Part I, pars. 99–101, for a summary of the argument._The Problem of the Rupee, Its Origin and Its Solution

Produced by Joseph Koshy.

Transcribed from: https://archive.org/details/in.ernet.dli.2015.218118

THE PROBLEM OF THE RUPEE

ITS ORIGINS AND ITS SOLUTION

B. R. AMBEDKAR

Sometime Professor of Political Economy at the Sydenham College of

Commerce and Economics, Bombay.

LONDON

P. S. KING & SON, LTD.

ORCHARD HOUSE, 2 & 4 GREAT SMITH STREET

WESTMINSTER

1923

DEDICATED

TO THE MEMORY OF

FATHER AND MOTHER

AS A TOKEN OF MY ABIDING GRATITUDE FOR THE

SACRIFICES THEY MADE AND THE ENLIGHTENMENT

THEY SHOWED IN THE MATTER OF MY EDUCATION.

_Printed in Great Britain by_ Butler & Tanner Ltd., _Frome and London_

PREFACE

In the following pages I have attempted an exposition of the events

leading to the establishment of the exchange standard and an examination

of its theoretical basis.

In endeavouring to treat the historical side of the matter I have

carefully avoided repeating what has already been said by others. For

instance, in treating of the actual working of the exchange standard I

have contented myself with a general treatment just sufficiently

detailed to enable the reader to follow the criticism I have offered. If

more details are desired they are given in all their amplitude in other

treatises. To have reproduced them would have been a work of

supererogation; besides it would have only obscured the general trend of

my argument. But in other respects I have been obliged to take a wider

historical sweep than has been done by other writers. The existing

treatises on Indian currency do not give any idea, at least an adequate

idea, of the circumstances which led to the reforms of 1893. I think

that a treatment of the early history is quite essential to furnish the

reader with a perspective in order to enable him to judge for himself

the issues involved in the currency crisis and also of the solutions

offered. In view of this I have gone into that most neglected period of

Indian currency extending from 1800 to [pg vi] 1893. Not only have

other writers begun abruptly the story of the exchange standard, but

they have popularised the notion that the exchange standard is the

standard originally contemplated by the Government of India. I find

that this is a gross error. Indeed the most interesting point about

Indian currency is the way in which the gold standard came to be

transformed into a gold exchange standard. Some old but by now forgotten

facts had therefore to be recounted to expose this error.

On the theoretical side there is no book but that of Professor Keynes

which makes any attempt to examine its scientific basis. But the

conclusions he has arrived at are in sharp conflict with those of mine.

Our differences extend to almost every proposition he has advanced in

favour of the exchange standard. This difference proceeds from the

fundamental fact, which seems to be quite overlooked by Professor

Keynes, that nothing will stabilise the rupee unless we stabilise its

general purchasing power. That the exchange standard does not do. That

standard concerns itself only with symptoms and does not go to the

disease: indeed, on my showing, if anything, it aggravates the disease.

When I come to the remedy I again find myself in conflict with the

majority of those who like myself are opposed to the exchange standard.

It is said that the best way to stabilise the rupee is to provide for

effective convertibility into gold. I do not deny that this is one way

of doing it. But I think a far better way would be to have an

inconvertible rupee with a fixed limit of issue. Indeed, if I had any

say in the matter I would propose that the Government of India should

melt the rupees, sell them as [pg vii] bullion and use the proceeds for

revenue purposes and fill the void by an inconvertible paper. But that

may be too radical a proposal, and I do not therefore press for it,

although I regard it as essentially sound. In any case the vital point

is to close the Mints not merely to the public, as they have been, but

to the Government as well. Once that is done I venture to say that the

Indian currency, based on gold as legal tender with a rupee currency

fixed in issue, will conform to the principles embodied in the English

currency system.

It will be noticed that I do not propose to go back to the

recommendations of the Fowler Committee. All those who have regretted

the transformation of the Indian currency from a gold standard to a gold

exchange standard have held that everything would have been all right if

the Government had carried out _in toto_ the recommendations of that

Committee. I do not share that view. On the other hand, I find that

the Indian currency underwent that transformation _because_ the

Government carried out those recommendations. While some people regard

that Report as classical for its wisdom, I regard it as classical for

its nonsense. For I find that it was this Committee which, while

recommending a gold standard, also recommended and thereby perpetuated

the folly of the Herschell Committee, that Government should coin rupees

on its own account according to that most naïve of currency principles,

the requirements of the public, without realising that the latter

recommendation was destructive of the former. Indeed, as I argue, the

principles of the Fowler Committee must be given up if we are to place

the Indian currency on a stable basis. [pg viii]

I am conscious of the somewhat lengthy discussions on currency

principles into which I have entered in treating the subject. My

justification of this procedure is two-fold. First of all, as I have

differed so widely from other writers on Indian currency, I have deemed

it necessary to substantiate my view-point even at the cost of being

charged with over-elaboration. But it is my second justification which

affords me a greater excuse. It consists in the fact that I have

written primarily for the benefit of the Indian public, and, as their

grasp of currency principles does not seem to be as good as one would

wish it to be, an over-statement, it will be agreed, is better than an

understatement of the argument on which I have based my conclusions.

Up to 1913, the Gold Exchange Standard was not the avowed goal of the

Government of India in the matter of Indian Currency, and although the

Chamberlain Commission appointed in that year had reported in favour of

its continuance, the Government of India had promised not to carry its

recommendations into practice till the war was over and an opportunity

had been given to the public to criticize them. When, however, the

Exchange Standard was shaken to its foundations during the late war, the

Government of India went back on its word and restricted,

notwithstanding repeated protests, the terms of reference to the Smith

Committee to recommending such measures as were calculated to ensure the

stability of the Exchange Standard, as though that standard had been

accepted as the last word in the matter of Indian Currency. Now that

the measures of the Smith Committee have not ensured the stability of

the Exchange Standard, it is given [pg ix] to understand that the

Government, as well as the public, desire to place the Indian Currency

System on a sounder footing. My object in publishing this study at this

juncture is to suggest a basis for the consummation of this purpose.

I cannot conclude this preface without acknowledging my deep sense of

gratitude to my teacher, Prof. Edwin Cannan, of the University of London

(School of Economics). His sympathy towards me and his keen interest in

my undertaking have placed me under obligations which I can never repay.

I feel happy to be able to say that this work has undergone close

supervision at his hands, and although he is in no way responsible for

the views I have expressed, I can say that his severe examination of my

theoretic discussions has saved me from many an error. To Professor

Wadia, of Wilson College, I am thankful for cheerfully undertaking the

dry task of correcting the proofs. [pg x]

[pg xi]

FOREWORD

_By Professor Edwin Cannan_

I am glad that Mr. Ambedkar has given me the opportunity of saying a few

words about his book.

As he is aware, I disagree with a good deal of his criticism. In 1893 I

was one of the few economists who believed that the rupee could be kept

at a fixed ratio with gold by the method then proposed, and I did not

fall away from the faith when some years elapsed without the desired

fruit appearing (see _Economic Review_, July 1898, pp. 400—403). I do

not share Mr. Ambedkar’s hostility to the system, nor accept most of his

arguments against it and its advocates. But he hits some nails very

squarely on the head, and even when I have thought him quite wrong, I

have found a stimulating freshness in his views and reasons. An old

teacher like myself learns to tolerate the vagaries of originality, even

when they resist “severe examination” such as that of which Mr. Ambedkar

speaks.

In his practical conclusion I am inclined to think he is right. The

single advantage offered to a country by the adoption of the

gold-exchange system instead of the simple gold standard is that it is

cheaper, in the sense of requiring a little less value in the shape of

metallic currency than the gold standard. But all that can be saved in

this way is a trifling amount, almost infinitesimal beside the advantage

of having a currency more difficult for [pg xii] administrators and

legislators to tamper with. The recent experience both of belligerents

and neutrals certainly shows that the simple gold standard, as we

understood it before the war, is not fool-proof, but it is far nearer

being fool-proof and knave-proof than the gold-exchange standard. The

percentage of administrators and legislators who understand the gold

standard is painfully small, but it is and is likely to remain ten or

twenty times as great as the percentage which understands the

gold-exchange system. The possibility of a gold-exchange system being

perverted to suit some corrupt purpose is very considerably greater than

the possibility of the simple gold standard being so perverted.

The plan for the adoption of which Mr. Ambedkar pleads, namely that all

further enlargement of the rupee issue should be permanently prohibited,

and that the mints should be open at a fixed price to importers or other

sellers of gold, so that in course of time India would have, in addition

to the fixed stock of rupees, a currency of meltable and exportable gold

coins, follows European precedents. In eighteenth-century England the

gold standard introduced itself because the legislature allowed the

ratio to remain unfavourable to the coinage of silver: in

nineteenth-century France and other countries it came in because the

legislatures definitely closed the mints to silver when the ratio was

favourable to the coinage of silver. The continuance of a mass of full

legal tender silver coins beside the gold would be nothing novel in

principle, as the same thing, though on a somewhat smaller scale, took

place in France, Germany, and the United States.

It is alleged sometimes that India does not want [pg xiii] gold coins. I

feel considerable difficulty in believing that gold coins of suitable

size would not be convenient in a country with the climate and other

circumstances of India. The allegation is suspiciously like the old

allegation that the “Englishman prefers gold coins to paper,” which had

no other foundation than the fact that the law prohibited the issue of

notes for less than £5 in England and Wales, while in Scotland, Ireland,

and almost all other English-speaking countries notes for £1 or less

were allowed and circulated freely. It seems much more likely that

silver owes its position in India to the decision which the Company made

before the system of standard gold and token silver was accidentally

evolved in 1816 in England, and long before it was understood: and that

the position has been maintained not because Indians dislike gold, but

because Europeans like it so well that they cannot bear to part with any

of it.

This reluctance to allow gold to go to the East is not only despicable

from an ethical point of view. It is also contrary to the economic

interest not only of the world at large, but even of the countries which

had a gold standard before the war and have it still or expect soon to

restore it. In the immediate future gold is not a commodity the use of

which it is desirable for these countries either to restrict or to

economize. From the closing years of last century it has been produced

in quantities much too large to enable it to retain its purchasing power

and thus be a stable standard of value unless it can constantly be

finding existing holders willing to hold larger stocks, or fresh holders

to hold new stocks of it. Before the war the accumulation of hoards by

[pg xiv] various central banks in Europe took off a large part of the

new supplies and prevented the actual rise of general prices being

anything like what it would otherwise have been, though it was serious

enough. Since the war the Federal Reserve Board, supported by all

Americans who do not wish to see a rise of prices, has taken on the new

“White Man’s Burden” of absorbing the products of the gold mines, but

just as the United States failed to keep up the value of silver by

purchasing it, so she will eventually fail to keep up the value of gold.

In spite of the opinion of some high authorities, it is not at all

likely that a renewed demand for gold reserves by the central banks of

Europe will come to her assistance. Experience must gradually be

teaching even the densest of financiers that the value of paper

currencies is not kept up by stories of “cover” or “backing” locked up

in cellars, but by due limitation of the supply of the paper. With

proper limitation enforced by absolute convertibility into gold coin

which may be freely melted or exported, it has been proved by theory and

experience that small holdings of gold are perfectly sufficient to meet

all internal and international demands. There is really more chance of

a great demand from individuals than from the banks. It is conceivable

that the people of some of the countries which have reduced their paper

currency to a laughing stock may refuse all paper and insist on having

gold coins. But it seems more probable that they will be pleased enough

to get better paper than they have recently been accustomed to, and will

not ask for hard coin with sufficient insistence to get it. On the whole

it seems fairly certain that the demand of Europe and [pg xv]

European-colonised lands for gold will be less rather than greater than

before the war, and that it will increase very slowly or not at all.

Thus on the whole there is reason to fear a fall in the value of gold

and a rise of general prices rather than the contrary.

One obvious remedy would be to restrict the production of gold by

international agreement, thus conserving the world’s resources in

mineral for future generations. Another is to set up an international

commission to issue an international paper currency so regulated in

amount as to preserve an approximately stable value. Excellent

suggestions for the professor’s classroom, but not, at present at any

rate nor probably for some considerable period of time, practical

politics.

A much more practical way out of the difficulty is to be found in the

introduction of gold currency into the East. If the East will take a

large part of the production of gold in the coming years it will tide us

over the period which must elapse before the most prolific of the

existing sources are worked out. After that we may be able to carry on

without change or we may have reached the possibility of some better

arrangement.

This argument will not appeal to those who can think of nothing but the

extra profits which can be acquired during a rise of prices, but I hope

it will to those who have some feeling for the great majority of the

population, who suffer from these extra and wholly unearned profits

being extracted from them. Stability is best in the long run for the

community.

EDWIN CANNAN.

[pg xvii]

Contents

Author’s Preface ..................................................

Foreword by Professor Edwin Cannan ................................

From a Double Standard to a Silver Standard .......................

The Silver Standard and the Dislocation of its Parity .............

The Silver Standard and the Evils of Its Instability ..............

Towards a Gold Standard ...........................................

From A Gold Standard to a Gold Exchange Standard ..................

Stability of the Exchange Standard ................................

A Return to the Gold Standard .....................................

CHART I: Discount Rates in India

CHART II: Fall of the Rupee-Sterling Exchange

CHART III: Relative Values and Relative Production of Gold and

Silver

CHART IV: Prices and Wages in India and England, 1873–93

CHART V: Monthly Fluctuations of The Rupee-Sterling Exchange

CHART VI: Comparative Price Levels, Indian and Foreign, 1893–1922

[pg 1]

*THE PROBLEM OF THE RUPEE*

CHAPTER I

*FROM A DOUBLE STANDARD TO A SILVER STANDARD*

Trade is an important apparatus in a society based on private property

and pursuit of individual gain; without it, it would be difficult for

its members to distribute the specialised products of their labour.

Surely a lottery or an administrative device would be incompatible with

its nature. Indeed, if it is to preserve its character, the only mode

for the necessary distribution of the products of separate industry is

that of private trading. But a trading society is unavoidably a

pecuniary society, a society which of necessity carries on its

transactions in terms of money. In fact, the distribution is not

primarily an exchange of products against products, but products against

money. In such a society, money therefore necessarily becomes the pivot

on which everything revolves. With money as the focusing-point of all

human efforts, interests, desires and ambitions, a trading society is

bound to function in a régime of price where successes and failures are

results of nice calculations of price-outlay as against price-product.

Economists have no doubt insisted that “there cannot … be intrinsically

a more significant thing than money,” which at best is only “a great

wheel by means of which every individual in society has his subsistence,

conveniences and amusements regularly distributed to him [pg 2] in their

proper proportions.” Whether or not money values are the definitive

terms of economic endeavour may well be open to discussion.¹ But this

much is certain, that without the use of money this “distribution of

subsistence, conveniences and amusements,“ far from being a matter of

course, will be distressingly hampered if not altogether suspended. How

can this trading of products take place without money? The difficulties

of barter have ever formed an unfailing theme with all economists,

including those who have insisted that money is only a cloak. Money is

not only necessary to facilitate trade by obviating the difficulties of

barter, but is also necessary to sustain production by permitting

specialisation. For who would care to specialise if he could not trade

his products for those of others which he wanted? Trade is the handmaid

of production, and where the former cannot flourish the latter must

languish. It is therefore evident that if a trading society is not to

be out of gear and is not to forego the measureless advantages of its

automatic adjustments in the great give-and-take of specialised

industry, it must provide itself with a sound system of money.²

At the close of the Moghul Empire, India, judged by the standards of the

time, was economically an advanced country. Her trade was large, her

banking institutions were well developed, and credit played an

appreciable part in her transactions. But a medium of exchange and a

common standard of value were among others the most supreme desiderata

in the economy of the Indian people when they came, in the middle of the

eighteenth century, under the sway of the British. Before the

occurrence of this event, the money of India consisted of both gold and

silver. Under the Hindu emperors the emphasis was laid on gold, while

under the Mussalmans silver formed a large [pg 3] part of the

circulating medium.³ Since the time of Akbar, the founder of the

economic system of the Moghul Empire in India, the units of currency had

been the gold _mohur_ and the silver _rupee_. Both coins, the mohur and

the rupee, were identical in weight, i.e. 175 grs. troy,⁴ and were

“supposed to have been coined without any alloy, or at least intended to

be so.”⁵ But whether they constituted a single standard of value or

not is a matter of some doubt. It is believed that the mohur and the

rupee, which at the time were the common measure of value, circulated

without any fixed ratio of exchange between them. The standard,

therefore, was more of the nature of what Jevons called a parallel

standard⁶ than a double standard.⁷ That this want of ratio could not

have worked without some detriment in practice is obvious. But it must

be noted that there existed an alleviating circumstance in the curious

contrivance by which the mohur and the rupee, though unrelated to each

other, bore a fixed ratio to the _dam_, the copper coin of the Empire.⁸

So that it is permissible to hold that, as a consequence of being fixed

to the same thing, the two, the mohur and the rupee, circulated at a

fixed ratio.

¹ Cf. W. C. Mitchell. “The Rationality of Economic Activity,”

_Journal of Political Economy_, 1910, Vol. XVIII, pp. 97 and 197;

also “The Rôle of Money in Economic Theory,” by the same, in the

_American Economic Review_ (Supplement), Vol. VI, No. 1, March

1916.

² For the whole of this discussion, cf. H. J. Davenport, _The

Economics of Enterprise_ (1913), Chapters II and III.

³ Prinsep, J., _Useful Tables_, Calcutta, 1834, pp. 15–16.

⁴ Robert Chalmers, _History of Colonial Currency_, 1893, pp. 336,

340.

⁵ Dr. P. Kelly, _The Universal Cambist_, 1311, p. 115.

⁶ _Money and Mechanism of Exchange_ (1890), p. 95.

⁷ Dr. P. Kelly’s view is that they circulated at their market ratio

(_loc. cit._). On the other hand, Sir R. Temple says: “In ancient

and mediaeval India the relative value of the coins of each metal

was fixed by the State, and all were legal tender virtually

without any formal limitation” (“General Monetary Practice in

India,” _Journal of the Institute of Bankers_, Vol. II, p. 406).

On another occasion he said: “The earliest Hindu currency was in

gold with a single standard. The Mohammedans introduced silver,

and in later times up to British rule there was a double standard,

gold and silver” (_ibid._, Vol. XV, p. 9). In contrast to this it

may be noted that the Preamble to currency Regulation XXXV of 1793

and other currency Regulations of early date make it a point to

emphasize that under pre-British régime there was no fixed ratio

between the mohur and the rupee.

⁸ Cf. Prof. S. V. Venkateswara, on “Moghul Currency and Coinage” in

the _Indian Journal of Economics_, July, 1918, p. 169; and F.

Atkinson, _The Indian Currency Question_ (1894), p. 1.

In Southern India, to which part the influence of the [pg 4] Moghuls had

not extended, silver as a part of the currency system was quite unknown.

The pagoda, the gold coin of the ancient Hindu kings, was the standard

of value and also the medium of exchange, and continued to be so till

the time of the East India Company.

The right of coinage, which the Moghuls always held as _inter jura

Majestatis,_⁹ be it said to their credit was exercised with due sense of

responsibility. Never did the Moghul Emperors stoop to debase their

coinage. Making allowance for the imperfect technology of coinage, the

coins issued from the various Mints situated even in the most distant

parts of their Empire¹⁰ did not materially deviate from the standard.

──────────────────────────────────────────────────────────────────

Name of the Rupee Weight Name of the Rupee Weight

in pure in pure

Grs. Grs.

──────────────────────────────────────────────────────────────────

Akabari of Lahore 175·0 Delhi Sonat 175·0

──────────────────────────────────────────────────────────────────

Akabari of Agra 174·0 Delhi Alamgir 175·0

──────────────────────────────────────────────────────────────────

Jehangiri of Agra 174·6 Old Surat 174·0

──────────────────────────────────────────────────────────────────

Jehangiri of 173·6 Murshedabad 175·9

Allahabad

──────────────────────────────────────────────────────────────────

Jehangiri of Kandahar 173·9 Persian Rupee of 1745 174·5

──────────────────────────────────────────────────────────────────

Shehajehani of Agra 175·0 Old Dacca 173·3

──────────────────────────────────────────────────────────────────

Shehajehani of 174·2 Muhamadshai 170·0

Ahamadabad

──────────────────────────────────────────────────────────────────

Shehajehani of Delhi 174·2 Ahamadshai 172·8

──────────────────────────────────────────────────────────────────

Shehajehani of Delhi 175·0 Shaha Alam (1772) 175·8

──────────────────────────────────────────────────────────────────

Shehajehani of Lahore 174·0

──────────────────────────────────────────────────────────────────

[pg 5] The table on p. 4 of the assays of the Moghul rupees shows how

the coinage throughout the period of the Empire adhered to the standard

weight of 175 grs. pure.¹¹

⁹ According to the Mohammedan historian, Khafi Khan, it enraged the

Emperor Aurangzeb when the East India Company in 1694 coined some

rupees at Bombay “with the name of their impure king” (_Imperial

Gazetteer of India_, Vol. IV, p. 515).

¹⁰ It is stated in the _Imperial Gazetteer of India_ (Vol. IV., p.

514), that in the early days of the Moghul rule there was only one

Mint—at Delhi—which struck the Imperial coins. The Emperor Sher

Sha was the first to introduce a plurality of Mints for coinage

purposes—a practice continued and extended by the later emperors

until between the reigns of Akbar and Bahadur Sha II the Mints

numbered about 200. From the _East India Moral and Material

Progress Report for_ 1872–73 it is clear that not every Mint was

open to the coinage of all three metals, gold, silver and copper;

but that some Mints coined only gold, others silver, and the rest

copper (_see_ Report, pp. 11–12).

¹¹ Prinsep, J., op. cit., p. 18.

So long as the Empire retained unabated sway there was advantage rather

than danger in the plurality of Mints, for they were so many branches of

a single department governed by a single authority. But with the

disruption of the Moghul Empire into separate kingdoms these branches of

the Imperial Mint located at different centres became independent

factories for purposes of coinage. In the general scramble for

independence which followed the fall of the Empire, the right to

coinage, as one of the most unmistakable insignia of sovereignty, became

the right most cherished by the political adventurers of the time. It

was the last privilege to which the falling dynasties clung, and was

also the first to which the adventurers rising to power aspired. The

result was that the right, which was at one time so religiously

exercised, came to be most wantonly abused. Everywhere the Mints were

kept in full swing, and soon the country was filled with diverse coins

which, while they proclaimed the incessant rise and fall of dynasties,

also presented bewildering media of exchange. If these money-mongering

sovereigns had kept up their issues to the original standard of the

Moghul Emperors the multiplicity of coins of the same denomination would

not have been a matter of much concern. But they seemed to have held

that as the money used by their subjects was made by them, they could do

what they liked with their own, and proceeded to debase their coinage to

the extent each chose without altering the denominations. Given the

different degrees of debasement, the currency necessarily lost its

primary quality of general and ready acceptability.

The evils consequent upon such a situation may well be imagined. When

the contents of the coins belied the value indicated by their

denomination they became mere merchandise and there was no more a

currency by tale to act as a ready means of exchange. The bullion value

of each coin had to be ascertained before it could be accepted as a

final [pg 6] discharge of obligations.¹² The opportunity for defrauding

the poor and the ignorant thus provided could not have been less¹³ than

that known to have obtained in England before the great re-coinage of

1696. This constant weighing, valuing, and assaying the bullion

contents of coins was, however, only one aspect in which the evils of

the situation made themselves felt. They also presented another

formidable aspect. With the vanishing of the Empire there ceased to be

such a thing as an Imperial legal tender current all through India. In

its place there grew up local tenders current only within the different

principalities into which the Empire was broken up. Under such

circumstances exchange was not liquidated by obtaining in return for

wares the requisite bullion value from the coins tendered in payment.

Traders had to be certain that the coins were also legal tender of their

domicile. The Preamble to the Bengal Currency Regulation XXXV, of 1793,

is illuminating on this point. It says:—

“The principal districts in Bengal, Bihar and Orissa, have each

a distinct silver currency … which are the standard measure of

value in all transactions in the districts in which they

respectively circulate.

――――――――

“In consequence of the Ryots being required to pay their rent in

a particular sort of rupee they of course demanded it from

manufacturers in payment of their grain, or raw [pg 7]

materials, whilst the manufacturers, actuated by similar

principles with the Ryots, required the same species of rupee

from the traders who came to purchase their cloth or their

commodities.

“The various sorts of old rupees, accordingly, soon became the

established currency of particular districts, and as a necessary

consequence the value of each rupee was enhanced in the district

in which it was current, for being in demand for all

transactions. As a further consequence, every sort of rupee

brought into the district was rejected from being a different

measure of value from that by which the inhabitants had become

accustomed to estimate their property, or, if it was received, a

discount was exacted upon it, equal to what the receiver would

have been obliged to pay upon exchanging it at the house of a

shroff for the rupee current in the district, or to allow

discount upon passing it in payment to any other individual.

――――――――

“From this rejection of the coin current in one district when

tendered in payment in another, the merchants and traders, and

the proprietors and cultivators of land in different parts of

the country, are subjected in their commercial dealings with

each other to the same losses by exchange, and all other

inconveniences that would necessarily result were the several

districts under separate and independent governments, each

having a different coin.”

¹² It was this necessity for ascertaining the true bullion value of

the debased coins which gave rise to that class of money-changers

known as Shroffs, who specialised in the business of evaluating

the coins at their proper discount from the standard purity by

means of the dates and other characteristics engraved upon them.

¹³ It is stated that Dr. Roxburgh, who was an eye-witness, was so

much impressed by the sufferings of the poor owing to the bad

state of the currency that he urged upon A. Dalrymple in a letter

dated June 30, 1791, to give prominence to the evils by inserting

a paper in his _Oriental Repertory_ (2 vols., London, 1808), “on

the current coin in circulation over the Company’s Territories

which might be productive of the most solid and lasting advantage

to the Governing and the Governed,” and added, “You may be able to

correct the evil, by which you will certainly go to heaven, if the

prayers of the poor avail, and I may get a step nearer paradise.”

_Observations on the Copper Coinage wanted in the Circars_, by A.

Dalrymple, London, 1794, p. 1.

Here was a situation where trade was reduced to barter, whether one

looks upon barter as characterised by the absence of a common medium of

exchange or by the presence of a plurality of the media of exchange; for

in any case, it is obvious that the want of a “double coincidence” must

have been felt by people engaged in trade. One is likely to think that

such could not have been the case as the medium was composed of metallic

counters. But it is to be remembered that the circulating coins on

India, by reason of the circumstance attendant upon the diversity in

their fineness and legal tender, formed so many different species that

an exchange against a particular species did not necessarily close the

transaction; the coin must, in certain circumstances, have been only an

intermediate to be further bartered against another, and so on till the

one of the requisite species was [pg 8] obtained. This is sufficient

indication that society had sunk into a state of barter. If this alone

was the flaw in the situation, it would have been only as bad as that of

international trade under diversity of coinages. But it was further

complicated by the fact that although the denomination of the coins was

the same, their metallic contents differed considerably. Owing to this,

one coin bore a discount or a premium in relation to another of the same

name. In the absence of knowledge as to the amount of premium or

discount, every one cared to receive a coin of the species known to him

and current in his territory. On the whole the obstacles to commerce

arising from such a situation could not have been less than those

emanating from the mandate of Lycurgus, who compelled the Lacedæmonians

to use iron money in order that its weight might prevent them from

overmuch trading. The situation, besides being irritating, was

aggravated by the presence of an element of gall in it. Capital

invested in providing a currency is a tax upon the productive resources

of the community. Nevertheless, wrote James Wilson¹⁴ no one would

question

“that the time and labour which are saved by the interposition

of coin, as compared with a system of barter, form an ample

remuneration for the portion of capital withdrawn from

productive sources, to act as a single circulator of

commodities, by rendering the remainder of the capital of the

country so much the more productive.”

¹⁴ _Capital, Currency and Banking_, 1847, p. 15.

What is, then, to be said of a monetary system which did not obviate the

evil consequences of barter, although enormous capital was withdrawn

from productive sources, to act as a single circulator of commodities?

Diseased money is worse than want of money. The latter at least saves

the cost. But society must have money, and it must be good money, too.

The task, therefore, of evolving good money out of bad money fell upon

the shoulders of the English East India Company, who had in the

meanwhile succeeded to the Empire of the Moghuls in India.

The lines of reform were first laid down by the Directors [pg 9] of the

Company in their famous Despatch, dated April 25, 1806,¹⁵ to the

authorities administering their territories in India. In this historic

document they observed:—

¹⁵ H. of C. Return 127 of 1898.

“17. It is an opinion supported by the best authorities, and

proved by experience, that coins of gold and silver cannot

circulate as legal tenders of payment at fixed relative values …

without loss; this loss is occasioned by the fluctuating value

of the metals of which the coins are formed. A proportion

between the gold and silver coin is fixed by law, according to

the value of the metals, and it may be on the justest

principles, but owing to the change of circumstances gold may

become of greater value in relation to silver than at the time

the proportion was fixed, it therefore becomes profitable to

exchange silver or gold, so the coin of that metal is withdrawn

from circulation; and if silver should increase in its value in

relation to gold, the same circumstances would tend to reduce

the quantity of silver coin in circulation. As it is impossible

to prevent the fluctuation in the value of the metals, so it is

also equally impracticable to prevent the consequences thereof

on the coins made from these metals … To adjust the relative

values of gold and silver coin according to the fluctuations in

the values of the metals would create continual difficulties,

and the establishment of such a principle would of itself tend

to perpetuate inconvenience and loss.”

They therefore declared themselves in favour of monometallism as the

ideal for the Indian currency of the future, and prescribed:—

“21. … that silver should be the universal money of account [in

India], and that all … accounts should be kept in the same

denominations of rupees, annas and pice …”

The rupee was not, however, to be the same as that of the Moghul

Emperors in weight and fineness. They proposed that

“9. … the new rupee … be of the gross weight of—

────────────────────────────────

Troy grains 180

Deduct one-twelfth alloy 15

――

An contain of fine silver 165

troy grs.

