THE INDIAN RATE OF DISCOUNT
1. The Presidency Banks publish an official minimum rate of discount,
in the same manner as the Bank of England. As an effective influence
on the Money Market the Presidency Bank Rates do not stand, and do
not pretend to stand, in a situation comparable in any respect with
the Bank of England’s. They do not attempt to control the market and
dictate what the rate ought to be. They, rather, follow the market and
supply an index of the general position.
It is, therefore, as the best available index to variations in the
value of money in India that the Presidency Bank Rates are chiefly
interesting; and it is in this capacity that I shall make use of them
in this chapter.
[Illustration:
_H. Bellingham_,
_India Office_.
]
If we are to use these rates, however, as an index, a few warnings are
first necessary. There is, of course, in India, just as there is in
England, not one single rate for money, but several rates according the
period of the loan required (or the maturity the bill negotiated) and
the character of the security offered. The published Bank Rate in India
represents, I believe, the rate charged day by day for a loan advanced
on such security as Government Paper. The interest on a loan of this
kind, that is to say, is calculated day by day at the published Bank
Rate prevailing on each day. It may be said to correspond, therefore,
to the London rate for some comparatively short period—say for
fortnightly loans. Because the Bank Rate is at 7 per cent, it does not
follow, therefore, that money can be used, or obtained, at this rate
for two or three months. The rate ordinarily charged for fine bills
of two or three months’ currency may be either higher or lower than
the published minimum Bank Rate. Further, the rates published by the
Presidency Banks may be from time to time more or less “effective.” The
Banks may not always be able, that is to say, to do any considerable
volume of business at their published minima. This would not be the
case, I believe, in the busy season, so much as in the slack season,
when the Banks do not let their published rates fall below 3 per cent,
although money may be practically unusable and they would probably
be glad enough to lend a large sum at 2 per cent. But these various
qualifications do not prevent the Presidency Bank Rates from affording
the best available index for measuring the relative ease or stringency
of the Indian Money Market. I append a chart giving the movements of
the Rate of Discount at the Presidency Bank of Bengal since 1893.[125]
2. The rates, announced by the three Presidency Banks, are not always
identical, but seldom, if ever, differ by more than 1 per cent. Such
differences as there are chiefly reflect the differences in date at
which occur the various crop movements with which each Presidency is
mainly concerned. A wider difference of rate tends to be prevented,
not only by the possibility of moving funds from one part of India to
another, but also by the fact that the Secretary of State is willing to
make his Bills and Transfers payable at any of the Presidency towns at
the option of the purchaser. If there is relatively greater stringency
at one of them, the bulk of the Council Bills and Transfers sold in
London tend to be drawn on that one. The general appearance of the
chart would not, therefore, have been appreciably different if I had
chosen Bombay in place of Bengal.
The official rates move by 1 per cent at a time. There have been
occasions of movements by 2 per cent, but not recently. When the rate
is rising or falling, however, at the beginning or end of the busy
season, changes often follow one another in quick succession.
3. An examination of the chart shows that the Indian Money Market
enjoys years of high and low average rates respectively, just as other
markets do. But these annual variations, while perfectly noticeable,
are relatively small in comparison with the seasonal changes, which are
very great and very regular, and which afford the most clear ground of
differentiation between the Indian Market and those with which we are
familiar in Europe.
Let us examine the annual fluctuations of the rate in recent years in
more detail:—
┌───–┬────────────––───────────┬────┬─────────────────────────┐
│ │ Bengal Rate per Cent. │ │ Bengal Rate per Cent. │
│ ├────────────┬────────────┤ ├────────────┬────────────┤
│ │Max. rate in│Min. rate in│ │Max. rate in│Min. rate in│
│ │ February. │ August. │ │ February. │ August. │
│1900│ 8 │ 3 │1907│ 9 │ 3 │
│1901│ 8 │ 3 │1908│ 9 │ 3 │
│1902│ 8 │ 3 │1909│ 8 │ 3 │
│1903│ 8 │ 3 │1910│ 6 │ 3 │
│1904│ 7 │ 3 │1911│ 8 │ 3 │
│1905│ 7 │ 3 │1912│ 8 │ 3 │
│1906│ 9 │ 3 │1913│ 8 │ │
└────┴────────────┴────────────┴────┴────────────┴────────────┘
From this table and the chart it is safe to make the generalisation
that the Indian Rate may be expected to reach 8 per cent in the winter
or early spring, and to fall to 3 per cent in summer. Years differ
from one another chiefly in the length of time for which the high and
low rates prevail respectively. From 8 to 3 per cent is an enormous
range for the normal seasonal fluctuation. What is the explanation of
it? The Bank of England rate seldom exceeds 5 per cent, and in many
years falls short of this, even in the winter. If there is so regular
an expectation of obtaining 7 or 8 per cent in India on excellent
security, why is it not worth some one’s while to transfer funds
to India in the busy season on an ampler scale than is the case at
present, and thus secure the advantage of so wide a discrepancy between
the English and the Indian rates?
4. The facts are to be explained, I think, as follows. High rates of 7
or 8 per cent are not obtainable in India all the year round. In normal
years they cannot be relied on to prevail for more than about three
months. The banker who raises funds in London in order to lend them
for short periods in India has to choose between leaving them in India
all the year round, waiting after one busy season for the next, and
bringing them back again to London after a comparatively short period.
He must either accept, that is to say, the rate obtainable in India
on the average of the whole year, or he must earn a high enough rate
in the brief busy season to compensate him for bearing the expense of
remittance _both ways_.
In considering the difference between two European Bank Rates as the
cause of a transfer of funds between the two centres, the cost of
remittance, as measured by the difference between the telegraphic
rate of exchange outwards at the beginning of the transaction and the
telegraphic rate of exchange back at the end of it, is not, of course,
to be neglected. But where the two centres are near together and there
is no reason to anticipate the suspension of a free market in gold,
this cost is, relatively, a minor consideration. The great distance,
however, between London and India makes it in their case a very
significant quantity, and a brief calculation shows that, measured in
terms of Bank Rate, the cost of remittance works out higher, perhaps,
than uninstructed common sense would anticipate. For, under present
conditions, the cost of remittance both ways can hardly be less than
1/16d. per rupee, rising in most years as between certain dates as high
as 5/32d., and reaching occasionally as much as 3/16d. It would not be
prudent to act on the expectation of a less cost than 3/32d. Now 3/32d.
on a rupee is about ·6 per cent. If this loss on exchange (_i.e._ on
remittance) is to be recouped in three months (_i.e._ in a quarter of
a year), an additional rate of nearly 2½ per cent per annum must be
earned in India as compared with the rate in London. If a different
degree of loss in exchange is anticipated, and if the length of time
for which money can be used in India at a high rate is expected to
be more or less than three months, the calculation must be adjusted
accordingly. In any case the reason why the Indian and London Bank
Rates can differ from one another for short periods by large amounts
is adequately explained. If, for example, money can be employed in
India at the high rate for one month only, even if the double cost of
remittance for that period is so low as 1/16d., the difference between
the London and Indian rates must amount to 5 per cent per annum to make
a transfer of funds _prima facie_ profitable.
