We present here for our readers the whole text of the Congressional Bill which proposes the monetization of the "Libertad" silver ounce, which several Congressmen ("Diputados") associated with various political parties introduced into the Congress on April 28, 2011. The Bill includes the exposition of the economic and social reasons which support the Bill's proposal, as well as the precise changes that must be made to the present Monetary Law in order to introduce the "Libertad" silver ounce into circulation, in parallel with the fiat peso.
At the present time the Bill has been turned over to the Finance Committee of the Congress and has considerable support among legislators of all political parties; the only obstacle to approval is the opposition of the Bank of Mexico, which adduces risks which are actually non-existent and which has systematically refused an open dialogue in the Congress in order to analyze the Bill.
We present the full text of this Bill because we are very proud of our country and of our legislators, who for the last eight years as members of four separate elected Legislatures have patriotically insisted upon the monetization of the "Libertad" silver ounce, despite the obstinate opposition of the Bank of Mexico, Mexico's Central Bank. (Legislatures LVIII, LIX, LX and LXI 2009 - 2012).
Mexico is the one and only country in which a Legislative Body is insisting, and has been insisting for the last eight years, on the imperative need for real money, which can only be regained by inserting a silver coin into circulation in parallel with the fiat peso.
The world is now going down to its destruction in the throes of the present fiat money episode. This period will pass. Silver will, someday, once again be money. When fiat money destroys itself, which it must, the silver placed in circulation alongside it will remain in the field, reaffirming its millennial status as real money for the people - along with gold.
Mexican Civic Association Pro Silver
Hugo Salinas Price
President
***
BILL PRESENTED BY CONGRESSMAN JOSÉ OSCAR AGUILAR GONZÁLEZ, IN THE NAME OF CONGRESSMEN AND SENATORS OF DIVERS PARLAMENTARY GROUPS, WHICH CONTAINS THE PROJECT FOR A DECREE BY MEANS OF WHICH ARTICLE 2 OF THE MONETARY LAW OF THE UNITED MEXICAN STATES IS MODIFIED IN ORDER TO PROTECT AND PROMOTE POPULAR SAVINGS THROUGH THE INSTITUTION OF A SILVER COIN WITHIN THE CIRCULATION OF MONEY.
CITIZEN PRESIDENT OF THE HONORABLE CONGRESSIONAL CHAMBER OF “DEPUTIES” OF THE LXI LEGISLATURE:
The undersigned, a member of the LXI Legislature of the H. Congress of the Union, on the basis of the provisions of Articles 71, Section II, of the United Mexican States Political Constitution; 55, Section II, 62 and 63, of the Rules for the Internal Government of the General Congress of the United Mexican States, hereby submits to the consideration of this Honorable Meeting this Bill to attach to Article 2 of the United Mexican States Monetary Law, a paragraph d) under the following considerations:
EXPOSITION OF MOTIVES
I. Premises
Since September of 2008 the whole world has become conscious of the existence of a systemic global crisis which has transformed into a marked recession for more than 50% of all nations.
In order to palliate the financial crisis and the economic recession, central banks and governments have reacted by injecting more liquidity and credit; these actions have intensified the causes that provoked the instability, further weakened the whole system, caused a world crisis of deficits and sovereign debt and further increased penury and scarcity in the majority of the population.
These “rescues” and emergency repairs have succeeded in prolonging for some additional months the life of the financial system, but they will cause its collapse to be much more dramatic and painful. The International Monetary Fund has itself warned that “the risk of a double recession has increased”. (IMF Report, June 1, 2010)
For families, the inflationary rise in prices, the evaporation of savings and the loss of purchasing power are causing a distressing situation of tightness and anxiety which are depressing and negative for interpersonal relations, as well as setting up a vicious circle of want and scarcity.
The ultimate origin of the financial and economic problems of today dates to August 1971 when real money – backed by precious metal – was substituted by fictitious money, which can be issued exorbitantly because it consists of nothing other than paper and computer digits.
A further analysis discovers that the lack of confidence and the turbulence of the markets, the social agitation and discouragement, the enormous financial frauds and the choking inflation which ravages the peoples, all have their origin in the lack of quality in money and in the consequent possibility of creating fictitious liquidity and credit out of nothing.
What we see today is that the irresponsible expansion of credit and the exaggerated creation of virtual money are arriving at their limit and their inevitable end, for which reason the international monetary and financial system is in a state of extreme weakness.
Taking all the foregoing into account and understanding that the present situation demands creative and urgent solutions, we consider it imperative and convenient to be able to offer the population a coin of real value, which cannot devalue and which at the same time elicits confidence and reaffirms our national unity. This is a pressing need above all for the more needy classes who do not have alternatives at hand for their protection.
