THE SECRETARY OF STATE’S RESERVES AND THE CASH BALANCES
1. The Indian authorities have undertaken a double responsibility. They
must be prepared to supply rupees in payment for Council Bills or in
exchange for sovereigns. And on the other hand they must be prepared
also to supply sterling or sterling drafts in exchange for rupees. The
maintenance of the Indian system depends on their ability to fulfil
this double obligation to whatever extent may be required of them.
The objects to be attained are simple, but the methods of the
Government are, largely for historical reasons, exceedingly
complicated. I will discuss, first, the nature of the existing methods;
second, their adequacy for their purpose; third, some proposals for
making them more orderly and intelligible; and lastly, the management
of the cash balances.
2. From the profits of rupee coinage[59] a reserve has been built up
expressly for the purpose of supporting exchange. This is known as the
Gold Standard Reserve. As the reserve is used in practice, not only
for holding sterling reserves but also for holding a part of the rupee
reserve, this title is a misnomer.[60]
For some years after the closing of the Mints no fresh coinage was
undertaken. By 1900 it had become necessary to mint additional rupees,
and from that time until 1907 the profits on coinage rapidly raised
the Gold Standard Reserve to a respectable total. The crisis of
1907–8 made it necessary to withdraw a great number of rupees from
circulation, and no further coinage was necessary on a significant
scale until the autumn of 1912. By October 1912 the aggregate profits
arising from coinage amounted to about £18,600,000. Of this, however,
about £1,100,000 was diverted in 1907 for capital expenditure on
railways—leaving about £17,500,000 for the Gold Standard Reserve.
In addition to this the receipts on account of interest on that part
which was invested amounted to about £3,250,000, against which is to be
set about £1,000,000 depreciation in the value of the investments in
October 1912 as compared with their original cost. Thus at that date
this reserve stood at about £19,750,000, allowing for depreciation.
During the winter of 1912–13 profits on the heavy issues of coinage
caused a further increase, and we may conveniently think of the Gold
Standard Reserve as being worth about £21,000,000 net at the end of
1912.
Of this total the greater part was held in sterling securities—about
£16,000,000 (market price). In recent times the policy has been
followed of holding at least half of this in securities of the most
liquid possible type. On March 31, 1912, £4,500,000 was held in British
Treasury Bills, and £4,735,600 in Exchequer Bonds. Of the rest about
£7,000,000 (face value) was in Consols and other stock guaranteed by
the British Government, and about £1,500,000 (face value) in various
Colonial Government Securities.
Apart from the £16,000,000 thus invested, about £1,000,000 was, at
the end of 1912, lent at short notice in the London Money Market;
about £3,750,000 was held in India in rupees; and £250,000 in gold was
“earmarked” at the Bank of England. The holding of some part in actual
gold in England was an innovation introduced in November 1912.
It has been announced that the Gold Standard Reserve is to be allowed
to accumulate through coinage profits and interest receipts until it
stands at £25,000,000, and that £5,000,000 of this will be held in
gold.[61] It is possible that when this figure has been reached, some
part of its income may be applied to capital expenditure on railways.
This would be a reversion to the policy of 1907–8, since abandoned,
when one–half of the profits of coinage was thus diverted.
The form in which the Gold Standard Reserve is held has been subject to
much criticism. But it will not be useful to consider this until we are
in a position to deal with the reserves as a whole.
3. The second reserve is the Paper Currency Reserve held against the
note issue. The constitution of this has been explained in Chapter III.
The invested portion may not exceed a stated maximum, of which a part
only may be held in sterling securities and the rest must be placed
in rupee securities. The whole of the balance must be held in gold or
silver bullion, rupees, or sovereigns. But the gold may be held either
in London or in India. The actual form in which the Currency Reserve
was held at the end of December 1912 was approximately as follows:—
Sterling securities £2,500,000
Rupee securities 6,500,000
Gold in London 7,250,000
Gold in India 17,500,000
Rupees in India 8,500,000
Silver bullion in India or in transit 1,500,000
─—————–────
£43,750,000
─────—————–
4. The Government’s remaining reserve source of supply of cash in the
form of rupees or sterling is the Cash Balances. Both the total of
these and the proportions held in rupees and sterling respectively vary
within wide limits from time to time. Their total amount fluctuates
according to the volume of taxes coming in at different seasons of the
year, the recency with which loans have been contracted for capital
expenditure, the proximity of extraordinary expenditure impending, the
receipts of windfalls of income (as, recently, from the opium revenue),
the general prosperity of the country, and the degree of caution or
optimism which, in the opinion of those responsible for the finances,
the general situation warrants. The proportions held in rupees and
sterling respectively depend even more on considerations of temporary
convenience,—recent or impending capital transactions in London, the
likelihood of sterling funds being wanted for the purchase of silver,
and trade demands for Council Bills as a means of remittance. The
totals of the cash balances at various dates are given below.
CASH BALANCES(a)
┌——────────——————┬————──────——┬———──────———┬——──────————–┐
│ │ In India. │ In London. │ Total. │
├————────────————┼—————──────—┼——──────————┼————──────——–┤
│ March 31, 1901 │ £8,767,687 │ £4,091,926 │ £12,859,613 │
│ ” 1903 │ 12,081,388 │ 5,767,786 │ 17,849,174 │
│ ” 1905 │ 10,597,770 │ 10,262,581 │ 20,860,351 │
│ ” 1907 │ 10,026,932 │ 5,606,812 │ 15,633,744 │
│ ” 1908 │ 12,851,413 │ 4,607,266 │ 17,458,679 │
│ ” 1909 │ 10,235,483 │ 7,983,898 │ 18,219,381 │
│ ” 1910 │ 12,295,428 │ 12,799,094 │ 25,094,522 │
│ ” 1911 │ 13,566,922 │ 16,696,990 │ 30,263,912 │
│ ” 1912 │ 12,279,689 │ 18,390,013 │ 30,669,702 │
│ ” 1913 │ 19,543,900 │ 8,372,900 │ 27,916,800 │
└——────────——————┴————──────——┴———──────———┴——──────————–┘
(a) Excluding balances held in the Gold Standard Reserve.
It may be added that the Indian cash balances are kept partly in
District Treasuries all over the country, partly in Reserve Treasuries,
and partly on deposit at the Presidency Banks. The District Treasuries
do not usually contain more resources than they require for ordinary
transactions, and the balances in excess of immediate requirements,
which are transferred to the Reserve Treasuries, are mainly held in the
form of notes. Thus the Government has no large surplus stock of rupees
outside the Currency Reserve. The London Balances are held partly at
the Bank of England and partly on loan for short periods with certain
financial houses on an approved list.[62] No more than a working
balance (about £500,000) is ordinarily held at the Bank of England, and
this has been reckoned for many years now (though not formerly) amongst
the “other” deposits, not amongst the “public” deposits. It will be
seen from the table given above that the London Balances fell to a low
level in 1908, the Secretary of State making free use of them to aid
him in supporting exchange during the critical months of that year. On
October 30, 1908, these balances had sunk to £1,196,691. In 1911 and
1912, on the other hand, they reached a very high figure, and in June
of both these years exceeded £19,000,000. By the end of 1912 they had
sunk again to a more normal level. This abnormally high level in the
first half of 1912 gave rise to much criticism in regard both to the
amount of the balances and also to the method adopted of lending them
out in the London Money Market. Something will be said about this in
the concluding paragraphs of this chapter.
5. We are now in a position to see exactly what resources in sterling
and rupees respectively the Indian authorities have, on which to draw
for the fulfilment of their currency obligations. Since the surplus
balances in India, beyond those required by the District Treasuries and
those deposited with the Presidency Banks, are mainly held in notes, we
may neglect them for the present purpose.
_Rupee Reserves_ are held partly in the Currency Reserve, partly in the
Gold Standard Reserve. In December 1912 the amounts were approximately
as follows:—
Currency Reserve(a) £10,000,000
Gold Standard Reserve 3,750,000
─────—————–
£13,750,000
(a) Including silver bullion in India or in transit.
_Sterling Reserves_ are held partly in the Currency Reserve, partly in
the Gold Standard Reserve, and partly in the London Cash Balances. The
forms in which they are held are gold (in the Currency Reserve, both in
India and London, and to a small extent in the Gold Standard Reserve),
money lent at short notice (in the Gold Standard Reserve and in the
Cash Balances), and sterling securities (in the Currency Reserve
and in the Gold Standard Reserve). In December 1912 the amounts were
approximately as follows:—
_Gold_—
Currency Reserve in India £17,500,000
Currency Reserve in London 7,250,000
Gold Standard Reserve in London 250,000
─────—————–
£25,000,000
═══════════
_Money at Short Notice_—
Gold Standard Reserve in London £1,000,000
Cash Balances in London 7,500,000
─────—————–
£8,500,000
═══════════
_Sterling Securities_—
Currency Reserve £2,500,000
Gold Standard Reserve 16,000,000
─────—————–
£18,500,000
═══════════
_Aggregate Sterling Resources_—
Gold £25,000,000
Money at Short Notice 8,500,000
Securities 18,500,000
─────—————–
£52,000,000
═══════════
6. Before we consider the adequacy of these reserves for their
purposes, it will be useful to recall the circumstances of the two
recent occasions on which their resources were severely taxed. The
Government were hard pressed to supply sufficient rupees in 1906, and
hard pressed to supply sufficient sterling in 1908. We can deal with
both these occasions in a continuous narrative.
The coinage of rupees recommenced on a significant scale in 1900. For
the five years following there was a steady annual demand for fresh
coinage (low in 1901–2, high in 1903–4, but at no time abnormal) and
the Mints were able to meet it with time to spare, though there was
some slight difficulty in 1903–4. In 1905–6 the demand quickened, and
from July 1905, when the Government’s silver reserves stood at what was
then considered the comfortable figure of 1837 lakhs[63] (£12,250,000),
it quite outstript the new supplies arising from the mintage of the
uncoined silver reserve. The Government were very slow to buy more
silver and, in fact, do not seem to have taken steps to do so until,
in December 1905, their bullion reserve was quite exhausted. They had
then to buy silver in London hurriedly and at rather a high price.
In the meantime the rupee reserves had sunk to the very low figure
of 761 lakhs (_i.e._, about 40% of the holdings six months earlier),
and the demand for Council Bills in London, which would have to be
cashed in rupees in India, showed no signs of abating. In order to give
themselves breathing space, and to allow time for the silver recently
bought in London to reach India and be coined, the Government had to
raise the price of telegraphic transfers to what was then the unusually
high figure of ¼–5/32. This was the worst that happened. The new
coinage very quickly overtook and passed the demand, and by the end of
March 1906 the available silver reserves were double what they had been
in January.