These illustrations show that what seems a very small fluctuation
in exchange can account for a very wide difference in the rate of
discount; and, apart from questions of unequal knowledge and unequal
security, it is this possibility of fluctuation that makes distinct
markets of the two centres. The underlying explanation is essentially
the same as that of the circumstance to which I called attention in
§ 9 of Chapter II., namely, that a temporary premium of ¾ per cent
on gold in those European countries where gold is not always freely
obtainable, is as effective as a very great increase in the Bank Rate
in preventing the remittance of funds abroad and even in attracting an
inward flow of funds.
5. This discussion will have served to make clear a distinction highly
important to the problem of the Indian Bank Rate. When we say that the
Indian Bank Rate is apt to be high, we mean, not that the _average_
effective rate over the whole year is high, but that the _maximum_ rate
in each year, effective for periods of shorter or longer duration, is
generally high. A high average rate and a high maximum rate are likely
to call for different explanations and, if a remedy is sought, for
different kinds of remedies. The available evidence does not suggest
that the average rate in India is at all unduly high for a country
in India’s stage of economic and financial development. Some of the
Exchange Banks, for example, do not find it worth their while to offer
more than 3½ per cent on Indian deposits fixed for a year. It is the
high maximum rate almost invariably reached which calls for enquiry.
The phenomenon under discussion is in no way peculiar to India and
does not arise out of those features of the Indian system which are
characteristic of a Gold–Exchange Standard. We find the same thing in
any country where the demand for funds for financing trade is to a
high degree seasonal and variable in amount throughout the year, and
where, at the same time, these funds have to be remitted from some
far distant foreign centre—in the countries of South America, for
example. In fact, by the establishment of a par of exchange between
the rupee and sterling; the severity of seasonal stringency has been
greatly moderated. The exceptionally high Bank Rates of 1897 and
1898 were partly occasioned by a natural timidity on the part of the
Banks in importing funds at a rate of exchange which at that time was
exceptionally high. The Banks had no guarantee that exchange would
be maintained at or near the existing level, and if they imported
funds they ran the risk of having to bring them home again at a heavy
loss. Under present arrangements the maximum fluctuation in exchange
between the busy season and the slack is known and limited. But while
the stabilisation of the gold value of the rupee has done much for
the Indian Money Market, and has rendered a 12 per cent Bank Rate
most improbable except at a time of wide–spread crisis and panic, it
does not prevent an 8 per cent or even a 9 per cent Bank Rate from
being a comparatively common occurrence. Is it possible to conceive of
any remedy or moderating influence for the somewhat severe seasonal
stringency still experienced?
6. It is clear that a remedy can be sought in one or other of two
ways only. Either the cost of remittance and the maximum range of
fluctuation in exchange must be reduced, or a new source for the
seasonal supply of funds must be found in India herself. I will discuss
these alternatives in turn.
It will help to make the points at issue plain if I begin by taking an
extreme case. Let us suppose that exchange between London and Calcutta
were fixed at 1s. 4d., in the sense that the Government were always
prepared to provide telegraphic remittance _in either direction_ at
this rate. Under such circumstances, the London and Indian Money
Markets would become practically one market, and the large differences
which can now exist between rates current in the two centres for loans
on similar security would become impossible. The effect of this on
the volume of remittance would be very great. Every year immense sums
would be remitted from London to India in the busy season and brought
back again at the end of it, since the fact which now diminishes the
profitableness of such transactions would have ceased to exist. The
following illustration shows on how large a scale these seasonal
movements to and fro would probably be. In July the cash reserves of
the Bank of Bengal might stand, as things now are, at, let us suppose,
about 1000 lakhs and its discount rate at 3 per cent. This reserve
might be 400 or 500 lakhs at least in excess of what prudence required.
But it would be useless to lower the Bank Rate; for the additional
funds were probably not loanable in India for the month of July at
any rate at all. Yet for the reasons already given it would not be
worth while in existing circumstances for any one to borrow this sum
and remit it to London, until such time as it may be again wanted in
Calcutta;—it is better to let it lie idle and wait for busier times.
But fix exchange at 1s. 4d. and all this would be changed. The Bank’s
customers would immediately remit the 400 or 500 lakhs to London,
knowing that they could be brought back without loss as soon as they
were wanted. Every one in India having loanable funds to spare would
act likewise.
What would be the effect on the Secretary of State if he were to lay
himself under such an obligation? In order to be in a position to act
as universal money–changer, and to be able to provide large quantities
of sterling in London in the slack season, and large quantities of
rupee funds in India in the busy season, it would be necessary for
him to keep very much larger reserves than he does at present in
both countries. It might even be necessary for him to remit gold
backwards and forwards himself, thus bearing the whole expense of
which the Exchange Banks were being relieved. At present the possible
fluctuation of exchange between what may fairly be termed the “gold
points” on either side of 1s. 4d., acts in some measure as a protection
to the currency and lessens the reserves which it is necessary for
the authorities to maintain; a falling exchange acts as a drag on
remittance from India and a rising exchange as a drag on remittance
from London, thus bringing the private interests of individuals and
the natural forces acting on the market into greater harmony with
the interests of the market as a whole, and with the efforts of
the Secretary of State to maintain the stability of the system. If
telegraphic exchange were fixed at 1s. 4d., the Indian Bank Rate would
closely follow London’s, but it would be at the expense of forcing the
Secretary of State enormously to increase his reserves.
7. I have taken this extreme case in order to make emphatic the
principles involved in all such proposals. But no one is likely to
propose the above as a practical policy. More moderate proposals of the
same kind, however, deserve consideration. Some critics, for example,
have suggested that the Secretary of State should never sell Council
Bills in London below 1s. 4d. This would lessen to a certain extent
the probable range of fluctuation in exchange and might, therefore,
diminish the risk of loss involved in remitting to India when exchange
is high; but the Secretary of State’s withdrawal from the market would
not necessarily prevent exchange from falling below 1s. 4d. Moreover,
in normal times the policy actually followed already approximates
closely to this proposal; in the last three years the occasions on
which Council Bills have been sold below 1s. 4d. have been very rare.
And in exceptional times it may be some protection to the sterling
reserves if Council Bills can be sold at a lower rate if necessary. I
conclude, therefore, that the advantage of such a policy would not be
great, probably not great enough to outweigh the cost.
Thus it is not easy to find a remedy for high Bank Rate by any method
of diminishing the maximum range of fluctuation in exchange. Indeed
so long as the currency arrangements are at all like those now in
force, this maximum range may fairly be said to be determined by forces
outside Government control, namely, by the forces governing the cost of
remittance of gold. Though the burden of this cost may be shifted, it
cannot be easily avoided altogether.
