An Impassioned Libertarian's Journal

Introduction

India’s obsession and fascination with gold is well known around the world. To most commentators, particularly western commentators, this obsession seems irrational and Indian people are deemed incurable gold bugs. However, on closer examination, gold ownership in India is neither excessive nor is it irrational. In fact, when religious, cultural and historical perspectives are considered, India’s appetite for gold seems rather matter-of-fact indeed. Nonetheless, it is not lost on any Indian worth his or her salt that gold is the asset class that best protects wealth and freedom.

When my father, a pediatric surgeon, wanted to buy land to construct his clinic and supplement his meager government income, he purchased land by mortgaging my mother’s jewelry. Similarly, millions of people in India have capitalized or recapitalized their businesses or farms by pledging their gold jewelry, not to mention securing their basic necessities after severe business reversals. India herself pledged her gold to secure a loan from the World Bank in 1991 when she was on the verge of defaulting on her international obligations. As we shall see below, were it not for gold, the average Indian’s lot through history could’ve been a lot worse. Further, I believe that India’s gold could, if tapped wisely, speed the country’s economic growth and alleviate poverty in the country over time.

India’s per capita gold holdings

India’s private gold ownership is difficult to determine accurately. However, several websites such as Gold Eagle estimate the total private gold holdings to be about 15,000 metric tons. Compared to that figure, the Indian government owns a negligible 360 metric tons of gold. Given that total gold mined in history is about 160,000 metric tons, India’s stake then amounts to 9.6% of the world’s total gold stock. In contrast, India accounts for just over 17% of the world’s population. Therefore, India’s large gold ownership is just a function of its large population and its per capita gold ownership is well below average.

While India’s per capita gold ownership is well below the world average, there can be no doubting their desire to own this metal. Demand from India consumes some 20%-25% of annual gold output. Much of this desire to continually acquire gold dates back almost 4,000 years to the Indus Valley Civilization.

Religious and Cultural Reasons For Gold Ownership

Gold jewelry was worn by ancient Indians dating as far back as the Bronze Age Indus Valley Civilization, some 2,000 years B.C. Gold also has a rich tradition in the Hindu epics, the Ramayana and the Mahabharata. It was associated with the pomp and splendor of the gods and kings who appeared in these mythological stories. The Ramayana, the earlier of the two epics, can be traced back to around 900 B.C., so even back then, gold had risen above all other commodities to be associated with power, prestige and wealth.

Let me narrate a short story to illustrate how deeply gold and wealth are imbibed into the Hindu culture. The world’s richest temple, at Tirupati, was built on the legend of Sri Venkateswara, an incarnation of Lord Vishnu. Legend has it that Sri Venkateswara, who was born poor, sought the hand of Princess Padmavati, the incarnate of Vishnu’s celestial consort, Lakshmi. Her father decreed that Venkateswara could marry Padmavati only if he possessed comparable wealth as the king himself. Venkateswara sought a loan of gold and jewels from Lord Kubera, the Hindu god of wealth. To help Venkateswara repay this loan symbolically, Hindu devotees to this day, donate money at Tirupati. This is but one of many thousands of stories from Hindu mythology, all of which involve gods, kings and wealth in some way, shape or form. Therefore, it is not an exaggeration to postulate that generations of Indians reared on these stories have come to associate gold with mythical qualities.

Historical usage of Gold

Silver coins were widely used in India during the reign of the Mauryas circa 250 B.C. The first gold coins were issued widely doing the Gupta dynasty around 250 A.D. Interestingly this period was also known as the Golden Age of India’s history. On the face of it, all emperors issue coins to commemorate and accentuate the significance of their reigns. However, there was a still more practical reason for Indians to use gold as money.

India, over the past 4 millennia, has been a collection of many thousands of kingdoms and fiefdoms. Every once in a while, an emperor or a dynasty such as Chandragupta Maurya or the Mughal dynasty appeared on the scene and was able to consolidate a majority of India under their rule. However, no sooner than an able emperor passed away than his empire disintegrated as infighting and ineffective rulers followed him. Even with the big empires, there was always plenty of fighting on the edges of the empire and border territories constantly changed hands. Millions of Indians could, in their lifetime, expect to be subjects of several rulers and be part of more than a few different kingdoms.

Gold, being of high value, could easily be hidden during times of strife, presenting ordinary citizens an avenue to prevent being looted by marauding armies. Further, a gold coin issued by one king could serve as money under any other king as long as the weight and purity of the issued coin could be assessed. Therefore, gold was the preferred medium of exchange and store of wealth.

