In the 40′s and 50′s of the last century, about 70% of reserves of central banks were in the form of gold at $35 US dollars an ounce.

At the present time, reserves of central banks, excluding gold, are about $8 Trillion dollars (not all of which, however, are dollars).

If these imaginary digital reserves (for such they are) were to once again amount to not more than 30% of total central bank reserves, the price of gold would have to increase substantially.

We can calculate the approximate price of gold that would be necessary in order to have the gold component of reserves resume the proportion it at one time took up of total central bank reserves, 70%.

$8 x 10 ¹² = .3 R, where R is the total of bank reserves including gold.

($8 x 10¹²)/ .3 = R

$26.7 x 10¹² = R

That is to say, the total of central bank reserves, including gold, would have to amount to $26.7 Trillion dollars.

Subtracting the present total of central bank reserves, excluding gold, will give us the total value of gold in central bank reserves which would equal 70% of the total, reinstating the situation which prevailed in the middle of the last century:

$18.7 x 10 ¹² = component of revalued gold reserves.

Assuming, for the sake of calculation, that central bank reserves amount to 30,000 tonnes of gold:

($18.7 x 10¹²)/30,000 = $623,333,300 value of one tonne of gold.

$623,333,300/32, 151= $ 19,479 value of one Troy ounce of gold.

Somewhere near $20 thousand dollars per ounce, therefore, would be the price of gold required to reestablish the proportion of gold in central bank reserves that prevailed in the middle of the last century.

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Raising the price of gold in this manner might allow the adoption of other measures necessary to achieve the health of the world’s economy. However, there would be no point in raising the price of gold so high, if the following and other measures were not adopted simultaneously or shortly thereafter:

1. Adoption of gold as the world’s currency; all other currencies to be simply expressions of each currency’s gold content, in which each currency could be freely redeemed.
2. As a consequence of gold being instituted as the world’s currency, all international payments would have to be effected in gold. The bond component of world reserves, with bonds now having become payable in gold, would tend to vanish or fall substantially. Sovereign bonds have exploded in volume, swelling reserves to outlandish heights, because international payments have been made in irredeemable currencies since 1971. Those bonds which would not be payable in gold, because the issuing countries did not in fact have the necessary gold, even at $20,000 dollars an ounce, would have to be cancelled through default.
3. The Real Bills market would have to be reactivated around the world, to support world trade. (See Prof. Antal E. Fekete’s work athttp://www.professorfekete.com/).
4. An end to credit expansion not based on real savings. Otherwise, the inflationary expansion of credit would require further increases in the price of gold. Or alternatively, it would require the devaluation (decrease in gold content) of currencies subject to such credit expansion. In either case this would amount to partial default. An end to the possibility of credit expansion not based on savings would imply an end to the world’s system of central banks, because central banks were invented to enable the inveterate lust of bankers to expand credit not based on real savings. If such expansion were outlawed, central banks would have no reason for existence.

Raising the price of gold to $20,000 dollars an ounce would imply a corresponding devaluation in the value of all paper money. An endless number of articles have been published by well-known analysts that call for an absolutely indispensable reduction in the debt load oppressing the world. By devaluing debt through an increase in the price of gold and cancelling non-payable debt, this objective would be attained.

Would the measure be inflationary? It seems to me that although a new world price level might be the consequence, inflation as a dynamic phenomenon might be precluded by outlawing credit expansion based on the new, increased price of gold.

The new, much higher price of gold would naturally benefit those countries holding larger reserves of gold, as well as private holders of gold. It would also affect gold producing countries, in the sense that instead of having to produce marketable goods for international trade, these countries would be able, to a certain extent, to import goods manufactured elsewhere in exchange for exported gold.

If all paper money became exchangeable for gold coin, then gold coin would once again be available to the public around the world. The public would once again regain control over government finances by refusing to purchase government bonds unless the interest rate were acceptable and the issuing governments were to demonstrate their credit-worthiness by limiting their expenditures and shunning fiscal deficits. Hoarded gold performs no beneficent social function; circulating gold is highly beneficial to society.

Consequently, the world’s economy would stabilize and enter a natural period of real and healthy economic growth with exports balanced against imports. The nightmare we are living, would be over.

One consequence of instituting gold as the world’s currency would be that the price of gold would disappear. Since there would be no other currency against which gold could be quoted, there would in fact be no price of gold. All prices would be gold prices, but gold itself would have no quotable price. Some people find it hard to visualize this situation, which would be quite normal.