────────────────────────────────

[pg 10] Such were the proposals put forth by the Court of Directors for

the reform of Indian currency.

The choice of a rupee weighing 180 grs. troy and containing 165 grs.

pure silver as the unit for the future currency system of India was a

well-reasoned choice.

The primary reason for selecting this particular weight for the rupee

seems to have been the desire to make it as little of a departure as

possible from the existing practice. In their attempts to reduce to

some kind of order the disorderly currencies bequeathed to them by the

Moghuls by placing them on a bimetallic basis, the Governments of the

three Presidencies had already made a great advance by selecting out of

the innumerable coins then circulating in the country a species of gold

and silver coin as the exclusive media of exchange for their respective

territories. The weights and fineness of the coins selected as the

principal units of currency, with other particulars, may be noted from

the summary table opposite.

To reduce these principal units of the different Presidencies to a

single principal unit, the nearest and the least inconvenient magnitude

of weight which would at the same time be an integral number was

obviously 180 grs., for in no case did it differ from the weights of any

of the prevailing units in any marked degree. Besides, it was believed

that 180, or rather 179·5511, grs. was the standard weight of the rupee

coin originally issued from the Moghul Mints, so that the adoption of it

was really a restoration of the old unit and not the introduction of a

new one.¹⁶ Another advantage claimed in favour of a unit of 180 grs. was

that such a unit of currency would again become what it had ceased to

be, the unit of weight also. It was agreed¹⁷ that the unit of weight in

India had at all times previously been linked up with that of the

principal coin, so that the _seer_ and the manual weights were simply

multiples of the rupee, which originally weighed 179·6 grs. troy. Now,

if the weight of the [pg 11]

TABLE I

_Principal Units of Currency_

────────────────────────────────────────────────────────────────────────────────────────────────────────────────

Issued Territory Date Silver Coins Gold Coins

by in and ──────────────────────────────────────────────────────────────────────────

the which Authority Name Gross Pure Name Gross Pure

Government it of Weight Contents Weight Contents

of circulated Issue. Troy Troy Grs. Troy Grs. Troy Grs.

Grs.

Bombay Presidency Surat 179·0 164·740 Mohur 179 164·740

Rupee

Madras Presidency Arcot 176·4 166·477 Star 52·40 42·55

Rupee Pagoda

Bengal, Regulations Sicca

Bihar and XXXV of Rupee

Orissa 1793 (19th 179·66 175·927 Mohur 190·804 189·40

──────────────────────────── Sun)

Cuttock XII of 1805

─────────────────────────────────────────────────────────────────────────────────────────────────────

Ceded Furrakabad

Provinces Rupee

Bengal ────────────── (Lucknow

Conquered XLV of 1803 Sicca 173 166·135 — — —

Provinces of

the

45th

Sun)

Benares III of 1806 Benares 175 168·875 — — —

Provinces Rupee

(Muchleedar)

¹⁶ Cf. The Despatch, op. cit., par. 8.

¹⁷ Cf. para. 26–28 of the letter from James Prinsep to the Calcutta

Mint Committee, printed in the Appendix to the Indian Tables by

John Muller, Calcutta, 1836.

¹⁸ _Ibid._ par. 28. How the English and the Indian systems of

weights were made to correspond to each other may be seen from the

following:—

─────────────────────────────────────────────────────

_Indian._ _English._

8 = 1 massa = 15 troy grs.

ruttees

12 = 1 tola (or = 180 troy grs.

massas sicca)

80 tolas = 1 seer = 2½ troy

pounds.

40 seers = 1 maund (or = 100 troy

mun) pounds.

─────────────────────────────────────────────────────

[pg 12] principal coin to be established was to be different from 180

grs. troy, it was believed there would be an unhappy deviation from the

ancient practice which made the weight of the coin the basis of other

weights and measures. Besides, a unit of 180 grs. weight was not only

suitable from this point of view, but had also in its favour the added

convenience of assimilating the Indian with the English units of

weight.¹⁸

While these were the reasons in favour¹⁹ of fixing the weight of the

principal unit of currency at 180 grs. troy, the project of making it

165 grs. fine was not without its justification. The ruling

consideration in selecting 165 grs. as the standard of fineness was, as

in the matter of selecting the standard weight, to cause the least

possible disturbance in existing arrangements. That this standard of

fineness was not very different from those of the silver coins

recognised by the different Governments in India as the principal units

of their currency, may be seen from the following comparative statement

on p. 13.

¹⁹ Attention may be drawn in this connection to the dissenting

opinion of Captain Jervis on the project of 180 grs. troy as the

unit of weight for the rupee. Cf. his most exhaustive treatise

called _The Expediency and Facility of establishing the

Metrological and Monetary Systems throughout India on a Scientific

and Permanent Basis, grounded on an Analytical Review of the

Weights, Measures and Coins of India_ …, Bombay, 1836, pp. 49–64.

It will thus be seen that, with the exception of the Sicca and the

Benares rupees, the proposed standard of fineness agreed so closely with

those of the other rupees that the interest of obtaining a complete

uniformity without considerable dislocation overruled all possible

objections to its adoption. Another consideration that seemed to have

prevailed upon the Court of Directors in selecting 165 grs. [pg 13] as

the standard of fineness was that, in conjunction with 180 grs. as the

standard weight, the arrangement was calculated to make the rupee

eleven-twelfths fine. To determine upon a particular fineness was too

technical a matter for the Court of Directors. It was, however, the

opinion of the British Committee on Mint and Coinage, appointed in 1803,

that²⁰ “one–twelfth alloy and eleven–twelfths fine is by a variety of

extensive experiments proved to be the best proportion, or at least as

good as any which could have been chosen.” This standard, so

authoritatively upheld, the Court desired to incorporate in their new

scheme of Indian currency. They therefore desired to make the rupee

eleven–twelfths fine. But to do so was also to make the rupee 165 grs.

pure—a content which they desired, from the point of view stated above,

the rupee to possess.

²⁰ Cf. The Despatch, op. cit., par. 9.

TABLE II

_Deviations of the Proposed Standard of Fineness from that

of the Principal Recognized Rupees_

──────────────────────────────────────────────────────────────────────

Silver Coins recognized More valuable Less valuable

as Principal Units and Standard than the than the

their Fineness. Fineness Proposed proposed

of Rupee. Rupee.

─────────────────────────── the ─────────────────────────────────

Name of the Its Pure Proposed In By In By

Coin. Contents. Rupee. Grs. p.c. Grs. p.c.

Troy Grs.

Surat Rupee 164·74 165 — — ·26 ·157

Arcot Rupee 166·477 165 1·477 ·887 — —

Sicca Rupee 175·927 165 10·927 6·211 — —

Furrukabad 166·135 165 1·135 ·683 — —

Benares 169·251 165 4·251 2·511 — —

Rupee

Reviewing the preference of the Court of Directors for monometallism

from the vantage-ground of latter-day events, one might be inclined to

look upon it as a little too short-sighted. At the time, however, the

preference was well founded. One of the first measures the three

Presidencies, into which the country was divided for [pg 14] purposes of

administration, had adopted on their assuming the government of the

country, was to change the parallel standard of the Moghuls into a

double standard by establishing a legal ratio of exchange between the

mohur, the pagoda, and the rupee. But in none of the Presidencies was

the experiment a complete success.

In Bengal²¹ the Government, on June 2, 1766, determined upon the issue

of a gold mohur weighing 179·66 grs. troy, and containing 149·92 grs.

troy of pure metal, as legal tender at 14 Sicca rupees, to relieve the

currency stringency caused largely by its own act of locking up the

revenue collections in its treasuries, to the disadvantage of commerce.

This was a legal ratio of 16·45 to 1, and as it widely deviated from the

market ratio of 14·81 to 1, this attempt to secure a concurrent

circulation of the two coins was foredoomed to failure. Owing to the

drain of silver on Bengal from China, Madras, and Bombay, the currency

stringency grew worse, so much so that another gold mohur was issued by

the Government on March 20, 1769, weighing 190·773 grs. troy and

containing 190·086 grs. pure gold with a value fixed at 16 Sicca rupees.

This was a legal ratio of 14·81 to 1. But, as it was higher than the

market ratio of the time both in India (14 to 1) and in Europe (14·61 to

1), this second effort to bring about a concurrent circulation fared no

better than the first. So perplexing seemed to be the task of accurate

rating that the Government reverted to monometallism by stopping the

coinage of gold on December 3, 1788, and when the monetary stringency

again compelled it to resume in 1790 the coinage of gold, it preferred

to let the mohur and the rupee circulate at their market value without

making any attempt to link them by a fixed ratio. It was not until 1793

that a third attempt was made to forge a double standard in Bengal. A

new mohur was issued in that year, weighing 190·895 grs. troy and

containing 189·4037 grs. of pure gold, and made legal tender at 16 Sicca

rupees. This [pg 15] was a ratio of 14·86 to 1, but, as it did not

conform to the ratio then prevalent in the market, this third attempt to

establish bimetallism in Bengal failed as did those made in 1766 and

1769.

²¹ F. C. Harrison, “The Past Action of the Indian Government with

regard to Gold,” in _Economic Journal_, Vol. III, p. 54 _et seq_.

Also Minute by Sir John Shore, in Bengal Public Consultations,

dated September 29, 1796.

The like endeavours of the Government of Madras²² proved more futile

than those of Bengal. The first attempt at bimetallism under the

British in that Presidency was made in the year 1749, when 350 Arcot

rupees were legally rated at 100 Star pagodas. As compared with the

then market ratio this rating involved an under-valuation of the pagoda,

the gold coin of the Presidency. The disappearance of the pagoda caused

a monetary stringency, and the Government in December, 1750, was obliged

to restore it to currency. This it did by adopting the twofold plan of

causing an import of gold on Government account, so as to equalise the

mint ratio to the market ratio, and of compelling the receipts and

payments of Government treasuries to be exclusively in pagodas. The

latter device proved of small value; but the former by its magnitude was

efficacious enough to ease the situation. Unluckily the ease was only

temporary. Between 1756 and 1771 the market ratio of the rupee and the

pagoda again underwent a considerable change. In 1756 it was 364 to

100, and in 1768 it was 370 to 100. It was not till after 1768 that the

market ratio became equal to the legal ratio fixed in 1749 and remained

steady for about twelve years. But the increased imports of silver

rendered necessary for the prosecution of the second Mysore war once

more disturbed the ratio, which at the close of the war stood at 400

Arcot rupees to 100 Star pagodas. After the end of the war the

Government of Madras made another attempt to bring about a concurrent

circulation between the rupee and the pagoda. But instead of making the

market ratio of 400 to 100 the legal ratio it was led by the then

increasing imports of gold into the Presidency to hope that the market

ratio would in time rise to that legally established in 1749. In an

expectant mood so induced it decided, in 1790, to anticipate the event

by fixing the ratio first at 365 to 100. [pg 16] The result was bound

to be different from that desired, for it was an under-valuation of the

pagoda. But instead of rectifying the error, the Government proceeded

to aggravate it by raising the ratio still further to 350 to 100 in

1797, with the effect that the pagoda entirely went out of circulation,

and the final attempt at bimetallism thus ended in a miserable failure.

²² H. Dodwell, “Substitution of Silver for Gold in South India,” in

the _Indian Journal of Economics_, January, 1921.

The Government of Bombay seemed better instructed in the mechanics of

bimetallism, although that did not help it to overcome the practical

difficulties of the system. On the first occasion when bimetallism was

introduced in the Presidency²³ the mohur and the rupee were rated at the

ratio of 15·70 to 1. But at this ratio the mohur was found to be

over-rated, and accordingly, in August, 1774, the Mint Master was

directed to coin gold mohur of the fineness of a Venetian and of the

weight of the silver rupee. This change brought down the legal ratio to

14·83 to 1, very nearly, though not exactly, to the then prevailing

market ratio of 15 to 1, and had nothing untoward happened, bimetallism

would have had a greater success in Bombay than it actually had in the

other two Presidencies. But this was not to be, for the situation was

completely altered by the dishonesty of the Nawab of Surat, who allowed

his rupees, which were of the same weight and fineness as the Bombay

rupees, to be debased to the extent of 10, 12, and even 15 per cent.

This act of debasement could not have had any disturbing effect on the

bimetallic system prevalent in the Bombay Presidency had it not been for

the fact that the Nawab’s (or Surat) rupees were by agreement admitted

to circulation in the Company’s territories at par with the Bombay

rupees. As a result of their being legal tender the Surat rupees, once

they were debased, not only drove out the Bombay rupees from

circulation, but also the mohur, for as rated to the debased Surat

rupees the ratio became unfavourable to gold, and the one chance for a

successful bimetallic system vanished away. The question of fixing up a

bimetallic [pg 17] ratio between the mohur and the rupee again cropped

up when the Government of Bombay permitted the coinage of Surat rupees

at its Mint. To have continued the coinage of the gold mohur according

to the Regulation of 1774 was out of the question. One Bombay mohur

contained 177·38 grs. of pure gold, and 15 Surat rupees of the standard

of 1800 contained 247,110 grs. of silver. By this Regulation the

proportion of silver to gold would have been \frac{247,110}{177·38} i.e.

13·9 to 1. Here the mohur would have under-valued. It was therefore

resolved to alter the standard of the mohur to that of the Surat rupee,

so as to give a ratio of 14·9 to 1. But as the market ratio was

inclined towards 15·5 to 1, the experiment was not altogether a success.

²³ Report of Dr. Scott on the History of Coinage in the Bombay

Presidency, with Appendices, Public Consultations (Bombay, dated

January 27, 1801).

In the light of this experience before them the Court of Directors of

the East India Company did well in fixing upon a monometallic standard

as the basis of the future currency system of India. The principal

object of all currency regulations is that the different units of money

should bear a fixed relation of value to one another. Without this

fixity of value the currency would be in a state of confusion, and no

precaution would be too great against even a temporary disturbance of

that fixity. Fixity of value between the various components of the

currency is so essential a requisite in a well-regulated monetary system

that we need hardly be surprised if the Court of Directors attached

special importance to it, as they may well have done, particularly when

they were engaged in the task of placing the currency on a sound and

permanent footing. Nor can it be said that their choice of

monometallism was ill-advised, for it must be admitted that a single

standard better guarantees this fixity than does the double standard.

Under the former it is spontaneous; under the latter it is forced.

These recommendations of the Court of Directors were left to the

different Governments in India to be carried into effect at their

discretion as to the time and manner of doing it. But it was some time

before steps were taken in consonance with these orders, and even then

it was on the realisation of those parts of the program of the Court

which pertained [pg 18] to the establishment of a uniform currency that

the efforts of the different Governments were first concentrated.

The task of reducing the existing units of currency to that proposed by

the Court was first accomplished in Madras. On January 7, 1818, the

Government issued a Proclamation²⁴ by which its old units of

currency—the Arcot rupee and the Star pagoda—were superseded by new

units, a gold rupee and a silver rupee, each weighing 180 grs. troy and

containing 165 grs. of fine metal. Madras was followed by Bombay six

years later by a Proclamation²⁵ of October 6, 1824, which declared a

gold rupee and a silver rupee of the new Madras standard to be the only

units of currency in that Presidency. The Government of Bengal had a

much bigger problem to handle. It had three different principal units

of silver currency to be reduced to the standard proposed by the Court.

It commenced its work of reorganisation by a system of elimination and

alteration. In 1819, it discontinued²⁶ the coinage of the Benares rupee

and substituted in its place the Furrukabad rupee, the weight and

fineness of which were altered to 180·234 and 135·215 grs. troy

respectively. Apparently this was a step away from the right direction.

But even here the purpose of uniformity, so far as fineness was

concerned, was discernible, for it made the Furrukabad rupee like the

new Madras and Bombay rupees, eleven-twelfths fine. Having got rid of

the Benares rupee, the next step was to assimilate the standard of the

Furrukabad rupee to that of Madras and Bombay, and this was done in

1833.²⁷

²⁴ Cf. Fort St. George Public Depart. Consultations, No. 19, dated

January 7, 1818.

²⁵ Cf. Bombay Financial Consultations, dated October 6, 1824.

²⁶ Bengal Regulation XI of 1819.

²⁷ Bengal Regulation VII of 1833.

Thus, without abrogating the bimetallic system, substantial steps were

taken in realising the ideal unit proposed by the Court, as may be seen

from the table on opposite page.

Taking stock of the position as it was at the end of 1833, we find that

with the exception of the Sicca rupee and the gold mohur of Bengal, that

part of the scheme of the Directors which pertained to the uniformity of

coinage was an accomplished fact. Nothing more remained to carry it [pg

19]

TABLE III

_Uniformity of Coinage at the end of A.D. 1833_

───────────────────────────────────────────────────────────────────────────────────────────────

Issued Silver Gold Coins.

by Coins. Legal

the ───────────────────────────────────────────────────────────────────────────── Ratio

Government Denomination. Weight. Fineness. Denomination. Weight. Fineness.

Sicca Rupee 192 176 or Mohur 204·710 187·651 1 to

11⁄12 15

Bengal ────────────────────────────────────────────────────────────────────────────────────

Furrukabad 180 165 or — — — —

Rupee 11⁄12

Bombay Silver Rupee 180 165 or Gold Rupee 180 165 or 1 to

11⁄12 11⁄12 15

Madras Silver Rupee 180 165 or Gold Rupee 180 165 or 1 to

11⁄12 11⁄12 15

to completion than to discontinue the Sicca rupee and to demonetise

gold. At this point, however, arose a conflict between the Court of

Directors and the three Governments in India. Considerable reluctance

was shown to the demonetisation of gold. The Government of Madras,

which was the first to undertake the reform of its currency according to

the plan of the Court, not only insisted upon continuing the coinage of

gold along with that of the rupee,²⁸ but stoutly refused to deviate from

the system of double legal tender at a fixed ratio prevalent in its

territories,²⁹ notwithstanding the repeated remonstrance’s addressed by

the Court.³⁰ The Government of Bengal clung to the bimetallic standard

with equal tenacity. Rather than demonetise the gold mohur it took

steps to alter its standard³¹ by reducing its pure contents³² from

189·4037 to 187·651 troy [pg 20] grs., so as to re-establish a

bimetallic system on the basis of the ratio adopted by Madras in 1818.

So great was its adherence to the bimetallic standard that in 1833 it

undertook to alter³³ the weight and fineness of the Sicca rupee to 196

grs. troy and 176 grs. fine, probably to rectify a likely divergence

between the legal and the market ratios of the mohur to the rupee³⁴.

²⁸ The Court of Directors were willing to permit the coinage and

circulation of gold _unlinked_ to the rupee, for they had observed

in their Despatch:—

“16. Although we are fully satisfied of the propriety of the

silver rupee being the principal measure of value and the money of

account, yet we are by no means desirous of checking the

circulation of gold, but of establishing a gold coin on a

principle fitted for general use. This coin in our opinion should

be called a gold rupee and be made of the same standard as the

silver rupee.”

²⁹ Cf. Fort St. George Public Consultations of August 19, 1817,

particularly the letter of the Accountant-General entered thereon.

³⁰ Cf. The Public Despatches to Madras dated March 6, 1810; July 10,

1811; and June 12, 1816.

³¹ Preamble to the Bengal Regulation XIV of 1818.

³² It, however, increased its weight from 190·895 to 204·710 troy

grs.

³³ Bengal Regulation VII of 1833.

³⁴ It may be that this alteration was also intended to make the Sicca

rupee eleven-twelfths fine.

But in another direction the Government in India wanted to go further

than the Court desired. The Court thought a uniform currency (i.e. a

currency composed of like but independent units) was all that India

needed. Indeed, they had given the Governments to understand that they

did not wish for more in the matter of simplification of currency and

were perfectly willing to allow the Sicca and the mohur to remain as

they were, unassimilated.³⁵ A uniform currency was no doubt a great

advance on the order of things such as was left by the successors of the

Moghuls. But that was not enough, and the needs of the situation

demanded a common currency based on a single unit in place of a uniform

currency. Under the system of uniform currency each Presidency coined

its own money, and the money coined at the Mints of the other

Presidencies was not legal tender in its territories except at the Mint.

This monetary independence would not have been very harmful if there had

existed also financial independence between the three Presidencies. As

a matter of fact, although each Presidency had its own fiscal system,

yet they depended upon one another for the finance of their deficits.

There was a regular system of “supply” between them, and the surplus in

one was being constantly drawn upon to meet the deficits in others. In

the absence of a common currency this resource operation was

considerably hampered. The difficulties caused by the absence of a

common currency in the way of the “supply” operation made themselves

felt in two different ways. Not being able to use as legal tender the

money of other Presidencies, each was [pg 21] obliged to lock up, to the

disadvantage of commerce, large working balances in order to be

self-sufficient.³⁶ The very system which imposed the necessity of large

balances also rendered relief from other Presidencies less efficacious.

For the supply was of necessity in the form of the currency of the

Presidency which granted it, and before it could be utilised it had to

be re-coined into the currency of the needy Presidency. Besides the

loss on re-coinage, such a system obviously involved inconvenience to

merchants and embarrassment to the Government.³⁷

³⁵ Cf. Despatch to Bengal dated March 11, 1829.

³⁶ The Accountant-General of Bengal, in a letter to the Calcutta Mint

Committee, dated November 21, 1823 wrote:—

“Par. 32. The amount of the balance must also necessarily depend

upon the state of the currency. If the Madras, Bombay, and

Furrukabad rupees instead of differing in weight and intrinsic

value were coined of one standard weight and value bearing one

inscription and in no way differing, the surplus of one Presidency

would at all times be available for the deficiency of another,

without passing through the Mint, and the balance of India might

be reduced in proportion to the increased availability of currency

for the disbursements of the three Presidencies” (Bombay Financial

Consultations, February 25, 1824).

³⁷ The evil of the system had already made itself felt in Bombay,

where the Government had been obliged by a Proclamation dated

April 9, 1824, to declare the Furrukabad rupee of 1819 standard as

legal tender within its territories on a par with the Bombay

rupee, in order to facilitate the supply operation from Bengal.

Cf. Bombay Financial Consultations, dated April 14, 1824.

At the end of 1833, therefore, the position was that the Court desired

to have a uniform currency with a single standard of silver, while the

authorities in India wished for a common currency with a bimetallic

standard. Notwithstanding these divergent views, the actual state of

the currency might have continued as it was without any substantial

alteration either way. But the year 1833 saw an important

constitutional change in the administrative relations between the three

Presidential Governments in India. In that year by an Act of

Parliament³⁸ there was set up an Imperial system of administration with

a centralisation of all legislative and executive authority over the

whole of India. This change in the administrative system, perforce,

called forth a change in the prevailing monetary systems. [pg 22] It

required local coinages to be replaced by Imperial coinage. In other

words, it favoured the cause of a common currency as against that of a

mere uniform currency. The authorities in India were not slow to

realise the force of events. The Imperial Government set up by

Parliament was not content to act the part of the Dewans or agents of

the Moghuls, as the British had theretofore done, and did not like that

coins should be issued in the name of the defunct Moghul emperors who

had ceased to govern. It was anxious to throw off the false garb³⁹ and

issue an Imperial coinage in its own name, which being common to the

whole of India would convey its common sway. Accordingly, an early

opportunity was taken to give effect to this policy. By an Act of the

Imperial Government (XVII of 1835) a common currency was introduced for

the whole of India, as the sole legal tender. But the Imperial

Government went beyond and, as if by way of concession to the Court—for

the Court did most vehemently protest against this common currency in so

far as it superseded the Sicca rupee⁴⁰—legislated “_that no gold coin

shall henceforward be a legal tender of payment in any of the

territories of the East India Company_.”⁴¹

That an Imperial Administration should have been by force of necessity

led to the establishment of a common currency for the whole of India is

quite conceivable. But it is not clear why it should have abrogated the

bimetallic system after having maintained it for so long. Indeed, when

it is recalled how the authorities had previously set their faces

against the destruction of the bimetallic system, and how careful they

were not to allow their coinage reforms to disturb it any more violently

than they could help, the provision of the Act demonetising gold was a

grim surprise. However, for the sudden _volte-face_ displayed therein,

the Currency Act (XVII of 1835) will ever remain memorable in the annals

of the Indian history. It marked [pg 23] the culminating-point of a

long and arduous process of monetary reform and placed India on a silver

monometallic basis with a rupee weighing 180 grs. troy and containing

165 grs. fine as the common currency and sole legal tender throughout

the country.

³⁸ 3 & 4 Will, IV, c; 85.

³⁹ Cf. the sentiments of Tucker in his _Memorials of Indian

Government_ (ed. by Kaye), 1853, pp. 17–19.

⁴⁰ Cf. their Financial Despatch to India, No. 9, dated July 27, 1836.

⁴¹ Section 9 of Act XVII of 1835.

No piece of British India legislation has led to a greater discontent in

later years than this Act XVII of 1835. In so far as the Act abrogated

the bimetallic system, it has been viewed with a surprising degree of

equanimity. Not all its critics, however, are aware⁴² that what the Act

primarily decreed was a substitution of bimetallism by monometallism.

The commonly entertained view of the Act seems to be that it replaced a

gold standard by a silver standard. But even if the truth were more

generally known, it would not justify any hostile attitude towards the

measure on that score. For what would have been the consequences to

India of the gold discoveries of California and Australia in the middle

of the nineteenth century if she had preserved her bimetallic system? It

is well known how this increase in the production of gold relatively to

that of silver led to a divergence in the mint and the market ratios of

the two metals after the year 1850. The under-valuation of silver,

though not very great, was great enough to confront the bimetallic

countries with a serious situation in which the silver currency,

including the small change, was rapidly passing out of circulation. The

United States⁴³ was obliged by the law of 1853 to reduce the standard of

its small silver coins sufficiently to keep them dollar for dollar below

their gold value in order to keep them in circulation. France, Belgium,

Switzerland, and Italy, which had a uniform currency based on the

bimetallic model of the French with reciprocal legal tender⁴⁴ were faced

with [pg 24] similar difficulties. Lest a separatist policy on the part

of each nation,⁴⁵ to protect their silver currency and particularly the

small change, should disrupt the monetary harmony prevailing among them

all, they were compelled to meet in a convention, dated November 20,

1865, which required the parties, since collectively called the Latin

Union, to lower, in the order to maintain them in circulation, the

silver pieces of 2 francs, 1 franc, 50 centimes and 20 centimes from a

standard of 900 ⁄ 1000 fine to 835 ⁄ 1000 and to make them subsidiary

coins.⁴⁶ It is true that the Government of India also came in for

trouble as a result of this disturbance in the relative [pg 25] value of

gold and silver, but that trouble was due to its own silly act.⁴⁷ The

currency law of 1835 had not closed the Mints to the free coinage of

gold, probably because the seignorage on the coinage of gold was a

source of revenue which the Government did not like to forego. But as

gold was not legal tender, no gold was brought to the Mint for coinage,

and the Government revenue from seignorage fell off. To avoid this loss

of revenue the Government began to take steps to encourage the coinage

of gold. In the first place, it reduced the seignorage⁴⁸ in 1837 from 2

per cent. to 1 per cent. But even this measure was not sufficient to

induce people to bring gold to the Mint, and consequently the revenue

from seignorage failed to increase. As a further step in the same

direction the Government issued a Proclamation on January 13, 1841,

authorising the officers in charge of public treasuries to receive the

gold coins at the rate of 1 gold mohur equal to 15 silver rupees. For

some time no gold was received, as at the rate prescribed by the

Proclamation gold was undervalued.⁴⁹ But the Australian and Californian

gold discoveries altered the situation entirely. The gold mohur, which

was undervalued at Rs. 15, became overvalued, and the Government, which

was at one time eager to receive gold, was alarmed at its influx. By

adopting the course it did of declaring gold no longer legal tender, and

yet undertaking to receive it in liquidation of Government demands, it

laid itself under the disadvantage of being open to be embarrassed with

a coin which was of no use and must ordinarily have been paid for above

its value. Realising its position, it left aside all considerations of

augmenting revenue by increased coinage, and promptly issued on December

25, 1852, another Proclamation withdrawing that of 1841. Whether it

would not have been better to have escaped the embarrassment by making

gold general legal tender than depriving it of its partial legal-tender

power is another matter. But, in so far as India was saved the trials

and tribulations undergone by the bimetallic countries to preserve the

silver part of their [pg 26] currency, the abrogation of bimetallism was

by no means a small advantage. For the measure had the virtue of

forearming the country against changes which, though not seen at the

time, soon made themselves felt.

⁴² To mention only one, cf. S. V. Doraiswami, _Indian Currency_,

Madras, 1915. _passim_.

⁴³ Laughlin, J. L, _History of Bimetallism_, New York, 1886, pp.

79–83.

⁴⁴ The cultural influence of France had led the other countries of

Latin origin to adopt the French monetary system. The political

independence acquired by Belgium in 1831 was followed by a change

in her monetary system. By the law of 1832, Belgium from a

monetary point of view, became a satellite of France. By that law

she adopted in its entirety the monetary system of France, and

even went so far as to give the French gold pieces of 20 and 40

francs and to the French silver 5-franc pieces the power of legal

tender in Belgium. In Switzerland, Art. 36 of the Constitution of

1848 had vested in the Federal Government the authority to coin

money. The law of May 7, 1850, adopted the French monetary system

for Switzerland: Art. 8 declared “that such foreign silver coins

as were minted in sufficiently close proximity with the French

system might be granted a legal status as regular media for the

payment of debts in Switzerland.” The various Italian States,

prior to unification, had, like the Swiss Cantons, each its own

currency. But with the desire for uniformity of coinage

consequent upon unification there arose a problem either of

selecting one of the old systems or of adopting a new one which

would be common to the whole country. Some form of a grateful

memorial to France was uppermost in the minds of the Italians for

the help the French gave in the matter of their independence, and

the adoption of the French monetary system for Italy was deemed to

serve the purpose. Fortunately, Sardinia already possessed the

French system, and the law of August 24, 1862, extended it to the

whole of Italy, with the lire as the unit, and also conferred

legal-tender power on the coins of France, Belgium, and

Switzerland. Cf. H. P. Willis, _History of the Latin Monetary

Union_, Chicago, 1910, pp. 15, 27, 36–37.

