Against Inflationism, For Gold

The news has it that all coins of 25p and below are being withdrawn from circulation. This is a sign of price inflation. It means that the metal in the coin is worth more than its face value. Thus, we could profit by melting them down and selling the metal. Wonder why they use metal anyway, for these coins of small denomination are just tokens - like the plastic chips you get to play with in casinos. Only, in this case, when you return your metal chips you get - nothing! Casinos are more honest than central banksters (as in "gangsters").

The entire planet is on such dishonest "funny money." And in our case, as I explained the other day, the rupee is losing value both internally as well as externally. Twenty years ago, the US dollar was worth less than 10 rupees; today, it is worth around 45 rupees - and the people, and the media, cheer, thinking we are "promoting exports."

What is the idea of promoting exports if we are simultaneously erecting tariff barriers against imports?

Actually, we enter into foreign trade only to obtain imports - that is, to obtain goods that are either not available domestically, or which are produced cheaper abroad. And we export only in order to pay for these imports. This is the rationale for engaging in foreign trade.

Now, what happens if the value of our currency keeps going down vis-à-vis that of our trading partners? The "mercantilist fallacy" consists of viewing the "correct" trade policy as that which "encourages exports and discourages imports." Thus, a depreciating currency is viewed by them as a "good thing." But this is a fallacy - as Mises explains:

What really happens is this: The country exports more than it did before, and it gets, as compensation for these increased exports, a smaller amount of foreign products. Exports are, as it were, subsidised and imports penalised to the burden of the natives. The inflation is, by and large, tantamount to a tax imposed upon the domestic consumers in order to cheapen the consumption of domestic products by foreigners.

Such a policy is - strictly speaking - "anti-national." Perhaps the powers-that-be engage in such anti-national activities because their own assets are denominated in foreign exchange, and not in Indian rupees. So they gain, anyway. Nobody is a fool.

Mises goes on to explain why a Gold Standard is the best:

The main argument in favour of the Gold Standard is that it renders the formation of the monetary unit's purchasing power independent of arbitrary action on the part of governments, political parties, and pressure groups [like exporters]. It places a check on inflationary policies, and is the only standard which can possibly become an international, a world standard.

Can one country - that too, a "poor" one - shift to the Gold Standard on its own, or does this require "international co-operation"? Let us hear Mises again on this:

The nineteenth century very successfully set up the gold standard as a monetary international standard. At the beginning of our century [the 20th - this was written in 1944, and not published till 2000, well after Mises' death in 1973] almost all commercially important nations had adopted the gold standard or the gold-exchange standard as their national standard. Both of these monetary systems tied a particular country's national currency unit to a definite quantity of gold, fixed by a duly promulgated act of that country's legislature. A divergence of the purchasing power of the national currency unit from the purchasing power of its legally fixed gold-parity was effectively prevented.... International trade and commerce, international credit transactions and investments, transportation, and travelling were not hampered by any monetary friction.

This satisfactory state of affairs was not the outcome of any international treaties, agreements, or conventions, or the operations of an internationally established institution or bank. It was an achievement of the various national governments acting of their own accord and aiming at nothing else but the most convenient arrangement of their own nation's economic matters. Governments were eager to stabilise foreign exchange rates because they considered such stability as beneficial for their own people's economic well-being. A sound money policy was not designed for the benefit of foreign interests, but as a policy highly beneficial for a country's own welfare....

The maintenance of the gold standard is possible only if a nation strictly abstains from all endeavours to inflate its currency system, either by the issue of additional paper money or by bank credit expansion. Nothing else is needed....

There is but one means to keep a nation's domestic currency at par with gold and the sound currency of other countries: to abstain from credit expansion and inflation.

As I pointed out in a column advocating India's unilateral adoption of the Gold Standard:

Any nation can unilaterally revert to the gold standard whenever it chooses. If we do so, our rupee, now pegged to gold, will always appreciate against the rest of the world’s fiat papers. This will help us become big importers. And cheap imports, including of capital goods and components, will make our manufactured exports competitive in terms of technology, quality and price. Our banks will attract the world’s savings, and we will possess capital, the vital ingredient of “capitalism”. All prices will steadily fall and the consumption of the poor will rise in leaps and bounds. This is the power of “sound money”.

Note that our "consumption of imports" will increase - precisely the opposite of what is happening today. And improved consumption is what better economic well-being is all about. We will no longer be a poor country. We will be rich!

Thus, all this Anna Hazare-Kiran Bedi-Prashant Bhushan "Lok Pal" business is nonsense. The real corruption in the world - and in our own country - revolves around the "funny money." Gold is the answer.

To get there, we must disabuse ourselves of just one false idea - that increasing the supply of money "stimulates the economy." Actually, even an increase in the supply of gold does not stimulate the economy. In both cases, price inflation is the inevitable result. If the quantity of gold in circulation increases, the price of gold declines - and all prices pegged to gold rise. The only difference in the two scenarios is this: today, The State can unilaterally increase the supply of paper money. With gold, only gold miners can. 

Whom do you trust?

Remember: Private gold miners will not increase the supply of gold because they will earn less in exchange as the price of gold will drop. Gold supplies will therefore increase only marginally, and slowly. There will be monetary stability.