A Thought Experiment

Tuesday, 1 November 2011

Hugo Salinas Price

Earlier this year I wrote a piece with the title “Dorothy’s Silver Shoes”, in which I proposed the re-monetization of the Constitutional silver currency of the US; there is a significant amount of this coinage still in existence.

Here’s a “Thought Experiment” regarding the re-monetization of the Constitutional silver dollar, the silver half-dollar, the silver quarter and the silver dime.

The Thought Experiment:

At present, the old silver currency of the US cannot circulate as money because the silver content in the coinage is actually worth a lot more (fiat) dollars if melted down into silver bullion bars. Everybody knows that, but you still can’t use those coins for everyday purchases because nobody knows exactly what they are worth as money in commercial transactions such as purchasing groceries.

Enter the Utah State Legislature, which has recently enacted legislation friendly to gold and silver. Suppose the State Legislature of Utah decided to empower the Utah State Treasury to establish a Federal Reserve Note (FRN) value for the silver dollar and its subsidiary coinage – the silver half-dollar, the silver quarter-dollar and the silver dime – for the purpose of receiving that silver currency at the established FRN value in payment of taxes and other sources of revenue payable to the State of Utah.  

The gist of that job would be to calculate, on a daily basis, the Federal Reserve Note value of the silver in the silver dollar, which contains 77.3% of a Troy ounce of pure silver; this FRN value of the silver in the silver dollar, would be increased by 12%, and then rounded up to the nearest multiple of four. (Why the 12% mark-up? Because the US Treasury is going to have to come into the act, a little later, and it will require a margin of profit to carry out the minting of the silver currency. So we provide that margin at the outset.)

Today’s (October 28, 2011) value of silver bullion as shown on kitco.com is $35.29.

So, $35.29 X .773 = $27.28 X 1.12 = $30.55, rounded up to $32.00

The “re-monetization of silver currency” should not be mentioned in any legislation! All that is necessary is that the Utah State Legislature enact that the State Treasury shall accept silver dollars in payment of taxes and other sources of revenue, at a FRN value as determined from time to time by the State Treasury. Such language avoids intruding upon the area of “money creation”, presently a monopoly of the Fed, and obtains the desired effect, for everyone in the State of Utah will know that there is a “final buyer” for the silver dollars, at a fixed rate: the Utah State Treasury. A telling mark of money is that a State will receive that money in payment of taxes.

By doing this, The Utah Treasury would make the Constitutional silver dollar worth – exclusively in Utah, of course - $32.00 FRNs. And because 32 is a multiple of 4, the half-dollar would be worth $16 FRNs; the quarter-dollar would be worth $8 FRNs, and the silver dime would be worth $3.20 - three FRN dollars and two junk metal dimes.

What could be the practical value of adopting this legislation, for the residents of the State of Utah?

The usefulness of this former US currency would be greatly enhanced. Even if its monetary value in FRNs were limited to the State of Utah, it would represent a highly desirable alternative for the savings of residents. Besides this it could be used for most – though perhaps not all - purchases within the State of Utah.  (Those readers who have the requisite knowledge may sort out the questions regarding which enterprises might legally refuse payment in a currency which the State of Utah will accept in payment of taxes.)

It seems to me that the State of Utah would be fully within its rights in accepting the Constitutional silver dollar (and its subsidiary silver coins) in payment of taxes, at a certain fixed value in FRNs.

In the highly unlikely case that the State Treasury should begin to receive large amounts of taxes in the form of silver currency, it could dispose of the incoming silver by using it to pay its bills and payrolls. I can see no impediment to the State of Utah issuing silver certificates at some point, for the sake of convenience in making payments – such certificates, based on silver actually existing in the State Treasury, of course.

In this Thought Experiment, the silver currency would circulate in parallel with the FRNs. I think the case of the State Treasury receiving large amounts of silver currency in payment of taxes is highly unlikely, because the residents of Utah would be saving their silver currency and would be very reluctant to part with it. The silver currency favors savings, desperately needed in a nation that is bankrupt.

As the FRN loses value against gold and silver, the corresponding rise in the FRN value of silver bullion on the market will bring the “mark-up” of the State Treasury down to 10% (from an initial 12%); at that point, a new quote for the FRN value of the silver dollar becomes necessary. The next price of bullion silver which would trigger a rise in the FRN value of the silver dollar would be $37.63. At that moment, the new FRN value of the silver dollar (in Utah) would be: $36.00.