8. We must fall back, therefore, on the second alternative, the
discovery of a new source for the seasonal supply of funds in India
herself. A proposal, having this object in view, has already been put
forward in more than one passage in the preceding pages. I believe
that, in future, the Government of India may have in the busy season
a considerable stock of rupee funds available in the Paper Currency
Reserve and, occasionally, a surplus stock in the Indian Cash Balances.
If a proper machinery is set up for lending these out in India, I
anticipate some appreciable relief to the Bank Rate at the season of
greatest stringency. Assuming that such a policy is practicable on
other grounds, let us try to compare its precise effect as compared
with the existing state of affairs.
9. Broadly speaking, surplus Government funds in India can at present
be released only by the sale of Council Bills in London. When these
bills are sold at a fairly high rate, the Government gain the premium
over and above 1s. 4d. and are in a position to put out at interest
funds in London. If the funds in India, instead of being released
through the encashment of Council Bills, are lent out there direct, the
interest obtained in India takes the place of the two sources of gain
distinguished above. In the first case money is first borrowed from
the London Money Market (by the Exchange Banks or otherwise) for the
purchase of Council Bills, and is then lent back again to that Market
by the Secretary of State. In the second case, instead of a double
transaction in London there is a single transaction in India. It might
be argued that the two methods come in the end to much the same thing;
that there can be no relief to the Money Market unless the Government
of India accept a lower rate of interest for sums lent out in India
than is the equivalent of what they would make if they were to sell
Council Bills at a premium and lend out the funds in England; and that
the second method involves no net addition to the resources available
in India. For the following reasons, however, I do not think that this
way of looking at the matter would be correct.
In the first place there would be an elimination of risk. If the
average loss from exchange on funds sent out to India for the busy
season works out at (say) 2 per cent per annum, the Banks, in order to
recompense themselves for the risk of fluctuations beyond the average,
would be able to make a difference of more than 2 per cent between
the current Indian and English rates. In the case of funds borrowed
in terms of rupees and repayable in terms of rupees, this element of
risk is absent; and the elimination of it provides a source of net
gain. If the effect of Government lending in India were to mitigate the
seasonal stringency there, some lowering of the normal upper limit of
fluctuation of exchange might result. In so far as this was the case,
in normal years the consequences would be outwardly similar to those
of the first alternative, discussed and rejected above, whilst the
Government would not have bound themselves by any undertaking capable
of turning out burdensome.
Secondly, the rate of interest which the Secretary of State can earn on
loans in London is appreciably lower, on account of the short period
for which he lends and the nature of the security he requires, than
the normal rate at which the Exchange Banks would raise their funds
there, and a good deal lower than what would be obtained by direct
lending in India. (It should be admitted, on the other hand, that
the practice of lending funds in India would probably involve some
sacrifice of perfect safety as compared with the present arrangements.)
And, thirdly, it is not clear that it might not sometimes be feasible
to lend out in India sums additional to those which would in fact be
released under the present system, so that there would be some net
addition to the resources available in India.
10. In addition, therefore, to the grounds for making loans in India
from the Paper Currency Reserve which I have given in earlier chapters,
I believe that it is in this direction that the best hope lies of a
remedy for the high level which the Indian Bank Rate commonly reaches
in the course of each busy season. I do not feel in a position to say
anything very decided as to the manner in which such loans could be
best made. But there is a presumption, I think, that, in the absence
of a State Bank, they must be made, mainly if not entirely, through
the Presidency Banks. And I believe that the Government would act
advisedly if, as a general rule, 5 or 5½ per cent were the highest
rate they ever chose to exact from the Banks. In financial matters of
this kind there is a danger lest Governments prove too jealous of the
profits of private persons. In a case where the co–operation of private
persons is necessary, they must be allowed a reasonable share of the
profits of the transaction. In their past relations with the Presidency
Banks in the matter of temporary loans, the Government of India have
sometimes seemed to attach more importance to preventing the Banks
from making any profit out of the loans than to any other aspect of
the transaction. I may repeat that the loans I contemplate are to be
for the busy season only, and that they should not be made until the
expectation of a normal or successful harvest is reasonably assured.
11. In the nature of a postscript to the above proposals, it may be
instructive to consider them in the light of the actual circumstances
of the season 1912–13. The peculiarity of this season from the point
of view of the Indian Money Market was the combination of a high Bank
Rate in India for a comparatively long period[126] with a relatively
low rate of exchange and only a moderate demand for Council Bills and
gold. At the end of 1912 the situation could have been described as
normal. The Bank Rate was at the somewhat high level usual at that
time of year; exchange was high (the minimum rate for the allotment of
Council Bills being 1s. 4–3/32d.); and the demand for Council Bills was
on a large scale. But from January to March, although the Bank Rate
remained at a high level and trade was active, the demand for Council
Bills fell away, slowly at first and rapidly during March, exchange
dropping _pari passu_ until, during the latter half of March, the
minimum rate at which Council Bills were allotted fell so low as 1s.
3–31/32d. The combination of so low a rate of exchange with an 8 per
cent Bank Rate at Bombay was very abnormal.
It is dangerous for a writer who is not in touch with the practical
side of the Money Market to venture on an explanation of current
events. But I will give my explanation for what it is worth. The poor
demand for Council Bills in March 1913 is not to be explained by the
competition of gold as a means of remittance; for the low level of
exchange did not favour the importation of sovereigns (even from Egypt,
except earlier in the season), and as a matter of fact the import of
them was on a very much smaller scale than in the previous year. It
must have been due, therefore, to an unwillingness on the part of the
Exchange Banks and others to lay out money in London for the purchase
of remittance to India. This unwillingness was due to a variety of
causes. The lock–up of funds in silver and opium, and the freedom with
which India was purchasing foreign goods, probably had something to do
with it; and an important contributory influence was the dearness[127]
of money in London combined with a sufficient expectation of cheaper
money soon, to provide an incentive to delay, wherever delay was
possible. A precise diagnosis of the causes of the unwillingness on
the part of the Banks to buy Council Bills is not necessary, however,
to the lesson I seek to enforce. For whatever reason, Indian Bank
Rates of 7 and 8 per cent, even in combination with a very low level
of exchange, did not in fact tempt the Banks to buy Council Bills on
any considerable scale. What was the effect on the Government Balances
in India? The ordinary method, by which the rupees accumulating in
the Reserve Treasuries from the proceeds of taxation are quickly
released and given back to the Money Market, the encashment, namely,
of large volumes of Council Bills, had failed. The position was
aggravated by the large realised surplus, much of which was to be
devoted to expenditure only in the _next_ financial year, and which in
the meantime was swelling the Government Balances in any case beyond
their usual dimensions. So far, therefore, from assisting the market,
the Government were busy increasing the stringency by taking off the
market, week by week, rupees which for the moment they did not in the
least want. Already at the end of 1912 (see table on p. 188) the sums
lying idle in the Reserve Treasuries were unusually high. By the end
of February 1913, the total Government Balances in India had risen to
£17,400,000, and the end of March to £19,300,000, of which £8,000,000
lay in the Reserve Treasuries. What Money Market in the world could
have seen such sums taken out of its use and control at one of the
busiest moments of the year without suffering a loss of ease?
