INDIAN CURRENCY AND FINANCE
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MACMILLAN AND CO., LIMITED
LONDON · BOMBAY · CALCUTTA
MELBOURNE
THE MACMILLAN COMPANY
NEW YORK · BOSTON · CHICAGO
DALLAS · SAN FRANCISCO
THE MACMILLAN CO. OF CANADA, LTD.
TORONTO
INDIAN CURRENCY
AND FINANCE
BY
JOHN MAYNARD KEYNES
FELLOW OF KING’S COLLEGE, CAMBRIDGE
MACMILLAN AND CO., LIMITED
ST. MARTIN’S STREET, LONDON
1913
COPYRIGHT
PREFACE
When all but the last of the following chapters were already in type,
I was offered a seat on the Royal Commission (1913) on Indian Finance
and Currency. If my book had been less far advanced, I should, of
course, have delayed publication until the Commission had reported,
and my opinions had been more fully formed by the discussions of the
Commission and by the evidence placed before it. In the circumstances,
however, I have decided to publish immediately what I had already
written, without the addition of certain other chapters which had been
projected. The book, as it now stands, is wholly prior in date to the
labours of the Commission.
J. M. KEYNES.
KING’S COLLEGE, CAMBRIDGE,
_12th May 1913_.
CONTENTS
CHAPTER I
PAGE
THE PRESENT POSITION OF THE RUPEE 1
CHAPTER II
THE GOLD–EXCHANGE STANDARD 15
CHAPTER III
PAPER CURRENCY 37
CHAPTER IV
THE PRESENT POSITION OF GOLD IN INDIA AND PROPOSALS FOR A GOLD
CURRENCY 63
CHAPTER V
COUNCIL BILLS AND REMITTANCE 102
CHAPTER VI
THE SECRETARY OF STATE’S RESERVES AND THE CASH BALANCES 124
CHAPTER VII
INDIAN BANKING 195
CHAPTER VIII
THE INDIAN RATE OF DISCOUNT 240
INDEX 261
CHART SHOWING THE RATE OF DISCOUNT AT THE PRESIDENCY
BANK OF BENGAL _Face page_ 240
CHAPTER I
THE PRESENT POSITION OF THE RUPEE
1. On the broad historical facts relating to Indian currency, I do
not intend to spend time. It is sufficiently well known that until
1893 the currency of India was on the basis of silver freely minted,
the gold value of the rupee fluctuating with the gold value of silver
bullion. By the depreciation in the gold value of silver, extending
over a long period of years, trade was inconvenienced, and Public
Finance, by reason of the large payments which the Government must make
in sterling, gravely disturbed; until in 1893, after the breakdown of
negotiations for bimetallism, the Indian Mints were closed to the free
mintage of silver, and the value of the rupee divorced from the value
of the metal contained in it. By withholding new issues of currency,
the Government had succeeded by 1899 in raising the gold value of the
rupee to 1s. 4d., at which figure it has remained without sensible
variation ever since.
2. There can be no doubt that at first the Government of India did not
fully understand the nature of the new system; and that several minor
mistakes were made at its inception. But few are now found who dispute
on broad general grounds the wisdom of the change from a silver to a
gold standard.
Time has muffled the outcries of the silver interests, and time has
also dealt satisfactorily with what were originally the principal
grounds of criticism, namely,—
(1) that the new system was unstable,
(2) that a depreciating currency is advantageous to a country’s
foreign trade.
3. The second of these complaints was urged with great persistency
in 1893. The depreciating rupee acted, it was said, as a bounty to
exporters; and the introduction of a gold standard, so it was argued,
would greatly injure the export trade in tea, corn, and manufactured
cotton. It was plainly pointed out by theorists at the time (_a_) that
the advantage to exporters was largely at the expense of other members
of the community and could not profit the country as a whole, and (_b_)
that it could only be temporary.
The recent spell of rising prices in India has shown clearly in how
many ways a depreciating currency damages large sections of the
community, although it may temporarily benefit other sections. In fact,
some recent complaints against the existing currency policy have been
occasioned by the tendency of prices to rise; whereas it is plain that
the great change of 1893 must have tended to make them fall, and that
rupee prices would, in all probability, be higher than they now are, if
the change had not been effected.