At this point, I should mention that the Utah Legislation to give the silver dollar a FRN value applicable in the payment of taxes and other sources of revenue should include a provision in the sense that any FRN quote given to the silver dollar by the State Treasury must be a quote which cannot be reduced once issued. To wrap your mind around this strange provision, think of the FRN quote by the Treasury as a sort of re-stamping of its value, upon the silver dollar. All money must have a known, fixed value in order to be used as money; that is why values are stamped on coins. But, in our world, silver bullion will be going up, and up, and up, as the FRN goes down, and down, and down in value; unless we can adapt the coin to the rising FRN value of silver bullion, the coinage must go out of circulation as soon as its metal value becomes higher than its quoted FRN value. Thus, the Treasury of the State of Utah will be able to keep this currency in circulation in Utah, by raising its FRN value to just slightly above its bullion value and fixing it there, until the next rise in the price of silver bullion. The FRN value quoted by the State Treasury would take the place of the normally stamped value.

Please think about this before rejecting the Thought Experiment.

What if the price of silver collapses? What would “back” the FRN quote given to the silver dollar by the Utah Legislature? The “backing” would be a lower FRN price of silver content, but there would still remain a valuable precious metal content, whereas the FRN has no content whatsoever. So the silver currency would still be more desirable money than the FRN, even in the worst case. People would still prefer to save these coins, rather than FRNs.

(This is a “Thought Experiment” – so, think about it!)

Further thoughts:

Article I, Section 10 of the Constitution of the US says: “No State shall ….coin money…. [or] make anything but gold and silver coin a tender in payment of debts”. However, the State of Utah would not be coining money; it would simply be giving the Constitutional silver dollar of the USA (371.25 grains of pure silver) a FRN value within its State Borders for the purpose of collecting taxes and other sources of revenue. And in the case of making payments in silver dollars, it would be following the letter of the Constitution. What’s to object about that?

When the Utah State Treasury declares that the silver dollar is worth $32 FRNs in the State of Utah for the purpose of receiving any taxes or other sources of revenue payable to the State of Utah, the Utah Treasury is not creating another currency, a move which would certainly raise huge objections in Washington. It is simply saying that it will also accept payment of State of Utah taxes in the old Constitutional silver currency, at a certain rate of FRNs per silver dollar. The legal tender money of Utah remains the FRN. Also, the State of Utah will not force anyone to take payment in silver dollars with a FRN value quoted by the State Treasury. Whoever does not wish to take silver dollars, will have the option of being paid in FRNs.

The Thought Experiment goes on to say:

People like this monetary measure, and they like it a lot. People are saying: ‘Why didn’t somebody think of this before?’ And what’s this? A number of other States of the Union are following suit along the same lines as Utah, and the usefulness of silver currency increases as the area where it can be used to pay state taxes grows from one state to another. The measure is accepted by leaps and bounds, since the #OWS crowds are getting very nasty and the police are cracking a lot of heads…

In a short time, silver currency is back – without having replaced the FRN, just being used “in parallel” with the FRN. And with the old silver currency back in the hands of the people, the Joy of Saving in real money returns. The US is looking good, for a change!

With silver back in circulation, popular pressure on the US Treasury to resume the minting of silver currency increases. People want the silver dollars, half-dollars, quarters and dimes; they are desperate to obtain them, but they are very scarce. The Treasury is forced to mint more and more of this silver currency. The US Treasury delivers its freshly minted silver coinage to the public (through the banking system) at the FRN value as established by the State Treasury of Utah and the State Treasuries of other States which have joined Utah in accepting the silver coinage in payment of taxes and other sources of revenue.

Behold! The Treasury reassumes its Constitutional mandate to provide silver currency to the citizens of the US. The silver currency is provided by the Treasury, just as the Constitution established. This is money that is not “Fed money”, not a creation of debt, as the FRN. Once in circulation, its existence does not depend on the health, or even the existence of a banking system. This is what real money always has been, and what real money always will be. The American people do not have to pay a rental fee to the banking system, in order to have silver money.

Behold! The Federal Reserve, that huge banking cartel clam, is pried open.
The public has experienced real money, once again. This has changed everything for the Fed, whose existence for decades has been unchallenged because there was no alternative to its FRNs. Now there is an alternative silver currency and the people have tested it and liked it.

The evil spell of paper money has been broken.

End of “Thought Experiment”.

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