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Funny Money and Honest Money

 -- Published: Monday, 6 October 2014 | Print  | Disqus 

How can a system which fails to maintain its value in terms of gold, which it is supposed to do, be regarded as a sound system of currency? - Dr. B. R. Ambedkar - Early 20th Century



- Manish Thatte



0) What is Money

1) What is funny money

2) What is honest money

3) Types of honest money

          a) Specie

          b) Gold Exchange Standard

          c) Gold Bullion Standard

          d) Bimetal Standard

4) Problems with funny money

          a) Wild fluctuations in the markets (Booms and Busts and Speculation)

          b) The loot of the masses (investors, employers, employees and dependents)

          c) Wars

          d) Unreasonable asset bubbles

5) Problems with honest money

          a) Fraud and Robbery

          b) Hoarding

          c) Banking and Fractional reserves

          d) Balance of Payments

          e) Quantity of money needed

          f) What about Keynes and Welfare Economics

6) Utah, Malaysia and Switzerland

6) Conclusion



0) What is money


I remember once, when I was a small boy, I went to purchase some clothes for myself with my parents. But my mother told me that first we have to go to the bank to take out some money for the purchase. I couldn’t understand why was money needed from the bank when my parents always seemed to have money in their purses, neither did I understand  from where did money in the bank come from.

So, where did my parents get money in their purses and where does the bank get the money, which it pays to us when we need it (of course, if and when we have a net savings balance in our account? There were no credit cards in those days.) And what will the cloth merchant do with our money?

Quite simply, my parents worked as businessman and employee, and from the profits of the business and salary which they got when the month was over, the money came.


This simple intercourse demonstrates that money is:

1) Remuneration for the goods and services provided to the community. (Think salary and profits)


2) Money is a store of work done previously, that is it is a store of value. (Think bank accounts, fixed deposits etc.)


3) Money is medium of exchange i. e. It is the settlement or extinguishing of debt. (Think about the shopkeeper who sells his clothes in exchange for my money, and who in turn pays the cloth manufacturer and the tailor for their work and keeps some of the money as a profit / operating expense for himself).


So, money is three things, viz. medium of exchange, store of value and payment for useful work done. So, as a corollary, Anything else is not money.


And what do we see today? Everybody and his grandma is purchasing a big expensive car on loan. Now a days, people seem to take a loan for almost anything, home loan, credit card loan, car loan, marriage loan, gold loan etc. A country which since times immemorial had been a financially healthy country of honest savers is being turned into a country of borrowers, decadents and consumerists.

The thought in my mind began taking root, that something was terribly wrong with today’s monetary system. And hence the reason for this essay and my PhD. thesis.


I researched the Internet to find out how we used to carry about our business in the ancient times and in the recent past in the world in general and in India in particular. And I came across the brilliant and well researched PhD. thesis of Dr. B. R. Ambedkar, as well as the works of such gifted scholars as John Maynard Keynes, Ludvig Von Mises, Murray N. Rothbard and Hugo Salinas Price. I also have the pleasure of being able to coordinate and obtain the valuable guidance of Dr. Vinayak Govilkar who had been my teacher during my MBA and continues to guide me to this day. I dedicate this very first of my work to the above mentioned scholars.



So, back to the point. What was right earlier and what is wrong with today’s monetary system?


1) What is funny money

What has been a bad habit of the various governments of the world, recently and currently, is that, they have been issuing paper money in the form of currency notes, coins and debt on a purely fiat basis.

i. e.

1) Nobody worked to provide useful goods and services and / or generate profits, which they paid to the government as taxes, and then the government issued those accumulated taxes as notes, coins or loans to deserving individuals


2) Such fiat money was also not any store of value, which the past generations had worked hard and earned, and then passed on their legacy to the government to spend at a future date.


3) It may be tempting to call Such fiat money as a medium of exchange, in the sense that it is counted in Rupees, Dollars, Euros and Pounds, but remember, its not real money in the sense that there is no backing to it either in terms of past or present useful work done.


At best such money may be seen as a promise given by its receivers for the future valuable work which they are going to do.

