A long monetary tradition

For centuries, Mexico’s silver coinage has been world famous, and in ourmodern history, from the foundation of the Central Bank (“Banco de México”)in 1925 to the present, there has been a constant effort to keep silvercoinage in circulation.

The importance of the silver coin has been recognized in almost all monetaryreforms and in all minting programs - from the peso of 1920 with a finenessof .720, to the present “States of Mexico Commemorative Coins” of 2005,with 1/2 Troy ounce of pure silver and face value of $100 pesos.

There has been no lack of will or effort on the part of legislators andmonetary authorities regarding the use of silver in our coinage. However,all efforts have been frustrated because, sooner or later, the newly designedcoinage reached its “point of fusion”, which is the instant when the pesovalue of the silver contained in the coins, exceeds the nominal legal tendervalue in pesos which is engraved upon the coins.

As a transitory but mistaken solution to this problem, each new coinage ofsilver was designed with a lower silver content, with the idea that by thismeans the coins would remain in circulation. However, the outcome hasalways been the same: the price of silver in pesos rose and the coinageeither went to the smelter or to numismatic collections.

The .720 Fine peso coin (12 grammes of pure silver)

Our most well-known silver coin is the silver peso, with fineness of .720and a pure silver content of 12 grammes, which was in use for 25 years,from 1920 to 1945.

There was a great fluctuation in the international priceof silver from 1920 to 1945, during which time theMexican Mint produced 458 million of these coins.However, the transitory lows in the price of silver, didnot cause any problem. When the Banco de México

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The .500 Fine peso coin (7 grammes of pure silver)

A new $1 peso coin containing silver went into circulationin 1947; it contained less silver than the previous $1peso coin - only 7 grammes of pure silver - and thefineness of the silver was .500. (That is to say, the coinweighed 14 grammes, but only half the weight (.500)was silver.)

This coin remained in

circulation only three

years, because an

abrupt devaluation of the

peso ( the rate of

exchange of the peso

w e n t f r o m $ 5 . 7 4

pesos/dollar, to $8.01

pesos/dollar in 1949)

raised the peso value of

the silver in the coin to

over $1 peso, engraved

upon the coin; minting

of this coinage ceased.

The .300 Fine peso coin (4 grammes of pure silver)

A new silver coinage was launched in 1950. This time

the peso coin was issued with a weight of 13.33 grammes

of which only 4 grammes were pure silver; thus, the

fineness was .300.

was created in 1925, the price of silver was $0.691 dollars an ounce, andit fell as low as $0.254 dollars an ounce in 1932.

Never, during those 25 years, did anyone ever return to the Banco deMéxico one single .720 peso coin as a result of a fall in the value of thesilver contained in the coin. (We mention this fact, because at the presenttime, in opposition to our project for the monetization of the silver “Libertad”ounce, the Banco de México is unreasonably alleging that in the case offalls in the value of silver, the “Libertad” coins would be returned to it by thepopulation.)

The problem which faced the .720 coin was a rise in the price of the metal,which went up from $0.45 to $0.71 dollars an ounce in 1945; the coin wasforced out of circulation, for the peso value of the silver it contained wasworth more that the $1 peso value engraved upon it; minting had to ceaseas it was uneconomic to produce the coin.

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The Monetary Reform of 1979

In 1979, President José López Portillo wished to create a silver coinage

that would not face, once again, the recurring and insoluble problem of a

“point of fusion”; he therefore presented to the Legislature a Bill, which for

the first time brought into circulation a silver coin with no nominal legal

tender value engraved upon it: the “Libertad”, one ounce of pure silver.

The Reform stipulated (a stipulation which today is still monetary law, but

which is unheeded) that the value of this new coin should be determined

“based on the international price of its pure metal content” and that this

coin should enjoy “legal tender value for the equivalent of its quote in

pesos”.