The history of dowry in India is almost as old as the Hindu religion itself. Dowry, before the negative connotations of today, was a gift from the bride’s family to a newly married couple. It was to compensate the groom for the additional expenses he would incur taking care of his stay-at-home bride and in time to come, a family. Add in the fact that the chances of a woman being widowed at a young age were high given rampant disease and almost constant warfare, the practice of dowry was prudent for much of India’s history. Although different commodities were used to pay dowry, gold was the preferred option simply because of its wide acceptance and the ability to safeguard it during the many times of strife. The practice of giving gold and gold jewels as dowry continues to his day. While I’m not condoning the practice of dowry in the modern day or the atrocities associated with it, I’m only giving a historical perspective on why that custom came into existence.

Another offshoot of the rich tradition of gold in the Hindu religion explains why Indians mark every auspicious and festive occasion with the purchase of a token amount of gold, particularly the observance of Akshaya Tritiya. In fact, the parents with daughters begin accumulating gold in anticipation of their daughter’s weddings in small quantities yearly on these occasions.

Other Contemporary Reasons For Gold Ownership

The above historical and cultural reasons explain the long entrenched practice among Indians to acquire gold. This deeply ingrained practice continued into contemporary times despite India having a unified currency since the British acquired complete control of the country in 1857. The reason was primarily because of the continued struggles for the average Indian, first under the British and then under socialist India.

Since India’s independence, India followed a socialist economic policy with the government running constant deficits to fund its five-year plans. Needless to say, these plans proved very inefficient, resulting in plenty of wastage and constantly increasing prices. India’s disastrous war with China in 1962 severely depleted India’s foreign reserves and removed the backing for the rupee. To prevent a massive flight out of the rupee, the government established the Gold Control Act in 1962 forbidding the ownership of gold in bullion form and mandating the conversion of all private gold bullion into gold jewelry. This prevented the rise of an alternate currency if the rupee should flounder. As with all government intrusions, this law had unintended consequences. Because licenses were required to hold gold bullion, many unconnected goldsmiths lost their livelihood, seemingly overnight. The prohibition also gave rise to gold smuggling and a huge black market in gold, which no doubt claimed many lives and livelihoods. The restrictions on gold were eased only in 1991 when the Indian economy was liberalized following it’s near bankruptcy.

Further, in 1969, the Indian government under Indira Gandhi nationalized the banks and licenses were required for almost anything. This was the beginning of ‘License Raj’ in India that instituted rampant corruption in all levels of the bureaucracy. Since the state controlled all the banks, loans were made to special sectors so as to buy votes, of course with the requisite kickbacks for the bank staff processing the loans and their political patrons.

To top this, the 1970s were a tumultuous period politically in India. A state of emergency was declared from 1975 to 1977 giving almost dictatorial powers to Indira Gandhi. When democracy was restored in 1977, Ms. Gandhi was ousted by Morarji Desai. However, the common man still couldn’t catch a break as marginal tax rates hit a scarcely believable 95% and with the rupee’s value declining steadily.

In light of these circumstances, gold was the average Indian’s best friend. Due to a ban on gold, the value of gold in relation to other commodities and the rupee soared. The high marginal tax rates gave rise to a huge black market. Citizens needed a way to hide and protect their assets from the taxman and gold was one of the two asset classes that proved effective in accomplishing this task, the other being real estate.

One last reason why extensive gold holdings are prudent in today’s context is the paltry level of insurance provided to bank deposits. A fractional reserve banking system is inherently insolvent and needs government insurance to prevent a run on deposits. In India, the amount covered under deposit insurance is just Rs.100,000 or USD 2,170. In contrast, FDIC insurance in the US was increased to USD 250,000 from USD 100,000. To put things in perspective, Rs.100,000 is about 5 months rent for a decent 3BR apartment in Bangalore whereas USD 250,000 is about 4-5 years worth of living expenses for a couple in Chicago, including a mortgage or rent. In other words, Rs.100,000 is an insignificant sum of money. Realizing that the banking system is shaky due to the low level of insurance, many savvy consumers hedge by holding a portion of their savings in gold. Moreover, millions of people in rural India completely bypass the banking system because they don’t understand it, preferring to hold their savings in gold. When in need of money in a crunch, they pledge their gold with a local money lender in return for currency.

In summation, India’s ancient and deep religions traditions combined with a plethora of historical, cultural and practical reasons have fostered an unflinching desire to acquire gold as a means of protecting one’s wealth. In this light, one can hardly dismiss this desire as irrational. Given what’s in store for the world at large when the inevitable currency crisis occurs, citizens from other countries could do worse than taking a leaf out of India’s history with gold.