CHAPTER IV_The Problem of the Rupee, Its Origin and Its Solution

*TOWARDS A GOLD STANDARD*

The establishment of stable monetary conditions was naturally enough

dependent upon the restoration of a common standard of value. Plain as

was the aim, its accomplishment was by no means an easy matter. Two ways

seemed at first to be open for carrying it out in practice. One was to

adopt a common metal as currency, and since all important countries of

the world had gone over to the gold standard it meant the

silver-standard countries should abandon their standard in favour of

gold. The other was to let the gold and silver standard countries keep

to their currencies and to establish between them a fixed ratio of

exchange so as to make the two metals into a common standard of value.

The history of the agitation for the reform of the Indian currency is a

history of these two movements. The movement for the introduction of a

gold standard was, however, the first to occupy the field. The failure

of the notification of 1868 may be said to have marked the failure of a

policy, but the movement for a gold currency in India started in the

sixties was not altogether stamped out of the country. That the movement

still had life in it is shown by the fact that it was revived four years

later by Sir R. Temple, when he became the Finance Minister of India, in

a memorandum¹⁹⁷ dated May 15, 1872. The important particular in which he

differed from his predecessors consisted in the fact that while they all

aimed to make the British sovereign the principal [pg 119] unit of the

gold currency in India, he desired to give that place to the Indian gold

coin, the “mohur.” Why his predecessors did not do the same when the

problem of correctly rating the sovereign was said to have baffled them

so much is a little surprising when it is recalled that the Indian Mints

had been since long past issuing the “mohur,” which, as it was possible

to rate it correctly, could as well have been made the principal unit of

the gold currency in India. That they did not can only be explained on

the assumption that they were anxious to kill two birds with one stone.

The adoption of the sovereign, besides supporting a gold currency in

India, was also calculated to promote the movement of international

uniformity of coinage then in vogue. The utility of the “mohur” was in

this respect comparatively inferior to that of the sovereign. But when

Sir Richard Temple came upon the scene the prospect of some universal

coin being internationally adopted seemed to be fast vanishing. At all

events the Report of the English Commission on International Coinage,

presided over by Lord Halifax, had pronounced adversely as to any change

in the standard of the English sovereign. Untrammelled by any

considerations for such a wider issue, Sir R. Temple was free to

recommend the adoption of the “mohur” as the unit of currency in place

of the sovereign.¹⁹⁸

¹⁹⁷ Printed as Appendix I, No. 12, to the _Report of the Indian

Currency Committee_ of 1898.

¹⁹⁸ Nevertheless, he said, “I would not object to make the sovereign a

legal tender for 10 rupees and 4 annas. But, the sovereign being

worth 10 rupees and a fraction over, there might be some slight

trouble of calculation in changing it for silver, and this would

be a drawback in respect of the use of the sovereign as currency

in India. And if this objection were urged, I would not press for

the sovereign being declared legal tender. But we should

continue, under any circumstances, to receive the sovereign in our

Treasuries at the present rating.”

“We have,” he wrote, “gold pieces representing fifteen, ten and

five rupees respectively; and believed to represent these

several sums very correctly, as regards the relative value of

gold and silver … that … we should take the first opportunity to

declare the gold coins legal tender to unlimited amount; that

gold pieces should continue to bear the fixed relation to the

rupee; that for a time it might be necessary to permit the rupee

to remain legal [pg 120] tender to an unlimited amount, which

would involve temporarily the difficulty of a double standard;

that the transition period of double standard should be as short

as possible, silver being reduced to a token coinage, and being

made legal tender up to a small amount only; and that gold

should be ultimately the one legal standard.”

He proposed the ratio of 10 rupees tor 120 grs. of standard i.e. 110

grs. of fine gold,¹⁹⁹ but he did not share the temerity of Sir Charles

Trevelyan.²⁰⁰ So intent was he on the project of a gold currency that he

was prepared to alter the ratio so as to make it favourable to gold. The

question of ratio, he observed, was one which

¹⁹⁹ This was a ratio of 15: 1, which was a slight undervaluation of

gold.

