Role of gold in economy
Since olden days, gold jewellery is kept as mortgage with money lenders to get loans. One cannot borrow money unless you have collateral. Most of the businesses borrow based on collaterals such as property or land. However, when it comes to small businesses or proprietorship firms, they often borrow by keeping family gold as collateral.
The major source of gold in ancient India was the Roman Empire. While part of the money that was exhausted by the Roman on the luxuries might have remained in Arabia, the rest came to India. During Roman era, large quantities of gold was transported to India, which continued for around 2,000 years. In ancient India, hundi system was followed. It was kind of credit instrument used for trade transactions which were based on credit-worthiness and trust. Well, other than land, you should have enough gold to earn trust and have your hundi accepted in far off countries.
Till recent times, a rule that there will be no trade without gold was practised. Even today if you wish to get a loan, all you have to do is simply deposit your gold either with your bank or NBFC’s (Non-Banking Financial Companies).
Initially, the global banking system recognized only gold as the deposit. Banks started issuing notes on the basis of gold through money lending. The words on our currency, “I promise to pay the bearer the sum of…” dates back to the time when our notes represented deposits of gold. It was the time when the public could exchange notes for gold to the same value. However, today the meaning of these words has changed. It means that the banknote is a legal tender for a particular amount.
Though gold standard was rejected in 1971 by Nixon, today banking system around the world, including Reserve Bank of India, holds gold to ensure liquidity of currency internationally.
In 1991, India observed one of the highest inflation rates. A plane loaded with gold was flown to Bank of England. Without physical reserves of gold, IMF refused to lend India.
Till the time government can be trusted, pieces of paper printed by it holds value. However, gold retains value irrespective of governments. Borrowing and investing is also aided by this yellow metal. Its value is equal to its market price, with good fungibility. It has uniform price across the world and can be converted into anything else without losing it value.