Friedman, Professor (Emeritus) of Economics at the University of Chicago and Hoover Institution Senior Research Fellow, Stanford University, and Nobel Laureate. (Our emphasis).
Another Nobel Laureate, Robert Mundell, has stated in his essay, “Uses and Abuses of Gresham’s Law in History”, that any amount of high quality money circulating along with paper money, adds a measure, limited though it may be, to the total quality of the circulating medium. Thus the silver “Libertad”, introduced into the Mexican monetary system, will add to the quality of that monetary system, and the greater the relative quantity of that quality money, the greater the quality of the monetary system as a whole.
In the present circumstances of monetary uncertainty throughout the world, and in view of the proximity and the weight of the U.S. dollar upon the Mexican economy, it is prudent to search for an alternative which will open the way to an independent monetary system of quality, which can sustain itself on its own, among the monetary systems of the rest of the world.
Silver, a traditionally Mexican money, is the clearest avenue open to Mexico.
Though not the central objective of monetizing silver, undoubtedly the coinage of large amounts of “Libertad” coins, which would be eagerly accepted by all Mexicans, would impact upon the price of silver, and be of great benefit to Mexican mining, which is providing large amounts of silver to the world markets, at ridiculously low prices, to the detriment of Mexican mining and the Mexican economy, which is hungry for a mass means of savings in a medium which will guarantee the conservation of value through the years.
What if this issuance of “Libertad” coins were carried to an extreme? We need not worry about such hypothetical doubts; the quantity to be issued is still subject to decision by the Banco de Mexico. It is doubtful they will be willing to issue large quantities of this coin. But, following the thinking of Milton Friedman, that is not really important: what is vitally important is that under this proposal an alternative is established and another tool for monetary policy will be in place and ready to be applied when a crisis erupts.www.plata.com.mx