⁴⁵ Switzerland was the first to reduce the amount of silver in her

small coins in order to keep them in circulation. But these Swiss

coins of reduced fineness crossed the national frontier and, as

they were legal tender in other countries of Latin origin, began

to displace their dearer coins of similar denominations, which

contained more silver but which passed current at the same nominal

value. This brought forth a decree in France (April 14, 1864)

which revoked the legal-tender power of these debased Swiss coins

in French territory. This, of course, compelled resort to a

concerted action on the part of all the Latin countries concerned.

⁴⁶ For more particulars of the Latin Union, cf. Laughlin, op. cit.,

pp. 146–9.

⁴⁷ Cf. H. of C. Return, East Indian (Coinage) 254 of 1860.

⁴⁸ _Ibid_., p. 8.

⁴⁹ _Ibid_., p. 10.

The abrogation of bimetallism in India accomplished by the Act of 1835,

cannot therefore be made a ground for censure. But it is open to

argument that a condemnation of bimetallism is not _per se_ a

justification of silver monometallism. If it was to be monometallism it

might well have been gold monometallism. In fact, the preference for

silver monometallism is not a little odd when it is recalled that Lord

Liverpool, the advocate of monometallism,⁵⁰ whose doctrines the Court

had sought to apply to India, had prescribed gold monometallism for

similar currency evils then prevalent in England. That the Court should

have deviated from their guide in this particular has naturally excited

a great deal of hostile comment as to the propriety of this grave

departure.⁵¹ At the outset any appeal to ulterior motives must be

baseless, for Lord Liverpool was not a “gold bug,” nor was the Court

composed of “silver men.” As a matter of fact, neither of them at all

considered the question from the standpoint as to which was a better

standard of value, gold or silver. Indeed, in so far as that was at all

a consideration worth attending to, the choice of the Court, according

to the opinion of the time, was undoubtedly a better one than that of

Lord Liverpool. Not only were all the theorists, such as Locke, Harris,

and Petty, in favour of silver as the standard of value, but the

practice of the whole world was also in favour of silver. No doubt

England had placed herself on a gold basis in 1816. But that Act, far

from closing the English Mint to the free coinage of silver, left it to

be opened by a Royal Proclamation.⁵² The Proclamation, it is true, was

never issued, but it is not to be supposed that therefore Englishmen [pg

27] of the time had regarded the question of the standard as a settled

issue. The crisis of 1825 showed that the gold standard furnished too

narrow a basis for the English currency system to work smoothly, and, in

the expert opinion of the time,⁵³ the gold standard, far from being the

cause of England’s commercial superiority, was rather a hindrance to her

prosperity, as it cut her off from the rest of the world, which was

mostly on a silver basis. Even the British statesmen of the time had no

decided preference for the gold standard. In 1826 Huskisson actually

proposed that Government should issue silver certificates of full legal

tender.⁵⁴ Even as late as 1844 the question of the standard was far from

being settled, for we find Peel in his Memorandum⁵⁵ to the Cabinet

discussing the possibility of abandoning the gold standard in favour of

the silver or a bimetallic standard without any compunction or

predilection one way or the other. The difficulties of fiscal isolation

were evidently not so insuperable as to compel a change of the standard,

but they were great enough to force Peel to introduce his famous proviso

embodying the Huskisson plan in part in the Bank Charter Act of 1844,

permitting the issue of notes against silver to the extent of one-fourth

of the total issues.⁵⁶ Indeed, so great was the universal faith in the

stability of silver that Holland changed in 1847 from what was

practically a gold monometallism⁵⁷ to silver monometallism because her

statesmen believed that

“it had proved disastrous to the commercial and industrial

interests of Holland to have a monetary system identical with

that of England, whose financial revulsions, after its adoption

[pg 28] of the gold standard, had been more frequent and more

severe than in any other country, and whose injurious effects

were felt in Holland scarcely less than in England. They

maintained that the adoption of the silver standard would

prevent England from disturbing the internal trade of Holland by

draining off its money during such revulsions and would secure

immunity from evils which did not originate in and for which

Holland was not responsible.”⁵⁸

But stability was not the ground on which either the Court or Lord

Liverpool made their choice of a standard metal to rest. If that had

been the case, both probably would have selected silver. As it was, the

difference in the choice of the two parties was only superficial.

Indeed, the Court differed from Lord Liverpool, not because of any

ulterior motives, but because they were both agreed on a fundamental

proposition that not stability but popular preference should be the

deciding factor in the choice of a standard metal. Their differences

proceeded logically from the agreement. For on analysing the

composition of the currency it was found that in England it was largely

composed of gold and in India it was largely composed of silver.

Granting their common premise, it is easy to account why gold was

selected for England by Lord Liverpool and silver for India by the

Court. Whether the actual composition of the currency is an evidence of

popular preference cannot, of course, be so dogmatically asserted as was

done by the Court and Lord Liverpool. So far as England is concerned,

the interpretation of Lord Liverpool has been questioned by the great

economist David Ricardo. In his _High Price of Bullion_, Ricardo

wrote:—

⁵⁰ The author of _A Treatise on the Coinage of the Realm_ was

anticipated by Sir John Shore, the Governor of Bengal, in his

Minute, op. cit., par. 55.

⁵¹ Cf. H. M. Dunning, _Indian Currency_, 1898, _passim_; also S. V.

Doraiswami, op. cit., _passim_.

⁵² Cf. Dana Norton, _The Silver Pound_, 1887, p. 161.

⁵³ Cf. the evidence of A. Baring (afterwards Lord Ashuburton) before

the Committee for Coin (1828), H. of C. Return 31 of 1830.

⁵⁴ See his Memorandum to the Cabinet printed by Gibbs, _A Colloquy on

Currency_ (1894), Appendix, p. xlvii.

⁵⁵ For which, see Andréadès, _History of the Bank of England_,

Supplement I.

⁵⁶ For the original purpose of this defunct proviso, _see_ Peel’s

Speech on the Bank Charter Act, dated May 20, 1844, Hansard, Vol.

LXXIV, pp. 1334–35.

⁵⁷ In theory Holland had adopted bimetallism in 1816. But the legal

ratio of 15·873 to 1 had undervalued silver so much that it had

made gold the chief circulating medium of Holland.

⁵⁸ _Report of the U. S. Silver Commission of_ 1876, p. 68.

“For many reasons given by Lord Liverpool, it appears proved

beyond dispute that gold coin has been for near a century the

principal measure of value; but this is, I think, to be

attributed to the inaccurate determination of the mint

proportions. Gold has been valued too high; no silver can

therefore remain in circulation which is of its standard weight.

If a new regulation were to take place, and silver be valued too

high … gold would then disappear, and silver become the standard

money.”⁵⁹ [pg 29]

⁵⁹ _Works_, p. 271

And it is possible that mint proportions rather than popular

preference⁶⁰ could have equally well accounted for the preponderance of

silver in India.⁶¹

⁶⁰ Mr. Dodwell, in his otherwise excellent article, op. cit., seems

to convey that silver was substituted for gold in Southern India

as a result of the natural preference of the people for the former

metal. So eager is he in meeting the contentions of writers like

Mr. Doraiswami that he fails to see how his own facts controvert

his own thesis.

⁶¹ The total coinage of India from 1800 to 1835 was, according to Mr.

F. C. Harrison’s estimate in the _Calcutta Review_, July, 1892:—

────────────────────────────────

Gold 3,845,000 ounces

Silver 3,781,250,000 ounces

────────────────────────────────

N.B.—In the case of silver, rupees are converted into ounces for

comparison.

Whether any other criterion besides popular preference could have led

the Court to adopt gold monometallism is a moot question. Suffice it to

say that the adoption of silver monometallism, though well supported at

the time when the Act was passed, soon after proved to be a measure

quite inadequate to the needs of the country. It is noteworthy that

just about this time great changes were taking place in the economy of

the Indian people. Such a one was a change from kind economy to cash

economy. Among the chief causes contributory to this transformation the

first place must be given to the British system of revenue and finance.

Its effects in shifting Indian society on to a cash nexus have not been

sufficiently realized,⁶² although they have been very real. Under the

native rulers most payments were in kind. The standing military force

kept and regularly paid by the Government was small. The bulk of the

troops consisted of a kind of militia furnished by Jageerdars and other

landlords, and the troops or retainers of these feudatories were in

great measure maintained on the grain, forage, and other supplies

furnished by the districts in which they were located. The hereditary

revenue and police officers were generally paid by grants of land on

tenure of service. Wages of farm servants and labourers were in their

turn distributed in grain. Most of its officers being paid in kind, the

State collected very little [pg 30] of its taxes in cash. The

innovations made by the British in this rude revenue and fiscal system

were of the most sweeping character. As territory after territory

passed under the sway of the British, the first step taken was to

substitute in place of the rural militia of the feudatories a regularly

constituted and well-disciplined standing army located at different

military stations, paid in cash; in civil employ, as in military, the

former revenue and police officers with their followers, who paid

themselves by perquisites and other indirect gains received in kind,

were replaced by a host of revenue collectors and magistrates with their

extensive staff, all paid in current coin. The payments to the army,

police, and other officials were not the only payments which the British

Government had placed on a money basis. Besides these charges, there

were others which were quite unknown to native Governments, such as the

“Home Charges” and “Interest on Public Debt,” all on a cash basis. The

State, having undertaken to pay in cash, was compelled to realize all

its taxes in cash, and as each citizen was bound to pay in cash he in

his turn stipulated to receive nothing but cash, so that the entire

structure of the society underwent a complete transformation.

⁶² Cf. the article “The Silver Question as regards India,” in the

_Bombay Quarterly Review_, April, 1857.

Another important change that took place in the economy of the Indian

people about this time was the enormous increase of trade. For a

considerable period the British tariff policy and the navigation laws

had put a virtual check on the expansion of Indian trade. England

compelled India to receive her cotton and other manufactures at nearly

nominal (2½ per cent.) duties, while at the same time she prohibited the

entry of such Indian goods as competed with hers within her territories

by prohibitory duties ranging from 50 to 500 per cent. Not only was no

reciprocity shown by England to India, but she made a discrimination in

favour of her colonies in the case of such goods as competed with

theirs. A great agitation was carried on against this unfair

treatment,⁶³ and finally Sir Robert Peel admitted [pg 31] Indian produce

to the low duties levied by the reformed tariff of 1842. The repeal of

the navigation laws gave further impetus to the expansion of Indian

commerce. Along with this the demand for Indian produce had also been

growing. The Crimean War of 1854 cut off the Russian supplies, the

place of which was taken by Indian produce, and the failure of the silk

crop in 1853 throughout Europe led to the demand for Asiatic, including

Indian, silks.

⁶³ Cf. Debates at the East India House on Duties affecting Indian

Commerce, _vide_ the _Asiatic Journal and Monthly Register for

British and Foreign India, China, Australia_ (London, New Series,

Vol. XXXVII, January, and Vol. XXXVIII, May, 1842).

The effect of these two changes on the currency situation is obvious.

Both called forth an increased demand for cash. But cash was the one

thing most difficult to obtain. India does not produce precious metals

in any considerable quantity. She has had to depend upon her trade for

obtaining them. Since the advent of the European Powers, however, the

country was not able to draw enough of the precious metals. Owing to

the prohibitions on the export of precious metals then prevalent in

Europe,⁶⁴ one avenue for obtaining them was closed. But there was

little chance of obtaining precious metals from Europe, even in the

absence of such prohibition; indeed, precious metals did not flow to

India when such prohibitions were withdrawn.⁶⁵ The reason of the check

to the inflow of precious metals was well pointed out by Mr. Petrie in

his Minute of November, 1799, to the Madras Committee of Reform:⁶⁶ until

their territorial acquisitions the Europeans

⁶⁴ For the history of those imposed by England, cf. Ruding, _Annals

of Coinage_, 3rd ed. Vol. I, pp. 353–4, 372, 376, 386–7; Thomas

Violet, _An Appeal to Cæsar_, London, 1660, p. 26.

⁶⁵ The following figures of the export of precious metals to India

from England are interesting:—

───────────────────────────────────────────────────

1652–1703 £1,131,653 (from Mr. Petrie’s Minute).

1747–1795 £1,519,654 (from Mr. Petrie’s Minute).

───────────────────────────────────────────────────

⁶⁶ For the Proceedings of the Committee, see _India Office Records_,

“Home Miscellaneous” Series, Vol. 456.

“purchased the manufactures of India with the metals of Europe:

but they were henceforward to make these purchases with gold and

silver of India, the revenues supplied the place of foreign

bullion and paid the native the price of his industry with his

own money. At first this revolution in the principles of

commerce was but little felt, but when [pg 32] opulent and

extensive dominions were acquired by the English, when the

success of war and commercial rivalship had given them so

decided a superiority over the other European nations as to

engross the whole of the commerce of the East, when a revenue

amounting to millions per annum was to be remitted to Europe in

the manufactures of the East, then were the effects of this

revolution severely felt in every part of India. Deprived of so

copious a stream, the river rapidly retired from its banks and

ceased to fertilise the adjacent fields with overflowing water.”

The only way open when the prohibitions were withdrawn to obtain

precious metals was to send more goods than this amount of tribute, so

that the balance might bring them in. This became possible when Peel

admitted Indian goods to low tariff, and the country was for the first

time able to draw in a sufficient quantity of precious metals to sustain

her growing needs. But this ease in the supply of precious metals to

serve as currency was short-lived. The difficulties after 1850,

however, were not due to any hindrance in the way of India’s obtaining

the precious metals. Far from being hindered, the export and import of

precious metals was entirely free, and India’s ability to procure them

was equally great. Neither were the difficulties due to any want of

precious metals, for, as a matter of fact, the increase in the precious

metals after 1850 was far from being small. The difficulty was of

India’s own making, and was due to her not having based her currency on

that precious metal, which it was easy to obtain. The Act of 1835 had

placed India on an exclusive silver basis. But, unfortunately, it so

happened that after 1850, though the total production of the precious

metals had increased, that of silver had not kept pace with the needs of

the world, a greater part of which was then on a silver basis, so that

as a result of her currency law India found herself in an embarrassing

position of an expanding trade with a contracting currency, as is shown

on the opposite page.

On the face of it, it seems that there need have been no monetary

stringency. The import of silver was large, and [pg 33]

TABLE IV

_Trade and Currency_⁶⁸

───────────────────────────────────────────────────────────────────────────────────────────────────────────────────────────────

Merchandise. Treasure. Total Excess (+) or Defect Annual

Net Coinage (―) of Coinage on Production (in

Imports of Net Imports of £, 00,000

Years of omitted) of

───────────────────────────────────────────────────────────────────────────────────────────────────────────────────────

Imports. Exports. Silver. Gold. Silver. Gold. Silver. £ Gold. £ Gold. Silver.

£ £ £ £ £ £

1850–51 11,558,789 18,164,150 2,117,225 1,153,294 3,557,906 123,717 +1,440,681 −1,029,577 8,9 7,8

1851–52 12,240,490 19,879,406 2,865,257 1,267,613 5,170,014 62,553 +2,304,657 −1,205,060 13,5 8,0

1852–53 10,070,863 20,464,633 3,605,024 1,172,301 5,902,648 Nil +2,297,624 −1,172,301 36,6 8,1

1853–54 11,122,659 19,295,139 2,305,744 1,061,443 5,888,217 145,679 +3,582,473 −915,764 31,1 8,1

1854–55 12,742,671 18,927,222 29,600 731,490 1,890,055 2,676 +1,860,455 −728,814 25,5 8,1

1855–56 13,943,494 23,038,259 8,194,375 2,506,245 7,322,871 167,863 +871,504 −2,338,382 27,0 8,1

1856–57 14,194,587 25,338,451 11,073,247 2,091,214 11,220,014 128,302 +146,767 −1,962,912 29,5 8,2

1857–58 15,277,629 27,456,036 12,218,948 2,783,073 12,655,308 43,783 +436,360 −2,739,290 26,7 8,1

1858–59 21,728,579 29,862,871 7,728,342 4,426,453 6,641,548 132,273 −1,086,794 −4,294,180 24,9 8,1

1859–60 24,265,140 27,960,203 11,147,563 4,284,234 10,753,068 64,307 −394,495 −4,219,927 25,0 8,2

⁶⁸ Prepared from figures given in Palgrave’s “Memorandum on Currency

and Standard of Value,” Appendix B to _Third Report of the Royal

Commission on Depression of Trade and Industry_. C4797 of 1886.

Figures for the production of gold and silver, which are for

calendar years, are added from the “Silver Question and the Gold

Question,” by R. Barclay.

[pg 34] so was the coinage of it. Why then should there have been any

stringency at all? The answer to this question is not far to seek. If

the amount of silver coined had been retained in circulation it is

possible that the stringency could not have arisen. India has long been

notoriously the sink of the precious metals. But in interpreting this

phenomenon, it is necessary to bear in mind the caution given by Mr.

Cassels that

“its silver coinage has not only had to satisfy the requirements

of commerce as the medium of exchange, but it has to supply a

sufficiency of material to the silversmith and the jeweller.

The Mint has been pitted against the smelting-pot, and the coin

produced by so much patience and skill by the one has been

rapidly reduced into bangles by the other.”⁶⁷

⁶⁷ Minute on Gold Currency for India, dated December 8, 1863, in the

_Report of the Bombay Chamber of Commerce_, 1863–64. App. I, p.

189.

Now it will be seen from the figures given that all the import of silver

was coined and used up for currency purposes. Very little or nothing

was left over for the industrial and social consumption of the people.

That being the case, it is obvious that a large part of the coined

silver must have been abstracted from monetary to non-monetary purposes.

The hidden source of this monetary stringency thus becomes evident. To

men of the time it was as clear as daylight that it was the rate of

absorption of currency from monetary to non-monetary purposes that was

responsible as to why

“notwithstanding such large importations [to quote from the same

authority], the demand for money has so far exceeded … that

serious embarrassment has ensued, and business has almost come

to a stand from the scarcity of circulating medium. As fast as

rupees have been coined they have been taken into the interior

and have there disappeared from circulation, either in the

Indian substitute for stocking-foot or in the smelting-pot for

conversion into bangles.”⁶⁹

⁶⁹ Minute on Gold Currency for India, dated December 1, 1863. Report,

op. cit., p. 184.

The one way open was to have caused such additional imports of silver as

would have sufficed both for the monetary [pg 35] as well as the

non-monetary needs of the country. But the imports of silver were

probably already at their highest. For, as was argued by Mr. Cassels,

“the annual production of silver of the whole world does not

exceed ten million sterling. During the last few years,

therefore, India alone has annually taken, and to a great extent

absorbed, more of the metal than has been produced by the whole

world. It is clear that this cannot long continue without

producing serious embarrassment. Either the European markets

will be unable or unwilling to supply us, or the value of silver

will rise to an extravagant extent. Under such circumstances it

is not difficult to foresee that the present crisis must

continually recur, and the commerce in this country must be

periodically, if not permanently, crippled by the scarcity of

the circulating medium.”⁷⁰

⁷⁰ Report, op. cit. p. 189.

Had there been any credit media the contraction of currency might not

have been felt as severely as it was. But there was no credit money

worth the name. The Government issued interest-bearing Treasury notes,

which formed a part of the circulating medium of the country. But, apart

from being insignificant in amount,⁷¹ these Treasury notes had

⁷¹ Amount of Indian Treasury notes outstanding:—

─────────────────────────────────────────────────────────────────

On April 30, 1850 £804,988

On April 30, 1851 £802,036 Extracted from Table No. 2 of

On April 30, 1852 £770,301 the Return relating to East

On April 30, 1853 £850,432 India Revenues, etc.,

On April 30, 1854 £850,627 Parliamentary Paper 201, VIII,

On April 30, 1855 £889,875 1858.

On April 30, 1856 £967,711

─────────────────────────────────────────────────────────────────

“proved a failure, owing, firstly, to the condition that they

would not be received in payment of revenue for twelve months;

secondly, they would be paid off or received only where issued,

so that as the issues were confined to Calcutta, Madras and

Bombay, their use and employment for purposes of circulation

were limited to those cities … and lastly, because their

amounts were too large and their period of running at interest

too short.”⁷² [pg 36]

⁷² _How to Meet the Financial Difficulties of India_, by A. C. B.,

London, 1859, p. 13. This is in many ways a most remarkable

pamphlet which suggested many of the later reforms in Indian

currency and banking.

Nor was banking so widely developed as to satisfy the currency needs of

commerce. The chief hindrance to its growth was the attitude of the

Court. Being itself a commercial body largely dealing in exchange, the

Court was averse to the development of banking institutions lest they

should prove rivals. As this traditional policy of hostility continued

even after the Court had ceased to be a body of merchant princes, banks

did not grow with the growth of trade. Indeed, as late as 1856 banks in

India numbered few and their issues were small, as shown in the table on

opposite page.

The insufficiency of silver and the want of credit currency caused such

an embarrassment to trade that there grew up a change in the attitude

towards the Currency Act of 1835, and people, for once, began to ask

whether, although it was well to have changed from bimetallism to

monometallism, it would not have been better to have preferred gold

monometallism to silver monometallism. As more and more of gold was

imported and coined the stronger grew the demand for giving it a legal

status in the existing system of Indian currency.⁷³ All were agreed on

the principle of a gold currency: whatever difference there was, was

confined to the method of its adoption. The introduction of gold on a

bimetallic basis was out of the question, for the Government refused to

make what it deemed to be the “hopeless attempt” to fix the value of

gold and silver and compel their acceptance at that value.⁷⁴ The

projects which the Government was willing to consider⁷⁵ were: (1) to

introduce the “sovereign” or some other gold coin and to let it

circulate at its market price from day to day as measured in silver; (2)

to issue a new gold coin, bearing the exact value of a given number of

[pg 37]

⁷³ The matter was first broached by the native shroffs and merchants

of Calcutta in April, 1859, in a letter to the President of the

Bengal Chamber of Commerce. Both agreed to urge upon the

Government the necessity of a gold currency in India. Cf. _Papers

relating to the Introduction of a Gold Currency in India_,

Calcutta, 1866, pp. 1–3.

⁷⁴ _Ibid._, p. 6.

⁷⁵ Cf. Minute by the Rt. Hon. James Wilson, dated December 25, 1859,

_ibid._, p. 23.

TABLE V

_Banks in India_⁷⁶

────────────────────────────────────────────────────────────────────────────────────────────────────────────────────────────

Name Capital. Notes Specie

of Year Head Branches ─────────────────────────── in in Bills under

the of Offices and Subscribed. Paid Circulation. Coffers. Discount. £

Bank Establishment Agencies £ up. £ £

Bank 1809 Calcutta 1,070,000 1,070,000 1,714,771 851,964 125,251

Bengal

Bank 1843 Madras 300,000 300,000 123,719 139,960 59,871

Madras

Bank 1840 Bombay 522,000 522,000 571,089 240,073 195,836

Bombay

Oriental 1851 1,215,000 1,215,000 199,279 1,146,529 2,918,399

Bank

Agra and 1833 Calcutta Agra, 700,000 700,000 — 74,362 —

U.P. Madras,

Lahore,

Canton,

and

London

N. W. Bank 1844 Calcutta Bombay, 220,560 220,000 — — —

Simla,

Mussowri

and

Agra.

Agencies

in Delhi

and

Cawnpore

London & 1854 250,000 — 325,000 — —

Eastern Bank

Commercial 1854 Bombay Agents 1,000,000 456,000 — — —

Bank in

London,

Calcutta,

Canton,

Shanghai

Delhi Bank 1844 Delhi Agents in — 180,000 — — —

London,

Calcutta,

Bombay

and

Madras

Simla Bank 1844 — 63,850 — — —

Dacca Bank 1846 30,000 — — — —

Mercantile Bombay London, 500,000 328,826 777,156 77,239 109,547

Bank Calcutta,

Colombo,

Kandy,

Canton,

and

Shanghai

India, China had not commenced business

and

Australian

Bank

⁷⁶ R. M. Martin, _The Indian Empire_, Vol. I, p. 565. N.B.—The table

in original does not specify dates, but internal evidence shows

that it is about 1856.

[pg 38] rupees, and make it a legal tender for a limited period, when it

might be readjusted and again valued, and made a legal tender for a

similar period at the new rate; (3) to introduce the English sovereign

as a legal tender for Rs. 10, but limited in legal tender to the amount

of Rs. 20 or two sovereigns; or (4) to substitute a gold standard for

the silver standard.

Of these projects the first three were evidently unsafe as currency

expedients. Fixity of value between the various components of the

currency is an essential requisite in a well-regulated monetary system.

Each coin must define a fixed value, in terms of the others realizable

by the most untutored intellect. When it ceases to do so it becomes a

mere commodity, the value of which fluctuates with the fluctuations of

the market. This criterion ruled out the first two projects. To have

introduced a coin as money, the value of which could not be vouched

for—as would have been the case under the first project—from one day to

another, apart from the trouble of computing and ascertaining the

fluctuations, would have been a source of such embarrassment that the

Government, it must be said, acted wisely in not adopting it. There was

no saving grace in the second project to recommend its adoption in

preference to the first. If it had been adopted the result would have

been that during the period that a rate was fixed, gold would have been

forced into circulation supposing that its market value was lower, and

at the end of the year, if it was known that the rate would be revised

and the value of the coin be reduced in conformity with the fall of

gold, a general struggle to get rid of the overrated gold coin and shift

the inevitable loss to the shoulders of others would have certainly

ensued. The third was a somewhat strange proposal. It is possible with

a low-priced metal to strike coins of less than full value for the

purposes of small payments and limit their tender. But this is not

possible with a high-priced metal, the _raison d’être_ of which is to

facilitate large transactions. The objections to the plan could hardly

be concealed. So long as gold was undervalued it would not circulate at

all. But once it became overvalued owing to changes in [pg 39] the

market ratio the rupee would go out of circulation, and shopkeepers and

traders would remain possessed of a coin which would be of no use in

liquidating large transactions.

The only project free from these faults was the adoption of a gold

standard, with silver as a subsidiary currency. The strongest argument

the Government could oppose to this demand was that “in a country where

all obligations have been contracted to be paid in silver, to make a law

by which they could forcibly be paid in anything else would simply be to

defraud the creditor for the advantage of the debtor, and to break

public faith.”⁷⁷ However sound the argument might have been, it was

hopelessly inadequate to meet the growing demand to place the Indian

currency on an expanding basis. Indeed, it cannot be said that the

Government was really serious in its opposition to a gold currency. For

the strength of its position it relied not so much on the soundness of

its arguments against gold, but on its discovery that a better solution

than a gold currency existed at hand. If what was wanted was a

supplement to the existing currency, then the remedy proposed by the

Government was unassailable. Gold would have been uneconomical and

inconvenient. Silver backed by paper would make the currency

economical, convenient, and expansive. Indeed, the advantages were so

much in favour of the official alternative that this first attempt

against the silver standard resulted not in the establishment of a gold

standard, but in the introduction of a Government paper currency to

supplement the existing silver standard.

⁷⁷ _Ibid._, p. 26.

None the less, the desire for a gold standard on the part of the people

was too great to be altogether ignored, though the demand for it was

supposed to have been met by the alternative measure. The paper

currency, as originally conceived by Mr. Wilson, was a complete

counterblast to the gold agitation. But his successor, Mr. Laing,

differed from him in what he regarded as the “barbarous” exclusion of

gold from Indian currency. He therefore introduced two important

provisos in the original Bill, when the task of [pg 40] carrying it

through fell upon him, owing to the untimely death of Mr. Wilson. One

was to raise the lowest denomination of notes from Rs. 5 to Rs. 20. The

other was

“to authorize the Governor-General in Council from time to time

to direct by order to be published in the Gazettes of Calcutta,

Madras and Bombay, that notes to an extent not exceeding

one-fourth of the total amount of issues represented by coin and

bullion … be issued in exchange for gold coin … or bullion

computed at rates to be fixed by such order …”

The Act which afterwards embodied the Bill adopted the second proviso

_in toto_, and the first after being modified so as to fix Rs. 10 as the

lowest denomination of notes to be issued. Although its general tenor

is clear the immediate aim of the second proviso does not become quite

clear from a perusal of the official papers. The Select Committee on

the Paper Currency Bill seems to have held that the proviso was

innocuous if not good. It thought

“that on special occasions and in particular transactions it

might be a great advantage to the mercantile community to know

that gold could be made available as money at a fixed rate. If,

on the other hand, at the rate fixed gold did not enter into

circulation it would prove that silver, with a secure and

convertible paper currency, gave perfect confidence and answered

all the wants of the trade and of the community, and the

enactment would remain a dead letter and be perfectly harmless.”

But there is no doubt that Mr. Laing looked upon it as an easy means of

making a transition to the gold standard. In his Minute on Currency and

Banking, dated May 7, 1862, he wrote:

“The object of this proviso was simply to leave the door open

for cautious and tentative experiments with regard to the future

use of gold. The importation of gold already exists and is

increasing, and the metal is much appreciated by the native

population as generally to command a premium. … Thus, after a

time, if the use of gold becomes more general, and its value

more fixed, some further step might be taken.” [pg 41]

And such seems to have been the impression of the Secretary of State at

the time, for he understood the force of the recommendation in favour of

issuing notes against gold was that it would “effectually contribute to

the introduction of a gold currency in India.”⁷⁸

⁷⁸ Par. 59 of the Secretary of State’s Despatch, No. 158, dated

September 16, 1862.

But whether conceived as a relief to the mercantile community or as an

avenue for introducing a gold currency the proviso was not put into

effect. The Secretary of State objected⁷⁹ to any action being taken

with regard thereto. In the meantime the paper currency did not prove

the panacea it was avowed to be. The extent it reached and the economy

it effected were comparatively insignificant.

⁷⁹ _See_ par. 64 of his Despatch, _supra_.

TABLE VI

_Extent and Economy of Paper Currency_

───────────────────────────────────────────────────────────────────────

Presidencies. Bullion. Coin. Government Value of

Securities. Notes in

Circulation.

