The global economy is facing an unprecedented crisis. Policymakers in international financial institutions and national authorities have responsibilities of effective policy action to pull the global economy out of the quagmire. The international economy could be heading for a long period of low growth and high inflation. Some renowned expert economists have been advocating one final large quantitative easing (QE) in the industrial countries via printing money. There is the well known dictum that policymakers should scrupulously avoid making gloomy forecasts of an apocalypse, lest it become a self- fulfilling prophecy. Nikolai Kondratieff, a Russian economist, put forth the hypothesis that the world would be caught in the vies of a long- wave cycle. Poor Nikolai was treated with suspicion by the Soviet authorities and eventually shot in 1938 for holding such negative views. The fear today is that the world economy may be caught in a long- wave Kondratieff cycle of low output and the remedy of today’s economists of massive pump priming could devastate the world with low growth and high inflation. To the Common Person in India all this esoteric debate would appear irrelevant. The Common Person in India has been berated for investing meagre savings in an ''unproductive' asset called ''gold' thereby reducing savings and therefore, investment and output. The Common Person is urged to integrate into the financial system and to deposit savings in ''No Frills' accounts which would wean the Common Person away from the barbaric instrument of gold.
Yet, what happens the world over is that central banks, high net worth individuals, and the middle class, all quietly invest in gold. The international monetary system is flawed as it is dependent on a reserve currency which is no longer linked to gold. Pundits tell us that there cannot be a system of multiple reserve currencies. A single reserve currency concept is flawed as it has to print money which is required by other countries. This major flaw is the central reason for the strong possibility of a global collapse. The anti- gold advocates have pulled off the greatest hoax on the Common Person. Now what can we honestly say to the Common Person in India? In India, the Common Person is barraged with untruths that financial savings are good for him/ her as it yields interest, without explaining that the Common Persons savings are eroded by inflation. What is reprehensible is that in high policy circles it is argued that the saver is ''trapped' and has nowhere to go and would, therefore, necessarily part with savings at low rates of interest. What is not told to the Common Person is that if the inflation rate is 10 per cent, a fixed deposit of Rs 100 would in real terms, after 10 years, be only about one- third the amount placed. Moreover, if the rate of interest is 10 per cent, the real rate is zero. It is sad to see more and more people from the low income strata being inveigled into the financial system with misleading and false promises. The saver needs a wake up call. Gold is by no means an unproductive asset. It is, in the long- run, the safest saving instrument for the Common Person. If the saver wants to make a quick buck then gold is not the appropriate instrument. The idea of a Gold Bank was first mooted in 1992 by the then Governor RBI, Mr. S. Venkitaramanan and the scheme was approved by the then Finance Minister Dr. Manmohan Singh and incorporated in the Budget of February 1992. It is unfortunate that this path- breaking idea was prematurely aborted. Since 1992, the stringent gold regime has been significantly liberalized and a number of banks and specified agencies are permitted to import gold. A number of gold products have been developed such as interest bearing Gold Deposits with banks, Gold Exchange Traded Funds ( GETFs) and Gold Funds of Funds ( GFoFs). In this context the idea of a Gold Bank needs to be revived. The outline of the Gold Bank could be as follows: The Gold Bank could be jointly floated by the RBI together with select banks and institutions ( akin to the setting up of Primary Dealers by the RBI). The Gold Bank could initially have a 51 per cent participation by the RBI; the balance 49 per cent could be held by banks, institutions and mutual funds floating gold schemes. The purpose of the majority RBI ownership would be to initially get the scheme going. The initial capital of the Gold Bank should be at least Rs 1,000 crore. There should be a clear understanding that the RBI would divest its holdings by periodic offerings of its shareholding. The Gold Bank could be provided a rupee line of credit by the RBI against the collateral of specified gold instruments, to enable the Gold Bank to meet short- term asset- liability mismatches; the interest rate on such refinance would be determined by the RBI from time to time. In turn the Gold Bank could provide refinance to the participant banks and institutions. The RBI could also offer to undertake outright purchases of physical gold in London Good Delivery Bars at prices to be announced by RBI from time to time this should not be a Tap facility but periodic auctions could be undertaken by RBI. The objective would be to develop gold paper instruments. The Gold Bank should not deal in jewellery or trinklets, as its basic objective would be to encourage instruments of paper gold. The Gold Bank would provide a major stimulus to developing a deep and well functioning market in paper gold which would be a boon to small savers who really have nowhere to go. The initial response would be to denigrate the idea. But it needs to be remembered that the entire mutual funds industry was initially developed with a tiny start up by the RBI sponsored Unit Trust of India which garnered only Rs 6 crores in its first year of operation. The Primary Dealership idea took off only after the RBI took the lead to set up two Primary Dealers and then others jumped on to the bandwagon. The least the RBI could do is to set up a Working Group to prepare the modalities of a Gold Bank.
FPJ
