Friday, January 23, 2015

Is it a good idea to extract tonnes of gold from Indian mines?

I came across this article from Sabhlok City blog where he points that an estimated 200 tonnes of gold are sitting under Indian ground due to mismanagement by the Indian management of its mines.

Of course the first instinct of most would be extract it as soon as possible and the underlying assumption would be that it would greatly improve the Indian economy.

But I'm not so sure. Firstly there is already a great deal of gold in hands of private individuals but it does precious little to propel the economy as it part of the great Indian parallel hidden economy.
There is a great of production and monetary transaction which simply does not figure in the official GDP.

Let us be very aware of what these precious metals entail:Brutal civil wars have been fought in Africa and elsewhere over possession of what is considered a rare resource. But is it that precious and rare?

India historically was not lacking in gold mines but what made it rich was not relentless mining but trade and industry.
Our silk, spices, teak, ivory,incense, steel, weapons,horses ,elephants found ready markets in other parts of the world.

Please note that in pretty much all the above skilled labor and capital is used to create a finished product

Even horses and elephants have to be trained, well groomed and cared for to find a willing buyer in the competitive market for animals in the ancient world

Capturing elephants for their ivory is no laughing matter either.

And in return we received gold from the Romans,Arabs, Persians and other peoples.

In other words , gold was used a unit of payment.

What happens when there is a sudden infusion of gold? Well look no further than the Spanish Empire

Spain was first in the empire game in the late 1400s while England was relatively a late bloomer. In the race of Americas it meant that it got access to the gold and silver South and Central American territories while England had to make do with relatively staid North America

Spain raided unknown tons of gold and silver from the Americas and the process inflicting incredible brutalities on the unfortunate indigenous peoples of the Americas. Effects of which still linger to this day.

Ah but one thing happens when you raid and kidnap Lakshmi is that Shiva does the dance of destruction on your economy. Before Spain realized there were bankrupt(within 200 years) and their currency was worth near nothing.

Why? As PJ O' Rourke put it best in his commentary of Adam Smith'sThe Wealth Of Nations: What Spain was doing was the equivalent of robbing a bank of its deposit slips rather than its money

Why were English enterprises (soon to become the U.S and Canada) successful while Spain failed? It was mostly by accident. While England failed at acquiring gold in its quest for the Americas, it acquired just the right amount(but not too much) by raiding Spanish ships. All the while its subjects engaged in profitable and productive pursuits such as farming ,fishing and metal work in the colonies.

Later again England did loot a great deal of gold from India to lubricate its industrial revolution. But do note the difference. Contrary to what some heavy breathing conspiracy theorists claim , the Rothshilds bank(which indeed financed a lot of imperial ventures but not all and also did lose a great deal of many on failed ones) did not steal trillions of dollars worth of gold in 1700-1800s. Because if it did

a) England would've ended up in the same fate of Spain economically
b) If they are lying around in gold vault as is claimed by the conspiracy theorists, it simply makes no sense for a shrewd investor like Rothschild not to make good use of this resource over time rather than let it rot.

Furthermore it is rather impossible move that amount clandestinely, especially after the fall of Tipu Sultan and the siege of his assets(which undoubtedly included gold stolen from Kerala temples) where there was a great deal of international interest in those wars due to Tipu's alliance with France and his friendship with the American colonists also fighting Britain.

But rather England and her daughter Americas benefit from the Scottish Enlightenment with its common sense views on freedom, economy and governance not to mention various scientific advancements rather than any gold bullion.
What precious resources did they have consisted of very productive North American farmland and livestock.

Especially cattle. It is not for nothing that the Latin word for money pecus also means cattle. Similarly Vedic tribes would measure their wealth in the number of cattle. So when a man from one tribe lifting cattle from another, it was often a declaration of war. This later became a more of a ritual when populations grew large enough to become empires such as Cholas and Chalukyas as late as the 10th century.

Just a currency note is simply a place holder for a national economy which is really an incredibly complex barter system and its value depends on the productivity of its citizens so is the value of gold on which many currencies are based dependent on its rarity.