This measure is the response of Mexico to the international financial crisis. While the world powers debate implementing measures that require enormous quantities of money, which will continue to worsen the global situation, Mexico proposes a simple response of proven efficacy: give the population a coin of intrinsic value which does not devalue and which irresistibly invites savings.
If the crisis arose due to an excessive expansion of debt and consumption which gave little importance to savings and limited and sound credit, the solution required to begin to regain economic health is to stimulate savings. This is absolutely the only way to achieve a sound recovery.
In this sense, the silver coin turned into money will exert irresistible attraction: spontaneously, with no need for any promotion, the public will prefer to save through these coins and to obtain sound credit using them as collateral. The savings in silver will protect families against the devaluation of the peso and the devaluation of the dollar, upon which rests the value of our peso.
In Mexico the access to instruments for savings becomes increasingly limited as the level of household income descends. The average value of a deposit account in commercial banks is only 19.4% of per capita income, one of the lowest in the world. The value of deposit accounts in the commercial banking system is only 15.08% of GNP, similarly one of the lowest in the world (for example Rwanda and Zambia have a participation in their GNP of 16.8% and 18.5% respectively).
For this reason it is necessary to increase the supply of available instruments for savings, above all for those sectors with lower incomes. The savings instruments must fulfill two functions: maintain their value and be of easy access. Savings stabilize the flow of income and, for that reason, stabilize household well-being.
In Mexico, 28% of households with no banking relationship and 40% of those who have a banking relationship maintain savings outside the formal financial system. At lower income levels, 20% use non-formal savings instruments and up to 40% of their savings are in physical assets.
Savings through debt instruments of the federal government (CETESDIRECTO) do not offer protection for the value of the savings, since the rates they offer provide no real return or even a negative return.
The monetization of silver offers the population a savings instrument with the characteristics required by an instrument for physical investment of massive penetration and with no transaction costs (contracts and commissions for banking services):
- Protection against inflation and therefore savings protection.
- Accessible at all levels of income.
- Immediate liquidity.
If we look at the graphs of silver prices for the last 15 years, we conclude that the returns on the monetization of silver among the population would have been among the best, in comparison with the typical savings investment instruments such as liquid accounts, government debt and other informal mechanisms, and they would have had a favorable impact upon the well-being of the population, an impact greater than that from any other public program of support for the income of the lowest deciles of the population.
II. Historic antecedents
During the Bretton Woods Monetary and Financial Conference which took place in July 1944 and in which the use of the dollar as an international reserve currency and its backing with gold was agreed, the Mexican Government presented a request that silver might also be used as money. This motion was approved by the majority, for which reason Mexico has been able to continue using silver as money up until our times, if only in marginal and flawed form, because the coins have borne a stamped monetary value.
Since the foundation of the Bank of Mexico in 1925 and to date, there has been a constant effort to introduce silver coins into circulation.
The importance of the silver coin has been present in all the monetary reforms and in all minting programs since the famous “silver 0.720 peso” (issued since 1920) up to the “States’ Commemorative Coin” (issued from 2004 to 2009).
In order to use silver in our coinage, there has been neither lack of purpose nor of effort on the part of legislators and monetary authorities. However, all these intentions have been in vain because, sooner or later, these coins reached their “melting point”, that is to say, the point at which the intrinsic value of the silver in the coins exceeded the nominal engraved value.
In the past, the invariable result of the minting of silver coins with a nominal engraved value has been that the seigniorage begins to turn negative as soon as the price of the metal in the coin exceeds the nominal value of the coin, or when the peso suffers a slide in value, which causes the same effect. Therefore, the Bank of Mexico has necessarily suspended minting these coins, even against the wishes of the population who naturally prefer silver coins to paper.
As a transitory but flawed solution, the Bank of Mexico has included less and less silver in its alloys, considering that in this way the silver coin might be retained in circulation. However, the result was always the same: the silver in the coin once again became worth more than the nominal engraved value and its destiny was to be melted down or retained in numismatic collections.
The most well-known case has been that of the silver peso 0.720 fine, which circulated in Mexico during 25 years; it contained 12 grams of pure silver.
During the period during which 458 million of these pesos were minted, from 1920 up to 1945, the price of silver fluctuated notably, without its transitory falls causing any problem (when the Bank of Mexico was founded in 1925, the price of silver was 69.1 US cents, and silver fell to 25.4 US cents in 1932).
Never, in those 25 years, did anyone ever return to Bank of Mexico one single peso 0.720 because of a fall in the value of the silver it contained, and the coin continued to circulate.