This slight scare, however, was more than sufficient to make the
Government lose their heads. Having once started on a career of furious
coinage, they continued to do so with little regard to considerations
of ordinary prudence—though their sins did not overtake them
immediately. Without waiting to see how the busy season of 1906–7
would turn out, they coined heavily throughout the summer months, and,
there being more silver in hand than could be conveniently held in the
Currency Reserve, it was maintained, at the expense of the sterling
resources, in the Gold Standard Reserve. In July 1906 the silver
reserve stood at about 3200 lakhs. As a matter of fact the season of
1906–7 turned out well, and the demand for rupees was on a large scale.
Yet the available silver in India hardly fell below 2000 lakhs—nearly
three times the minimum at the most critical moment of the preceding
year. The more than adequacy of their reserve at the busiest moment
of the very busy season 1906–7 did not check, however, the impetuous
activity of the Mints. During the summer of 1907, as in the summer of
1906, they continued to coin without waiting until the prosperity of
the season 1907–8 was assured. In September 1907 their silver holdings
in one form or another stood at the excessive figure of 3148 lakhs.
This time they got what they deserved. The season of 1907–8 was a
failure, and at the end of 1907 came the crisis in America. In place
of there being a demand for new rupees, it was necessary to withdraw
from circulation an immense volume of the old ones; and the sterling
reserves, not the rupee reserves, were in danger of insufficiency. This
leads us to the next chapter of the history.
7. The coinage policy of the Government of India from 1905 to 1907
suggests one obvious reflection. A succession of years, in which there
is a heavy demand for currency, makes it less likely that the heavy
demand will persist in the year following. The effects of heavy coinage
are cumulative. The Indian authorities do not seem to have understood
this. They were, to all appearances, influenced by the crude inductive
argument that, because there was a heavy demand in 1905–6, it was
likely that there would be an equally heavy demand in 1906–7; and, when
there actually was a heavy demand in 1906–7, that this made it yet more
likely that there would be a heavy demand in 1907–8. They framed their
policy, that is to say, as though a community consumed currency with
the same steady appetite with which some communities consume beer. In
so far as the new currency is to satisfy the demands, not of hoarding,
but of trade, it is hardly necessary to point out the fallacy.
Moreover, even a superficial acquaintance with the currency history of
India brings experience to the support of reason. Even when the rupee
was worth no more than its bullion value, so that it was hoarded and
melted much more than it is now, years of unusually heavy coinage were
nearly always followed by a reaction. India has taken her coinage in
great gulps, and it need not have been difficult to see that the demand
of 1905–7 was one of these.
8. The Government of India’s silver policy during the early part of
1907 left them, therefore, in a somewhat worse position to meet the
crisis which came at the end of the year, than need have been the case.
But their sterling reserves were nevertheless fairly high. On September
1, 1907, they seem to have been, approximately, as follows:—
_Gold_—
Currency Reserve in India £4,100,000
Currency Reserve in London 6,200,000
——————————–
£10,300,000
═══════════
_Money at Short Notice_—
Gold Standard Reserve in London £50,000
Cash Balances in London 5,150,000
——————————–
£5,200,000
═══════════
_Sterling Securities_—
In Currency Reserve £1,300,000(a)
In Gold Standard Reserve 14,100,000(a)
——————————–
£15,400,000
═══════════
_Aggregate Sterling Reserves_—
Gold £10,300,000
Money at Short Notice 5,200,000
Securities 15,400,000
——————————–
£30,900,000
═══════════
(a) Book value.
Thus, to take a round figure, the crisis found the Secretary of State
with about £31,000,000 in hand. The storm was soon on him. By the
end of October 1907 it had become plain that the Indian harvest would
be a bad one, and the financial crisis in the United States was fast
developing. On November 4 the Bank of England raised its rate to 6 per
cent, and on November 7 (for the first time since 1873) to 7 per cent.
On November 6 the Secretary of State could only manage to sell even 30
lakhs of rupees by allowing the rate to drop to the minimum figure of
1s. 3–29/32d. For several weeks following, at a time of year when the
demand for Council Bills is usually strong, he sold none at all. But
beyond withdrawing from the market he took no further steps for the
support of exchange. This measure was inadequate to effect its purpose,
and there is a good deal to be said for the view that he ought to have
taken at once the more drastic steps for maintaining the gold value of
the rupee which he had to take a few months later. However, it was a
perplexing and unprecedented time for every one, and that it was some
weeks before his advisers found their bearings is not to be wondered at.
So inadequate was his action that at first the fall in exchange was
scarcely stayed at all. Tumbling day by day, it reached on November
25 the rate of ⅓–11/16. This is below the gold export point (from
India), and it could not have fallen so low if the Government had made
gold freely available in India. But, as can be seen from the preceding
table, their Indian gold reserve was not large. Individuals were not
permitted, therefore, to take out more than £10,000 at a time; and
in this manner the gold dribbled slowly away over a period of a few
months. It would probably have been of more use if it had been allowed
to disappear in a week at the moment when it was most badly wanted.
In the meantime the Secretary of State, deprived of his usual source of
income from the sale of Council Bills, was meeting his normal expenses
from the gold portion of the Currency Reserve in London. But the Gold
Standard Reserve, although about £1,000,000 worth of Consols was sold
out in order to be ready for use in a more liquid form, was kept so far
intact.
Thus matters went on until the end of December 1907, when the
authorities nerved themselves, although the immediate necessity had
temporarily disappeared through a slight strengthening of exchange, to
take whatever drastic steps might be necessary to maintain the gold
value of the rupee. It was announced that they would sell in India
telegraphic transfers on London at a fixed rate. Before the need arose
for acting on this announcement, it was changed into an offer to sell
sterling bills on London at the fixed minimum rate of ⅓–29/32.
By March 1908 the reserves of actual gold were nearly exhausted, but
the securities and cash at short notice had not yet been trenched
on. Early in April exchange was again weak, and the offer referred
to above came into active operation. At first £500,000 a week, and
later £1,000,000 a week of sterling bills on London were sold in
India at ⅓–29/32. These were cashed in London from the proceeds of
selling securities from the Gold Standard Reserve. By August 1908 about
£8,000,000 of bills had been cashed in this way. At the beginning of
September 1908 the sterling reserves, which I give for comparison with
the amounts in September 1907 quoted above, were, approximately, as
follows:—
_Gold_—
Currency Reserve in India £150,000
Currency Reserve in London 1,850,000
——————————–
£2,000,000
═══════════
_Money at Short Notice_—
Gold Standard Reserve in London _nil._
Cash Balances in London £1,850,000
——————————–
£1,850,000
═══════════
_Sterling Securities_—
In Currency Reserve £1,300,000
In Gold Standard Reserve 6,000,000
——————————–
£7,300,000
═══════════
_Aggregate Sterling Resources_—
Gold £2,000,000
Money at Short Notice 1,850,000
Securities 7,300,000
——————————–
£11,150,000
═══════════
9. Thus the Secretary of State’s sterling resources sank in the
course of a year from about £31,000,000 to about £11,000,000. But
these figures do not supply by themselves a complete explanation of
the manner in which he had financed himself in London during this
period. Between September 1907 and September 1908 railway loans to
the aggregate amount of about £12,500,000 and a loan of £2,000,000
for “general purposes”[64] were raised in sterling.[65] A large part
of the former was required for the discharge of some previously
existing railway debentures, and for the purchase in England of railway
materials chargeable to capital account. In so far as the loan was
used for these purposes it did not help the general position. But in
so far as it was used for railway construction which could be paid
for by rupees in India, it had the effect of increasing the Secretary
of State’s sterling resources by a corresponding amount. Altogether,
during the period under review, the net assistance obtained by loans
amounted, I think, to about £4,500,000; so that the total deterioration
in the Secretary of State’s position during the first year of the
depression was not far short of £25,000,000.
After October 1908 the market still showed some hesitation. If the
season had turned out poorly, it is clear that the Secretary of State
must have had recourse to borrowing on a fairly heavy scale. In fact
the harvest was satisfactory, and by December 1908 the demand for
Council Bills was strong. It may be added to complete the story, that
in August and September 1909 there was a short period of weakness when
it was again necessary to offer sterling bills in Calcutta. Since that
time India has enjoyed a period of very great prosperity, and, so far
from the reserves being tested, it has been possible to build up the
very strong position analysed above.
10. I have looked at the crisis so far from the point of view of its
effect in depleting the sterling resources of the Secretary of State.
To the authorities in India it presented its other face. There it was
a question of how many rupees they would be able to withdraw from
circulation. Unless there is a deficiency in the revenue from taxation,
and apart from loans, the extent to which the Secretary of State can
draw on sterling resources must exactly equal the extent to which the
Government of India can withdraw rupees from circulation. For every
transfer from the sterling branch of any of the reserves must be
balanced by a corresponding transfer into the rupee branch. The amount
of the sterling reserves is a measure of the ability of the authorities
to withdraw rupees; and conversely, the volume of rupees which can be
spared from the circulation (or from hoards) in bad times sets an upper
limit to the extent to which they can be compelled to draw on their
sterling reserves for the support of the currency.
Regarded from this standpoint, the facts were as follows:—By March
1908 nearly 115 million rupees had been withdrawn into the currency
reserve by the release of gold, and by December 1908 the figure had
risen to 154 million. Up to March 1908 it had not been necessary to
take rupees into the Gold Standard Reserve; but by the end of November
1908 about 130 million rupees had been withdrawn in this way. There
was also a small increase of rupees in that part of the Indian Cash
Balances which is held in rupees and not in currency notes. Thus the
active circulation was reduced altogether by about 285 million rupees
(£19,000,000). This figure agrees closely enough with the figures we
reached by studying the state of the sterling resources.
11. This completes the narrative of events up to the end of the crisis
of 1908. I have given only such details as are relevant to my main
topic—the adequacy of the reserves to fulfil their purpose.