On another note, the dollar moved away from the gold standard under the Nixon administration, thereby giving the Federal Government even greater powers to print fiat money hence creating runaway inflation. As an aside, the reason colleges in U.S costs have risen almost exponentially since the 1970s is not just the absence of gold standard but the availability of government funds and financial aid which in turn incentive high tuition fees

I'm afraid bringing this gold out will therefore have nothing but negative consequences. Imagine runaway inflation of the 1970s with African levels of corruption of violence.

I just don't see the upside.

I am cross posting to Sabhlok's comments board to see his take on the matter.

Anyone else here with a knowledge of economic history who imagines a different scenario , please let me know





14 comments:

  1. This comment has been removed by the author.

    ReplyDelete
  2. YSV a very very good analysis on this subject by you!On a lighter note,Mr Sabhlok probably doesn't have very strong counter-argument against your points :) So he has chosen to disengage,instead of calling you a Zionist, hasbara ,R stooge etc :) Anyway I must also say that Mr Sabhlok is a very knowledgeable person and he also runs a highly resourceful blog just like you.I respect his opinions also.

    "but it does precious little to propel the economy ..." - Yeah gold does little to propel the economy.Gold has very little industrial value.Whatever value is put on gold is mostly the ornamental and sentimental angle to it.hidden gold is more like hidden rupee notes.While they might bring some relief in the short term,they will not be particularly useful in the long run.For the long term,sustainable & productive economic activities are better.For example if a country has a robust steel industry,then iron ore mining will be more beneficial than gold mining for that country.This is a very simple aspect of economic theory.

    "Spain raided unknown tons of gold....Effects of which still linger to this day." - Here I have a question.By effects do you mean cultural effects like the use of spanish as official language or other things?Please elaborate on this as I don't know very little on this topic.

    "Our silk, spices, teak, ivory,incense, steel, weapons,horses ,elephants found ready markets in other parts of the world." - you have aptly summed up what I was trying to tell .This is why some economists are predicting that silver and platinum will see higher growth than gold in the long run(probably 50 to 60 years or more),not because of their ornamental value but for their diverse industrial uses.

    "What happens when there is a sudden infusion of gold? Well look no further than the Spanish Empire" - Not only spanish empire,I can remember of no single nation in the world which grew in stature with gold as their major asset.A counter- example to consider here can be the oil economies of middle east nations.But we also must remember that petroleum has very high intrinsic value as of now and it is not likely to diminish in the near future,considering the fuel efficiency of "liquid gold" and its vast demand in multiple sectors.Some people fear that solar power might overtake petroleum but I think it would not be feasible anytime in the near future.This is because human energy requirement and per capita energy consumption of the civilization on earth are increasing by leaps and bounds.So unless the abundance of petroleum decreases to the point of increase of costs of mining substantially,it would not affect fossil fuel economy drastically.

    "did not steal trillions of dollars worth of gold in 1700-1800s. " -As I already wrote and you have also pointed out,stealing so vast amount of gold is akin to stealing a large vaults of pound and sterling currencies suddenly from India ;) What else would it do other than reducing the value of the british currency.A better option would be to capture the economically productive assets like industries etc and England had worked in that direction.I don't know why Mr Sabhlok is disagreeing with you here.

    "On another note, the dollar moved away from the gold standard" - Gold standard is not healthy for any currency of any nation except for temporary spans in some rare situations like the current ISIS etc.

    "I'm afraid bringing this gold out will therefore have nothing but negative consequences. " - Increasing the efficiency of the existing gold mines is one thing but unearthing all the gold will not be good for Indian rupee.

    "Ah but one thing happens when you raid and kidnap Lakshmi is that Shiva does the dance of destruction on your economy. "- YSV how do you manage to mine out such humour ? :) A whole-hearted salute to your style of writing :)

    ReplyDelete
  3. Thanks JAM. Perhaps I must be fair to Vadakayil in that I realized that the captain isn't the only one moderating his blogs. Perhaps all older guys are somewhat set in their ways and don't wish to argue. But OTOH it is their intention to reach out to a large audience. Sabhlok intends to start a political party strong enough to dominate the central government How can they do this without engaging online, forget about campaigning in person?

