Vivek Kaul
“How do I define history?” asked Alan Bennett in the play The History Boys, “It’s just one f@#$%n’ thing after another”.
But this one thing after another has great lessons to offer in the days, weeks, months, years and centuries that follow, if one chooses to learn from it.
Finance minister P Chidambaram and other fire fighters who have been trying to save the Indian economy from sinking, can draw some lessons from the experience of the Mongols in the thirteenth and the fourteenth century.
The Mongol Empire at its peak, in the late 13th and early 14th century, had nearly 25 percent of the world’s population. The British Empire at its peak in the early 20th century covered a greater landmass of the world, but had only around 20 percent of its population. The primary reason for the same was the fact that the Mongols came to rule all of China, which Britain never did.
In 1260 AD, when Kublai Khan became King, there were a number of paper currencies in circulation in China. All these currencies were called in and a new national currency was issued in 1262.
Initially, the Mongols went easy on printing money and the supply was limited. Also, as the use of money spread across a large country like China, there was significant demand for this new money. But from 1275 onwards, the money supply increased dramatically. Between 1275 and 1300, the money supply went up by 32 times.By 1330, the amount of money in supply was 140 times the money supply in 1275.
When money supply increases at a fast pace, the value of money falls and prices go up, as more money chases the same amount of goods. As the value of money falls, the government needs to print more money just to keep meeting its expenditure. This leads to the money supply going up even more, which leads to prices going up further and which, in turn, means more money printing. So the cycle works. That is what seems to have happened in case of Mongol-ruled China.
Gold and silver were prohibited to be used as money and paper money was of very little value as the various Mongol Kings printed more and more of it. Finally, the situation reached such a stage that people started using bamboo and wooden money. This was also prohibited in 1294.
What this tells us is that beyond a certain point the government cannot force its citizens to use something that is losing value as money, just because it deems it to be so. By the middle of the 14th century, the Mongols were compelled to abandon China, a country, they had totally ruined by running the printing press big time.
There is a huge lesson here for Chidambaram and others who have been trying to put a part of the blame on the fall of the rupee against the dollar because of our love for gold. The logic is that Indians are obsessed with buying gold. Since we produce almost no gold of our own, we have to import almost all of it. And every time we import gold we need dollars. This sends up the demand for dollars and drives down the value of the rupee.
This logic has been used to jack up the import duty on gold to 10%. But as Jim Rogers told the Mint in an interview “Indian politicians…suddenly blamed their problems on gold. The three largest imports to India are crude oil, gold and cooking oil. Since they can’t do anything about crude and vegetable oil, the politicians said India’s problems were because of gold, which, in my view, is totally outrageous. But like all politicians across the world, the Indians too needed a scapegoat.”
The question that no politician seems to be answering is, why have Indians really been buying gold, over the last few years? And the answer is ‘high’ inflation. As we saw in Mongol ruled China, it is very difficult to force people to use something that is losing value as money. And rupee has constantly been losing value because of high inflation.
High inflation has led to a situation where the purchasing power of the rupee has fallen dramatically over the last few years. And given that people have been moving their money into gold. As Dylan Grice writes in a newsletter titled On The Intrinsic Value Of Gold, And How Not To Be A Turkey “Now consider gold. In ten years’ time, gold bars will still be gold bars. In fifty years too. And in one hundred. In fact, gold bars held today will still be gold bars in a thousand years from now, and will have roughly the same purchasing power. Therefore, for the purpose of preserving real capital in the long run, gold has a property which is unique in comparison with everything else of which we know: the risk of a loss of purchasing power approaches zero as one goes further into the future. In other words, the risk of a permanent loss of purchasing power is negligible.”
And this is why people are buying gold in India. Gold is the symptom of the problem. Take inflation out of the equation and gold will stop being a problem, though Indians might still continue to buy gold as jewellery. But creating ‘inflation’ is central to the politics of the Congress led UPA. Now that does not mean that people need to suffer because of that? Especially the middle class. As M J Akbar put it in a column in The Times of India “Gold is the minor luxury that a confident economy purchases for its middle class. The cost of gold imports has become a problem only because the economy has imploded.”
Nevertheless people need to protect themselves against the inflationary policies of the government. “Historically, people have understood money’s intrinsic value when they have been forced to, when alternative monies have been rendered unfit for purpose by persistent debasement,” writes Grice.
In ancient times Kings used to mix a base metal like copper with gold or silver coins and keep the gold or silver for themselves. This was referred to as debasement. In modern day terminology, debasement is loss of purchasing power of money due to inflation.
Given this, people will continue to buy gold. The buying may not show up in the official numbers because a lot of gold will simply be smuggled in. A recent Bloomberg report quoted Haresh Soni, New Delhi-based chairman of the All India Gems & Jewellery Trade Federation as saying “Smuggling of gold will increase and the organized industry will be in disarray.”
And other than leading to a loss of revenue for the government, it might have other social consequences as well. As Akbar wrote in his column “If we are not careful we might be staring at 1963, when finance minister Morarji Desai imposed gold control to save foreign exchange. Desai, and a much-weakened prime minister, Jawaharlal Nehru, could issue orders and change laws but they could not thwart the Indian’s appetite for gold, even when he was in a much more abstemious mood half a century ago. All that happened in the 1960s was that the consumer turned to smugglers. From this emerged underworld icons like Haji Mastan, Kareem Lala and their heir, Dawood Ibrahim. India has paid a heavy price, including the whiplash of terrorism.”
Maybe the new Dawood Ibrahims and Haji Mastaans are just about starting up somewhere.
The piece originally appeared on www.firstpost.com on August 20, 2013
(Vivek Kaul is a writer. He tweets @kaul_vivek)