Mexican Silver Currency Proposed

By James Rapholz
Economic Advice

       These tough economic times call for major changes in monetary management such as the curbing of excessive household debt and limiting government plans to revitalize the economy through spending. While the U.S. and Germany inject their financial institutions with cash to the rescue them from bankruptcy, the Mexican Civic Association, ProSilver AC, is implementing a plan aimed at bringing back credibility to Mexico's currency.
       The plan is to give Mexicans a currency with an intrinsic value, the kind of value that will foster savings. Lead by businessman and banker, Hugo Salinas Price, this group of financial advisors, business managers and policy makers want to re-establish silver as currency and are presenting the idea to the Chamber of Deputies. Historically, however, establishing a silver currency in Mexico has been problematic.
       Hugo Price is a retired businessman and banker living in Mexico. A follower of the Austrian School of Economics, he has written three books and numerous articles on the use of silver as money in Mexico. As President of the Mexican Civic Association, ProSilver, he is actively lobbying the Mexican Congress to approve a Bill to institute the pure, one-ounce, silver Libertad coin as currency. He is convinced that this would help fight inflation as the coin would not increase interest rates the way the printing of paper money without intrinsic value does. Supporters of ProSilver maintain that circulating silver coins will contain inflation without hurting Mexican industry and will in fact benefit the silver mining industry.
       To be a true currency the coin must have a nominal value. The new Bill proposes to protect savings in silver currency by offering a coin that has a nominal value that increases as the price of silver rises. The coin would maintain its last nominal value if the price of silver goes down. In this way Mexican citizens will be provided with an instrument for saving that is not impacted by inflation, and is not subject to volatility due to monetary policies or bank collapses.
       The Bill Amendment to present constitutional law for minting money in Mexico argues that historically, silver currency required no marketing to be widely accepted. Why not use it again? After all, the use of silver as a liquid currency goes back at least 4,500 years; it is mentioned in the Old Testament; during Charlemagne's reign silver was the only legal tender. The British Pound, so named because its value was literally one troy pound of sterling silver, dates back to the Anglo-Saxon times of around 500 AD. Even colonial America preferred silver or gold as the ultimate exchange currency.
       Silver often functioned as a hedge alternative currency and as it was minted more often than gold. Banks preferred silver currency and used the mined silver coins as collateral. Silver and gold provide a safe haven for savings during volatile economic and political times. The Bank of California, for example, financed a number of silver mining operations to develop the Comstock Lode discovered near Virginia City, Nevada in 1859. Foreseeing the need for silver in order to mint coins, William Chapman Ralston, founder of the bank, repossessed some of these mines when their owners defaulted on loans. The bank made enormous profits from the Comstock Lode in the years that followed and became the richest bank in the western United States.
       Demonetization of silver occurred in 1873, roughly 100 years before the official end of the gold standard in the US. Nevertheless, many countries continued minting silver and gold coins as a way to provide citizens with a commodity-based investment. One of the reasons the demand for silver currency decreased was that silver's increased use in industrial applications such as photography and printing gave the metal price volatility in the market. Coin collections were even melted down as the value of the metal became higher than the nominal value of the coin.
       According to Pro Silver AC, the problem with issuance of the coins is the stamped nominal value. With a fixed nominal value, a silver coin begins to yield negative margins for the issuer when the silver metal price exceeds the nominal value stamped on the coin, or when the Mexican currency devalues. The issuer of the coin loses money because the price of the metal becomes higher than the value of the coin. As the coin becomes less valuable, it reaches its melting point, the point when it is more profitable to melt it down and sell it as plain silver metal.
       In an attempt to keep the coins in circulation, Banco de Mexico put less silver in the coins, but the result was always the same. The silver in the coin was eventually worth more than the nominal value stamped on the coin, resulting in the melting of entire numismatic collections.
       The central bank repeatedly tried to circulate silver coins in Mexico and silver currency has been part of almost every minting program, from the famous Mexican Peso 0.720, issued from 1920 to 1945 and circulated for 25 years up to the Commemorative Mexican Coin of the States, issued from 2004 to 2008.
       In total, 458 million coins were minted from 1920 to 1945 and the price of silver fluctuated significantly. However it was not the drops in the value of silver that caused problems, it was the increase in silver's value that created problems. When the Banco de Mexico was established in 1925, silver was worth 69.1 cents US, it dropped to 25.4 cents US in 1932. However, not one single Peso 0.720 was returned to the Banco de Mexico as a result of the drop in the value of silver. The problem was a rise in the price of the metal from 45 cents US to 71 cents US per ounce in 1945. The currency had to go out from circulation, as the value of the stamped "$1 peso" and its minting became unprofitable.
       In 1979, in an attempt to eliminate the problems that come with stamping a silver coin with a face value, the government presented a Bill that for the first time introduced a silver coin as currency, without a stamped nominal value. The silver once coin, called the Libertad, has been minted since 1982 up to now.