Thanks to the first condition, these coins have never reached a “point of

fusion”; in spite of peso devaluations and rises in the international price of

silver, the Banco de México has been minting these coins since 1979

without interruption; the coins have not been melted down and the population

is holding them as savings.

However, the second purpose – that

they should be a means of payment

– could not be accomplished,

because due to the fluctuation of

the legal tender value of the coins

according to the method by which

they were quoted that value, their

use as money implied losses to the

Banco de México or to the holders of

this coin, when there was a fall in the

international price of silver.

Another devaluation of the peso

in 1954 lowered the rate of

exchange once more, from

$8.65 pesos/dollar to $11.34

pesos/dollar, and once again,

the peso value of the silver in

the coin was more than $1 peso,

and the coin was forced out of

circulation.

The .100 Fine peso coin (1.6 grammes of pure silver)

In 1957 there was, once again, a reduction in the silver

content of the Mexican $1 peso coin; it was minted with

a total weight of 16 grammes, of which only 1.6 grammes

was pure silver – a fineness of .100.

This coin circulated for ten

years, until 1967, when once

again, the coins reached the

“point of fusion”: in that year,

the international price of silver

rose from $1.29 dollars per

Troy ounce, to $2.06 dollars

per Troy ounce and the public

withdrew these coins from

circulation and sent them to

the refinery.

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“Libertad”: 1 ounce of pure silver,issued by Mexican Mint.

The solution

In order to attain the two desireable objectives, that the silver coin shallnever reach a “point of fusion” and that the silver coin may simultaneouslybe used as a means of payment – as money – the present Bill before theMexican 59th Legislature stipulates three necessary conditions:

1. A coin with a quotednominal value

The coin to be monetized shall not bear an engraved nominal value, acondition filled by the “Libertad” silver ounce. This will allow its nominalquoted value to rise in response to a devaluation of the peso or to a risein the international price of silver, so that minting the coin will always beeconomically feasible and so that it will remain in circulation without endingup at the refinery.

2. An official quote fromthe Central Bank

The Banco de México shall determine its official quote (with a small seignioragein its favor). For all practical purposes, a quoted nominal value is the equivalentof an engraved nominal value, with the difference that the first can be adjustedto accommodate rises in the price of silver when they occur.

Coins made of base metals bear an engraved nominal value in order tocommunicate to the public their legal tender value. However, thecommunication of the legal tender value of the “Libertad” can be done quiteas effectively by modern means of communication: the press, radio,television, the interbank communications network or the Internet, thusmaking unnecessary the impractical engraving of a permanent, fixed pesovalue upon a pure silver coin.

Besides this condition, in order for the “Libertad” to become money, itsquoted value must be a value that cannot be reduced – as was the case

Conclusions

Both legislators and Banco de México have

evinced a clear and constant record of attempts

to offer the public silver coinage which will also

be a means of payment.

The transitory falls in the price of silver did not

hinder the circulation of silver coinage with

engraved nominal value, for neither the saver of

these coins, nor the user in commerce, nor the

Banco de México ever suffered a loss, because

the legal tender value of these silver coins never

diminished, and this guaranteed their full

acceptance by the population.

What drove the silver coinage out of circulation,

was a series of rises in the peso value of silver,

which made the silver in the coins worth more

than the engraved nominal value.

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with all the previous silver coins which had a nominal engraved value, whichof course, could never be reduced. A coin whose legal tender value risesand falls cannot become money. It will not be accepted as such, by thebanking system, to begin with. In order to become money, the falls in theprice of the value of silver contained in the coin must not affect the quotedlegal tender value. Thus, losses to the holders of the coin will be nonexistentand the Banco de México will be immune to losses from speculative flows.This was the key provision omitted from the legislation of 1979, whoseintention was to monetize the “Libertad”.

Therefore, the third indispensable condition:

3. The legal tender value,once quoted, must not be reduced.

The quote by the Banco de México shall be increased when the price ofsilver rises (as it is doing at this time) but that according to the Law, thequote shall not be reduced if the contrary takes place, so that no legal tenderquote can be lower than the last established quote.

