The Mexican peso coin that circulated from 1920 through 1945 is known as the “Peso 0.720” because its 12 grams of silver content represents 72% of its gross weight. Today, the coin known as the “Libertad Ounce” contains one ounce or 31.1 grams of pure silver. It is this coin that would be monetized, or converted to legal currency, under a Bill that has been presented in the Lower House of the Mexican Congress.
Here is a comparison of the two coins: the history of the Peso 0.720 from 1920 to 1945, and the likely performance of the Libertad Ounce in the event that it becomes legal currency under the proposed law.
The Peso 0.720 circulated alongside paper currency for 25 years under two circumstances.
The first circumstance was that the monetary value of the peso was always superior to the market value of the 12 grams of silver that it contained. In 1920, the value of the silver in the Peso 0.720 was 48 centavos. It would not have been feasible to mint the coin if the cost of the silver had been more than one peso. In effect, the Peso 0.720 stopped circulating in 1945, when the cost of silver skyrocketed in peso terms and the price of 12 grams of silver was more than one peso.
The second circumstance that kept the Peso 0.720 in circulation was that during the period of 1920-1945, any payment for less than five pesos required the use of the Peso 0.720 coin; there was no other option since there were no one peso notes.
In the hypothetical case that one peso notes had existed, the Peso 0.720 would have served as a savings vehicle for Mexicans. This can be clearly affirmed according to Gresham’s Law.
If there had been a one peso note from 1920 through 1945, the silver Peso 0.720 coin would have been saved by the public. Peso 0.720 coins would have been put away in hoards and payments would have been made with one peso notes.
What would be the likely performance of the Libertad Ounce, once converted into currency?
If the Congress approves the monetization of the Libertad Ounce, its monetary value would be determined by a quote established by Mexico’s Central Bank, Banco de México, because the coin does not have a stamped value.
To make minting this coin feasible for Banco de México, it would be necessary for its quoted monetary value to be greater than the market price of the 31.1 grams of pure silver that the coin contains.
The legislative proposal that has been presented contemplates this situation and establishes a rule: the monetary value quoted by the Banco de México for the Libertad Ounce would be approximately 15% higher than the value of the silver it contains.
Therefore, the Libertad Ounce would be in a circumstance similar to that of the Peso 0.720 from 1920-1945: in both cases the monetary value of the coin would be higher than the value of the silver it contains.
However, while the Peso 0.720 was necessarily used for any payments of less than five pesos (since there were no one-peso notes), this second circumstance would not exist for the monetized Libertad Ounce.
If the Libertad Ounce were monetized at current silver prices and exchange rates, it would be worth about $510 pesos.
The public would have the option of making purchases or liquidating debt for $510 pesos with paper currency or with a Libertad Ounce. According to the Gresham’s Law, the public would choose to hand over paper money and retain the Libertad Ounce. In other words, the Libertad Ounce coins would be put away in savings; and would only be used to make payments in cases of extreme necessity.
In 1945, the Peso 0.720 was removed from circulation because the value of the silver in the coin rose that year to more than one peso, making it a profitable transaction to melt down the coins: the silver in the coins was worth more as bullion than as peso coins. Most of that coinage went to the refineries and was melted down, but some Mexicans saved these coins – wisely so – and much like the American silver dollar, they are still available in the marketplace.
In comparison, once monetized, the Libertad Ounce would never go out of circulation. Because it has no stamped value, the quoted monetary value of the coin set by Banco de México would rise with the rising price of silver. The silver coin would adapt to a fundamental situation of the 21st century: the persistent rise in the price of silver.
Melting down a Libertad Ounce quoted at $510 pesos would give you 31.1 grams of pure silver, with a market value of silver of about $440 pesos. There would be no profit in doing that, and it would never be profitable to melt it down once it became legal currency, because its quoted monetary value would reflect the rising price of silver.
In reality, the Bill does not contain any groundbreaking innovation. It is based on the same principles applied in the creation of the Peso 0.720 in the first half of the 20th century. It only proposes adaptation to the traditional way of creating silver currency, in order to convert the Libertad Ounce into permanent money.
The Peso 0.720 could not be worth less than one peso, since that was the value stamped upon it. Although the value of its silver content went from 48 centavos in 1920 to 32 centavos in 1933, the public disregarded this fact entirely!
The Libertad Ounce does not have a stamped value. A quoted monetary value, listed and widely reported by the Banco de México, would take the place of a stamped value; that quoted monetary value would state to how many pesos the monetary value had risen at any time.
In the event of a fall in silver prices, according the proposed law, the monetary value as determined by Banco de México would not be reduced, in exactly the same way that the monetary vale of the Peso 0.720 was not reduced when the price of silver fell during the Great Depression of the Thirties. This highly important precedent lasted twenty five years: not one person turned in his silver pesos for paper money, because the price of silver had fallen: a classic example of Gresham’s Law in operation.
Therefore, another similarity between the Peso 0.720 and the monetized Libertad Ounce would be that its legal value would not be reduced, with the unsubstantial difference that in the former, the legal value was stamped and in the latter, it would be decreed through a monetary value assigned by the Banco de México, which according to the proposed law would be prevented from reducing its last monetary quote.
The proposed law does not present a single groundbreaking innovation; it only adapts the currency practices of the early 20th century to modern circumstances.
The Peso 0.720 disappeared in 1945 because the Mexican peso price of silver increased. The coin was followed by the Peso 0.500, the Peso 0.300 and the Peso 0.100, each minted with less fineness and less weight of silver to adapt the coins to the rising price of silver in Mexican pesos.
The future history of the Libertad Ounce would be like gathering the histories of the Pesos 0.720, 0.500, 0.300 and 0.100 into a single, permanent coin; it would never again be necessary to mint a series of coins. A single coin, the Libertad Ounce would continue to be useful as money for generations, because its monetary value would adjust – with successive quotes from Banco de México – to the rising price of silver for as long as it continues to rise.
Although we know that the monetized Libertad Ounce would be saved, it would be entirely possible for Mexicans to use this coin for payments, should they wish to do so. Therefore, while its actual hand-to-hand circulation would be minimal – a “Velocity of Circulation” close to zero – savings in Libertad Ounces would have a known and entirely liquid monetary value at the immediate disposal of each saver: real money, not to enslave but to liberate mankind.
Hugo Salinas Price
June 25, 2011