It is akin to the shopkeeper giving me the clothes without me giving him anything in exchange, perhaps a promise to pay him at a future date, the price of the clothes. But once I get possession of the clothes, the shopkeeper has no means to ensure that me or my parents will pay the price. And by the way, I have a lot of sutali firecrackers saved from the last Diwali, which I can use to cause nuisance to the shopkeeper if and when he insists on payment.


          So, in essence, fiat money grows on trees (money plants anyone?) or it can be created out of nothing or in the extreme, it can even be dropped from helicopters (think helicopter Ben) so that the people will take it and spend it to get useful goods and services. Lets take a look at some of the various kinds of funny monies that are circulating around the world today.


Rupee: The rupee is the common name for the currencies of India, Pakistan, Sri Lanka, Nepal, Mauritius, Seychelles, Maldives, Indonesia (as the rupiah), and formerly those of Burma and Afghanistan. Historically, the first currency called "rupiya" was introduced in the 16th century by Sher Shah Suri, founder of the Sur Empire of Northern India. The term is from rūpya, a Sanskrit term for silver coin, from Sanskrit rūpá, beautiful form. It is also alternately said that the name Rupee originates from the Sanskrit word Rupyakam (a unit of money measurement in Ancient Akhanda Bharat (Akhanda Bharat refers to todays India, Pakistan, Sri Lanka, Nepal, Bangladesh, Bhutan, Mauritius, Seychelles, Maldives, Indonesia , Thailand, Malaysia, Singapore, Burma and Afghanistan.) The Sanskrit word for silver is Roupya!!!)

          The original rūpaya was a silver coin weighing 178 grains (11.534 grams or 1 tola). As Dr. Ambedkar has noted in his seminal work, the rupee minted at various mints across the country during the Mughal period was extremely standardized.

Name of the Rupee

Weight in pure Grains

Name of the Rupee

Weight in pure Grains

Akbari of Lahore


Delhi Sonat


Akbari of Agra


Delhi Alamgir


Jehangiri of Agra


Old Surat


Jehangiri of Allahabad




Jehangiri of Kandhar


Persian Rupee of 1745


Shehajehani of Agra


Old Dacca


Shehajehani of Ahmedabad




Shehajehani of Delhi




Shehajehani of Delhi


Shaha Alam (1772)


Shehajehani of Lahore






So, we see, that as recently as the Mughal era, for which we have hard data, there was a silver rupee weighing approx 11.5 grams and a gold mohur of similar weight for higher value transactions.

The Indian Government holds about 550 tons of gold in its vaults today. And Indian citizens and temples hold about 20,000 to 25,000 tons of gold in private hands, and about approximately, 20,000 tons of silver in private hands.


Pound Sterling: The pound is a unit of currency in UK. The term originated in Great Britain as the value of a pound (weight) of silver. The word pound is the English translation of the Latin word libra, which was the unit of account of the Roman Empire. The British pound derived from the Roman libra, which is why the pound (mass) is often initialized to 'lb'; along with the French livre, the Italian lira and the Portuguese Libra

The UK officially holds about 200 tons of gold.


Euro: The euro (sign: €; code: EUR) is the currency used by the Institutions of the European Union and is the official currency of the eurozone, which consists of 18 of the 28 member states of the European Union: Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain. Lithuania is adopting the euro as its official currency in place of the lithuanian litas on 1 January 2015. The name euro was officially adopted on 16 December 1995. The euro was introduced to world financial markets as an accounting currency on 1 January 1999, replacing the former European Currency Unit (ECU).

The Euro was never based on any precious metal to derive its value from. It was floated freely against the worlds currencies. But today, the EU as a conglomeration of nations continues to officially hold substantial stocks of gold in its central banks.


Ruble: Historically, a "ruble" was a piece of a certain weight chopped off a silver ingot (grivna), hence the name. Another version of the word's origin is that it comes from the Russian noun рубец, rubets, i.e., the seam that is left around the coin after casting: silver was added to the cast in two steps. Therefore, the word ruble means "a cast with a seam".