The projected Law, according to the present Bill before the Legislature,seeks to crown the legislative efforts of almost one century, by proposinga technique through which the “Libertad” will become a means of savingwith enduring value and complete liquidity, because it has become money.

The graph in the next page illustrates the theoretical behavior of the “Libertad”ounce if quoted by the proposed method, during the period of ten years1995-2005, based on real data for silver and exchange rates.

As can be seen, the coin would always have produced a seigniorage forthe Banco de México, the coin would never have reached the “point offusion” and the occasional falls in the price of silver would not have producedlosses, neither to its holders nor to the Banco de México, because itsquoted legal tender value would never have diminished.

By means of this technique, Mexicans would enjoy the use of a silver coincomplementary to, and in parallel with the fiat money system, and Mexico’s persistent political effort to use this metal as money would come to fullfruition – “A consummation devoutly to be wished!”.

Notes

The Mexican monetary unit will remain the fiat peso.

The ‘Libertad’, when monetized, will acquire a quoted legal tender valuein Mexican pesos.

When a ‘Libertad’ is deposited in a bank for credit to an account, the creditwill be in Mexican pesos at the quoted legal tender value.

There will be no separate bank accounts for ‘Libertad’ coins.

The Mexican Central Bank will mint such quantities of ‘Libertad’, as it deemsconvenient.

Those who wish to acquire ‘Libertad’ coins may or may not find themavailable at their bank.

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Our technique will alsofunction for the reintroductioninto European circulation of a

gold coin

No engraved nominal value.

A quoted nominal legal tendervalue in Euros, which can floatupwards.

No quote below the last quote,in case of a fall in the value ofgold in Euros.

Utilizing this technique, thegold coin would circulatepermanently in parallel

with the Euro.

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Suggested method for Quote:

(International price of gold expressed in euros) / (.9) for10% seigniorage, rounded to the nearest multiple of 5.

Sources:

Historical price of gold: www.kitco.com / Historical exchange rate of the euros: www.oanda.com

The Gold ‘Ecu’

We suggest a gold coin to be called the ‘Ecu’, with samecharacteristics as the French, Italian, Swiss and Belgian coinsissued under the 1871 agreement between these nations.

All these 1871 coins had the same:

Size: diameter 21 mm.Weight: 6.45 grammes.

Fineness: .900

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(All actual sizes)

The Gold Ecu

Size: Diameter 21 mm.Weight: 6.45 grammesGold content: 5.81 grammes pure goldFineness: .900

The Gold Ecu:The Crown of the EMU

• A Gold ‘Ecu’ can circulate permanently in parallel with Euros.

• It would contribute to social and political cohesion among the nations ofthe European Union.

• Its efficiency as a symbol of European Union is unsurpassable.

The message transmitted by the coin:

“Europe faces the future confidently, proudlyrecognizing its historic achievements and valuesfor the benefit of mankind. The gold signifies thehumane dimension of the European Union”.

The Gold Ecu could be placed in circulation by using superfluous CentralBank reserves and /or ECB reserves to purchase gold, which could thenbe sold to the public at the quoted legal tender value. (As money, thedemand would be enormous.)

As the strongest buyer, the EMU could raise the price of Gold gradually asan alternative to buying more US Treasury debt.

Gold Ecus would provide an excellent means of savings and investmentfor Europeans, increasingly worried about the value of their pensions andsavings plans, and would give the ECB a means of regulating the moneysupply, as gold purchases by the public wolud absorb Euros in circulation.

This is precisely the policy Richard Lehmann (Forbes.com July 27, 2005)recommends for China. Richard Lehmann is Editor of Forbes / LehmannIncome Securities Investor.

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The Silver Billin the Mexican Congress

This project has been under discussion inthe Congress since March 2003.

Last April 5th, seven congressmen from allparties officialy presented a Bill for Reformbefore the Congress, filling the requirementsoutlined here.

