Silver As Currency

By Michelle Smith – Exclusive to Silver Investing News

It’s not only individuals that are seeking safe havens. Increasingly, legislators are showing interest in providing their constituents with safe alternatives to paper money. Over a dozen US states have expressed interest in considering or issuing an alternative currency, and one has already taken a step in that direction with gold and silver coins.

On March 25, 2011, Utah’s Governor Gary Herbert signed House Bill 317, approving gold and silver coins issued by the federal government as legal tender. Recognizing gold and silver as legal tender eliminated certain state tax liabilities such as tax on profits on coins when were viewed mostly as assets.

Last month, legislators in the state of Wyoming voted down House Bill 85, referred to as the Doomsday Bill. The legislation called for a study into the measures the state government would need to take in order to continue operating in the event of a disruption of federal operations. One issue considered under the bill is the “potential effects of the rapid decline of the United States dollar and the ability to quickly provide an alternative currency.”

Though the Doomsday Bill was voted down, it is an indication that the threat of failing currency is a concern within society.

The consideration of alternative currencies by state governments is a subject not without debate.
Eric Freedman, professor at Hofstra University’s law school believes an “economic catastrophe” could result from having competing currencies in the US which “would be the destruction of the country,” Freedman said. It is believed that US states would face major constitutional challenges if they attempted to develop alternative currencies.

Furthermore, offering a currency alternative is perhaps a task that is not best undertaken by lower governments, according to Hugo Salinas Price, President of Mexican Civic Association Pro Silver.

In a presentation for the Cheviot Sound Money Conference in London, Salinas Price said the Treasury is the entity that “could and should” monetize the silver ounce for the UK, suggesting that implementing the use of the metal as a currency should be a federal undertaking.

Silver as currency in Mexico

According to Salinas Price, the only country contemplating reforming its currency on a national level is Mexico. A Congressional bill to monetize the Libertad silver ounce is currently under review with the aims to include the silver as legal tender operating in parallel to the current monetary system.

Salinas Price has presented the case for silver currency in the UK and says he has also tried to encourage it in the US. In Mexico, the silver currency bill has a notable amount of political support and Salinas Price believes that there is a good chance the bill will be signed into law.

If Mexico passes this bill, he believes other Latin American countries will follow the example soon after.

Recognizing monetary value

While commending the law in Utah as a praiseworthy effort, Salinas Price argues that it falls short because simply making gold and silver coins legal tender does not give them a stable value that will be recognized by everybody.

One of the potentially major obstacles facing the use of silver as currency is implementing a system to produce and establish value for the metal. Salinas Price’s presentation outlines a process that he says can work in any country that mints its own silver ounce (or silver coin of smaller weight), and presents no risk to the issuer.

Silver coins for circulation will be minted with no engraved monetary value in order to keep in line with rising silver prices. The coins’ value would be set by the Treasury, who would quote a monetary value that would include the value of the silver in the coin, the cost of minting it, and seigniorage for the mint.

Similar to regular currency and bank notes, silver coins in circulation will not be subject to depreciation, even if silver prices fall. Otherwise, according to the UK presentation, they will act as a commodity and not as a currency.

Impact of silver currency

Whether or not alternative currencies become a widespread phenomenon remains to be seen, but there is definitely a growing desire for real, globally recognized money.

Silver as part of a monetary system could be a viable option for storing one’s wealth as many investors already consider silver a safe haven. If it was used as currency, its ability to be used in commerce and the ease with which it can be liquidated for cash would likely encourage its use.

For mining companies, silver for use in circulated coins would create another source of demand for the white metal. Under the silver currency model that Salinas Price outlined, governments would buy silver directly from miners and repay them in minted silver coins. In nations that implement such a system, silver mining opportunities could become more attractive, especially if there was minimal or no silver mining at the time.

With a limited silver supply, and high demand for industrial purposes, the added demand for silver could cause prices to escalate more rapidly than seen in the past; a winning situation for miners and investors.

For physical silver investors, the use of the metal as currency would likely make it more expensive to buy into the market. However, under Salinas Price’s model, however, there would be no risk, as the investment couldn’t be subject to losses. Even under a different system, demand should help to support prices and boost profits.