Physics of Poverty : The Glitter of Gold

Physics of Poverty series by Dr. Tara Thiagarajan, Chairperson, Madura MicrofinanceA couple weeks ago my newly married maid came asking me for a loan to pay the rental deposit on her flat. I knew she had saved up much more than the amount she needed so I asked her what she had done with the money. She told me she had bought gold jewellery with it.

With all of it? I asked her. Why did you do that when you knew full well you had this expense coming up?

I had to she said, without gold they won’t let you get married.

Who is ‘they’? I inquired.

Everyone , she told me. All my relatives in my village

At the time I told her she was foolish. Now I’m not so sure.

Back in the old days money used to be linked to something of physical utility – typically gold. For every note issued, the government maintained gold bars of equivalent ‘value’. Today money is delinked from anything of actual physical utility. It is simply a piece of paper that we place implicit faith in. A piece of paper that we hope we are collectively making good on by creating adequate value to justify its printing. (For more about this read my earlier post Of Mind and Money). While the Governments have left behind the gold standard, Indians have not. India has the largest privately held gold in the world. And the rural poor, at least in Tamil Nadu, maintain a far greater fraction of their wealth in gold than the rest of us. This seems to suggest to me that they don’t have quite the implicit faith in our money system as we do.

One big reason to keep gold rather than money, my maid and others from the villages tell me, is that paper money can just slip through your fingers. You will spend it on unnecessary things. In the case of Gold, you will think properly about what you need it for. When you finally go to sell it or pawn it, you will do it only for good reason. The easier it is to spend money, the more foolish uses we find for it. The more foolishly we spend money, the less real value we create and the worse off we all are collectively. Somehow they know this better than financiers and governments. Many governments try to spur growth is by increasing the money available for spending. But if more money means more spending on silly things, then it is simply pumping up the economy with hot air.

Gold is not the only indication of the lack of participation by the poor to the government’s monetary system. Recently I met a woman who has developed a micronutrient fortified salt that she wants to market in rural areas. I asked her about the cost and how much more it would be priced relative to regular salt. She was in a bit of a dilemma. It was not the relatively lower price of regular salt that was the problem. Most of the rural poor did not ‘buy’ salt. Salt is still a bartered commodity. They will generally exchange cereal, rice, fruit and other such things for salt. This sort of exchange involves an agreement of value largely between two people that could change circumstantially. Paper money is reserved largely for purchases of urban factory products. The highly individual value exchange in barter is extremely different from the pricing set by collective markets.

Bottom line, the economic and financial systems of the rural poor are entirely distinct in character from the government prescribed monetary system we subscribe to. It needs a whole different perspective of analysis and understanding.