Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. He operates the blog MISH'S Global Economic Trend Analysis and believes in the Austrian School of economics.
My friend Hugo Salinas Price, a tireless promoter of sound money, offers a Primer on the Mexican ‘Libertad’ Silver Ounce as a Vehicle for Savings of the Common Folk.
This is a guest post by Hugo Salinas Price. Due to its length, I will not use block quotes. My comments appear at the conclusion.
A Primer on the Mexican ‘Libertad’ Silver Ounce as a Vehicle for Savings of the Common Folk
Hugo Salinas Price
Who created the Mexican silver peso known as the “0.720 Peso”? President of Mexico Venustiano Carranza.
When did minting of this coin begin? In 1920.
Why was it known as the “0.720 Peso”? Because its silver content was 72% of its weight.
What was the silver content of the “0.720 Peso”? The pure silver content of the “0.720 Peso” was 12 grams.
What was the value of the silver in the “0.720 Peso” in 1920? In 1920, 12 grams of silver were worth 52 Mexican cents.
For how many years was the “0.720 Peso” in circulation? It circulated for 25 years, until 1945.
During those 25 years, was the silver in the “0.720 Peso” ever worth less than 52 centavos? Yes; in 1931, 12 grams of silver were worth only 31 centavos, but the public using the coin took no notice of this fact.
Why did the “0.720 Peso” go out of circulation in 1945? It went out of circulation because after World War II, the international price of silver rose and thus the silver in the “0.720 Peso” was worth more than one Peso. Minting more silver Pesos became a loss-making business for the Mexican Mint, so minting ceased.
What became of the “0.720 Peso” coins when they went out of circulation? Most of the coins were sent to a refinery so that their silver could be sold at a profit on the international markets, as happened to the US silver coinage in the 1960’s, but some were saved by Mexican savers, and can still be purchased in downtown Mexico City.
Were other silver Peso coins minted, after the “0.720 Peso” went out of circulation? Yes, three different silver one-Peso coins were offered to the public after 1945: In 1947-1949, a silver one-Peso coin was minted with 7 grams of silver; in 1950-1954, a silver one-Peso coin was minted with 4 grams of silver; in 1957-1967, the last one-Peso coin with silver was minted, and it contained only 1.6 grams of silver.
What happened to all these coins? They all suffered the same fate as the “0.720 Peso”: they were sent to the refinery, because the value of the silver they contained became worth more than one Peso.
What took the place of the “0.720 Peso” when it went out of circulation? It was replaced with a paper “One Peso” note, whose cost of production was next to nothing. As inflation of the stock of money in circulation advanced, coins of One Peso became quite unimportant, in spite of the inclusion of some silver in the Peso coins of the Fifties and Sixties.
Paper money record: In 1925, $2.03 Mexican Pesos bought $1.00 Dollar. In 2017, it costs $17,600 Pesos to purchase $1.00 Dollar. (Three zeros were wiped off the Peso in 1993, in a cosmetic measure to make it look better; thus the “Official Exchange Rate” is $17.60 “new” Pesos to $1.00 Dollar at this writing.)
This does not take into account the depreciation of the US Dollar itself, which is now worth something like 3 cents of its value in 1920.
1.- It is impossible to mint silver coins for stable popular savings, if they bear a stamped monetary value, because the value of silver fluctuates with a tendency to rise, and thus any stamped value on a silver coin will always be surpassed by the rising value of the silver in the coin.
2.- Mexico can recover silver coinage as a vehicle for popular savings if the silver coin does not have a stamped value, but rather an official quoted value which can be raised as rises in the value of silver take place.
3.- The “Libertad” pure silver one-ounce coin is already Legal Tender in Mexico. Its value fluctuates with a tendency to rise with the silver market. If it were given an official monetary quote, it would turn into an ideal vehicle for popular savings and would never go out of circulation. (More than 60% of the Mexican population have no savings for their retirement.)
4.- A silver coin with a quoted official monetary value would be a great vehicle for popular savings, but due to the fact that its monetary value would always be for a larger amount of Pesos, and never for a lesser amount, the “Libertad” pure silver one-ounce coin would never be able to substitute the present monetary system of Mexico, which will endure such as it is today.
End Hugo Salinas Price – Mish Comments
That history lesson should make the problem and the solution quite obvious (and it pertains equally to gold and silver).
The problem: If the value of a metal increases above the stamped value, coins will be hoarded then melted. The same applies to printed money 100% backed by metals. People would redeem the paper for the coins and sell the coins to arbiters who would melt the coins for a profit.
Stellar Solution: Do not stamp coins or the paper with a value other than ounces.
That may sound strange, so here is another way of expressing the same thing: A dollar, a Mexican Peso, or a Euro should represent an ounce or a fraction of an ounce of silver or gold instead of foolish attempts to fix the price of gold or silver to a currency.
The latter does not work as Hugo has shown.
This brings into play discussions of dual currencies. However, as long as the price is not fixed or stamped in dollars, pesos, euros or yen, but rather as ounces or fractions of ounces the system works.
Historical minds may be interested in the slogan give us back the “Dollar of Our Daddies“.
Mike “Mish” Shedlock