With regard to the temporary nature of the effect on exporters,
experience has decisively supported theory. The nature of this
experience was admirably summed up by Mr. J. B. Brunyate in the
Legislative Council (February 25, 1910), speaking in reply to the
similar line of argument brought forward by the Bombay mill–owning
interests in connexion with the imposition in 1910 of a duty on
silver.[1]
4. The criticisms of 1893, therefore, are no longer heard, and the
Currency Problems with which we are now confronted are new. The
evolution of the Indian currency system since 1899 has been rapid,
though silent. There have been few public pronouncements of policy
on the part of Government, and the legislative changes have been
inconsiderable. Yet a system has been developed, which was contemplated
neither by those who effected nor by those who opposed the closing of
the Mints in 1893, and which was not favoured either by the Government
or by the Fowler Committee in 1899, although something like it was
suggested at that time. It is not possible to point to any one date at
which the currency policy now in force was deliberately adopted.
The fact that the Government of India have drifted into a system
and have never set it forth plainly is partly responsible for a
widespread misunderstanding of its true character. But this economy
of explanation, from which the system has suffered in the past, does
not make it any the worse intrinsically. The prophecy made before the
Committee of 1898 by Mr. A. M. Lindsay, in proposing a scheme closely
similar in principle to that which was eventually adopted, has been
largely fulfilled. “This change,” he said, “will pass unnoticed, except
by the intelligent few, and it is satisfactory to find that by this
almost imperceptible process the Indian currency will be placed on a
footing which Ricardo and other great authorities have advocated as the
best of all currency systems, viz., one in which the currency media
used in the internal circulation are confined to notes and cheap token
coins, which are made to act precisely as if they were bits of gold by
being made convertible into gold for foreign payment purposes.”
5. In 1893 four possible bases of currency seemed to hold the field:
debased and depreciating currencies usually of paper; silver;
bimetallism; and gold. It was not to be supposed that the Government
of India intended to adopt the first; the second they were avowedly
upsetting; the third they had attempted, and had failed, to obtain by
negotiation. It seemed to follow that their ultimate objective must
be the last—namely, a currency of gold. The Committee of 1892 did
not commit themselves; but the system which their recommendations
established was generally supposed to be transitional and a first step
towards the introduction of gold. The Committee of 1898 explicitly
declared themselves to be in favour of the eventual establishment of a
gold currency.
This goal, if it was their goal, the Government of India have never
attained. The rupee is still the principal medium of exchange and is
of unlimited legal tender. There is no legal enactment compelling any
authority to redeem rupees with gold. The fact that since 1899 the
gold value of the rupee has only fluctuated within narrow limits is
solely due to administrative measures which the Government are under
no compulsion to undertake. What, then, is the present position of the
rupee?
6. The main features of the Indian system as now established are as
follows:—
(1) The rupee is unlimited legal tender and, so far as the law
provides, inconvertible.
(2) The sovereign is unlimited legal tender at £1 to 15 rupees, and is
convertible at this rate, so long as a Notification issued in 1893 is
not withdrawn, _i.e._, the Government can be required to give 15 rupees
in exchange for £1.
(3) As a matter of administrative practice, the Government is, as a
rule, willing to give sovereigns for rupees at this rate; but the
practice is sometimes suspended and large quantities of gold cannot
always be obtained in India by tendering rupees.
(4) As a matter of administrative practice, the Government will sell in
Calcutta, in return for rupees tendered there, bills payable in London
in sterling at a rate not more unfavourable than 1s. 3–29/32d. per
rupee.
The fourth of these provisions is the vital one for supporting the
sterling value of the rupee; and, although the Government have given no
binding undertaking to maintain it, a failure to do so might fairly be
held to involve an utter breakdown of their system.
Thus the second provision prevents the sterling value of the rupee from
rising above 1s. 4d. by more than the cost of remitting sovereigns to
India, and the fourth provision prevents it from falling below 1s.
3–29/32d. This means in practice that the extreme limits of variation
of the sterling value of the rupee are 1s. 4⅛d. and 1s. 3–29/32d.