12. Let us consider, first, the adequacy of the reserve of coined
rupees. The governing facts of the situation are that every addition
to the rupee reserve diminishes to an equivalent extent the amount
available for the sterling reserve; that if the rupee reserve
is insufficient, nothing worse can happen than some delay and
inconvenience to merchants at a time of boom, whereas, if the sterling
reserve is insufficient, a dangerous crisis may be aggravated to the
pitch of panic; that at the last moment the rupee reserve can always
be replenished with no very great delay from the resources of the
sterling reserve, whereas the reverse is not the case (the silver
being not so saleable at a crisis as the gold is in a boom); and that,
therefore, it is desirable to keep the rupee reserve at the lowest
possible point consistent with probability and ordinary prudence. The
practical information chiefly required for settling the proper policy
is in regard to the ease with which new rupees can be supplied as they
are wanted—as to how far, that is to say, the Government can safely
pursue the policy of living from hand to mouth. This depends upon how
fast silver can be bought by the Government without its submitting to
extravagant charges, and how fast, in relation to the maximum rates of
new demand so far experienced, the Indian Mints can turn the silver
into rupees.
13. The Government of India’s recent attempt to solve the first part of
the problem unhappily involved its officers in a good deal of obloquy.
The silver market is a very narrow one and can only be dealt in through
the agency of one or other of a very small number of brokers. A ring of
speculators lay waiting to force prices up as soon as the Government
should appear as a buyer. Apart from the brokers who acted for the
ring, there was only one firm in a position to buy large quantities of
silver with the secrecy which was necessary if the speculators were to
be defeated. Unfortunately the head of this firm was closely related
by blood to the Parliamentary Under–Secretary of State. Two courses
were open: to buy openly and pay such extra price as the speculators
might find themselves in a position to demand, or to risk charges
of venality from any one who might have an interest in discrediting
the Government—disappointed speculators, currency malcontents, or
members of the political party in opposition. The officials, thinking
(bureaucratically) more of the Indian Exchequer and the Indian taxpayer
than of the House of Commons, chose, in fact, the second of the two
alternatives—in a spirit, perhaps, of too great innocence, bred of
long immunity from charges of personal corruption. It turned out that
they had made insufficient allowance for the deep interest which the
House of Commons takes in suggestions of personal scandal. The question
of Indian currency became almost interesting. Members asked one another
what the Gold Standard Reserve might be, and, when writers in the Press
told them, were duly horrified to learn that it contained no gold.
Closer inquiry elicited further facts unsuspected hitherto. It was
discovered that a number of the most prominent members of the London
Money Market were Jews, and that the Government of India’s holdings of
Consols had depreciated in market value since they were bought. But
attention was specially concentrated on the fact that the cash balances
held in London, after fluctuating considerably from time to time, had
risen for a year past to an unusually high level, and had been lent
out at low rates of interest to persons many of whom bore foreign
names. How was the ordinary member of Parliament to be sure that some
cosmopolitan syndicate of Jews was not fattening at the expense of
the ryots of India, whose trustee he had often declared himself to
be? Indian currency is too complicated a subject to be mastered at a
moment’s notice; and many persons, without paying much attention to
random charges of corruption, felt, quite legitimately, that there was
a great deal going on of which they had no conception, and that they
would like to be fully satisfied for themselves, and not merely on
the word of the officials, that everything was really in order. The
situation in its fundamentals has arisen before, and will arise from
time to time in the future so long as the relations of the House of
Commons to India combine in a high degree responsibility and ignorance.
14. The circumstances themselves are of very transient importance,
but they are likely to have some permanent effect on the particular
question which we are now discussing. It will be too much to expect the
officials to expose their personal reputations again to a suspicion,
however ill–founded, even in the interests of the Indian Exchequer.
Next time that the Government of India have to buy silver on a large
scale, it is likely that they will do so publicly and pay such extra
price as this policy involves. It is not worth a Government’s while to
risk its transactions falling into suspicion in order to save half a
million pounds. Assuming, therefore, that in future the Government will
have to buy publicly, we have to consider whether it is likely to be
cheaper for them to buy when the price of silver seems low, and hold
stocks in hand, or to wait until the last moment and buy at whatever
price is then ruling. I am inclined to think that the second of these
two policies is the better—though it is plainly a matter on which it
is not possible at present to see one’s way clearly. It is outside the
ordinary run of Government officials’ duties to judge whether or not
a given time is a good one at which to buy silver. The speculative
business of estimating the future of silver is best left to experts
in the matter, even though the price ultimately paid has to include
some commission to them for their services or their foresight. In the
second place the history of the recent speculative ring in silver,
so far as it can be known to an outsider, does not suggest that such
a transaction is a very easy or profitable thing to carry through,
or that the speculators have had a sufficiently striking success to
encourage similar attempts on a large scale in the future. I do not
know with what profit the ring have emerged from the transaction; but
the expense of carrying silver for a long period is great, and the rise
in its price in the last two years, though substantial, has not been
enough—so far as one can judge—to leave a surplus of profits at all
commensurate with the great risks run. In the third place, it does not
seem certain that the urgent demands for fresh coinage of rupees, to
which India is subject from time to time, will be as frequent in the
future as they have been in the immediate past. On the one hand the
heavy coinages since 1900 are cumulative in their effect and render
further coinages in the future less probable; and on the other hand an
increased use (it is to be hoped) of other media of exchange will allow
an urgent demand for currency to be met in other ways.
15. I do not think, therefore, that the Government need show a very
long foresight lest they should have to buy silver dear. But when their
stocks are falling low and there are apparently signs of demand in the
_immediate_ future, how long can coinage be delayed safely? To answer
this we need to know the maximum rate of output of the Mints, and the
maximum rate of absorption of new currency so far experienced.
16. The rates of absorption of rupees in various years have been
given in the Table on p. 55. The maximum absorption in the October
to December quarter was 11·39 lakhs in 1905–6, and the maximum in
the January to March quarter was 2·68 lakhs in 1909–10. It has been
estimated that the Indian Mints can turn out 2·25 lakhs of rupees per
month without overtime, and 4·50 lakhs per month with overtime. There
seems little reason, therefore, for over–anxiety lest the Government
be caught short of rupees. If they were to start the busy season with
a surplus of 500 or 600 lakhs over what was considered a safe minimum,
the reasonable demands of prudence would have been fully satisfied.
The safe minimum in question must necessarily depend on circumstances,
especially on the volume of the note issue and on the amount of gold
held in India; it is impossible to suggest any figure which would
be permanently suitable. I am dealing merely with the surplus over
this minimum which, on the basis of experience, the Government might
reasonably take pains to have in stock at the beginning of a busy
season. The calculation refers throughout to their _aggregate_ rupee
resources in the Currency Reserve and Gold Standard Reserve combined.
17. We now come to the much more important question of the adequacy of
the sterling reserves.
I do not think it has ever been thought out quite clearly for what
precise purposes these reserves are held. The difficulty can be put
shortly in this question,—Are they held purely as a currency reserve,
or are they to fulfil also the purpose of a banking reserve? Is their
only purpose, that is to say, to make certain that the Government
will always be able to exchange for sterling such rupees and notes as
may be presented to them, or are they also intended to ensure India’s
being able to meet her international obligations at a time of dangerous
crisis? The two purposes are plainly not identical. If all bankers
and merchants keep adequate reserves in rupees and notes, then it
will be sufficient if the Government are always able to turn these
rupees and notes into sterling. But if in a financial crisis the Indian
Money Market as a whole is in fact unable to meet its international
obligations without Government assistance, is it the Government’s
intention to stand calmly aside and permit (for example) a suspension
of cash payments by the three Presidency Banks, or will they, if
necessary, use their sterling reserves to give some support to the
Indian Money Market _in extremis_?
If the Government’s Reserve is held purely to support the currency,
then the maximum volume of rupees and notes, which could, so far as
one can anticipate, be spared from the circulation and tendered to the
Government for exchange, sets an upper limit to the necessary amount
of this Reserve. If, on the other hand, it is intended to act as a
banking reserve and to ensure India’s ability to meet her international
obligations at all times, then its upper limit is set by the probable
maximum amount of the adverse balance which could arise against India
for immediate payment.
18. I will begin by discussing this question on the first
hypothesis—that what the Government has been accumulating is intended
to serve as a currency reserve only—and will return later to the
problem of a reserve held for wider purposes, and of the possible
magnitude of the balance of international indebtedness against India.
19. To estimate the demand that the reserves might have to meet merely
in order to support the currency, the existing volume of currency is
what we chiefly require to know. For this sets, or suggests, a limit
to the maximum amount which can possibly be spared from the active
circulation.
Attempts to estimate the rupee circulation of India have been the
occasion of some very interesting calculations. For many years past
(since 1875) an annual census of rupees has been taken by examining in
each Government Treasury a bag containing 2000. This enabled Mr. F. C.
Harrison, when he was Comptroller of Currency, to apply the Jevonian
method very fully; and he was also able to corroborate his estimates by
reference to the numbers of the older issues, 1835 and 1840 (_e.g._),
actually withdrawn from circulation on the occasions when the Mint
recalled them. Mr. Harrison’s results were checked by the labours of
a later Comptroller of Currency, Mr. Adie, who applied to the same
material two alternative methods of much greater technical complexity
than Mr. Harrison’s.[66]
Jevons’s method is based on the assumptions that the proportions of
coins issued at different dates found in the given samples roughly
correspond to their proportions in the circulation at large, and that
the numbers in circulation of the latest issues do not much differ
from the numbers issued from the Mint. In short, if we know the
relative proportions of coins of 1860 and of 1912 in the circulation,
and if we know, approximately, the absolute number of coins of 1912,
we can calculate the absolute number still circulating of the coins of
1860. In applying this method to the Indian data, we are assuming that
the proportions of rupees of each date found in the bags examined in
a great number of scattered Government Treasuries are a fair sample
of the proportions still in circulation throughout the country. In a
country such as India, however, there may be great stagnancy in a part
of the circulation, and the coins finding their way to the Government
Treasuries may be a sample rather of the floating surplus of coinage,
which has a relatively high velocity of circulation, than of the
total stock, which includes semi–hoards passing from hand to hand
comparatively seldom. Since these samples are likely, therefore, to
contain an undue proportion of recent issues, estimates of the total
circulation, which are based on them, may be expected to fall short
of the truth rather than to exceed it. There is reason, also, for
supposing that in some cases the officials charged with the duty of
examining the samples did not always deal with them conscientiously. A
tendency was noticed for the returns of one year to resemble those of
the previous year more closely than they should, and not infrequently a
batch of coins would be attributed to a year in which it is known that
none were minted. Nevertheless the calculations of Mr. Harrison and Mr.
Adie, and the data on which they are based, seem on the whole coherent,
and bear, so far as one can judge, the marks of substantial accuracy.
