Can We Have a Virtual Gold Standard?

Beijing has contacted major banks and producers of gold asking them to support its bid to establish a Global Gold Exchange in Shanghai.

The stated aim of the initiative is to lessen the extreme volatility in the price of gold; but lurking not too far behind is the ambition to have the Yuan compete with the US$ as an international reserve currency.  (A reserve currency is one all governments must hold to facilitate trade.)

How realistic is that ambition?

The Chinese certainly seem to have the right credentials. Their economy is now, according to the latest World Bank purchasing power parity estimate, larger than that of the United States, and last year China overtook Germany as a global trader.

But I doubt if the Yuan will ever become the world's reserve currency, and that has nothing to do with China's credentials:  it's because I think the Information Age is creating the possibility of an entirely new monetary system, free of dependence on any single country, no matter how large and dominant.

To explain what this new option is, I have to provide some background.

Through most of history, the only acceptable international currencies were gold and silver, either coined or as bullion.

Paper money began as promissory notes issued by private financiers stating values in terms of gold (or more rarely, other precious commodities).

When governments began to issue paper currencies they were initially on a "gold standard" that imposed a ceiling on how much money was available for use. That proved a serious constraint in times of rapid economic growth or war, both requiring a swift expansion of finance.

Not surprisingly, governments went off the gold standard under pressure, and once that happened, the problem of international exchange rates became a primary concern: there was no agreed common measure of value.

The problem was especially difficult at a time when the leaders of imperial Europe believed the strength of a country was founded in its capacity to maximize exports and minimize imports.

To achieve that ideal they engaged in reckless manipulation of trade rules and currency exchange rates, dignifying their sharp tactics as "trade and monetary policy."

But all they achieved was endemic economic instability.

The major European empires sought to cushion themselves by monopolizing the markets of their colonies, but that only deepened the poverty of their victims, rendering them useless as consumers. 

Among the nations of Europe and North America, the volatility put all countries on a downward spiral of falling trade, consumption, production and employment.

As factories closed and millions lost their jobs, the world sank into the Great Depression of the 1930s. The mass misery of those times empowered fascists of the Left and Right, and a British-led effort to set them violently against each other mushroomed into the Second World War.

After the war, as the world's sole economic super-Power, the United States moved swiftly to create a system in which currency exchange rates were fixed and trade restrictions removed.

A new International Monetary Fund established the currency values of all its members in terms of gold at $35 an ounce. The US$ was deemed "as good as gold," and that freed the system from the rigidities of linking currencies directly to metal.

The IMF system functioned well until the massive export of US$ to fund postwar reconstruction in Europe and Japan, and to fight the proxy conflicts of the Cold War, caused a glut of the currency abroad.

When foreign governments with huge holdings of dollars tried to convert them into gold, Richard Nixon refused. The central agreement of the IMF was thus destroyed, and all currencies left to "float" to their market valuations.

That happened in 1972-1973, and since then, the world monetary system has lurched along with floating currency rates set by opaque, volatile "and staggeringly large international financial flows.

As the United States economy was by far the largest in the world and petroleum was priced in $, it became necessary for all trading nations to hold the currency in their own reserves.

That is what made the US$ the world's "reserve currency."  

Against that background it is quite clear that the Chinese ambition to have the Yuan replace the $ in international trade is a pipe-dream.

The Chinese economy is nowhere as large, diverse or vital as the American, and GDP comparisons based on PPP calculations will not impress hard-eyed financiers called upon to decide which currency they want to hold in large quantities.

In addition, the Information Revolution has opened up the possibility of an international monetary system with a fluid market-imposed gold standard operating largely on autopilot.

It could work something like this: exporters of a particular product or commodity would price it in terms of the domestic cost of gold in their countries. Importers would decide what was the best buy based on the gold price in their own countries. Supply and demand would set the purchase price.

Such an arrangement is possible because information technology can sift through enormous amounts of data to present buyers and sellers with clear choices.

The free global marketplace that would evolve from such interactions can be envisaged as a giant e-Bay, with a reformed IMF producing a periodically adjusted scale of currency valuations as reflected in millions of trades. It would also monitor overall balances in trade and payments flows and work with national authorities to head off problematic situations.

Such a system would provide a completely elastic gold standard for multiple currencies and with great economy of effort, take into account a diversity of social factors in exchange valuations.   

Has Ambekar "Beaten Gandhi Hollow"?

The dishonesties of newspaper columnists are usually petty and insignificant, but not so with Swaminathan Aiyar's assault on the Mahatma in the Times of India on 9 February; it is a very large attack on the truth.

Its first sentence claims that: "January 30, the death anniversary of Mahatma Gandhi, drove home the growing irrelevance of the father of the nation."

How?

Why, Trinamool cabinet ministers in Calcutta did not attend the official ceremonies on the occasion, and the Mayor of Mumbai forgot too. Also, a "newspaper poll some years ago," showed "two-thirds of all voters thought that Sonia Gandhi was related to Mahatma Gandhi."

This is very weak tea and Aiyar moves quickly to a new brew: he claims Bhimrao Ambedkar "has posthumously beaten the Mahatma hollow."

He does not explain how that contest was arranged. Perhaps the statement that Ambedkar is "the icon of all dalits" is a gesture in that direction. For some reason, Aiyar seems to disregard the millions of us non-dalits who also consider Babasaheb iconic; not to mention the hundreds of millions who consider both men heroes.
 
But all this is preliminary throat-clearing; Aiyar's main theme is Ambedkar's opposition to Gandhi's idea that India should be composed of self-ruling villages. He quotes Ambedkar's rejection of panchayat raj in the Bombay Legislative Council on the grounds that a “population which is hidebound by caste ... infected by ancient prejudices ... flouts equality of status and is dominated by notions of gradations in life" cannot "be expected to have the right notions even to discharge bare justice.”

