The political sting against corruption and black money1 that was raised by Team Anna and Baba Ramdev hasn’t evaded yet and the Indian media is ready to blow winds against hoarding in general. Recently, various Indian newspapers, including The Indian Express published a report about rich Indians hoarding banknotes, art works and gold in Swiss Banks2 .
General belief is that by hoarding money, people selfishly cause a slug in the flow of money circulation and hence, they hamper trade. Politicians, mob leaders and Keynesian economists suggest that hoarding of money causes depression, poverty and other economic problems. Politicians also make a huge issue of hoarding money and Indian President Pranab Mukherjee also expressed his worries over flow of savings for investment in gold3 when he was the finance minister of India. He said that there is a need to dissuade people from investing in gold. However, hoarding is certainly not a menace and all this hue and cry against hoarding money is Swiss banks is just because of irrational Keynesian economic approach.
What is Money Hoarding?
Hoarding money is saving money (in any form) to use it in future, when the need arises. It is a person’s increased desire to maintain cash balance. One will desire to save or hoard only such things that can be used in future. Any commodity can be used as money if it is easily recognizable, durable, fungible, transportable, divisible, scarce, and suitable for hoarding. If you cannot hoard a commodity for future value exchange, you cannot use it as money. Saving is necessary especially because of uncertainties of future. Every prudent man saves money for future. However, as Murray Rothbard pointed out in his book “What Has Government Done to Our Money?”, there is no clear differentiation between saving money and hoarding money.
At what point does a man’s cash balance become a faintly disreputable “hoard,” or the prudent man a miser? It is impossible to fix any definite criterion: generally, the charge of “hoarding” means that A is keeping more cash than B thinks is appropriate for A. — Murray Rothbard4
Why Baba Ramdev and Anna Hazare are against Hoarding Money?
It is easy to notice that despite of their success as mass leaders, both Baba Ramdev and Anna Hazare are economically uninformed or uneducated. Baba Ramdev believes that a few Indians have stashed so much money in foreign banks that if that money is brought back and distributed in poor masses, there won’t be any poverty in India. However, this isn’t true. Murray Rothbard explained the issue of money clearly,
People will almost always say, if asked, that they want as much money as they can get! But what they really want is not more units of money–more gold ounces or “dollars”–but more effective units, i.e., greater command of goods and services bought by money. — Murray Rothbard5
By bringing all that money from Swiss Banks back in India to be circulated in economy, the government will cause further inflation which will further reduce the value and effectiveness of Rupee and the prices of other commodities will soar. Indian government and RBI already have inflated Rupee to enormous levels and it has caused price rise and poverty in masses. Inflation is termed as ‘Mudra Sfeeti’ in Hindi which means an unchecked increase in currency or rupee. Price rise is a direct consequence of inflation. While government blames weak monsoon, bad weather, or black money for price rises, the actual culprit of enormous price rises in India is inflation, the expansionary monetary policy of Indian government and Reserve Bank of India. Thus, all the hue and cry in support of Baba Ramdev or Anna Hazare on the issue of money hoarding or black money is pointless. Yet, these mass leaders are gaining support of people and this suggests weakness of Indian libertarians who have failed to spread the idea of economic freedom and sound money in Indian masses till now.
Why Politicians cry against saving or hoarding money?
Unlike Baba Ramdev or Anna Hazare, Pranab Mukherjee had different agenda when he expressed his worries about Indians investing their savings in gold. Pranab Mukherjee isn’t a student of economics, yet he is in great influence of other Keynesian economists of India including our current Prime Minister Mr. Manmohan Singh. He claimed that gold is a dead asset, he certainly was wrong6 . Gold can never be a dead asset and in fact, gold is much more sound money than Indian Rupee. This is because of the fact that it is very difficult to inflate gold and it is very easy to hoard gold. Gold can be easily transferred, divided, recognized, it is fungible and durable, and it is a scarce metal. Obviously, gold is much more sound money than paper or fiat currency. Yet, Indian government, just like other governments of the world, prefers fiat currency over gold currency because government cannot inflate gold at its whims.
When people buy gold, they attain a certain security against governmental corruption, inflation and other bad affects of ill economic policies of Reserve Bank of India. Since gold cannot be inflated easily, it’s worth or price hardly decreases with time and since government keeps inflating Indian Rupee, the price of gold keeps rising up. Thus, by investing in gold, people not only save themselves against inflation, they actually hoard money for future consumption.
For Keynesians, hoarding is a great evil. Keynesians believe that every ounce of gold or every note of Rupee unspent is actually reducing the sales and hence, by hoarding money, people reduce the profits and cause layoffs and unemployment. However, this is a wrong and irrational assumption. It should be noted that if the total supply of money is constant at a given time, then all this money is owned by individuals at that given time in their cash balance. If individuals start hoarding money, the value of unit Rupee will increase and the prices of other commodities will decrease. Thus, hoarding makes things cheaper while increasing the purchasing power of Rupee. Thus, people will be able to buy commodities at cheaper prices. This may seem unprofitable for producers at first glance, however; the production structure of the economy remains unaffected by hoarding of money because while the prices of commodities decrease, the cost of further production, raw material, and labor also decrease to maintain the equilibrium.
So, why are Indian politicians against the idea of common men hoarding money to secure their future? The reason is simple. Allowing a sound currency reduces the power of government to control people through economic policies and inflation. They can inflate fiat currency at any time by printing more currency through RBI, but they cannot produce gold at their whims. This is the reason why politicians try to dissuade people from investing their money in gold.
- I have discussed the issue of Black Money and Baba Ramdev separately at different post, this article is strictly about Money Hoarding, RFL [↩]
- Rich hoarding banknotes, art works and gold in Swiss Banks, The Indian Express [↩]
- People are already literate about their finances in this part of the world Mr. FM and that is the reason why they are buying Gold and Silver to protect their wealth against raging inflation which you only have created. You stop preaching about the matters which you truly don’t understand. You want to encourage people to invest in market so that they loose everything in those phony paper promises? You should go and check Gold’s record for last 5000 years before making such nonsense statements; And, if you can’t check 5000 years history, then at least check last 11 years history of Gold v.s. market paper promise investment options. They all are in gutter right now compared to Gold. By encouraging people to invest in phony paper market instruments you are encouraging them to commit financial suicide! Mr. Mukherjee, who is advising people to commit suicide, is basically in need of financial literacy!, Need to dissuade people from investing in gold: Pranab Mukherjee [↩]
- Economists err if they believe something is wrong when money is not in constant, active “circulation.” Money is only useful for exchange value, true, but it is not only useful at the actual moment of exchange. This truth has been often overlooked. Money is just as useful when lying “idle” in somebody’s cash balance, even in a miser’s “hoard.” For that money is being held now in wait for possible future exchange–it supplies to its owner, right now, the usefulness of permitting exchanges at any time–present or future–the owner might desire., What Has Government Done to Our Money? [↩]
- We have seen that society cannot satisfy its demand for more money by increasing its supply–for an increased supply will simply dilute the effectiveness of each ounce, and the money will be no more really plentiful than before. People’s standard of living (except in the non-monetary uses of gold) cannot increase by mining more gold. If people want more effective gold ounces in their cash balances, they can get them only through a fall in prices and a rise in the effectiveness of each ounce., What Has Government Done to Our Money? [↩]
- gold is not a dead asset. Gold is MONEY. And money can never be dead. Gold gives you protection against highly uncertain future and that’s its productivity, Gold is a dead asset: Pranab Mukherjee [↩]