Calcutta on — 1,84,55,922 1,10,44,078 2,95,00,000

Oct. 31, 1863

Madras on — 73,00,000 — 73,00,000

Oct. 31, 1863

Bombay on 1,17,00,000 1,19,00,000 — 2,36,00,000

Jan. 4, 1864

Total 1,17,00,000 3,76,55,022 1,1,44,078 6,04,00,000

As was pointed out by Mr. Cassels⁸⁰ the currency notes, after three

years, had been taken only to the extent of about 6 per cent. of the

whole metallic currency, which was then estimated by Mr. Wilson to be

£100,000,000 in sterling, and that they had actually fulfilled their

primary object of releasing the reproductive capital of the country only

to [pg 42] the extent of a million sterling or 1 per cent. of the whole.

On the other hand, the demand for currency grew apace. Owing to the

demand for Indian cotton in the Liverpool market to take the place of

American cotton, the export of which was stopped during the Civil War,

the growing foreign trade assumed enormous proportions. And as the

paper currency gave no relief the entire stress fell upon silver. The

production of silver, however, was not increasing much faster than it

did previously, and its absorption by India had not slackened. The

inadequacy of a currency medium therefore continued to be felt as

acutely as before, notwithstanding the introduction of a paper currency.

This inadequacy was made good by increased imports of gold. Not only

was gold imported in large quantities, but was employed for monetary

purposes, although it was not legal tender. The fact was brought to the

notice of the Government of India by the Bombay Chamber of Commerce⁸¹ in

a memorial praying for the introduction of a gold currency in India, in

which it was pointed out

⁸⁰ Cf. his letter to the Government of Bombay dated January 1, 1864,

_Vide_ Papers, etc., on the Introduction of Gold in India, pp.

51–69.

⁸¹ _Report of the Bombay Chamber of Commerce_, 1863–64, App. I, p.

206.

“that there is an increasing tendency to the creation of a gold

ingot currency, by the natives of this country, as a rude remedy

for the defects of the existing silver one,”

and

“that gold bars, stamped with the mark of Bombay banks, are for

this purpose circulated in several parts of the country.”

This led to an agitation for requiring the Government to give effect to

the proviso in the Paper Currency Act,⁸² and the movement assumed such

dimensions that it forced the hands of the Government. On this occasion

the plan for effecting the change was boldly conceived. Sir Charles

Trevelyan [pg 43]

⁸² This time the Government was memorialized by all the Chambers of

Commerce—Bengal, Bombay, and Madras. Action was also urged by the

Bombay Association and the Manchester Chamber of Commerce. But the

movement derived its greatest strength from the support of the

Government of Bombay, particularly by Sir William Mansfield’s

famous Minute on Gold Currency for India.

TABLE VII

_Trade and Currency_⁸³

──────────────────────────────────────────────────────────────────────────────────────────────────────────────────────────────

Merchandise. Treasure. Total Excess (+) Annual

Net Coinage of or Defect Production

Imports of (-) of (in £,

Coinage on 00,000

Years Net Imports omitted)

of of

──────────────────────────────────────────────────────────────────────────────────────────────────────────────────────

Imports. Exports. Silver. Gold. Silver. Gold. Silver. Gold. Gold. Silver.

£ £ £ £ £ £ £ £ £ £

1860–61 23,493,716 32,970,605 5,328,009 4,232,569 5,297,150 65,038 −30,859 −4,167,531 23,9 8,2

1861–62 22,320,432 36,317,042 9,086,456 5,184,425 7,470,030 58,667 −1,616,426 −5,125,758 22,8 8,5

1862–63 22,632,384 47,859,645 12,550,155 6,848,156 9,355,405 130,666 −3,194,750 −6,717,490 21,6 9,0

1863–64 27,145,590 65,625,449 12,796,717 8,898,306 11,556,720 54,354 −1,239,997 −8,843,952 21,4 9,8

1864–65 28,150,923 68,027,016 10,078,798 9,839,964 10,911,322 95,672 +832,524 −9,744,292 22,6 10,3

1865–66 29,599,228 65,491,123 18,668,673 5,724,476 14,639,353 17,665 −4,029,320 −5,706,811 24,0 10,4

1866–67 29,038,715 41,859,994 6,963,073 3,842,328 6,183,113 27,725 −779,960 −3,814,603 24,2 10,1

1867–68 35,705,783 50,874,056 5,593,961 4,609,466 4,385,080 21,534 −1,208,881 −4,587,932 22,8 10,8

1868–69 35,990,142 53,062,165 8,601,022 5,159,352 4,269,305 25,156 −4,331,717 −5,134,196 22,0 10,0

1869–70 32,927,520 52,471,376 7,320,337 5,592,016 7,510,480 78,510 +190,143 −5,513,506 21,2 9,5

⁸³ Sources same as those used in the case of Table IV.

[pg 44] saw through the weak point of the proviso on which the

Government was called upon to act. He argued that the currency notes

were payable only in the current coin of the country, which in India was

the silver rupee, and to hold a portion of the reserve in gold which

could not be tendered in payment of the notes was seriously to endanger

their convertibility in times of political distrust or commercial

panic.⁸⁴ He therefore ventured beyond the scope of the agitation, and

pronounced that instead of allowing gold a back-door entry into the

currency system it ought to be made the standard of value in India. He

did not agree with Mr. Wilson that the substitution of gold for the

silver standard would be “to break faith with the creditor.” Nor was he

much deterred by the fact that before the silver currency could be

reduced to a subsidiary position the introduction of gold in India would

give rise to a double standard for the time being; for he argued that

“all nations must pass through a transition stage of a double standard

before they arrive at a single standard.” Accordingly he proposed that

(1) sovereigns and half-sovereigns of British or Australian standard

should be legal tender in India, at the rate of one sovereign for Rs.

10; and that (2) Government currency notes should be exchangeable either

for rupees or sovereigns at the rate of one sovereign for Rs. 10, but

that they should not be exchangeable for bullion.

⁸⁴ Cf. his Minute dated June 20, 1864. _Vide_ Papers, etc., on Gold

in India, p. 147 _et seq_. He was even opposed to holding silver

_bullion_ in the paper currency reserve, for this involved on the

Currency Department the obligation to get the silver coined, which

was a matter of time having regard to the limited capacity of the

Indian Mints at the time, while the notes issued were payable _in

coin on demand_. There was a run on the Paper Currency Department,

which found itself short of coin.

His proposals were accepted by the Government of India and were

communicated to the Secretary of State⁸⁵ for his sanction. But the

Secretary of State, impatient and intolerant of any deviation from a

monometallic system, whittled down the whole project with scant

courtesy. His [pg 45] reply⁸⁶ is a grotesque piece of reasoning and

terribly shallow. He was unwilling to allow the measure, because he

felt satisfied that the rate of Rs. 10 to a sovereign underrated the

sovereign too much to permit its circulation. Here he was on solid

ground. The cost of producing a sovereign at a Mint in India was

estimated⁸⁷ at the time to be Rs. 10–4–8; while the cost of importing it

to Calcutta from England was estimated at Rs. 10–4–10, and from

Australia at Rs. 10–2–9. Whichever was the proper rate, it was certain

that sovereigns could not circulate at the rate of Rs. 10 to 1. It was

a pity that Sir Charles Trevelyan did not propose a higher ratio⁸⁸ so as

to make the circulation of the sovereign an assured event. But the

Secretary of State would have been averse to the measure just the same

even if the ratio had been favourable to the sovereign. To the

Secretary of State, the measure, based as it was on an unfavourable

ratio, was useless. But if based on a favourable ratio it was none the

less pernicious, for it portended the possibility of what he considered

as the most vicious system of double standard, however temporary it

might have been. The mere contingency of giving rise to a bimetallic

system was enough to frighten the Secretary of State into opposition to

the whole measure, for he refused to admit that “it may be for the

public advantage to pass through a period of double standard in order to

change the basis of the currency from silver to gold.”

⁸⁵ Cf. Government of India’s Despatch, No. 89, dated Simla, July 14,

1864,

⁸⁶ Financial Despatch from the Secretary of State, No, 224, dated

September 26, 1864.

⁸⁷ Cf. Letter from the Hon. Claud Brown to the Hon. Sir C. E.

Trevelyan, dated Calcutta, May 28, 1864. _Vide_ Papers, etc., on

Gold, p. 265.

⁸⁸ The reason why he preferred the ratio of 10 to 1 was that that was

the prevalent market ratio in India. His argument was that “the

sovereign must be rated for circulation in India, not with

reference to its English, but to its Indian price estimated in

silver.” Probably he was unwilling to overrate the sovereign

because of his fear that “the existing Indian currency would be

rapidly revolutionized and creditors would receive much less than

their due.” Cf. his Minute dated November 23, 1864. _Vide_

Papers, etc., on Gold in India,

The only concession that the Secretary of State was willing to make was

to permit “that gold coin should be received [pg 46] into public

treasuries at a rate to be fixed by Government and publicly announced by

Proclamation” without making it a general legal tender in India. It will

be recalled that this was a revival of that foolish measure which was

abandoned in 1852 for having embarrassed the Government. To offer to

receive coin which you cannot pay back is to court trouble, and it was

to obviate the too-well-known danger inherent in the project that this

more complete measure was proposed. But the currency stringency was so

great that the Government of India, rather than obstinately cling to

their view, consented to avail themselves of the suggestion of the

Secretary of State, and issued a Government Notification in November,

1864, which proclaimed that

“sovereigns and half-sovereigns coined at any authorized Royal

Mint in England or Australia of current weight, shall until

further notice be received in all the Treasuries of British

India and its dependencies in payment of sums due to Government,

as the equivalent of 10 and 5 Rs. respectively; and that such

sovereigns and half-sovereigns shall, whenever available at any

Government Treasury, be paid at the same rates to any person

willing to receive them in payment of claims against the

Government.”

The real par, however, was somewhat above Rs. 10 to the sovereign,⁸⁹ and

the notification was therefore inoperative. The currency situation, on

the other hand, continued to be as acute as ever, and the Government of

India was again moved in 1866 by the Bengal Chamber of Commerce to take

steps to make the circulation of gold effective. This time the Chamber

insisted on the institution of a Commission of Inquiry “as to the

expediency of introducing gold into the monetary system of India.” But

the Government of India held⁹⁰ that “instead of a gold a paper currency

has been introduced, in the expectation that it would prove a more

convenient and acceptable circulating medium then either [pg 47] of the

precious metals,” and consequently “it must be shown that paper has not

proved and is not likely to prove a circulating medium adequate to the

wants and suitable to the habits of the country before an endeavour is

made to introduce gold in supersession of, or in addition to, paper.” A

commission was therefore appointed to inquire into the “operation of the

existing currency arrangements which were established under Act XIX of

1861,” and to report as to “what may be the advantage, as based on

expediency, of the introduction of the legal tender of gold into India,

in addition to that of silver.” After an exhaustive investigation the

Commission came to the conclusion⁹¹ that owing to several causes the

paper currency had failed to establish itself among the circulating

media of the country, but that gold was finding a larger place in the

transactions of the people. The Commission ended by urging upon the

Government “to cause a legal tender of gold to be a part of the currency

arrangements of India.” Now it was the turn of the Government to give

effect to the recommendation. But, curiously enough, it did not go to

the extent of adopting the recommendation of the Commission which it had

itself appointed. Instead of making gold legal tender, as advised by the

Commission, the only action the Government took was to issue another

Notification on October 28, 1868, which simply altered the rate of the

sovereign to Rs. 10–8 without doing anything further to avoid the evil

consequence attendant upon that one-sided measure. Fortunately for the

Government, even this correction of the rate did not induce any flow of

gold into the circulation of the country. The currency troubles had by

then subsided, and as no new pressure was exerted upon the Government

this proved the last of two abortive attempts the Government made to

introduce gold into India.

⁸⁹ Cf. Appendix A to the Minute by Sir William Mansfield on Gold

Currency for India, H. of C. Return 79 of 1865.

⁹⁰ Resolution in the Financial Department dated February 3, 1866, in

the _Fort William Gazette_ of the same date, under Notification

No. 592.

⁹¹ For the Report of the Commission, _see_ H. of C. Return 148 of

1868.

For the time being the problem was solved by the natural course of

events. But, as subsequent events showed, the change to a gold standard

would have been better for India⁹² [pg 48] and would have been

welcomed⁹³ in the interest of Europe, which was then suffering from high

prices due to the superfluity of gold. At this particular juncture the

Government of India was really at the crossing of ways, and could have

averted the misfortunes that were to befall it and its people if it had

sided with the forces of change and replaced the silver standard by a

gold standard, as it could most easily have done. That those in charge

of Indian affairs should have thrown the weight of their authority

against the change was no dishonest act deserving of reproach,⁹⁴ but it

does furnish one more illustration of those disastrous human ways which

often lead people to regard the situation in which they live as most

secure just when it is most precarious. So secure did they feel about

the currency situation that in 1870, when the Mint Law came to be

revised and consolidated, they were content, as though nothing had

happened or was likely to happen, to allow the silver standard of 1835

to continue pure and unsullied by any admixture of gold.⁹⁵

⁹² It is true Prof. J. E. Cairnes was against the introduction of a

gold standard in India; but later he withdrew his objections. Cf.

his _Essays in Political Economy_ (London, 1873, pp. 88–90).

⁹³ Cf. J. R. McCulloch, _Dictionary of Commerce_, Ed. 1869, p. 1131.

⁹⁴ Mr. H. B. Russell says that they retained the silver standard

because they profited by it on their remittances. Cf. his

_International Monetary Conferences_, 1898, p. 32.

⁹⁵ The original mint and coinage bill contained clauses embodying the

notification of 1868, compelling the Government to receive

sovereigns at Public Treasuries. Cf. _Gazette of India_, Part V,

dated July 23, 1870. But such was the degree of indifference

shown that they were afterwards dropped by the Select Committee,

which preferred to leave the matter to the discretion of the

Executive.

Alas! those who then said⁹⁶ that they were not called upon to take more

than a “juridical” view of the Indian currency question knew very little

what was in store for them. [pg 49]

⁹⁶ Cf. the speech of the Hon. Mr. Stephen on September 6, 1870,

introducing the coinage and mint bill. Vide _Supreme Legislative

Council Proceedings_ (abbreviated into _S.L.C.P._), Vol. IX, p.

398.

CHAPTER II

*THE SILVER STANDARD AND THE DISLOCATION OF ITS PARITY*

It is clear how the clear how the evolutionary process with respect to

the Indian currency culminated in the establishment of a silver standard

and how the agitation for a gold currency ended in the silver standard

being supplemented by a paper currency. Before proceeding to inquire

into the working of such a mixed system, it would be useful to review

briefly the nature of its framework.

The metallic part of it was regulated by Act XXIII of 1870, The coins

authorized and legalized thereunder were as shown on p. 50. [pg 50]

⁹⁷ This may be seen from the following:—

(a) _Gold Coins_. (i), (ii), and (iii) were authorized by

Section VII of Act XVII of 1835. Only (iv) was an addition

made by this Consolidating Act of 1870.

(b) _Silver Coins_. (i), (ii), and (iii) were authorized by

Section I of Act XVII of 1835. This Act had also authorized

the issue of a silver coin called “Double Rupee,” but this

was discontinued by Section II of Act XIII of 1862, which

substituted in its place the silver coin No. iv.

by Section I of Act XXI of 1835, which, however, restricted

their circulation to the Presidency of Bengal. They were

afterwards universalized for the whole of India by Act XXII

of 1844. Coin No. (iii) was first introduced by Section II

of Act XI of 1854.

TABLE VIII

─────────────────────────────────────────────────────────────────────────

Denomination Gross Remedy Fineness Remedy Legal-tender

of Coins Wt. in Troy in power

issued by the Troy Weight Grs. Fineness.

Mint. Grs.

I. _Gold

Coins_ (a)

(i) Mohur 180 2 ⁄ 165 2 ⁄

1000ths 1000ths

────────────────────────────────────────────────────────

(ii) Third of 60 2 ⁄ 65 2 ⁄

a Mohur 1000ths 1000ths

──────────────────────────────────────────────────────── Not Legal

(iii) 120 2 ⁄ 110 2 ⁄ Tender at all.

Two-thirds of 1000ths 1000ths

a Mohur

────────────────────────────────────────────────────────

(iv) Double 360 2 ⁄ 330 2 ⁄

Mohur 1000ths 1000ths

II. _Silver

Coins_ (b)

(i) Rupee 180 5 ⁄ 165 2 ⁄

1000ths 1000ths Unlimited

──────────────────────────────────────────────────────── Legal Tender

(ii) 90 5 ⁄ 82·5 2 ⁄

Half-rupee 1000ths 1000ths

(iii) 45 7 ⁄ 41·25 3 ⁄ Legal Tender

Quarter-rupee 1000ths 1000ths for Fractions

──────────────────────────────────────────────────────── of a Rupee

(iv) Eighth 22·5 10 ⁄ 20·625 3 ⁄ only.

of a Rupee 1000ths 1000ths

III. _Copper

Coins_ (c)

(i) Pice 100 1 ⁄ — — Legal Tender

40th for

\frac{1}{64}th

part of a

Rupee.

(ii) Double 200 1 ⁄ — — Legal Tender

Pice 40th for

\frac{1}{32}nd

part of a

Rupee.

(iii) 50 1 ⁄ — — Legal Tender

Half-pice 40th for

\frac{1}{128}th

part of a

Rupee.

(iv) Pie 33·3 1 ⁄ — — Legal Tender

40th for

\frac{1}{192}nd

part of a

Rupee.

The Act made no innovations either in regard to the number of coins

issued by the Mints or their legal-tender powers. Identical though it

was with the earlier enactments in the matter of coins,⁹⁷ its juridical

provisions were designed to perfect the monetary law of the country as

had never been done before. The former Acts which it repealed were [pg

51] very sparing in their recognition of the principle of mint “remedy”

or “toleration,” as it is called. The point has been largely deemed to

be one of mere mint technique. That is so; but it is not without its

monetary significance. When the precious metals were current by weight

the question of a mint toleration could not possibly have arisen, for it

was open to every one to ascertain the same by weighing the value of his

return. But since the invention of coinage, when currency came to be by

tale, every one has trusted that the coins contained the value they were

certified to contain. The actual value of the coin cannot, however,

always be in exact agreement with its certified value. Such differences

are bound to exist, and even with all the improvements in the art of

coinage it would be difficult to avoid them. What matters is the extent

of the deviation from the true mint standard. The mint laws of all

countries, therefore, contain provisions which declare that coins shall

not be legal tender at their certified value if they err from their

legal standard beyond a certain margin. Indeed, to make coins legal

tender without prescribing a limit to their toleration is to open a way

to fraud. In so far as the Act laid down a limit of toleration to the

coins it authorized to be issued from the Mint, it was a salutary

measure. It is to be regretted, however, that the Act instituted no

machinery with which to ascertain that the coinage conformed to the

law.⁹⁸ Another important improvement made by the Act was the recognition

of the principle of free coinage. The principle, though it has not

received the attention it deserves, is the very basis of a sound

currency in that it has an important bearing on the cardinal question of

the quantity of currency necessary [pg 52] for the transactions of the

community. Two ways may be said to be open by which this quantity can

be regulated. One way is to close the Mint and to leave it to the

discretion of the Government to manipulate the currency to suit the

needs. The other is to keep the Mint open and to leave it to the

self-interest of individuals to determine the amount of currency they

require. In the absence of unfailing tests to guide the exercise of

discretion necessary in the case of closed Mints, the principle of open

Mints has been agreed upon as the superior of the two plans. When every

individual can obtain coin for bullion and convert coin into bullion, as

would be the case under open Mints, the quantity is automatically

regulated. If the increasing demands of commerce require a large amount

of circulating medium, it is for the interest of the community to divert

a larger quantity of its capital for this purpose; if, on the contrary,

the state of trade is such as to require less, a portion of the coin is

withdrawn, and applied as any other commodity for purposes other than

those of currency. Because the Act of 1870 expressly recognized the

principle of open Mint, it is not to be supposed that the Mints were

closed before that date. As a matter of fact they were open to the free

coinage of both gold and silver, although the latter alone was legal

tender. But, strange as it may seem, none of the earlier Acts contained

a word as to the obligation of the Mint Master to coin all the metal

presented to him—a condition which is of the essence of the open mint

system. The provisions of the Act on this point are unmistakable. It

required:—

⁹⁸ This machinery is provided in England by what is known as the

“Trial of the Pyx.” For a history of this institution and the way

it functions, cf. H. of C. Return 203 of 1866. During the time of

the East India Company the maintenance of the standard purity of

the Indian coins always formed a most anxious concern of the Court

of Directors. The coins of Indian mintage were regularly required

to be sent over to England, where they were tested at a special

Trial of the Pyx and the verdict reported back for the future

guidance of the Mint Masters in India. Cf. H. of C. Return 14 of

1849. Since the winding-up of the Company there is no machinery

to bring the Mint Masters to book.

“Section 19. Subject to the Mint-rules for the time being in

force, the Mint Master shall receive all gold and silver bullion

and coin brought to the Mint:

“Provided that such bullion and coin be fit for coinage;

“Provided also that the quantity so brought at one time by one

person is not less, in case of gold, than fifty tolas, and, in

the case of silver, than one thousand tolas.

“Section 20. A duty shall be levied at the rate of one rupee

per cent. at the Mint on the produce of all gold bullion and on

all gold coin brought for coinage to the Mint in accordance with

the said Mint-rules. [pg 53]

“Section 21. All silver bullion or coin brought for coinage to

the Mint, in accordance with the said Mint-rules, shall be

subject to a duty at the rate of 2 per cent. on the produce of

such bullion or coin, and the amount of such duty shall be

deducted from the return to be made to the proprietor.

“Section 22. A charge of one-fourth per mille on gold bullion

and coin, and of one per mille on silver bullion and coin, shall

also be levied for melting or cutting such bullion and coin so

as to render the same fit for receipt into the Mint.

“Section 23. All gold and silver bullion and coin brought to

the Mint for coinage, and which is inferior to the standard

fineness prescribed by this Act, or which, from brittleness or

other cause, is unfit for coinage, shall, in case it is refined,

be subject, in addition to the duty and charge aforesaid, to

such charge on account of the loss and expense of refining as

the Governor-General in Council prescribes in this behalf.

“Section 24. The Mint Master, on the delivery of gold or silver

bullion or coin into the Mint for coinage, shall grant to the

proprietor a receipt which shall entitle him to a certificate

from the Assay Master for the net produce of such bullion or

coin payable at the General Treasury.

“Section 25. For all gold bullion and coin, in respect of which

the Assay Master has granted a certificate, payment shall be

made, as nearly as may be, in gold coins coined under this Act

or Act No. XVII of 1835; and the balance (if any) due to the

proprietor shall be paid in silver, or in silver and copper,

coins current in British India.”

In the matter of paper currency the Government, it is to be noted, did

not proceed upon the principle of freedom of issue which then obtained

in the country. There prevails the erroneous view that before the

introduction of the Government paper currency the right of note issue

was confined to the three Presidency banks in India. As a matter of

fact there existed in India what is called the free banking system, in

which every bank was at liberty to issue its notes. It is true that

notes of the Presidency banks enjoyed a status slightly superior to that

enjoyed by the notes of other banks in that they were received by the

Government to some extent in payment of revenue⁹⁹—a privilege for which

the Presidency banks had to submit to a stringent legislative control

[pg 54] on their business¹⁰⁰ from which other banks whose issues were

not so privileged were immune. But this disadvantage was not sufficient

to discourage other banks from indulging in the right of issue which was

left open to them by law. However, this freedom of issue does not seem

to have been exercised by any of the banks on any very large scale, not

even by the Presidency Banks,¹⁰¹ and was taken away from all in 1861,¹⁰²

when there was established a national issue for [pg 55] the whole of

India entrusted to the management of a Government Department called the

Department of Paper Currency. But if private interest was not allowed

to play the same part in determining the quantity of paper currency as

was the case with regard to metallic currency, neither was any

discretion left to the Government Department in the regulation of the

paper currency. The Department of Paper Currency had no more discretion

in the matter of paper currency than the Mint Master had in the matter

of metallic currency.

⁹⁹ Cf. F. C, Harrison, _Economic Journal_, 1891, Vol. I, p. 726.

¹⁰⁰ The reasons for such control are to be found in the peculiar

relationship that subsisted between the Government and the

Presidency banks. Prior to 1862, as a safeguard against their

insolvency, the Presidency Bank charters restricted the kind of

business in which they were to engage themselves. Put very

briefly, the principal restrictions imposed prohibited the banks

from conducting foreign-exchange business, from borrowing or

receiving deposits payable out of India, and from lending for a

longer period than six months, or upon mortgage, or on the

security of immovable property, or upon promissory notes bearing

less than two independent names, or upon goods unless the goods or

title to them were deposited with the banks as security. The

Government held shares in the banks and appointed a part of the

Directorate. In 1862, when the right of note issue was withdrawn,

these statutory limitations on the business of the banks were

greatly relaxed, though the Government power of control remained

unchanged. But, the banks having in some cases abused their

liberty, nearly all the old restrictions of the earlier period

were reimposed in 1876 by the Presidency Banks Act, Government,

however, abandoning direct interference in the management, ceasing

to appoint official directors, and disposing of its shares in the

banks. Some of these limitations have been incorporated in Act

XLVII of 1920, which amalgamated the three Presidency banks into

the Imperial Bank of India. Banks other than Presidency banks

have been entirely immune from any legislative control whatsoever,

except in so far as they are made amenable to the provisions of

the Indian Companies Act. Cf. in this connection Minutes by Sir

Henry Maine, No. 47, and the accompanying note by W. Stokes. The

control of these banks is one of the important problems of banking

legislation in India.

¹⁰¹ It should, however, be noted that in 1860 the circulation Of notes

of the three Presidency banks was larger than their current

accounts, as is evident from the following:—

───────────────────────────────────────────────────

_Name of the Bank_ _Accounts _Notes in in

Current._ Circulation._

Bank of Bengal £1,254,875 £1,283,946

Bank of Bombay £438,459 £765,234

Bank of Madras £161,959 £192,291

(_Bankers’ Magazine_, April, 1893, p 547.)

───────────────────────────────────────────────────

¹⁰² For a summary of the controversy _re_ Bank issue _v._ Government

issue, see _Report of the Bombay Chamber of Commerce for_ 1859–60,

Appendix L, pp. 284–318.

The Department’s duty was confined by law¹⁰³ to the issue of notes in

exchange for the amount thereof: (1) in current silver coin of the

Government of India; (2) in standard silver bullion or foreign silver

coin computed according to standard at the rate of 979 rupees per 1,000

tolas of standard silver fit for coinage; (3) in other notes of the

Government of India, payable to bearer on demand of other amounts issued

within the same circle; and (4) in gold coin of the Government of India,

or for foreign gold coin or bullion, computed at such ratio and

according to such rules and conditions as may be fixed by the

Governor-General, provided that the notes issued against gold did not

exceed one-fourth of the total amount of issues represented by coin and

bullion. The whole of this amount was required by law to be retained as

a reserve for the payment of notes issued with the exception of a fixed

amount which was invested in Government securities, the interest thereon

being the only source of profit to the Government. The limit to the sum

to be so invested was governed “by the lowest amount to be estimated to

which, according to all reasonable experience, the paper currency might

be expected to fall.”¹⁰⁴ Estimating on this basis, the limit to the

investment portion was fixed at 4 crores in 1861,¹⁰⁵ at 6 crores in

1871,¹⁰⁶ and at 8 crores in 1890.¹⁰⁷ But notwithstanding the growing

increase in the investment portion, never was the fiduciary issue based

[pg 56] thereon so great¹⁰⁸ as to abrogate the essential principle of

the Indian Paper Currency Law, the object of which was to so regulate

the volume of paper currency that it should always preserve its value by

contracting and expanding in the same manner and to the same extent as

its metallic counterpart.

¹⁰³ Sect. IV of Act XIX of 1861.

¹⁰⁴ Cf. Sir Richard Temple’s speech introducing the Paper Currency

Bill, dated March 25, 1870. _Supreme Legislative Council

Proceedings_, Vol. IX. pp. 151–52.

¹⁰⁵ Act XIX, Sec. X.

¹⁰⁶ Act III, Sec. 16.

¹⁰⁷ Act XV, Sec. I.

¹⁰⁸ The following table shows the distribution of the paper currency

reserve at three different periods:

─────────────────────────────────────────────────────────────────────────────────────────────────

Composition of the Percentage of each

Reserve. Component of the

Period. Note Reserve to the

Circulation. Total Circulation.

────────────────────────────────────────────────────────────────────────

Silver. Gold. Securities. Total Silver. Gold. Securities.

1862–1871 7·63 4·80 0·03 2·80 7·63 63 — 37

1872–1881 11·82 5·98 — 5·84 11·82 51 — 49

1882–1891 15·74 9·64 — 6·10 15·74 61 — 39

Such was the organization of the mixed currency that existed in India

before it underwent a profound change during the closing years of the

nineteenth century. Though of a mixed character, the paper portion

formed a comparatively small part of the total. The principal reasons

why the paper currency did not assume a large proportion are to be found

in the organization of the paper currency itself.¹⁰⁹ One such reason was

that the lowest denomination of the notes was too large to displace the

metallic currency. By the law of 1861 the denomination of notes ranged

upwards from Rs. 10 as the lowest to Rs. 20, 50, 100, 500, and 1,000.

In a country where the average range of transactions did not exceed R. 1

and were as low as 1 anna or even lower, it is impossible to expect that

paper currency could to any great extent figure in the dealings of the

people. Even Rs. 5 notes, the issue of which was first sanctioned in

the year 1871,¹¹⁰ were not low enough to penetrate into the economic

life of the people. The other impediment to the increase of [pg 57]

paper currency was the difficulty of encashing notes. One of the

infelicitous incidents of the paper currency in India consisted in the

fact that they were made legal tender everywhere within a circle, but

encashable only at the office of issue. For such a peculiar

organization of the paper currency in India, what was largely

responsible was the prevalence of internal exchange¹¹¹ in the country.