The greatest problem facing a return to gold money is the widespread conviction held around the world today that governments have a central and obligatory mission to relieve poverty and produce prosperity. This is the religious belief in the viability of the Welfare State. It was this belief which underpinned the Soviet Union, while it lasted.

A return to gold as the world’s money means the Death of the Welfare State: let us be clear about this.

The Welfare State is predicated on a Ponzi Scheme of benefiting some people today, at the expense of others tomorrow. It is not viable. But people want to believe it is viable and demand it. Politicians love it and so do bankers; together they love to expand credit, run deficits and inflate currencies.

We can have the fraud of the Welfare State or the benefit of gold as money. We cannot have both.

In the absence of kings who rule not by popular consent, but by the will of God, what legitimation can be found for government that does not depend upon the Welfare State as its foundation? (It is pertinent to remark that although kings were consecrated as such by the Church, there was always an important element of popular consent to their elevation to kingship. The concept of “divine right” was a late development.)

The legitimacy of any government is today based on its ability to manage the Welfare State, which means it must actually relieve poverty and produce prosperity and “growth”. According to the opinion-makers of the world a government that cannot deliver the Welfare State should be replaced: that government has produced a “failed State”. Governments of “failed States” have failed in their prime function, the relief of poverty and creation of prosperity; therefore subjecting them to “Régime Change” is entirely justified, according to present political theory and popular opinion as molded by the opinion-makers.

The world today does not in fact have “popular government”. The world is ruled by international bankers, a class of men not qualified to rule. The present world catastrophe is a clear demonstration of the fact that they rule, and that they are incompetent to rule.

The political theory of “popular government” promoted by the French Revolution of 1789 led to the Welfare State and has produced the world’s bankruptcy. In point of fact, the world’s monarchs were replaced by international bankers.

What political theory is going to displace the Welfare State? According to a new political theory, yet to be formulated, who – to the exclusion of the international bankers – is going to be legitimately entitled to rule the world’s nations?

We must think about this while striving for a return to gold as the world’s money: after the Welfare State, what?

hugosalinasprice@yahoo.com.mx

http://www.plata.com.mx/mplata/articulos/articles.asp

Some people think that one of the fundamental institutions of the 19th century should be restored; we 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 exactly the same amount of gold. 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.

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, the restoration of this institution would restore stability, growth savings and true and lasting prosperity.

Free coinage of silver considered

First we must think of what sort of “free coinage” of silver 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 the silver coinage 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.

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, which is politically 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 under present conditions 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 minting as legal tender a coin with a face value superior the value of its silver content, 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 for silver coins with no face value.

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. The closest thing to a price of silver was the amount of gold one ounce of silver could buy.

Miners digging up silver 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! – their silver bullion was turned into silver money.

How did we get from there, to where we are today?

It’s a very long story but we shall 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. These were the “Pieces of Eight”, which were coins 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. This size of coin probably derives from the Arabian Rial, for Spain was under Moslem domination for about seven centuries until the Moors were expelled from Spain in 1492. And the Rial itself is perhaps 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 no one ever has so much gold, that he begins to attribute a lesser value to any additional gold. Regarding the world as a whole we can say that world 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 has been calculated as about 162,500 tonnes, and yet the price had gone up to close to $1,000 dollars. Additional gold is being added to this pile at a rate of about 2,500 tonnes annually, approximately 1.5% per year, and it all has an immediate market. And yet, as of June 2011, the price is in the $1,500′s.

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 radically in the 19th century and huge quantities of silver began to flood the world and notably, the United States.
The prevailing view of what happened to silver in the 19th century is as follows:

The world’s appetite for silver began to taper off as a result of its declining marginal utility under the impact of the enormous production of silver. There arose a great conflict between those miners who insisted that the U.S. Government should maintain, to their benefit, of the old ratio of 16:1, and the market for silver, which began to reflect the declining marginal utility of silver in lower prices for silver, while the gold price stood firm, due to its non-declining marginal utility, even when gold mining was also producing increasing quantities of gold.

In 1873, the Sherman Act by the U.S. Congress finally demonetized silver. The struggle to maintain the old ratio of 16:1 was ended. Gold had triumphed.

Professor Antal E. Fekete has a different explanation for what happened to silver in the 19th century. As we understand his explanation, the Sherman Act of 1873 was not the result of a fall in the price of silver, which would have meant an enormous subsidy of the Western mining interests had the policy of the “Open Mint” been continued, but rather the cause of a fall in the price of silver. Because up until the Sherman Act, all silver taken to the US Mint was minted into coin for the account of the owner of the silver – i.e. the miners; whereas the Sherman Act changed this crucial arrangement and declared that henceforth, the Treasury would mint silver dollars for its own account, that is to say, only in the amounts which it, the Treasury, decided should be minted. The miners were thus left hanging in the air with an excess of production of silver which had to be offered on the market. The result was that the price of silver began to decline.

