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FTI should work with Chris Lingle to propose sound money policy
A project team on FTI is working on a policy for sound money for India.
Given the disastrous depreciation of the rupee over the past 65 years, and the loot of wealth from the poorest of the poor who can't afford to inflation-proof their savings, it is crucial that policies be created to stem the rot.
Chris Lingle is a good friend of mine (met him both in India and later in Melbourne), and teaches economics at Universidad Francisco Marroquin in Guatemala. He is in India at the moment and I'd encourage the FTI project team to hold intensive discussions with him to clarify their questions and develop sound money principles for India.
I'm copying his recent article for Spontaneous Order:
INDIA BIGGEST BENEFICIARY FROM RETURN TO GOLD STANDARD?
According to data from the World Bank, India’s GDP is about $1.7 trillion or 2.79% of the world economy, making it the 11th largest economy when calculated at market exchange rates.
Data from the World Gold Council (WGC) indicate that Indians are the largest holder of gold with about 18,000 tonnes or about 11% of the entire global stock of gold. At current prices this is about $1.05 trillion or more than 90% of deposits in bank, 90% of market capitalization, more than 350% of forex reserves,more than 320% of forex debt & about 61% of GDP.
Instituting a classical gold standard whereby gold is money & money is gold would vault India to the top tier of global economies without waiting for politicians that allow their own partisan party issues get in the way of implementing economic reform.
Since the RBI has just under 600 tonnes of gold, about 9.2% of global total held by central banks, individual Indian citizens would be biggest beneficiaries rather than the RBI or the government. (A recent article in Mint pointed out that gold has gone up every year for last 11 years, provided a hedge against rupee depreciation, & outperformed inflation, equities & fixed income investments.)
Once Richard Nixon removed the link of the dollar to gold in 1971, no government in the world faces an explicit constraint on monetary issue, something that has NO precedence in all of recorded history. In turn, the lack of a commodity (gold) standard ended the use of money as a safe store of value, making savings always vulnerable to confiscation due to rising prices.
Under a gold standard, interest rates, bond prices & consumer prices tend to be more stable. It is hard to imagine that things would have been worse than the sorry track record of fiat money & central banks. But how do we get there from here…?
Transitioning to a gold (commodity) standard:
Several options exist. First, there could be a centralized move based on “experts” that would act as central planners but would likely lead to failure for all the reasons that central planning fails.Trying to target (peg) the gold price will work no better than central bankers ability to manage the quantity of money supply or keeping prices stable. And a peg would require that central banks must buy or sell unlimited quantities of gold at the fixed price that would have disastrous consequences after decades of irresponsible monetary pumping.
A better start would be to repeal laws “legal tender” laws as well as those that nullify gold clauses in private contracts & a requirement that governments only issue bonds denominated in gold. Taxes on “capital gains” in gold & silver should be repealed. And every government mint should offer “seignorage-free” coinage of gold & silver so citizens could trade metal for freshly-minted coins.
No monetary system works perfectly & implementing a gold standard will not be, ahem, a “silver bullet” solution. But it turns out the criticisms of the historic experience with commodity standards has been rewritten, but largely ignored. And it should be noted that the most strident opponents of a gold standard are strong supporters of the “welfare state” knowing it would be undermined by limits that “hard money” would put on issuance of paper money.
Read more at Sanjeev Sabhlok’s Occasional Blog-Economics
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