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March 16, 2005

Indians, Keep Your Gold!

Banks in India are eager to get their hands on privately-hoarded gold so they can add it to their reserves and expand credit on it.

"Initially, the metal itself would be retained by the bank, as the seller of a paper gold certificate, and the buyer could at any time trade in the paper to receive the current market value of the quantity of gold originally bought - not just the amount of money originally spent," writes Anand Giridharadas in the international Herald Tribune.

The key phrase is "at any time." Banks practicing fractional reserve lending are incapable of keeping that promise. When they get in trouble they'll get the government to allow them to suspend gold redemption while staying in business. Eventually, banks will whine for a more "elastic" currency and government will let them issue fiat money.

And the fiat money will exist to serve the big banks and government growth.

And poor people who once hoarded gold won't even have gold to fall back on.

Posted by George F. Smith at March 16, 2005 05:59 PM

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