The situation was not due, in my judgment, to any ignorance or
incompetence on the part of the executive officers of Government, but
to a system which provided them with no sort of appropriate machinery
for dealing with the position. The “Independent Treasury System” and
the traditional aloofness of Government from the Money Market were seen
at their worst. Millions of rupees were lying idle in the Government
Treasuries at the time of year when there was most work for them to do
outside. The sort of arrangements I have outlined in earlier paragraphs
might have done something, I feel sure, to ease the situation. One can
point, therefore, to the first quarter of 1913 as a specific occasion
on which Government could have lent sums in India with profit to
itself, with advantage to the Money Market, and without incurring any
risk of which it need have been afraid.
12. I have now completed my discussion of these questions. Two points
I would end by emphasising. The first affects my general treatment of
the subject matter. I have tried to bring out the fact that the Indian
system is an exceedingly _coherent_ one. Every part of the system
fits into some other part. It is impossible to say everything at once,
and an author must needs sacrifice from time to time the complexity
and interdependence of fact in the interests of the clearness of his
exposition. But the complexity and the coherence of the system require
the constant attention of anyone who would criticise the parts. This is
not a peculiarity of Indian Finance. It is the characteristic of all
monetary problems. The difficulty of the subject is due to it.
My second point affects the kinship of Indian arrangements to those
lately developed in other parts of the world. Indian affairs are
so exclusively studied by those whose knowledge and experience is
preponderantly Indian or English, that the true perspective of India’s
development is sometimes lost; and the value of foreign experiences
neglected. I urge that, in her Gold–Exchange Standard, and in the
mechanism by which this is supported, India, so far from being
anomalous, is in the forefront of monetary progress. But in her banking
arrangements, in the management of her note issue, and in the relations
of her Government to the Money Market, her position _is_ anomalous; and
she has much to learn from what is done elsewhere.
INDEX
Adie, Mr., 149 ff.
Atkinson, F. J., 151 ff.
Australian sovereigns, remittance of, to India, 115–116
Austro–Hungarian Bank, 24, 32, 33, 70
Bagehot, W., 162, 177
Balances. _See_ Cash Balances
Balkan War, effect of, on gold markets, 23, 165
Bank Rate in India, 105, 163, 164, 196–198, 240 ff.
Banking in India, 195 ff.
Banking Reserves in India, 147, 160, 161, 204–205, 215–218, 224–227, 232
Banks with small paid–up capital, 230–232
Bengal, Bank of, 182, 198 ff., 234
Bombay, Bank of, 182, 199 ff.
Bombay, proposed mintage of gold at, 64, 67–68, 84–87
British monetary system, 15–19, 69
Brunyate, J. B., 3, 38 _n._, 181 _n._, 199 _n._, 201, 234
Burma, Bank of, 222, 225–226
Cash Balances in India, 60–61, 127–129, 131, 181–190
Cash Balances in London, 128–129, 143–144, 190–192
Central Bank for India, 58–59, 161, 233–239
Cheque system, 16, 39
China, Currency for, 36
Circles of issue for Paper Currency, 40–46
Co–operative Credit Societies, 227 _n._
Council Bills, 102 ff., 132, 210 ff., 255–257
Crewe, Lord, 89
Crisis of 1907–8, 135–141, 159, 164, 167–168
Currency Reserve. _See_ Paper Currency Reserve
Currency notes of India. _See_ Paper Currency
Dadabhoy, Hon. Mr., 13 _n._
Dawkins, Sir Clinton, 64
Depreciating rupee, effects of, 2–3
Dickson, Mr., 234, 238
Egyptian gold shipped to India, 116–118
Egyptian system of currency, 29 _n._, 71 _n._
Elasticity of Indian currency system, 57–58, 60–62, 180–181, 251–254
English and Indian Bank Rates, their differences accounted for, 243–246
English institutions, influence of, on Indian, 38–39, 52, 59, 201 _n._,
231, 239, 259
Exchange Banks, 103, 158, 163, 206–221
Fowler Committee, 4, 7, 34, 50, 63, 196, 235
France, Bank of, 20–21
Gauntlett, M. F., 76
German Reichsbank, 19–22, 70, 239
Gillan, R. W., 76, 77, 78
Gold, amount of, circulating in India, 75–84
Gold Currency in India, 63–101
Gold, methods of checking a foreign drain of, 17 ff.
Gold, premium on, 23, 26–27, 246
Gold, 10–rupee coin, 68, 84, 87–88
Gold–Exchange Standard, 10–11, 30–36, 106 ff., 119–120
Gold–Exchange Standard, transition to, 27–30
Gold import point, 114 ff.
Gold not the principal circulating medium in countries having a gold
standard, 69–71
Gold Note Act of 1898, 48
Gold Reserves, division of, between India and London, 28, 48–50,
126–127, 131, 174–178
Gold Standard Reserve, 8, 90, 107, 110 ff., 125–127, 130–131, 137, 143,
170 ff.
Goschen, Lord, 69, 72, 91
Hambro, E., 235
Harrison, F. C., 149 ff.
Herschell Committee, 7, 33
Hoarding, 77–78, 81, 85–86, 99–101, 153, 158–160, 165–166, 225
Holland, Bank of, 32, 239
Home Charges, 102, 120–122, 171–172
Indian Bank Rate. _See_ Bank Rate in India
Indian Banking, 195 ff.
Indian currency system, 1893–1899, 1–3;
since 1899, 4–6, 8–10;
main features as now established, 6–7, 10–11;
reference dates, 7–8;
future development, 194, 258–259
Indian Joint Stock Banks, 221–226
Indian Money Market, 195–198, 240 ff.
Indian Treasury. _See_ Reserve Treasury System
Japanese system of currency, 27, 28 _n._
Java, currency of, 27, 35
Jevons, W. S., 99, 149
Lindsay, A. M., 5, 34, 72 _n._, 238
Madras, Bank of, 199 ff.
Marshall, A., 31
Meston, Sir James, 67
Mill, J. S., 72
Northbrook, Lord, 182
Note circulation in India. _See_ Paper Currency, volume of
Note currency of India. _See_ Paper Currency
Note issue by Banks, 38, 199–200
Paper Currency, 37 ff.
Paper Currency, volume of, 46–47, 53 ff.
