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.]
May 7, 2004. The Golden Sextant: New Look and New Library
Today The Golden Sextant introduces a new section to the website: a Library. Its purpose is to try to make more accessible to the public various important and useful materials dealing with the subject of gold as money, especially since many of them are either out of print or otherwise quite difficult to obtain. It would be hard to find a more appropriate initial work for inclusion in the Library, or one where the copyright laws present less of an obstacle, than the Report to Congress of the Commission on the Role of Gold in the Domestic and International Monetary Systems delivered in March 1982 and described more fully in the following commentary. Although a portion of this material has been published previously, until now the entire Report has been available in only a handful of libraries worldwide. We post it here as a public service.
Regular visitors to The Golden Sextant will notice other changes as well, including a new home page designed to make navigation around the site easier. Less obvious but no less important are certain organizational adjustments reflected in the About Us section. Management of the site is now under the direction of an editorial board consisting of its former proprietor and his partner in Golden Sextant Advisors LLC. However, except as necessary to preserve existing bookmarks to earlier commentaries posted as coming from its files, references to that business entity are largely eliminated. The economic reality is that The Golden Sextant has functioned largely as a free educational resource. We intend to continue it in that vein.
Accordingly, we have registered www.goldensextant.org, which is now linked to the site and operates in the same manner as www.goldensextant.com. Over the past few days, the site has migrated to a new server with greater disk usage and data traffic capabilities. Unfortunately, the move caused some interruptions in service, for which we apologize. Looking further into the future, additional organizational changes are a possibility, as are a greater number of guest commentaries. In the meantime, new commentaries along with additions to the Library should keep the editors occupied.
May 7, 2004. In the Library: Report of the U.S. Gold Commission
Background. The Report was authorized by an Act of the 96th Congress directing that a commission be established to conduct a study to assess and make recommendations with regard to the policy of the U.S. Government concerning the role of gold in domestic and international monetary systems. The Commission, chaired by then Secretary of the Treasury Donald T. Regan, consisted of 17 members and met 9 times from June 1981 to March 1982, taking testimony from 23 witnesses and receiving numerous written submissions from the public. At just under 800 pages in length, the Report is probably the most extensive official examination of the monetary role of gold ever compiled.
Organization and Structure. The Report consists of two volumes. Volume I contains the Commission's majority report, which is set out in an introduction, four chapters and a statistical appendix. The Introduction and Recommendations provide a brief overview and summary of the Commissions majority position. Chapter 1 provides background on the economic stress that led to the creation of the Commission. Chapter 2 is an historical survey on the role of gold in the U.S. monetary system. Chapter 3 is a survey of different types of monetary standards. Chapter 4 is a discussion of existing gold arrangements in the United States and the various proposals for change then under consideration. The Staff Appendix is a detailed study of the gold market.
Volume II contains five Annexes to Volume I. Annex A sets out supplementary and dissenting views, including the magisterial minority report by Congressman Ronald Paul and Lewis Lehrman. At 292 pages, the minority report is substantially longer than Volume I (226 pages), and has since been published separately (1). Annex B contains 70 two-page summaries of statements submitted to the Commission by individuals who were invited to testify before it as well as other interested persons. This is a remarkable compendium of brief, thoughtful remarks by a wide range of talented contributors. Annex C is a memorandum prepared by the Treasury Departments legal staff on Some Implications of Legal Tender Status of U.S. Currency. Annex D is an interesting set of materials entitled Continuing Audit of the United States Government-Owned Gold. It describes a peculiar internal audit process, conducted on a partial basis over a multi-year period. Annex E is a list of the contents of the Commissions permanent records. These include transcripts of hearings and numerous other materials of possible interest. We hope to post relevant portions of these documents as they become available.
Significance. The headline result of the Commissions inquiry was the recommendation that Congress not restore a gold standard. Another recommendation, familiar perhaps only to gold market specialists, was that the U.S. gold stock not be subject to unconventional uses such as swaps, leasing and other commercial arrangements. However, the Report actually contains 10 separate findings and recommendations, which by default appear collectively to represent official U.S. policy on gold to this day.
With respect to the headline recommendation, there was never any prospect that the Commission would vote to recommend a return to some form of gold standard. Representative Paul later observed that the politicians and central bankers were so alarmed at such a thing that they made sure it was packed by an array of Keynesians and monetarists. (2) Similarly, Murray Rothbard, the Austrian economist who contributed a substantial portion of the minority report, noted: After a brief flirtation with gold, the Presidentially appointed U.S. Gold Commission, packed with pro-fiat money Friedmanites abetted by Keynsians, predictably rejected gold by an overwhelming margin. (3)
Today, with gold long since banished to the outer fringes of discourse on monetary theory, what seems remarkable is not that the Commission rejected a gold standard, but rather that the subject was officially discussed at all. As the drafters of the minority report well understood, at root the monetary discussion represented a clash between two radically different notions of the proper role of the national government: the limited, night watchman state of libertarian theory versus the welfare-warfare state of current usage. Adoption of a gold standard would eliminate fiat money inflation, the covert funding mechanism on which the contemporary state depends. It would shrink the state and reduce the power of its officials to a degree unthinkable to the contemporary political mind. So there was never a realistic possibility that a majority on a 17 man panel that contained, inter alia, two senators, four congressmen, three members of the Board of Governors of the U.S. Federal Reserve, two members of the President's Council of Economic Advisors and the secretary of the treasury, would ever have voted for the discipline of a gold standard.
Accordingly, it is not the official outcome of the Report that now commands our attention, but rather the wealth of information and analysis contributed by participants in the process. The Commission's hearings marked the last time that the leading minds in economics were brought together under government auspices to focus on the arguments for and against the official use of gold as money. The result was a sort of monetary Woodstock, which accounts for much of the fascination of this material today.
Going Forward. We predict that the Report will hold a more practical fascination in the future. Although the Commission missed its opportunity to recommend a top-down reform of the system during a period of relative calm, it nevertheless left an invaluable legacy to those who must cope with bottom-up reform in the period of crisis that we expect will mark the end of the world's great experiment with universal fiat money. Especially through its dissenting voices, the Report presents useful guidance for engineering a recovery, from the guiding principle -- separation of bank and state -- down to specific steps that must be taken to clear away artificial impediments to true market-driven monetary reform.
The Report contains a vast amount of material. We will return to comment on certain portions of it in the future. For now, however, our mission is simply to make the Report accessible to all, in the hope that others will find it as provocative and illuminating as we do.
1. R. Paul and L. Lehrman, The Case for Gold (Cato Institute, 1982). Portions of the minority report may also be found in M.N. Rothbard, A History of Money and Banking in the United States (Mises Institute, 2002).
2. As quoted in L.H. Rockwell, ed., The Gold Standard, An Austrian Perspective (D.C. Heath & Co., 1985), p. 130.
3. M.N. Rothbard, Americas Great Depression (Fifth Edition, Mises Institute, 2000), p. xxii.