²⁰⁰ _Supra_, Chap. I.

“the Government of India ought to be able to determine. These

are questions which have been determined by every nation that

has adopted a gold currency. No doubt it is a difficult and

important problem, but it cannot be insoluble, and it ought to

be solved.”

Such in outline was the first proposal for a gold currency. It was

projected before the fall in the value of silver had commenced, and was

therefore more a culmination of the past policy than a remedy against

the ensuing depreciation of silver. In that consisted, probably, the

chief strength of the proposal. It was in good time to avoid the cost

of hauling up the currency which later on proved so very deterrent and

caused the defeat of so many other projects. Besides, it cannot be said

that at the time the memorandum was presented the Government was not

warned of the impending crisis; for the wave of demonetizing silver had

already commenced two years before.²⁰¹ But, for some reason not known to

the public, no action was taken on the proposal. [pg 121]

²⁰¹ Lord Northbrook, who was the Viceroy of India when this proposal

was made, in his evidence before the I.C.C. of 1898, Q. 8,447,

suggested that the reason for his not adopting it then was that

“that was a time when gold was appreciating, and it was impossible

to do.” This is, of course, historically untrue except on the

hypothesis that the proposal came for consideration long after it

was submitted.

The second plan for the introduction of a gold currency was that of

Colonel J. T. Smith, the able Mint Master of India. His plan was

avowedly a remedy for the falling exchange.²⁰² The plan was set forth in

the first essay in his brochure, _Silver and the Indian Exchanges_,²⁰³

and may be described in his own words as follows:—

²⁰² He had previously taken part in the agitation for the introduction

of a gold standard in India during the sixties with the sovereign

as the unit. But that was as an advocate of the movement for

uniformity of international coinage. Cf. his _Remarks on a Gold

Currency for India and Proposal of Measures for the Introduction

of the British Sovereign_, etc., etc., London, 1868.

²⁰³ London, Effingham Wilson, 1876.

“6. Although it cannot be denied that the difficulty of

effecting this object of restoring the Indian exchange to its

normal condition is much greater now than it would have been

some years ago, owing to the decline which has already taken

place, yet there seems to be sufficient ground for belief that,

even now, if decided measures were adopted, it would not be too

late to restore the currency to its former value for home

(India) payments; and that, too, without any shock or

disturbance; the principal step being that of putting a stop to

the coinage of silver on private account, at the same time

taking measures to discourage the importation, or at the least

the circulation, of foreign-made silver coins, and opening the

Mints for the receipt of gold bullion for coinage.

“7. To explain how this would operate, I must observe that …

“8. … the internal trade of the Empire of India has increased

and is increasing …

“9. Whatever may be the cause, the internal trade of India has,

ever since the beginning of this century, required constant and

steady additions to her currency, averaging during the last

thirty-eight years upwards of five millions of pounds sterling

per annum in value. Besides this, the returns show that the

balance of imports over exports of gold bullion, during the same

period, exceeded an average of two and a half millions sterling

annually, having been, during the last twenty years, more than

four millions per annum.

“10. Such being the case, it appears to be a necessary

consequence that, if the supply of rupees were put a stop to,

[pg 122] the remainder must increase in local value, as compared

with commodities, till they resumed the position which they held

on a par with gold, at the rate of 10 rupees to a sovereign, for

the fifteen years previous to 1870.

“11. After that point had been attained, it would be the

interest of merchants to take gold into the Indian Mints for

coinage; and they would do so, indeed, before the attainment of

this improvement of the exchanges, owing to the premium or

‘batta’ which would at first be obtained for the gold coins.