That view "continues to ring true eight decades later," Aiyar declares. As evidence of village-level infamy he points to the "mass killing of Muslims in Muzaffarnagar; the regressive "khap panchayats" in Haryana and Punjab; the recent West Bengal khap panchayat that ordered gang rape of a woman with a Muslim lover; the 2012 arson in a Tamil Nadu village after a dalit boy eloped with a  Vanniyar girl; and, in the same state, the "several cases" of intimidation that kept dalits from occupying reserved panchayat seats.

That is still a very weak case against Panchayat Raj, and to shore it up Aiyar throws in a reference to World Bank "research" confirming that "the world over, central governments tend to be far more egalitarian and secular in outlook than villages." He adds: "What Ambedkar said of hidebound villages is a global truth."

As a student of the Bank's research output for over four decades, I find it a bit hard to believe that it produced that definitive hold-all finding. I could be wrong, but it sounds more like something out of an Oxfam brochure or, at a stretch, a Human Development Report from UNDP. 

If Aiyar had looked closer home he would have found that the actual Indian experience with Panchayati Raj has been overwhelmingly positive.

Things got off to a slow start because Ambedkar's fears were widely shared. Parliament took 40 years to enact constitutional provisions into law and enable a system of directly elected bodies with quotas for women and Scheduled Castes/Tribes; and in the early years funding was limited and progress slowed by a corrupt nexus of conservative bureaucrats and caste leaders threatened by democracy.

However, by the beginning of the 11th Five Year Plan (2007-2012), there were some 250,000 elected village-level bodies, with 3.2 million elected members, over a third of them women.

By then, their functioning had finally won the confidence of the Planning Commission. It increased funding 471 percent to Rs.775 crores (approximately $168 million), noting that although achievements in the past had not been commensurate with expenditures, the Panchayat system had proved to be a laboratory “of multi-level pluralist democracy, facilitating the achievements of consensus on development issues at the lowest level of government."

Experience had shown that at “the local level, groups learn to co-exist, cooperate, negotiate and arrive at acceptable decisions and even marginalized groups can gain confidence and move on from token participation to higher forms of direct social action for the collective good."

The realization of the effectiveness of Panchayat Raj has not led to any rethinking of the main thrust of Indian economic development. It has continued in the 12th Five Year Plan (2013 -2018) towards industrialization, with tall talk of "corridors" for manufacturing across the length and breadth of the country.

This points to a basic disconnect at the highest levels of Indian policy-making, and it should make ordinary Indians extremely anxious, for it shows that our leaders still think of "development" purely in terms of GDP growth and not the welfare of the people. Consider the following facts:

1. India is tooling itself to fit into a world economy that is in a state of terminal crisis. 
2. It is making itself part of patterns of global production and exchange that are killing the life-sustaining systems of the planet.
3. In the process, it is destroying the basis for Indian productivity, both by unbalancing the complex patterns of social and ecological interdependence in the countryside and by paving over rich farmland for luxury housing and shopping malls.
4. The result is an ever more obscene gap between the ultra-rich and everyone else: the net worth of India's billionaires increased 12-fold in 15 years. As IMF chief Christine Lagarde noted recently, that money could have eliminated poverty in the country -- twice over.
5. There is massive proof, made concrete in China, that rapid industrialization will cause a whole slew of new problems, including massive despoliation of air, land and water, and a huge new burden of environment-related illnesses, especially cancer.  
6. The more we industrialize, the sharper we will feel international pressures through manipulated energy prices and rigged currency markets. 

Mahatma Gandhi's advice that India should seek to revive its villages as the means of advance was not some idealistic pipedream. He knew Indian ground realities better than any other politician of his generation or since; what he proposed would have brought growth where it mattered most, to the poor. 

As things stand, if India is to survive with its traditions intact, we have no alternative but village-based development. 

Austerity Measures Could Lead to Depression

Economic austerity measures imposed by governments could land the world in a Great Depression.

That is the unvarnished warning from two parts of the UN System that usually have very different takes on policy matters: the United Nations Conference on Trade and Development (UNCTAD) and the International Monetary Fund (IMF).

In a new Policy Brief, UNCTAD has explained that warning. It noted that because of lack of consumer demand several advanced economies were “hovering on the brink of a second bout of recession,” but their “political attention" had "turned to ways to cut fiscal deficits and reduce the domestic public debt.” If they continued with that effort it would make it impossible for the private sector to grow and "de-leverage" its own massive debt.

Without “a rapid policy turnaround” said UNCTAD, the world is “in danger of repeating the mistakes of the 1930s.”

“During the Great Depression of the 1930s, the United States had experienced “two sharp downturns in succession.” Recovery from the “first wave (August 1929 to March 1933),” began “after President F.D. Roosevelt took office, in 1933. However, another severe downturn set in during 1937-38. That second downturn, UNCTAD said, was the result of “poor government policy, especially the decision to tighten up fiscal policy too early in the recovery.”

UNCTAD called on countries “threatened by recession and deflation” to “avoid intensified austerity measures because these are unlikely to produce the intended outcomes and could propel the world into a renewed bout of recession, or even into an outright depression.” (It did not address the possibility of hyperinflation if governments continued massive stimulus policies by simply printing new money.)

Given today’s highly integrated world economy, the “impact will not be limited to specific sectors or to well-defined regions.” Further, a “lost decade” for the world economy would “throw into question the ability of democratic governments to tackle the most urgent challenges of our age.”

Not to mince words, that is a warning that a Depression could bring fascist demagogues to power.