Whatever the cause of the demonetization of silver – whether the fall in the price of silver gave rise to the Sherman Act, or whether the Sherman Act was itself the cause of the fall in the price of silver, the fact is that silver finally ceased to be regarded as money in itself, except for China, which capitulated in the 1930′s and Latin America which abandoned silver in the early 1900′s.

In spite of having been demonetized, in spite of no longer being money-in-itself, silver went on being used to manufacture coins for everyday use all over the world until the 1950′s. Since then, all silver coins in the world gradually went out of circulation, one by one. The reason for the disappearance of silver money was that the increasing volume of money in the form of banknotes and bank deposits created by the banking systems of the world began to exert an upward pressure upon the price of silver. The silver in coins of various denominations began to be worth more when melted down into silver bullion, than as monetary coins. Some people saved their silver coins, perceiving the increase in the value of silver, but the vast majority of silver coinage in the world was melted down and sold as silver bullion.

The rise of technology in the world since 1950 created the principal market for silver bullion. Silver’s continued use in the minting of coins became a minor part of the market. Industrial use created by technology became the major support for the price of silver.

Silver is no longer used to mint coins for monetary use. The fall in the price of silver, initiated in the 1800′s, has now ceased and silver is gaining value, partly as an effect of the increase in money in circulation and the perceived probability of huge future increases in money in circulation due to current monetary policy around the world.

People around the world are now concerned about the safety of their savings and are buying silver and gold as a refuge for those savings.

The silver coins that people are buying are not monetary silver coins; they cannot easily and immediately be used in daily transactions to pay for purchases of goods or services. Purchasing those coins is a form of speculation on the future increase in the price of silver and the value of the coins. It is a wise speculation, but a speculation nevertheless. More and more people are now buying silver coins in spite of the occasional falls in the price of silver, because the fears caused by these falls are outweighed by the fear of losing all their savings when invested in other ways.

This is where we are today, with regard to silver.

The rise of numeric money

At the dawn of the 20th century, gold was the world’s money. A British Pound was 7.32 grams of gold, and the coin which contained that amount of gold was called the “Sovereign”; it had no numeric value engraved upon it, which is significant: gold was money and the Sovereign did not require a numeric value in terms of something else. A US dollar was the name for a monetary unit that contained 1.505 grams of gold. A Mexican peso was the name for a monetary unit that contained .75 grams of gold. And so on, around the world.

The 20th century saw the birth and growth of the power of the State thanks to the idea that the State is to be responsible for prosperity and the amelioration of the economic condition of the poor – the Welfare State, in other words. The Welfare State requires expenses far beyond the resources of the State which can be provided by taxation.

Banking systems all over the world collaborated in providing their respective States with banking money (deposits) and bank notes created out of nothing.

Initially, it was possible to redeem this bank money by claiming gold against the delivery of bank money, but finally in the 30′s, paper calims against gold were so excessive that general bankruptcy took place, and since then, no bank note in the world has been exchangeable for gold upon demand.

The last tenuous link between money and gold which existed in the world was expressed by the Bretton Woods Treaty of 1944. Only foreign Central Banks could claim gold redemption for dollars which they held. Their own monetary systems were based on the trust that their dollar claims upon US gold would be honored.

On August 15, 1971 those claims were dishonored. Nixon “closed the gold window” and the dollar, and with it the whole world, was freed from any constraint upon the increase of debt – debt could be “paid” with more debt, forever and ever, or so it was thought.

The international bankers were delighted. At last, they were free from that pesky limiting factor, gold! Free to expand credit, free to create more money ad libitum. The ensuing decades were a banker’s dream!

By and large, the change to irredeemable bank money was enormously successful, if the creation of a world gone mad can be considered a success.

As the decades went by, people eventually forgot about the gold into which their bank notes (paper money) had once been redeemable. They began to think about their bank notes as money itself, when they are not so by any means; they are only a formerly redeemable representation of actual gold money.

The bank notes bear numbers which originally referred to the weight of metal they represented. The world has forgotten this entirely and now people everywhere regard the bank note as money itself and the quantity of money as equivalent to the number on the note.

The population of the globe today thinks of money in terms of numbers which refer to no quantity of anything. The more numbers you can add up, the wealthier you are! The world’s money is simply numeric.

Problems of free coinage of gold without a gold monetary system

Within a world monetary system that is exclusively numeric, the free coinage of gold would mean the minting of coins either bearing a face value, or not bearing a face value.