“12. By this means gold would gradually be brought into India;

and, as it has been shown that an addition to the circulating

medium of at least five million sterling per annum is necessary,

and no more silver coins being admitted [into the currency], it

would slowly accumulate there. …

“13, The proposal therefore is that, after due notice, the

coinage of silver on behalf of private individuals and advances

upon silver bullion should be suspended; that part of the Act 23

of 1870, which makes it incumbent on the Government to receive

and coin it, being repealed; the Government retaining in their

own hands the power of replenishing the silver currency whenever

they may deem it expedient. That gold bullion should be

received by the Government at the mint rate of 38 rupees 14

annas per standard ounce, and coined into sovereigns and

half-sovereigns (representing 38 rupees 15 annas), or ten or

five rupee-pieces of the same value, which should be declared

legal tender, but not demandable, the present silver rupees

continuing to be legal tender, as before.”²⁰⁴

²⁰⁴ This was calculated to make the rupee-sterling exchange 2s. gold.

The average rupee-sterling exchange in 1876 was about 1s. 9·645d.

This would have placed a small premium on gold which would have no

doubt soon disappeared owing to the appreciation of the rupee

consequent upon the stoppage of its coinage.

At the time the Smith plan was presented the fall of silver had made

itself felt so that a considerable support in favour of the plan was

forthcoming. The support of the trading community was embodied in the

resolution, dated July 15, 1876, of the Bengal Chamber of Commerce,

which urged “that it was expedient, in view of any ultimate measures

that the Government may adopt, that Clause 19 of Act XXIII of 1870,

making it obligatory on the Mints [pg 123] in India to receive all

silver tendered for coinage, and also Section II, Clause (_b_) of Act

III of 1871, making it obligatory on the Currency Department to issue

notes against silver bullion sent in, be temporarily suspended, at the

discretion of Government, and that during each such suspension or till

further notice it be not lawful to import coined rupees from any foreign

port.” A similar feeling was voiced by the Calcutta Trades Association.

By this time the fall of exchange had also commenced to tell upon the

finances of the Government of India, so much so that Sir William Muir,

in his Financial Statement for 1876–77, was led to observe:—

“The sudden depreciation of silver and the consequent

enhancement of charge to the Government of India in laying down

yearly the sum required in England of about fifteen millions

sterling, without doubt cast a grave shadow on the future. In

truth, it may be said that the danger, from whatever point of

view considered, is the gravest which has yet threatened the

finances of India. War, famine, and drought have often

inflicted losses on the Exchequer far greater than the charge

which threatens us in the present year. But such calamities

pass away; the loss is limited; and when it has been provided

for, the finances are again on sure and stable ground. This is

not the case with the present cause of anxiety. Its immediate

effects are serious enough. … But that which adds significance

to it is that the end cannot be seen; the future is involved in

uncertainty.”²⁰⁵

²⁰⁵ P. 93.

In the face of such a situation nothing would have been more natural

than to expect the Government precipitating into some kind of action to

save itself, if not others, from an impending calamity. On the

contrary, the Government not only failed to take any initiative, but

showed, when pressed by the Bengal Chamber of Commerce to act upon the

foregoing resolution, a surprising degree of academic somnolence only to

be expected from an uninterested spectator. No doubt the proposal of

the Bengal Chamber was defective in that it did not suggest the opening

of the Indian Mints to the coinage of gold. The Government of India was

sharp [pg 124] enough to fasten upon this defect. It made plain to the

Chamber that if it had proposed the free coinage of gold

“such a recommendation would not have been open to the

objections that appear fatal, _in limine_, to the adoption of

the resolution actually adopted … viz. to close the Mints

temporarily to the free coinage of the one metal into

legal-tender money, without simultaneously opening them to the

free coinage of the other into legal-tender money.”