A quite different method of estimating the circulation has been
adopted by Mr. F. J. Atkinson.[67] His method is direct; and consists
in a calculation or estimate of the additions to the currency and
the losses from export, melting, etc., year by year, from 1831 when
the modern coinage first began. Some of the items in the calculation
are definitely known, but others, the amount annually melted, for
example, are almost entirely a matter of guesswork. The fact that his
calculations contain altogether a great number of separate guesses
does not prevent his final result from being a guess too. For the
period previous to the closing of the Mints some of his estimates for
the amount melted seem very low, and this may possibly explain why
his final results yield a much higher total for the circulation than
those of Mr. Harrison and Mr. Adie. In recent times, _i.e._ since the
closing of the Mints, and specially since the new equilibrium which
was reached in 1900, Mr. Atkinson’s method is much more satisfactory
than for earlier years and, since the doubtful items are in these later
years a far smaller proportion of the whole, much less likely to lead
us wrong. For the earlier years, therefore, I am inclined to prefer
Mr. Harrison’s conclusions; but I think they can be brought up to date
by a year–to–year method resembling Mr. Atkinson’s. The increase in
Mr. Atkinson’s estimate during the ’nineties is due to the fact that,
as his figures purport to exclude rupees in hoards, he must make large
allowance for the coins from this source then entering into circulation.
The actual figures are as follows:—
ESTIMATE OF THE RUPEE CURRENCY IN CRORES (10,000,000) OF RUPEES
┌——────——┬—————─────–┬———──────———┬———──────———┬————───────———┐
│ │ Harrison. │ Adie, │ Adie, │ Atkinson.(a) │
│ │ │ 1st method │2nd method. │ │
┼——────——┼—————─────–┼———──────———┼———──────———┼————───────———┼
│ 1881 │ { │ 108 │ ... │ 135 │
│ 1882 │ { │ 111 │ 108 │ 133 │
│ 1883 │ { about │ 113 │ 110 │ 136 │
│ 1884 │ { 115 │ 106 │ 107 │ 136 │
│ 1885 │ { │ 104 │ 105 │ 139 │
│ 1886 │ { │ 106 │ 110 │ 145 │
│ 1887 │ ... │ 109 │ 108 │ 148 │
│ 1888 │ 120 │ 106 │ 106 │ 152 │
│ 1889 │ ... │ 112 │ 112 │ 154 │
│ 1890 │ ... │ 121 │ 115 │ 159 │
│ 1891 │ ... │ 121 │ 116 │ 166 │
│ 1892 │ 125 │ 129 │ 121 │ 167 │
│ 1893 │ 128 │ 132 │ 130 │ 173 │
│ 1894 │ ... │ 129 │ 126 │ 176 │
│ 1895 │ ... │ 128 │ 127 │ 169 │
│ 1896 │ ... │ 121 │ 120 │ 172 │
│ 1897 │ ... │ 116 │ 116 │ 178 │
│ 1898 │ 120 │ 118 │ 113 │ 183 │
│ 1899 │ ... │ 118 │ 112 │ 178 │
│ 1900 │ ... │ ... │ ... │ 177 │
│ 1901 │ ... │ ... │ ... │ 189 │
└——────——┴—————─────–┴———──────———┴———──────———┴————───────———┘
(a) Of Mr. Atkinson’s two separate calculations, made in 1897 and 1903,
I have taken the latter. His calculation explicitly excludes rupees
in hoards, currency reserves, and Government balances; and is not,
therefore, entirely comparable with the others. If it were, the excess
would be considerably greater than it actually appears above.
20. These are the _data_. It is very difficult to estimate the extent
to which rupees may have emerged from hoards during the period which
succeeded the closing of the Mints. Mr. Atkinson’s figures suggest
that rupees from this source not only made good the natural wastage in
the active circulation but actually brought about a large increase in
it. Judging from the course of prices, I think he must have made an
excessive allowance under this head. The figures of Mr. Harrison and
Mr. Adie, on the other hand (which refer to the _total_ circulation),
point to a more moderate influx out of hoards into current use. I
propose to take a middle course, nearer, however, to Mr. Harrison than
to Mr. Atkinson, and to assume a _public_ circulation in 1900 (_i.e._,
excluding rupees in the Currency Reserve and Government Balances) of
120 crores of rupees. This estimate is probably near enough to the
truth for our purpose. If it is incorrect, I think it is more likely to
be an underestimate than an overestimate.
Starting from this assumption, I have worked out the details given
in the following table as a guide to the probable circulation at the
present time. By _public_ circulation, whether of rupees or notes, I
mean the whole circulation not in the hands of the Government—_i.e._,
including that in the hands of the banks. I am primarily concerned with
the circulation of rupees; but the public circulation of notes has been
added in the last column but one, as it is useful to know at the same
time the _total_ public circulation of currency.
CURRENCY IN LAKHS OF RUPEES
Total Currency
in the hands────────────────────────────────────────────–┐
of the Public │
on March 31.(d) │
│
Public circolation │
of Notes on──────────────────────────────────────–┐ │
March 31. │ │
│ │
Public circolation │ │
of Rupees on──────────────────────────────┐ │ │
March 31.(d) │ │ │
│ │ │
Net(c) Export.────────────────────–┐ │ │ │
│ │ │ │
Rupees released │ │ │ │
from Currency, │ │ │ │
Gold Exchange────────────────┐ │ │ │ │
Standard, │ │ │ │ │
and Treasur │ │ │ │ │
Reserves. │ │ │ │ │
│ │ │ │ │
New Coinage less │ │ │ │ │
Recoinage,(a)────────–┐ │ │ │ │ │
etc.(b) │ │ │ │ │ │
│ │ │ │ │ │
Public │ │ │ │ │ │
Circolation────┐ │ │ │ │ │ │
of Rupees │ │ │ │ │ │ │
on April 1. │ │ │ │ │ │ │
│ │ │ │ │ │ │
Financial │ │ │ │ │ │ │
Year, │ │ │ │ │ │ │
April 1– │ │ │ │ │ │ │
March 31. │ │ │ │ │ │ │
│ │ │ │ │ │ │ │
┌────┴───–┬───┴──┬───┴──┬───┴──┬──┴─–┬───┴──–┬───┴──┬───┴──–┐
│1900–1901│120,00│+13,60│– 4,66│– 35│=128,59│+23,79│=152,38│
│1901–1902│128,59│+ 2,04│– 2.72│–1.42│=126,49│+24,24│=150,73│
│1902–1903│126,49│+ 60│– 58│–2,23│=124,28│+28,87│=153,15│
│1903–1904│124,28│+11,42│– 45│+ 40│=135,65│+31,54│=167,19│
│1904–1905│135,65│+ 6,88│+ 55│– 61│=142,47│+33,73│=176,20│
│1905–1906│142,47│+16,11│– 2,11│– 78│=155,69│+37,90│=193,59│
│1906–1907│155,69│+22,88│– 4,88│–1,28│=172,41│+41,20│=213,61│
│1907–1908│172,41│+15,48│–11,56│– 41│=175,92│+38,65│=214,57│
│1908–1909│175,92│+ 2│–14,90│– 29│=160,75│+39,23│=199,98│
│1909–1910│160,75│+ 8│+13,14│–1,39│=172,42│+46,51│=218,93│
│1910–1911│172,42│– 42│+ 3,76│–1,72│=174,04│+45,68│=219,72│
│1911–1912│174,04│– 7│+11,61│–1,13│=184,41│+53,24│=237,65│
│1912–1913│184,41│ │ │ │ │ │ │
└────────–┴──────┴──────┴──────┴────–┴──────–┴──────┴──────–┘
(a) This column is derived from the figures given by the Currency
Department, and the total of net coinage issued in individual years
differs somewhat from the total amount minted as stated in the Mint
Statistics.
(b) In one or two of the earlier years deduction is made on account of
an appreciable sum in rupees paid out to native states. This deduction
is in accordance with the practice of the reports of the Currency
Department.
(c) For Bahrain Islands, Ceylon, Arabia, Mauritius, and East African
Coast.
(d) Not allowing for natural wastage of rupees (see below).
This calculation makes no allowance for the general wastage through
loss and various causes, or for the steady drain of rupees across the
land frontiers. This last item is probably considerable and is not
adequately accounted for in the trade returns. The recorded statistics
of trade overland show a large annual balance against India, which
is probably met by an unrecorded export of gold, silver bullion, and
rupees. In the case of Nepal, for example, the recorded statistics
show a considerable net balance of imports of treasure _into_ India;
and in the case of Tibet, Afghanistan and, in fact, all the land
frontiers, the official statistics of the export of treasure do not
tally with what we know of the circulation of the rupee beyond the
frontiers. Taking all these causes of loss together, I do not think
we should overestimate the wastage of rupees from the circulation in
placing it between half a crore and a crore annually. For the twelve
years 1900 to 1912, therefore, I propose to make an aggregate deduction
of 941 lakhs.
This leaves us with a public circulation of 175 crores of rupees
(£116,500,000) on March 31, 1912, and a total public circulation,
including notes, of 228 crores[68] (£152,000,000), being an increase
since 1900 of 46 per cent in the rupee circulation and of 58 per cent
in the total circulation. If Mr. Atkinson’s estimate of the circulation
in 1900 is nearer the truth than Mr. Harrison’s, then the public rupee
circulation in 1912 may have been as much as 200 crores. In the course
of 1912 there was a good deal of fresh coinage, of which, at the time
of writing, accurate statistics are not yet available. For our present
purpose it will be quite sufficiently cautious to think of the public
rupee and note circulation together as amounting to not more than 250
crores.
21. How much of this could possibly be spared from circulation at a
time of crisis? In 1908 the rupee circulation fell (at its lowest
point) by somewhat less than 30 crores, or less than 20 per cent of the
estimated rupee circulation at that time. The note circulation (see p.
55) fell much less seriously. It does not seem to me likely that the
Government could be called on at the present time to redeem more than
25 per cent of the total circulation (notes and rupees together), or,
on the basis of the foregoing calculations, 60 crores (say) of rupees
(£40,000,000). If the Government were to keep in one way or another a
reserve of this amount for purely currency purposes, I think they would
have done as much as reasonable prudence could require. I do not say
that it is impossible that they should be called on to redeem a greater
amount than this. But it would be extravagant to maintain a reserve
adequate for all conceivable emergencies, since there is a further
resort of which use might fairly be made without great reluctance.