Paper Currency Reserve, 40, 48 ff., 89, 97, 127, 130–131, 170 ff.,
189, 254
Post Office Savings Banks, 158, 227–228
Presidency Bank Rates. _See_ Bank Rate in India
Presidency Banks, 38, 53 _n._, 56, 60, 158, 163, 181–186, 198–206, 234,
240–243
Reserves of Government. _See_ Rupee Reserves, and Sterling Reserves
Reserves of Indian Banks. _See_ Banking Reserves in India
Reserve Treasury System, 56–57, 129, 181–189, 257–258
Ricardo, 31, 72
Rothschild, Lord, 35
Rupee, legal position of, 6–10
Rupee circulation of India, 149–155
Rupee Reserves of Government, 132–133, 141–147
Rupees, coinage of, 131–135
Rupees, profit on coinage of, 36, 124–126
Russian Finance and Currency, 24, 27, 32
Salisbury, Lord, 183
Savings Banks. _See_ Post Office Savings Banks
Seasonal demand for money in India, 53–56, 57–58, 146–147,
180–181, 242–244
Shroffs, 195–198
Silver purchases by Government, 132–135, 142–146
Sleigh, J. H., 196
Sovereigns, circulation of, in India, 6–10, 73–74, 76–84, 94–96, 115–118
State Bank for India, 233–239.
_See also_ Central Bank
Sterling Reserves, 137–140, 147–171, 193
Telegraphic transfers, 105, 137, 210–211
Thackersey, Sir Vithaldas, 67
United States Independent Treasury System, 56–57
Wilson, James, 38
Wilson, Sir G. Fleetwood, 64, 67
Wood, Sir Charles, 39 _n._
THE END
_Printed by_ R. & R. CLARK, LIMITED, _Edinburgh_.
FOOTNOTES:
[1] Mr. Brunyate spoke as follows:—“Many here will remember the
arguments used on behalf of the tea–planting industry. At that time
India and China had been competing together for years on the same
footing as regards currency. It was argued that the disturbance of
the exchange, the appreciation of the rupee and the depreciation of
silver, might not only result in India’s ascendancy in regard to tea
being wrested from her, but in the entire and irretrievable ruin of the
tea industry. I am quoting the words actually used by the Darjeeling
Planters’ Association in 1892. In the year before the closing of the
Mints India exported 115 million pounds of tea to foreign countries,
and by 1909 had a little more than doubled that amount. Almost exactly
the same arguments were used in regard to the cotton industry, and here
I must enter into more detail. What the mill–owners feared, and had
excellent reason for fearing, was an enormous depreciation in silver.
This actually took place. In 1892–93, the year before the Mints were
closed, the average value of silver per ounce was nearly 40d. The next
year it fell to 33⅓d.; the year after to about 29d.; and it stayed at
or below 30d. for some years. Surely here were the conditions in which
a disastrous stimulus to production in China might have been expected.
The so–called bounty in this case was not 2 per cent but 25 per cent.
It was not a temporary decline which might be counterbalanced by other
causes in the course of a single month. It continued for years, and as
we all know silver has not since returned to a price anything like 40d.
an ounce. In addition, just before the closing of the Mints occurred
there had been considerable overtrading, and the mills had actually
been working short time for some months before to enable the Chinese
markets to dispose of their accumulated stocks. There was, as a matter
of fact, a fall in exports in 1893–94 partly due to the dislocation
arising from the changes in our currency system and partly to the
existing glut of the Chinese market. The exports picked up, however,
in 1894–95, and it would appear that the adjustment of prices and
wages in China to the extraordinary new conditions began very quickly,
for I find it stated that by the first month of 1894 the mills were
again working steadily and profitably. I may perhaps give the actual
figures. In 1891–92 the exports of yarn had been 161 million pounds.
In 1892–93 the inflated year just preceding the closing of the Mints,
they rose to 189 million pounds. In 1893–94 they fell (as I have said)
to 134 millions, but went up again the following year to 159 millions.
In 1902–3 and 1903–4, though by this time the value of silver had now
fallen to 24d., the exports were about 250,000,000 pounds, and in
1905–6 they reached the record figure of 298 millions. In the last two
or three years there has been a falling off, owing to various causes,
but the amount exported in 1908–9 was as much as 235 millions, and in
the exports to China in particular there was a marked improvement.”
[2] There had been temporary Acts to the same effect in 1898 and 1900.
[3] Notes of Rs. 100 were universalised in 1911 by Notification under
this Act.
[4] The Hon. Mr. Dadabhoy, speaking in the Legislative Council in 1910,
argued that “the harmful effects of a further fall in silver (_i.e._
in its bullion value) can be neutralised by Government by creating a
further contraction in the volume of the currency, and thus producing
a greater scarcity of the rupee, by maintaining the Gold Standard
Reserve at a higher figure, and, further, by more frequent withdrawal
of Council Bills from the market.” A contraction of the currency would
not, of course, have the effect supposed, but the Government could not,
in fact, bring about a contraction in the manner described.
[5] This question of the power of Government over the volume of
circulation is discussed in much greater detail in § 8 of Chapter V.
[6] For example, in November 1912, “no gold was handed across the
counter at the Bank of France except on the most urgent demand, and
then the highest sum paid in gold was 300 francs per head. The other
banks followed this example, and the most generous released 200 francs
in gold. All special wishes for payment in money were charged 1 per
cent premium. At the same time, deposits in gold were credited with 1
per cent premium” (see _Bankers’ Magazine_, December 1912, p. 794).
At the beginning of the month cashiers were charging a premium or
commission of 6 f. per 1000 f. for payments in gold instead of silver
(see _Economist_, November 9, 1912, p. 961).
[7] Although the Bank of France only holds an important quantity of
foreign bills (generally sterling), on exceptional occasions, _e.g._
at the beginning and end of 1907 and at the end of 1909, foreign paper
enters very largely, through the agency of the great Crédit Banks, into
the transactions of the French Money Market. These institutions take
foreign bills into their own portfolios, and obtain the necessary funds
by rediscounting inland bills at the Bank of France. Thus the French
mechanism is much more closely analogous to the British than appears
outwardly, and the influence of the Bank of France, like that of the
Bank of England, is mainly indirect. The possibility of this is no
doubt due to the fact that France, like Great Britain, is a creditor
nation in the international short–loan market.
[8] For example, in November 1912 there was a premium of nearly ¾ per
cent on gold for export.
[9] This premium was made possible by the Austro–Hungarian Bank’s
exercising its right to refuse to exchange its bank notes for gold
freely.
[10] In the abnormal conditions of recent times (1912–13), however, the
Bank has not found it possible to maintain this part of its reserves at
a high level.
[11] This does not include the funds held abroad on account of the
Russian Treasury. Speaking in March 1913, in the Budget Committee of
the Duma, the Minister of Finance stated that the total amount of
Russian State funds placed abroad was £60,000,000.
[12] I have throughout deliberately ignored the current practice
of the United States in these matters. Her development and present
position are anomalous, and have claimed no imitators. Her arrangements
would need a discussion to themselves, and would, I think, convey few
lessons of value to students of Indian affairs. In dealing with her
dependencies, she has herself imitated, almost slavishly, India.
