The Mexican currency is known as the peso coin. It was known as peso ‘0.720’ because it contained a melt value of silver Mexican coins of 12 grams representing 72% of its total weight, from 1920 to 1945.Credit: http://www.dollarvigilante.com/blog/2011/5/18/an-interview-with-hugo-salinas-price-on-a-return-to-a-silver.html
The Mexican coin today is known as the ‘Libertad Ounce’ because it contains a melt value of silver Mexican coins of one ounce or 31.1 grams of pure silver. It’s a coin that would be made the legal currency of Mexico once a bill currently in the Mexico’s Congress Lower house goes through.
Melt Value ComparisonCredit: http://www.fotolia.com/id/4617597
Let us try to compare the melt value of silver Mexican coins: the peso 0.720 and the Libertad Ounce once it becomes the legal currency. The Peso 0.720 was used alongside notes for 25 years because of a couple of circumstances. The first one is that the monetary value was always higher than the sale value of its 12 grams of silver. In 1920, the melt value of silver Mexican coins of the 0.720 peso was 48 cents. It would not be viable to mint the coin if the value of silver exceeded one peso. As a result, the 0.720 was discontinued when silver prices shot through the roof in pesos and the price of 12 grams exceeded one peso. The other circumstance that made 0.720 stay for 25 years was any payments less than 5 pesos needed the 0.720 coins as there were no one peso notes. Hypothetically, if one pose notes existed, the 0.720 pesos would have been used as saving means by Mexicans. Mexicans would have used the one peso notes for payments.
If the Mexican congress approves the Libertad as legal currency, then its monetary value would be determined by the Central Bank of Mexico, because it doesn’t have a stamped value. To make the minting of Libertad Ounce viable, it would be important for its monetary value to exceed the selling price of its 31.1 grams of pure silver.
The Proposed LawCredit: http://www.lawgarcia.com/
The proposed law looks at this possibility and sets a rule which states that the monetary value of the coin be 15% higher than its silver content. This would make the Libertad be in a situation similar to the peso 0.720 of 1920-1925. However, as the peso 0.720 was used for payments of less than 5 pesos, this situation would not arise for the legal Libertad Ounce.
If the Libertad Ounce is made legal currency at the present silver prices and exchange values, it would fetch about 510 pesos. The public would choose to make payments for 510 pesos using notes or Libertad Ounce. It’s likely that the public would choose notes over the Libertad Ounce. Put it another way, the public would save the coins and only use them when in extreme need.
Reason for MeltingCredit: http://www.creweb.com/silver-refining/
The peso 0.720 was discontinued from circulation in 1945 because the melt value of the silver Mexican coins rose in the year to more than one peso, making it worthwhile melting the coins. The melt value of the silver Mexican coins was worth more for its silver than as money. Most of the 0.720 coins were melted down, but some Mexicans wisely saved the coins, and like the dollar silver, they are still in the market.
In contrast, when the Libertad Ounce is monetized (made legal currency), it would never go out of circulation. Because there is no stamped value, the monetary value set by the Mexican central bank would rise with rise in price of silver. The coin would adapt to the basic fact of 21st century: the consistent rise of silver prices.
Melting down the Libertad Ounce coin worth $510 pesos would get you 31.1 grams of silver, which would sell at $440pesos. It would not be viable to do that, and it will never be profitable melting it down if it becomes legal tender. This is because the quoted monetary value has to reflect the rise in price of silver.
The Libertad Ounce by not having a stamped value would have a monetary value set by the Mexican central bank. That monetary value would show how much, in pesos, the monetary value has gone up at any time. According to the proposed law, if prices of silver fall, the quoted monetary value would not fall the same way the monetary value of 0.720 did not reduce due to the fall of the silver prices in the Great Depression of the 1930s. This important development lasted for 25 years, not one person exchanged his silver pesos for notes, because of the fall of silver prices.
Therefore, the peso 0.720 and the legal Libertad Ounce would have another similarity in that their legal value would not be reduced. There is a slight difference, however, in the former because it had a stamped legal value and the value in the latter would be determined by the central bank of Mexico which would not be allowed to reduce its last monetary value according to the proposed law.
The proposed law is not revolutionary in any sense, as it only adapts to modern circumstances, money laws of the 20th Century. The peso 0.720 went out of the market because the price in Mexican pesos of silver rose. The coin was succeeded by the pesos 0.500, 0.300 and 1.00 respectively, each minted with less elegance and less melt value of silver Mexican coins to adapt them to rise in silver prices in Mexican pesos.
In the future, the Libertad Ounce would be made into one permanent coin. It will then not be feasible to mint other coins. The single Libertad Ounce coin would serve generations because its monetary value will adjust with quotes from the central bank of Mexico to the rise in price of silver as long as they rise.
Though the legal Libertad Ounce would be saved, Mexicans can still use the coin for payments. Therefore, while its circulation would be limited, saving money in form of the coins would have a liquid monetary value for use by the saver. It would be real money to take care of their needs.
In conclusion, the melt value of silver Mexican coins is much lower than its monetary value because it isn’t viable to mint coins whose silver value is higher than its monetary value.