The U.S. Mint does produce gold coins with a face value, but the face value is so low as to be meaningless – the face value is ignored; it is as if it were not there at all.

If the Mint were open to free coinage, the miner supplying the gold bullion would be in the same position as the miner supplying silver bullion in exchange for silver coins with no face value: “Now, what do I do with the coins? Who wants them?” The market for gold coins is satisfactorily served by current minting. There is no scarcity of gold coins. They are readily available. The miner does not want this hassle. He disposes of his gold by other means.

Since they bear no numeric face value which is related to reality, gold coins are not easily useable in commerce. Purchasing them is pure speculation – even if the best and most solid speculation. Using them as money directly will require negotiation between buyer and seller. This is cumbersome and inefficient.

Gold is money, but it cannot at present be used as money directly in day to day affairs, because using it requires what is actually barter activity. Today it is not possible to make a deposit in a bank anywhere in the world, using a gold coin. Some banks in Europe buy and sell gold coins. If you want to make a deposit, you must first sell your gold coin at one window, and with the numeric money you can then make a deposit at another window.

My friend James Turk has invented an ingenious system which he calls “Goldmoney” and it does perform a useful service for gold owners; “Goldmoney” can accept numeric money from the owner of an account, and convert that numeric money into gold held for his account; conversely, “Goldmoney” will convert the gold holdings of the owners of an account into numeric money and effect a transfer of this numeric money according to the account holder’s instructions. Alternatively, “Goldmoney” can effect transfers of gold between gold holder’s accounts.

Let us now suppose that the U.S. Mint is going to produce gold coins with a true face value. Just what is that value going to be?

A moment’s consideration will suffice to conclude that such a project is not feasible, because the true price is fluctuating every day in terms of numbers and today, numbers rule in this world.

Gold is not directly useable as money in today’s world, but it remains a mighty metal.

Let us suppose that the U.S. Mint produced a gold ounce coin and that it was given a value of $2,000 dollars, when the market price of gold is $1,600 dollars per ounce. What would be the result?

The result would not be a gold coin overvalued in terms of present numeric dollars. The result would a devaluation of the numeric dollar in terms of gold! Up to 1934, the U.S. dollar represented 1.505 grams of pure gold. This worked out to a price of gold in dollars of $20.67 per Troy ounce.

Suppose gold has reached a price of $1,600 dollars an ounce. If a gold coin is minted that says “$2,000 Dollars”, then that means that the dollar is now worth less, it has been devalued to one two-thousandth of an ounce of gold; otherwise, people would take four of these coins, paying $8,000 dollars for them, and buy five ounces of gold bullion. What people want with gold is to have more gold, no matter how it looks!

So, it is not possible to overvalue a gold coin.

Winding up this discussion it is clear that as things are, “opening the Mint to the free coinage of gold” cannot be a useful measure, because it can only be considered as an institution that complements a monetary system wholly based on gold as money in itself. Whenever we talk of “the price of gold” it is evident that we are living in a monetary system that is not a gold system. Under a gold monetary system, there is really no “price” of gold, for everything is priced in terms of gold, and “the price of gold” is revealed by the things which gold can purchase – its purchasing power.

Free coinage of gold is not viable except as a support to a monetary system that consists exclusively of gold, or of gold and silver, where the silver floats in relation to gold. To put it simply, think of the monetary system as a duck, and of free coinage as the feathers on the duck. The two must exist together!

Considerations regarding silver

If silver is currently $36 dollars an ounce, a one-ounce silver coin can be successfully placed in circulation with a monetary, numeric face value of $60 dollars, which overvalues the silver contained in the coin.

These coins would be very useful to the population and would be eagerly snapped up in vast quantities. The population would save these coins and use paper money for transactions – Gresham’s Law; individuals would dispose of their silver money only in situations of great need. Theoretically, it would be possible to gather important quantities of these coins and use them to purchase a greater weight of silver bullion than that contained in the coins. However, it would be difficult to gather such quantities of silver, as the people would be jealously hanging on to their silver coins. Those individuals who might wish to carry out such an operation would be turning in silver money in exchange for bullion, and bullion, unlike the coins, would carry the risk of a fall in the price of silver. The speculators would have abandoned cash for a speculative position in bullion.

Those people who might wish to own more silver bullion would want to purchase their bullion with numeric money and not with overvalued silver money – this is predicated by Gresham’s Law: you spend the money that appears less desirable, and retain the money that you think is more desirable; a silver coin which overvalues the silver in the coin, is certainly more valuable, in the eyes of its owner, than a paper note or a bank deposit.