    Gold is a strong conductor of electricity so would have a lot of usage in electronic applications. We may not see another breakthrough in electronics until gold is inexpensive enough to be used in a large scale.
    As for silver, heck we EAT silver in our burfee :)


    Spanish conquest of South America destroyed many ancient civilizations- this much is known. The social and racial structure of those countries today stems from that conquest. Initially the conquistadores(conquering generals) did not bring many Spanish women with them and so mated with local women creating a hybrid race(mestizo) which forms the bulk of the population. When the regions were stabilized, Spanish noblemen brought their families with them and these pure Spanish blood were at the top of the social hierarchy and this continues to this day with some exceptions.
    Furthermore the style of economy was feudal and exploitative ,similar to the Mughals in India in contrast to North Americans who were dynamic and productive.
    The Marxists and communists hence recruited many of these indios(indigenous "Indians") to fill their ranks but even here Latin Americans of pure blood Spanish descent filled the top ranks such as Che Guevera and Fidel Castro.

    One exception to this is Chile where Pinochet saw that the old system wouldn't work and implemented free market reforms by seeking counsel of U Chicago economists such as Thomas Friedman and others(these were referred to as Chicago boys)


    Petroleum unlike gold is a very useful commodity obviously. Of course it can be a mixed blessing to have this- having lived in Dubai I can tell you, there is a great deal of development in terms of infrastructure but relatively little in human capital. Only recently have the Emiratis getting educated in considerable numbers to take charge of their own economy.
    It is not a good idea for an economy to be overwhelmingly dependent on one commodity no matter how useful
    A caveat here is that Dubai didn't become successful due to oil(Abu dhabi has most of UAEs oil) but trade due to its strategic location. It receives only a piitance of oil revenue from Abu Dhabi.
    Where the social dysfunction due to oil wealth is especially severe is Saudi Arabia

    The British seemed to smart or lucky enough(possibly both) to steal just enough of gold for comfortable cash flows to purchase required goods and services.

    Gold standard is a lesser evil which keeps the central bank in check. Its best to have neither and but the current situation where you have only the central bank tinkering with the economy as per its wishes is the worst scenario.

    ReplyDelete
    Replies
    1. "Gold standard is a lesser evil which keeps the central bank in check" - yeah you are not wrong here.While gold standard is not all good,I also believe that a whimsical central bank is no better than this. Atleast gold standard does not follow any ego or bias :)

      'Of course it can be a mixed blessing to have this"- Yeah the human development indices of the middle eastern countries which depend on oil are not good.Actually I realised just now that I had left this point incomplete in my last comment.What I wanted to say is that I also don't support the dependence or deliverence of an economy based solely on a single raw material,whether it is a near-zero value like gold or high one like fossil fuel.It is not healthy for the nation also.I was just trying to point out why a gold economy might not be as successful as a fossil fuel economy,as has being envisioned as a hypothetical scenario by me.Even fossil fuel economy is doomed,unless ofcourse they persue intelligent and far-sighted economic diversification.

      'Gold is a strong conductor of electricity " - Unless gold value drastically reduces to the levels of copper etc . it will not have large-scale industrial applications.Again if gold's value decreases to such levels,we would not value it as precious after all .

      Thanks for elaborating on the spanish conquest and South America point.

      Delete
  4. Four million pounds in 1783. How much is it worth in today's money?

    That was the cash reserve of Mangalore, a province of Mysore sultanate which defected to British side in 1783 and handed over their their entire wealth to British. So logically, booty acquired by Brits after killing Tipu and conquering Mysore should be worth tens of millions of pounds.

    English were an enterprising and innovative people. Spaniards were neither. So when Spaniards got gold, they had no idea how to use it wisely. English in contrast knew how to use the treasure trove (if they had acquired one as per one of the widely circulated conspiracy theory) wisely since they are a nation of shop-keepers.

    ReplyDelete
    Replies
    1. Interesting. Can you give references for this claim? 10s of millions of pounds today could well be more than half a billion. I assume this includes the gold stolen from Kerala by Tipu Sultan(here I am in agreement with the captain)
      But we don't know how this captured gold was used. Was all of it shipped back to England or was it also used in India for infrastructure projects as well as bribing other Indian princes etc?

