The Silver Economy

April 12, 2011

In a previous commentary I looked at how our economies would function in a world where our paper, fiat currencies had collapsed. Given the unrepayable debts racked-up by most Western economies, and the out-of-control money-printing by our central banks (sanctioned by our governments), this is not merely a plausible scenario, but as many would argue it is a highly likely outcome.

I explained how by merely applying existing laws on "legal tender" currencies and taxation that we should be able to hold gold and silver money to protect ourselves from the collapse in wealth which accompanies the collapse of banker-paper, and be able to spend that money without any adverse taxation consequences. Specifically, there should be no "capital gains" tax on any transactions where we are spending our gold and silver money - irrespective of how much they have appreciated versus the bankers' worthless paper.

I titled that piece "The Gold Economy", in deference to the superior status which gold enjoys (today) as "money". However, shortly after that I was enlightened by some historical materials submitted to me by readers. I quickly revised my position on silver versus gold as "money", and now firmly believe that it is silver rather than gold which is the key, monetary currency - at least on the individual level. Certainly when it comes to "backing" an entire economy, gold's superiority remains obvious.

In a subsequent commentary, I looked at how an economy would function hypothetically if it fully "monetized" silver as the official currency in circulation. I pointed out an obvious fact which has been completely forgotten by the modern charlatans who call themselves economists: that a "strong" (and appreciating) currency is the hallmark of both a stable and prosperous economy. I illustrated the fraudulent trade arguments used by these academic dolts which they have used to trigger a "race to the bottom": seeing which governments could devalue their (paper) currencies the fastest.

I explained how an economy with "sound money" (in the form of silver currency) would quickly rise above the banker-dominated cesspool of fiat, paper currencies. I referred to the (previous) real-life example of the U.S. economy to provide evidence of how a "high wage" economy with a very strong currency would be more prosperous than competing economies with their paper currencies, rather than less so. However, as my "hypothetical" model for such an economy I used Mexico as my example - saluting the ongoing movement in Mexico today to partially re-monetize silver.

Many silver investors are now quite familiar with the Mexican silver-sage, Hugo Salinas Price. His one-man "crusade" to have silver coins recirculated in the Mexican economy as a "parallel" (but official) currency in Mexico is elegant in its simplicity.

The genius of his proposal was to keep the unit of currency constant (a 1-oz coin), while allowing the nominal quote which assigns these coins their value to float in conjunction with the prevailing "spot" price of silver - subject to some minor, but technical constraints. He also stressed the importance of allowing the government Treasury which mints these coins to incorporate a fair-but-significant seigniorage (or "premium") on the nominal quote it issued on the coins, in order for it to maintain a reasonable profit-margin on this operation for taxpayers and to ensure there was never a monetary incentive to melt-down the coins for their silver.

In other words, the nominal quote would (for example) be 15% above the market-value of the silver - making the coins always more valuable as money than their melt-down value of the silver. The government actually turns a profit on one of its functions, and the money is preserved in our economies. However, there is a third benefit which also flows from the brilliance of his proposal: it makes a "parallel" silver currency just as economically viable (and practical) in non-silver producing nations as it is in a country like Mexico - which is one of the world's largest silver-producers.

To explain how this can be so, we must first back-up and project how this new, silver "money" would be handled by the Mexican population - where the availability of sufficient silver is clearly not a constraint. Some critics of Salinas Price mistakenly believe that Gresham's Law (stating that "bad money will drive out good money") represents a flaw in his proposal.

They argue that the Mexican people would spend their paper pesos and "hoard" their much more highly-valued silver money (otherwise known as "savings"). Indeed, this is exactly what we should hope that people would do when "good money" was reintroduced into our economies.

But let's put aside that argument for now, and instead focus on one point within the argument: given the choice, any rational person would rather hold silver money than paper money. This is precisely how and why non-silver producing nations can also introduce silver money into their economies - on terms very similar to those which could be obtained in a large silver-producing nation like Mexico.

To obtain all the silver it needs from silver mines to supply an economy with silver, all that a government needs to do is to pay the silver miner in that nation's silver currency. Immediately, some readers will conclude that this is insanity: that no silver miner would ever agree to such a "money-losing proposition".