Did it, then, adopt the proposal of Colonel Smith, which contained such

a recommendation? Not at all! Why did it not, then, adopt a remedy to

which it saw no objections? The reason was that it had arrived at a

different diagnosis of the causes of the monetary disturbances. To the

Government the possibilities of explaining “the disturbance in the

equilibrium of the precious metals” seemed to be many and varied.²⁰⁶ (1)

The value of gold being unchanged, the value of silver had fallen; (2)

the value of silver being unchanged, the value of gold had risen; (3)

the value of gold had risen, and the value of silver had fallen; (4) the

value of both metals had risen, but the value of gold more than that of

silver; (5) the value of both metals had fallen, but the value of silver

more than that of gold. In the midst of such possibilities, marked more

by pedantry than logic, the Government warned the currency reformers

that

“the character of the remedies indicated, if the disturbance is

found to be due to a rise in the value of gold, will obviously

differ from what would be suitable in the case of a fall in the

value of silver.”²⁰⁷

²⁰⁶ Cf. The Resolution of the Government of India relating to the

Depreciation in the Value of Silver, dated September 22, 1876,

par. 6. Commons Paper 449 of 1893.

²⁰⁷ _Ibid_.

Out of these possibilities what seemed to it to be proven was that “gold

had risen in value since March, 1872,”²⁰⁸ and therefore if any reform

was to be effected it should fall upon the gold-standard countries to

undertake it. Situated as the Government of India then was, it could

have suffered [pg 125] itself without incurring much blame to be hurried

into some kind of currency reform that promised to bring relief. To

have refused to allow the exigencies of a crisis to rule its decisions

on such a momentous issue as the reform of currency, need not imply a

spirit of obstinacy. On the other hand, it bespeaks a spirit of caution

which no reader of that illuminating despatch of October 13, 1876,

conveying to the Secretary of State its decision to wait and watch, can

fail to admire. But it is hardly possible to speak in a similar

commendatory manner of the underlying attitude of the Government of

India. Whether it is possible to hold that gold had appreciated but

that silver had not depreciated may be left for logicians to decide

upon. But for a silver-standard country to refuse to undertake the

reform of her currency system on the plea that it was gold that had

appreciated was no doubt a tactical error. In military matters there is

probably such a thing as depending on a position; but in currency

matters there cannot be such a thing. The reason is that in the former

strength sometimes lies in the weakness of the other. But in the case

of the latter the weakness of one becomes the weakness of all. There

can be no doubt, therefore, that the Government, in discarding its

responsibility to do the needful in the matter, committed the same kind

of mistake as a man who, in the words of Prof. Nicholson,²⁰⁹ “should

suppose that the ship cannot sink because there is no leak in the

particular cabin in which he happens to sleep.”

²⁰⁸ _Ibid._, par. 16.

²⁰⁹ _Money and Monetary Problems_, 1895, p. 90.

That the attitude of inaction was unwise was soon brought home to the

Government of India. Within a short space of two years it was obliged

to reconsider the position taken in 1876. In a despatch dated November

9, 1878,²¹⁰ the Government of India observed:—

²¹⁰ P.P., C. 4868 of 1886, p. 18.

“6. It was to have been expected that a subject so encompassed

with difficulties should not receive any early settlement, and

it was probably the wisest, as it was certainly the most natural

course, to allow further time to elapse before attempting any

final solution of the grave problem it [pg 126] involved. The

improvement that took place in the value of silver in the year

1877 favoured this policy of inaction; and it is only now, when

a fresh fall has brought down the rupee to a value hardly

greater than that which it had in July, 1876, that the serious

nature of the risk which our existing currency law entails on us

is once more forced on our attention by its practical effects on

the Home remittances.

“21. The uncertainty that has now for some years prevailed with

reference to the value of silver, and the consequent

disturbances in the exchange, have … been causes of continued

financial difficulty to the Government … and it is not possible

to doubt that similar results must have been produced by these

disturbances in the trade transactions of the country, or that

investments of foreign capital in India, either for trading or

other purposes, must have been very seriously interfered with by

their influence.

“23. Such we hold to be a true statement of the present

difficulties and prospective risks of maintaining the existing

Currency Law, and we feel assured that they have not been in any

way overstated. It remains for us to inquire whether any

practical remedy could be devised that should not be open to

serious objections, or the risks attending the adoption of which

should not be so great as to prohibit it. We feel most fully

the heavy responsibility that will rest on us in dealing with

the currency of India; but it is plain that the responsibility

for doing nothing is no less great. Whether the law is left as

it is, or whether it is changed, the result will be equally due

to our action, and we cannot, if we would, avoid facing this

grave question.

