For A Gold Rupee

A scholar from the Mises Institute has been quoted in a ToI story on the gold standard. I had blogged the quote earlier, but was requested to do a separate post on the implications of a 100 per cent gold backed Indian rupee.

Let us begin with the quote:

Robert Murphy, Adjunct Scholar at the Ludwig von Mises Institute in Alabama, USA, says, "A gold standard is essential today because it would force central banks to raise interest rates to their correct levels. In fact, it would work as a very good safety precaution, since it places a firm limit on how much inflation the central bank can create. Also, it's an excellent option for emerging economies like India, since any country with 100% gold backing for its currency would see its own currency appreciating against others, and more capital would begin flowing there.”

Let us take up each point, one by one:

First, high interest rates would be good for savers. Most people save, and they will be encouraged to do so when interest rates are high and when inflation does not rob them of their savings. The present system penalizes savers and subsidizes borrowers. It encourages borrowing and discourages savings – with fatal consequences, as in the USA. This has enormous moral consequences too – as witnessed in the USA once again. In India, the saving instinct is strong and should not be wiped out by easy credit and cheap loans. An inflation-free gold-backed rupee is the only way to achieve this.

Second: A 100 per cent gold-backed rupee means that there is no means available to The State to create money out of a hat. The finance minister of such a State therefore has “golden handcuffs” on his wrists. This means The State cannot “buy” goods and services by printing money to pay for them. This is vital for “representative democracy” – for it means that The State cannot buy up “vote banks” with sops and largesse. As Sharad Joshi has pointed out in his excellent article on Chacha Manmohan’s NREGA:

“At election time, parties and candidates promise people endowments that will come from government resources that they will get control of if they are elected. That is the reason why socialism/welfarism and democracy cannot coexist.”

The “golden handcuffs” on The State will mean that there will finally be a real representation of tax payers, instead of the representation of tax parasites, which is what we have today, only because The State has the ability to create money and credit out of thin air.

Finally, let us turn to the point that a 100 per cent gold-backed rupee is excellent for emerging economies like India; that we will see our rupee appreciate, and also attract capital flows.

The key point to note is that no “global action” is required. India can and should anchor its currency to gold on its own – and watch as the fiat currencies lose value against the Gold Rupee. This means that we will stop exporting iron ore and start importing on a huge scale. The international purchasing power of every Indian will go up. We will be the world’s biggest shoppers. The consumption and thereby the wealth of every Indian will go up because our money is Gold, nothing less.

Of course, as Murphy notes, this will also attract Capital to India, where money is Gold, because the money is not only safe, but also appreciating. All this Capital will help India become a fully “developed country” as more and more Capital is used alongside our abundant Labour, thereby raising Productivity.

Mises once said that any country, no matter how poor or underdeveloped, can on its own return to gold and sound money whenever it chooses to do so.

Chacha Manmohan and his band of merry robbers are taking us in the opposite direction, into the waiting arms to the international rent-seeking bureaucracy of the IMF. Note that the IMF is selling gold today. Its expanded “money” will be backed by nothing.

If we proceed in this chachacha direction, of internationalism and the IMF, our rupee will always be weak, we will forever export iron ore, and we will never be able to import much. We will, as individuals, remain poor.

With a 100 per cent gold-backed rupee, Indians will dominate the world economy.

We will not, like Chacha, be handing out a begging bowl at G-20 meets, pleading for benefits and grants in the name of the poor.

We will be Rich!