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Indian Gold as Alternative Currency

Recent events unfolding in India illustrate that Indians and others use gold as an alternative currency.  Several years ago, I made this point when I opened up my talk at the Mises Institute on a panel on how to transition to sound money.

Briefly, many Indians and others throughout the world still use gold as money for savings, etc.  Millions, likely billions, of people around the world are "unbanked" and lack established relationships with formal financial institutions.  I've ranted before on how technology is reaching these people faster than decades of central bank failures: look at financial apps on phones and other mobile technologies that allow people far from an ATM–much less a brick and mortar bank–give people access to financial services.  In far too many places in the world, regulatory hurdles limit consumer choice and protect endemic corruption.

Which brings us to India which earlier this month inaugurated a new governor, Raghuram Rajan whom the New York Times explains is described in terms usually reserved for Bollywood stars.  It gets worse, the NYTs continues, " [The] Reserve Bank of India [has] tried and failed to stop the steep decline of the rupee against the dollar. India’s chronic inflation is almost certain to move higher in the coming months, given the country’s heavy dependence on imported oil priced in dollars."  No mention of the growth of the Indian money supply. Wikipedia provides a good historical graph: provides a good chart for the more recent M3 Indian money supply growth:

Or as the Times explains in another article, "The rupee fell further and faster in August against the dollar than any of the world’s 77 other internationally traded currencies as investors in affluent countries took their money home for higher returns. It was down 20 percent since May, a period in which the stock market followed suit and fell almost 8 percent."

The new Indian central bank governor does not seem to be the best one to sympathize with everyday Indians and respect their flight to gold.  Says the Times:

Mr. Rajan also has a history of skepticism about financial innovations, having warned in a paper in 2005 that they had made credit markets more risky and could prompt a financial crisis.

That was not a popular view at the time. Lawrence H. Summers, the former Treasury secretary, now said to be the chief candidate to lead the Fed, publicly described Mr. Rajan’s paper then as “slightly Luddite” and “largely misguided.”

Is this really the right time for a misguided Luddite to run the central bank?  Is there really any time for it?  No, of course not.  Alas, bureaucracies are not known for changing quickly with the times anyway.

Dr Subroto Roy, in the Cayman Financial Review, provides a good historical review of the Indian currency and concludes:

To move towards a currency of integrity today that befits the real growth requires comprehensive candid study of the structure of government liabilities and expenditures, systematic cleaning of government accounts at their roots, seeking to raise productivity of government investments and expenditures by better use of the audit function, as well as bringing coherence to fiscal and monetary policy through institutional changes in the processes of public decision-making, specifically, separating the banking and central banking functions from the Treasury function, while bringing the planning function to be one serving the Treasury function rather than pretending to be above it.

Waste or ostentation in public expenditure itself creates incentives for evasion of taxes; indeed, the untaxed economy may even have caused an underestimation of real growth being made. The road exists to be taken though it may be one that demands excessive political courage.

So what have the Indian people done in response to the inflation (the loss of rupee value)?  Done what any other right-thinking people would do: vote with their feet from rupees to a better store of value (in this case, gold).  Kevin Lees at suffragio explains it well:

As the rupee has fallen, the higher cost of imports has accelerated India’s current account imbalance.  Much of the problem lies in Indian demand  for gold imports, which constitute nearly three-fourths of India’s current account deficit.  But it’s not about bling as much as it’s about the fact that hundreds of millions of rural Indians lack formal access to banking, so gold represents the safest and easiest means of saving.  That’s why the Indian government is encouraging Indians to stop buying gold from abroad.  Although India raised the tariff on gold imports from 4% to 6% and although the RBI is toying with the idea of instituting gold-backed savings funds for Indians (the idea is to reduce imports by creating a kind of domestic gold exchange), demand for gold has remained steady.  That’s intuitive enough — even if you have access to a bank account, if you’re a farmer in Bihar state and the rupee keeps on losing purchasing power, of course you would rather invest your savings in a hard metal like gold instead of a drooping currency.

What do central planners do when real people in the real world don't do what the planners told them to do?  Try to force them to do it.  In this case, India then banned gold imports (because, you know, that's how you show you care about the poor desperately trying to escape from your bad policies and impoverish them).  Falsifying price signals is a tried and true form of deception after all.

India has recently (in a limited and bureaucratic way that Indian bureaucrats do best) allowed the resumption of gold imports.  Don't think though that the Indian bureaucrats are now suddenly keen to let the poor people vote no confidence in the Indian monetary policies–it's gotten so comical now that the bureaucrats are going after the gold in the Hindu temples!  Apparently nothing is sacred.