7. The important characteristics of the Indian system are so much
a matter of notification and administrative practice that it is
impossible to point to single Acts which have made the system what
it is. But the following list of dates may be useful for purposes of
reference:—
1892. Herschell Committee on Indian Currency.
1893. Act closing the Indian mints to the coinage of silver on private
account. Notifications by Government fixing the rate, at which rupees
or notes would be supplied in exchange for the tender of gold, at the
equivalent of 1s. 4d. the rupee.
1898. Fowler Committee on Indian Currency. Exchange value of rupee
touched 1s. 4d.
1899. Act declaring the British sovereign legal tender at 1s. 4d. to
the rupee.
1899–1903. Negotiations for coinage of sovereigns in India (dropt
indefinitely Feb. 6, 1903).
1900. Gold Standard Reserve instituted out of profits of coinage.
1904. Secretary of State’s notification of his willingness to sell
Council Bills on India at 1s. 4⅛d. the rupee without limit.
1905. Act authorising the establishment of the Currency Chest of
“earmarked” gold at the Bank of England as part of the Currency
Reserve against notes,[2] and the investment of a stated part of the
Currency Reserve in sterling securities.
1906. The Notification withdrawn which had directed the issue of
rupees against the tender of gold (as distinguished from British gold
coin).
1907. Rupee branch of the Gold Standard Reserve instituted.
1908. Sterling drafts sold in Calcutta on London at 1s. 3–29/32d. the
rupee, and cashed out of funds from the Gold Standard Reserve.
1910. Act rendering Currency notes of Rs. 10 and 50 universal legal
tender,[3] and directing the issue of notes in exchange for British
gold coins.
1913. Royal Commission on Indian Finance and Currency.
8. In § 6 I have stated the practical effect of these successive
measures. But the legal position is so complicated and peculiar, that
it will be worth while to state it quite precisely. Previous to 1893
the Government were bound by the Coinage Act of 1870 to issue rupees,
weight for weight, in exchange for silver bullion. There was also in
force a Notification of the Governor–General in Council, dating from
1868, by which sovereigns were received at Government Treasuries as
the equivalent of ten rupees and four annas. This Notification, which
had superseded a Notification of 1864 fixing the exchange at ten
rupees, had long been inoperative (as the gold exchange value of ten
rupees four annas had fallen much below a sovereign). The Act of 1893
was merely a repealing Act, necessary in order to do away with those
provisions of the Act of 1870 which provided for the free mintage of
silver into rupees. At the same time (1893) the Notification of 1868
was superseded by a new Notification fixing fifteen rupees as the
rate at which sovereigns would be accepted at Government Treasuries;
and a Notification was issued under the Paper Currency Act of 1882,
directing the issue of currency notes in exchange for gold at the Rs.
15 to £1 ratio. The direct issue of rupees against the tender of gold
also has been regulated by a series of Notifications, of which the
first was published in 1893, up to 1906 rupees being issued against
either gold coin or gold bullion; and since 1906 against sovereigns and
half–sovereigns only. Apart from Notifications, an Act of 1899 declared
British sovereigns legal tender at the Rs. 15 to £1 ratio, an indirect
effect of which was to make it possible for Government, so far as Acts
are concerned, to redeem notes in gold coin and refuse silver. And
lastly, the Paper Currency Act of 1910 bound the Government to issue
notes against the tender of British gold coin.
The convertibility of the sovereign into rupees at the Rs. 15 to £1
ratio is not laid down, therefore, in any Act whatever. It depends
on Notifications withdrawable by the Executive at will. Further, the
management of the Gold Standard Reserve is governed neither by Act nor
by Notification, but by administrative practice solely; and the sale of
Council Bills on India and of sterling drafts on London is regulated by
announcements changeable at administrative discretion from time to time.
All this emphasises the gradual nature of the system’s growth, and
the transitional character of existing legislation. As matters now
are, there is something to be said for a new Act, which, while leaving
administrative discretion free where there is still good ground for
this, might consolidate and clarify the position.
