-->May 25, 2004. Guest Paper: Hugo Salinas Price on the Mexican"Libertad"


We are pleased to present a recent paper by Hugo Salinas Price, How to Introduce a Silver Coin into Circulation in Mexico: The Hybrid Coin, presented at a Conference on Resumption of the Gold Standard sponsored by the American Institute for Economic Research on May 13-14, 2004.


Mr. Salinas is a director and honorary president of Mexico's Grupo Elektra (www.grupoelektra.com.mx) from which he retired as CEO in 1987. In 1995 he founded Asociación Cívica Mexicana Pro Plata A.C. (www.plata.com.mx), which advocates the reintroduction of legal tender silver coins in Mexico to circulate alongside, but not in place of, paper pesos. As La Plata's president, Mr. Salinas has campaigned widely for its program of monetary reform, authoring many articles as well as making TV and other public appearances, including numerous lectures at universities throughout Mexico.


In 2001 Mr. Salinas persuaded the Banco de México, issuer of the one-ounce"Libertad" silver coin, to supply them to Grupo Elektra for resale to the public through its nationwide outlets, where sales of these coins now exceed 30,000 per month. The Libertad, an official coin with limited legal tender characteristics, renders in silver close to what the U.S. Gold Commission recommended for gold but the Congress declined to authorize: a bullion coin without nominal monetary or legal tender value yet exempt from taxation.


Mr. Salinas now proposes to convert the Libertad into a circulating medium, a parallel currency. Under his proposal, the Banco de México would quote daily a legal tender value in paper pesos based on the market price of silver plus minting costs and a reasonable seignorage, but subject to the condition that no future quote would be less than that preceding it. In other words, the legal tender value in pesos could ratchet up but not down, thus assuring users of the coin that its value in pesos would never fall below that of an equivalent amount of paper money received on the same date.


This bold and creative proposal addresses a number of practical issues regarding the reintroduction of a silver-based circulating currency in Mexico. It accepts Ludwig von Mises' regression theorem, echoed in the Minority Report of the U.S. Gold Commission (at p. 208), that"new currency units cannot be imposed de novo from above, by politicians or economists [footnote omitted]. They must emerge out of the experience and the valuations of the public on the market."


What is more, the proposal's potential significance extends well beyond Mexico's borders, not least because the approach outlined by Mr. Salinas appears equally applicable to reintroducing a gold-based circulating medium in other nations. However, we are particularly struck by its implications for Mexico's two NAFTA partners, the United States and Canada.


In both these countries, a Libertad hybrid coin with a legal tender floor expressed in pesos should find significant private demand, particularly at the retail level. While its weight might make it unsuitable for large commercial transactions, the hybrid coin would be well-suited as a vehicle through which to save for travel or vacation in Mexico while at the same time investing in silver. It would provide the same exposure to rising silver prices as American or Canadian silver bullion coins but with far less downside risk for those able or willing to use the coin in Mexico.


Of greater potential significance, however, is the probable effect of any such program on the COMEX silver contract in New York. Whenever silver prices on the COMEX fell below the legal tender quote in Mexico by an amount sufficient to cover the cost of shipping physical silver to a Mexican mint, arbitrage would provide the Banco de México with a risk free opportunity for profit. It could buy spot silver in New York, take delivery, and convert the purchased silver into coins with a higher legal tender value in Mexico than their total cost of production.


The Mexican government could then use these coins in place of paper pesos to pay its expenses until such time as demand from Mexico or elsewhere drove silver prices high enough to stop the profitable arbitrage. The era of speculation in paper silver contracts driving the price for the physical metal would wither away. Silver prices would likely stabilize at levels significantly above those of recent years, all to the great benefit of the world's silver producers, of which Mexico ranks first.


Longer term, the potential implications are even more profound. Many believe that the North American Free Trade Area is destined to adopt the U.S. fiat dollar as its common currency. But the successful implementation La Plata's program could put the Libertad in a position someday to displace the greenback as NAFTA's principal reference currency. Indeed, the historical precedent for such a development brings to mind Santayana's dictum (The Life of Reason (1905), I:12):"Those who cannot remember the past are condemned to repeat it.".


Not wishing to chance another Continental currency, the framers of the American Constitution turned to the Mexican silver dollar -- the"Ocho Reales" or Pieces of Eight -- as the monetary unit for their new republic. Having had enough of playing card money, Canadians followed the American lead, effectively putting all of North American on a standard silver dollar.


Today, more than thirty years into a reckless worldwide experiment with unlimited fiat money, no one can predict with certainty the fate of the U.S and Canadian dollars. But the record of paper money with no effective tie to the monetary metals suggests that, as Mr. Salinas observes, banking systems the world over"cannot be saved in their present state." Introduction of the hybrid Libertad would be a first step toward a system of freely competing currencies that would again offer individuals a practical choice between paper or specie and, in the process, sow the seeds for an organic regeneration of a new and more viable international monetary system.


Eighty years ago, Mises described the salutary role that hard money of foreign (or any) origin can play in a currency crisis (Stabilization of the Monetary Unit--From the Viewpoint of Theory (1923), pp. 13-14):



Gradually, there is accumulated within the country a supply of foreign moneys. This substantially softens the effects of the final breakdown of the domestic paper standard....


Not only do incontrovertible theoretical considerations lead to this hypothesis. So does the experience of history with currency breakdowns. With reference to the collapse of the"Continental Currency" in the rebellious American colonies (1781), Horace White says:"As soon as paper was dead, hard money sprang to life, and was abundant for all purposes. Much had been hoarded and much more had been brought in by the French and English armies and navies.” [Footnote omitted.]