Russia officially holds about 1,000 tons of gold.


Right upto WWII the pound, ruble and many other currencies were linked to gold and silver by weight.


Yuan (Renmimbi): The renminbi is the official currency of the People’s Republic of China. The name literally means "people's currency".

The yuan is the basic unit of the renminbi, but is also used to refer to the Chinese currency generally, especially in international contexts. The distinction between the terms "renminbi" and "yuan" is similar to that between sterling and pound, which respectively refer to the British currency and its primary unit.

The yuan was the People’s money espoused by Mao in the 1960s. It was never linked to gold and / or silver at anytime.

China currently and officially holds about 1,000 tons of gold in its reserves.


Dollar: The word Dollar originates from the word Thaler. On 15 January 1520, the kingdom of Bohemia (it was then a state located in today’s Czech Republic in Central Europe) began minting coins from silver mined locally in Joachimsthal. The coins were called "Joachimsthaler," which became shortened in common usage to thaler or taler. The German name Joachimsthal literally means Joachim's valley or Joachim's dale. This name found its way into other languages: Czech tolar, Hungarian taller, Danish and Norwegian (rigs) daler, Swedish (riks) daler, Icelandic dalur, Dutch (rijks)daalder or daler, Ethiopian talari, Italian tallero, Polish talar, Persian Dare, as well as - via Dutch - into English as dollar.

The USA is officially the largest holder of gold in the world and continues to hold about 8000 tons of gold in its vaults.

The history of the dollar is more interesting and enduring. Initially the dollar was a certain weight of gold and silver. The dollar was freely and fully convertible in gold and silver.

In the 1930s, President Roosevelt made it illegal for Americans to own any personal gold, ostensibly, so as to put that gold to use to come out of the depression. At that time the dollar was exchangeable with gold at the rate of 20 USD for every ounce of gold. After the domestic confiscation of the gold, the US changed the rate of the dollar from 20 USD per ounce to 35 USD per ounce for international transactions.

          After the WWII, the economies of Europe and Japan had been severely damaged and war-ravaged. USA was the only country which still had a modicum of sense as a normally functioning economy. At the Bretton Woods Conference, it was agreed by all the Major countries to base their individual currencies on the dollar, and the fully convertible dollar was to be based on gold at the rate of 35 dollars per ounce of gold. That rate remained steady till 15th August 1971, when President Nixon closed the gold window to the world. Now, the dollars earned by the other countries (by export to the US) could not be redeemed for gold. These countries were stuck with their dollar reserves.


Rise of the petrodollar: In the mean while during the Korean War, Vietnam War and the Cold war, America also realized, (following in the footsteps of Prof. Keynes) that the gold standard will never allow it to run up financial deficits. And financial deficits are necessary if you want to finance a war in a far off place.

          Also, the real power behind smoothly running the wheels of the modern economic world was not gold but easy and cheap energy. So, America signed an agreement with Saudi Arabia (house of Saud) that whatever crude oil that Saudi Arabia will sell, it will be priced in the dollar !!! And in return, USA guaranteed the House of Saud, that they will not be destabilized from their ruling position. This single contract was to give rise to the hegemony of the Petro-Dollar for years to come in the future.

          So, now which ever country depended on crude oil (that makes it most of the countries in the world) from the middle east, had to first have dollars to pay to the middle east countries. So, first they had to earn those dollars by exporting what ever goods and services they had to USA !   Now all countries began a mad scramble to export their own commodities, goods and services to America. So, as a bonus to America, all the international trade of goods, commodities and services came to be priced in dollars. This is the intrinsic power and value of the American Dollar which is continuing to this day!


Currently, all the currencies mentioned above are what we can call fiat currencies, or funny money in the sense, that they do not possess any intrinsic value of their own. Their value is stamped by their government and is accepted and circulated by the general public.


2) What is honest money

Now that we have seen what is fiat money, it is very easy to postulate what honest money is. Namely, in addition to other qualities, it must possess 3 most essential qualities...

