Monetising Precious Metals

The widespread acceptance of paper money seems just a function of the fact that we know others will accept it in exchange for goods and services. Its own bootstrap, so to speak, pulls it, up. But such a sophisticated convention is not universally acceptable. In poorer societies, including India, many prefer to hold their savings in the form of ornaments and utensils made from silver and gold. Economists have no clear understanding of the effects of this phenomenon though there are plenty of half-baked theories. One of them may be that these idle savings on the one hand reduce pressure on the market for consumer goods, but on the other hand they do not add to the sum total of investible funds resulting in too high an interest rate.

 

Which aspect of these two you consider to be important is a matter of economic prejudice. What does seem obvious, however, is that it is a peculiar phenomenon to have a substantial proportion of the economys savings lying, so to speak, in limbo. A possible solution to bringing demonetised gold and silver into the monetary system might be to re-open the mints which were such a common phenomenon in the last century. In other words, to provide a system whereby gold biscuits and silver ornaments could be converted into coins for circulation in the monetised world.

An immediate problem would be the exchange rate as between paper money and coin money. The matter would not be insurmountable because coined money could effectively be quoted on par with foreign exchange. A gold sovereign would be valued in US dollars according to the price fixed in London and New York. Its rupee equivalent would emerge through normal foreign exchange operations.

The proposed scheme will, no doubt, at first be dismissed as either hare-brained, or impractical; but actually it is remarkable in its simplicity. What is being suggested is that the authorities should provide a reliable system to allow the people to establish a currency in a useable form so those idle savings could be brought into the market. It will be argued that the proposal is superfluous because in a ready market jewellery and bullion dealers are able to convert precious metals into cash and vice versa. Yet, in spite of its widespread use, this market has not acquired its importance considering the extent of the trade in precious metals.

The real difficulty lies in the fact that there is lack of homogeneity and authority in dealings in gold and silver. There are all these different weights and measures which make it difficult to gauge that quality of the market, but more seriously the lack of homogeneity in the market makes it difficult to judge its size. It is still relatively disorganised. It is difficult to imagine lending and borrowing through the medium of gold biscuits or silver bars.

On the other hand, if the mints were re-opened and coins of uniform size and weight were produced, it might be possible to integrate this market with the normal money and foreign exchange markets. This would also reveal to international lenders the size and scale of Indias foreign exchange assets albeit in private hands.

That such notions should have occurred to us earlier goes without saying; but the long period in which the precious metals market has lain in the shadow of illegality has made it difficult to arrive at any creative analysis of these markets. Informally, however, the scale of operations is well known and widely recognised. It is believed that the Indian stock of gold is anywhere between 9,000 and 12,000 tonnes, which on current values would be worth $100 billion. No one can even guess the stock of silver but it must be worth at least $10 to $20 billion. And events have changed the illegality of these markets. Slowly, but surely, the world bullion markets are moving to their natural habitat which must be the bazaars of India rather than the souks of Dubai. It is now for us to take the next step in unifying the illegal and legal markets by monetising precious metals.

Thus far, these resources are lying idle, in the sense that they play no active role in building or financing industry. Can something be done to change this? It seems to me that the first step must be to provide the mechanism that would enable the conversion of demonetised metals into their monetary equivalent. This requires the establishment of government-owned mints. In turn, this should open the market where gold is loaned and borrowed through the economy and thereby integrated into the monetary system. If this is thought to be a retrograde step, if it is looked upon as going back in history, so be it.

Whatever the reason, it is clear that Indians have an appetite for precious metals. At its most primitive, it may be a consequence of a distrust of paper money, it may be still an unacceptable convention to put ones savings in such ephemeral assets as government bonds.

But it is not the business of economists to tell a people what they should do. It is nevertheless our task to mould what we see and create forms and structures that ease the utilisation of resources. For whatever reason, the Indian sub-continent has been rightly described the sink of precious metals. For too long, Indian authorities tried to devise ways of keeping gold and silver out. That entire exercise failed.

Legalising imports has served two purposes: first, it is bringing important statistics into the open. It is also improving our economic morals. The black market rate or the hawala rate of foreign exchange has collapsed. The premium is down to 2 per cent, although the quantum of imported gold is on the rise. The time has come to take the next step of integrating this monetary phenomenon into the Indian economy. Precious metals should be made convertible into a form in which they can be used. The first step towards this is to re-establish the mints.