However, these temporarily overvalued silver coins would eventually exist in a situation where silver bullion is valued at more than $60 dollars an ounce, because since numeric or fiat money is continually increasing in volume, prices are rising and silver bullion will eventually be worth more than $60 dollars an ounce.

These coins would then be undervalued and their destination would be the refinery, where they would be turned into bullion with a higher numeric value. Thus, silver coinage with an overvalued face value is possible, but destined to a short life in circulation.

We have covered all the alternatives regarding free coinage of silver and of gold. The free coinage of both precious metals poses similar yet different problems which make it impossible to implement free coinage.

Free coinage is only possible and indeed, highly useful and desirable where people think in terms of quantities of precious metals when they are doing their economic calculation, not in terms of numeric money, and this can only happen where the monetary system is based on gold or silver, or on both.

The way back

How can we return to such a sound and realistic economy, where precious metals become once again money itself, because people think in terms of quantities of precious metal, either silver or gold?

First, we do not believe any change can be effected by a decree of any sort. The change must come in a roundabout way, insensibly. The problem of an overnight change, from the whole world’s way of economic calculation by simple numbers, to calculation by quantity of precious metal is simply overwhelming.

Just as the change from using quantities of precious metal to effect economic calculation was gradual – a gradual decline in quality of money, we may remark – so a change back to using precious metals in economic calculation will have to be gradual.

We believe that the insertion of silver into circulation must come first, because silver is the metal that is accessible to the majority of the world’s population.

This can be done by a kind of collaboration with the present system of numeric calculation in terms of money which is only numbers.

Gresham’s Law is popularly expressed as “bad money drives out good”, meaning that money of higher quality is driven out of circulation and into savings!

The plan is to infiltrate good silver money into potential circulation, in parallel with numeric – paper – money; “potential circulation” means that though the silver money will be usable in any transaction, in practice it will not circulate, because as higher-quality money it will be driven into savings. And savings, immediate and massive increase in savings, is what is vitally necessary in today’s over-indebted world. Good silver money could and would provide the necessary incentive and means to accommodate massive savings.

Silver can be turned into money that will never vanish en route to the refinery, as in the past, but remain permanently in savings as potentially circulating money

There is only one way to achieve this

A silver coin with no engraved face value can be granted a numeric value by means of an official quote on the part of a State Authority, either by the Central Bank, or preferably by the Treasury itself.

The numeric value will overvalue the silver in the coin, ideally by a small percentage. This numeric value, granted by the Central Bank or Treasury, will increase as the price of silver rises; the rise in the price of silver will be inevitable, due to the constant increase in the volume of numeric paper money and bank deposits.

The overvaluation of the silver coin by the Treasury or other Authority creates a profit for the Treasury or other Authority that mints and grants a virtual monetary value to the coin. This is can be called either a subsidy or a tax paid by the population to the issuing institution. This is a one-time-only cost of furnishing real, tangible silver money for the population, and it will willingly be paid by the population. The cost will not be paid by the Monetary Authority, but paid by the population to the Monetary Authority.

Temporary falls in the price of silver will not be allowed to affect the official numeric value, only rises, just as the value of a dollar bill does not depend upon the value of the paper it’s printed on. (Though rises in the price of paper and costs of printing are making the printing of paper dollars uneconomical already, as shown by the attempts to introduce metallic dollars into circulation in the U.S.) A fall in the price of silver would mean greater profit for the Monetary Authority, and a larger over-valuation of the silver in the coin, regarding which the public will be totally indifferent. Absolutely no one will wish to turn in his over-valued silver coins for paper bills.

This coin will never disappear from circulation, as it bears no engraved value which cannot be modified when the intrinsic value of the silver in the coin begins to approach its engraved value.

This coin, due to its superior quality as incorporating a quantity of silver, will immediately be snapped up by the population and retained as savings. Daily expenses will be met with numeric money but silver will be kept back as savings, useable in emergencies directly as money in daily transactions.

The creation of this silver coin, now become money with a virtual numeric value, makes its use possible in numeric economic calculation and in daily needs in case of pressing circumstances. It can co-exist with numeric money. Whoever pays with the coin, the recipient of the coin will probably retain it in savings. It can be deposited for credit in a bank at its numeric value, in which case the bank manager will probably keep it for himself, by substituting an equivalent amount of paper money out of his own pocket for the silver coin.