1) It must be a really long term store of value and must not be perishable

2) It must be able to reimburse honestly for valuable goods and services provided

3) It must be able to extinguish debt with finality


It so happens, that since the dawn of civilization, various monies have been in use such as  cowries (shells), salt, cattle, bags of grain, gold and silver (mohurs and rupyakam). Of these, since the gold and silver coins fulfill all the above conditions unobtrusively, and have been doing so since times immemorial, lets focus on them.

          As of today, silver is a commodity and is also liable to get tarnished in polluted and humid climates. So lets not consider silver at the moment. Also, silver along with platinum and palladium have industrial uses such as making catalytic converters, critical for modern living.

          Which leaves us with gold. Gold possesses all the above much needed characteristics. In addition to that, it has zero utility (except a very minor utility in electronics) aside from its use as jewelery. Gold is as if nature herself has handed over an ideal medium of exchange (currency) to humanity. Also, its unique density and rarity makes it very difficult to counterfeit. Also, it very primly satisfies the three conditions namely,

1) Gold does not tarnish, neither does it corrode, it is not perishable, so it is a really long term store of value.

2) It cannot be printed at will by any central bank. So, unless, you have gold over which you really have in your own right, you cannot pay somebody. So it is able to reimburse honestly for valuable goods and services


3) It is not any promise to pay the bearer as assured sum of money promised by any bank or government. Thus, it is an excellent medium to extinguish all debt with finality.


Gold also has other excellent qualities such as almost unlimited divisibility, universal fungibility, luster, rarity, high weight to value ratio etc.

In addition to that, whatever fluctuations and new discoveries were to happen in the gold mining sector have almost all been past. And now, on an average the net addition to the world’s gold stocks is 2% of the total. Thus, it will even appeal to classical Keynesian economists, that the rate of inflation in a gold standard will be a steady, benevolent and gentle 2% per annum, all other things being equal.

Dr. B. R. Ambedkar, in his treatise, classifies the masses into three types, the savers, the employers and the employee. We can conclude, that a gold mohur will be an ideal medium to save money, purchase machinery and set up industries with and will also be suitable to pay the employees which they in turn can spend to satisfy their daily needs.

What else will happen if and when we usher in the gold standard?

1) Fractional reserve banking will have to go. Since all money in circulation will have to be real honest money.

2) Interest rates will be outside the purview of the RBI, they will be decided by the free market. But in essence, credit will become easier for businessmen.

3) Politicians will loose their power to favor crony capitalists through doles of easy undeserved credit.

4) Initially there will be deflation in the artificial bubbles which have been created in real estate, stock markets, derivatives markets. But once the system has stabilized, there will be a gentle steady inflation of 2 % overall.

5) In such a scenario, all types of people namely, savers, employers and employees will have a level playing field. The people who will loose out are those who want to live beyond their means by using credit cards, derivatives, bank loans, car loans, marriage loans etc. But mind well, the business of credit and the banks will become healthier in the long run.


3) Types of honest money


Now that we have seen what honest money is and have discussed some of the effects, lets see how can we get back to the gold standard aka the honest money system?


a) Specie

In the gold specie standard the monetary unit is associated with the value of circulating gold coins or the monetary unit has the value of a certain circulating gold coin. Quite simply it means the government mint will mint standardized gold coins of requisite purity and weight, and they will be acceptable as legal tender in the open market and for government payments.

The reader will appreciate at the outset that in such a system the gold coins in circulation will be liable for wear and tear in daily usage. Hence this is not suitable, atleast initially, according to some economists. This author is of the view, that Gresham’s law will operate. If and when a freely convertible, free floating  and legal tender gold mohur is introduced into the marketplace, alongside of paper currency notes, first of all it will be hoarded. Let it be hoarded by the people. It will give them that much more monetary stability. The money belongs to the people and so it should be in their own hands.


b) Gold Exchange Standard

The gold exchange standard usually does not involve the circulation of gold coins. The main feature of the gold exchange standard is that the government guarantees a fixed exchange rate to the currency of another country that uses a gold standard (specie or bullion), regardless of what type of notes or coins are used as a means of exchange. This creates a defacto gold standard, where the value of the means of exchange has a fixed external value in terms of gold that is independent of the inherent value of the means of exchange itself.