9. As a result of these various measures, the rupee remains the local
currency in India, but the Government take precautions for ensuring its
convertibility into international currency at an approximately stable
rate. The stability of the Indian system depends upon their keeping
sufficient reserves of coined rupees to enable them at all times to
exchange international currency for local currency; and sufficient
liquid resources in sterling to enable them to change back the local
currency into international currency, whenever they are required to
do so. The special features of the system, although, as we shall see
later, these features are not in fact by any means peculiar to India,
are: first, that the actual medium of exchange is a local currency
distinct from the international currency; second, that the Government
is more ready to redeem the local currency (rupees) in bills payable
in international currency (gold) at a foreign centre (London) than to
redeem it outright locally; and third, that the Government, having
taken on itself the responsibility for providing local currency in
exchange for international currency and for changing back local
currency into international currency when required, must keep two kinds
of reserves, one for each of these purposes.
I will deal with these characteristics in successive chapters. It
is convenient to begin with the second of them and at the outset to
discuss in a general way the system of currency, of which the Indian
is the most salient example, known to students as the _Gold–Exchange
Standard_. Then we will take the first of them in Chapters III. and IV.
on _Paper Currency_ and on the _Present Position of Gold in India and
Proposals for a Gold Currency_; and the third in Chapter VI. on the
_Secretary of State’s Reserves_.
10. But before we pass to these several features of the Indian system,
it will be worth while to emphasise two respects in which this system
is _not_ peculiar. In the first place a system, in which the rupee is
maintained at 1s. 4d. by regulation, does not affect the level of
prices differently from the way in which it would be affected by a
system in which the rupee was a gold coin worth 1s. 4d., except in a
very indirect and unimportant way to be explained in a moment. So long
as the rupee is worth 1s. 4d. in gold, no merchant or manufacturer
considers of what material it is made when he fixes the price of his
product. The _indirect_ effect on prices, due to the rupee’s being
silver, is similar to the effect of the use of any medium of exchange,
such as cheques or notes, which economises the use of gold. If the
use of gold is economised in any country, gold throughout the world
is less valuable—gold prices, that is to say, are higher. But as
this effect is shared by the whole world, the effect on prices in
any country of economies in the use of gold made by that country is
likely to be relatively slight. In short, a policy which led to a
greater use of gold in India would tend, by increasing the demand for
gold in the world’s markets, somewhat to lower the level of world
prices as measured in gold; but it would not cause any alteration
worth considering in the _relative_ rates of exchange of Indian and
non–Indian commodities.
In the second place, although it is true that the maintenance of the
rupee at or near 1s. 4d. is due to regulation, it is not true, when
once 1s. 4d. rather than some other gold value has been determined,
that the volume of currency in circulation depends in the least upon
the policy of the Government or the caprice of an official.[4] This
part of the system is as perfectly automatic as in any other country.
The Government has put itself under an obligation to supply rupees
whenever sovereigns are tendered, and it often permits or encourages
the tender of sovereigns in London as well as in India; but it has no
power or opportunity of forcing rupees into circulation otherwise. In
two matters only does the Government use a discretionary power. First,
in order that it may always be possible to fulfil this obligation, it
is necessary to keep a certain reserve of coined rupees, just as some
authority in this country—in point of fact the Bank of England—must
keep some reserve of token silver and coined sovereigns and not hold
in its vaults too large a proportion of uncoined or foreign gold.
The magnitude of this reserve is within the discretion of the Indian
Government. To a certain extent they must anticipate probable demands
on the output of the Mint. But if they miscalculate and mint more than
they need, the new rupees must lie in the Government’s own chests until
they are wanted, and the date at which they emerge into circulation
it is beyond the power of the Government to determine. In the second
place, the Government can postpone for a short time a demand for rupees
by refusing to supply them in return for sovereigns tendered in London
and by insisting upon the sovereigns being sent to Calcutta. Sometimes
they do this, but very often it is worth their while, for reasons to
be explained in detail later on, to accept the tender of sovereigns in
London. In either of these cases the permanent effect of their action
one way or the other on the volume of circulation is inconsiderable.
The kind of difference it makes is comparable to the difference which
would be made if it lay within the discretion of a government to charge
or not, as it saw fit, a small _brassage_ not much greater than the
cost of coining.[5]