Unless the London Money Market has collapsed as well as the Indian, it
is always open to the Secretary of State to borrow by means of India
Bills. There would be nothing shameful in this—though possibly some
expense. But the expense, even if the Secretary of State had to pay a
rate of interest appropriate to Turkey or China, would be much less
than the expense of maintaining a very great reserve against unlikely
emergencies.[69]
22. So much for the proper magnitude of the Reserve, regarded as a
Currency Reserve. The question of its use as a Banking Reserve raises
two problems—a problem of policy and a problem of statistics. Ought
the Government to allow its Reserve to be used as a Banking Reserve? If
so, how large ought this Reserve to be? Let us consider policy first.
23. There are three kinds of crises by which the Indian Money Market
might be assailed—a purely internal crisis, in which the banks have
difficulty in meeting a run on them by their Indian depositors; a
purely external crisis, in which India owes, and is called on to pay,
large sums in the London Market, but is free from serious banking
trouble at home; and a general crisis, in which the features of an
internal and an external crisis are combined.
A purely internal crisis of the first kind might require assistance
from the resources of Government, but would involve no claims on their
sterling resources specifically, as distinguished from their rupee
resources. The trouble would probably begin with a boom of the usual
type, heavy commitments on the part of the banks, large importations
of foreign goods, and (in the future) a good deal of internal company
promoting. If, early in the autumn, a serious failure of the monsoon
became apparent, a widespread suspension on the part of the numerous
bubble banks, which have been springing up lately all over India,[70]
would be a probable consequence. Indian depositors generally might take
alarm and hoard money in their own houses on a large scale. Exchange
Banks have such large deposits in India and so little cash there[71]
that they would probably require to import funds from London as fast as
possible. The Indian Joint Stock Banks, however, are now so important
that the part played by the Exchange Banks might not be adequate to
save the situation. The Government would then be called on to make
advances to the Presidency Banks. This has happened from time to time
in the past, the last occasion being in April 1898, when the Bank of
Bombay, whose bank rate was then at 13 per cent, asked the Government
for an advance of 25 lakhs.[72]
This raises the first question of policy—whether the Government should
help the bankers’ reserves on an occasion of internal crisis by making
rupee advances to them. But it is hardly relevant to the question of
the Government’s _sterling_ resources; and, unless the Government
Savings Banks were to be in trouble at the same time, it is not likely
that there would be any difficulty in helping the bankers, if it were
thought right to do so.
A crisis of the second kind, due to general depression or bad harvests,
in which India has to meet a heavy adverse balance in London,
provided that, as in 1907, it is not accompanied by internal banking
difficulties of the kind just described, causes, it is true, a drain on
the Government’s sterling resources through the necessity of providing
remittance on London, but only in proportion to the volume of notes and
rupees which are brought to the Government for encashment or in payment
of sterling drafts.
At first, therefore, in such a case, there is no question of the
Government’s using its reserves otherwise than as currency reserves;
and the banks will have plenty of notes and rupees with which to buy
the Government’s sterling drafts. Only if the depression is very
prolonged, and one bad harvest follows another, is the need likely to
arise for sterling advances from Government, otherwise than against a
corresponding face value of notes and rupees.
It is not very improbable, however, that in the future there might be
a general crisis of the third kind—a heavy adverse balance against
India, and an internal banking crisis at the same time. It is in these
circumstances that the most difficult question of policy arises. The
Indian Money Market would need to remit funds to London, but, on
account of the internal banking crisis and an outbreak of hoarding
amongst depositors, would not have even rupee resources with which to
do it. Consequently the Government’s offer to sell sterling drafts in
Calcutta, or to release gold from the Currency Reserve would not meet
the case. If general distrust of banking was widely spread, and notes,
gold, and rupees were being hoarded in the old–fashioned way on a large
scale, the banks would not be able to put their hands on sufficient
cash resources of any kind to enable them to pay for the Government’s
drafts on a scale adequate to their necessities. The position would be
that the Indian Money Market was on the verge of general insolvency
with the Presidency Bank Rates at (say) 12 per cent, and that the
Indian Government had (say) £40,000,000 sterling resources in hand with
demands on only a modest scale for the encashment of notes and rupees.
The Government would be vehemently urged to save the situation by
making sterling advances, not simply in exchange for notes or rupees,
but on some other non–monetary security.
24. We now have the possibilities before us. If in any of these sets
of circumstances the Government were faced with demands for advances
either in rupees or sterling, what line would it be proper to take?
On the one hand the policy of advances may introduce into the Indian
Money Market a serious element of weakness,—an element, perhaps,
inseparable from a system where there is no central banking authority
and where the currency authority stands, normally, outside the money
market. It is not the business of the Government to hold any of the
reserves which the bankers ought to hold. But if the Government does,
in fact, for another purpose hold large reserves in its hands, and if
it is believed that it will in case of extreme necessity come to the
market’s rescue, the bankers may tend to keep somewhat lower reserves
than they ought, and than they otherwise would. We have over again
the situation which has long existed, to its detriment, in the United
States. There, as in India, the Government, with immense currency
reserves of gold, is normally aloof from the money market. There
also they have no central banking authority. The expectation that
the Government will bring some of its gold to the rescue in extreme
circumstances, has always been said to exert an enervating influence
on the banks themselves in the matter of the precautions they take
for times of crisis. The ultimate solution probably lies in the
establishment of a Central Bank for India which shall be the Government
Bank and shall hold the banking and currency reserves at the same
time.[73]
In the meantime, in spite of this consideration, the Government will
not, I think, be able to resist the pressure on them in a crisis to
come to the assistance of the market. Indeed, I do not know that they
ought to resist it. It would be absurd to have large reserves in hand,
and not to use them to avert a general calamity. The awkwardness of the
situation is intrinsic, and cannot be avoided so long as the present
divorce is maintained between the banking and the currency authorities.
The plans of the Government ought, therefore, to be laid accordingly.
25. If there is force in this contention, and unless the Government
of India have definitely made up their minds that their sterling
reserves are to be used in no circumstances except for the support of
exchange and of the sterling value of their currency, it is important
to understand that immediate action is essential, and that to delay
action for a few weeks may be fatal. I would emphatically apply to
India the well–known doctrine which the powerful advocacy of Mr.
Bagehot raised in England, many years ago, to an impregnable position
in the unwritten constitution of this country—the doctrine, namely,
that in a time of panic the reserves of the Bank of England must, at
a suitably high rate, be placed at the disposal of the public without
stint and without delay. There is a danger that the matter may not
be thought out until, quite suddenly, the financial crisis comes,
and that then, while the decision is being taken and the best advice
sought, an inadvertent delay will intervene. If there were signs of a
general banking crisis in India, and particularly if the position of
the Exchange Banks were weakening in England, I am inclined to think
that it would be a wise policy on the part of Government to make an
immediate announcement that they would place up to (say) £10,000,000 at
the disposal of the Presidency Banks (or other approved borrowers) at a
rate of (say) 10 per cent. If this action stayed, as it well might, the
run on the banks in India, and the difficulties of the Exchange Banks
in raising temporary loans in London, the Government might with a very
moderate loss of funds (the mere announcement that they were available
being sufficient) find itself in a far more favourable position for
dealing with the subsequent depression; whereas after a delay a similar
announcement might eventually be forced upon them, and if the panic had
then gained impetus, the £10,000,000 quickly lapt up.
26. Two points connected with the above may be emphasised before we
pass on to the statistical problem. In the first place, in the event of
a _financial_ crisis, accompanied by numerous bank failures, I do not
think it likely that the Government would be overwhelmed with demands
for the encashment in sterling of notes and rupees. It would be much
more in accordance with what we know of similar crises elsewhere to
expect hoarding on a large scale, rather than a diminished demand for
currency and an ability to export it. In this matter the experience
of 1907–8, when the monetary position in India was easy throughout,
may prove, I think, misleading. During the eventful weeks in November
1907, when the Bank of England rate stood at 7 per cent, the Bank of
Bengal rate did not rise above 6 per cent.[74] No tendency whatever was
apparent for there to be withdrawals of money from the banks in India,
or for hoarding to reassert itself amongst the class which is learning
to bank. On the other hand, the comparative failure of the crops
left financiers with considerable rupee funds in their hands which
they could not use. The banks had, therefore, no special difficulty
in putting their hands on rupees and notes, and the only problem was
for the Government to turn these into sterling. The easiness of the
internal money market at that time and the total absence of banking
trouble have produced the impression that there will be plenty of
rupee funds available at a crisis, and that the only question will be
as to whether the Government can turn these into sterling. The great
development of Indian Joint Stock Banking since that time on not
perfectly sound lines makes it doubtful whether bank troubles will be
absent in an equal degree on the next occasion of difficulty.
There is no one now living in England within whose memory hoarding has
been a normal thing. But in countries where the tradition is but lately
dead or still lingers, it is apt to revive with astonishing vitality
at the least sign of danger. The extent to which the people resorted
to hoarding in France, Germany, and Austria (especially in the latter
country) during the Balkan War was very remarkable, and has exhibited
a danger to which the banking systems of those countries are still
subject, although some had begun to forget it. If this is the case in
European countries, there cannot be much doubt as to what would happen
in India. Some banking failures, a hint of political trouble,—and the
old habits will come back, whatever progress banking may seem to have
made in a time of prosperity.
But, secondly, assuming a sharp financial crisis to be accompanied by
increased hoarding, it would plainly be better if it were a hoarding
of rupees and notes rather than of gold. It is not impossible that
this might be the case. A trust in the Government’s capacity to meet
its obligations will persist some time after all confidence in private
institutions has been dissolved. In Austria, for example, the hoarding
was not so much of gold or silver as of notes. I believe that in some
parts of India, especially in those where gold has made relatively
little progress, hoards are sometimes held already to a fair extent in
notes. I know, for example, a very conservative Brahmin family, small
landowners in Eastern Bengal, where this is the case. Once a week the
head of the family will retire privately to a corner of the roof of the
house, take out the little hoard of notes with ritual care, count and
check them, dust each with a feather brush, and lay them out in the sun
to air and to recover from any trace of damp. If a note shows signs of
age or wear, it is taken to the nearest currency office and changed
for a new one. In troubled times such a family would hoard more notes
or silver, not gold. This, however, is no more than an illustration of
the point I have already dwelt on and emphasised—the manner in which
any increase in the popularity of gold diminishes the stability of the
currency.
27. Returning from these digressions, I conclude that the Government
will not be able in practice to restrict its responsibility to the
currency, and may have to take a part in moderating the consequences
of rash or unfortunate banking, and in meeting an adverse balance of
indebtedness. This conclusion brings us to the statistical problem.