So, if tomorrow US or UK or China or Russia starts relying on a gold standard and we peg our Rupee at a fixed rate to the USD, Pound, Yuan or Ruble respectively, that will be as good as a gold standard, as long as the reference country does not debauch its currency by any means. Before the Nixon Shock of 1971, most countries of the world were on such a gold exchange standard. The chance of that happening in the near future is very remote at best.


c) Gold Bullion Standard

The gold bullion standard is a system in which gold coins do not circulate, but the authorities agree to sell gold bullion on demand at a fixed price in exchange for currency.

This according to the author, is the ideal system at the moment for our country. But it will be a test of patience of our central bank and the ruling government to see to it that there is no inflation and the gold notes are truly honoured.


d) Bimetal Standard or even multiple commodity standard

In this case, gold and or silver and or copper and or aluminum or even a basket of energy and commodities may be used as a basis to issue currency. But such a case is too complicated to consider at the moment, hence we will treat it at a later stage.  


4) Problems with funny money

a) Wild fluctuations in the markets (Hyperinflation, stagflation, depression)

We have been witnessing various abnormal phenomenon in the financial markets since 1971, such as hyperinflation (Zimbabwe), the stock market bubbles of 2000, 2014, the Asian financial crisis, Crisis in Argentina, Financial crisis in USA in 2007-8 etc. These are all due the unhealthy tendency of the world central banks to simply print money and loan money to the governments and corporates and individuals. Such money does not have any backing in terms of its not being any stored value. Its giust printed or digitized into existence. So, its easy money, free money.

          Whenever, such money is created, it tends to lower the value of honest money, because both are counted in the same unit of measure e.g. the Rupee. In such a scenario, what happens is, capital is not efficiently allocated to the most profitable ventures, but such capital goes to finance bubbles in various markets such as real estate (e.g. Freddie mac and Fannie may), stock markets (2000 and 2014 stock indices) etc. Greed feeds on itself and prudent financial decisions and investments are put on the back-burner.


b) The loot of the masses (investors, employers, employees and dependents)

When the central banks and the governments retain the power to issue their own money, they can be partial. They can benefit only those people and organizations which they favor. As a corollary, those people who are not of a favored status, see the value and purchasing power of their savings and investments being continually inflated away when inflation runs rampant in a fiat monetary regime.


c) Wars

N. M. Rothschild is said to have once uttered “ I care not what puppet is placed upon the throne of England to rule the Empire on which the sun never sets. The man who controls the British money supply controls the British Empire, and I control the British money supply”.

          In todays scenario, the central banks and the governments of the world, control this money supply.

          See, gold in the hands of the masses is real wealth and power in their hands. Gold is the ultimate democratization of wealth. And history is a witness, no democratic country has ever been an aggressor. Aggression is always committed under the sway of ambitious dictators and despots.

Lets take the case of India. Throughout history, India has never invaded any country what so ever. This is because, most of the real wealth i.e. gold and silver has always been under the control of its citizens. Real money is needed to finance wars. And real money goes into hiding at the first cloud of a war. Its not about being unpatriotic, its about being prudent.

          As against that, consider Germany under Hitler, or more recently USA. The Federal Government of USA controls the money supply of its people; nay, of the whole world. And it is incessantly engaged in some kind of conflict with some or the other nation.

So, funny money tends to cause wars. 


5) Problems with honest money

A gold standard is not without its own problems. But compared to the problems caused by fiat money, such problems with the gold standard are not insurmountable. Lets consider what are the problems with a gold standard.


a) Fraud and Theft

Gold specie is subject to fraud. In the sense that the issuing authority or even unscrupulous individuals can adulterate the gold coin, as we have seen in the long history of the world since the Roman Empire.

This can be easily surmounted in 2 ways:

1) Technology: Modern technology has made it possible to have cheap and portable xray machines. I envisage a dharam-kata combined with an xray machine, to test the purity of the gold coins in circulation. Such a dharam kata maybe as common as we used to have STD booths.


