Silver Coinage: Basis for a Latin American Common Market
Hugo Salinas Price
he central problem which determines the majority of other problems which plague Mexico and the other countries of Latin America, is that without Dollar monetary reserves they have no monetary system and no financial system.
The fact that without Dollar monetary reserves we have no monetary and financial systems, implies that we live in a chronic economic instability which it is impossible to remedy, for the following reasons:
a) The overriding need to have Dollar reserves, means that each country must export more than it imports. No country may even export as much as it exports, because this means that its reserves are not growing, a situation which already in itself puts at risk the stability of its monetary and financial system, and gives rise to international speculation which inevitably means devaluation of the currency and upheaval in the financial system, which is forced to raise interest rates in an attempt to retain reserves.
b) Exports in excess of imports are thus permanently linked to the stability of the monetary and financial system. The national center of gravity is placed outside the country, and export activity rather than being an auxiliary activity, rises to primary importance, to the detriment of our various national economies and with consequent political dissatisfaction.
c) Thus international relations in Latin America become a competitive free-for-all to obtain Dollar reserves through exports, and in this struggle, exporters compete for external markets, by reducing prices of raw materials, and by lowering the cost of their manufactured products through wage reductions, in turn achieved by devaluation of the currency and its effect, the destruction of savings. The nations of Latin America, and of the whole World, are engaged in a quiet destructive mutual warfare with the object of obtaining Dollar reserves. This commercial warfare is identified as "development of international competition" and baptized with the attractive name of "Global Economy".
This imperative need to have increasing Dollar reserves, forces our respective governments, not only to follow the policy mentioned in the preceding point, but forces them, nolens volens, like it or not, to the following:
a) To consent to the reception of speculative Dollars, hot money, which at the first misgiving takes flight and destroys Dollar reserves.
b) To consent to the participation of foreign capital, in those activities which common sense would reserve to its own nationals. A situation emminently advantageous to the United States, since its Federal Reserve creates Dollars by computer keystrokes, while our countries must deliver tangible goods in order to obtain capital in Dollars.
c) To consent to the implementation of all sorts of policies, from population control to ecology, which do not arise from national sentiment, but rather are imposed by the United States and its international agencies, to the benefit of their own interests. The most flagrant example is the "War on Drugs" which turns a problem of the United States, the world´s largest consumer of drugs, into bloody civil wars within our countries.
d) To consent to the general americanization of culture, even if it brings with it values which are not shared by the countries of Latin America.
e) To acquiesce to dictates in the interest of the United States, under penalty of feeling the consequences of import restrictions and the consequent collapse of their currencies and financial systems.
The fact all currencies of Latin America depend on Dollar reserves for a precarious stability produces another damaging phenomenon: interest rates cannot ever be equal to or lower than those prevailing in the United States, which places us in a situation in which we are forever to be producers whose cost of capital must be greater than the costs of capital for productive enterprises in the United States: the competitive advantage must be supplied by labor, whose income must be lowered in order to obtain exports.
It is worth mentioning in passing, that this need to export to the United States has caused serious damage to the productive structure of the United States, and that producers in the United States are constantly complaining that Mexico exports more to the United States than the United States exports to Mexico, a situation which of course is determined by Mexico´s life or death need for export surpluses. There is important political dissatisfaction in the United States with regard to massive imports of Chinese and Japanese goods. This condition is a consequence of the fact that currencies and financial systems, the world over are dependent on reserves of Dollars, sine qua non.
As in medicine, half of a successful treatment lies in a correct diagnosis. The cause of our ills lies predominantly in the fact that without Dollar reserves there is no monetary system and no financial system.
Only a currency with intrinsic value can provide us with a monetary and financial system which will not require Dollar reserves. The history of thousands of years, allows us to state that only gold and silver, can provide us with currency of intrinsic value.
It is incovenient for the moment, to talk of gold, since the policy of the United States is resolutely against the remonetization of gold. On the other hand, silver is not so politicized and besides, our people have a historic memory of hundreds of years of the use of silver as money. Most of our people cannot envision themselves as owners of gold coins; however, they can easily imagine themselves as users of silver currency. For this reason, I propose the silverization of our economies, in lieu of the increasing dolarization.