Is the £40,000,000, which I put forward as a safe maximum for the
reserves, so far as the convertibility of the currency is concerned,
still adequate when the possible magnitude of India’s adverse balance
of indebtedness is our test of sufficiency?
This problem is even less capable than the former of exact solution.
The _variable_ elements in India’s international balance–sheet are
chiefly (i.) the excess of exports over imports, including treasure,
_i.e._ the trade balance; (ii.) the amount of _new_ fixed capital lent
to India by European capitalists; and (iii.) the amount of short–period
loans afforded to India by the European Money Market.
We require to know the magnitude of possible _variation_ in these
items, rather than the absolute amount of the various annual payments
which India has to make, in order to gauge the possible balance of
indebtedness against her. The greatest stress is commonly placed on
the first of them—the trade balance. But in the normal state of
affairs receipts and payments only balance after account has been
taken of capital transactions; and if a certain amount of new capital
has been flowing in every year, a slackening of this flow affects the
balance as adversely as a reduction in the volume of exports affects
it. In 1907–8 the adverse balance of indebtedness was largely due to
a change in the trade balance;—on the one hand, goods ordered during
the boom continued to pour into Bombay for some weeks after they had
become unsaleable, thus continuing for a time a large supply of bills
on India, while, on the other hand, the failure of the monsoon and
consequent anticipations of a scanty harvest cut off a considerable
part of the normal supply of trade bills on London. But even on this
occasion the adverse balance arose to a considerable extent out of
changes in capital transactions under items (ii.) and (iii.). The
acute stringency in the international money markets, occasioned by the
position in America, made it necessary for Exchange Banks and others to
reduce below their normal level their short–period borrowings (direct
or indirect) in London for use in India; and this stringency also
caused the flow of new investment to India to fall short of its usual
volume.
Thus, of the adverse balance of some £25,000,000 which had to be met
between September 1907 and September 1908, perhaps £18,000,000 was due
to a change in the trade balance and £7,000,000 to a diminution of
new capital transactions and to the non–renewal of some short–period
loans.[75] It is not easy, however, to argue from the experience of
1907–8 as to what will happen in the future. The volume of trade has
expanded very greatly since that time,[76] and the absolute variation
in the favourable balance between good years and bad is likely to
be correspondingly greater. In addition, the growth of banking in
the intervening period has been on a very great scale; and there is,
therefore, greater room for disturbance in the short–period loan
market. If, moreover, the internal banking position in India is as weak
as in Chapter VII. I make it out to be, a serious breakdown there may
embarrass the Exchange Banks in London, however intrinsically sound the
position of these Banks may really be, in their efforts to assist the
Indian market.
28. These are the relevant considerations. But any conclusion as to
the possible magnitude of the adverse balance at which one can arrive
on the basis of them is little better than a guess. I will give my
guess for what it is worth. I think the £40,000,000, which I have
fixed as the maximum figure of what is required for the redemption
in sterling of such notes and rupees as may be presented, is more
than sufficient to meet the adverse balance that is at all likely to
emerge in any single year. But I do not think it certain that this
sum would be adequate to the necessities of two successive bad years.
On the other hand, it is necessary to bear in mind that by the second
bad year there would have been time for a very great reduction in the
volume of imports, on account of the greatly reduced purchasing power
of the people, and that this might go a long way towards righting
the balance; also that, if there was a considerable liquidation of
short–period loans in the first year, it would not be necessary to
repeat this to anything like the same extent in the second year. In
short, the _natural_ forces tending towards equilibrium would begin in
the second year to show themselves more strongly. Nor is it necessary
to accumulate reserves in advance for every eventuality. Two bad years
in succession are not very likely; and, if they do come, the Secretary
of State will have ample time to make his arrangements for borrowing.
I think it a sufficient concession, therefore, if the £40,000,000 be
given as the proper limit, not as before of the aggregate sterling
resources of all kinds, but of the Gold Standard Reserve and the
sterling branch of the Paper Currency Reserve (_i.e._ excluding the
Cash Balances).
In a country such as India, where all available resources are required
for capital expansion, and where it is not sound or humane policy to
burden the present overmuch for the sake of the future, it is nearly
as important to avoid extravagance in the reserve policy as to avoid
undue parsimony. As the rupee and note circulation is increased, the
proportion of reserves ought to grow, of course, _pari passu_. But in
existing circumstances to hold much more than £40,000,000 in sterling
in the Gold Standard Reserve and the Paper Currency Reserve together
would border on extravagance. If the reserves were somewhat lower than
this, I do not think it would necessarily be blameworthy to leave them
so, provided it would prove a very burdensome thing to raise them. For
the expedient of a loan is always available.[77] My conclusion, rather,
is that the reserves should be allowed to reach some such figure as
this by the natural processes of growth, before sums are diverted from
them to other purposes.
A very few years ago hopes of reaching so secure a position as this
would have seemed chimerical. But the details given on p. 131 show that
in December 1912 the sterling reserves already amounted to somewhat
more than this. It is not yet clear, however, that their present amount
is normal. If it turns out to be so, then a position of adequate
strength has been attained already. But the form in which these
reserves are held is open to much criticism, and this must be my next
topic.
29. The criticisms which have had most popular vogue have been mainly
directed against the absolute amount of the Gold Standard Reserve,
against the investment of a large part of this reserve in securities,
and against the maintenance in London of some part of the gold in the
Currency Reserve.
In regard to the amount of the Gold Standard Reserve, Lord Curzon, in
1904, was inclined to think that £10,000,000 would be a proper figure.
In 1905 Sir E. Law, the Financial Member of the Viceroy’s Council,
suggested £20,000,000. In 1906 Sir E. Baker thought £20,000,000 a
suitable minimum. More recently, in 1912, £25,000,000 is the amount
which responsible officials have announced that they are aiming at.
Sir E. Law and Sir E. Baker both based their estimates on the amount
which the Secretary of State would require for his Home Charges if he
had to curtail his drawings of Council Bills by one–third or one–half
for a considerable period. I do not think that this is the most useful
point of view from which to approach the question, or that the proper
magnitude of the Gold Standard Reserve can be discussed without
reference to the magnitude of the other reserves.
30. The other two criticisms quoted above lead on to the general
question of how the sterling resources should be held and how they
should be divided between the several Reserves. The second of these
questions is mainly a matter of book–keeping, but has nevertheless
some importance. The Government of India’s present system has no
logical basis, is exceedingly difficult to understand, and has often
led, in consequence, to a good deal of misunderstanding. The ideal
system should be as simple and logical as is compatible with leaving
the authorities a free hand to shift and adjust as the necessities
of the moment may require. The present system is the outcome partly
of historical origins, partly of the authorities not having allowed
themselves by law a perfectly free hand. The much criticised practice,
for example, of holding six crores of coined rupees in the Gold
Standard Reserve is probably due to the provision by which that
portion of the Currency Reserve, which is held in London, can be
held only in gold. If rupees have to be released hurriedly from the
silver portion of the Gold Standard Reserve in India, the authorities
have a completely free hand as to the form in which they make the
corresponding addition to their sterling reserves in London; whereas,
if they are released from the Currency Reserve, the corresponding
transference in London must be made wholly in gold coin—a course which
may sometimes be exceedingly inconvenient at the moment.
31. If the authorities allowed themselves more latitude as to the
manner in which the Currency Reserve might be held, it would be a mere
book–keeping transaction to transfer to this reserve the rupees now
held in silver in the Gold Standard Reserve and to replace them by a
corresponding transfer of gold; but such an arrangement would be more
logical and easier to understand.
32. I think, therefore, that there might be considerable advantages
in the adoption of some general scheme for the reserves such as the
following:—
(1) While it would be legal to hold the Gold Standard Reserve in
_any_ form—gold, securities, bills of exchange, loans, or rupees—it
should be normal in good times to hold, say, £11,000,000 in sterling
securities and the rest in gold either in London or India, but
preferably in London.
(2) Power should be taken to invest a larger amount of the Currency
Reserve than at present (say £7,500,000 sterling securities in addition
to the rupee securities instead of £2,500,000 as at present), and to
hold a prescribed maximum proportion (say one–third) of it in bills of
exchange or on loan at short notice either in India or London.
All this, after the necessary change of law, could be effected by a
change in book–keeping; and in December 1912 the account would have
stood as follows (compare the actual state of affairs as given on p.
131):—
_Gold_—
Gold Standard Reserve in London £7,500,000
Gold Standard Reserve in India 2,500,000
Currency Reserve in India 15,000,000
——————————–
£25,000,000
═══════════
_Money at Short Notice_—
Currency Reserve in London £1,000,000
Cash Balances in London 7,500,000
——————————
£8,500,000
═══════════
_Sterling Securities_—
Currency Reserve £7,500,000
Gold Standard Reserve 11,000,000
——————————–
£18,500,000
═══════════
_Rupees_—
Currency Reserve £13,750,000
═══════════
33. Some changes of substance might be added to these changes in
book–keeping and are naturally suggested by them. There is, first, the
question whether the gold portion of the reserves ought to be held in
India or in London. Readers of Chapter IV. will know that there are,
in my opinion, no advantages in keeping gold in India, and that such
a policy involves a direct money loss through the cost of originally
carrying the gold to India and the cost of bringing it back again to
London when, at a later date, it is required to support exchange.
But Indian opinion views with suspicion the holding in London of
the greater part of India’s gold reserve, and this opinion, though
ill–founded, is likely to persist for some time to come. The amount of
expense involved in keeping gold in the Indian reserves is, in relation
to the issues involved, not great; and it might be well worth while
to incur it in order to avoid the currency system’s falling under a
suspicion, however ill–founded. It might be a satisfactory compromise,
therefore, if, as a normal practice (but not as a legal requirement),
the gold in the Gold Standard Reserve were held “ear–marked” at the
Bank of England, but the gold in the Currency Reserve retained in
India. It may be added that the authorities seem, in fact, to be moving
somewhat in this direction; for it is understood to be their intention
to accumulate £5,000,000 in gold “earmarked” for the Gold Standard
Reserve.
If, however, a large part of the gold be held in India, it is of the
utmost importance, in the event of a crisis, that the gold should be
shipped by the Government to London and sterling drafts on London
sold against it, or, if it were released in India, that the banks
only should be allowed to get it, and on an undertaking to export it.
Otherwise, if it were made freely available in India, a part might be
lost and wasted (so far as the support of exchange is concerned) in
hoards.
34. The suspicion which is felt with regard to the holding of Indian
gold in London is exceedingly natural, and can be completely dissipated
only by a fuller knowledge of the currency system and of the mechanism
of the foreign exchanges, than the generality is likely to possess.