“24. To obtain fixity of exchange by the adoption of a gold

standard, and the substitution of a gold for a silver currency

through the direct action of the Government, has, we think, been

conclusively shown to be impracticable by the despatch of the

Government of India of October last, and this plan therefore

calls for no further notice. The increase in the weight of the

rupee, also noticed in that despatch, is equally undeserving of

attention, as, in fact, it would give no security for the

future, and would entail a heavy charge without accomplishing

the essential point to be aimed at. There remains the simpler,

and first proposed suggestion, the limitation of the coinage of

silver, which, though rejected in 1876 by the Government of

India … appears to us to call now for a closer examination. [pg

127]

“25. This suggestion in its main features is, that the Coinage

Act shall be so far modified as to withdraw the free right of

the public to take silver bullion to the Mint for coinage, and

either to suspend it entirely in future, or limit it for a time.

“26. It is obviously an essential part of any such scheme, if it

is to have the effect of fixing the exchange value of the rupee,

that the power of obtaining that coin in future shall be

regulated in some manner by a gold payment, and that the

relation between sterling and rupee currency shall thus be fixed

irrespective of the fluctuations in the relative value of the

metals of which the coins are formed.

“27. It is not, on the other hand, an essential part of such a

plan that any particular relation of value should be thus fixed

at two shillings … or at any smaller or larger proportion. All

that is necessary is that the rate, being once fixed, shall

remain for the future unchanged. …

“33. Probably the most important question is … whether or not it

is practicable to maintain a silver coinage as the principal

element in our currency, with a very limited gold coinage, or

without a legal-tender gold coinage at all. The Government of

India, in its despatch of 1876, expressed an opinion adverse to

the possibility of maintaining such a system. … On a full

reconsideration of this point, we are led to take the opposite

view, and to think that such a system would be perfectly

practicable and would lead to no material difficulty. It is

true that there is no country in which such a condition of

things actually exists. But those countries, and there are many

of them, in which an inconvertible paper currency exists or has

existed, give proof that the far greater anomaly of a currency

devoid of any intrinsic value whatever is capable of performing

the work of a metallic currency satisfactorily, and of

maintaining its local exchange value, so long as an excessive

issue is only guarded against.

“37. [Such] instances [as the British shilling and the French

five franc piece] seem to show that neither in the way of

surreptitious coinage, nor of discredit from depreciation of

intrinsic value, is it probable that there would be any serious

difficulty in keeping the rupee in circulation at its present

weight, at a nominal value of two shillings, with a gold

standard and a partial gold coinage.

“46. We are thus led to the general conclusion that it will be

practicable, without present injury to the community [pg 128] as

a whole, or risk of future difficulties, to adopt a gold

standard, while retaining the present silver currency of India,

and that we may thereby in the future fully protect ourselves

from the very real and serious dangers impending over us so long

as the present system is maintained. We consequently desire to

recommend to Her Majesty’s Government the adoption of such a

change at the earliest moment possible, and we shall proceed to

explain, in all necessary detail, the measures by which we

advise that it should be effected.

“50. It has to be borne in mind that it is not the object of our

action to force on India a gold currency, or to displace the

silver currency, but rather to avoid such a result, or to check

the tendency in that direction, so far as it can be done

consistently with the adoption of the gold standard. We are

consequently led to the conclusion that, while we give certain

facilities for the introduction of gold coins into India, we

should not yet go so far as to declare them a general legal

tender; and that we should, at the same time, make provision for

the coining of silver, without limit as to quantity, but on

terms that will give no advantage to the introduction of silver

in relation to gold.

“51. These objects we propose to attain as follows:— We first

take power to receive British or British Indian gold coin in

payment for any demands of the Government, at rates to be fixed

from time to time by the Government, till the exchange has

settled itself sufficiently to enable us to fix the rupee value

in relation to the pound sterling, permanently at two shillings.