This plan for monetizing silver is not a plan for “free coinage of silver”. The Mint will coin such quantities of silver coins as demanded by the public. If the coin is scarce, a premium will be paid by savers anxious to own this coin. The Monetary Authority will be charged with the task of minting quantities of this coin sufficient to satisfy popular demand. If the coin is so abundant that its quantity exceeds the capacity for savings of the population, the excess will return, via the banking system, to the Central Bank, until the desire for saving on the part of the population once more manifests itself in further demand for the coin.

Thus, silver will come once again into use as money, with the help of a virtual numeric value granted by a Monetary Authority.

It is foreseeable that masses of this silver money, put away in savings, will be in the hands of the people as numeric money destroys itself, as it appears to be doing through its issuance in astronomic quantities. When the pernicious numeric money destroys itself, silver will remain in the field! When the Central Banks collapse through their own actions, silver will once again take its rightful and reasonable place in the lives of people, by default.

World demand for this coin, ideal for savings, will be so great as to drive industrial use of silver into second place in the determination of the price of silver. As silver is sought as a monetary refuge, minting of coins will become so great that demand for silver as money will determine limits to its industrial use and drive the price so high that the old ratio of 16:1 might become a reality once again. But, that would be far in the future.

The fixed ratios between silver and gold which existed in the past were actually mistakes of policy and theoretically, it is unsound to look for such a fixed ration, because of the difference between gold and silver. Gold does not have a diminishing marginal utility, while silver does have such a diminishing marginal utility. This indicates that the ratio between silver and gold must be a fluctuating ratio, where it is the value of silver with relation to gold that fluctuates.

It is important to place monetized silver in the hands of people once again so that the idea of silver as money does not totally disappear from the memory of mankind.

Our very civilization depends upon the use of real, physical money. We cannot have an industrial civilization along with the use of numeric money which is now either paper, or in bank accounts nothing more than imaginary money.

Man cannot deal with reality with what is the stuff of numbers of no substance.

Silver must be first in circulation, before gold, because silver is for use by the masses and gold is much more special. The way back to gold, which is so vitally important, is through silver as money in the hands of the people.

All of this does not mean that people will be saddled with the need to handle heavy quantities of silver to make payments. The ownership of a quantity of silver money can be transferred by electronic means from one owner to another; “Goldmoney” can also be “Silvermoney”. Only 50 years ago, the U.S. Treasury issued Silver Certificates representing silver in the vaults of the Treasury. Silver Certificates representing monetized silver coins in Treasury vaults would be acceptable, as there would be no leveraging involved.

All great transformations in social and economic life must involve masses of people. In other words, change must come from the grass roots.

The mobilization of silver as money once again, to circulate in parallel with numeric money, is the way forward. Silver money is the thread that will allow humanity to escape from the Labyrinth of numeric money.

We have no idea to propose, regarding the reform of the international monetary system to restore gold as money. This is something that has to take place, because the world has truly turned into a madhouse of disorder since gold was banished in 1971. We have no idea how the restoration of gold as money in the world will take place.

The restoration of gold money is gigantic counter-revolution in monetary affairs. While we wait for this event, the monetization of the silver ounce, or somefraction of it, to allow it to circulate permanently in parallel with numeric money is something that favors humanity and that can be carried out without upsetting the world’s numeric monetary system.

We conclude with a phrase borrowed from Franz Lehar’s “Merry Widow” operetta: “Man tut vas man kann!” – one does what one can!

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Hugo Salinas Price

http://www.plata.com.mx/mplata/articulos/articles.asp

Cortez conquered the Aztec Empire, in August 1521 (490 years ago, next month). When the war was over, the Spanish began to investigate the culture of the conquered people and found, to their amazement, that the people of what is now Mexico possessed a vast body of medical knowledge based on the curative qualities of plants.

The Spanish filed reports and sent back to Spain drawings of the plants with their Aztec names together with information about their curative powers.

The reaction of the doctors in Spain was immediate. They scoffed at the value of the supposed medical knowledge of these newly-conquered “barbarians”. Their argument was: “These primitive people have no medical theory to support their medical claims. They do not know that the human body is governed by four humors or liquid spirits in the body: the choleric, the phlegmatic, the sanguine and the melancholic humors. These humors are affected by the planets, the Sun and the Moon. When there is no balance of these humors in the body, then the body is sick. The Aztecs have only experience upon which to base their medicine; our medicine is vastly superior because we know the true theory of health, and we deduce our medicine from the theory. All that medicine from New Spain (Mexico) is nonsense.”