It is natural to think that this gold is more at the disposal of the
London Money Market than it would be if it were in India, and that the
Secretary of State, under corrupt or interested pressure, can easily
place it at the disposal of London financiers. Apart from the question
how far the Secretary of State is really open to such pressure, it may
be doubted whether he is likely to be exposed to it, because at a time
of real stringency it will prove easy, I believe, for the London Market
to get hold of some part of the Indian gold, whether held in London
or in India, by perfectly legitimate means. India is normally in the
position of owing London money; this debt is discharged partly by the
consignment of goods, partly by the renewal at frequent intervals of
short loans or credits made by the London Market to the Indian Market
on bills of exchange or through the Exchange Banks, and partly by new
permanent loans. If there is great stringency in the London Market and
London is in urgent need of funds, the use of the last two methods can
be so much restricted that India can be practically forced to pay
what is owing in gold. It is, in fact, precisely because she is open
to this pressure that it is necessary for a considerable gold reserve
to be kept. So long, therefore, as the gold is freely available either
in India or in London for the support of exchange, it is unlikely
that it can be withheld from the London Money Market if this Market
really wants it. If it is in London, India will be able, by the sale
of telegraphic sterling transfers in Calcutta, to discharge her due
obligations cheaply and without delay; if it is in Calcutta, additional
charges and a loss of time must be incurred.
A feeling of jealousy on a country’s part, lest some other country
should have a lien on its gold reserve, is frequently liable to arise
at the present time, but is essentially opposed in spirit to the whole
purpose and meaning of keeping gold reserves at all. Gold reserves
are meant to be used in times of difficulty, and for the discharge of
pressing obligations. It is absurd for a man with a large balance at
his bank to default to his creditors, because a feeling of jealousy,
in regard to any one in whose favour he draws a cheque, prevents him
from ever drawing one. Mr. Bagehot certainly did England a great
service in dissipating from the minds of her financiers this primitive
prejudice;—for wonderfully few other countries have yet learnt that
gold reserves, although no doubt they serve some purpose when they are
held for show only, exist to much better purpose if they are held for
use also.
Vague stirrings of the original sin of mercantilism always inherent in
the mind of the natural man and urging him to regard gold as beyond
everything essential wealth; jealousy of the too powerful magnates of
the London Money Market obtaining what should belong to India’s Market
for their own purposes; jealousy of the Secretary of State seeming,
like a man who invests abroad, to seek in this way an independence
of India in case of trouble; jealousy of Great Britain, who might
use or regard India’s “ear–marked” gold as her own war–chest;—all
combine to make a powerful, natural, and yet unfounded prejudice
which it is exceedingly difficult to combat. Nothing is commoner than
to read incitements against malevolent financiers who would seek to
deprive India of her “fair share” of the world’s new gold. India must
be allowed, I suppose, to hug her sterile favourite. In spite of the
notorious fact that the Bank of England holds less gold than the
Central Bank of any other first–class Power,—far less even than the
Caja of the Argentine,—the belief will continue that the amount of
gold a country holds at home, rather than the degree of promptness
and certainty with which at all times it can meet its international
engagements, is the measure of its financial strength.
35. What other changes of substance might be made usefully? By far the
most important is connected with the proposed power to make advances
from the Currency Reserve on bills of exchange and other approved
security, as briefly described in Chapter III.
The policy pursued during 1912 of holding large cash balances in London
and of lending them out in the London Market provoked widespread
criticism both in India and at home. The line of thought underlying
this criticism appears to me to be entirely reasonable. If the
Government of India hold in London a penny more than is required to
establish the stability of their financial system, they are certainly
diverting resources from India, where they are greatly required, to
the detriment of India’s own trade. I do not think, however, that the
authorities are in fact open to any serious blame up to the present
time. The holding of such large balances in London has not been
part of a permanent policy, and was due in 1912 to a combination of
circumstances which could not easily have been foreseen. And further,
the Government have not until quite lately held more sterling resources
altogether than have been required for the stability of the system.
Public feeling points, nevertheless, in the direction of what, in
the future, will be the right policy. If I am right in thinking that
about £40,000,000 in the sterling Reserves is in present circumstances
adequate, further accumulations in the hands of Government ought to
be put at the disposal of the Indian Money Market and not converted
into sterling. At present there is no machinery for doing this; and
the absence of the appropriate arrangements constitutes a serious gap
in the country’s financial system. What would be thought in France or
Germany, or in any other European country, if an expansion of the note
issue could not be made against the discount of home bills, but only
against a corresponding deposit in cash cent per cent? Yet this is the
position in India. The Government (apart from their deposits in the
Presidency Banks, which will be dealt with later on) have no choice
between allowing the funds which accumulate in their hands to lie
absolutely idle in India and transferring them to London to earn a low
rate of interest there.
If the use of notes continues to increase, and if £40,000,000 is an
adequate figure for the sterling Reserves, a considerable sum may soon
be available in India from the funds of the Paper Currency Reserve.
Every addition, moreover, to the Gold Standard Reserve reduces to some
extent the need for holding large amounts of sterling in the Paper
Currency Reserve. Great advantages may be obtained if the surplus
funds in the Paper Currency Reserve be used, not as a permanent or
quasi–permanent loan to Indian traders, but to provide _elasticity_
in the seasonal supply of currency and to make possible the increase
in the stock of purchasing power in the form of money which is
_temporarily_ required in the busy season, without having to raise it
in London. _Permanent_ additions to the currency must be obtained in
the future as they are at present. But _temporary_ additions, due to
seasonal demand, ought to be provided by a suitable organisation of
credit money in India herself.
The advances from the Currency Reserve, therefore, must be made at
a fairly high rate of interest and for periods not exceeding three
months; and they should be so arranged that the Government would
regain possession of its funds and the advances be reduced to nil in
each slack season. Thus the Government would begin each busy season
with their funds intact; and they would not lend until the success of
the season was assured, and it was plain that the general position
warranted it. The advances would be made in notes or rupees, according
to the demand. These prosperity advances, therefore, are to be sharply
distinguished from the adversity advances, discussed on pp. 160–163,
which would be made in sterling drafts, and which would be governed by
wholly different considerations.
36. There remains for discussion the question of the Government’s Cash
Balances.[78] I will begin with the method of managing that part of
them which is held in India. It will be useful to know in what way this
method has grown up.[79]
When, in 1862, the right of note issue was taken away from the
Presidency Banks, they were given as part recompense the use of the
whole of that part of the Government balances which would otherwise
have been received at the General Treasury, or at places where the
Banks had branches, provided that sums in excess of a prescribed amount
(70 lakhs in the case of the Bank of Bengal), if not held in cash,
should be invested in Government paper and other authorised securities.
Difficulties very soon arose (in 1863) through the Government’s
requiring the use of its funds at a time when the Bank of Bengal
could only sell out the securities in which it had invested them at
a considerable loss. The system of virtually compelling the Banks to
lock up the Government funds in securities, not easily saleable at all
times, was plainly vicious, and in 1866 a new arrangement was made by
which the Banks were permitted to use the whole of the balances, placed
with them for the time being, for banking purposes. This seems to have
worked satisfactorily up to 1874. In that year there was a famine in
Bengal, and the Government had to buy rice in Burma and send it to
Bengal for relief purposes. The rice had to be paid for in cash; but
when the Government intimated to the Bank of Bombay that they would
have to draw out about 30 lakhs (£300,000), their balance at the Bank
then being about a crore (£1,000,000), the Bank was unable to let
them have the money. In the correspondence which the Viceroy (Lord
Northbrook) raised in regard to this, the Secretary of State (Lord
Salisbury) suggested that the Government should release themselves
from their engagement to leave their whole balances with the Banks
and that they should retain the surplus in their own Treasury, or
“lend it for short terms under suitable conditions as to interest and
security.” This interesting suggestion, closely anticipating more
recent proposals, was not acted on, the Indian authorities thinking it
improper that the Government should appear to enter into competition
with the Banks. But in 1876 the Reserve Treasury system was set up, the
Government undertaking to leave, ordinarily, certain minimum amounts at
the Banks and diverting the bulk of the rest of their funds into their
own Reserve Treasury. In 1878 it proved inconvenient to divert from the
Banks immediately the whole of the proceeds of a newly raised loan,
and the Comptroller–General was told that he “would be at liberty, to
the extent to which he could conveniently do so, to accommodate the
Banks with temporary advances from the Reserve Treasury, provided they
were willing to pay interest on such advances at the current rates.”
No special security was taken from the Banks for the sums thus lent to
them. For some time loans were freely given in this way. In 1889 the
Government declared “that any assistance in relief of the Money Market
which may be afforded by means of the Treasury Reserve can only be
made (1) through the Bank, (2) at its published rate of discount, (3)
in relief of temporary stringency.” Up to 1892, however, loans were
made as before. From 1892 to 1899 loans were made very rarely. In 1899
the Secretary of State wrote to the authorities in India:—“I see no
objection to your lending to the Presidency Banks, on the security of
Government paper, at such rates of interest from time to time and for
such periods as you think best. I am inclined to think that the rate
should, as a rule, be not below the Bank rate.” Between 1899 and 1906
such loans were made on four or five occasions; but since 1906 there
have been none. The balances left with the Banks without interest
normally exceed, however, the prescribed minima.[80]
The question of the proper employment of the Indian Cash Balances is,
therefore, a very old one, and one in regard to which the Government
have pursued no consistent policy. The effect of recent practice,
however, has been on the whole to divert more funds than formerly from
banking purposes. On the one hand the Government have been less willing
to allow the Banks loans in addition to the normal balances kept with
them, and on the other hand the general level of the cash balances has
been getting higher.
While the Government’s practice has become stricter, it is arguable,
I think, that there is less need for it. Originally, we have seen, the
Government banked with the Presidency Banks, and difficulties arose
because, the Government’s deposits bearing a high proportion to the
Bank’s total resources, it was not easy to release a large part of
these deposits suddenly. This would no longer be the case to nearly
the same extent, even if the Government were to place much larger sums
with the Banks. In 1870[81] the public deposits at £3,600,000 fell not
far short of the total private deposits and exceeded by 50 per cent
the capital and reserve of the Banks; in 1880 they were £1,900,000,
and were about one–third of the private deposits; in 1890 the figures
were £2,400,000, equal to about a quarter of the private deposits; in
1900, £1,900,000, equal to less than a quarter; in 1912 the Government
deposits at £2,500,000 were not much more than a tenth of the private
deposits. Moreover, the capital and reserves of the Banks have doubled
since 1870.