2) Gold Bullion Standard obviates the need to have pure gold coins in circulation. As long as the RBI is freely and openly ready to exchange its currency notes for pure gold coins, there is no need to circulate gold coins. The gold can be stored across various locations across the length and breath of India e.g. The gold can be stored in the treasury branches of the State Bank of India in each district. That will also democratize the holding of wealth of the nation.

Alternately, each treasury branch can have a government certified mint to mint gold coins freely or with a certain nominal seignorage, from the gold which the public brings to it.


b) Hoarding

Gresham’s law states that bad money drives out good money out of circulation. It will be logical, if the RBI embarks on a policy of degrading its gold coins, or if the price of gold in the international markets skyrockets, then people will tend to hoard the gold coins they already have.

          So, what I suggest is that the value of the gold coins not be stamped on them in Rupees, because the price is subject to change over time. The coins or bars can iust have the weight and true purity stamped on them.

We need to understand here, that gold is the most unproductive asset. It iust sits there and does nothing. Its not like real estate, or shares or bonds. It does not earn interest, dividend, rent, nothing. On the contrary, it is expensive and risky to maintain stocks of gold.

If the free market forces compel the people to hoard their coins without interest for indefinite periods, with the accompanying risk of theft, then fine. Other wise they may opt to lend them or deposit them with the banks, as a fixed deposit or for safekeeping. In a truly free market, the market forces will operate and people will be ready to bring their gold into circulations, as long as their gold earns the true market interest when owned and gets the value in terms of useful goods and services, which it deserves from time to time when exchanged.

I am sure, hoarding will not be a problem, if the gold is valued properly from time to time. The key to this will be again I emphasize, not assigning any face value to the gold coin. Let the coin or bar find its own worth in the open market.


c) Banking and Fractional reserve banking

As stated earlier, fractional reserve banking will have to go. This may seem a bit stringent at the moment, but when the dust has settled, it will be seen to be most prudent. In the sense, that it will guarantee the financial solvency of the banks.

We may even speculate, that initially, a severe deflation will be caused in the real estate and stock markets, if the existing gold is not valued properly at market value.

When gold is monetized, either of the 2 things will have to happen, either gold will need to be valued to its true market value (here the government does not need to do anything, only let the free market forces play out, so that existing gold supplies find their true value) OR face deflation. By the way, deflation of asset prices is not a bad thing. What it will do is, it will negate the inflation that has become so rampant recently. But when the dust has settled, so to speak, we will be on the threshold and ready to usher in a golden stable age of banking, trade and commerce in India.

And of course, banking can be carried out in all its wonderful glory under a gold standard. What stops that from happening. Only thing is the banks will have an absolute liability to stay solvent, liquid and viable at all times. No Funny Money business, no window dressing, no favouring the undeserving.


d) Balance of Payments (import and export)

Today the position is that oil is priced in dollars. And oil is the lifeblood of trade and commerce. So, each and every nation is obliged to export goods and services to USA to earn dollars. (And as a corollary, USA exports its dollar papers and dollar electronic digits to the whole world. But we do not concern ourselves with that at the moment.) Under a gold standard, we can sign supply contracts with the oil producers. And I am sure, the oil producing countries will be more than happy to import the best of the best of Indian Spices, cloth, silk, gold jewelery, perfumes, fruits, vegetables, grains and various other goods, commodities and valuable services, which we can offer, in exchange for their oil. We can even use the price of the oil and our commodities and services in dollars as a reference. Same mechanism can be used to import other commodities and services from other countries and export our commodities and services to them. What ever the minuscule difference in the trade balance, can be settled in terms of gold and silver bullion, instead of paper fiat currencies, quarterly, half yearly or annually. I am sure, this will provide a great impetus to international trade between India and other countries. As a bonus, it will an added incentive for Indians to start producing ever better goods and services, so that we dont have to let go of our precious gold reserves.


e) Quantity of money needed

As stated earlier, my hypothesis is that gold and silver are currently grossly undervalued. If and when we espouse the gold standard, 2 things can happen.

