Tuesday, June 8, 2010

Why Silver Should Be Legal Mexican Currency

Scott Smith of The Daily Bell interviewed Hugo Salinas-Price on "Why Silver Should Be Legal Mexican Currency" (May 23, 2010).

Hugo Salinas Price, 75, is a successful, retired businessman who lives in Mexico. He has been a follower of the Austrian School of Economics since his youth. He has written three books in Spanish on how and why silver should be instituted as money in Mexico, in parallel with paper money, and numerous related articles in English and Spanish, posted at his website. His organization, the Mexican Civic Association Pro Silver, is actively lobbying the Mexican Congress to approve legislation, which will institute the pure silver "Libertad" ounce as money.

Daily Bell: What is your campaign in Mexico for sound financial policy?

Hugo Salinas-Price: I actually avoid discussing "sound financial policy" because one can argue about that till the cows come home. During the last fifteen years I have devoted my efforts to one single aim, and that is to achieve the monetization of a silver ounce coin currently minted by our Central Bank. This coin has no engraved monetary value and is called the "Libertad" coin; it can very easily be turned into a monetary coin, that is to say, a coin with a monetary value. As such, anyone owning such a coin could, if he or she wished, be able to pay any bill or debt denominated in Mexican pesos.

The monetary value of this coin would be slightly higher than its bullion value; the monetary value would not fluctuate according to the price of the silver ounce, but its monetary value would be raised if the bullion price of silver rose and closed in on the monetary value. The Central Bank would give the coin its monetary value, according to a formula in the proposed legislation.

If the price of silver fell to $1 dollars an ounce, the monetary value of the coin would remain where it was last pegged. (But it would still be better money than any paper or digital money in the world!)

On the other hand, if silver should go to $50 dollars an ounce, this coin would remain in circulation, useable as money, because then its monetary value would be about $57 dollars, and stay there until a further rise in the value of bullion silver.

The monetized silver ounce would be an excellent refuge for savings and would attract them irresistibly. You don't need a bank account, you don't even have to know how to sign your name, to invest your savings in this simple and inflation-proof way.

This coin would be better money than the US dollar and I expect many Americans would be wanting to own these "Libertad" ounces once monetization is realized.

Daily Bell: Has Mexico always suffered from an unsound economy? Does Mexico now have a stable political structure?

Hugo Salinas-Price: The first question is like asking me "When did you stop beating your wife?"

Seriously, I think the Mexican economy is sounder than the US economy – which isn't saying too much. The Mexican economy is much less complex than the American economy. Think of the Mexican economy as a low, wide pyramid or mound. The American economy is by comparison a skyscraper. Personally, I don't like to occupy hotel rooms above the 12th story, thinking of the possibility of a fire. Think also of all the things that can go wrong for a skyscraper: a power outage, and you and your family are on the 30th floor. No elevators, no water, no refrigerator...you get the idea. The American economy is vulnerable in ways that the Mexican economy is not.

Mexicans have mostly fully-paid housing – the house may be very modest, such that most Americans would not care to live that way, but – it is paid for! Mortgages are not widespread; during recent years there was an increasing use of mortgages but on the whole, the Mexican population lives in housing that is paid for.

Mexican indebtedness is not as great as in the US; because until recently, 70% of the population did not have bank accounts – which given the behavior of banks in general, is a very good thing.

Mexicans, unlike Americans, are used to bearing with hard times. They can "cope" with situations which would drive an American to despair. We do not have a government that prints the World's money, so we haven't been as coddled by all levels of government, as the American people.

About political stability: I don't think American political stability is stronger than ours. We don't have Tea Parties and we don't think about taking up guns and holing up in our houses. Matter of fact, I think I see a Revolution brewing right in the old U.S. of A. But of course, we can always be the object of "Regime Change" by the Powers That Be in Washington, D.C. It's happened before, though most Mexicans are not aware of the fact that our Glorious Revolution of 1910, was a "Regime Change" Operation, carried out covertly by the U.S., because Mexico was getting too prosperous and inviting European Capital into the country, in preference to American Capital. So, it can happen again – any excuse will do. How about: "The Drug War in Mexico threatens American security"? That ought to do the trick.

From The Daily Bell After Thoughts:

Hugo Salinas-Price comes across as thoughtful and gracious soul – someone who truly has the good of his country in mind in many ways. His is certainly a life well-lived. He has built a national Mexican company from the bottom up, provided for his family and then spent his mature years engaged in a great struggle to introduce sound money into the economy of his native land. In fact, given the sensibleness of his endeavor (which grows closer to success in our opinion every year) you would think that his campaign to create a legal and circulating silver dollar in Mexico would already have borne fruit.

Given the shape of the Mexican economy and of paper money in general, Hugo Salinas-Price's monetary solution makes sense. Silver is the money of the people, just as gold has traditionally been the money of bankers and the wealthy. Silver has traded in a ratio with gold for millennia, and thus bi-metallism has been the monetary standard of choice for many cultures and countries. Historically, this is provable and seems reasonable to us here at the Bell, but such is the decrepitude of modern understanding of money that the Internet is assaulted a thousand times a day with elaborate monetary plans featuring all kinds of money stuff and strategies.

Essentially, money over the millennia has proven to have four characteristics:

(1) durability (value),

(2) divisibility (malleability),

(3) transportability, and

(4) noncounterfeitability (serviceability)

As free-market economist Murray Rothbard has famously pointed out, money evolved from a competition featuring different kinds of money stuff. Gold and silver (and to a lesser extent copper), precious metals often found together, were not appointed by a committee or king. The market itself determined the choice of money historically – and in fact money has manifested itself in other forms as well – beads, salt, sugar even large, carved rocks. But ultimately and over and over, the market itself has chosen gold and silver as the money of choice.

We have often observed in these modest pages that a gold (or silver) backed currency would prove most attractive if some country were to step forward and issue it. In fact, were Iceland or Greece or some other nation currently struggling with the ruinous ramifications of mercantilist fiat money to simply back the national currency with gold, many difficulties would be reduced or eliminated. (Of course, a country would need to find the gold to begin with, but that is a separate question.)

In the best of all worlds, of course, a country and a ruling class will not mandate the composition of money nor control its circulation. The market itself would decide on the composition of money, the kinds of banking that was demanded and even the level of fractionality with which money would circulate, if any. In fact, money really is a pretty simple issue once the market itself is re-involved. In a laissez-faire money economy, interest rates would fluctuate regionally, no doubt, the supply of money would vary from region to region and even inflation or deflation rates would be variable.

What we have today, of course, is much different. The powers-that-be have taken the various paraphernalia of money – its banks, bills and issuance – and gradually hollowed them out, offering instead an imitation that provides a historical representation but none of the control or value. Even government mints, which used to stamp gold and silver, today work overtime stamping what in the past would have been considered slugs – any kind of non-precious metals.

From our point of view it is only a matter of time until some nation, some group or even some region re-introduces currency backed by precious metals – or even, as Hugo Salinas-Price hopes, circulates the metal itself as a national money. If he has his way, Mexico will be the first major modern country to do this. We wish him well in this important quest. When Mexico does begin to circulate its Libertad, others countries will soon follow. The benefits will be clear and fairly immediate.

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