Understand what is implied here. Using our previous, hypothetical example of a government which reserves a 15% seigniorage on the nominal "quote" it issues for the silver money, this means that a silver miner would "sell" a certain number of ounces of silver to a government, and receive (as its payment in full) the purchase price in silver money - represented by the number "X". The payment for the silver miner in ounces would then be X - 15%.

"How could any silver miner ever contemplate such a ridiculous transaction?" is the instant reaction of most people to this proposition. However, Salinas Price argues (with complete confidence) that the miners would be happy to accept such payment for their silver, and I concur with his reasoning entirely.

What do miners currently receive for their silver? Paper money. The same paper currencies which we bullion-holders are ridding ourselves of in favor of good money. Recall the proposition of logic which we have already accepted: given the choice, a rational individual would choose always silver money over paper money.

Why would a silver miner not act like a "rational individual"? In fact, contrary to the illusion of this transaction, the silver miner loses nothing. The seigniorage which the silver miner "loses" in the original transaction is preserved in the silver money. When the silver miner spends that silver money, it recoups the entire "loss" on the transaction. The only difference is that it receives "good money" for its silver in the original transaction instead of the (worthless) paper money it currently receives.

Indeed, because these silver currencies are guaranteed to never lose their value (as money), because the nominal quote can never be reduced (in accordance with Hugo Salinas Price's proposal), not only will this silver money be preferred to paper currencies, it will even be preferred to holding silver, in its pure "commodity" form.

Logically, we would expect silver miners to line up, hoping to be selected to be the official supplier of the "good money" for one government or another. The problem of supply is, in fact not a problem at all.

This brings us back to another proposition of our original analysis: that average citizens would "hoard" silver money. Another way of putting this is: the "savings rate" would go up. Certainly, if there is one equation which is beyond doubt in North America it is that the average person saves much, much too little.

In this respect, let us affix blame squarely where it belongs: on our central banks, and the lackey-politicians who support their monetary insanity. It is near-zero interest rates which perpetually rob anyone foolish enough to save, while the rabidly excessive money-printing destroys that wealth with inflation - a double-blow to anyone who saves in the face of the economic purgatory our governments have created.

Conversely, with "good money" introduced into our economies as parallel currencies, we can (to some extent) ignore the depravity (and hypocrisy) of bankers and politicians. Holding good money, we don't care about what fraudulent interest rates our governments choose. Understand that while bankers pay us a tiny fraction in "interest" on savings (with one hand), they are stealing five times that amount from us through the inflation they deliberately create with their money-printing.

With our silver money guaranteed to never lose its value, we don't need to spend it instantly - just to make sure the bankers don't cause it to erode to nothing while we hold it. Suddenly savers are rewarded, which is obviously the proper outcome for this virtuous behavior - rather than the sleazy double-robbery committed by bankers in our current world of paper currencies.

Let me summarize where we have arrived at, in our hypothetical world of silver money. First of all we have "good money", which we can hold fearlessly without fear of being robbed or cheated via near-zero interest rates, excessive inflation, or hypocritical taxation policies which amount to outright theft.

Second, we instantly reverse the trend of debt-bloated households spending as fast as they can, and taking on much too much debt - because the monetary policies of our morally- and intellectually-bankrupt governments force us to do this. Instead, people would be rewarded and encouraged to build-up a healthy level of savings, both at the individual and collective level in our economies.

More broadly, the healthy deflationary impact of using "good money" as currency would purge our economies of excessive, leveraged debt - and automatically incorporate sound, sustainable economic practices among both the government and the economy in general.

In short, an economy which replaces fiat-paper with good money must inevitably rise above its paper-loving peers. All that is "lost" in making the transition from paper to metal are the bankers' opportunities to steal from us with their paper schemes.

Now you understand completely why these bankers fight with all their might to attempt to discredit gold and silver, and prevent these precious metals from (once again) assuming their proper place as our only money.

Jeff Nielson

Jeff NielsonJeff Nielson is co-founder and managing partner of Bullion Bulls Canada; a website which provides precious metals commentary, economic analysis, and mining information to readers/investors. Jeff originally came to the precious metals sector as an investor around the middle of last decade, but soon decided this was where he wanted to make the focus of his career. His website is

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