Gold is Money: Turkey Edition

While Ben Bernanke and his ivory tower based cohorts do not treat gold as money, for the average Turks, gold is money.

From the Wall Street Journal,

The Turkish government, facing a bloated current-account deficit that threatens to derail the country's rapid expansion, is trying to persuade Turks to transfer their vast personal holdings of gold into the country's banking system.

The push to tap into the individual gold reserves—the traditional form of savings here—is part of Ankara's efforts to reduce a finance gap that is currently about 10% of gross domestic product.

Government officials say the banking regulator will soon publish a plan to boost incentives for consumers to park their household wealth inside the financial system. Banking executives said they are considering new interest-yielding gold-deposit accounts that would allow savers to withdraw gold bars from specially designed automated teller machines.

The moves come after the central bank in November announced that lenders could hold up to 10% of their local-currency reserves in gold, in part to tempt Turkey's gold hoarders to deposit their jewelry, coins or bullion at banks.

Economists say the policy shift is designed to change Turks' historic preference for storing a high percentage of personal wealth outside the banking system as a way to protect themselves against the economic volatility that has periodically hit Turkey in recent decades.

The effort is one front in a broader battle to encourage more savings while curbing the ballooning current-account deficit—a pressure point many investors fear could upend a fast-growing economy, estimated to have expanded more than 8% last year. Turkey's current-account gap has expanded faster than expected in recent weeks amid a surge in oil prices and data showing unexpectedly high consumer demand.

"Turkey has historically been hit by crises and inflation, so the tradition of holding gold outside the system could be hard to shift," said Murat Ucer, an economist at Global Source Partners, an Istanbul-based research consultancy.

The size of the gold haul stored outside Turkey's banking system is hard to quantify; no data reliably capture the scale of the informal economy. The Istanbul Gold Refinery estimates the figure at 5,000 metric tons, valued at $270 billion. Recent numbers show many consumers have boosted home-held deposits even as the country's tightly regulated banking system won plaudits for comfortably weathering the financial crisis.

Unlike India, whom recently announced plans to raise import duties on gold imports, Turkey’s government either has not yet reached a point of desperation to impose political controls over gold trades, or that they have come to realize of the futility of imposing antagonistic and oppressive policies. Instead, the Turkish government has, so far, resorted to wooing or appealing to the public to help the government.

However, I am inclined to the view that this as an initial or temporary step before any imposition of political controls. With institutional violence under their control (police or military power), the temptation to use force through tax or administrative policies will always be there.

It is also very important to note of how gold has served as insurance against political control via the banking system. It would appear that the average Turks, basically don’t trust the banking system, and thus keeps their savings in gold and stashed away from the prying eyes of political authorities. The average Turks, I presume, perhaps (culturally) understands that through the banking system, their savings or wealth could be faced with greater risks of confiscation through various political means as taxation.

Nevertheless this is a good remainder of the distinction between the world as seen by politicians and bureaucrats and of reality (which reflects on people’s sense of values.)

This quote, which I earlier blogged, attributed to Mr. Janos Feteke (who I think was the deputy governor of the National Bank of Hungary) seems very relevant

There are about three hundred economists in the world who are against gold, and they think that gold is a barbarous relic - and they might be right. Unfortunately, there are three billion inhabitants of the world who believe in gold

This is essentially why political actions that go against public’s desires eventually self-destructs.