It raised a serious problem for the Government to cope with. If notes

were to be made universally encashable it was feared that merchants,

instead of using notes as currency, might use them as remittance on

different centres to avoid internal exchange, and the Government be

obliged to move funds between different centres to and fro lest it

should have to suspend cash payments. To undertake resource operations

on such a vast scale between such distant centres when facilities for

quick transport were so few was obviously impossible,¹¹² and the

Government therefore decided to curtail the encashment facilities of the

notes it [pg 58] issued. For the purposes of the paper currency the

Government divided the country into a number of circles of issue, and

each currency circle was further subdivided into sub-circles,¹¹³ and the

notes issued bore on their face the name of the circle or sub-circle

from which they originated. Notes issued from any agency of issue

situated in the territory comprised within a circle of issue were not

legal tender in the territory of any other currency circle, nor were

they encashable outside their own circle. Nay more, the notes issued

from sub-circles subject to the same chief circle were legal tender in

one another’s territory, but were not encashable except at their office

of issue or at the issue office of their chief circle. The sub-circle

notes could thus be cashed at two places, but the notes of the issue

office of the chief circle, though legal tender in the entire territory

covered by it, were encashable nowhere except at its own counter, not

even at any of its own sub-circles.¹¹⁴ This want of universal

encashability, though it saved the Government from the possibility of

embarrassment, proved so great a hindrance to the popularity of the

notes that it may be doubted whether the paper currency could have made

a progress greater than it did even if the lowest denomination of the

notes had been lower than it actually was.

¹⁰⁹ For a clear and concise sketch of the organization of the paper

currency in India, _see_ the Note of the Government of India in

the Report of the U.S. Director of the Mint, Washington, 1894, pp.

231—33.

¹¹⁰ Sec. 3 of Act III.

¹¹¹ It may be pointed out that although the Presidency banks had

ceased to issue notes, yet under the agreements made with the

Government in virtue of Act XXIV of 1861 the banks were employed

by the Government “for superintending, managing and becoming

agents for the issue, payment and exchange of promissory notes of

the Government of India, and for the carrying on the business of

an agency of issue” on a remuneration of ¾ per cent. per annum “on

the daily average amount of Government currency notes outstanding

and in circulation through the agency of the bank.” In the

conflict that ensued between the Government of India and the

Secretary of State as to the propriety of thus employing the

banks, the former was in favour of the plan because it believed

that it would help the extension and popularization of the notes,

while the latter disliked the arrangement because it seemed to him

to compromise the principle of complete separation between the

business of issue and the business of banking. Neither of the two,

however, grasped the fact that the profit on remittances on

different centres owing to the prevalence of internal exchange was

so great that the commission allowed to the banks was an

insufficient inducement to cause them to promote the circulation

of notes by providing facilities at their branches for the free

encashment of them. So high was the internal exchange, and so

reluctant seemed the banks to popularize the notes, that

Government finally discharged them from being their agents for

paper currency from January 2, 1866. _See_ House of Commons

Return, East Indian (Paper Money) 215 of 1862.

¹¹² Cf. the speech of the Hon. Mr. Laing on the Paper Currency Bill

dated February 16, 1861, _S.L.C.P._, Vol. VII, pp. 73–74.

¹¹³ Each sub-circle had within it a number of agencies of issue; but

the agencies were centres not of encashment but only of issue.

¹¹⁴ For the inconveniences of the “circle” system and the various

measures contemplated by Government to facilitate the encashment

of notes, see _Report of the Bombay Chamber of Commerce for_

1868–69, Appendix X, pp. 309–16.

It must, however, be borne in mind that it was not the intention of the

Indian Legislature to make the Indian currency as economical¹¹⁵ as was

desired by the Executive Government. The Legislature was no doubt

appealed to by the original author of the paper currency to turn India

into a new Peru, where as much currency could be had with as little

cost,¹¹⁶ but the Legislature showed a rather prudent reserve on the

matter of aiding the consummation of such a [pg 59] policy. As the

centres of encashment were so few, and the area included within each so

large as to separate the furthest point in a circle by a distance of

about 700 miles from the centre of encashment of the circle, it viewed

with dread the authorizing of notes of smaller denomination which the

poor could not refuse and yet could not cash.¹¹⁷ Besides the hardship

involved in the want of encashability in the notes, the Legislature

feared they would prove a “fugitive treasure” in the hands of the Indian

peasant. Not being able to preserve them from rain and ants, he might

have had to pay a heavy discount to be rid of the notes he could have

been forced to accept.¹¹⁸ So opposed was the Legislature to the

economizing clauses of the Paper Currency Bill as contrived to drive out

metallic currency that it gave the Government an option to choose

between legal-tender notes but of higher denomination and

lower-denomination notes but of no legal-tender power.¹¹⁹ And as the

Government chose to have legal-tender notes, the Legislature in its turn

insisted on their being of higher denomination. At first it adhered to

notes of Rs. 20 as the lowest denomination, though it later on yielded

to bring it down to 10, which was the lowest limit it could tolerate in

1861. Not till ten years after that did the Legislature consent to the

issue of Rs. 5 notes, and that, too, only when the Government had

promised to give extra legal facilities for their encashment.¹²⁰ On the

whole, the desire of the Indian Legislature was to make the Indian

currency safer, rather than economical, and such it undoubtedly was. [pg

60]

¹¹⁵ Cf. the whole speech of the Hon. Mr. Sconce dated September 22,

1860, _S.L.C.P._, Vol. VI, p. 1143 _et seq_.

¹¹⁶ Cf. the speech of Mr. Wilson, the originator of paper currency in

India, dated March 3, 1860, where he says: “In short, to abstract

so much coin from the mere mechanical purpose of the circulation,

supplying its place with convertible paper, would be exactly the

game in effect as if suddenly, in the control of the Maidan, a

rich silver mine had been discovered which produced silver at

little or no cost.” _Supreme Legislative Council Proceedings_,

Vol. VI, p. 250.

¹¹⁷ Cf. the speech of the Hon. Mr. Forbes, dated September 22, 1860,

_ibid._, p. 1154,

¹¹⁸ Cf. the speech of the Hon. Mr. Forbes, dated July 13, 1861.

_Supreme Legislative Council Proceedings_, Vol. VII, p. 768.

¹¹⁹ Cf. the speech of the Hon. Mr. Sconce, September 22, 1880,

_S.L.C.P._, Vol. VI, p. 1151.

¹²⁰ For such extra legal facilities, and measures adopted to

materialize them, cf. the interesting speech of the Hon. Sir

Richard Temple on the Paper Currency Bill dated January 13, 1871,

_S.L.C.P._, Vol. X, pp. 22–25.

How did the currency system thus constituted work? Stability of value

is one of the prime requisites of a good currency system. But if we

judge the Indian currency from this point of view we find that there

existed such variations in its value that it is difficult to escape the

conclusion that the system was a failure.

Taking the rate of discount as an evidence of the adequacy of currency

for internal commerce, it was the opinion of such a high financial

authority as Mr. Van Den Berg that the unexpected contortions and sudden

transitions in the Indian money market were unparalleled in the annals

of any other money market in any other part of the world.¹²¹ India is

pre-eminently a country subject to seasonal swings.¹²² Mid-summer [pg

61] is naturally a period of diminished activity, while autumn brings

renewed vigour in all activities of social and economic life. Not

production alone is affected by seasons. On the side of consumption

Indian social life is also subject to seasonal variations. There are

marriage seasons, holiday seasons, and holy seasons. Even distribution

has assumed in India quite a seasonal character. The practice of paying

rents, wages, dividends, and settling accounts at stated intervals has

been gaining ground as a result of contact with Western economic

organization. All these generate a kind of rhythm in the social demand

for money, rising at certain periods of the year and falling at others.

Having regard to the seasonal character of the economic and social life,

the fluctuations caused by the discount rate soaring high during busy

months when it should have been low enough to liquidate the

transactions, and falling low during slack months when it should have

been high enough to prevent the market from being demoralized, are

unavoidable. But what made the contortions of the Indian money market

so obnoxious was the circumstance that the seasonal fluctuations in the

discount rate were so abnormal.¹²³

¹²¹ _The Money Market and Paper Currency of British India_, Batavia,

1884, p. 3.

¹²² It should be noted that the slack and the busy seasons are not

uniformly distributed over the whole surface of the country. The

distribution is roughly as follows:—

────────────────────────────────────────────────────────────────────────────

Eastern India Western Northern India. Southern

Months ──────────────────────── India. ─────────────────────── India.

Rangoon. Calcutta. Bombay and Cawnpore. Lahore. Madras.

Karachee.

Busy 3 months 4 months 6 months 6 months 9 6 months

months

Slack 9 months 8 months 6 months 6 months 3 6 months

months

Jan. Busy Slack Busy Slack Busy Slack

Feb. Busy Slack Busy Busy Busy Busy

March Busy Slack Busy Busy Busy Busy

April Slack Slack Busy Busy Busy Busy

May Slack Slack Slack Slack Busy Busy

June Slack Slack Slack Slack Busy Busy

July Slack Slack Slack Slack Slack Busy

Aug. Slack Busy Slack Slack Slack Slack

Sept. Slack Busy Slack Busy Slack Slack

Oct. Slack Busy Slack Busy Busy Slack

Nov. Slack Busy Busy Busy Busy Slack

Dec. Slack Slack Busy Slack Busy Slack

Busy Jan. to Aug. to Nov. to Feb. to April Feb. to

March Nov. April April to June July

Slack April to Dec. to May to May to July to April to

Dec. July Oct. Aug. Sept. Dec.

Busy — — — Sept. to Oct. to —

Nov. March

Slack — — — Dec. to — —

Jan.

¹²³ The rate of discount of the Bank of Bengal for private paper

running thirty days and after was altered—

In 1876 16 times, with 6½ per cent. as minimum and 13½ per cent.

as maximum.

In 1877 21 times, with 7½ per cent. as minimum and 14½ per cent.

as maximum.

In 1878 10 times, with 5½ per cent. as minimum and 11½ per cent.

as maximum.

In 1879 15 times, with 6½ per cent. as minimum and 11½ per cent.

as maximum.

In 1880 8 times, with 5½ per cent. as minimum and 9½ per cent.

as maximum.

In 1881 9 times, with 5½ per cent. as minimum and 10½ per cent.

as maximum.

In 1882 9 times, with 6½ per cent. as minimum and 12½ per cent.

as maximum.

In 1883 14 times, with 7½ per cent. as minimum and 10½ per cent.

as maximum.

(_Van Den Berg, loc. cit._)

The explanation for such a market phenomenon is to be sought in the

irregularity of the money supply of the country. In order that money

may be had at a uniform price, its supply should be regulated according

to the variations in the demand for it. It is well to recognize that

the demand for money is never fixed. But it will avail nothing until it

is realized that the changes in the demand for money [pg 62] which take

place from year to year with the growth of population, trade, etc.,

belong essentially to a different category from the fluctuations in the

demand for money which occur within the course of a year owing to

seasonal influences. In any well-regulated currency it is necessary to

distinguish these two categories of changes in monetary demand, the one

requiring steadiness and expansibility and the other elasticity. On a

comparative view it seems more than plausible that a metallic money is

as especially adapted to furnish this element of steadiness and

stability as paper money is to furnish that of elasticity. Indeed, so

appropriate seem to be their respective functions that it has been

insisted¹²⁴ that in an ideal system these two forms of money cannot

interchange their functions without making the currency burdensome or

dangerous. The proof of the soundness of this view, it may be said, is

found in the fact that, excluding the small transactions which take

place by direct barter, the purchasing medium of any commercially

advanced country is always a compound of money and credit.

¹²⁴ Cf. Prof. R. P. Falkner in _A Discussion of the Interrogatories of

the Monetary Commission of the Indianapolis Convention_, 1898,

Publications of the University of Pennsylvania in Political

Economy and Public Law, No. 13, pp. 26–26.

On the face of it the Indian currency is also a compound of money and

credit, and as such it may be supposed that it contained provisions for

expansibility as well as elasticity. But when we come to analyse it we

find that it makes no provision whatever for elasticity. Far from

allowing the credit part of it to expand and contract with the seasonal

demands, the Paper Currency Act placed a rigid limit upon the volume of

its issue regardless of any changes in the volume of the demand. Here,

then, is to be found one of the causes for the “convulsions” in the

discount rates prevalent in the Indian money market. As was pointed out

by Mr. Van Den Berg:—

“The paper currency established by the Indian legislator fully

answers the purpose, so far as business requires an easier means

of exchange than gold or silver coin; but no connection whatever

exists between the issue of the fiduciary currency and the wants

of the public to have their bills or [pg 63] other commodities

converted into a current medium of exchange … and this is the

sole cause of the unexpected convulsions and sudden transitions

in the money market so utterly detrimental to business to which

the British Indian trade is constantly exposed.”¹²⁵

¹²⁵ Op. cit., p. 7.

It may, however, be objected that such a view is only superficial. The

Indian Paper Currency Act is a replica of the English Bank Act of 1844

in all its essentials. Like the English Bank Act, it set a definite

limit to the fiduciary issue of notes. Like it, it separated the Issue

Business from the Banking Business,¹²⁶ and if it made the banks in India

mere banks of discount it is because it copied the Bank Charter Act,

which deprived banks in England, including the Bank of England, from

being banks of issue. And yet it cannot be said that the English money

market is affected by such “convulsions and sudden transitions” as has

been the case with the Indian money market. On the other hand, it was

the considered opinion of Jevons¹²⁷ that “the Bank of England and

bankers generally have just the same latitude in increasing or

diminishing their advances now (i.e. under the Act of 1844) as they

would have under a[n un]restricted system”; for, as he elsewhere argued,

if the limitation on fiduciary issue is arbitrary, and if people want

more money, “it is always open to them to use metallic money instead.

The limitation is imposed not upon money itself, but upon the

representative part.”¹²⁸ What, then, is the [pg 64] reason that the

Indian Paper Currency Act should produce the evils which its English

prototype did not? _À priori_ there need be no such convulsions in a

money market subject to such a law. The Act, by limiting the issue of

notes, did seem to leave no choice but to use metallic money even for

seasonal demand. This would be true if notes were the only form in

which credit could be used. As a matter of fact, this is not so.

Credit could take the form of a promise to pay issued by a bank as well

as it could take the form of an order on the bank to pay, without making

any difference to the social economy of the people who used them.

Consequently, if under the provisions of the Act banks are restricted

from issuing promises to pay, it does not follow that the only way open

to them is a resort “to use metallic money instead,” for they are

equally free to consent to honour as many orders to pay as they like.

Indeed, the success or failure of the Act depends upon which of the two

alternatives the banks adopt. It is obvious that those who will submit

to the ruling of the Act and resort to metallic money will have to bear

the “convulsions,” and those who will circumvent the Act by utilizing

other forms of credit will escape them. The chief reason, then, why the

Act has worked so well in England and so badly in India is due to the

fact that, whereas English banks have succeeded in implanting the order

or cheque system of using credit in place of the note system, Indian

banks have unfortunately failed. That they should have failed was,

however, inevitable. A cheque system presupposes a literate population,

and a banking system which conducts its business in the vernacular of

the people. Neither of these two conditions obtains in India. The

population is mostly illiterate, and even were it otherwise it could not

have availed itself of the cheque system, because Indian banks refuse to

conduct their business in any other medium but English. Besides, the

growth of the cheque system presupposes a widespread network of banks, a

condition which is far from being fulfilled in India. In the absence of

banking, a cheque is the worst instrument that could be handled. If not

presented within a certain time a cheque may become stale and valueless,

and is therefore [pg 65] inferior to a note as a store of wealth. In

such circumstances as these it is no wonder that in India cheques did

not come into being on a sufficiently large scale to amend the

inelasticity of the notes.

¹²⁶ The Indian Paper Currency Act carried the principle of separation

further than did the English Bank Charter Act. It not only

prevented the Issue Department being conducted under the ægis of a

Banking Department, but also disallowed the two being housed under

the same roof. Such an ideal of separation was held out by Sir

Charles Wood during the debate on the Bank Charter Act. Cf.

_Hansard Parliamentary Debates_, Vol. LXXIV, p. 1363. Though he

was then disappointed, he did not fail to realize his ideal when

he became the Secretary of State for India.

¹²⁷ Cf. his Essay on the “Frequent Autumnal Pressure in the Money

Market and the Action of the Bank of England,” _Investigations in

Currency and Finance_ (ed. Foxwell), 1884, p. 179. Italics by

Jevons. There is, however, an apparent misprint in the original,

which at the close of the quotation reads “as they would have

under a restricted system.”

¹²⁸ _Money and the Mechanism of Exchange_, Kegan Paul, London, 1890,

p. 225.

But even if Indian banks had succeeded in making use of credit in a form

other than that of notes, they could not have eased the money market to

the same extent as the English banks have been able to do. One of the

incidents of banking consists in the liability of banks to pay cash on

demand. If all their deposits were received in cash this liability

would involve no risk. As a matter of fact, a large part of their

deposits consists of bills which they make it their business to

undertake to pay in cash. One of the first things, therefore, that a

banker has to look to is the proportion which his cash deposits bear to

his credit deposits. Now, this proportion may be adversely affected

either by an increase in his credit deposits or by diminution in his

cash deposits. In either case his ability to pay cash is _pro tanto_

weakened by lowering the ratio of his total cash to his total

liabilities. Against an undue expansion of credit a banker may

effectually guard himself. But, notwithstanding the development of the

cheque system, there is always lurking the possibility of withdrawal of

some cash at some time or other. A banker must, therefore, provide by

keeping on hand a certain minimum reserve. How large should be the

reserve depends upon what the possibilities for the withdrawal of cash

are. The point is that to the extent of the reserve the power of the

bank to grant credit is curtailed. If the reserve of the bank is

already at the minimum it must stop discounting or must strengthen its

position by recovering the cash withdrawn from its coffers. Now it is

obvious that if the amount of money withdrawn is kept in the current of

business where the banks can get at it, they of course can strengthen

their position again immediately, and not only always keep themselves

well away from the danger line of minimum reserve, but be always

prepared to meet the needs of the money market. What was the position of

the Indian banks from this point of view? Owing to the absence of a

cheque system the [pg 66] possibilities for the withdrawal of cash are

great, and the reserve was required to be large in consequence thereof.

A large part of their funds being thus held for a reserve, their

resources for discounting were small. But there was a further weakening

of their position as lenders by reason of the fact that the cash

withdrawn did not speedily return to them. The result was the Indian

banks were obliged to curtail their discounts to a far greater extent

than were the English banks, in order to preserve a due proportion

between their cash and their credits. The absence of branch banking was

an important desideratum in this regard. But, even if there were branch

banks, the money withdrawn could not have returned, for it was not left

in the current channels of business. It was locked up in Government

treasuries whose operations were independent of the banking transactions

of the country. Of course there could be nothing inherently wrong in

the maintenance by a Government of an Independent Treasury, and if its

operations were to have a resultant connection with the operations of

the business community no harm need arise. But the operations of the

Indian Treasury ran counter to the needs of business. It locked up when

it should have released its hoards, and released its hoards when it

should have locked them up.

The causes that “convulsed” the Indian money market had therefore been

the inelasticity of the credit media and the working of the Independent

Treasury System in so far as they were the prime factors affecting the

money supply of the country (_see_ Chart I). The evil effects of such

convulsions of the discount rate can hardly be exaggerated.¹²⁹ In an

economy in which almost every business man must rely, at certain seasons

if not all the year round, on borrowed capital, the margin of profit may

be wiped out by a sudden rise or augmented by a sudden fall in the rate

of discount leading to under-trading or over-trading. Such fluctuations

increase business risks, lead to higher business expenses and a greater

cost to the consumer.

¹²⁹ For American experience, cf. E. W. Kemmerer, “Seasonal Variations

in the New York Money Market,” in _The American Economic Review_,

March, 1911.

[Illustration: CHART I: Discount Rates in India]

[pg 67] They bring about swings in prices, promote speculation, and

prepare for panics. Evils such as these would have in any other country

compelled the authorities to take proper steps to deal with them. But

it is a curious fact that in India no serious attempts were made to

alleviate the sufferings they inflicted upon the trading community. A

reform of the paper currency or the abolition of the Independent

Treasury System would have eased the situation, though a reform of both

would have been better. The general community, however, was not

desirous for a change of the paper currency,¹³⁰ but was anxious for the

abolition of the Independent Treasury. The Government, on the other

hand, refused to do away with its Independent Treasury System,¹³¹ and

[pg 68] repudiated even its moral obligation to help the business

community on the somewhat pedantic plea that in locking up currency it

did not lock up capital.¹³² Nor is it possible [pg 69] to say, since it

was not called upon to enunciate a policy, how far it would have gone to

modify the Paper Currency Act so as to relieve the situation. Before,

however, this controversy could end in a satisfactory solution for

imparting to the currency system that element of elasticity which it

needed, there developed another and a greater evil which affected its

metallic counterpart in a degree sufficient to destroy its most vital

element of steadiness and stability of value which it was its virtue to

furnish. So enormous did the evil grow, and so pervasive were its

effects, that it absorbed all attention to the exclusion of everything

else. What fixity of value between the different units of its currency

is to the internal transactions of a country, a par of exchange is to

its external transactions. A par of exchange between any two countries

expresses the relative exchange values of their respective currencies in

terms of each other. [pg 70]

¹³⁰ Cf. _India in_ 1880, by Sir Richard Temple, p. 469; Sir Charles

Wood’s _Administration of Indian Affairs_, p. 89; also _The Indian

Statesman_, January 15 (1884).

¹³¹ It should, however, be noted that between 1862 and 1876, at some

centres comprising the head offices and branch offices of the

Presidency banks, the Independent Treasury System was suspended.

By way of compensation for the loss of their right of note issue,

the Presidency banks were given certain concessions by the

Government under agreements entered into in accordance with Act

XXIV of 1861. Among the concessions one was the use by the banks

of Government balances. The first agreement, that of 1862,

conceded to the banks the following privileges in regard to the

Government balances: (1) The unrestricted use for banking purposes

“of all moneys and balances which but for the agreement would have

been received or held at the General Treasury” up to the limit of

70 lakhs in the case of the Bank of Bengal, 40 lakhs in the case

of the Bank of Bombay, and 15 lakhs in the case of the Bank of

Madras. (2) The option of setting aside the excess over these sums

in a separate strong room for production when demanded, or of

investing it in Government paper or other authorized securities,

the power of investment being subject to the condition that the

banks should be “at all times answerable and accountable to

Government for the surplus cash balance for the time being.” (3)

The right to interest from Government on the difference between

the actual balance and 50 lakhs in the case of the Bank of Bengal,

30 lakhs in the case of the Bank of Bombay, and 10 lakhs in the

case of the Bank of Madras, whenever the balances at these banks

fell below these minima. (4) Permission to the banks to use the

Government balances at their branches on similar terms, suitable

limits being fixed in each case, as in the head office agreements.

A year after the agreements were executed difficulties arose with

the Bank of Bengal, which had locked up the funds to such an

extent that it was unable to meet the demands of the Government on

the public balances it held. Negotiations were therefore opened

in 1863 for the revision of the agreements, and the revised

agreements came into force on January 2, 1866. They contained the

following provisions regarding the public balances: (1)

Undertaking by Government to maintain in the hands of the banks at

their head offices an “average cash balance” of 70 lakhs at the

Bank of Bengal, 40 lakhs at the Bank of Bombay, and 25 lakhs at

the Bank of Madras, “so far as the same may conveniently be done.”

(2) Permission to the banks to use the whole balances for the time

being deposited with them for banking purposes. (3) The right to

interest from Government when the Government balance at the head

offices of the Bank of Bengal, Bank of Bombay, and Bank of Madras

fell below the minima of 45 lakhs, 25 lakhs, and 20 lakhs

respectively. (4) Permission to employ “the whole of the balances

(at branches) however large for the time being” for banking

purposes, subject to the condition that each branch should “at all

times be ready to meet the drafts of the Government" to the extent

of the Government balances at the branch.

These revised agreements were to remain in force till March 1,

1874. In 1874 the question of the revision of the charters of the

Presidency banks was under consideration, and it was the aim of

the Government to continue to the banks the right to use the whole

Government balances. Just at this time (1874) difficulties

occurred with the Bank of Bombay and the Government could not draw

upon their balances. This led to a reconsideration of the policy

of merging the Government balances with the bank balances and

leaving them in the custody of the banks. After a somewhat

lengthy discussion the Government of India reverted to the system

of Independent Treasury by instituting what were called Reserve

Treasuries at the headquarters of the Presidencies which held the

Government balances previously held by the Presidency banks. For a

history of this episode _see_ House of Commons Returns 109 and 506

of 1864; also J. B. Brunyate, _An Account of the Presidency

Banks_, Chap. VII.

¹³² In the despatch of May 6, 1875, sanctioning the re-establishment

of the Independent Treasury System, the banks were admonished by

the Secretary of State thus: “Capital supplied by Government, and

not representing the savings of the community, is a resource on

whose permanence no reliance can be placed, and which therefore

tends to lead traders into dangerous commitments. It gives ease

for a time, and produces prosperity which is at the mercy of an

accident. A political exigency suddenly withdraws the

adventitious resource, and the commerce which trusted to it finds

itself pledged beyond what its own resources can make good.”

Under the arrangements of 1876 leading to the establishment of the

Reserve Treasuries, the Government agreed as before to pay

interest to the banks when their balances at the banks fell below

certain minima. The Government entered into no formal undertaking

as regards maxima, and gave the banks to understand “that the

Government will ordinarily not leave with the headquarters of the

banks, otherwise than temporarily, more than the following sums:

Bank of Bengal 100 lakhs, Bank of Madras 30 lakhs, and Bank of

Bombay 50 lakhs. But this condition will not be inserted in the

contract, which will impose no obligation upon the Government to

leave any balances whatever with the banks. … The Government will

not undertake to give to the banks the exclusive custody of all

the public balances where the Government banks with the banks.”

The question of the amount of balances which the Government would

leave with the banks in the ordinary course being thus settled,

the only way left open to give help to the banks to meet seasonal

demands was to grant loans to the Presidency banks for its

balances held in the Reserve Treasuries. Up to 1900 the

Government had refused to make any loans to the banks. After 1900

it agreed to make such loans of a limited amount at the bank rate.

Up to 1913 only six loans were made, which shows that the terms of

such loans were rather onerous. The Chamberlain Commission of

1913 recommended loans rather than the abolition of the

Independent Treasury system. The war, however, hastened the

course of events. It proved the necessity of co-operation between

the Presidency banks and the Government, and also the need of a

large and powerful Banking Institution. This was accomplished by

the amalgamation of the Presidency banks into an Imperial Bank of

India (Act XLVII of 1920), with the inauguration of which the

Independent Treasury system is again in the process of abolition.

For a history of episodes of the Independent Treasury after 1876,

_see_ Appendices to the _Interim Report of the Chamberlain

Commission_, Vol. I, Cd. 7070 of 1913, Nos. I and II.

It is obvious from this that the par of exchange between any two

countries will be stable if they employ the same metal functioning as

their standard money freely convertible into and exportable as bullion,

for in that case they would have as a measure of value a common medium,

the value of which could not differ, given freedom of commerce, in the

two countries by more than the cost of its transhipment, i.e. within

specie points. On the other hand, there can be no fixed par of exchange

between two countries having different metals as their currency

standards of value. In that case their exchange is governed by the

relative values of gold and silver, and must necessarily fluctuate with

changes in their value relation. The limit to the exchange fluctuations

between them will be as wide or as narrow as the limit to fluctuations

in the relative values of the two metals may happen to be. When,

therefore, two countries such as England and India are separated by

differences in their metallic standards, theoretically there could be no

possibility for a stable par of exchange between them. But, as a matter

of fact, notwithstanding the difference in their metallic standards, the

rate of exchange between England and India seldom deviated¹³³ from the

normal¹³⁴ rate of 1 _s_. 10½ _d_. for R.1. So steady was the rate up to

1873 that few people were conscious of the fact that the two countries

had different currency standards. After 1873, however, the

rupee-sterling exchange suddenly broke loose from this

¹³³ It appears, however, from the chart that the rupee-sterling

exchange before 1873 was not quite stable. But the fluctuations

in it are to be attributed to quite a different set of factors.

It should be noted that the rates of exchange used for reducing

the Indian moneys into sterling during the time of the East India

Company had been various: moreover, they had so little relation to

the intrinsic value of the coins exchanged that the actual rates

officially given were far from the actual market rates. As having

a bearing on this interesting subject, consult H. of C. Sessional

Papers 735 II of 1831–32; Appendix No. 20, _Correspondence, etc.,

relating to the rates of exchange at which the currencies of India

are converted into sterling_; also Tucker, H. St. George, _Remarks

on the Plans of Finance_, 1821, _passim_, and _Memorials of Indian

Government_, 1853, by the same, pp. 382–85.

¹³⁴ Normal only if 15½ to 1 be taken as the normal ratio between gold

and silver, which was the case for nearly seventy years.

[Illustration: CHART II: Fall of the Rupee-Sterling Exchange]

[pg 71] normal parity, and the dislocation it caused was so great and so

disorderly (Chart II) that no one knew where it would stop.

The rupee-sterling exchange was in reality a reflection of the

gold-silver exchange. When, therefore, it is said that the

rupee-sterling before 1873 was stable at 1 _s_. 10½ _d_., it merely

meant that the gold-silver exchange before 1873 was stable at the ratio

of 1 to 15½; and that the rupee-sterling exchange was dislocated after

1873 meant that the gold-silver exchange lost its old moorings. The

question which therefore arises is why was the ratio of exchange between

gold and silver disturbed after 1873, as it never was before that year?