The problem it faced was the rise in the value of the metal, which rose from 45 US cents to 71 US cents per ounce in 1945; the coin had to cease circulating, for the value of the silver it contained rose above the value of $1 peso engraved on its obverse side and further minting became uneconomic.
Moved by the wish to avoid the limitation which caused the silver coinage to reach a melting point, in 1979 the Executive sent to Congress a Bill which for the first time introduced into circulation silver coins with no engraved nominal value. The Reform stipulated that these should enjoy legal tender status, a legislation that remains current to this day.
The result of this Reform was the creation of the “Libertad” silver ounce, which has been minted continuously since 1982 up to this date.
Thanks to the first stipulation [no engraved value] these coins have not reached the melting point: in spite of devaluations, Bank of Mexico has minted them continuously since then, they have not been melted down and they remain in the savings of the population. However, the second purpose (that they should be a means of payment) was not achieved, because the absence of a stable nominal value in circulation – which in no money coin can be reduced – caused losses for the saver and for the Bank of Mexico.
III. General considerations
The specific purpose of this Bill is to offer the technical element in order to make possible the full incorporation of the “Libertad” silver ounce into the monetary system, in such a way that it may serve the population as a solid instrument for savings and at the same time, as a regular means of payment.
In order for the silver coin to turn into real money, so that it may enter into circulation in permanent form, it is indispensable to grant it a nominal value in circulation that may be increased if the price of silver increases, but retain its last nominal value in case of a fall in the price of silver.
Both the banknotes and the coins we use carry a nominal printed or stamped value, and this value cannot be reduced even if there is a fall in the international value of the material of which they are made. A legal stipulation in the sense that their value shall not be reduced would be redundant. But in the case of a silver coin without an engraved nominal value, which must be turned into money – which was the purpose of the Reform of 1979 – express legislation is necessary in order that this condition, which today is implicit in all banknotes and coins, may be explicit in the case of the “Libertad” silver ounce.
Without an irreducible nominal value it is not possible to turn the silver coin into money and it will continue to exist as a commodity.
The social objective of the Bill is to create a shield for popular savings by offering the population an instrument which cannot devalue, which will not be affected by inflation and which is subject neither to the errors of monetary policies nor to banking collapses.
Mexico occupies first place as a world producer of silver. Sadly, according to the Mexican Chamber of Mining, about 80% of our silver leaves the country and is sold under the hammer in New York City at ridiculously low prices. For more than ten years, international demand has not been reflected in futures contracts. This manipulation of the markets undervalues Mexican silver, retards Mexican mining industry or even to force the closure of mines in spite of the fact that they contain silver.
A direct effect of the Bill is that it would grant an added value to silver by creating a new market and make it possible for silver to remain in our country for the benefit of Mexicans.
The Project will impact favorably upon the mining industry and will create more jobs. Of the 32 States of the Republic, 24 are mining states. The Mexican Chamber of Mines estimates that, if the Project for monetizing silver is approved, new mines offering 2,500 additional jobs would open in the short term, and it calculates that proven and probable reserves of silver, close to 1,800 million ounces, would be able to support popular demand.
For these reasons, the National Conference of Governors (CONAGO) has on two occasions unanimously resolved to support the introduction of the silver ounce into circulation, in order to stimulate popular savings and to favor regional development.
Additionally, the monetization of silver contributes to the expansion of banking, because besides being able to denominate digitally the silver kept in custodial silver accounts, the banking system and the public may find benefits by being able to use coins kept in custodial accounts as collateral for low interest credits, thus carrying forward the development of many productive projects. This credit would be sounder than credit created from nothing, because it would be supported by prior savings.
With regard to falls in the value of silver, transitory falls in the international price of silver would cause no losses, neither for the Bank of Mexico nor for the holder of ounces, precisely because of the nominal value, just as from 1920 to 1945 neither any holder of 0.720 pesos nor the Bank of Mexico suffered losses and no one returned any coins due to the falls in the price of the metal.
On the other hand, rises in the nominal value do not imply a subsidy from the government, since these arise from increases in the market price and it is the saver that pays the price of the metal, its minting and seigniorage when he acquires the ounces.
We must also emphasize that this measure, far from affecting the management of monetary policy, actually helps to combat inflation by a method different from that of monetary restriction, which affects the productive system because it requires higher interest rates. The introduction of silver coin into circulation attains the same effect of containing inflation, but without damaging production.
