Gold policy in modern India

Posted in Business, Current Affairs, European History, Gold Reserves, History, Media by Anuraag Sanghi on December 2, 2007

Terrorism comes to town.

Terrorism comes to town. ( Policemen inspect the Bombay Stock Exchange building after the blast in 1993. Thirteen serial bomb blasts tore the city in which at least 250 people were killed. - Photo - AP).

Who is responsible for Mumbai Bomb blasts?

Dawood Ibrahim? Wrong!

Tiger Memon? Wrong?

The answer is Late Morarjee Desai – India’s ex-Prime Minister and Finance Minister.

And a whole lot of RBI and GOI officials who were behind 40 years of legislation which has created India’s underworld, corrupted 4 generations of India Government officials and reduced the value of Indian savings by Rs.1,20,000 crores. (4000 tons of gold purchased by Indian consumers at a 30% premium at today’s value – do your numbers).

Blind Imports

The Indian development idiom is an imported idea. For instance, the Five Year Plans, from Russia. Indian monetary authorities have been led by western discourse and strategy.

No enabling mechanism, (an output of differential thinking) like the Japanese business led by MITI, American business supported by Marshall Plan, NATO, CENTO, SEATO, IMF, World Bank, US Exim Bank, ADB et al. It is these mechanisms that enabled these economies retain their dominant and exploitative positions.

India’s Gold Policy was also a case of warped thinking. To be fair, domestic thinking had to contend a tectonic shift – from a colonial-feudal system to a nationalist, democratic economy. Not discounting, Western pressures tied to aid. For instance, India’s infamous population control policy.

The other big disadvantage – English language.

TN Ninan on Indian poverty

TN Ninan on Indian poverty

The French Lesson

India’s red herring of English language stopped it following French strategy, an empire under eclipse before WW2. Today, 60 years later, France has come ahead of its arch rival and competitor – Britain. Of course, the French strategy is simple – nationalize the economy, with token private sector presence.

In the 1960s, most of the world was buying gold at an artificially low price of US$35 – and the USA was bleeding gold. The French team of Charles de Gaulle and his economic advisor, Jacques Rueff did quick maths. It was clear this मेला would not last long. The USA was printing dollars and dumping it in world markets.

The French redeemed their dollar holdings, sent the French navy to take delivery of gold from USA and bring it to Banque de France. The French raised gold reserves and dumped dollars. Banque De France finally increased its gold reserve to 92% (as a percentage of total foreign currency /monetary reserves).

The Bretton Woods system.

The world after WW2, has been governed by a financial system that has been a failure. The Bretton Woods Agreement, a millstone around the developing world. As WW2 came to a close, British-American economists came together and devised this system. The Bretton Woods system was technically created by more than 700 delegates from the 44 allied nations. But the match was fixed.

It was designed by the Anglo-Saxon countries (America, Australia, Britain, Canada), for the benefit of the Anglo Saxon countries. Did anyone notice how much Britain resisted, joined and finally exited the European Currency Union. Thie Bretton Woods System has swamped the world with accelerating inflow of dollars (American, Australian, Canadian) and British pounds. Producers and exporters are left with vast reserves of depreciating currencies.

The dollars cracking

The dollars cracking

It also gave rise to the Bretton Woods twins (the IMF and the World Bank), which are run and managed by the Anglo-Saxon countries. The ABC countries (and their client states like Japan, etc.) have more than 67% of the voting rights. With this huge voting majority, less than 5% of the world’s population (of the ABC countries) decide how 95% of the world lives.

Indian Government supported the Bretton Woods sham

The Bretton Woods system worked for 20 years because Indians were not allowed to buy gold. India’s finance minster during that crucial period, Morarji Desai, (allegedly on CIA payroll during Lyndon Johnsonn’s Presidency 1963-1968), presented a record 10 budgets, between February 1958, up to 1967. His break with Indira Gandhi began when the Finance portfolio was taken away from him.

Morarji Desai’s ban on gold imports allowed the sham of Bretton Woods to continue for 20 years. His adamant attitude on gold cost the government popularity and electoral losses – and the Indian economy and Indians much more. Was it a co-incidence that many of the RBI functionaries later got plum postings at LSE (IG Patel) and IMF (BN Aadarkar-IMF)?

