Thoughts on Hugo’s Thought Experiment

Dear Hugo Salinas Price,

In your article, Second Thoughts on the ‘Thought Experiment, you raised a sequence of 5 items which together form an objection which led you to believe that the Thought Experiment had to “go back to the drawing board”. I think, that with a small adjustment, this objection can be overcome. I treat each of the 5 points separately, in order that the case is full bodied.

  1. With the certainty that Utah State taxes are payable with silver dollars at the value quoted by the State Treasury, the residents of Utah would know that there is a “final buyer” for the coins.

    Interesting that you find it necessary for a single large institution, in this case the state of Utah, to support the use of silver coins in order that widespread adoption be achieved. Despite your other writings in support of a “grass-roots” movement toward precious metal coins, you assume here that no such movement would be achievable without a large “final buyer”. I actually agree with this implicit assumption. Most of the populace does not know about all the forces trying to influence them. Indeed there are far too many!

    However, insofar as a large institution is necessary for supporting the widespread adoption of silver coins, that institution does not necessarily have to be the state. Indeed, I could imagine a consortium of businesses willing to sell their wares and services in exchange for silver coins. If this consortium were large enough, it could establish the use of silver coins at the consumer level.

  2. The residents of Utah would be able to purchase these silver dollars for less that the Utah Treasury quoted value, on the US market, and tender them in payment at the quoted value. Thus, they would be able to get a discount on their payment of taxes.

    The payment of taxes is but once a year. And although, I and many others would like to receive a discount on these coercive obligations, such a measure would introduce an unnecessarily cyclical aspect to the silver coin market. Demand for the coins would peak during tax season, and stagnate during the rest of the year. Unfortunately, under your proposed system of value quoting, it’s the yearly peak that would determine the quote.

    Far better, I think, for goods and services to be paid in terms of silver coin. For these are items which I use more often. For example, If all the people in my apartment complex were to pay their monthly rent in silver coin, the price would be far less cyclical. As the demand and exchange of coins shall take place on a predictable, frequent, and stable schedule. Should the landlord accept silver at the quoted value, then it is the landlord which gives the discount. Not the state. In this manner the loss can be distributed and more easily borne. Indeed, as long as the landlord is interested in saving silver coins over the equivalent fiat, the discount will be granted as a “convenience of market conversion”.

  3. The proposed measure would draw silver dollars from the rest of the US, to Utah, where the silver dollars could be used to pay taxes with an effective discount.

    This is an issue about Utah relative to the rest of the United States. Yes, silver dollars would be amassed by that institution which receives them as payment. If this were to be the state of Utah, then it would begin to amass coins in its treasury relative to other states. When the fiat Fed Reserve Note finally reach its intrinsic value, then Utah will find that it weathered the storm better than its neighbors. As good as this can be for Utah residents, it will likely breed resentment and discord to the Union itself.

    However, if a multi-state consortium of businesses began to amass silver coins because they chose to accept such coins in exchange for goods and services, then it is the businesses in the consortium which will do well relative to others. Society is much more comfortable in disparity between businesses than in disparity between political regions. The sooner businesses join the bandwagon the better they shall do during a hyperinflation.

  4. The State Treasury, in that event, would bulge with silver dollars obtained at an overvalued price.

    Is this a problem because the state has a limited budget? That the treasury can only afford to purchase so much at a discount before it runs out of … ? Or is it a problem of storage?

    Any business which wishes to allow its customers to use silver coin for payment will be giving those customers a discount relative to the equivalent fiat. This discount should actually encourage the use of silver as payment. Effectively driving it into circulation. The business itself can choose to hoard the silver, or again turn it around and use it for payment of materials and employee salaries. Hopefully, enough businesses are within the consortium, that each is doing business with each other. In this situation the discount occurs at the interface between fiat and silver (the end customer) but all inter-business transactions would naturally occur via silver coins and so do not receive any net discount. Carrying out the inter-business transaction via silver coins (because they appear at a discount to fiat) will also lessen the need for centralized storage. Coins in circulation do not need a giant vault for warehousing.

    Unlike the state, businesses actually produce something of value for their customers. So they can afford to discount some of their goods and services, with knowledge that, because they produce, they will not go bankrupt. For especially large businesses and those that would be severely hurt by hyperinflation, it would be a wise and prescient investment to participate in an early conversion to silver coins. Even though the discount might eat some of today’s profits, helping to prevent currency collapse is quite possibly the most responsible decision an owner could make to ensure continued operation of the business. Also, if the discount actually threatened the solvency of the business, it could then raise both fiat and silver prices, still keeping an apparent discount to its customers.

  5. Individuals wishing to own silver dollars would want to receive payment in Federal Reserve Notes, and purchase silver dollars at the US market price, which would be lower than the price quoted by the State Treasury.

    Just as the state treasury is depleted by paying employees in Federal Reserve Notes while collecting silver coins at a discounted rate, so would any business in my proposed consortium fare poorly by paying its employees in fiat while its own products are purchased with silver. All businesses within the consortium will have to make some accounting changes in order that the difference between silver and fiat not drive it to insolvency. A business in this situation actually has more options than the state: it could retract by firing the lower performing employees, it could raise prices to pass this new operational cost on to customers, it could apply the same kind of discount to salaries that it does to customers, it could pay employees in silver only. If a silver mint or bank were in the consortium then it could broker a deal that would “share the loss”. The bank still remains interested in joining the consortium, because it will see an increase in its customer base, being one of the few and early places where consumers can change their fiat for coins in order to receive price discounts at other businesses.

Throughout my arguments I refer to a “consortium of businesses.” For you, of course, the most natural consortium would be those businesses which are under your influence. In so far as you still act as a guidance counselor or advisor, I think that you will be more successful converting the country to silver coin if you offer the silver coin discount on monthly bills to the subscribers to both your television and financial services first. Your businesses already touch the lives of more people, and on a daily basis, than the government could ever hope to reach. Don’t wait for the politicians. If you have the influence, use it now. Save the country and your businesses from currency collapse together.