Lastly, we must point out that the substitution of monetary base is minimal, for the increase of money in circulation derived from this legislation is practically nil, specifically 0.23% of M1 corresponding to 22 million ounces which are currently owned by the public, and 0.08% which corresponds to the new coins which are minted annually. By comparison, the annual increase of M1 made up of fiat pesos is close to 12%, and this does cause inflation and great damage to the population.
We must also point out that the seigniorage, which will always be positive, will offer a continuous source of income which may be applied to social programs. At the present time, Bank of Mexico receives no guarantee, since it sells the Libertad as a commodity, and the profits on sales are made by the private banks, who charge a commission on the sales and discount the price when repurchasing from the public.
This Bill, once approved, turns the silver ounce into money with an official value assigned by the Bank of Mexico; the commercial banks will no longer be able to buy and sell the silver ounce and the Bank of Mexico will obtain a profit from its seigniorage.
At the present time, the Bank of Mexico obtains a huge seigniorage of over 99% on the banknotes it issues, and in the case of the “Libertad” silver ounce it will be of 10%. However, since there is no plan to substitute any quantity of banknotes and ordinary coins which the Bank of Mexico now issues – the “Libertad” ounce will enter in parallel and in complementary form – the seigniorage which the Bank of Mexico presently obtains from regular banknotes and coins will continue without change, and additionally, to that seigniorage will be added that obtained from the “Libertad” ounces.
Needless to say, once the nominal circulation value of the “Libertad” ounce is established, the Bank of Mexico will benefit from transitory falls in the international price of silver, for those falls will increase the seigniorage in its favor as the cost of minting is reduced.
IV. DESCRIPTION OF THE BILL
The amendment to the Mexican Monetary Law which is proposed by virtue of this Bill consists of the following:
a) To Article 2 is attached a paragraph d) for the purpose of including the ‘Libertad’ silver ounce within the classification of circulating coins, and to determine the method by which the Bank of Mexico shall establish its initial nominal value, and may adjust this value upwards in case an increase in the international value of silver reduces considerably or eliminates coverage of its minting and seignorage costs.
b) In order to prevent speculative movements from forcing the Bank of Mexico to give a high nominal value to the silver ounce, a provision for exception is included that allows the Bank of Mexico to maintain the last nominal value for a period of six months, until it is proven that silver prices return to market prices.
c) This paragraph d) disposes that the nominal value of circulation shall be an amount adjustable to multiples of Five Pesos, in order to have a number that the population may easily remember and which will be more convenient in accounting terms. In addition, this adjustment upwards will serve as a margin that will allow the retention of the official equivalence without change when the price of silver rises only marginally.
As a result of the foregoing, through your honorable person, Citizen President, we submit to the consideration of the Mexican Congress, the following:
BILL WITH A PROJECT FOR A DECREE WHEREBY ARTICLE 2 OF THE UNITED MEXICAN STATES MONETARY LAW IS MODIFIED, IN ORDER TO INSTITUTE THE SILVER COIN WITHIN MONETARY CIRCULATION IN PERMANENT FORM.
ARTICLE. - Article 2 of the United Mexican States Monetary Law is modified with a paragraph d), to read as follows:
Article 2. The only circulating coinage shall be:
a) […]
b) […]
c) […]
d) The “Libertad” silver ounce that shall be considered legal tender for its nominal value current in Mexican Pesos.
The Bank of Mexico shall exclusively determine and modify the nominal value of the “Libertad” silver ounce. The initial nominal value of the “Libertad” silver ounce shall be established by the sum of the following factors: the current international price of the silver ounce in Mexican Pesos, plus cost of minting, plus a seigniorage no greater than 10 percent calculated on the total cost of the currency; the result of this sum shall be rounded up to the immediate higher multiple of Five Pesos.
Banco de México shall determine an increase in the nominal value of the “Libertad” silver ounce following the procedure stated in paragraph two of this paragraph, whenever the total sum of the factors exceeds the current nominal value.
The nominal value shall be published daily in the Official Gazette of the Federation and, once established, this nominal value may in no case be reduced.
In the event of an extraordinary increase in the price of silver, the Bank of Mexico may retain the current nominal value, without considering such increase, for a maximum period of six months. Upon expiration of this period the Bank of Mexico shall establish the new nominal value, following the procedure stated in paragraph two of this paragraph, if the total sum of such factors is higher than the current nominal value.
The Bank of Mexico shall mint as many “Libertad” silver ounces as required to prevent shortages of these coins from giving rise to speculative overprices above the nominal value established by the Bank of Mexico.
TRANSITORY
Single. - This bill shall become effective the day following its publication in the Official Gazette of the Federation.
Yours truly
San Lazaro Legislative Palace, on April 28, 2011.
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