Guest-blogged by SNS Member Ricardo B. Salinas, Chairman of the Board, Grupo Salinas

Last month, on my own blog, I shared my general view about the energy monopoly. Here, I want to write about another monopoly that affects our pocketbooks: the monopoly of money issuance.

The total amount of money circulating in a country has to correlate to the amount of goods and services produced by the economy. The production of these goods reflects the efforts of millions of workers, who, together with capital, add value to society. The least that can be expected in exchange for this effort is that it be recompensed by a means of exchange that retains its value over time.

For this to happen, by definition, inflation must be kept under control, which is achieved by respecting the relationship between the amount of cash in circulation and the value of total production. In my country of Mexico, the institution in charge of maintaining the value of money is the Banco de México (or central bank), whose website states that its “priority objective is to ensure the stability of the currency’s purchasing power.”

To achieve this goal, the Banco de México operates the constitutional monopoly of the printing of money and has several mechanisms for monetary regulation. That is, it must issue the bills and coins necessary to make transactions in the economy possible, and not a penny more. Monetary theory is very complex, but I’m sure the central bank has people who have been trained to understand it and are able to fulfill this function.

However, the reality is that at some point, something went wrong, because the value of our peso has dropped dramatically over the last three decades. Let’s look at the figures:

When I graduated from the Monterrey Technological Institute (the TEC) in 1976, a dollar was worth Mex$12.50. But we have to take into account that at that time, Mexico’s currency had three more zeros added on: that is, a dollar was worth Mex$0.0125 at today’s rate. Today, that same dollar costs Mex$14. To make it simple, we went from Mex$12.50 to Mex$14,000 (old pesos). This means that after 33 years, in dollar terms, the peso is worth 0.89 thousandths of what it was worth then. It’s hard to imagine such microscopic figures.

But that’s not the whole story.

If we look at the price of gold, the loss of our currency’s value is even worse. Today, an ounce of gold is worth US$925, compared to US$120 per ounce 33 years ago. That is, the dollar, the currency of the most powerful country on earth, the country where the gurus from the Chicago School of Economics are from, lost 87 percent of its value in gold over the last three decades.

While the dollar is worth only a little over one-eighth in terms of gold what it was in 1976, today’s peso is worth one-ten-thousandth of what it was worth in gold in 1976.

So, we Mexicans have been the victims of a huge fraud. But, in contrast to the Madoff case, this mass fraud affected millions, even if it took decades to pull off.
The loss of the value of currency creates, among other negative effects, the inflationary tax. This is the most unjust tax of all because it’s not decided by decree, it’s not published anywhere, and it’s not put to a democratic vote. It’s just levied. And to top it all off, it hits the purchasing power of the bottom of the pyramid (BOP) the hardest of all because this is the part of the population that keeps a large part of its savings in cash.

Put Not Your Trust in Money

With great insight, an American poet once said, “Put not your trust in money, but your money in trust.” If the bottom of the pyramid had had access to banking services in times of the highest inflation in modern Mexican history, it would have earned interest on its savings, compensating somewhat for the currency’s lost purchasing power. In fact, this is part of the vision behind Banco Azteca.

However, since most of the population has practically no access to banking services, the impoverishment of millions of families was proportional to price hikes, effected to finance disproportionate and inefficient public spending.

One definition of madness is to “do the same thing over and over and expect different results.” Today, many people propose using the same remedy that has been applied for decades. Isn’t this what’s happening right now in the U.S., where the Fed has nearly tripled its balance sheet with the stroke of a pen?
The world has gone mad, but that’s a matter for another entry.

Related Entries from Ricardo’s Blog:

Economic Freedom in Crisis
Following the Words of Buffet
What Should Be Done About the Billion People Trapped in Poverty?
What the Government Spends Affects You