The Hindu Business Line : What's so great about gold?

The evolution of money and the need for a common medium of exchange are lucidly brought out in the article "Why money must be gold-plated'' (Business Line, February 28). But the author's wish to go back to the days of `Gold Standard' is a little surprising. `Gold Standard' was tottering even in the 1940s and had almost been abandoned when the Bretton Woods `Twins' were born.

Well-known writers on `money' such as Geoffrey Crowther had absolutely no difficulty in explaining why the `Gold Standard' collapsed. Indeed, no leading economic theorist has suggested the revival or restoration of `Gold Standard'. This is because the cent per cent gold backing of a currency is no guarantee against fluctuations in its exchange value.

The reality

Coming to specific problems such as combating inflation, the `Gold Standard' may be a stronger base from which to tackle the issue, provided the volume and velocity of money alone is the desideratum of the inflationary trend. But in the modern milieu, it is not so.

There are a few other factors much more potent than the quantity of money in circulation — the steep increase in the cost of essential imports, or the side-effects of increasing economic activity. In this situation, the earnings of the people will increase while, correspondingly, a rise in the supply of goods and services cannot be taken for granted. Indeed, this is the reality.

Thus, as we analyse the phenomenon of inflation, the question of whether gold is at the foundation of the monetary structure and status of a currency does not crop up at all. This is because there are other forces at play which are of greater relevance.

In these days of complex world trade, governments and central banks are often forced to regulate the exchange rates of their currencies and this warrants `intervention'. The related `open market operations' cannot but have an impact on the value of the currency.

Fascination about gold

In this e-commerce and Internet era, what is essential for a strong and stable currency is a strong and healthy economy. The status of the US dollar and China's yuan proves this . It is almost puzzling that in spite of persisting current account deficit for years on, nothing serious has overtaken the US economy or its dollar! As long as it is a supreme economic power, none would be interested in what gives abnormal strength to the dollar. We can safely conclude that gold, at any rate, is not one. Similarly, the world is both persuading and sometimes pressurising China to revalue the yuan, but China is in no mood to yield! This is just on account of the strength of its economy — both in growth and external trade. People hardly think of any other factor.

It may, thus, not be drastic to conclude that the proverbial dependence on gold in monetary matters has declined steeply, and a revival of its indispensability is not felt to be necessary. It can at best be one among other securities to back a currency. India is home for several tonnes of gold, privately held by the people. But the percentage of gold supporting the rupee is quite low.

Bertrand Russell would question the `rationale' of laboriously shifting gold from deep mines in South Africa just to put them in underground vaults of central bank buildings in far-off places. He would also wonder what all this fascination for gold is about!

(The author is a Bangalore-based freelance writer.)

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