Two factors have been appealed to as affording a sufficient explanation

of what then appeared as a strange phenomenon. One was the

demonetization of silver as the standard money medium by the principal

countries of the world. This movement in favour of demonetization of

silver was the outcome of an innocent agitation for uniformity of

weights, measures, and coinages. In so far as the agitation was aimed

at such uniformity it was in every way beneficial. But it also

exemplifies how the pursuit of good sometimes leaves behind a legacy of

evils. At the Great Exhibition held in London in 1851 the great

difficulty of comparing the different exhibits owing to the differences

of weights, measures, and coinages as between the countries of their

origin and other countries was amply demonstrated to the representatives

of the different nations assembled at that exhibition.¹³⁵ The question

of international uniformity in weights, measures, and coins was

discussed by the various scientific assemblies gathered at this

exhibition, and although nothing tangible came out of it, the question

was not allowed to be dropped: it was taken up at the Brussels

International Statistical Congress held two years after. Opinion had so

far advanced that the next Statistical Congress, held at Paris, issued a

declaration, which was confirmed by the Vienna Statistical Congress of

1859, strongly urging the necessity of bringing about the desired [pg

72] uniformity in the weights, measures, and coinages of different

countries.¹³⁶ Encouraged by the action of England, which had made in

1862 the metric system of weights and measures optional, the 1863

International Statistical Congress of Berlin resolved to invite the

different Governments “to send to a special Congress delegates

authorized to consider and report what should be the relative weights in

the … gold and silver coins, and to arrange the details by which the

monetary systems of the different countries might be fixed, upon a

single unit decimally subdivided.”¹³⁷ The significance of this Congress

can hardly be overlooked. It made a departure. At the former

Congresses the question debated was largely one of uniformity in weights

and measures. But at this Congress “that phase of it was subordinated

to uniform coinage and was well-nigh laid aside.”¹³⁸ Though the

resolution was a departure it should not have been fraught with serious

consequences if the reform had been confined to the question of

uniformity of coinage. But there occurred a circumstance which extended

its application to the question of currency. When this agitation for

uniform coinage grew apace the French quite naturally wished that their

coinage system, which had already been extended over the area comprised

by the Latin Union, should be taken as a model to be copied by other

countries outside the Union in the interest of uniformity. With this

end in view the French Government approached the British Government of

the time, but was told in reply that the British Government could not

consider the suggestion until France adopted the single gold

standard.¹³⁹ Far from being taken aback, the French Government, then so

anxious to cultivate the goodwill of England, proved so complacent that

it felt no compunction in conceding to the British the pre-requisite it

demanded, and indeed went so far out of the way, when the Conference met

in Paris in [pg 73] 1867, that it actually manœuvred¹⁴⁰ the Assembly

into passing a resolution “that for uniform international coinage it was

necessary that gold alone should be the principal currency of the

world.” So much importance was attached to the question of uniformity

of coinage that those who passed the resolution seemed not to have

noticed what sacrifice they were called upon to make for its

achievement. Perhaps it would be more correct to say that they did not

know that they were affecting by their decision the currency system of

the world. All they thought they were doing at the time was to promote

uniformity of coinage and nothing more.¹⁴¹ But whatever the extenuating

circumstances, the result was disastrous, for when the resolution came

to be acted upon by the different countries assembled, the real end of

the Conference, namely uniformity of coinage, was completely lost sight

of, and the proposed means eventually became the virtual end.

¹³⁵ _Report of the Royal Commission on International Coinage_, 1868,

p.v.

¹³⁶ Cf. Russell, H. B., _International Monetary Conferences_, 1898,

pp. 18–25.

¹³⁷ Quoted by Russell, op. cit., p. 25.

¹³⁸ Russell, loc. cit.

¹³⁹ Cf. evidence of Prof. Foxwell, Q. 23,876, Royal Commission on

Agricultural Depression in England, 1892.

¹⁴⁰ For which cf. Russell, op. cit., p. 46.

¹⁴¹ An honourable exception must be made in the case of Dr. Mees, the

representative of Holland, who drew attention to the harm likely

to result from this resolution.

The ball once set rolling, the work of demonetizing silver began to grow

apace. First in the field was Germany. Having vanquished France in the

war of 1870, she utilized the war indemnity in the reform of her chaotic

currency¹⁴² by hastening to adopt a gold currency for the United Empire

of Germany. The law of December 4, 1871, authorized the change, with

the mark as the unit of currency. Silver was demonetized by this

enactment; but the existing silver coins continued to be legal tender,

though their further coinage was stopped, along with the new gold coins

at the legal ratio of 15½ to 1. This full legal-tender power of the

silver coins was taken away from them by the law of June 9, 1873, which

reduced them to the position of a subsidiary currency.¹⁴³ This policy

was immediately copied by other [pg 74] countries of Germanic

culture.¹⁴⁴ In 1872 Norway, Sweden, and Denmark formed a Scandinavian

Monetary Union, analogous to the Latin Monetary Union, by which they

agreed to demonetize silver as was done by Germany. This treaty, which

established a gold standard and reduced the existing silver currency to

a subsidiary status, was ratified by Sweden and Denmark in 1873 and by

Norway in 1875. Holland also followed the same course. Till 1872 she

had a pure silver standard. In that year she closed her Mint to the

free coinage of silver, although the old silver money continued to be

legal tender to any amount. In 1875 she went a step further and opened

her Mints to the free coinage of gold. Her policy differed from that of

the Germanic countries in that she only suspended the free coinage of

silver, while the latter had demonetized it. Even the Latin Union was

unable to resist this tide against silver. As a consequence of this

exclusion of silver, the Latin Union, enlarged as it was by additional

members, naturally desired to take precautionary measures against being

flooded by the influx of this depreciated silver. Nor was this fear

unfounded, for the silver tendered for coinage at the Belgian Mint in

1873 was three times greater than what was tendered in 1871. Rather than

be embarrassed, Belgium, by the law of December 8, 1873, suspended the

free coinage of her silver five-franc pieces. This action of Belgium

forced the hands of the other members of the Union to adopt similar

measures. The delegates of the Union met in Paris in January, 1874, and

¹⁴² For a history of the movement for the unification of German

currency prior to 1870, cf. H. P. Willis, “The Vienna Monetary

Treaty of 1857,” in the _Journal of Political Economy_, Vol. IV,

p. 187 _et seq_.

¹⁴³ For the text of the Laws, _see_ Appendix to _History of

Bimetallism_, by Prof. J. L. Laughlin, New York, 1886,

¹⁴⁴ Cf. _Report of the Committee on the Depreciation of Silver_, 1876,

p. xxix.

“agreed to a treaty supplementary to that originally framed in

1865, and determined on withdrawing from individuals the full

power of free coinage by limiting to a moderate sum the silver

five-franc pieces which should be coined by each State of the

Union during the year 1874.”¹⁴⁵

¹⁴⁵ Laughlin, op. cit., p. 155.

The respective quotas fixed for 1874 were slightly increased [pg 75] in

1875, but were reduced in 1876.¹⁴⁶ But the actual coinage did not even

reach these small quotas. So greatly was the Union perturbed by the

silver situation that during 1877 the coinage of silver five-franc

pieces was, with the exception of Italy,¹⁴⁷ entirely suspended. This

action was, however, only a preliminary to the Treaty of November 5,

1878, by which the Latin Union agreed to close its Mints to the free

coinage of silver till further action. Though at first _sine die_, the

closure proved in the end perpetual.¹⁴⁸ Simultaneously with the

precautionary measures of the Latin Union, Russia suspended, in 1876,

the free coinage of silver except to such an amount as was necessary for

the purposes of her trade with China,¹⁴⁹ and the Imperial Decree of

November 22, 1878, directed that all customs duties above 5 roubles and

15 copecks should be payable in gold.¹⁵⁰ Austria in like manner

suspended the free coinage of silver in 1879.¹⁵¹

¹⁴⁶ The quotas fixed at the Conferences for the several members of the

Union were:—

_In Millions of Francs._

──────────────────────────────────────────────────────────────────

1874. 1875. 1876.

──────────────────────────────────────────────────────────────────

France 60 75 54

Belgium 12 50 36

Italy 40 15 10

Switzerland 8 10 7

Greece — — 3

⸺ ⸺ ⸺

120 150 110

──────────────────────────────────────────────────────────────────

In 1874 Italy was allotted an extra 20 million francs. _Ibid_., p.

155.

¹⁴⁷ She was allowed to coin 10 millions of them.

¹⁴⁸ _Ibid_., p. 158.

¹⁴⁹ _Report of the Directors of the Mint_, Washington, 1893, p. 23.

¹⁵⁰ Cf. P. Willis, “Monetary Reform in Russia,” in the _Journal of

Political Economy_, Vol. V, p. 291.

¹⁵¹ Cf. F. Wieser, “Resumption of Specie Payment in Austria-Hungary,”

in _Journal of Political Economy_, Vol. I, pp. 380–7.

On the other side of the Atlantic an important event had taken place in

the United States. In 1870 that Government resolved to consolidate the

Mint laws, which had not been revised since 1837, in a comprehensive

statute. Since the legislation of 1853 the silver dollar was the only

coin which the United States Mints coined freely. But in the new

consolidated Mint Statute of 1873 the silver dollar was deleted from the

list of coins to be issued from the Mint, [pg 76] so that it virtually

amounted to suspension of the free coinage of silver in the United

States.¹⁵² The silver dollars previously coined continued to circulate

as full legal tender, but that power was taken away by the law of June,

1874, which declared that “the silver coins of the United States shall

be a legal tender at their nominal value for any amount not exceeding

five dollars in any one payment.”

¹⁵² This measure was the subject of a strange controversy. The gold

men argued that it was deliberately adopted, while the silver men

decried it as a surreptitious act due to a “combination of

rascally contrivance and rascally connivance.” Prof. Laughlin has

well cleared the mystery surrounding this Act. He shows by

reference to debates in Congress on the legislation of 1853 that

Congress knew that by refusing to alter the ratio between gold and

silver it was placing the country on a gold standard. Too much

consideration, he thinks, has been wasted on the Act of 1873,

which merely took legal notice of the consequences of the Act of

1853. Cf. his _History of Bimetallism_, pp. 80 and 93–95.

The other factor appealed to in explanation of the dislocation of the

relative values of gold and silver was the great increase in the

production of silver as compared to gold.

TABLE IX

_Relative Production of Gold and Silver (Ounces)_

──────────────────────────────────────────────────────────────────────────────────────

Total Production. Annual Average Index Number for

Production Average Annual

Period Production.

Gold. Silver. Gold. Silver. Gold. Silver.

1493–1600 24,266,820 734,125,960 224,693 6,797,463 100 100

1601–1700 29,330,445 1,197,073,100 293,304 11,970,731 130·5 176·1

1701–1800 61,088,215 1,833,672,035 610,882 18,336,720 271·8 269·7

1801–1840 20,488,552 801,155,495 512,217 20,028,887 227·9 293·1

1841–1870 143,186,294 931,091,326 4,772,876 31,038,378 2,124·1 456·6

1871–1890 106,950,802 1,715,039,955 5,347,545 85,751,998 2,375·4 1,261·5

The history of the production of the precious metals in modern times

begins from the year 1493, a date which marks the discovery of the

American continent. Reviewing the results of the production from 1493

to 1893, a period in all of 400 years, we find that during the first

hundred years the [pg 77] production of gold and silver rises at a

uniform rate of progression. Assuming the annual average production of

each during the first century (1493–1600) in the modern history of their

production to be 100, it will be seen that in the next century

(1601–1700) the index number for the production of gold rises to 130 and

that of silver to 176. This rate of progression is also kept up in the

succeeding century (1700–1800), during which the figure for both gold

and silver approximates to 270, and continues without much disturbance

up to 1840, when the respective index numbers stood at 228 for gold and

293 for silver. From this point onwards the relative production of the

two metals underwent a complete revolution. During the next thirty

years (1841–70) the production of gold reached unprecedented heights,

while that of silver lagged behind, relatively speaking. The index

number for silver production advanced only to 450, but that for gold

went up to 2,124. This revolution was followed by a counter-revolution,

as a result of which the position as it stood at the end of 1870 was

well-nigh reversed. The production of gold received a sudden check, and

though it had increased enormously between 1840–70 it remained

stationary between 1870–93. On the other hand, the production of

silver, which was steady between 1841–70, increased threefold between

1870–93, so that the index number for its average annual production

during the latter period stood at 1,260.

In the controversy which arose over the reasons which brought about this

dislocation and decline in the value of silver in terms of gold, there

were parties to whom one of these two factors was a sufficient cause.

One side argued that had suspension or demonetization of silver not

taken place its value could never have fallen. This position was

vehemently challenged by the other side, which believed in the

over-supply of silver as the primary cause of its depreciation. Now was

the argument from relative over-supply sufficient to account for the

fall in the gold value of silver? On the face of it the explanation has

the plausibility of a simple proposition. It is one of the elementary

theorems of political economy that the value of a thing varies inversely

[pg 78] with its supply, and if the supply of silver had largely

increased, what could be more natural than that its value in terms of

gold should fall? The following were the relevant facts which formed

the basis of the argument:—

TABLE X

_Gold and Silver_¹⁵³

_Relative Production and Relative Value_

────────────────────────────────────────────────────────────────────────────────

Correlation

Ratio of Ratio between Relative

Production of Production and

(by Value Index Relative Value.

Weight) of Index Number ────────────────────────

of Gold Gold Number for Relative Relative

Period. to to for the the Production Value

Silver. Silver. Ratio of Ratio of of

As 1 As 1 Production. of Silver. Silver.

Grain Grain Value. Falls - Falls

to: to: Rises + -

Rises

1681–1700 31·8 14·95 100 100 — —

1701–1720 27·7 15·21 87 101·7 −13 −1·7

1721–1740 22·6 15·10 71 101 −29 −1·0

1741–1760 21·7 14·70 67 98·3 −33 +1·7

1761–1780 31·5 14·40 99 96·3 −1 +3·7

1781–1800 49·4 15·08 155·6 100·8 +55·6 −.8

1801–1810 50·3 15·67 158·0 104·8 +58·0 −4·8

1811–1820 47·2 15·68 148·0 104·9 +48·0 −4·9

1821–1830 32·4 15·82 101·9 105·8 +1·9 −5·8

1831–1840 29·4 15·77 92·4 105·4 −7·6 −5·4

1841–1850 14·2 15·81 44·6 105·8 −55·4 −5·8

1851–1855 4·4 15·45 13·8 103·3 −86·2 −3·3

1856–1860 4·5 15·28 14·0 102·2 −86·0 −2·2

1861–1865 5·9 15·42 18·55 103·1 −81·5 −3·1

1866–1870 6·9 15·52 21·7 103·8 −78·3 −3·8

1871–1875 11·3 16·10 35·5 107·6 −64·5 −7·6

1876–1880 13·2 17·79 41·5 119·0 −58·5 −19·0

1881–1886 17·3 18·81 54·4 125·8 −45·6 −25·8

1886–1890 19·9 20·98 62·6 140·3 −37·4 −40·3

1891–1895 20·0 26·75 62·9 178·9 −37·1 −78·9

The facts thus presented led to two conclusions. The first is that the

supposed enormous increase in the relative production of silver was an

assumption which had no foundation [pg 79] in reality. On the contrary,

glance at the figures for relative production discloses the curious fact

that since the beginning of the eighteenth century silver, instead of

rising, has been falling in proportion. With the exception of the first

quarter of the nineteenth century, silver had formed, throughout the two

centuries covered by the table, a diminishing proportion as compared

with gold.¹⁵⁴ Indeed, never was the proportion of silver so low as it

was in the latter half of the nineteenth century, and even when after

1873 it began to grow it did not reach half the magnitude it had reached

in the beginning of the eighteenth century. The second conclusion which

these facts were claimed to sustain was that the value of silver in

terms of gold did not move in sympathy with its supply relative to that

of gold. According to theory, the value of silver should have been

rising because the relative volume of its production had been

diminishing. On the other hand, a closer examination of the figures of

relative values and relative productions, as given in the foregoing

table, instead of showing any close correlation (_see_ Chart III)

between them, pointed to the contrary. Instead of supply and value

being inverse in proportion, it showed that as its supply was falling

there was also a fall in its value. Such being the facts of history, it

was contended that they gave no support to those who rested their case

on over-supply rather than on demonetization as a sufficient explanation

for the depreciation of silver.

¹⁵³ The table is based on figures of M. de Foville of the French Mint,

as given by Mr. F. B. Forbes in _The Bimetallist_ of July, 1897,

pp. 125–28.

¹⁵⁴ In view of this, it is a matter of some surprise that such an

eminent economist as Prof. W. Lexis should have ceased to be

bimetallist on the ground that the enormous increase of silver

militated against the establishment of a permanently high ratio

with gold. Cf. his essay on “The Present Monetary Situation,” in

the _Economic Studies of the American Economic Association_, 1896,

Vol. I, No. 4, pp. 273–77. The habit of measuring the production

of silver in terms of value is no doubt largely responsible for

this quite unfounded notion.

[Illustration: CHART III: Relative Values and Relative Production of

Gold and Silver]

Apart from such minor points, the issue was considerably narrowed by the

peculiarity of the events of the twenty years preceding and following

the year 1873.¹⁵⁵ Compare, it was said, the period commencing with 1848

and ending [pg 80] with the year 1870 with the period following 1870,

and there emerges the arresting fact that these two periods, though they

have been the opposite of each other with reference to the relative

values of the two metals, were alike with reference to the changes in

their relative supply. The period between 1870 and 1893 on the side of

relative production was marked by the preponderance of silver. The

period between 1848 and 1870 is an exact parallel to the above period

with respect to changes in the relative supply of the two precious

metals, only in this case it was gold that had increased in volume.

Now, if it is over-supply that governed the value relations of the two

metals in the second period (1870–93) the same should be true of their

value relations in the first period (1848–70). Was there, then, a

disturbance in the relative values of the two metals in the first period

anything like what took place in the second period? It was insisted

that the disturbance in the ratios of production of the two metals in

the first period was enormously greater than that which occurred in the

second period. Indeed, comparatively speaking, the disturbance in the

second period was nothing to speak of. And yet their relative (value

during the first period was well-nigh constant at the ratio of 1 to 15½,

while in the second it fluctuated between 16·10 and 26·75. Those who

argued that the value of silver fell after 1873 because of its

over-supply were thus faced with the problem as to why the value of gold

did not fall when its supply had become so abundant before 1873. The

whole controversy was therefore centred into the question as to what

could have made this difference in the two situations? If the colossal

increase in the production of gold in the first period did not raise the

value of silver by more than 2 per cent., how was it that a

comparatively insignificant rise in the relative production of silver in

the second period led to such an enormous rise in the price of gold?

What was the controlling influence present in the one case which was

absent in the other? Those who held that it was demonetization of silver

that was responsible for its depreciation argued that, though alike in

every way, the two periods differed in one important [pg 81] particular.

What distinguished them was the fact that in the former it was a common

practice to define the standard money of a country as a certain quantity

of gold _or_ a certain quantity of silver. Prior to 1803 the two metals

were rated differently in different countries,¹⁵⁶ but since that date

the rating of 1 to 15½ became more uniform, with the result that the

monetary standard throughout that period was either 1 gr. of gold or 15½

grs. of silver. On the other hand, during the second period, the “_or_”

which characterized the first period was deleted by the

silver-demonetizing and suspending decrees. In other words, the first

period was characterized by the prevalence of bimetallism under which

the two metals could be used interchangeably at a fixed given ratio. In

the second period they could not be so used owing to the fact that the

fixed ratio necessary for interchange had been abrogated. Now, could

the existence or non-existence of a fixed ratio be said to be such a

powerful influence as to make the whole difference that set the two

periods in such marked contrast? That this was the factor which made

the whole difference was the view of the bimetallists. It was said

that, by virtue of the monetary system prevalent during the first

period, gold and silver were rendered substitutes and were regarded as

“one commodity of two different strengths.” So related, the conditions

of supply had no effect upon their ratio of exchange, as would have been

the case in respect of a commodity without a substitute. In the case of

commodities which are substitutes, the relative scarcity of one can give

it no greater value in terms of the other than that defined by their

ratio of exchange, because by reason of the freedom of substitution the

scarcity can be made good by the abundance of the other. On the other

hand, the relative abundance of one can not depreciate its value in

terms of the other below the ratio of exchange, because its superfluity

can be absorbed by the void created in consequence of a paucity of the

other. So long as they remain substitutes with a fixed ratio of

substitution, nothing originating in demand or supply could disturb

their [pg 82] ratio. The two being one commodity, whatever changes take

place in the demand or supply of either system beyond the needs of

commerce express themselves in the price level exactly as though one of

them alone was the money medium; but their ratio of exchange will be

preserved intact in any case.

¹⁵⁵ Cf. H. S. Foxwell, “Bimetallism: Its Meaning and Aims,” in _The

(Oxford) Economic Review_ (1893), Vol. III, p. 302.

¹⁵⁶ For these ratios, _see_ Appendix, Table B, to _A Colloquy on

Currency_, by H. H. Gibbs.

In support of this was cited the authority of Jevons, who said:¹⁵⁷

“Whenever different commodities are thus applicable to the same

purposes their conditions of demand and exchange are not

independent. Their mutual ratio of exchange cannot vary much

for it will be closely defined by the ratio of their utilities.

Beef and mutton differ so slightly that people eat them almost

indifferently. But the wholesale price of mutton, on an average,

exceeds that of beef in the ratio of 9 to 8, and we must

therefore conclude that people generally esteem mutton more than

beef in this proportion, otherwise they would not buy the dear

meat. … So long as the equation of utility holds true, the ratio

of exchange between mutton and beef will not diverge from that

of 8 to 9. If the supply of beef falls off people will not pay

a higher price for it, but will eat more mutton; and if the

supply of mutton falls off, they will eat more beef. … We must,

in fact, treat beef and mutton as one commodity of two different

strengths—just as gold at 18 carats and gold at 20 carats are

hardly considered as two but rather as one commodity, of which

twenty parts of one are equivalent to eighteen of the other.

“It is upon this principle that we must explain, in harmony with

Cairnes’ views, the extraordinary permanence of the ratio of

exchange of gold and silver, which from the commencement of the

eighteenth century up to recent years never diverged much from

15 to 1. That this fixedness of ratio did not depend entirely

upon the amount or cost of production is proved by the very

slight effect of the Australian and Californian gold

discoveries, which never raised the gold price of silver more

than about 4⅔ per cent., and failed to have more than a

permanent effect of 1½ per cent. This permanence of relative

values may have been partially due to the fact that gold and

silver can be employed for [pg 83] exactly the same purposes,

but that the superior brilliancy of gold occasions it to be

preferred, unless it be about 15 or 15½ times as costly as

silver. Much more probably, however, the explanation of the fact

is to be found in the fixed ratio of 15½ to 1, according to

which these metals are exchanged in the currency of France and

some other continental countries. The French Currency Law of the

year XI established an artificial¹⁵⁸ equation—

Utility of gold = 15½ × utility of silver

[pg 84] and it is probably not without some reason that Wolowski

and other recent French economists attributed to this law of

replacement an important effect in preventing disturbance in the

relations of gold and silver.”

¹⁵⁷ _Theory of Political Economy_, 4th ed., 1911, pp. 134–36.

¹⁵⁸ It is this artificiality of the bimetallic system which

unfortunately befogs the minds of some people and prejudices those

of others. Some do not understand why the price determination of

two commodities used as money should be so different from the

price determination of any other two commodities as to be governed

by a ratio fixed by law. Others are puzzled as to why, if gold and

silver are a pair of substitutes, should they require a legal

ratio while other pairs of substitutes circulate without a legal

ratio, merely on the basis of the ratio of their utility. These

difficulties are well explained away by Prof. Fisher thus:

“… two forms of money differ from a random pair of

commodities in being substitutes. Two substitutes proper

are regarded by the consumer as a single commodity. Thus

lumping together of the two commodities reduces the number

of demand conditions, but does not introduce any

indeterminateness into the problem because the missing

conditions are at once supplied by a _fixed ratio of

substitution_. Thus if ten pounds of cane sugar serve the

same purpose as eleven pounds of beet-root sugar, their

fixed ratio of substitution is ten to eleven. … In these

cases the fixed ratio is based on the relative capacities

of the two commodities to fill a common need, and is quite

antecedent to their prices. … The substitution ratio is

fixed by nature, and in turn fixes the price ratio.

“In the single case of money, however, there is no fixed

ratio of substitution. … We have here to deal not with

relative sweetening power, nor relative nourishing power,

nor with any other capacity to satisfy wants—no capacity

inherent in the metals and independent of their prices.

We have instead to deal only with relative _purchasing

power_. We do not reckon a utility in the metal itself,

but in the commodities it will buy. We assign their

respective desirabilities or utilities to the sugars …

before we know their prices, but we must inquire the

relative circulating value of gold and silver before we

can know at what ratio we ourselves prize them. To us the

ratio of substitution is incidentally the price ratio.

The case of the two forms of money is unique. They are

substitutes, but have no natural ratio of substitution,

dependent on consumers’ preferences.

“The foregoing considerations … are overlooked by those

who imagine that a fixed legal ratio is merely

superimposed upon a system of supply and demand already

determinate, and who seek to prove thereby that such a

ratio is foredoomed to failure … the … analogy … is

unsound. … Gold and silver … are not completely analogous

even to two substitutes, because for two forms of money

there is no consumers’ natural ratio of substitution.

There seems, therefore, room for an artificial ratio.

…”—_Purchasing Power of Money_. 1911. pp. 376–77.

But granting that before 1873 the ratio was preserved owing to the

compensatory action of the bimetallic law, can it be said that it would

have been maintained after 1873 if the law had not been suspended? To

give an uncompromising affirmative as the bimetallists did is to suppose

that bimetallism can work under all conditions. As a matter of fact,

though it is workable under certain conditions it is not workable under

other conditions. These conditions are well described by Prof.

Fisher.¹⁵⁹ The question under bimetallism is whether the market ratio

between gold and silver bullion will always be the same as the legal

ratio between gold and silver coins freely minted and possessing

unlimited legal-tender power. Now supposing the supply of silver

bullion has increased relatively to that of gold bullion, the result

will obviously be a divergence in the mint and the market ratio. Will

the compensatory action of the bimetallic law restore the equilibrium?

It may succeed in [pg 85] doing it or it may not. If the increase in

the supply of silver bullion and the decrease in that of gold bullion

are such that a decrease in that of silver caused by its inflow into the

currency and an increase in that of gold caused by its outflow from

currency can restore then to their old levels as bullion, bimetallism

would succeed; in other words, the market ratio of the two bullions

would tend to return to the mint ratio. But if the increase in the

supply of silver bullion and the decrease in that of gold is such that

the outflow of silver bullion into currency reduces the level of the

silver bullion to the old level, but the outflow of gold bullion from

currency does not suffice to raise the level of the gold bullion to the

old level, or if the outflow of gold from currency raises the level of

the gold bullion to the old level, but the inflow of silver into

currency does not result in the reduction of the level of silver bullion

to its old level, bimetallism must fail; in other words, the market

ratio of the two bullions will remain diverted from the mint ratio

legally established between their coins.

¹⁵⁹ _Elementary Principles of Economics_, 1912, pp. 228–29. In the

illustrations given by Prof. Fisher he appears, although he does

not mean it, to make the success or failure of bimetallism hang

upon the question whether or not the two metals are maintained in

circulation. For in illustration which he gives to show the

failure of bimetallism—Fig. 14 (b)—his film _f_ shows gold to be

entirely thrown out of circulation; while in the illustration he

gives to show the success of bimetallism—Fig. 15 (b)—his film _f_

shows gold to be only partially thrown out of circulation. But

there seems to be no reason to suppose that there cannot be a

third possibility, namely, that while the position of the film _f_

is as in Fig. 14 (b) the level of the gold bullion and silver

bullion may be as in Fig. 15 (b)—a possibility in which

bimetallism succeeds although one of the two metals is entirely

pushed out of circulation. For the success of bimetallism it is

not necessary that both the metals should remain in circulation.

Its success depends upon whether or not the compensatory action

succeeds in restoring the relative values of the two bullions to

that legally established between the two coins. If it succeeds in

achieving that, the ratio would be preserved even if the

compensatory action drives one metal entirely out of circulation.

Under which of these two possibilities could the circumstances arising

after 1873 have fallen? That is a question about which no one can say

anything definitely. Even Jevons, who admitted the success of the

bimetallic law in the earlier period, was not very sanguine about its

success in the latter period. It was he who observed¹⁶⁰

“that the question of bimetallism is one which does not admit of

any precise and simple answer. It is essentially an

indeterminate problem. It involves several variable quantities

and many constant quantities, the latter being either

inaccurately known or, in many cases, altogether unknown. …”

¹⁶⁰ _Investigations_, etc. (ed. Foxwell), p. 317.

None the less, it is certain that the divergence between the mint ratio

and the market ratio under a bimetallic system must be smaller than may

be the case where there is no bimetallic system. Whenever the market

ratio diverges from the mint ratio the compensatory action under the

bimetallic law tends to restore the equilibrium, and even where it fails

in restoring it, it does succeed in abridging the [pg 86] gulf between

the two ratios. That being the case, it is safe to argue that had there

been no demonetization of silver after 1873 the ratio between gold and

silver would have probably been preserved as it was during the monetary

disturbances of the earlier period. At any rate, this much is certain,

that the market ratio between the two metals could not have diverged

from the mint ratio to the extent it actually did.¹⁶¹

¹⁶¹ Fisher, _Purchasing Power of Money_, 1911, pp. 134–35.

It is therefore a sad commentary on the monetary legislation of the

seventies that if it did not actually help to create, for no purpose, a

problem unknown before, it certainly helped to make worse a bad

situation. Prior to 1870 not all countries had a common currency. There

were India and countries of Western Europe which were exclusively on a

silver basis, and others, like England and Portugal, which were

exclusively on a gold basis, and yet none of them felt the want of a

common standard of value in their mutual dealings. So long as there

existed the fixed-ratio system in France and the Latin Union the problem

was really provided for, for under it the two metals behaved as one and

thereby furnished a common standard, although all countries did not use

the same metal as their standard money. It was therefore a matter of

comparative indifference to most countries which metal they used so long

as there was some one country which used either at a certain defined

ratio. With the destruction of this fixed ratio what was thus a matter

of comparative indifference became a matter of supreme concern. Every

country which had before enjoyed the benefits of a common international

standard without having a common currency was faced with a crisis in

which the choice lay between sacrificing its currency to securing a

common standard or hugging its currency and foregoing the benefits of a

common standard. That exigencies of a common standard ultimately led to

its accomplishment was as it should have been, but it was not a fact

before a great deal of harm and some heavy burdens had brought home to

people what the want of it really meant to them. [pg 87]

CHAPTER III

*THE SILVER STANDARD AND THE EVILS OF ITS INSTABILITY*

The economic consequences of this rupture of the par of exchange were of

the most far-reaching character. It divided the commercial world into

two sharply defined groups, one using gold and the other using silver as

their standard money. When so much gold was always equal to so much

silver, as was the case previous to 1873, it mattered very little, for

the purposes of international transactions, whether a country was on a

gold or on a silver standard; nor did it make any difference in which of

the two currencies its obligations were stipulated and realized. But

when, owing to the dislocation of the fixed par, it was not possible to

define how much silver was equal to how much gold from year to year or

even from month to month, this precision of value, the very soul of

pecuniary exchange, gave place to the uncertainties of gambling. Of

course all countries were not drawn into this vortex of perplexities in

the same degree and to the same extent, yet it was impossible for any

country which participated in international commerce to escape from

being dragged into it. This was true of India as it was of no other

country. She was a silver-standard country intimately bound to a gold

standard country, so that her economic and financial life was at the

mercy of blind forces operating upon the relative values of gold and

silver which governed the rupee-sterling exchange.