      Delete
    2. Sagar I don't see any pragmatism or futuristic economic planning on part of the brits when they got access of the huge wealth of the colonies.And by wealth I mean the raw materials for industries which were sucked out at cheap cost and finished goods delivered to the world markets with insane amount of profits.I don't think gold (as is envisioned by conspiracy theorists) of the magnitude of tonnes were derived by the Brits.I am not saying that gold wasn't present in India in such high amounts.I am just questioning the theory that Brits could have derived so high an amount of gold and thereby circulate it in the economy without any impact.Here I agree with the views of YSV.What catapulted Britain in the 19th century was their industrial base(ofcourse with the forcible extraction of raw materials from the colonies) and not gold treasures,which is the reason why Britain became the first "successful" industrial economy of the modern world.

      However enterprising you are,it is a herculean task to circulate a massive volume of gold coming suddenly from previously hidden sources within the world and national economic system without negative impacts.

      And I have claimed that Brits weren't economically pragmatic atleast for the long term,because most of their flourishing industrial power was based on the "fodder" from colonies they captured. YSV's superb line in this post "one thing happens when you raid and kidnap Lakshmi is that Shiva does the dance of destruction on your economy" can also be applied to the erstwhile Britain,I think.As soon as the British industrial giant started losing his raw material source due to gradual loss of the colonies,he went out of consideration.Quite a dance of Shiva but manifested in a little different way than that of the Spaniards :)

      Delete
  5. http://historicalleys.blogspot.in/2008/10/kumaran-nambiar-alias-hyat-sahib.html

    An informative and reliable blog written by another man from our Captain's home town.

    If Brits did indeed acquire a vast booty from Mysore, then most likely it must have ended up financing their much larger and costlier wars with Marathas in 1803-1805. along with counter insurgency operations in North Kerala and Western Tamil Nadu.

    I dont think they would have had much spare gold after all the wars they have waged between 1799 and 1805.------------ I guess our Conspiracy theorists seems to have missed this point.

    ReplyDelete
    Replies
    1. Sagar thanks for the link.I feel some form of allergic aversion when it comes to anything geographically close to Capt :) If there is historical reliability in the claim,then the recovery of gold by brits make sense.Otherwise,as YSV wrote,it is plain impossible for a nation to put a overnight treasure of tonnes of gold into circulation without hampering the economic parameters.

      The Brits can be credited for building up an empire but surely they made one serious flaw,ie,they made their economy dependent on the resources of the colonies.Instead of looting their establishments,if they had tried to indigenise and integrate these colonies with mainstream Britain(both economically and socially),today we would have seen a physically larger and better Britain.Anyway their sole objective was plunder and so my views are quite utopian wrt erstwhile Great Britain :) And this led to the total fall of their economy in a very short span of time with the loss of the colonies.YSV what's your opinion on this?

      Delete
  6. JAM your observation is correct. If Britain had worked for a social and economic union of Great Britain and India, their hold on India might have survived.

    I think they could not do that precisely because British conquest of India was not a national enterprise of British nation or even its ruling class. It was accomplished by a handful of criminal adventurers who had great influence in British ruling establishment. These adventurers and their supporters in London were more interested in India as a source of profit for themselves rather than as an asset for English nation.

    ReplyDelete
  7. I forgot to add - in case if they had stumbled upon a vast treasure trove, it would have also gone into financing Britain's struggle with Napoleonic France.

    ReplyDelete
    Replies
    1. Yeah Sagar I agree with you.As YSV states,most "India is the best nation" type conspiracy theorists suffer from inferiority/superiority complex.It is plain impossible and absurd for Brits or Rothschilds to unearth so huge an amount of gold like the hidden treasure stories of pirates.However that doesn't mean India wasn't rich in the past.It was the wealth of India which drew Mahmud of Ghazni to plunder this nation nearly 40 times.India was real rich those days,as is evident from the vast amounts of bounties(mainly in the form of gold) were recovered from the temples.

      Infact Indian people and kings believed that the deities of the temples will protect their wealths from robbers :) YSV it is an ideal example of ISKCON bhakti going haywire,isn't it ? :)

      Delete
    2. Sagar I do believe India is a unique nation in the whole world due to it's spirituality,yoga,mysticism,Sanatan Dharma,multidimensional society
      (bound in one thread by the rupee currency which is the only common thing shared without problems across the length and breadth of the nation),but that doesn't necessarily catapult it to the level of the best nation in the modern world.

      However India will surely become the best in the world in future,only if Iniyavel decides to stay with us and not part ways with the independent Tamil Republic :D

      Delete
    3. This comment has been removed by the author.

      Delete