The burden of the dollar

The burden of the dollar

March 15th, 1968. Finally, US support for gold prices stopped at consumer level. USA continued to promise redemption to Governments at US$35 per ounce. And on August 15th, 1971, the world got the Nixon Chop. By that time, USA gold reserves had dropped from 20,000 tons to 8500 tons – from 21,828 tons (701.8m troy ounces) in 1949 to 8130 tons (261.4-264.6m troy ounces) in the 1980s.

What did India do.

From practically, 1939, (the start of WW2) gold imports into India were controlled or banned. This British legacy (aimed at colonial exploitative ends) was continued by Indian Government and RBI. Many Gold control laws were enacted which stopped all legal gold imports into India.

Our finance minister at that time – Late Morarjee Desai.

Seymour Hersh, an American investigator implied that Morarjee Desai was in CIA pay. Morarjee Desai filed a court case – and subsequently died. Henry Kissinger, made a bald defence of Morarjee Desai.

The other thing that happened was that gold imports went underground.

Morarji Desai may get his place on Mount Rushmore

Morarji Desai may get his place on Mount Rushmore

Gold (illegal) imports (called smuggling) spawned biggest criminals that India has seen. Karim Lala, Haji Mastan, Varadarajan Mudaliar, Yusuf Patel, Tiger Memmon, Chota Rajan, and of course, Dawood Ibrahim – a biological son of a police constable Sheikh Ibrahim Kaskar, was spawned by Morarjee Desai’s laws.

These laws corrupted four generations of Indians Government and politicians. It made gold in India very expensive – and the Indian buyer remained in poverty longer.

12 Responses

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  1. galeo said, on December 5, 2007 at 5:52 pm

    interesting points.

    Any thoughts on India’s monetary policy during the late 70s’ as the dollar was collapsing? how did India maintain the peg at nearly Rs. 8/dollar? what was India’s gold policy then?

    I vaguely remember something about gold bonds being floated… that backfired. In 1981 – Congress signed an IMF loan for about $4b…


  2. Anuraag Sanghi said, on December 6, 2007 at 8:56 am

    The below mentioned position paper on policy changes on gold outlines the history of gold deposits schemes by the Indian Government from 1962 to 1990 collected less than 100 tons (link provided in the blog).

    These were confused strategies with a strong element of mix and match of many different policies – which achieved nothing.

    (Deregulation of Gold in India; A Case Study in Deregulation of a Gold Market by Himadri Bhattacharya)

    On the more interesting issue of dollar to rupee exchange ratio. Gold price after the Bretton Woods agreement, and WW2 was fixed at US$35. US gold reserves were at call – and banks could buy gold at US$35 and sell it in the open market. USA and Britain operated what was called the London Pool – and they were sure that they could manage this – only if India (and Indians) did not buy gold.

    Morarjee Desai obliged. He ensured that India and Indians could not buy gold.

    This carried on till 1968 when the USA stopped defending the dollar-gold peg in the consumer market.

    In 1971, when the world was given the Nixon Chop

    Indian rupee pegged to the declining British Pound till 1971 – in the so-called sterling area, till it became irrelevant. For 30 years, after our so-called independence, we were hanging onto British coat-tails – and they ensured continual damage and harm to the Indian economy; with our active co-operation now.

    After 1971, it was simple, there were “limited”, “managed”, “free” floating exchange rates.

    India managed stability on rupee-pound-dollar cross currency stability with aggressive import control & import substitution; foreign aid and remittances from Indians abroad.

    India had an exports problem. Exporters were expected to manage – with impossible import systems; with a strong currency; with high interest rates; labour inflexibility; raw material shortages; no technology imports; marathon licensing norms – and an endless list. Net, nett – Indian exports suffered. This changed finally only after 1995.

    Another negative policy bias was towards a “strong currency” – (which in the Middle East means having an imposingly large currency note) and in India meant giving less rupees for for more foreign currency (unlike the Japanese Yen or Italian lira, which were in Indian perception a “weak” currencies). Devaluation was a big no-no.

