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Turkish Government Wants Their People's Gold

03/23/2012

Just one visit to Istanbul’s Grand Bazaar tells a visitor how Turks store value. The Turkish monetary authorities have a history of debauching their currency so Turks store their wealth in gold and rugs. There are 373 jewelers and 125 rug stores in the bazaar.

In 1966, one US dollar bought 9 lire. By 2001, a dollar bought 1.65 million lire. Four years later, six zeros were lopped off the lira and a dollar equaled 1.29 new Turkish lire. Today, a dollar can be traded for around 1.80 lire.

The last half-decade of tamer inflation has helped make the Turkish economy one of the strongest. However, Ahmet Akarli, an economist at Goldman Sachs in London, told The Economist last year, “The cyclical picture is looking ugly, imbalances are accumulating and financial vulnerabilities are growing.” Akarli says wages are up 18 percent, domestic demand is increasing 25 percent, and credit growth is 30 to 40 percent.

The Turkish government is facing a current-account deficit and now has its eye on the vast amounts of gold held by private citizens outside the nation’s banking system. The Wall Street Journal reports,

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.

This counting of gold deposits as reserves allows banks to use that gold to expand their balance sheets, create money, and help fund the country’s current-account deficit.

Just as Murray Rothbard explained that bank runs are an effective weapon against inflation, storing one’s gold outside the banking system, keeps banks from creating money through fractional reserves. Money in a bank is lent out, but ownership of the money isn’t transferred. The deposit remains in the account of the depositor, while the funds are lent to another party. Banks keep 10% (or less) of their deposits around just in case people show up for their money, with the result being money is created out of nowhere. Of course a central bank is needed to backstop the inflationary operation.

Instead of leaving their money in banks to be inflated away, Turks have learned to exchange their government’s money into things that have been stores of value in their culture for centuries: gold and rugs.

The Istanbul Gold Refinery believes Turks are holding 5,000 metric tons of gold in their homes. And with the Lira falling 20% against the dollar last year, gold demand doubled. This ain’t the Turks first inflation rodeo.

That suggests that despite a tripling of incomes and a sharp reduction of unemployment in the past decade, Turks remain nervous that holding too much of their assets in banks could leave them exposed to losses.

Memo to the Turks. Stay nervous, keep your gold at home.

Author:

Doug French

Douglas French is President Emeritus of the Mises Institute, author of Early Speculative Bubbles & Increases in the Money Supply, and author of Walk Away: The Rise and Fall of the Home-Ownership Myth. He received his master's degree in economics from UNLV, studying under both Professor Murray Rothbard and Professor Hans-Hermann Hoppe.