[13] I may seem to speak as if Japan had in name a Gold–Exchange
Standard, which is not the case. There is not much publicity in regard
to her monetary arrangements. But I believe that they are, in fact,
such that it is as a Gold–Exchange Standard hers ought impartially to
be classified. The Finance Minister stated in the Diet in 1912 that
the gold funds held by the Government and the Bank of Japan in Europe
and the United States were about £37,000,000. The amount of gold
circulating in Japan herself is, I believe, inconsiderable.
[14] Unless it be Egypt.
[15] In the course of the last twenty years, however, the Bank of
Holland, having got rid of the greater part of her redundant stock of
silver coins, has gradually come to rely more on her holding of gold
and less on her holding of foreign bills than formerly. In 1892–93
foreign bills at £1,801,409 were about 16 per cent of her resources
(excluding silver coin); in 1911–12 they had fallen to £1,389,139
or about 5·5 per cent of her resources (excluding silver coin). But
the media of exchange are still notes and silver, and not less than
formerly does the Bank pursue the policy of keeping her gold for
purposes of export only and of withholding it from circulation. Almost
the whole of her stock of gold is in the form of bars and foreign
coin. (It should be added, however, that at the end of 1912 there
were proposals, in order to avoid fresh coinage of silver, for the
introduction of a 5 fl. gold piece.)
[16] The rupee contains ⅜ oz. of silver of eleven–twelfths fineness.
When standard silver is at 24d. per oz. the cost of a rupee to the
Government is about 9·181d.; at 32d. per oz. it is about 12·241d. The
average rate of profit on coinage of rupees from 1910 to May 1912 was
about 42% of the nominal value.
[17] See also pp. 199, 200.
[18] For this and other historical details see J. B. Brunyate, _An
Account of the Presidency Banks_.
[19] Mr. Wilson had proposed to invest a high proportion of the reserve
(perhaps two–thirds) in Government securities.
[20] I quote this from the Secretary of State’s despatch (Sir Charles
Wood, March 26, 1860) criticising Mr. Wilson’s original scheme.
[21] A rearrangement was made in 1910; previous to that date there
were four circles and four sub–circles. It is no longer worth while
to explain the relations which used to exist between the circles and
sub–circles.
[22] For the legal provisions outlined in the following paragraphs see
_Statistics of British India_, part iv. (a).
[23] For some further details see p. 9.
[24] Report of Comptroller of Paper Currency, 1910.
[25] Before 1893 these terms were used with a different significance.
The statistics are still a little ambiguous as to whether for the net
circulation the notes in Government reserve treasuries or the notes in
_all_ Government treasuries are to be deducted. I use the term in the
latter sense.
[26] For an account of this see p. 73.
[27] At all times the vast bulk of the funds held by the Presidency
Banks at their Head Offices are kept in notes, chiefly of high
denominations (Rs. 1000 and Rs. 10,000); _e.g._ on December 31, 1911,
£4,200,000 out of £4,800,000 was thus held.
[28] The part played by gold is discussed in Chapter IV.
[29] I estimate that at this date the total volume of the active rupee
circulation was between five and six times the total volume of the
active note circulation.
[30] The proper proportion would partly depend upon the policy pursued
in regard to the Gold Standard Reserve.
[31] H. of C. 495 of 1913.
[32] This quotation is from a letter addressed by the Government of
India to the Secretary of State, nine years later (May 16, 1912).
[33] The value of the token coins (silver, nickel, and bronze)
circulating in Egypt and the Sudan is estimated at no more than
£E3,600,000, and the notes of the National Bank of Egypt (chiefly
current in the large towns) at £E2,400,000. The whole of the rest of
the currency consists of gold coins (chiefly British sovereigns). The
existing position in Egypt is, therefore, the ideal at which many
Indian currency reformers seem to aim.
[34] See Lindsay’s evidence before Indian Currency Committee (1898), Q.
3404.
[35] The above account is summarised from the Reports of the
Comptroller of Paper Currency for 1900 and 1901.
[36] This is probably very considerable. India must be the main source
of supply of gold for the whole of Central Asia. The following extract
from a report sent in to the Comptroller of Currency (1911–12) is
instructive:—“From Peshawar a considerable absorption of gold in
connection with the trans–border trade is reported; this trade is said
to have amounted during 1911–12 to the value of Rs. 30 lakhs. Gold so
taken seldom or never returns. The Amir’s subsidy is also largely paid
in gold.” It is also reported that gold is preferred by those who go on
pilgrimage to Mecca.
[37] Throughout 1911–12 the Bank of Bengal quoted them at a premium of
4d.
[38] Report on Paper Currency, 1911–12.
[39] See pp. 97–99.
[40] See Report for 1909.
[41] In the _calendar_ year 1912 India increased her stock of gold by
£29,500,000, of which about £21,500,000 was in sovereigns.
[42] The fluctuations in the proportions for different years of the
figures in columns (4) and (5) of the table on p. 76 must certainly be
explained in part by the state of the exchanges, and not wholly by the
degree of deliberate preference for sovereigns.
[43] The Accountant–General, Bombay, has suggested (_see_ Paper
Currency Report, 1911–1912) that “the principal cause” of the heavy
importation of sovereigns has been a reduction in the rate of charge
(from 1/16 per cent to 1/32 per cent) for Telegraphic Transfers issued
upon Madras and Calcutta against gold imported into Bombay. No doubt,
this favours gold to a slightly greater extent than before, as against
Council Transfers, as a means of remittance from London to Madras and
Calcutta, but the difference seems too small in relation to the other
factors which determine the cheapest form of remittance, for the change
to have exerted any appreciable influence.
[44] This corresponds to the Bank of England’s normal price for gold
bullion.
[45] At present notes can be issued by currency offices, but only to
treasuries on the requisition of the Comptroller–General, in exchange
for gold bullion at the rate of 1 rupee for 7·53344 grains troy of fine
gold. Since April 1, 1907, the receipt at the Indian Mints of gold
bullion and gold coins other than sovereigns and half–sovereigns has,
in fact, been stopped by Government of India Notification.
[46] I have, however, seen no evidence which suggests that
_half_–sovereigns are specially popular on account of their lower
denomination.
[47] The Manager of the National Bank in the Punjab reported in
1911–1912:—“The fact of currency notes having always been unpopular
throughout the Punjab and, excepting in Lahore, being cashed only at
a considerable discount, has no doubt conduced to the popularity of
the sovereign. A portable medium commanding its full face value was
urgently required and the sovereign has for the present met the want.”
[48] £6000 in rupees weighs more than a ton.
[49] The Government should probably instruct its officers to receive
and change notes with freedom on every possible occasion, in order to
dissipate this idea.
[50] See pp. 113–118 for an account of the cost of transporting bullion
to India.