Simultaneously with this, the seignorage on the coining of

silver would be raised to such a rate as would virtually make

the cost of a rupee, to persons importing bullion, equal in

amount to the value given to the rupee in comparison with the

gold coins above spoken of. We should thus obtain a self-acting

system under which silver would be admitted for coinage, at the

fixed gold rate, as the wants of the country required; while a

certain limited scope would be given for the introduction and

use of gold coin, so far as it was found convenient or

profitable.”

Such was the scheme outlined by the Government of India. The reason why

it rejected the Smith plan, although it was simple, economical, and

secure, was because it contemplated a demand by India on the world’s

dwindling stock of gold. Now, in the circumstances then existing, [pg

129] this was a fatal defect, and the powers that be had already decided

that at all cost India must be kept out of what was called the “scramble

for gold.” Therefore, to have proposed an effective gold standard was

to have courted defeat. A mild and diluted edition of a gold standard

such as was proposed by the Government was all that stood any chance of

success. But even this timid attempt did not fare well at the hands of

the Committee²¹¹ appointed jointly by the Secretary of State and the

Chancellor of the Exchequer to examine and report upon the proposals.

The members of the Committee were “unanimously of opinion that they

cannot recommend them for the sanction of Her Majesty’s Government.”²¹²

The reasons which led to the rejection of the proposals we are not

permitted to know. Although the Report of the Committee was made

public, the proceedings have never seen the light of day. Indeed, there

has been a most stern and obstinate refusal on the part of the officials

to allow a peep into them. Why they should be regarded as confidential

after a lapse of nearly half a century it is difficult to imagine.

Enough, however, was revealed by Sir Robert Giffen, who was a member of

this Committee, in evidence before the Indian Currency Committee of

1898²¹³ for us to know the contents of this closely guarded document.

It seems that the Committee declared against the proposals because it

thought they wore calculated to make the Indian currency a “managed”

currency. At the time when the Committee delivered its opinion the

current prejudice was unanimously against such a system. All

acknowledged writers on currency were pronounced opponents of an

artificially regulated system.²¹⁴ A naturally automatic currency was

their ideal. In addition to being misled by [pg 130] this prejudice,

the Committee felt convinced that the situation would soon ease itself

by the natural working of economic forces without necessitating a reform

of the Indian currency. This conviction on the part of the Committee

was founded on the high authority of the late Mr. Walter Bagehot²¹⁵ that

the disturbance could not but be temporary. His argument was that the

depreciation would encourage exports from India, and discourage imports,

and the unfavourable balance of trade thus brought about would induce a

flow of silver to India, tending to raise its price. He was also of

opinion that increased demand for silver would also arise from outside

India. He argued that the reduction of demand caused by the

demonetization of silver by some countries would be more than

compensated for by the adoption of silver by other countries then on a

paper basis for their impending resumptions of specie payment.

²¹¹ It was composed of Louis Mallet, Edward Stanhope, T. L. Seccombe,

R. E. Welby, T. H. Farrer, R. Giffen, and A. J. Balfour.

²¹² For Report of the Committee, _see_ Commons Paper C. 4868 of 1886,

p. 26.

²¹³ Q. 10,025–50.

²¹⁴ So novel was the idea at the time that the United States Monetary

Commission, 1876, was surprised when some of the witnesses

expressed themselves in favour of regulating the principal

metallic unit of account in the currency system of a country by

Governmental agency. _See_ 44 Congress 2nd Session Senate

Document, No. 703, pp. 47–48.

²¹⁵ Cf. his _Some Articles on the Depreciation of Silver, and on

Topics connected with it_, London, 1877, pp. 10, 65, and 80; also

his evidence before the _Select Committee on the Depreciation of

Silver_, Lords Paper 178 of 1876, Q. 1,361–1,450.

