From the archive.
Some
people think that one of the fundamental institutions of the 19th century
should be restored; I will single out Great Britain as the great leader
embracing this institution.
This
institution was the free minting of gold practiced by Great Britain in its
heyday of growth, world economic and financial power. Under this system, any
owner of gold bullion could take his bullion to the Royal Mint and have it
minted into coins containing the same amount of gold as provided to the Mint
by the owner of the bullion delivered. This was done at no cost to the owner
of bullion as a government service to the economy.
Thus,
the owner of gold bullion converted his bullion directly into money which
could be saved, invested or spent at will. The new gold was turned into money
and increased the money supply because gold was money.
Another
idea has been floated, regarding doing the same with silver: “Opening
the Mint to Silver” is the same idea as free coinage of gold, outlined
above, but applied to silver.
As
I said above, some people suppose that re-instituting this practice of
centuries prior to the 1800’s, which was indeed entirely wholesome and
beneficial in its time, would produce the same wonderful results today;
supposedly, this institution would be the central institution capable of
restoring stability, growth, savings and true and lasting prosperity.
Much
as I should like to agree with this proposition, I have my doubts about the
possibility of obtaining the marvelous results expected of it.
Free
coinage of silver considered
Let
me start with silver, which I have considered first due to my interest in
monetizing a silver coin, the Mexican “Libertad” silver ounce.
First
we must think of what sort of “free coinage” we are thinking of.
Would we propose the free coinage of a coin with a face value, or with no
face value?
If
we propose the free coinage of a coin with a face value, then the face value
must be superior or equal to the intrinsic value of silver. No one is going
to take silver bullion to the U.S. Mint, for instance, and have it turned
into silver coins with a face value that is less than the bullion value of
the silver in the coins!
If
the face value is equal to the intrinsic value of the silver, then within a
week’s time it would probably be on its way back to the refinery, the
price of silver having gone up in the meantime and made the melted coins
worth more than the coins themselves.
Now,
if the face value is superior to the bullion value of the silver in the
coins, then the miners who are taking their silver to the Mint are obtaining
a State subsidy of their mining operations.
This
is objectionable.
Alternatively,
if we are proposing the free coinage of a coin with no face value, then the
situation is different. There is no subsidy at all involved; if there is a
cost for minting, it could reasonably be attributed to social and economic
policy for the benefit of the community in general. It would be an acceptable
State expenditure, indeed, a quite legitimate function of the Treasury.
However,
the miner having turned his silver bullion into coins with no face value
– or with a face value far below the intrinsic value, which negates the
coin’s monetary function - is now faced with the problem of what to
do with them. The coins are valuable, indeed, but – what is
their value? They can be designated as “legal tender”, they are a
product of the Treasury, but the problem does not go away – what is the
value of these coins?
Each
individual would have a different idea regarding the value of these coins
with no face value! And the ideas of each individual would change hourly,
according to the quoted price of silver on the international exchanges. Each
transaction with these coins would necessitate a process of haggling about
the correct value of the coins.
Some
people, but most definitely not all people, would wish to save these coins,
and under present conditions, they would most likely be doing something wise
and prudent; however, they would be speculating on a rise in the price of
silver, either long-term or short-term, according to the views of each
individual saver. Speculators are a small portion of the total population,
especially among the less-affluent savers who are the most interested in
silver as a means of saving.
The
fact is that silver coins with no face value, or with a face value so low as
to be meaningless as in the case of the American Silver Eagle 1 oz. coin, are
generally available in quantities sufficient to cover the needs of American
speculators on the price of silver, who wish to speculate by purchasing
Silver Eagles.
For
this reason, if the US Mint or any other Mint were open to “free
coinage of silver”, there would probably not be a great increase in the
amount of such silver being minted. Such miners who turned in large amounts
of silver to be minted, would be well and truly stuck with them and have a
great deal of trouble in placing them among the public, which in the U.S. for
instance, is already largely satisfied with the production of Silver Eagles
by the U.S. Mint.
The
dilemma
If
free coinage refers to a coin with a face value as legal tender, then this
implies a subsidy to the mining interests. This is unacceptable,
politically.
If
free coinage refers to a coin with no face value, even if by Law classified
as legal tender, this means that any important amount of additional minting
is going to lead to piles of coins stuck in the hands of the miners who
delivered the bullion to the Mint for minting into coins. This is unworkable
economically, as there is insufficient market.
Why
did free coinage work at one time, and why would it not work again today?
The
reason is not hard to find: in the past, in earlier centuries, silver was
money in itself. There was no “price of silver”! The price of
silver was expressed in the amount of things that a given amount of silver
could purchase.
Miners
digging up silver – which they did with great zeal – were
actually “digging up money”. With free coinage of silver, all the
miners had to do was take their silver to the Mint, and - presto! – the miners had money.
How
did we get from there, to where we are today?
It’s
a very long story but I’ll try to abbreviate it.
The
greatest minter of silver in history was the Spanish Empire.
In
1535 the Spanish Crown established a Mint in Mexico City, to mint coins which
already existed in Spain before the Conquest of Mexico. I refer to the
“Pieces of Eight”, which was a coin that bore in inscription
“Ocho Reales”
– meaning “Eight Reales”. A
“Real” was the name given to a certain weight of pure silver,
about 3 grams. I think this size of coin derives from the Arabian Rial, for as you know, Spain was under Moslem domination
for about seven centuries until the Moors were expelled from Spain in 1492.
And the Rial itself is another name for the Koranic
“dirham” which is defined in Islamic Law as a silver coin of
about 3 grams in weight.
Eight
reales of 3 grams each made a coin of 24 grams. And
since the U.S. silver dollar was modeled by Thomas Jefferson upon the Spanish
“Pieces of Eight” used by the American Colonies before
Independence, the U.S. Silver Dollar as defined by the Constitution contains
– 24.05 grams of pure silver!
The
ratio between the values of gold and silver, at the dawn of the Industrial
Revolution, was fixed in the U.S. at 16:1. The gold dollar contained 1.505
grams of gold, while the silver dollar contained 24.05 grams of silver. 24.05
/ 1.505 = 15.984, that is, very close to the ratio of 16:1.
We
must pause to understand something with regard to the peculiar valuation
which humans give to gold, a valuation which is quite different from that
accorded to silver.
Gold
has, for practical purposes, no declining marginal utility. What this
means is that for humans, generally speaking, no one ever has so much gold,
that he ceases to value any additional gold. Regarding the world as a whole
we can say that the demand for gold is insatiable. At the end of 1970, there
was an above-ground stock of 90,000 tonnes of gold,
and the price of gold was $35 dollars an ounce. At the end of 2008, the
above-ground stock of gold in the world was 162,500 tonnes,
and yet the price has gone up to close to $1,000 dollars an ounce at this
writing. Additional gold is added to this pile at a rate of less than 1.5%
per year, and it all has an immediate market.
Silver,
on the other hand, does have a declining marginal utility.
The
old ratio of 16:1 between the price of gold and the price of silver was
established before the Industrial Revolution, when the extraction of silver
from the ground was still a primitive labor-intensive process. This changed
radicall
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