[51] It was operative, however, in the middle of March 1913, when the
whole amount offered was not allotted, tenders below 1s. 4d. being
rejected; later in the month tenders below 1s. 4d. were accepted.
[52] The rule is supposed to be that the extra charge for transfers is
1–32d. per rupee when the Indian bank rate is below 9 per cent, and
1/16d. when it is 9 per cent or above. The last occasions, on which the
difference of 1/16d. was in force, occurred between December 1906 and
March 1907. In 1904 and formerly the 1/16d. difference came into force
when the Indian bank rate exceeded 6 per cent.
[53] Thus a probable effect of exceptionally large sales of Council
Bills is an earmarking of gold on Indian account at the Bank of
England. The extent to which the Indian system can be misunderstood is
well illustrated by the fact that in a money article recently published
in an important newspaper in this country, an increased offering of
bills by the India Council was given as a reason for expecting a
_postponement_ of the need for earmarking gold at the Bank on Indian
account.
[54] On two occasions this practice has been suspended—in January
1900, when the price rose to 1s. 4⅜d., and in December 1906–March
1907, when it rose to 1s. 4–3/16d. The reason for the suspension in
the second case was the operation of the rule by which the premium
charged for telegraphic transfers over the rate for bills depends on
the Indian bank rate (see p. 105). The statement made in answer to a
question on this subject in the House of Commons (April 30, 1912) by
the Parliamentary Under–Secretary was not quite correct.
[55] Old–fashioned treatises on the foreign exchanges often leave the
student with the impression that the gold import point is a known and
stable thing given for good in books of reference. How far this is from
the truth, the example of India well illustrates.
[56] It is worth his while to do this, because the cost of sending gold
from Australia to London in one transaction is less than the cost of
sending it first from Australia to India and then from India to London
in two separate transactions.
[57] I make this assumption, which is not exactly accurate, for
purposes of illustration only.
[58] Or less, if paid at the time of shipment and in advance of the
time of delivery.
[59] See p. 37 (footnote).
[60] The designation of the reserve was changed from “Gold Reserve” to
“Gold Standard Reserve” in 1906, when it was decided to hold a part in
silver; but the change of title has not really made the position much
clearer.
[61] At the end of March 1913, £1,620,000 in gold stood to the credit
of the Gold Standard Reserve in London.
[62] See also pp. 190, 191, below.
[63] Reckoning uncoined silver at its coined value.
[64] A further loan of £2,500,000 for “general purposes” was incurred
in December 1908.
[65] An unfunded debt of £6,000,000, which has been wiped off lately
out of the proceeds of the opium windfall, was incurred by the issue of
India Bills during this period.
[66] For details of the method applied in these various investigations
see Appendices to Reports of Head Commissioner of Paper Currency, 1894,
1895, 1896, 1897, and 1900. See also Mr. Harrison’s article on the
“Rupee Census” in the _Economic Journal_ for 1891.
[67] _Stat. Journ._ March 1897 and March 1903.
[68] This represents a _per capita_ circulation of between Rs. 7 and
Rs. 8.
[69] In 1899, the Government of India contemplated the possibility
of a loan. See their despatch of August 24, 1899 (H. of C. 495 of
1913, p. 13):—“If India were afflicted with famine or other adverse
circumstances in the earlier years of our new currency, and before an
adequate reserve had accumulated, circumstances might arise in which
borrowing to maintain the standard would become an absolute necessity.
We should have preferred to have been armed against such a contingency
... not by actual borrowing but by obtaining power to borrow.... We
have learnt with satisfaction ... that your lordship has stated in the
House of Commons that borrowing would be resorted to if it should prove
to be necessary.”
[70] See Chap. VII.
[71] See p. 215.
[72] The Government was on the point of sanctioning this advance when
the urgent necessity for it came to an end, and the advance was not
actually made.
[73] I will recur to this proposal in Chapter VII.
[74] For the movements of the Indian bank–rate in the autumn and spring
of 1907–8, see the chart appended to Chap. VIII. Eventually, on January
16, 1908, the Bengal rate did rise to 9 per cent (the Bombay rate did
not rise to this level until February 7); but this is not very abnormal
in the winter, and the average rate for money in 1907–8 was lower than
in the corresponding season of the two busy years 1905–6 and 1906–7.
[75] For a fuller discussion of this question in relation to the events
of 1907–8, see my article on “Recent Economic Events in India” in the
_Economic Journal_, March 1909.
[76] Aggregate exports of Indian produce and manufactures: 1906–7,
£115,625,135; 1911–12, £147,813,000.
[77] The Government of India stands in a particularly strong position
in this respect, because few countries have so good a market for their
loans at a foreign centre as India has.
[78] In continuation of what has been said in § 4.
[79] See Brunyate, _loc. cit._ chap. vii., from which the greater part
of what follows is summarised.
[80] All this refers to the balances at the Head Offices. “There is no
limit to the Government deposits at branch offices. But the latter are
held absolutely at call, and in actual practice are removed with the
utmost freedom.”—Brunyate, _loc. cit._ p. 98.
[81] See table given on p. 204.
[82] The exceptional circumstances of 1913 are dealt with in Chap. VIII.
[83] See Report of Comptroller of Currency, 1911–12: “In July the
balance generally reaches its highest level. From July onwards until
December the revenue collections are comparatively small and the
balances steadily go down till they reach their minimum level in
November or December. After December the surplus revenue receipts far
exceed the demands for expenditure.”
[84] See also Lord Inchcape’s letter to the _Times_ of November 12,
1912. I forbear to enter in detail into what is not, in reality, one of
the truly vital aspects of Indian Government Finance.
[85] The payments to the Government broker, from which, no doubt, some
deduction has to be made for expenses, have been as follows:—
1908 £2,642
1909 6,396
1910 12,728
1911 10,544
1912 (up to Dec. 14) 7,958
The principles governing the amount of these payments were explained in
the House of Commons on December 17, 1912, in answer to a question.
[86] See Mr. J. B. Brunyate’s _Account of the Presidency Banks_ (1900),
whence the historical details which follow have been chiefly derived.
Mr. Brunyate’s _Account_ is of the highest value to students of banking
history.
[87] The first Bank of Bombay went into liquidation in 1868, although
its liabilities were eventually paid up in full. A new Bank of Bombay
was formed in the same year.
[88] By 1862 such issues were of negligible account, but in earlier
times they had been important. “Probably the first banking institution
in India, on European lines, was the Bank of Hindustan, which was
established in Calcutta about 1770 by a private trading firm. The
notes of this Bank, though not recognised by the Government, obtained
a local circulation which occasionally reached forty or fifty lakhs
and generally averaged about half that amount.” It is said that they
were “received for many years at all the public offices in Calcutta
scarcely excepting the Treasury itself.” On two occasions, once in 1819
and again in 1829, the occurrence of a panic led to the presentation
for payment of about twenty lakhs’ worth of the notes, and the demand
was promptly met. (Brunyate, _loc. cit._ p. 55.) This Bank and others
disappeared in the commercial disasters of 1829–1832. “Out of their
ruin rose the Union Bank, a Joint Stock Bank created by co–operation
among all the leading Calcutta houses.” (Brunyate, _loc. cit._ p.