Whatever might be said with regard to the Committee’s preference of a

natural to an artificial system of currency, there can be no doubt that

in turning down the proposals of the Government, in the hope that silver

would recover, it was grossly deceived. The basic assumptions on which

the Committee was led to act failed to come true. To the surprise of

everybody India refused to absorb this “white dirt.” Indeed, it was one

of the puzzles of the time to know why, if silver had fallen so much in

Europe, it did not go to India in larger quantities. Many blamed the

Secretary of State for the sale of his Council Bills.²¹⁶ These bills, it

was said, presented an alternative mode of remittance so much better as

to prevent the sending of silver to India, and thereby caused a

diminution in the demand for it. That this was not a correct view is

obvious.²¹⁷ Silver could not have [pg 131] gone to India more than it

did even if Council Bills had been abolished. Council Bills must be

regarded as ordinary trade bills drawn against services and commodities,

and could not be said to have competed with the transmission of bullion

in any special manner different to that attributable to the trade bills.

The only bearing the Council Bills may be said to have had upon the

issue in question lies in the fact that to the extent they figured in

the transactions they prevented India from buying other commodities.

But there was nothing to prevent her residual buying power left over

after paying for the Council Bills from being utilized in the purchase

of silver in preference to other commodities. That this buying power

would be used in purchasing silver because it was depreciated in Europe

was theoretically an unsound assumption on the part of Mr. Bagehot. The

deciding factor which could have caused such a diversion of this

residual buying power to the purchase of silver was whether it was

_appreciated in India_. Only on that condition could there have been a

flow of it to India. But as matters then stood, it was the opinion of

Prof. Pierson²¹⁸ that when the general depreciation of silver commenced

all over the world, it had been forestalled in that part of the globe.

India was already glutted with silver. Under ordinary circumstances

India would have sent back a large portion of its silver to Europe. But

the general depreciation prevented her from doing so; and now there were

two opposing forces, one tending to produce an export of silver from

India to Europe and the other tending to produce an export of silver

from Europe to India; and, although the latter was the stronger of the

two, the former was sufficiently powerful to prevent any considerable

quantity of silver from being exported from Europe to India. If the

Committee was, deceived in one part of its assumptions, it was also

disappointed in others. Far from resuming specie payments in terms of

silver, as Mr. Bagehot expected the countries then on paper basis to do,

they one and all demonetized [pg 132] silver to the great disappointment

of all those who adhered to the policy of “wait and see.”

²¹⁶ This argument was prominently put forth in the _Report_ (pp.

xxx-xxxv) _of the Select Committee on the Depreciation of Silver_,

1876; and also by Monometallic Members of the Gold and Silver

Commission, 1886. Cf. pp. 77–79 of the Final Report, Part II.

²¹⁷ Cf. evidence of Professor Marshall before the Gold and Silver

Commission, 1886, Q. 10,164~76.

²¹⁸ Cf. his reply to the Circular of the Gold and Silver Commission,

1886. Second Report, App. VII (1), p. 254.

The falsification by India and other countries of such anticipations led

to a change in the angle of vision of most of the European countries who

had theretofore shown no inclination to do anything by way of reducing

the chaotic currencies to some kind of order. They were advised by

eminent authorities not to hurry. Jevons said²¹⁹:—

²¹⁹ Op. cit., p. 354.

“We only need a little patience and a little common sense to

surmount the practical difficulties. Within the next few years

good harvests in India will, in all probability, enable that

country to buy up all our surplus silver, as it has been in the

habit of doing, with rare exceptions, since the time of Pliny. …

In future years any amount of silver could be got rid of without

loss, if it be sold gradually and cautiously.”

When, however, it was found that the waiting period would be more

painful if not longer than what it pleased the proverbial peasant to

undergo, in order to let the stream run dry so as to permit of his

fording it without wetting his feet, there grew up an agitation in

Europe to undertake the necessary reform to prevent the depreciation of

silver.