    Basically, what this meant was that India went out scouting for aid – till Bombay High and foreign remittances from our expat workers improved our lot.

  3. Galeo said, on December 7, 2007 at 5:36 am


    The position paper was very informative, thanks.

    On a separate subject – how familiar are you with silver in 1800s? One of the causes of the “Panic if 1857” – a precursor to the US civil war – (http://en.wikipedia.org/wiki/Panic_of_1857) was the “..the decision of British investors to remove funds from U.S. banks…”

    I am doing some research on a related subject – and haven’t had much luck in finding resources that point to the above mentioned cause – other than the same wikipedia entry.

    Any thoughts?

    You can reach me at paragtope@gmail.com

  4. Anuraag Sanghi said, on December 7, 2007 at 8:49 am

    Gold and India and Silver and China – these are two combination in history till the 20th century.

    Three major histories in the 19th century with effect on silver: –

    1. Four major determinants – South America was a major source of silver.
    2. Major silver discoveries in South America – Colombia, Peru, Mexico, Argentina, and Bolivia.
    3. Spanish colonies in South America – Fall Of Haiti, Rise Of Cuba, Argentina.
    4. Latin for Silver is Argentum – and Argentina was named thus.
    5. Slavery outlawed in Europe – but continues in Americas.
    6. Slavery used for mining and sugar.
    7. Sugar is the other major commodity in 1800-1900
    8. The story of the pepper king.
    9. Most countries demanded and got independence from Spain in 1800-1850 period.
    10. Newly minted millionaires.

    Second was US of A –

    1. Most of the 19th century was currency mayhem in USA – where numerous banks issued numerous currencies.
    2. Corruption was endemic
    3. The American Civil War (1861–1865)
    4. 1849 – Gold discovered in California
    5. 1837 business crisis
    6. British reaction due to 1857
    7. This book can help. Just click on this
    8. Another reference. Just click on this

    Third was China and Japan –

    1. Opium was being a flooded into China – and silver flowed out of China.
    2. The Opium Wars, The Boxer Uprising; Sino Japanese Wars
    3. Japan which was the world’s 2nd largest producer of gold in 16th/17th century.
    4. The Japanese market opened up.

    I think these should give you a broad direction. On Haiti, Cuba, Opium, Japan, my blogs on these subjects can give you a start.

  5. Galeo said, on December 7, 2007 at 9:21 pm

    Thanks Anuraag

  6. Anuraag Sanghi said, on December 11, 2007 at 3:07 pm

    A blogger who has been travelling to this part of the world writes

    “…in 1969 a dollar fetched 13 rupees, although you could buy 28 rupees for a dollar in Switzerland and 40 rupees for a dollar in Kabul. The official exchange rate is now 38.50 rupees for a dollar, a nice deal”

    This demonstrates the Government’s “management” of the rupee-dollar till the 1990’s. The Govt. simply kept the rupee at a higher value – and there was active black market supported by the gold smuggling into India; drug transshipment out of India from the Golden crescent and the Golden Triangle. This artificial valuation of the rupee made exports uncompetitive; imports cheap – for which there was no foreign exchange. India regularly had meetings with AID India Consortium and elaborate cases for borrowings were made.
    Thus there was a massive arbitrage opportunity between the official rates and black market was very high. This spawned a huge crime wave.

  7. […] The promise of the Bretton Woods system was stability. USA promised the world that they will redeem the dollar for gold – at a rate of US$35. This was supposed to be done out of the London Pool system. Within 20 years, the first promise was broken. Redemptions of dollar for gold to individuals was stopped in 1968 (March15th). […]

  8. […] answer is Late Morarjee Desai – India’s ex-Prime Minister and Finance Minister. And with Morarjee Desai, were a whole lot of RBI and GOI officials who were behind 40 years of legislation which has created India’s underworld, corrupted 4 generations of India Government officials and […]

  9. […] course, there was the old case where Seymour Hersh alleged that Morarji Desai was paid of by the CIA. So, I will not repeat myself […]

  10. P Mulay said, on August 17, 2009 at 11:53 am

    Excellent article. Shall definitely read others on here too.

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