37. The portion of the Cash Balances deposited, under the above
arrangements, with the three Presidency Banks varies, of course, from
week to week. The amount normally placed with the Head Offices of the
Banks has fluctuated for some time in the neighbourhood of £1,000,000.
In addition to this, further sums, fluctuating about £1,500,000,
are held at branch offices of the Banks. These are deposited on a
different understanding (see p. 184, footnote) from that governing the
sums at the Head Offices, and are held literally at call, the amounts
at particular branches being subject to wide variations. The total sums
placed with the Banks, head and branch offices together, are usually
about £2,000,000, and the maximum deposits in recent years have been
about £3,000,000. On these deposits, as in the case of the Bank of
England and the British Government deposits, the Banks pay no interest.
The whole of the rest of the Government Balances is maintained in cash
(rupees, notes, or sovereigns) in the various Government Treasuries.
This is the present position. The Government are free in exceptional
circumstances, as we have seen above, to place additional sums with the
Presidency Banks on which interest is payable. But advantage has not
been taken of these powers recently.
38. In view of the facts mentioned at the end of § 36, I am of opinion
that the Reserve Treasury system needs reconsideration and that at
present rather more funds, perhaps, than is necessary are withdrawn
from the use of the Money Market into the Treasuries.
But the critics referred to in § 35 are following a false track when
they argue that much offence lies in the present use of the Cash
Balances, and that the main remedy for the seasonal stringency of the
Indian Money Market is to be found in lending out these balances in
India during the busy season. In thinking that any substantial remedy
is to be obtained by loans from this source, they are paying too much
attention to the transient circumstances of a single year. I believe,
for the reasons given below, that the Indian Money Market cannot expect
very much assistance from the Cash Balances, and that they have much
more to hope for in the future from the growing resources of the Paper
Currency Reserve.
Only under one or other of two conditions could loans from the Cash
Balances be important: first, if the proceeds of taxation tended to
accumulate in the Government Treasuries in the autumn and winter months
so that the balances tended to be above their normal level at the busy
season; and second, if the Government were to pursue the foolish policy
of habitually keeping more ample balances than they really required.
The first of these conditions is not fulfilled to any important extent.
The land tax is collected, naturally, _after_ the harvest has been
sold, not during it; and at the end of the calendar year the surplus
balances are small. The totals of the Indian Balances on August 1 and
January 1 of recent years are shown below:—
(IN LAKHS OF RUPEES)
┌────────–┬──────────–───────────────┬──────────–───────────────┐
│ │ August 1. │ January 1. │
│ ├──────────–┬──────────────┼──────────–┬──────────────┤
│ │ Reserve │Total Balances│ Reserve │Total Balances│
│ │Treasuries.│ in India. │Treasuries.│ in India. │
├────────–┼──────────–┼──────────────┼──────────–┼──────────────┤
│1906–1907│ 5,26 │ 17,18 │ 1,60 │ 10,46 │
│1907–1908│ 5,18 │ 17,14 │ 3,20 │ 11,84 │
│1908–1909│ 7,41 │ 19,54 │ ,76 │ 9,33 │
│1909–1910│ 2,22 │ 13,61 │ 1,74 │ 10,16 │
│1910–1911│ 9,49 │ 21,43 │ 2,82 │ 13,18 │
│1911–1912│ 9,62 │ 22,66 │ 3,21 │ 15,18 │
│1912–1913│ 10,96 │ 24,58 │ 10,62 │ 21,99 │
└────────–┴──────────–┴──────────────┴──────────–┴──────────────┘
The total balances include the working balances in the innumerable
District Treasuries all over India and the sums already deposited with
the Presidency Banks. When, therefore, we are considering to what
extent the Government could lend at the height of the busy season, we
must chiefly pay attention to the sums in the _Reserve_ Treasuries on
January 1. The above figures show conclusively that, as a rule, the
Indian Money Market cannot expect substantial assistance from this
source at the time of year when it is most needed. Except in 1913,[82]
the resources of the Reserve Treasuries on January 1 have been in
recent years between £1,000,000 and £2,000,000.
After January 1, it is true, the revenue comes in rapidly.[83] But as
a matter of fact, the funds which accumulate from the proceeds of
revenue between January and April are quickly released and returned to
the Money Market, as matters now are, through the encashment of the
Council Bills which are generally sold in large quantities at this
time of year. If this money were to be released by loan instead of by
the encashment of Council Bills, the effect would be that less funds
would be remitted to London; and unless we assume that more funds are
being remitted to London than are really required, this would put the
Secretary of State to inconvenience in meeting the Home Charges. Only
in years when sufficient funds had been remitted to London earlier in
the financial year, therefore, would surplus funds be available in the
Indian Treasury to any important extent even in the latter half of the
busy season.
I do not say that the Government should not lend from the Cash Balances
in India whenever exceptional circumstances may lead to their being
at an unnecessarily high level in the busy season. But the sums which
could be lent in this way would not generally be important, and the
amount of elasticity which the financial system could gain by these
loans would be small compared with what it might acquire from a reform
of the Paper Currency Reserve. I should prefer, therefore, that the
Indian Cash Balances should be held, so far as possible, in notes, thus
increasing the capacity of the Currency Reserve, and that all advances
should be made in form from the Currency Reserve. The question of the
use of funds in the Cash Balances would then lapse into the question
of the use of funds in the Paper Currency Reserve. But if a different
system of book–keeping be preferred, no substantial change is involved
in what I propose. The method of loaning from the Currency Reserve is
applicable _mutatis mutandis_ to loans from the Cash Balances.
39. Of the Cash Balances in London no more than a working account is
kept with the Bank of England. The manner in which the rest is dealt
with is best described in the words of an official memorandum issued by
the India Office in 1913 [Cd. 6619]:—
The practice followed since 1838 has been to keep a certain part of
the balance at the Bank (of England) and to lend the remainder at
interest. The usual method is to lend to certain banks, discount
houses, and stock–brokers of high standing, whose names are included
in an approved list, now containing sixty–two names. The list is
revised periodically, and applications for admission are carefully
considered with reference to the standing and resources of the
applicants and the nature of their business. Loans to borrowers on the
approved list are granted as a rule for periods from three to five
weeks, occasionally for six weeks, so that the whole balance could, if
needed, be called in within six weeks. The Accountant–General informs
the Secretary of State’s broker daily of the amount of loans that
may be renewed, the amount of new loans that may be placed, or the
amount that must be called. The broker is responsible for obtaining
the best possible rate of interest. The amount of a loan is not paid
out from the Secretary of State’s account at the Bank of England until
the security has been lodged at the Bank. In 1909 it was found that
the borrowers on the approved list could not take the full amount of
the balances available for loan; and, in order to obtain employment
for the funds, the broker was instructed, as a temporary measure, to
deposit the excess amount from time to time with leading London banks,
usually for periods of between one and three months.
40. In the autumn of 1912 a determined attack was made, in the Press
and by means of questions in the House of Commons, on the management of
the English Balances, as described above, and on their amount. Many of
the questions were framed rather with some other object than to elicit
information. But they undoubtedly had the result that the authorities
published to the public much ampler details than were previously
available. A valuable summary of these will be found in the official
memorandum [Cd. 6619] from which I have just quoted.[84] As the outcome
of this very full inquisition into the whole subject, only two points
have emerged in which, in my opinion, the authorities are open to
criticism in detail—_i.e._, apart from wide questions of policy. They
renewed India Bills (which were eventually paid off in December 1912)
when they could have very well afforded to discharge them. If the
season of 1912–13 had been a bad one, or if their expectations had been
upset in any other way, it would always have been open to the India
Council to issue the Bills afresh. Their action appears to the outside
critic to have been one of ill–considered caution. The other point is a
trifle and reflects, perhaps, on a curiosity of our economic organism
rather than on the India Office. It was slightly shocking to discover
that the Government broker, who is not even a whole–time officer, and
has a separate business of his own besides his official duties, is the
highest paid[85] official of the Government with the sole exception of
the Viceroy. He has probably been paid too high even on current city
standards. But it suggests once again the old question how long it will
be found necessary to pay city men so entirely out of proportion to
what other servants of society commonly receive for performing social
services not less useful or difficult.
41. Some of the conclusions of this chapter may be summarised. All
countries, since the practice has been generally adopted of employing a
medium of exchange composed of some cheaper material than the standard
of value, must keep a monetary reserve. Where there is a State bank,
the bank is usually entrusted with this duty. Where the State regulates
the currency and the note issue without the intervention of a bank, the
State must itself undertake it. The proper magnitude of the reserve
must depend upon the particular circumstances of each country. In India
the reserve must be unusually large, first, because India is a great
country specially liable to wide fluctuations in her prosperity and
trade on account of climatic conditions the character of which cannot
be easily foreseen; and second, because a large amount of foreign
capital is employed, not only in permanent investment, but in temporary
loans withdrawable at short notice, and because against these foreign
liabilities India holds no appreciable amount of international Stock
Exchange securities capable of easy realisation. I have argued that
£40,000,000 may be, perhaps, at present a suitable amount to be held
by Government in its sterling Reserves. These Reserves are most useful
if they are held in London, where they must necessarily be wanted
whenever there is need to make use of them. In deference to a public
opinion which does not clearly understand the purpose of the Reserves
or the limitations under which the Secretary of State must needs act
in managing his sterling resources, it may be worth while to allay a
groundless suspicion by the compromise of holding a fair proportion
of the reserve of actual gold coin in India herself. When a Reserve
of some such amount as the above has been firmly established, the
diversion of further funds into any form of sterling or into the London
Market should be deliberately avoided.
Stability has been attained already, or is about to be. So, on the
whole, has economy, though some current opinion in regard to the
use of gold puts it in jeopardy. The system still wants elasticity.
A machinery ought to be set up, therefore, by which further funds,
accumulating in the hands of Government through the increased use of
notes, may be used in India to afford the needed elasticity in the
seasonal supply of currency.
Let the Indian public learn that it is extravagant to use gold as a
medium of exchange, foolish to lessen the utility of their reserves
through suspicion of the London Money Market, and highly advantageous
to their own trade and to the resources of their own money market to
develop the use of notes; and their financial system may soon become
wonderfully well adapted to the particular circumstances of their
situation. The history of the last twelve years has been transitional.
The authorities have been—wisely—building up the reserves they ought
to have. This process has necessarily diverted funds from the Indian
Money Market, and has naturally excited some measure of opposition. But
the fruits of cautious growth may soon be reaped.