We have been proposing the monetization
of a silver coin in Mexico since 2001. According to our proposal a one-ounce
coin of pure silver, with no engraved value, would be given a monetary value by
the Mexican Central Bank. This coin would exist and circulate as money, in
parallel with the paper money system of Mexico.
The monetary value would be superior to
the bullion value of the silver ounce by about 15%. This margin would allow a
profit, called “seigniorage”, for the
Central Bank. Since the coin would not have an engraved value, rises in the
price of silver (which would tend to eliminate the seigniorage
of the Central Bank) would be met with new, higher, Central Bank quotes for
the monetary value of the coin.
The rises in the value of silver in the
silver markets of the world would no longer cause the disappearance of the
monetized silver ounce. As soon as a rise in the price of silver would begin
to affect the seigniorage of the Central Bank, it
would produce a new and higher quote.
In order for the silver coin to become
money and cease to be a commodity, the last quote of the Central Bank would
have to remain stable and not diminish if and when the price of silver were
to fall, which of course it does from time to time. Granted such immunity
from falls in the price of silver, the coin would become legal tender money
and could be used for any commercial transaction.
Now we read that China is having
problems with inflation of its money supply. We think that if China were to
monetize a silver coin, its Central Bank would have an effective instrument
to assist in dealing with inflation.
China used silver exclusively as money
for many centuries and restoring it to circulation in China would seem
appropriate for China, as it aspires to recover its former glory as the
richest country in the world.
The hypothetical case of a monetized
silver coin in China.
The first thing that strikes us as we consider
a silver coin to be used as money in China is that given its enormous
population a one-ounce coin would appear to be much too large.
Let us consider a smaller coin. In the
case of silver coins with engraved values we have seen the case of Mexico,
whose Central Bank attempted to retain a silver peso (with an engraved value)
in circulation all the way up to 1967. The attempt required removing all
previously minted and engraved silver coins from circulation and replacing
them with new One Peso coins containing less silver.
What we are suggesting is radically
different. Instead of replacing a One Peso coin with coins with progressively
less silver content, we are simply, in the special case of China,
“cutting up” a one ounce pure silver coin into smaller pieces.
For the purpose of silver in circulation
in China, we suggest a small coin, about the size of an American dime, with a
pure silver content of 1/10 oz., alloyed with 10% copper to give a fineness
of .900. In metric terms, the coin would have a gross weight of 3.45 grams
and a pure silver content of 3.11 grams.
The determination of the monetary value
of the 1/10 oz coin in Yuan
Today, November 24, 2010, the exchange
rate for the Chinese Yuan is 6.6489 Yuan per dollar, and silver is traded at
$27.59 oz.
At these values, the value of silver
bullion per ounce, in Yuan, is 6.6489 x $27.59 = 183.44 Yuan per ounce.
The value of silver in a 1/10 coin would
be 183.44 / 10 = 18.34 Yuan.
Add to 18.34 Yuan, the cost of minting,
which we shall estimate at 10 cents per coin = .67 Yuan for minting costs.
Then 18.34 + .67 = 19.01 Yuan.
19.01 Yuan x 1.1 to provide a seigniorage profit to the Chinese Central Bank = 20.91
Yuan.
We round up the Yuan figure of 20.91, to
25 Yuan as the initial official quoted legal tender value of the small 1/10 oz coin, using multiples of 5 for steps in future
increases of legal tender monetary value as the price of silver continues to
rise. This facilitates public use of the coin.
The Chinese population will snap up
these coins in enormous quantities. As they do so, they will initially be
handing over 25 Yuan for each coin purchased.
One tonne of
silver will serve to manufacture 321,510 coins. One thousand tonnes of silver will allow for the manufacture of
321,510,000 coins. For the population of China, this will be merely the first
appetizer. The population of China will gobble up many thousands of tonnes of silver for its savings.
Each 1,000 tonnes
of silver that is monetized, at 25 Yuan per coin, will initially withdraw 8.04
billion Yuan from circulation.
The silver coins that go into
circulation will be money, but will hardly be used for purchases. It will be
difficult to find these coins, as they will all be treasured up by the
Chinese population. Their velocity of circulation will be close to
zero and thus they will have no inflationary effect upon the economy. Paper
Yuan are withdrawn and replaced with silver money which goes into savings;
this is a correct way to fight inflation.
Saving these coins will amount to voluntary
austerity for the Chinese. Saving is the postponement of consumption.
Voluntary austerity is always more effective and sounder from an economic
point of view than the forced savings beloved of Statists, who have
dictated taxes and scarcity for consumer goods so that the Statists can build
factories.
The monetization of a silver coin will
be a free-market decision that prompts people to save, spontaneously, of
their own accord, and which does not require raising interest rates to draw
the people’s money out of the economy into savings.
When the Chinese begin to withdraw
silver from the world markets, in order to supply the vast appetite for
silver savings of the Chinese, the price of silver will climb to unsuspected
heights. We can easily visualize a price four times higher than the present
high price: $100 Dollars an ounce.
At 100 Yuan per 1/10 oz. – the
initial price calculated above, times four – the Chinese Central Bank
would be withdrawing about 32 billion Yuan from circulation with each 1,000 tonnes of monetized silver coin placed in the hands of
the Chinese people.
Silver is sold on the world markets, for
dollars. At $100 dollars/oz., the Central Bank would be able to transform
part of its vast dollar and euro reserves into silver at $3,125,100 dollars
per tonne. One thousand tonnes
would require $3.1 billion dollars. A drop in the bucket as far as Chinese
C.B. reserves are concerned, but every little bit helps, considering that
Chinese reserves are not actually worth a Chinese firecracker and that sooner
or later, China will have to take a gigantic bath when this fact is
recognized.
What about the impact of $100 silver on
the price of gold?
We think that the ratios of the past and
of the present will disappear. Gold will not necessarily rise four times in
price, to retain the same ratio with silver, at its new price of $100 dollars
/ oz. The silver ratio to gold has been as high as 100 to 1, and lately has
been around 50 to 1. The silver ratio to gold can continue to fall towards
the old ratio of 16 to 1. If China persists in purchasing world silver, the
price of silver might far exceed $100 dollars per ounce and become
increasingly effective in stemming inflation as higher prices for the silver
coin draw off greater amounts of paper money from the economy.
Quite apart from the effect of sopping
up quantities of Yuan at present in circulation in China, monetizing the
silver coin for the use of Chinese in their savings would have a salutary
effect upon society in China.
Silver as money gets masses of people to
think, not of the present, but of the future, and to focus on their long-term
objectives as they accumulate savings in real money. It has a binding effect
upon society.
Tranquility, or peace of mind, is one of
the great Confucian philosophical values of the Chinese and solid savings in
real money are a great tranquilizer. It seems to us, that more tranquility in
a frenzied Chinese society would be of benefit to China.
The world is seeking a new paradigm in
money. The Keynesians and inflationists and
Statists have had their day, and they have fudged it. The world’s
monetary system is in the initial stage of breakdown. Confidence in fiat
money is evaporating. The trend is in place and there is nothing to stop it.
The time for real money has arrived, and China can lead the way by monetizing
silver into small coins which can be used as money.
Perhaps silver will open the way to a
further, more far-reaching reform for gold in the International Monetary
Process; for what the world has at present is not a System, but only a
Process – of meltdown.
****
Hugo
Salinas Price is President of the Mexican Civic Association Pro Silver; its
website, with some articles in English, is www.plata.com.mx
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