1) Deflation: No need to fear the word so much. By deflation, I mean, the bubbles which have been blown up due to the funny fiat money in various markets, such as commodities, real estate, stocks, bonds will need to be deflated to their true value in terms of gold and silver. Inflation is inflammation, it is not true growth. In the long run, a certain amount of deflation will prove to be very healthy for the economy.


2) Revaluation of gold and silver: Gold and silver, as money, will need to show an increase in their ability to purchase other commodities, real estate and stocks. In simple terms, if we don’t want large scale deflation in the asset markets, then gold and silver will need to be revalued to higher levels in terms of their purchasing power.


In my opinion, if the free market forces are left to operate on their own, without government policy intervention, then an equilibrium will be soon reached as to the prices of the commodities, stocks, bonds, real estate and gold / silver markets. In simple terms, a combination of both, deflation and revaluation of purchasing power of gold and silver will occur.


f) What about Welfare Economics and stimulus?

Welfare Economics: In the open society, there are some sections of the populace which require support, in the sense, that they are not able to provide for themselves e.g. the destitute, the old and the infirm.

Various governments across the world profess to help them and thus justify their printing of fiat money. But this is a falsity on their part. Printing fiat money makes the poor even more poorer, without their realizing that the government is taxing them without their knowing that they are being taxed. In a fiat money regime, only those who have easy access to the newly printed fiat money, e.g. The whole vertical value chain of the car spare parts supplier, the car manufacturer, the car dealer and finally the car purchaser benefits but the general population does not benefit in any way. And if the government attempts to benefit everybody at the same time then only the price levels increase as we saw in 2011 when the prices of grains and vegetables skyrocketed in India, when the Government increased the minimum support price of grains and vegetables. And this especially hits hard the poor daily wage earners, the retirees, the infirm and the destitute.

          Government is free to do welfare economics to favored sections of society using the honest money taxes which they collect from honest tax payers. And in return, honest money tax payers will become more careful regarding whom to choose to govern themselves. As a bonus, suicides by the poor marginal land holding farmer will be severely curtailed, the influence of private money lenders will be severely curtailed, as the farmer farm laborer will now be able to earn and save honest money. His saved honest money in terms of gold and silver coins will come to the rescue as and when needed and that too with all its full purchasing power glory.

Stimulus: I am sure, that in a honest money regime, economic stimulus by deficit financing wont be needed. Of course, government can undertake many developmental projects (including construction of dams, canals, townships, metros, freeways, roads etc.) for the general uplift of society in general, but in the absence of deficit financing and fractional reserve banking that will have to be done through means of honest money. I am sure, that the private gold and silver holders will rise to the occasion. Our financial markets are now sufficiently mature. And I am also sure, that the foreign countries will see that the mere word of The Government of India is as good as gold. Many many countries will be very eager and will come forward to invest their precious finances and know-how in to a Golden Re-surging India. Especially when offered a chance in invest in the economy of a rich, powerful and peaceful country which can export so many valuable commodities, goods and services to them.


6) Who others are on a gold or silver standard?

There is always space at the top. Currently, no sovereign country is on a gold or silver standard. Right upto the Bretton Woods Agreement, almost all countries were on a gold or silver standard. After The Bretton Woods Agreement, only the USA was on a gold standard, and all the other country’s currencies were pegged to the USD, right upto 15th August 1971. On 15th August 1971, President Nixon closed the gold window by executive order, thus ending the free convertibility of the USD with gold. After that, gold was free to float in terms of the currency of each country. This paved the way for Keynesian policies to run rampant in the world. Keynes was a brilliant economist, and his policies were perfect for a World War Ravaged Europe to come out of the quagmire of the severe damage caused by the Great War. But today, in times of peace, his policies have lost their relevance. On the other hand, the world has created an artificial black-hole of fiat currency and derivatives. Its high time that we came to realize that nature never intended humanity to print their way out of debt. Thats not the way how nature works, not in physics, neither in chemistry and never in biology. There are no free lunches.