       Because the Libertad has no nominal provision, these coins are valued accordingly to the price of silver as a commodity. However, the intended purpose of these coins as currency (legal tender) was not realized, as they lacked a stamped nominal circulation value.
       However, in order for a silver coin without a stamped nominal value to become currency, legislation is required to ensure that legal tender becomes explicit in the case of the silver ounce Libertad. Without an irreducible nominal value, it is impossible to use the silver coin as money, and it will remain a commodity.
       What, if this becomes the law of the land in Mexico and they start minting one ounce silver coins with a stated monetary value?
       What are the chances of this law being enacted?
       The people with 20-20 vision that I communicate with believe that the law has a very good chance of being enacted because the unemployment in Mexico is high and silver mining can be carried on with the heavy use of unskilled labor. They also believe inflation is on the up-tick in Mexico and these coins could put a damper on that age-old problem.
       I personally believe that this is only a part (not to say that it isn't a big and important part) of a massive upward trend in the price of silver!
       Year to date the price of silver is up over 100 percent, whereas gold is only up 10 to 12%, depending on which day of the week you choose to measure its movement.
       Those of you, who are old enough to remember, will recall that back in 1980 the Hunt brothers of Texas, Nelson and Bunker, tried to corner the price of silver and in so doing, drove its price up from $2.00 an ounce to $50.00. I remember it very well as I made nearly a half a million dollars by buying and selling penny silver stocks.
       Nearly every bartender, taxi driver, bookie and barber bought small silver bars and hid them under their beds in hopes of getting filthy rich. The sad part of it was that very few did, because they held on too long and when the federal government forced the Hunt brothers to liquidate their hoard of silver - the price of silver collapsed almost over night.
       Today, it's utmost in my thinking that something of nearly the same game is now afoot in the silver price market! There are probably some very wealthy folks out there, somewhere, who are pushing up the price of silver, just like Nelson and Bunker Hunt did back in 1980. I have no idea of who they are or where they reside and I don't have the slightest idea of how high the price of silver will go or where the top will eventually be found.
       However, let's look at the background of silver's fantastic move upward, over the past year. The world economy is moving at the slowest rate of speed that it has moved since the great depression. So it's safe to say that industrial demand for silver is not pushing up its price. Silver jewelry sales are also in the dumps because of the recent recession. There are not any large-scale military build-ups pulling silver off the market either. I have no way of proving what I think is going on in the silver price market however; there appears to be a considerable amount of circumstantial evidence to support my thesis.
       What was the biggest underlying reason for the price of silver going from the gutter to the summit back in 1980? Because of the OPEC and Arab oil embargos of the middle to late 1970s - inflation was going crazy by 1980 and the thinking people all over the world were forced to find a way to protect what they owned from the ravages of inflation!
       It's my scenario that the same conditions are afoot today. The price of imported oil has set up the very same conditions that existed back in 1980 and because of the severe recession that has threatened the economic existence of the entire world, nearly every nation on earth that had the capability of creating money out of thin air - has done so.
       What does this all mean to those of you who are fortunate enough to be subscribing to this leading edge market letter and what action should you take? First and foremost you should do nothing but think about my theory. After you've had the opportunity to digest my scenario you should be in the position of agreement, disagreement or a maybe. If you totally disagree with me, you should find another place to invest your precious hard earned funds. If you happen agree with my thoughts on this subject, you should start researching the subject by reading everything pertinent to the price and history of silver that you can get your hands on. Your next step should be to carefully and diligently watch the price movements of silver. There is no reason that you have to get in right now. You've already missed the bottom and if my thinking is correct - the top is going to be found a very long distance into the future!
       Back in 1980, the U.S. economy was much stronger than it is today. When the ravages of inflation finally showed its ugly face, then President Jimmy Carter, fired his Chairman of The Federal Reserve System, William G. Miller, and replaced him with Paul Volker who immediately raised the interest rates to 18%, which almost stopped inflation dead in its tracks. However, the economy of the U.S. and most of the industrial world is very weak today and could not withstand a drastic raise in rates without causing a depression of a far greater magnitude than what was suffered back in the 20s and 30s. Therefore, I'm sure that I don't have to explain to you that the price of silver will most probably go considerably higher than $50 per ounce this time around and its advance will by no means, be easily stopped!
       If you happen to be in the camp that agrees with my thoughts on a tremendous surge in the price of silver this is what I suggest that you do: After you've done your homework on silver, start making some silver investments. You can invest in physical silver, silver ETFs, the Mexican silver coins, or some silver stocks. If you choose to invest in silver stocks, I'd stick with mining companies that are in production and are located in the U.S., Canada or Mexico. I happen to favor buying mining stocks because they generally move up in price faster than the price of silver itself and I've had very good luck with stocks that trade under $5.00 a share.