Present Day Alternatives Proposed, to the Problem of Dollar Reserves
The European experiment.
The nations of the European Union have decided to minimize the problems which we have outlined, through a Monetary Union which intends to begin on January 1, 1999. There is much doubt regarding the final consummation of that Union, because its monetary unit will be the Ecu, an intellectual construct without intrinsic value, whose creation depends on the will of the German Bundesbank, and no one knows what level it will take with regard to the Dollar, nor how it will be received by the various members, nor what German hegemony means for the diverse economies of Europe. The finances of Spain, will be determined in Frankfurt. The same holds for Italy. The fact is that the Ecu will be a highly politicized currency and will bring with it wide dissatisfaction from the start. No one will be pleased. A single paper currency, controlled from a foreign country, is a sure formula for interminable conflicts.
Dollarization, Argentina style.
Unless they adopt a currency of intrinsic value, each of the countries of Latin America will inevitably go the road of Argentina. The slide towards dollarization does not require promotion, it occurs spontaneously. Under dollarization, the concept of "national sovereignty" disappears. The media in the United states are already proclaiming with satisfaction, the loss of national identity. A writer in "The Wall Street Journal" states that the destiny of Argentina is already de facto determined in New York.
Dollarization has its material rewards: an approximation to the "American Way of Life", consisting in consumer debt and consumption. An apparent or perhaps real prosperity soon ensues. Banks are taken over by foreign banks. The most important sources of wealth are controlled by foreigners. This process is well advanced in Mexico, and we hear voices asking us to abandon the idea of having our own monetary and financial system.
We do not know exactly which are to be the consequences of accepting this servitude to the Dollar. Let us note that the sense of nationality is enduring and that to forget it is the cause of abundant bloodshed. If the Central Bank of Spain were in Bilbao, the terrorists would be in Madrid.
Dollarization, however, brings with it grave dangers perhaps not evident at first sight:
a) Even with "Currency Boards", which guarantee the convertibility of all money in circulation into Dollars at a predetermined rate, the problem of financial fragility (illiquidity) remains unsolved, because local banks will never be able to obtain long term deposits on a par with their credits. The United States banking system is not able to obtain these long-term deposits, so how can satellite systems be expected to do so? Specifically, how can Argentina have a financial system that is more solid than that of the United States, if it uses the same Dollars, disguised as pesos? In the United States, the Federal Reserve would do what it could to stem a bank run in the face of illiquidity, but in the rest of Latin America, its intervention, in case we adopted "Currency Boards", would be highly doubtful. In the face of an important recession in the United States, the illiquid foreign banks would be the first to collapse.
b) Evidently, massive currency and financial turmoil worlwide is on the horizon, for the International Monetary Fund has just recently proposed a 40% increase in capital, surely aware that world economic collapse is a real menace.
c) Even with "Currency Boards" and complete de facto dolarization, interest rates in our countries could never descend to levels comparable to those in the United States, due to the risk factor in foreign investing. "Currency Boards" imply a permanent acceptance of this inferior position, no matter how good the investments.
Monetary and Financial Reform in Latin America based on Silver
Our plan is simple and feasible; it takes advantage of impulses which are natural to the human being, impulses which have no frontiers. Nature loves what is simple and generally destroys what is complicated. Our plan does not require costly parliaments for its implementation. It will not cause regional dissatisfaction. It will not injure nationalist feelings, but rather, reinforce patriotism. It functions in accord with laws which govern economic behaviour of the individual, in a quiet but powerful fashion, just as water flows downhill.
It is made up of the following measures:
1. Win the consent of the various mints of Latin America, to coin pure silver currency with weights of one ounce, ½ ounce, ¼ ounce, 1/10 ounce and 1/20 ounce. These coins already exist in Mexico and can be reproduced in the other countries of Latin America, with the sme characteristics but with their own national symbols. The mints will consent to coin, at cost, all silver which is presented to them for coinage.
2. These coins must be despositable in the banks of the country, which are to give in return receipts for the quantity of silver they have received, and which will be returned to the depositor, with interest at the term contracted, in silver. The banks are to effect silver loans with the silver in their vaults, at terms similar to the terms at which they have received silver on deposit. It is vital that legislation provide banking regulations in the sense that there is to be no "borrowing short and lending long" in silver, since this practice is absolutely fatal to banking, in that it causes inevitable illiquidity.