At present, the Bill is being discussed inCommittee of the House of Representatives.

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Congressional Support

“We hope to have good news for Mexicans from the

Congress, that we shall have silver money, the ‘Libertad’

ounce, hard, strong and solid …”

Fernando Guzmán Pérez Peláez

PAN Federal Congressman

“It will generate more savings and each Mexican will be

able to own this instrument, a means of defense against

unforeseen (events) …”

Diego Fernández de Cevallos

PAN Federal Congressman

“This is a very useful opportunity socially, with economic

support, within reach of all economic sectors –it is a theme

that draws the interest of different parties ...”

Enrique Burgos García

PRI Federal Congressman

“We are going to support this Bill totally, the parties are

in agreement in this because it is a noble Bill, very healthy

and it is not costly … we are going to generate employment,

we are going to have, once again, a money that is our

own...”

Martha Lucía Micher Camarena

PRD Federal Congressman

“Mexico deserves the most beautiful coin in the world

and the most valuable … besides, there is a dollar crisis

coming, and we must be prepared; this silver coin can

very well be the lifesaver for the Mexican economy …”.

José Julio González Garza

PAN Federal Congressman

“A very nationalist measure that will allow our silver, a

non-renewable national resource, to remain among

Mexicans …”

Leonardo Álvarez Romo

PVEM Federal Congressman

“The state of Zacatecas, as the number 1 producer of silver

at national level, would be greatly benefited in its economy

and it would not only generate wealth, but jobs which would

stop the growth of emigration to the U.S. …”

Rafael Candelas Salinas

PRD Federal Congressman

“In order to have value, money must be a measure of

something valuable and real to back it up. Silver does not

devalue because it does not lose its value over time …”

Fauzi Hamdán Amad

PAN Federal Congressman

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Governors of Mexican States

On November 30, 2004, the 31 Governors of all the statesthat make up the Mexican Republic sent a communiqué to the“Ways and Means” Committee of the Mexican House ofRepresentatives, in which they expressed their unanimousapproval of the monetization of silver and urged the Committeeto approve a bill which aims to achieve precisely this objective.

Statement of Agreement

During the present 59th Mexican Congress,343 Congressman of the main parties,suscribed a Statement of Agreement in supportof the Bill.

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Partido Verde Ecologistade México

Partido de la RevoluciónDemocrática

Partido Acción Nacional Partido RevolucionarioInstitucional

Mexican Newspaper Writers

176 Mexican newspaper writers put their signaturesto full page declarations by the Journalists’ Club inthe main newspapers of Mexico City, also in supportof the monetization of the “Libertad” silver ounce .

Mexicanswant the ‘Libertad’ monetized

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A poll by national T.V. Azteca, Mexico’s #2 televisionchain, revealed that 96% of viewers approved ofthe monetization of the silver ounce, when asked ifthey were, or were not, in favor.

A persistent national effortmay become a reality

1920 – 1945 Mexican silver peso, .720 fine(went out of circulation)

1946 – 1967 Silver pesos with various silvercontents (went out of circulation)

1979 Silver ounce with no nominal valueengraved (could not be used as a meansof payment)

1979 Silver ‘Morelos’ $100 peso coin(went out of circulation)

1993 $10, 20 and 50 pesos coins withsilver (went out of circulation)

2003 ‘Coins of the Mexican States’.Nominal engraved value $100 pesos,with 1/2 Troy oz. of silver (This coin willgo out of circulation when the price of 1/2

Troy oz. of silver is over $100 pesos).

The ‘Libertad’ silver ounce, no nominalengraved value, quoted by the Banco

de México.

It would remain in circulation indefinitely becauseits value would be adjusted upward according to

the peso price of silver, and it would be acceptedas a means of payment because its quoted legal

tender value could not be reduced.

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2005

Peso .720 Fine

Lic. José López PortilloPresident of Mexico

1976-1982

Dr. Guillermo Ortíz MartínezGovernor of the

Banco de México