Special: Economic meltdown vindicates forgotten Indian economist

The imminent collapse of the European monetary union is a welcome development as it will herald the end of the Keynesian economic system that has been responsible for various economic crises around the world. For several decades, most governments and international organisations have based their economic policies on debt, deficit and inflation, as their policies have been shaped by the ideas of John Maynard Keynes, a British bureaucrat who once worked at the India office.

Nearly a 100 years ago, in 1915, even before Keynes’s star had risen, an Indian economist, SV Doraiswami, published his book, Indian Finance, Currency And Banking. Doraiswami’s ideas were opposed to those of Keynes and his views are vindicated by events today.

Doraiswami had already published his views in several outlets like London’s Statist, and his book was reviewed around the world. In the decades that followed, though Doraiswami’s work was known in academic circles, the Keynesian economists who gained control of academia were dismissive of his ideas and relegated him to the footnotes as they had memorised the claims of Keynes and were conditioned to believe that governments could solve all problems.

Doraiswami faulted the British economic policies in India and demanded that the central bank be an ‘instrument for allowing and encouraging the free and unfettered inflow of  gold into India.’ He wrote that a ‘gold standard without a gold currency is an absurdity’ and wrote in support of a resolution by Vitthaldas Thackersey in the Imperial Legislative Council calling for the opening of mints for the free coinage of gold. Doraiswami wanted the exchange rate of gold to be ‘automatic’ by leaving it to the forces of supply and demand and opposed the government setting its price.

If these suggestions for sound money by Doraiswami had been followed around the world, the current crisis in Europe as well as the Great Depression of the 1930s in the United States could have been avoided. Instead, it was Keynes whose ideas held sway leading to many problems in the world.

Keynes was an influential figure in the British government and opposed the setting up of gold mints in India as he considered gold to be a social evil and a ‘barbaric relic of the past.’ He did not have an understanding of the nature and function of money that Doraiswami had lucidly explained in his book, and some of his ideas were bizarre. He confused cause and effect after observing greater amounts of spending during times of prosperity and concluded that more spending would lead to more wealth. He even famously argued that hiring people to dig holes in the ground would increase the ‘real national dividend of useful goods and services.’

In contrast to Keynes’s views, Doraiswami objected to wasteful spending and blamed the British for creating huge debts for India through ‘reckless railway construction’ and funding wars using Indian money. Although Doraiswami was harsh on the British, he was also very objective and pointed out that the British Conservatives did a better job than the British Liberals in managing India’s finances. He pointed out that the policies of the Conservatives in currency matters “were sounder and more sensible” than those of the Liberals.

Doraiswami was also very knowledgeable about the banking systems of various countries and described them in his book. He pointed out that the reason that Indian banks did not do well was that the British government competed against them.

Today, Doraiswami’s views gain centre stage as several governments that swore by paper money, and even the International Monetary Fund, scramble to increase their reserves of gold after realising that gold is the only stable currency. Meanwhile, as the European Union teeters on the brink of collapse due to its debts, it would be apt to recall the prescient words of Doraiswami from his book: 'The State Bank should do nothing to increase credit currency, as some would advocate, or in any way meddle in the increase of note circulation, as such a step would only lead to the inflation of paper money and end in disaster.’

As discredited Keynesian ideas are on the way out, the Indian government too should move away from running up debts and deficits and printing paper money. It should replace these Keynesian policies with Doraiswami’s suggestions as it is now safe to state that the entire literature produced by the Keynesian economists is not worth a page of wisdom in Doraiswami’s book.

arvind@classical-liberal.net.