Financing revival through household gold

The expansion of base money through household gold will have a negative wealth effect on households, besides attracting a hidden tax or seigniorage

According to available information, the government is contemplating “a series of measures, including using household gold and foreign exchange reserves as collateral to print more currency, to finance the proposed expenditure to revive the economy”. Quite an exciting proposal, which essentially has two parts — purchase of gold and using foreign exchange reserves as collateral.

Households in India hold roughly 25,000 tonne of gold on their balance sheet although the exact amount has never been estimated. Thus the proposal to purchase gold under some arrangement — either through banks or the RBI directly— would put in motion the KUB Rao