There is a curious anecdote from the 16th century; an Aztec was summoned before a court of medical doctors, because he was practicing medicine without a license. Faced by an accuser, he pulled out a cutting from an herb from a little bag he was carrying. He asked the accuser to smell it, which he did. The accuser’s nose began to bleed uncontrollably, it was a veritable hemorrhage. Nothing could stop it. The Aztec was implored to stop the bleeding. He pulled out another herb from his bag and gave it to the bleeding man to smell. The hemorrhage stopped immediately. The case against the Aztec doctor was dismissed.

Such is the world, and such it will ever be. Today, Ph Ds in Economics infest the landscape. They are supposed to know a lot more than the rest of us, who refer to experience in our critical view of the world’s illness, and point out what is wrong. However, we are not to be taken into account, like the Aztec doctors, because we do not know the all-important theory. We only have the experience of centuries, or millennia, to back up our considerations, and that of course, cuts no ice: no diplomas and no TV time for people who refer to historical experience; diplomas and kudos and respect are for the theorists, as possessors of arcane knowledge.

Of course, all of us have preconceived notions about everything, we couldn’t manage life without them; but some people are able to see past important preconceived notions, especially those who have spent many years looking at facts and attempting to make sense out of them. Others can look at facts and never really see anything, because they are intellectually lazy or because they just don’t care to set aside generally accepted opinion and decide for themselves. It’s so much easier to go with the flow!

Take the case of the Dutchman Antony van Leeuwenhoek (1632-1723). He became wealthy as a cloth merchant. In his youth, as an apprentice to a cloth merchant, he first saw a magnifying glass, which was used by such merchants to examine their goods more closely. Later on, he developed a fascination with lenses; he began to make his own lenses and to apply them to looking at tiny things which had never been examined before. In 1674 he sent a report to the Royal Society for the Advancement of Science in London, about some tiny “animalcules”, invisible to the naked eye, which he had seen in pond water. He wrote to the Royal Society believing them to be open-mined and interested in his work. Well, the Royal Society disbelieved his account of these microbes – the first any man had seen! So he had to send them a letter signed by eight distinguished persons – parsons, doctors and lawyers – who testified that they had seen the “animalcules”. The Royal Society, to their credit, did finally take great interest in Leeuwenhoek’s work, and he sent them 300 letters describing his incredible discoveries.

He was the first man to see human spermatozoa and he realized that what he saw was the seed which serves to reproduce all mammals – a fact which he knew was quite at odds with the “scientific” opinion of his times.

Leeuwenhoek’s work was not appreciated by many, who criticized his “lack of scientific preparation”: he had no Ph D. He was only a retired cloth merchant. What could he know?

Then again, we have Galileo, who first saw the moons that circle Jupiter, which convinced him that the Earth circles the Sun – an opinion hateful to the Catholic Church at that time. He barely escaped burning at the stake, a fate which ended the life of Giordano Bruno in 1600, who postulated an infinite Universe and the multiplicity of worlds. An emissary from the Inquisition visited Galileo in his home. Galileo urged him to look through his telescope and see the moons of Jupiter for himself. The official refused to look through the telescope. Theory or dogma had to take precedence. The facts are irrelevant if they do not confirm the theory or dogma. This attitude prevails to our day, and will always prevail as long as human nature is what it is. We see it today, in the rejection on the part of the astrophysics establishment of the new and fascinating theory of the “electrical universe”.

The experience of the Wright brothers is illuminating with regard to the Media. The Wright brothers had been flying their airplane on the outskirts of Dayton, Ohio, for five years before the local newspaper decided to send a reporter to investigate – the idea of a heavier-than-air machine taking to the air was unthinkable, why bother?

Now we have the 9/11 delusion. The vast majority of people do not really see with their own eyes: they “see” what they are told to see, and will swear by it. Competent civil engineers, observing (with sound “off”) the collapse of the Twin Towers and of the almost ignored WTC -7 – a forty seven story building – immediately identified the event as, unquestionably, a programmed demolition. However, hundreds of millions of individuals all over the world attribute the collapse of these buildings to the fact that they were struck by two airplanes, and they will get angry if you suggest that the buildings could not have collapsed as a result of those airplanes crashing into them; the fact that WTC-7 collapsed on its own footprint, like the Twin Towers, and no airplane struck it is – well, beside the point for these people. Facts are supposed to confirm a theory; if they do not – then the facts must be shelved.

Archeologist Michael Cremo has written a thick book, “Forbidden Archeology” which is crammed with facts proving that Man has existed upon this earth in his present form, for many millions of years. However, these facts contradict Darwinism, and Darwinism and Evolution are regarded with religious reverence by today’s archaeology. So the uncomfortable facts that archeologists come up with are filtered out of their reports. In their field of investigation, theory comes first, and only facts which agree with the Darwinian theory of evolution are reported. Other facts are discreetly ignored.