3. The introduction of silver to the economies of our brother countries of Latin America, is to be in parallel to the existence of our present paper currencies. All our paper currencies are to continue operating as usual. Silver will be adopted without any problem. We are simply offering the peoples of our countries the opportunity to use it to do business, to save, to contract loans, etc., as an alternative to seeking refuge in the Dollar.
By implementing these extremely simple measures, we shall achieve important benefits:
a) The people of Latin America will begin to save in silver, and will restore to this noble metal a use which it has had since time immemorial.
b) The monetization of silver, means the privatization of money. Central banks cease to be the suppliers of discredited paper money, and the miners of Latin America assume the extremely important role of purveyors of currency.
c) The common currency of Latin America becomes automatically the world´s best currency, and wins worldwide acceptance.
d) The remonetization of silver means that its price rises, and benefits the miners.
e) The people of Latin America are already willing to save silver without the benefit of earning interest. (All silver coinage disappears immediately) How much more willing to save silver will they be, if they are given the opportunity of depositing their silver in savings accounts denominated in silver, in the banks which are most responsible and enjoy the best reputations? Internal savings surge and foreign capital ceases to enjoy a privileged position, and becomes only ancillary to popular, national savings.
f) The banks are able to attract long term deposits in silver and at low interest rates, and are able to make long term loans in silver at low, real interest rates, thus avoiding the subordination to foreign interests which is implicit in Dollar loans.
g) The unfortunate link between exports and stability is destroyed: lower exports no longer signify monetary and financial collapse. National savings can be channeled to general productive activites, and not primarily to export activities.
h) Any silverized country can import merchandise or machinery for the total of its exports, and will not be forced to import only a fraction of exports. Presently, a surplus of exports is imperative in order to obtain Dollars for the reserves, which are used in turn to purchase United States Treasury Bonds. Even the poorest countries must finance the United States Government by purchasing its bonds.
i) The spectre of devaluation disappears, and with it a curse of the Twentieth Century for Latin America. Silver currency has its own intrinsic value, and once monetized, silver will no longer be subject to the vagaries of foreign industry. If foreign industry wishes to have silver, it will have to pay for it a price sufficient to persuade the holders of silver to hand it over. In other words, there will be an important internal market in Latin America, and not only an external market, as at present.
j) All the various silver coins, wherever they have been minted, will circulate freely and without distinctions as to origin, all over Latin America. Peruvian and Bolivian coins will circulate in Mexico, and Mexican coins will be found in Patagonia and Chile.
k) On the basis of a common currency, we shall have created immediately a true common market.
l) Since the monetary substance will be identical, rates of interest in Latin America will exhibit a trend to harmonization and equalization, at real rates. Capital transfers and commercial transactions will cease to threaten the obsolete requirements for Dollar reserves. Capital will flow to and through all parts of Latin America, and commerce between nations will flourish.
ll) Politically, patriotism and stability will take hold, since devaluations have for decades threatened not only our economies, but the stability of our governments.
m) We achieve Diversity within Unity, through the medium of a true currency, the silver coin of intrinsic value.
n) Most importantly, Latin America finds the way to a bright future of solid growth, of enduring prosperity, and of new pride in its discovery of its own strength and creative power. This new sentiment of pride, perhaps the most important sentiment any nation can cultivate, brushes aside those wounds which a century of experiments in paper money have caused us.
I invite those who have participated in this Congress of the Latin American Mining Organization ("OLAMI") to think over this plan; those who believe it to be a good plan, may wish to establish in their own countries Civic Associations pro-Silver, following the plans of the Civic Association pro-Silver which has been recently formed here in Mexico. For your information, we are furnishing a copy of our Articles of Incorporation.
In creating Civic Associations pro-Silver, from the Grande river (Rio Bravo) to Tierra del Fuego, we shall have created a powerful instrument calling for that which all the people of our countries desire, deserve, and demand: a currency of intrinsic value which will free us from so many sufferings endemic to our region during most of this century.