The fall increased the burden of those who were under an obligation to

make gold payments. Amongst such the most [pg 88] heavily charged was

the Government of India. Owing to the exigencies of its political

constitution, that Government has been under the necessity of making

certain payments in England to meet: (1) Interest on debt and on the

stock of the guaranteed railway companies; (2) expenses on account of

the European troops maintained in India; (3) pensions and non-effective

allowances payable in England; (4) cost of the home administration;¹⁶²

and (5) stores purchased in England for use or consumption in India.

England being a gold-standard country, these payments were necessarily

gold payments. But the revenues of the Government of India out of which

these payments were met were received in silver, which was the sole

legal-tender money of the country. It is evident that even if the gold

payments were a fixed quantity their burden must increase _pari passu_

with the fall in the gold value of silver. But the gold payments were

not a fixed quantity. They have ever been on the increase, so that the

rupee cost of the gold payments grew both by reason of the growth in

their magnitude, and also by reason of the contraction of the medium,

i.e. the appreciation of gold, in which they were payable. How greatly

this double levy diminished the revenues of India, the figures on the

opposite page give a convincing testimony.

¹⁶² Since the Reform Act of 1920 that part of this cost which was

“political” has been placed upon the British Estimates.

TABLE XI

_The Increase in the Rupee Cost of Gold Payments_¹⁶³

─────────────────────────────────────────────────────────────────────

Total Excess Amount of this Excess due

of Rupees to

needed to ─────────────────────────────

provide for (1) Fall in (2)

Average the net the Rate of Increase in

Rate of Sterling Exchange gold

Exchange Payments of over that Payments

Financial for the the Year over of 1874–75. over those

Year Year. those of the Year

required to 1874–75.

meet the

Sterling

Payments of

1874–75.

───────────────────────────────────────────────────────────

s. d. R R R

1875–76 1 9·626 86,97,980 41,13,723 45,84,257

1876–77 1 8·508 3,15,06,824 1,44,68,234 1,70,38,590

1877–78 1 8·791 1,30,05,481 1,14,58,670 1,15,46,811

1878–79 1 7·794 1,85,23,170 1,04,16,718 81,06,452

1879–80 1 7·961 39,23,570 1,65,37,394 −1,26,13,824

1880–81 1 7·956 3,12,11,981 1,92,82,582 1,19,29,399

1881–82 1 7·895 3,18,19,685 1,98,76,786 1,19,42,899

1882–83 1 7·525 −62,50,518 1,86,35,246 −2,48,85,764

1883–84 1 7·536 3,44,16,,685 2,33,46,040 1,10,70,645

1884–85 1 7·308 1,96,25,981 2,48,03,423 51,77,442

1885–86 1 6·254 −1,82,11,346 2,54,95,337 −4,37,06,683

1886–87 1 5·441 4,69,16,788 4,46,68,299 −33,47,376

1887–88 1 4·898 4,63,13,161 4,96,60,536 −33,47,376

1888–89 1 4·379 9,00,38,166 6,59,71,998 2,40,66,168

1889–90 1 4·566 7,75,96,889 6,06,98,370 1,68,98,519

1890–91 1 6·090 9,06,11,857 4,65,48,302 4,40,63,555

1891–92 1 4·733 10,44,44,529 6,54,52,999 3,89,91,530

¹⁶³ Compiled from figures in Appendix II, p. 270, of the Indian

Currency Committee of 1893.

The effect of such a growing burden on the finance of the Government may

well be imagined; the condition of the Government, embarrassing at

first, later became quite desperate under this continuously increasing

burden. It enforced a policy of high taxation and rigid economy in the

finances of the Government. Analysing the resource side of the Indian

Budgets from the year 1872–73, we find that there was hardly any year

which did not expire without making an addition to the existing imposts

of the country. In 1872–73 there commenced the levy of what were called

Provincial Rates. The fiscal year 1875–76 witnessed the addition of R.1

per gallon in the excise duty on spirits. In 1877–78 the Pass Duty on

Malwa opium was raised from [pg 89] Rs. 600 to Rs. 650 per chest. An

addition of a Licence Tax and Local Rates was made in the year 1878–79,

and an increase of Rs. 50 per chest took place in the Malwa Opium Duty

in the following year. With the help of these imposts the Government

expected to place its finances on an adequate basis. By the end of 1882

it felt quite secure and even went so far as to remit some of the taxes,

which it did by lowering the customs duties and the Patwari Cess in the

North-Western Provinces. But the rapid pace in the fall of the exchange

soon showed that a resort to further taxation was [pg 90] necessary to

make up for the increased cost of the sterling payments. To the existing

burdens, therefore, was added in 1886 an Income Tax, a duty of 5 per

cent. on imported and also on non-illuminating petroleum. The Salt Duty

was raised in 1888 in India from Rs. 2 to Rs. 2½, and in Burma from 3

annas to R. 1 per maund. The Patwari Cess of the North-Western

Provinces, repealed in 1882, was re-imposed in 1888. The rates of duty

on imported spirit and the excise duties on spirits were not only raised

in 1890, but were afterwards added to in every province. An excise duty

on malt liquor was levied in 1893, and another on salted fish at the

rate of 6 annas per maund. The yield of the taxes and duties levied

from 1882–83 was¹⁶⁴ as follows:—

¹⁶⁴ _Report of the Indian Currency Committee_, 1893, App. II, p. 263.

──────────────────────────────────────────────────────────────────

Sources 1882–83. 1892–93.

──────────────────────────────────────────────────────────────────

Rs. Rs.

──────────────────────────────────────────────────────────────────

Salt 5,67,50,000 8,14,90,000

──────────────────────────────────────────────────────────────────

Excise 3,47,50,000 4,97,90,000

──────────────────────────────────────────────────────────────────

Customs 1,08,90,000 1,41,80,000

──────────────────────────────────────────────────────────────────

Assessed Taxes 48,40,000 1,63,60,000

──────────────────────────────────────────────────────────────────

All this additional burden was due to the enhanced cost of meeting the

gold payments, and “would not have been necessary but for the fall in

the exchange.”¹⁶⁵

¹⁶⁵ J. E. O’Conor, _Report of the Indian Currency Committee_, 1898,

App. II, p. 182.

Along with this increase of resources the Government of India also

exercised the virtue of economy in the cost of administration. For the

first time in its history the Government turned to the alternative of

employing the comparatively cheaper agency of the natives of the country

in place of the imported Englishmen. Prior to 1870 the scope of

effecting economy along this line was very limited. By the Civil

Service Reforms of 1853¹⁶⁶ the way was cleared for the appointment of

Indians to the posts reserved for the members of the covenanted Civil

Service by the statute of [pg 91] 1793.¹⁶⁷ But this reform did not

conduce to any economy in the cost of the administration, because the

Indian members carried the same high scale of salaries as did the

English members of the Civil Service. It was when the statute of 1870

(33 Vic. c. 3) was passed permitting the appointment by nomination of

non-covenanted Indians to places reserved for the covenanted Civil

Service on a lower scale of salary, that a real scope for economy

presented itself to the Government of India. Hard pressed, the

Government of India availed itself of the possibilities for economy held

out by this statute. So great was the need for economy and so powerful

was the interest of the Government in reducing its expenditure that it

proceeded, notwithstanding increased demands for efficient

administration, to substitute the less expensive agency of

non-covenanted civilians in place of the more expensive agency of the

covenanted civilians. The scale on which this substitution was effected

was by no means small, for we find that between 1874 and 1889 the

strength of the covenanted service recruited in England was reduced by

more than 22 per cent., and was further expected to be reduced by about

12 per cent., by the employment of uncovenanted Indians to the posts

usually reserved for covenanted civilians.¹⁶⁸ Besides substituting a

cheap for a dear agency in the administration, the Government also

sought to obtain relief by applying the pruning knife to the rank growth

in departmental extravagances.¹⁶⁹ Even with such heroic efforts to

increase the revenue and reduce the expenditure the finances of the

Government throughout the period of the falling exchange were never in a

flourishing state.

¹⁶⁶ Cf. _Report of the Public Service Commission_, C. 5327 of 1887.

¹⁶⁷ This clause of the statutes has been re-enacted into the statute

of 1861.

¹⁶⁸ Cf. evidence of Mr. Jenkins, Q. 12. Mit. of Evid. of the Select

Committee on East India (Civil Servants), H. of C. 327 of 1890.

¹⁶⁹ Cf. _Calcutta Civil Finance Committee’s Report_, 1886; also _The

Report of the Civil Finance Commissioner_ (1887), who completed

the work of the Committee after it was dissolved.

Much more regrettable was the inability of the Government, owing to its

financial difficulties, to find money for useful public works. The

welfare of the Indian people [pg 92]

TABLE XII

_Revenue and Expenditure of the Government of India_

──────────────────────────────────────────────────────────────────────────────────────────────────

In India. In England. Final

Average Result.

Rate ──────────────────────────────────────────────────────────────────────────────

of Net Net Surplus Net Exchange. Surplus

Year. Exchange. Revenue. Expenditure Revenue. Sterling (+) or

excluding Revenue. Deficit

Exchange. (−)

──────────────────────────────────────────────────────────────────────────────────────────

d. R. R. R. £ R. R.

1874–75 22·156 39,564,216 25,897,098 13,667,118 12,562,101 1,045,239 59,778

1875–76 21·626 40,053,419 24,541,923 15,511,496 12,544,813 1,377,428 1,589,255

1876–77 20·508 38,253,366 25,355,285 12,898,081 13,229,646 2,252,611 −2,584,176

1877–78 20·791 39,275,489 27,658,021 11,617,468 13,756,478 2,123,030 −4,262,040

1878–79 19·794 44,415,139 25,778,928 18,636,211 13,610,211 2,891,902 2,134,098

1879–80 19·961 45,258,197 29,384,030 15,874,167 14,223,891 2,878,169 −1,227,893

1880–81 19·956 44,691,119 34,880,434 9,810,085 11,177,231 2,264,848 −3,031,394

1881–82 19·895 45,471,887 27,717,249 17,754,638 11,737,688 2,421,499 3,595,451

1882–83 19·525 42,526,173 25,500,437 17,025,736 13,299,976 3,050,923 674,837

1883–84 19·536 43,591,273 23,566,381 20,024,892 14,770,257 3,375,158 1,879,477

1884–85 19·308 41,585,347 24,763,779 16,821,568 13,844,028 3,363,986 −386,446

1885–86 18·254 42,635,953 27,352,132 15,283,821 13,755,659 4,329,888 −2,801,726

1886–87 17·441 44,804,774 25,124,335 19,680,439 14,172,298 5,329,714 178,427

1887–88 16·898 45,424,150 25,968,025 19,456,125 15,128,018 6,356,939 −2,028,832

1888–89 16·379 46,558,354 25,051,147 21,507,207 14,652,590 6,817,599 37,018

1889–90 16·566 50,005,810 26,367,855 23,637,955 14,513,155 6,512,767 2,612,033

1890–91 18·090 49,403,819 25,579,727 23,824,092 15,176,866 4,959,055 3,688,171

1891–92 16·733 50,023,142 27,013,618 23,009,524 15,716,780 6,825,909 467,535

[pg 93] depends upon turning to best account the resources which the

country possesses. But the people have had very little of the necessary

spirit of enterprise in them. The task, therefore, has fallen upon the

Government of India to provide the country with the two prime requisites

of a sustained economic life, namely a system of transport and a network

of irrigation. With this object in view the Government had inaugurated

a policy of developing what were called “Extraordinary Public Works,”

financed by capital borrowings. For such borrowings India, as was to be

expected, hardly offered any market, the people being too poor and their

savings too scanty to furnish a modicum of the required capital outlay.

Like all Governments of poor peoples, the Government of India had

therefore to turn to wealthier countries who had surplus capital to

lend. All these countries unfortunately happened to be on the gold

standard. As long as it was possible to say that so much gold was equal

to so much silver the English investor was indifferent whether the

securities of the Government of India were rupee securities or sterling

securities. But the fall in the gold value of silver was also a fall in

the gold value of the rupee securities, and what was once a secure

investment ceased to be so any more. This placed the Government in a

difficult position in the matter of financing its extraordinary public

works.

The English investor would not invest in the rupee securities. An

important customer for the Indian rupee securities was thus lost. The

response of the Indian money market was inadequate. To issue sterling

securities was the only alternative to enable the Government to tap a

bigger and a more constant reservoir for the drawing of capital to

India; but as it was bound to increase the burden of the gold payments,

which it was the strongest interest of the Government to reduce, the

resort to the London money market, unavoidable as it became, was

somewhat restrained,¹⁷⁰ [pg 94]

¹⁷⁰ During the period of falling exchange the distribution of the debt

of India was as follows:—

──────────────────────────────────────────────────────────────────

_Sterling Debt._ _Rupee Debt._

End of 1873–74 41,117,617 66,41,72,900

End of 1898–99 124,268,605 1,12,65,04,340

_Indian Currency Committee_ (1898), Appendix II, p. 179.

──────────────────────────────────────────────────────────────────

TABLE XIII

_Price Movements of the Rupee and Sterling Securities of

the Government of India_¹⁷¹

────────────────────────────────────────────────────────────────────────────────────────────────────────────────────────────────────

Price of 4 per cent. Price of Sterling India

Rates of Rupee Paper. Stock.

Exchange. ─────────────────────────────────────────────────────────────────────────────────────────────────────────

Year. In In 4 per 3½ per 3 per

Calcutta. London. cent. cent. cent.

Highest. Lowest. Highest. Lowest. Highest. Lowest. Highest. Lowest. Highest. Lowest. Highest. Lowest.

d. d.

1873 22⅞ 21⅝ 105 101⅞ 97 94½ 106½ 101¼

1874 23⅛ 21¾ 104½ 99½ 98 94½ 103¾ 101

1875 22 3⁄16 21¼ 102⅞ 101¾ 94 91 106¼ 103¼

1876 22⅜ 18½ 101⅞ 98¾ 89¾ 78 105⅞ 101⅞

1877 22¼ 20 9⁄16 98⅞ 93¼ 88½ 81 104⅝ 102¼

1878 21 18¾ 96⅞ 93½ 82½ 75⅜ 104⅝ 99

1879 20⅝ 18⅝ 94⅞ 91¼ 80 77¼ 105⅜ 100⅞

1880 20⅜ 19¾ 100 92 81⅜ 77¾ 105⅝ 102⅛

15⁄16

1881 20 1⁄16 19½ 104⅝ 100 86 81½ 106⅜ 103⅞ 103⅞ 100¾

1882 20 3⁄16 19 1⁄16 102 1⁄16 95⅝ 85 81 105⅛ 102⅞ 101⅞ 99¾

1883 19 9⁄16 19 3⁄16 101⅛ 97 9⁄16 82 79¾ 104⅝ 102 103⅛ 101⅜

7⁄16

1884 19¾ 18 100⅝ 95 5⁄16 81¾ 78¼ 104⅜ 101⅝ 107⅛ 101¾ 96¼ 91¾

15⁄16

1885 19 3⁄16 17 98 7⁄16 92¼ 77½ 73¼ 103 1⁄16 98¾ 102¾ 97½ 91½ 85¾

11⁄32

1886 18 16⅛ 97¾ 97 3⁄16 73 66¼ 103½ 101¼ 102¾ 99¾ 90⅛ 86⅝

1887 18 3⁄16 15⅝ 99 3⁄16 95 5⁄16 71 11⁄16 67⅞ 102¾ 100½ 103¼ 100¼ 92¾ 95⅜

1888 17⅛ 16 100 3⁄16 97¾ 69⅜ 66¼ 102⅞ 100½ 107¼ 104⅝ 98 95

1889 16 15⁄16 16 100⅜ 97 1⁄16 69⅛ 66⅜ 109½ 106⅞ 101⅛ 99

1890 20 29⁄32 16⅞ 103⅞ 96 87¼ 68¾ 108½ 105¼ 100¾ 95¼

13⁄16

1891 18¼ 16⅝ 107 104 80¾ 74¼ 109½ 105 99 94½

13⁄16 1⁄16

1892 16 11⁄16 14⅝ 108 103 74½ 62 109½ 106⅛ 98½ 94⅞

15⁄16 11⁄15

¹⁷¹ Appendix II to the _Report of the Indian Currency Committee_ of

1893, p. 272. These prices differ slightly from those given in

Appendix IV to the First Report of the Gold and Silver Commission,

1886, and also from those in the Statistics of British India

(First Issue) for 1906–07, Part IV, (_a_) Finance Tables 7 and 8

of the division called Prices.

[pg 95] with the result that the expansion of extraordinary public works

did not proceed at a pace demanded by the needs of the country. The

effects of this financial derangement, consequent on the fall of the

exchange, were not confined to the Government of India. They were

immediately felt by the municipalities and other local bodies who were

dependent upon the Government for financial aid. So long as the cash

balances were overflowing in the Treasury of the Government, “one of the

most useful ways” to employ them was found in lending a portion of them

to these local institutions. As they had just then been inaugurated

under the local self-government policy of Lord Ripon’s régime, and were

looked upon only as an experiment, their taxing and borrowing powers

were rigidly limited. Consequently, this financial aid from the Central

Government by way of temporary advances was a resource of inestimable

value to them. When, however, the cash balances of the Central

Government began to diminish owing to the continued losses by exchange,

these facilities were severely¹⁷² curtailed, so that the very vitality

of these institutions was threatened just at the moment when they needed

all help to foster their growth and strengthen their foundations.

Addressing the Secretary of State, the Government of India, in a

despatch of February 2, 1886, observed¹⁷³:—

¹⁷² Cf. _Financial Statement_, 1876–77, p. 94.

¹⁷³ See C. 4868 of 1886, p. 8.

“10. We do not hesitate to repeat that the facts set forth in

the preceding paragraphs are, from the point of Indian

interests, intolerable; and the evils which we have enumerated

do not exhaust the catalogue. Uncertainty regarding the future

of silver discourages the investment of capital in India, and we

find it impossible to borrow in silver except at an excessive

cost.

“On the other hand, the Frontier and Famine Railways which we

propose to construct, and the Coast and Frontier defences which

we have planned, are imperatively required and cannot be

postponed indefinitely.

“We are forced, therefore, either to increase our sterling

liabilities, to which course there are so many objections, or

[pg 96] to do without the railways required for the commercial

development of the country, and its protection against invasion

and the effects of famine.

――――――――

“11. Nor can the difficulties which local bodies experience in

borrowing in India be overlooked. The Municipalities of Bombay

and Calcutta require large sums for sanitary improvements, but

the high rate of interest which they must pay for silver loans

operates to deter them from undertaking expensive works, and we

need hardly remind your Lordship that it has quite recently been

found necessary for Government to undertake to lend the money

required for the construction of docks at Calcutta and Bombay,

and that when the Port Commissioners of Calcutta attempted to

raise a loan of 75 lakhs of rupees in September, 1885,

guaranteed by the Government of India, the total amount of

tenders was only Rs. 40,200, and no portion of this

insignificant amount was offered at par. …”

The importation of capital on private account was hampered for similar

reasons, to the great detriment of the country. It was urged on all

hands, and was even recommended by a Royal Commission,¹⁷⁴ that one

avenue of escape from the ravages of recurring famines, to which India

so pitifully succumbed at such frequent intervals, was the

diversification of her industries. To be of any permanent benefit such

diversified industrial life could be based on a capitalistic basis

alone. But that depended upon the flow of capital into the country as

freely as the needs of the country required. As matters then stood, the

English investor, the largest purveyor of capital, looked upon the

investment of capital in India as a risky proposition. It was feared

that once the capital was spread out in a silver country every fall in

the price of silver would not only make the return uncertain when drawn

in gold, but would also reduce the capital value of his investment in

terms of gold, which was naturally the unit in which he measured all his

returns and his outlays. This check to the free [pg 97] inflow of

capital was undoubtedly the most serious evil arising out of the rupture

of the par of exchange.

¹⁷⁴ Cf. _The Report of the Famine Commission of_ 1880, Part II, C.

2735 of 1880, pp. 175–76.

Another group of people who suffered from the fall of exchange because

of their obligation to make gold payments was composed of the European

members of the Civil Service in India. Like the Government to which

they belonged, they received their salaries in silver, but had to make

gold remittances in support of their families, who were often left

behind in England. Before 1873, when the price of silver in terms of

gold was fixed, this circumstance was of no moment to them. But as the

rupee began to fall the face of the situation was completely altered.

With every fall in the value of silver they had to pay more rupees out

of their fixed salaries to obtain the same amount of gold. Some relief

was no doubt given to them in the matter of their remittances. The

Civil Servants were permitted, at a sacrifice to the Government, to make

their remittances at what was called the Official Rate of Exchange.¹⁷⁵

It is true the difference between the market rate and the official rate

was not very considerable. None the less, it was appreciable enough for

the Civil Servants to have gained by 2½ per cent. on the average of the

years 1862–90¹⁷⁶ at the cost of the Government. The Military Servants

obtained a similar relief to a greater degree, but in a different way.

Their salary was fixed in sterling, though payable in rupees. It is

true the Royal Warrant which fixed their salary also fixed the rate of

exchange between the sterling and the rupee for that purpose. But as it

invariably happened that the rate [pg 98] of exchange fixed by the

Warrant was higher than the market rate the Military Servants were

compensated to the extent of the difference at the cost of the Indian

Exchequer.¹⁷⁷ This relief was, comparatively speaking, no relief to

them. The official or the warrant rates of exchange, though better than

the market rates of exchange, were much lower than the rate at which

they were used to make their remittances before 1873. Their burden,

like that of the Government, grew with the fall of silver, and as their

burden increased their attitude became alarmist. Many were the

memorialists who demanded from the Government adequate compensation for

their losses on exchange.¹⁷⁸ The Government was warned¹⁷⁹ that

¹⁷⁵ As was explained by Mr. Waterfield before the Select Committee on

East India (Civil Servants), H.C. Return 327 of 1890, Q. 1905–17,

it was first instituted in 1824 and was arrived at as follows: In

December of each year a calculation was made at the India Office

of the cost of sending a rupee to India, based on the market price

of silver in London, and of the cost of bringing a rupee from

India, based on the price of bills on London in Calcutta. A mean

between the two was struck and taken as the adjusting rate for the

coming official year between the India Office and the British

Treasury in regard to such transactions or payments undertaken by

one Government as the agent of the other. It was fixed anew for

each and formed a fair average rate, although it was sometimes

above and sometimes below the market rate of exchange.

¹⁷⁶ _Ibid._, Q. 1925–26,

¹⁷⁷ Cf. F.S. 1887–8, pp. 39–40. This cost was as follows:

────────────────────────────────────────────────────────────────────

1874–75 Rs. 6,400,000 1885–86 Rs. 4,00,000

1884–85 Rs. 18,43,000 1886–87 Rs. 5,15,000

¹⁷⁸ Cf. _Report of the Indian Currency Committee_, 1893, App. I, pp.

185–90 and p. 202, for memorials of the European Civil Servants.

¹⁷⁹ Cf. Col. Hughes-Hallett, M.P., _The Depreciation of the Rupee: its

Effect on the Anglo-Indian Official—the Wrong and the Remedy_,

London, 1887, p. 14.

“the ignorant folk who think India would be benefited by

lowering present salaries are seemingly unable to comprehend

that such a step would render existence on this reduced pay

simply impossible, and that recourse would of necessity be had

to other methods of raising money.”

Such, no doubt, was the case in the earlier days of the East India

Company, when the Civil Servants fattened on pickings because their pay

was small,¹⁸⁰ and it was to put a stop to their extortions that their

salaries were raised to what appears an extraordinary level. That such

former instances of extortions should have been held out as monitions

showed too well how discontented the Civil Service was owing to its

losses through exchange.

¹⁸⁰ The connection between the rapacious conduct of the early European

Civil Servants and the smallness of their salaries was well

brought out by Clive in his speech dated March 30, 1772, during

the course of the debate in the House of Commons on the East India

Judicature Bill, _Hansard_, Vol. XVII, pp. 334–39.

Quite a different effect the fall had on the trade and industry of the

country. It was in a flourishing state as [pg 99] compared with the

affairs of the Government or with the trade and industry of a

gold-standard country like England. Throughout the period of falling

silver there was said to be a progressive decline relatively to

population in the employment afforded by various trades and industries

in England. The textile manufactures and the iron and coal trade were

depressed as well as the other important trades, including the hardware

manufactures of Birmingham and Sheffield, the sugar-refining of

Greenock, Liverpool, and London, the manufactures of earthenware, glass,

leather, paper, and a multitude of minor industries.¹⁸¹ The depression

in English agriculture was so widespread that the Commissioners of 1892

were “unable to point to any part of the country in which [the effects

of the depression] can be said to be entirely absent,” and this

notwithstanding the fact that the seasons since 1882 “were on the whole

satisfactory from an agricultural point of view.”¹⁸² Just the reverse

was the case with Indian trade and industry. The foreign trade of [pg

100]

¹⁸¹ Report by Dunraven, Farrer, Muntz, and Lubbock in the _Final

Report of the Royal Commission on Depression of Trade and

Industry_, par. 54, C. 4893,

¹⁸² _Final Report of the Royal Commission on Agricultural Depression

in England_, C. 8540 of 1897, par. 28,

TABLE XIV

_Imports and Exports (Both Merchandise and Treasure)_¹⁸³

──────────────────────────────────────────────────────────────────────────

Exports. Imports. Year. Exports. Imports.

Year. ─────────────────────────── ─────────────────────────────────────

R. R. R. R.

─────────────────────────────────── ─────────────────────────────────────

1870–71 57,556,951 39,913,942 1881–82 83,068,198 60,436,155

─────────────────────────────────── ─────────────────────────────────────

1871–72 64,685,376 43,665,663 1882–83 84,527,182 65,548,868

─────────────────────────────────── ─────────────────────────────────────

1872–73 56,548,842 36,431,210 1883–84 89,186,397 68,157,311

─────────────────────────────────── ─────────────────────────────────────

1873–74 56,910,081 39,612,362 1884–85 85,225,922 69,591,269

─────────────────────────────────── ─────────────────────────────────────

1874–75 57,984,549 44,363,160 1885–86 84,989,502 71,133,666

─────────────────────────────────── ─────────────────────────────────────

1875–76 60,291,731 44,192,378 1886–87 90,190,633 72,830,670

─────────────────────────────────── ─────────────────────────────────────

1876–77 65,043,789 48,876,751 1887–88 92,148,279 78,830,468

─────────────────────────────────── ─────────────────────────────────────

1877–78 67,433,324 58,819,644 1888–89 98,333,879 83,285,427

─────────────────────────────────── ─────────────────────────────────────

1878–79 64,919,741 44,857,343 1889–90 105,366,720 86,656,990

─────────────────────────────────── ─────────────────────────────────────

1879–80 69,247,511 52,821,398 1890–91 102,350,526 93,909,856

─────────────────────────────────── ─────────────────────────────────────

1880–81 76,021,043 62,104,984 1891–92 111,460,278 84,155,045

¹⁸³ From Appendix II (Nos. 1 and 2) to the _Report of the Indian

Currency Committee_ of 1898.

TABLE XV

_Nature of Industrial Pursuits in England and India_¹⁸⁴

─────────────────────────────────────────────────────────────────────────────────────────────────────────────────────────────────────

Distribution of _Indian_ Distribution of _English_

Exports exclusive of Exports exclusive of

Treasure. Treasure.

────────────────────────────────────────────────────────────────────────────────────────────────────────────────────────────────

Manufactured Raw Food Unclassified Total. Manufactured Raw Food Unclassified Total.

Articles. Materials. Articles. Articles. Articles. Materials. Articles. Articles.

1857 11 34 22 23 100 90·9 4 4·9 ·2 100

1858 6 35 26 33 100 91·4 3·4 5·1 ·1 100

1859 6·5 40 15·5 38 100 91·5 3·8 4·6 ·1 100

1860 5·7 43·6 17·7 33 100 91·9 3·6 4·4 ·3 100

1861 5·8 46·5 15·3 32·4 100 90·4 4·8 4·8 — 100

1862 5 52 16 27 100 90·3 4 4·8 ·9 100

1863 3·7 58·7 10·6 27 100 91·0 4 4 1·0 100

1864 4 69·2 9·3 17·5 100 92·5 3·7 3·7 ·1 100

1865 3·5 68 12 16·6 100 92·1 3·6 3·6 ·7 100

1866 4·2 67·2 10·3 18·3 100 92 3·7 3·7 ·4 100

1867 4 58 11 27 100 92·2 3·8 3·7 ·3 100

1868 4 58·5 11·5 26 100 92 4·4 3·4 ·2 100

1869 4·8 60·5 14 20·7 100 92 4·2 3·1 ·7 100

1870 4·4 63·6 9 23 100 91 4 4 1·0 100

1871 3·7 65·3 11 20 100 90 4·4 4·9 ·7 100

1872 3·3 61·4 13·5 21·8 100 91·2 5·4 3·5 ·9 100

¹⁸⁴ The figures for India are calculated from the _Statistical

Abstract for British India_, Second Number (1857–1866), Table No.