But the ultimate delusion prevailing in the world for the last forty years is fiat money. This delusion is so powerful that only a tiny minority among the close to 7 billion human beings on Earth is aware that it is a delusion, that all the money being used in the world as money, is in fact not money, but a simulation of money. Fiat money is now rapidly destroying the world, but in spite of all the signs pointing to fiat money as the cause, the foremost brains of the world refuse to acknowledge the fact. Their theories, which they were taught in prestigious schools and universities, take precedence over the fact of collapsing economies. As James Grant, publisher of The Interest Rate Observer points out, we are on a “Ph D Standard” – and the Ph Ds are taking the world down with their theories. I suspect that if these Ph Ds were injected with a “truth serum”, they would confess that they don’t actually believe their theories, but that for personal reasons, they prefer not to question them publicly.

To conclude, I present “Prologue for Our Times” which I have written for a Spanish translation of Andrew Dickson White’s masterpiece, “Fiat Money Inflation in France”.

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Whoever wishes to understand what is taking place in the world today would do well to read this small but highly important book, which we have translated into Spanish: “Fiat Money Inflation in France”, by Andrew Dickson White, a former President of Cornell University, at one time in the diplomatic service of the United States, a student of economic and social affairs and author of numerous books. This book was first published in 1896, and reprinted in 1933.

This book places before us a microcosm of our present world.

What happened in Revolutionary France in the years 1790 to 1797 is precisely what is taking place in the whole world in 2011. The world is living in a process of monetary degeneration which began, explicitly, with the outbreak of World War I in 1914, though its origin lay in a series of previous financial malpractices dating back years before World War I; the disastrous conclusion of that process is approaching.

The fiat money inflation in France, whose birth and death took place in the short span of seven years, originated in a typically “revolutionary” idea held by the French lawmakers of the period: that human intelligence can dispense with the permanent and immutable laws that govern human action and can substitute them with schemes devised by the intellect, in order to achieve prosperity in the short term without the bothersome need to exercise the “bourgeois” virtues of savings, honest work, prudence and patience.

The lawmakers, impatient to resolve the problem of economic malaise which the Revolution itself had caused, decided to take a short-cut to stimulate the economy. Faced with popular unrest which cried out that “There is no money!” they proposed to remedy the supposed lack of money (a mere symptom) by creating money out of nothing.

Deaf to the warnings of men with financial experience, they confirmed to one another the supposed validity of their fallacious reasoning; convincing themselves of the viability of their monetary scheme, the lawmakers carried forward a project based on fiat money – money irredeemable in gold or silver.

In spite of the negative results which this policy soon produced – a steadily falling purchasing power of this fiat money, reflected in the rising prices of all goods – they insisted on pressing forward on this mistaken road and attributed the bad results to everything but their policy of inflation with fictitious money. That invariable law of finance with regard to fiat money, the law of the acceleration in the issue of fiat money and its concomitant accelerated depreciation, took possession of the French legislature.

Seven years later, France was totally ruined. Manufacturing had closed down. Unemployment was pervasive and consequently the stagnating salaries for labor brought enormous hardship for the poor, amid rising prices of food, clothing and fuel. Unemployment was only relieved by the military drafts which sent millions of Frenchmen to their deaths in the foreign wars. Morals suffered a precipitous decline. All business activity became a game of chance. Speculation enriched unscrupulous men and at the same time swept the poorer classes of the population into misery. Famine forced the government to dole out bread to the population.

What is perhaps most noteworthy in this fateful French experiment is that not one of those responsible for the disaster ever acknowledged having been mistaken. What took place in France, under the régime of fiat money, is precisely what is happening in our world today. The same phenomena observed in France in the 18th century can be seen all over the world, today.

Those responsible for the huge world crisis of the present time insist on continuing down the path that led to this disaster. Not one of those responsible is willing to recognize that they have all been mistaken. They insist, as did the French revolutionaries, on applying greater doses of fiat money: if enough money is created, they say, the problems of the crisis will be resolved.

The destruction of France took only seven years. The same policy that destroyed France now operates around the world. Therefore, the moral and economic destruction has taken longer, since the whole world is the theatre of this tragedy, and not only one country.

The fatal outcome of this experiment with fiat money will arrive, sooner or later; it will have worldwide effects and it will take a century, at least, for the world to regain economic health.

And when this tragic conclusion shall have arrived, the readers of this little book may be quite sure that not one of those responsible for the catastrophe will ever admit that he had been mistaken.

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Hugo Salinas Price
July 28, 2011