59.) In 1834 the Bank of Bengal refused to accept the notes of its
formidable rival, and in 1848 the Union Bank disappeared.
[89] This was in some degree consequent on the failure of the Bank
of Bombay in 1868, the Government having found itself in the awkward
position of being a shareholder in a Bank, its liability for which was
not clearly defined.
[90] The way in which Indian institutions have been moulded on and
influenced by English is interestingly illustrated by the fact that
several of the provisions in the Charters of the Presidency Banks were
copied from the 1695 constitution of the Bank of England.
[91] This also was partly consequent on the failure of the Bank of
Bombay in 1868.
[92] Except for the use of principals for the purpose of certain
specified kinds of remittance.
[93] In 1877 the Banks pressed strongly for a relaxation of this
provision. But the Secretary of State held that “the concession of
a power of creating a foreign agency in England, such as would be
the result of entering into loan transactions of the nature of those
contemplated, would admit of the Banks locking up a large portion
of their capital at so great a distance as to render it practically
unavailable in the case of any emergency arising in India.” This
argument is not one which would be likely to be used at the present
time. The fear would rather be lest they should lock up funds in India.
[94] Up to 1907 the maximum period was three months.
[95] See §§ 36–38 of Chapter VI.
[96] The rupee has been converted at the uniform rate of 1s. 4d.
throughout.
[97] This is the date of the foundation of this Bank under its present
style, but it was formed out of the old Chartered Mercantile Bank of
India, London and China, which dates much further back.
[98] The Chartered Bank, in spite of its name, has never done business
in Australia.
[99] But not exclusively. The National Bank, for example, has a large
interest in East Africa; this coast has considerable trade connexions
with India, and the rupee has a fairly wide circulation there (see
figures of rupees exported given on p. 154).
[100] The New Oriental Bank, established in 1885 (the great Oriental
Bank Corporation had failed in 1884), went into liquidation in 1893.
[101] I fancy that it has more the character of an Indian Joint Stock
Bank and less of the character of an Exchange Bank than the others.
[102] The Eastern Bank was established under the auspices of Messrs.
E. D. Sassoon, while two important French Banks and Messrs. Brown,
Shipley, and Co. are represented on the board of directors.
[103] There is of course much business of a semi–banking character
transacted by financial and mercantile houses, some of them of the
first magnitude, with establishments both in India and London. But they
are private firms and publish no information about their business of
which it is possible to take account.
[104] Another method occasionally worth while employing is the purchase
of Government Rupee Paper in London and its sale in India.
[105] The volume of bills, drawn in India on London and outstanding,
is not, of course, a correct measure of the extent to which India
is being financed abroad. A bill may be used to finance the foreign
purchaser just as much as the Indian seller. For example, a dealer in
cotton in India might be paid by a 3 m/s Bank credit supplied by the
buyer, a Continental spinner; this spinner might get the cotton within
a fortnight of the acceptance of the bill, which would, therefore, be
really financing his cotton factory.
[106] The figures for 1910, for example, are in the issue which was
obtainable in England early in 1913.
[107] On the one hand, these balances are even weaker than they look,
because they include the Exchange Banks’ balances at the Presidency
Banks. On the other hand, the Exchange Banks often have sovereigns or
Council Bills in transit which they may fairly consider, perhaps, as
equivalent to cash.
[108] A certain proportion of their bills, no doubt, are drawn on the
London branches of Banks with a foreign domicile. These bills are not
always so readily discountable as London acceptances, the Bank of
England taking them unwillingly and charging ¼ per cent extra discount.
But for the present purpose they can, I think, be regarded none the
less as liquid London assets.
[109] I believe that the Eastern Bank offers rather better terms than
the other Banks for fixed deposits.
[110] The confusing point here is this: that (ix.) is the amount
advanced to Indian merchants, and (x.) the amount advanced to English
merchants; yet (ix.) must be reckoned an English asset and (x.) an
Indian asset. For (ix.) when it falls due is paid in England, although,
of course, the Bank has advanced money, through the purchase of it, in
India.
[111] It would be most useful to have a triple classification—India,
London, and elsewhere. But I do not see how the Indian authorities
could reasonably enforce this.
[112] The great majority (363) of these small money–lending
establishments were registered in Madras. Most of them are mutual
societies, and it would not be difficult to exclude them from the
official statistics.
[113] There is also, on a smaller scale, the Bangalore Bank (1868).
[114] There are a few others on a very small scale, such as the Kashmir
Bank (1882), and the Poona Mercantile Bank (1893).
[115] In 1901 the People’s Bank of India was founded, but it did not
reach the 5 lakhs’ limit until 1908.
[116] The Bank of India has a paid–up capital of 50 lakhs and a reserve
and rest of 5½ lakhs; the corresponding figures for the Indian Specie
Bank are 75 lakhs and 19 lakhs. The Bank of Rangoon is on a smaller
scale and has been less successful.
[117] This represents compound interest at the rate of about 8 per cent
per annum.
[118] Here again it is tantalising that no later figures should be
available.
[119] In the official statistics no definition is given of what
precisely is meant by “cash.”
[120] The Co–operative Credit Societies are not important in this
connexion, capital, reserves, loans, and deposits altogether being less
than £1,000,000.
[121] At the time of writing, this Bill has not yet passed through its
final stages.
[122] In the published balance sheet, which I have before me, of one of
the largest of these little Banks, the cash is lumped together with the
“investments,” _i.e._, with the Bank’s speculations.
[123] These quotations are derived from Mr. Brunyate’s _Account_, _loc.
cit._
[124] In their Despatch dealing with the Report of the Fowler
Committee (August 24, 1899) the Government of India went so far as to
declare that the constitution of a State Bank, by the amalgamation
and absorption of the three Presidency Banks, was desirable. For the
circumstances and discussions which led up to the ultimate abandonment
of these ideas, see “Papers relating to the Proposed Establishment of
a Central Bank in India (reprinted from the _Gazette of India_ and
_Supplement_, dated the 12th Oct. 1901).”
[125] I am indebted for the preparation of this chart to Mr. H.
Bellingham of the India Office.
[126] The Bengal Bank Rate was at 7 or 8 per cent from November 28,
1912, to April 17, 1913, and the Bombay Bank Rate at no less than 8 per
cent from December 27, 1912, to April 8, 1913.
[127] The Bank of England’s rate was 5 per cent, with the market rate
well up to the Bank Rate; and the _difference_ between the current
rates for money in London and India was probably, for the time of year,
not much greater than usual.
TRANSCRIBER’S NOTE:
—Obvious print and punctuation errors were corrected.
End of Project Gutenberg's Indian Currency and Finance, by John Maynard Keynes