34, and the Eighth Number (1864–1873), Table No. 24. Figures for

England are taken from Appendix C (Statement 6) to the _First

Report of the Royal Commission of the Depression of Trade and

Industry_, 1885, with this alteration—that the separate figures in

the original under “Manufactured” and “Partially Manufactured” are

here grouped under “Manufactured.” The “Unclassified Articles”

under Indian Exports are for the most part “Jewellery.”

[pg 101] the country, which had bounced up during the American Civil

War, showed greater buoyancy after 1870, and continued to grow

throughout the period of the falling exchange at a rapid pace. During

the short space of twenty years the total imports and exports of the

country more than doubled in their magnitude, as is shown by Table XIV.,

p. 99.

Not only had the trade of India been increasing, but the nature of her

industries was also at the same time undergoing a profound change. Prior

to 1870 India and England were, so to say, non-competing groups. Owing

to the protectionist policy of the Navigation Laws, and owing also to

the substitution of man by machinery in the field of production, India

had become exclusively an agricultural and a raw-material-producing

country, while England had transformed herself into a country which

devoted all her energy and her resources to the manufacturing of raw

materials imported from abroad into finished goods. How marked was the

contrast in the industrial pursuits in the two countries is well

revealed by the analysis of their respective exports on opposite page.

After 1870 this distribution of their industrial pursuits was greatly

altered, and India once again began to assume the rôle of a

manufacturing country. Analysing the figures for Indian imports and

exports for the twenty years succeeding 1870 (_see_ table below), we

find that the progress in [pg 102] the direction of manufactures formed

one of the most significant features of the period.

TABLE XVI

_Changes in Industrial Pursuits of India_¹⁸⁵

Imports. Exports.

──────────────────────────────────────────────────────────────

Years Manufactured. Raw. Manufactured. Raw.

──────────────────────────────────────────────────────────────

Rs. Rs. Rs. Rs.

1879 25,98,65,827 13,75,55,837 5,27,80,340 59,67,27,991

1892 36,22,31,872 26,38,18,431 16,42,47,566 85,52,09,499

Percentage of increase

Total 39 91 211 43

Annual 2·8 6·5 15 3

¹⁸⁵ From Ranade’s _Essays on Indian Economics_, p. 104.

This change in the industrial evolution was marked by the growth of two

principal manufactures. One of them was the manufacture of cotton. The

cotton industry was one of the oldest industries of India, but during

100 years between 1750 and 1850 it had fallen into a complete state of

decrepitude. Attempts were made to resuscitate the industry on a

capitalistic basis in the sixties of the nineteenth century and soon

showed signs of rapid advance. The story of its progress is graphically

illustrated in the following summary table:—

TABLE XVII

_The Development of Indian Cotton Trade and Industry_

───────────────────────────────────────────────────────────────────────────

Growth of Trade (Average Annual Quantities

in each Quinquennium).

───────────────────────────────────────────────────────

1870–71 1875–76 1880–81 1885–86 1890–91

to to to to to

1874–75. 1879–80. 1884–85. 1889–90. 1894–95.

Imports of raw 23 52 51 74 89

cotton—thousands of

cwts.

Exports of raw 5,236 3,988 5,477 5,330 4,660

cotton—thousands of

cwts.

Imports of twist 33·55 33·55 44·34 49·09 44·79

and yarn

Growth of Industry (at end of each fifth

year).

Number of mills 48 58 81 114 143

Number of 1,000 1,471 2,037 2,935 3,712

spindles—000

omitted

Number of looms—000 10 13 16 22 34

omitted

Number of persons — 39,537 61,836 99,224 —

employed

Another industry which figured largely in this expansion of Indian

manufactures was jute. Unlike the cotton industry [pg 103] of India, the

jute industry was of a comparatively recent origin. Its growth,

different from that of the cotton industry, was fostered by the

application of European capital, European management, and European

skill, and it soon took as deep roots as the cotton industry and

flourished as well as it did, if not better. Its history was one of

continued progress.

TABLE XVIII

_Development of Jute Industry and Trade_

Average Annual of each Quinquennium.

───────────────────────────────────────────────────────

Growth of Trade. 1870–71 1875–76 1880–81 1885–86 1890–91

to to to to to

1874–75. 1879–80. 1884–85. 1889–90. 1894–95.

Exports—

Raw, million 5·72 5·58 7·81 9·31 10·54

cwt.

Gunny bags, 6·44 35·96 60·32 79·98 120·74

millions.

Cloth, million — 4·71 6·44 19·79 54·20

yds.

_Growth of Industry_.

Number of —

Mills — 21 21 24 26

Looms, 000 — 5·5 5·5 7 8·3

omitted

Spindles, 000 — 88 88 138·4 172·4

omitted

Persons — 38·8 38·8 52·7 64·3

employed, in

thousands

This increasing trend towards manufactures was not without its indirect

effects on the course of Indian agriculture. Prior to 1870 the Indian

farmer, it may be said, had no commercial outlook. He cultivated not so

much for profit as for individual self-sufficiency. After 1870 farming

tended to become a business and crops came more and more to be

determined by the course of market prices than by the household needs of

the farmer. [pg 104]

TABLE XIX

_Growth of Agricultural Exports of India_

1868–69. 1873–74. 1877–78. 1882–83. 1887–88. 1891–92.

Wheat 100 637·41 2,313·47 5,152·36 4,914·37 11,001·44

Opium 100 118·38 123·83 122·47 120·20 116·82

Seeds 100 111·26 305·87 239·97 403·60 480·99

Rice 100 131·66 119·84 203·28 185·55 220·36

Indigo 100 116·91 121·57 142·17 140·76 126·33

Tea 100 169·35 293·17 507·25 775·09 1,075·75

Coffee 100 86·04 69·98 85·31 64·59 74·11

Such was the contrast in the economic conditions prevalent in the two

countries. This peculiar phenomenon of a silver standard country

steadily progressing, and a gold-standard country tending to a

standstill, exercised the minds of many of its observers. The chief

cause was said to be the inability of the English manufacturers to hold

out in international competition. This inability to compete with his

European rivals was attributed to the prevalence of protective tariffs

and subsidies which formed an essential part of the industrial and

commercial code of the European countries. Nothing of the kind then

existed in India, where trade was as free and industry as unprotected as

any could have been, and yet the Lancashire cotton-spinner, the Dundee

jute manufacturer, and the English wheat-grower complained that they

could not compete with their rivals in India. The cause, in this case,

was supposed to be the falling exchange.¹⁸⁶ So much were some people

impressed by this view that even the extension of the Indian trade to

the Far East was attributed to this cause. Already, it was alleged, the

dislocation of the par of exchange between gold and silver had produced

a kind of segregation of gold-using countries and silver-using countries

to the exclusion of each other. In a transaction between two countries

using the same metal as standard it was said the element of uncertainty

arising from the use of two metals varying in terms of each other [pg

105] was eliminated. Trade between two such countries could be carried

on with less risk and less inconvenience than between two countries

using different standards, as in the latter case the uncertainty entered

into every transaction and added to the expense of the machinery by

which trade was carried on. That the Indian trade should have been

deflected to other quarters¹⁸⁷ where, owing to the existence of a common

standard the situation trade had to deal with was immune from

uncertainties, was readily admitted. But it was contended that there

was no reason why, as a part of the segregation of commerce it should

have been possible for the Indian manufacturer to oust his English rival

from the Eastern markets to the extent he was able to do (_see_ Table

XX, p. 106). [pg 106]

¹⁸⁶ Cf. The _Final Report of the Royal Commission on Gold and Silver_

Part I, pars. 99–101, for a summary of the argument.

¹⁸⁷ The distribution of Indian trade during this period was as

follows:—

_Distribution of Indian Trade_

Annual Average for each Quinquennium in Millions of Rupees.

1875–76 to 1879–80. 1880–81 to 1884–85.

Countries ──────────────────────────────────────────────────────────────

Imports. Exports. Total. Imports. Exports. Total

United 323·68 278·15 601·83 434·45 344·22 778·67

Kingdom

China 14·05 132·27 146·32 19·23 134·94 154·17

Japan ·02 ·33 ·35 ·19 2·09 2·28

Ceylon 5·74 22·97 28·71 5·35 16·37 21·72

Straits 10·83 26·11 36·94 15·88 33·65 49·53

Settlements

Annual Average for each Quinquennium in Millions of Rupees.

1885–86 to 1889–90. 1890–91 to 1894–95.

Countries ──────────────────────────────────────────────────────────────

Imports. Exports. Total. Imports. Exports. Total

United 510·47 360·59 871·06 526·24 338·40 864·64

Kingdom

China 21·64 134·54 156·18 28·69 133·30 161·90

Japan ·25 7·27 7·52 1·51 14·44 15·95

Ceylon 5·86 20·56 26·42 6·42 31·18 37·60

Straits 20·09 42·54 62·63 23·32 52·66 75·88

Settlements

TABLE XX

_Exports of Cotton Goods to Eastern Markets_

─────────────────────────────────────────────────────────────────

Yarn, lb., 000 omitted. Piece-goods, yds., 000

Years. omitted.

────────────────────────────────────────────────────────

From India. From U.K. From India. From U.K.

─────────────────────────────────────────────────────────────────

1877 7,927 33,086 15,544 394,489

─────────────────────────────────────────────────────────────────

1878 15,600 36,467 17,545 382,330

─────────────────────────────────────────────────────────────────

1879 21,332 38,951 22,517 523,921

─────────────────────────────────────────────────────────────────

1880 25,862 46,426 25,800 509,099

─────────────────────────────────────────────────────────────────

1881 26,901 47,479 30,424 587,177

─────────────────────────────────────────────────────────────────

1882 30,786 34,370 29,911 454,948

─────────────────────────────────────────────────────────────────

1883 45,378 33,499 41,534 415,956

─────────────────────────────────────────────────────────────────

1884 49,877 38,856 55,565 439,937

─────────────────────────────────────────────────────────────────

1885 65,897 33,061 47,909 562,339

─────────────────────────────────────────────────────────────────

1886 78,242 26,924 51,578 490,451

─────────────────────────────────────────────────────────────────

1887 91,804 35,354 53,406 618,146

─────────────────────────────────────────────────────────────────

1888 113,451 44,643 69,486 652,404

─────────────────────────────────────────────────────────────────

1889 128,907 35,720 70,265 557,004

─────────────────────────────────────────────────────────────────

1890 141,950 37,869 59,496 633,606

─────────────────────────────────────────────────────────────────

1891 169,253 27,971 67,666 595,258

─────────────────────────────────────────────────────────────────

The causes which effected such trade disturbances formed the subject of

a heated controversy.¹⁸⁸ The point in dispute was whether the changes in

international trade such as they were, were attributable to the monetary

disturbances of the time. Those who held to the affirmative explained

their position by arguing that the falling exchange gave a bounty to the

Indian producer and imposed a penalty on the English producer. The

existence of this bounty, which was said to be responsible for the

shifting of the position of established competitors in the field of

international commerce, was based on a simple calculation. It was said

that if the gold value of silver fell the Indian exporter got more

rupees for his produce and was therefore better off, while by reason of

the same fact the English producer got fewer sovereigns and was

therefore worse off. Put in [pg 107] this naïve form the argument that

the falling exchange gave a bounty to the Indian exporters and imposed a

penalty on the English exporters had all the finality of a rule of

arithmetic. Indeed, so axiomatic was the formula regarded by its

authors that some important inferences as to its bearing on the trade

and industrial situation of the time were drawn from it. One such

inference was that it stimulated exports from and hindered imports into

the silver using countries. The second inference was that the fall of

exchange exposed some English producers more than others to competition

from their rivals in silver-using countries. Now, can such results be

said to follow from the fall of exchange? If we go behind the bald

statement of a fall of exchange and inquire as to what determined the

gold price of silver the above inferences appear quite untenable. That

the ratio between gold and silver was simply the inverse of the ratio

between gold prices and silver prices must be taken to be an

unquestionable proposition. If therefore the gold price of silver was

falling it was a counterpart of the more general phenomenon of the fall

of the English prices which were measured in gold, and the rise of the

Indian prices which were measured in silver. Given such an

interpretation of the event of the falling exchange, it is difficult to

understand how it can help to increase exports and diminish imports.

International trade is governed by the relative advantages which one

country has over another, and the terms on which it is carried on are

regulated by the comparative cost of articles that enter into it. It

is, therefore, obvious that there cannot be a change in the real terms

of trade between countries except as a result of changes in the

comparative cost of these goods. Given a fall in gold prices _all

round_, accompanied by a rise in silver prices _all round_, there was

hardly anything in the monetary disturbance that could be said to have

enabled India to increase her exportation of anything except by

diminishing her exportation or increasing her importation of something

else. From the same view of the question of the falling exchange it

follows that such a monetary disturbance could not depress one trade

more than another. If the falling or rising exchange was simply [pg

108] an expression of the level of _general_ prices, then the producers

of all articles were equally affected. There was no reason why the

cotton trade or the wheat trade should have been more affected by the

fall of exchange than the cutlery trade.

¹⁸⁸ _See_ the evidence and memoranda by Profs. Marshall and Nicholson

before the Royal Commission on Gold and Silver (1886); also Prof.

Lexis, “The Agio on Gold and International Trade,” in the

_Economic Journal_, Vol. V, 1895.

Not only was there nothing in the exchange disturbance to disestablish

existing trade relations in general or in respect of particular

commodities, but there was nothing in it to cause benefit to the Indian

producer and injury to the English producer. Given the fact that the

exchange was a ratio of the two price-levels, it is difficult to see in

what sense the English producer, who got fewer sovereigns but of high

purchasing power, was worse off than the Indian producer, who got more

rupees but of low purchasing power. The analogy of Prof. Marshall was

very apt. To suppose that a fall of exchange resulted in a loss to the

former and a gain to the latter was to suppose that, if a man was in the

cabin of a ship only ten feet high, his head would be broken if the ship

sank down twelve feet into a trough. The fallacy consisted in isolating

the man from the ship when, as a matter of fact, the same force, acting

upon the ship and the passenger at one and the same time, produced like

movements in both. In like manner the same force acted upon the Indian

producer and the English producer together, for the change in the

exchange was itself a part of the more sweeping change in the general

price-levels of the two countries. Thus stated, the position of the

English and Indian producer was equally good or equally bad, and the

only difference was that the former used fewer counters and the latter a

larger number in their respective dealings.

A bounty to the Indian producer and a penalty to the English producer,

it is obvious, could have arisen only if the fall of silver in England

in terms of gold was greater than the fall of silver in terms of

commodities in India. In that case the Indian producer would have

obtained a clear benefit by exchanging his wares for silver in England

and thus securing a medium which had a greater command over goods and

services in India. But _à priori_ there could be no justification for

such an assumption. There was no reason why gold price of silver should

have fallen at a different [pg 109] rate from the gold price of

commodities in general, or that there should have been a great

difference between the silver prices in England and in India. Statistics

show that such _à priori_ assumptions were not groundless.

It is obvious that if silver was falling faster than commodities, and if

silver prices in India were lower than silver prices in England, we

should have found it evidenced by an inflow of silver from England to

India. What were the facts? Not only was there no extraordinary flow

of silver to India, but the imports of silver during 1871–93 were much

smaller than in the twenty years previous to that period.¹⁸⁹ This is as

complete a demonstration as could be had of the fact that the silver

prices in India were the same as they were outside, and consequently the

Indian producer had very little chance of a bounty on his trade.

¹⁸⁹ Cf. figures for imports of silver in Chap. I. It will, however,

be noted how closely the flow of silver into India between 1872

and 1893 followed the fall in gold price of silver.

Although such must be said to be the _à priori_ view of the question,

the Indian producer was convinced that his prosperity was due to the

bounty he received. Holding such a position he was naturally opposed to

any reform of the Indian currency, for the falling exchange which the

Government regarded a curse he considered a boon. But however plausible

was the view of the Indian producer, much sympathy would not have been

felt for it had it not been coupled with a notion, most commonly held,

that the bounty arose from the _export trade_, so that it became an

article of popular faith that the fall of exchange was a source of gain

to the _nation as a whole_. Now was it true that the bounty arose from

the export trade? If it were so, then every fall of exchange ought to

give a bounty. But supposing that the depreciation of silver had taken

place in India _before_ it had taken place in Europe, could the fall of

exchange thus brought about have given a bounty to the Indian exporter?

As was explained above, the Indian exporter stood a chance of getting a

bounty only if with the silver he obtained for his produce he was able

to buy more goods and [pg 110]

TABLE XXI

_Movements of Prices, Wages and Silver Between India and

England_¹⁹⁰

───────────────────────────────────────────────────────────────────────────────────────

Net Imports of Index Index Index

Silver into No. No. for Index No. for Index

India. for Silver No. Gold No.

────────────────────── Gold Years. Prices for Prices for

Years. Amount. Price of Wages of Wages

Rs. of Commodities in Commodities in

Silver. in India. in England

India. England.

(1) (2) (3) (4) (5) (6) (7) (8)

1871–72 6,587,296 99·7 1871 100 — 100 100

1872–73 739,244 99·2 1872 105 — 109 105·8

1873–74 2,530,824 97·4 1873 107 100 111 112

1874–75 4,674,791 95·8 1874 116 101 102 113

1875–76 1,640,445 93·3 1875 103 97 96 111·6

1876–77 7,286,188 86·4 1876 107 98 95 110

1877–78 14,732,194 90·2 1877 138 97 94 109·8

1878–79 4,057,377 86·4 1878 148 99 87 107

1879–80 7,976,063 84·2 1879 135 100 83 105·8

1880–81 3,923,612 85·9 1880 117 99 88 106·5

1881–82 5,381,410 85·0 1881 106 99 85 106·5

1882–83 7,541,427 84·9 1882 105 100 84 106·5

1883–84 6,433,886 83·1 1883 106 102 82 108

1884–85 7,319,581 83·3 1884 114 101 76 109

1885–86 11,627,028 79·9 1885 113 106 72 108

1886–87 7,191,743 74·6 1886 110 105 69 107

1887–88 9,319,421 73·3 1887 111 114 68 108

1888–89 9,327,529 70·4 1888 119 112 70 109·8

1889–90 11,002,078 70·2 1889 125 112 72 113

1890–91 14,211,408 78·4 1890 125 113 72 118

1891–92 9,165,684 74·3 1891 128 118 72 118

1892–93 12,893,499 65·5 1892 141 110 68 117·4

1893–94 13,759,273 58·5 1893 138 119 68 117·4

¹⁹⁰ Col. (2) is from Appendix II, Table No. 2 of the I.C.C. of 1898.

Cols (3), (5), (6), and (7) are from Atkinson’s “Silver Prices in

India,” in the _Journal of the Statistical Society_, March, 1897.

Col. (8) is based on the figures given by W. T. Layton in his

_Introduction to the Study of Prices_ (1912), Table I, Col. 1, p.

150, re-scaled to 1871 as 100.

[pg 111] services in India. To put the same in simpler language, his

bounty was the difference between the price of his product and the price

of his outlay. Bearing this in mind, we can confidently assert that in

the supposed case of depreciation of silver having taken place in India

first, such a fall in the Indian exchange would have been accompanied by

a penalty instead of a bounty on his trade. In that case the exporter

from India would have found that though the Indian exchange, i.e. the

gold price of silver, had fallen, yet the ratio which gold prices in

England bore to silver prices in India had fallen more, i.e. the price

he received for his product was smaller than the outlay he had incurred.

It is not quite established whether silver had fallen in Europe before

it had fallen in India.¹⁹¹ But even if that were so the possibility of a

penalty through the fall of exchange proves that the bounty, if there

was any, was not a bounty on the export trade as such, but was an

outcome of the disharmony between the general level of prices and the

prices of particular goods and services within the country, and _would

have existed even if the country had no export trade_.

¹⁹¹ _See infra_, Chap. IV.

Thus the bounty was but an incident of the general depreciation of the

currency. Its existence was felt because prices of _all_ goods and

services in India did not move in the same uniform manner. It is well

known that at any one time prices of certain commodities will be rising,

while the general price level is falling. On the other hand, certain

goods will decline in price at the same time that the general price

level is rising. But such opposite movements are rare. What most often

happens is that prices of some goods and services, though they move in

the same direction, yet do not move at the same pace as the general

price level. It is notorious that when general prices fall wages and

other fixed incomes which form the largest item in the total outlay of

every employer do not fall in the same proportion; and when general

prices rise they do not rise as fast as general prices, but generally

lag behind. And this was just what was happening in a silver-standard

country like India and a gold-standard [pg 112] country like England

during the period of 1873–93 (_see_ Chart IV). Prices had fallen in

England, but wages had not fallen to the same extent. Prices had risen

in India, but wages had not risen to the same extent. The English

manufacturer was penalized, if at all, not by any act on the part of his

Indian rival, but by reason of the wages of the former’s employees

having remained the same, although the price of his products had fallen.

The Indian producer got a bounty, if any, not because he had an English

rival to feed upon, but because he did not have to pay higher wages,

although the price of his product had risen.

The conclusion, therefore, is that the falling exchange could not have

disturbed established trade relations or displaced the commodities that

entered into international trade. The utmost that could be attributed

to it is its incidence in economic incentive. But in so far as it

supplied a motive force or took away the incentive, it did so by

bringing about changes in the social distribution of wealth. In the

case of England, where prices were falling, it was the employer who

suffered; in the case of India, where prices were rising, it was the

wage-earner who suffered. In both cases there was an injustice done to

a part of the community and an easy case for the reform of currency was

made out. The need for a currency reform was recognized in England; but

in India many people seemed averse to it. To some the stability of the

silver standard had made a powerful appeal, for they failed to find any

evidence of Indian prices having risen above the level of 1873. To

others the bounty of the falling exchange was too great a boon to be

easily given away by stabilizing the exchange. The falsity of both the

views is patent. Prices in India did rise, and that, too, considerably.

Bounty perhaps there was, but it was a penalty on the wage-earner. Thus

viewed, the need for the reform of Indian currency was far more urgent

than could have been said of the English currency. From a purely

psychological point of view there is probably much to choose between

rising prices and falling prices. But from the point of view of their

incidence on the distribution of wealth, very little can be said in

favour of a standard which changes in its [pg 113] value and which

becomes the _via media_ of transferring wealth from the relatively poor

to the relatively rich. Scrope said: “Without stability of value money

is a fraud.” Surely, having regard to the magnitude of the interests

affected, depreciated money must be regarded as a greater fraud. That

being so, the prosperity of Indian trade and industry, far from being

evidence of a sound currency, was sustained by reason of the fact that

the currency was a diseased currency. The fall of exchange, in so far

as it was a gain, registered a loss to a large section of the Indian

people with fixed incomes who suffered from the instability of the

silver standard equally with the Government and its European officers.

[Illustration: CHART IV: Prices and Wages in India and England, 1873–93]

[Illustration: CHART V: Monthly Fluctuations of The Rupee-Sterling

Exchange]

So much for the fall of silver. But the financial difficulties and

social injustices it caused did not sum up the evil effects produced by

it. Far more disturbing than the fall were the fluctuations which

accompanied the fall (_see_ Chart V).

The fluctuations greatly aggravated the embarrassment of the Government

of India caused by the fall in the exchange value of the rupee. In the

opinion of the Hon. Mr. Baring (afterwards Lord Cromer),¹⁹²

¹⁹² _Financial Statement_, 1883–84, p. 26.

“It is not the fact that the value of the rupee is,

comparatively speaking, low that causes inconvenience. It would

be possible, although it might be exceedingly troublesome, to

adjust the Indian fiscal system to a rupee of any value. What

causes inconvenience alike to Government and to trade is that

the value of the rupee is unstable. It is impossible to state

accurately in Indian currency what the annual liabilities of the

Government of India are. These liabilities have to be

calculated afresh every year according to the variations which

take place in the relative value of gold and silver, and a

calculation which will hold good for even one year is

exceedingly difficult to make.”

Owing to such fluctuations, no rate could be assumed in the Budget which

was likely to turn out to be the true market rate. As matters stood,

the rate realized on an average during a particular year differed so

widely from the Budget rate that the finances of the Government became,

to [pg 114] employ the phraseology of a finance minister, a “veritable

gamble.” How greatly the annual Budget must have been deranged by the

sudden and unprovided-for changes in the rupee cost of the sterling

payments the table on opposite page may help to give some idea.

If Government finance was subjected to such uncertainties as a result of

exchange fluctuations, private trade also became more or less a matter

of speculation. Fluctuations in exchange are, of course, a common

incident of international trade. But if they are not to produce

discontinuity in trade and industry there must be definite limits to

such fluctuations. If the limits are ascertainable, trade would be

reasonably certain in its calculation, and speculation in exchange would

be limited within the known limits of deviations from an established

par. Where, on the other hand, the limits are unknown all calculations

of trade are frustrated and speculation in exchange takes the place of

legitimate trading. Now, it is obvious that fluctuations in the

exchange between two countries will be limited in extent if the two

countries have the same standard of value. Where there is no such

common standard of value the limits, though they exist, are too

indefinite to be of much practical use. The rupture of the fixed par of

exchange, having destroyed a common standard of value between gold and

silver countries, removed the limits on the exchange fluctuations

between such countries. As a result of such variations in the value of

the standard measure, trade advanced by “rushes and pauses,” and

speculation became feverishly active.¹⁹³

¹⁹³ Evid. I.C.C., 1898, Q. 6,290, 9,808–10.

That progress of trade depends on stability is a truism which seldom

comes home until it is denied in fact. It is difficult to appreciate

its importance to healthy enterprise when government is stable, credit

secure, and conditions are uniform. And yet so great is the handicap of

instability that everywhere business men have been led by a variety of

devices to produce stability in domains enveloped by uncertainty.

Everywhere there have grown up business barometers forewarning business

men of impending changes and so enabling them to forearm against them by

timely [pg 115]

TABLE XXII

_Fluctuations of Exchange and Fluctuations in the Rupee

Cost of Gold Payments_¹⁹⁴

Estimated Rate of Changes in the Rupee

Rate of Exchange Cost of Sterling

Exchange on actually Payments consequent

Financial which the realized on upon Changes between

Year. Budget of the the Average the Estimated and the

Year was during the Realized rates of

framed. Year. Exchange.

───────────────────────────────────────────────────────────

s. d. s. d. Rs. Rs.

1874–75 1 10·375 1 10·156 15,91,764 —

1875–76 1 9·875 1 9·626 19,57,917 —

1876–77 1 8·5 1 8·508 — 76,736

1877–78 1 9·23 1 8·791 38,43,050 —

1878–79 1 8·4 1 7·794 56,87,129 —

1879–80 1 7 1 7·961 — 84,40,737

1880–81 1 8 1 7·956 4,24,722 —

1881–82 1 8 1 7·895 10,17,482 —

1882–83 1 8 1 7·525 37,46,890 —

1883–84 1 7·5 1 7·536 — 3,62,902

1884–85 1 7·5 1 7·308 18,97,307 —

1885–86 1 7 1 6·254 56,82,638 —

1886–87 1 6 1 5·441 65,17,721 —

1887–88 1 5·5 1 4·898 71,90,097 —

1888–89 1 4·9 1 4·379 77,98,400 —

1889–90 1 4·38 1 4·566 — 27,31,892

1890–91 1 4·552 1 6·09 — 2,35,51,744

1891–92 1 5·25 1 4·733 80,09,366 —

¹⁹⁴ Compiled from figures given in the _Final Report of the Gold and

Silver Commission_, p. 40, and in App. II, p. 270, to the _Report

of the Indian Currency Committee_, 1893.

[pg 116] changes in their operations. The whole of insurance business is

aimed at giving stability to economic life. The necessity which

compelled all regularly established Governments to maintain standard

measures by which the true proportion between things as to their

quantities might be ascertained and dealings in them regulated with

certainty was motivated by the same purpose, and the meticulous

precision with which every civilized country defines its standard

measures, and the large machinery it maintains to preserve them from

deviation, are only evidences of the great importance that an economic

society must continue to attach to the matter of providing precision of

expression and assurance of fulfilment with regard to the contracts

entered into by its members in their individual or corporate capacities.

Important as are the standard measures of a community, its measure of

value is by far the most important of them all.¹⁹⁵ The measures of

weight, extension, or volume enter only into particular transactions.

If the pound, the bushel, or the yard were altered the evils would be

comparatively restricted in scope. But the measure of value is

all-pervading.

¹⁹⁵ Cf. Harris, _An Essay upon Money and Coins_ (reprinted by J. R.

McCulloch in his volume of _Scarce Tracts on Money_, Part I, Chap.

IT, par. 21; Part II, Chap. II, pars. 11, 13, and 20).

“There is no contract,” Peel declared,”¹⁹⁶ public or private, no

engagement national or individual, which is unaffected by it.

The enterprises of commerce, the profits of trade, the

arrangements made in all domestic relations of society, the

wages of labour, pecuniary transactions of the highest amount

and of the lowest, the payment of national debt, the provision

for national expenditure, the command which the coin of the

smallest denomination has over the necessaries of life, are all

affected”

¹⁹⁶ Cf. his speech dated May 6, 1844, delivered during the Commons

debates on the Bank Charter Act. Hansard, Vol. XXXIV, p. 720.

by changes in the measure of value. This is because every contract,

though ultimately a contract in goods, is primarily a contract in value.

It is, therefore, not enough to maintain constancy in the measures of

weight, capacity, or volume. A contract as one of goods may remain

exact to the measure [pg 117] stipulated, but may nevertheless be

vitiated as a contract in values by reason of changes in the measure of

values. The necessity of preserving stability in its measure of value

falls on the shoulders of every Government of an orderly society. But

its importance grows beyond dispute as society advances from status to

contract. The conservation of the contractual basis of society then

becomes tantamount to the conservation of an invariable measure of

value.

The work of reconstituting a common measure of value in some form or

other which those misguided legislators of the seventies helped to

destroy, it was found, could not be long delayed with impunity. The

consequences that followed in the wake of that legislation, as recounted

before, were too severe to allow the situation to remain unrectified.

That efforts for reconstruction should have been launched before much

mischief was done only shows that a world linked by ties of trade will

insist, if it can, that its currency systems must be laid on a common

gauge. [pg 118]