Utah, Malaysia, Mexico and Switzerland:

Utah: Utah is a state in The USA. In 2011, Utah passed a law and legalized the use of gold and silver coins as legal tender in addition to the American Federal Notes.

Malaysia: Malaysia is a Muslim country and it wants to implement Sharia Law in its monetary system. Malaysia is in the process of incorporating and implementing a silver dirham into its currency system.

Mexico: Mexico has introduced the silver ‘libertad’ as currency in parallel with the circulation of its peso.

Switzerland: Switzerland is holding a referendum of its citizens to compel its central bank to hold 20% of its reserves in gold on 30th November 2014. In effect, if the referendum passes through, the Swiss Franc will become a 20 % gold backed currency.


INDIA: India can now lead the way by launching a full fledged gold standard. We can convert some of our huge stockpile of 300 billion USD reserves into gold. These reserves are paying a minuscule interest at the moment. And god forbid, if the USD collapses as it is bound to collapse anytime, under its own weight of 17 trillion dollars of US national debt, what will happen to our balance of payments?

At the current market price of USD 1200 for 30 grams of gold, even if we purchase a few hundred tons of gold, we will still have sufficient USD to pay our oil bills.


6) Conclusion

Lets not forget, that the people of India are some of the wisest people in the world. Over the years, they have squirreled away an estimated 25,000 tons of gold, (more but not less) and an immeasurable quantity of silver. I am sure, that all that gold and silver will come in circulation once gold and silver is legislated as the legal tender and India becomes a gold standard country.

          Traditionally, Ancient India has been a rich nation. It used to be called a ‘Sone ki Chidiya’. i.e. A golden Bird. There is a reason for that !!!

          Many an ancient economists (especially Romans) have lamented that all that India sends us is her spices and silk which are perishable commodities but what India accepts in payment is only Gold and Silver. That gold and silver is still out there amongst the Indians. Only thing is it needs security and stability to come out into circulation. This is a golden opportunity for India to reclaim its developed and prosperous nation status amongst the countries of the world.

          The author suggests that to begin with The Government should stop its inflationary policies immediately. Let the rupee appreciate against the dollar and other currencies. If other nations want to do quantitative easing of their own, let them do that. Exports will suffer initially. But what we have in our favor is the young and vibrant population of India. The demographic dividend so to speak.

          At least the farmer suicides will stop. And with its appreciating currency and high demographic dividend, India will become a magnet for foreign investment. But mind well, we are preparing to usher in a gold standard. So, we will only accept investments in gold and / or oil and natural gas. :)

Then We should peg the value of the rupee to be backed by 100% gold and silver (say at the nominal market rate of Rs. 30,000 per 10 grams and Rs. 40,000 per kg of silver).

Initially, the Government may introduce a very high value (say Rs. Ten lakhs or Rs. One Crore) note which will be fully convertible and backed by gold and a One lakh Rs. note in equivalent quantity of silver) with the RBI. Roughly it works out to a gold brick of 333.33 gms. and 3.3333 Kg. A high value note is essential initially, so as to facilitate better checks on tax evasion, money laundering. And if people want to hoard such a brick, they are welcome. Remember, the brick will never be said to have gone out of circulation, only it will be squirreled away for any contingency. 

Such a note and the corresponding bullion coin / bar can even be marked with an RFID tag. Such a note may also be invested in a bank so as to earn interest and on maturity again become fully convertible in gold. In addition, such a note may also be made compulsory to pay taxes / government dues by the corporates / individuals. Or alternately, a small discount maybe offered on payment of taxes by means of gold and silver notes. This is sure to bring in much needed supplies of gold and silver stock in to the public treasury.


Later-on smaller denominations of paper notes and coins fully backed by gold, silver, copper and aluminum may be brought into circulation. This topic will be discussed at length at a later date.




1) The Problem of the Rupee - Dr. B. R. Ambedkar

2) What has Government done to our Money - Murray N. Rothbard

3) Man, Economy and State (A treatise on Economic principles) - Murray N. Rothbard

4) Wikipedia

5) Hugo Salinas Price -


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