Far from being sentimental, the agitation was real and derived its force

from the evils which arose out of the existing currency conditions. The

monetary condition of most of these countries was very unhealthy. Their

schemes of an effective gold standard with silver as token currency were

arrested in the midst of their progress. Germany, when she demonetized

silver, had retained her silver thalers as full legal tender at the old

ratio with gold, only to get time to be rid of them to the extent

necessary to reduce them to a truly subsidiary position. But, before

she could do so, her policy of demonetization had commenced to tell upon

the value of silver, and the continued fall thereof compelled Germany to

retain the thalers as legal tender at their old value, despite the fact

that their metallic value was fast sinking. Precisely the same was the

result of the action of the Latin Union on their system of currency.

They had [pg 133] stopped their further coinage of the silver five-franc

pieces; but they could do nothing with those that were already coined

except to permit them to circulate at the old mint par, although the

metallic par continued to change with changes in the market values of

gold and silver. The United States was also involved in similar evils,

although they arose from choice rather than from necessity. Yielding to

an agitation of the silver men, it passed in 1878 a law called the Bland

Allison Act, requiring the Secretary of the Treasury to purchase and

coin each month not less than $2,000,000 and not more than $4,000,000

worth of silver bullion into standard silver dollars, which were to be

full legal tender for all debts public and private, “except where

otherwise expressly stipulated in the contract.”²²⁰ As the metallic

value of these dollars fell with every fall, while their legal value

remained as before, they became, like the thalers and the francs,

overvalued coins. It is clear²²¹ that when the stock of a country’s

currency is not equally good for all purposes it is relatively speaking

in an unsatisfactory condition. Though good for internal purposes,

these coins were useless for international payments. Besides making the

whole currency system unstable and top-heavy, they could not be made to

serve the purpose of banking reserves, which it is the _prime_ function

of a metallic currency to perform in modern times. The possibilities

they opened for illicit coinage were immense. But what made their

existence such a source of menace was the fact that a large proportion

of the total metallic money of these countries was of this sort. The

figures given by Ottomar Haupt (see p. 134) prove sufficiently the

difficulties that these countries had to face in regulating and

controlling such a mass of token currency.

²²⁰ _Report of the Monetary Commission of the Indianapolis

Convention_, Chicago, 1898, pp. 138–145.

²²¹ Cf. the speech of Prof. Pierson, Delegate of the Netherlands at

the International Monetary Conference of 1881, _Report of the

Delegates of the United States_, Cincinnati, 1881, pp. 77–84.

If a gold-standard country like England had escaped these difficulties

it was only to meet others equally embarrassing. As has been pointed

out before, the continued fall of prices, the reflex part of the

appreciation of gold, [pg 134]

TABLE XXIII

_Distribution of the Stock of Money in Different

Countries_²²²

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

Monetary Circulation at the _Beginning_ of 1892.

Countries ──────────────────────────────────────────────────────────────────────────

Gold. Silver. Uncovered Fractional Billon

Notes Currency. Money.

Austria 65,000,000 197,000,00 601,000,000 40,000,000 14,000,000

fl.

England £ 118,000,000 — 10,000,000 26,000,000 1,900,000

France 3,900,000,000 3,200,000,000 572,000,000 280,000,000 280,000,000

fr.

Germany 2,500,000,000 430,000,000 450,000,000 457,000,000 57,000,000

Holland 64,000,000 135,000,000 98,000,000 7,600,000 1,800,000

fl.

Italy li. 485,000,000 81,000,000 847,000,000 150,000,000 75,000,000

Russia £ 59,500,000 — 51,200,000 8,200,000 1,000,000

Spain 160,000,000 646,000,000 548,000,000 190,000,000 157,000,000

pes.

U.S.A 671,000,000 458,000,000 419,000,000 77,000,000 18,000,000

doll.

²²² The figures are as given by Ottomar Haupt (London: Effingham,

Wilson & Co., 1892, p. 160.)

[pg 135] had produced a depression in the trade and industry of the

country never known before in its history. Apart from this, the

monetary disturbances affected the yield on capital investment, the

mainstay of so many of her people, by reducing the field for its

employment. Said the American Commission:—

“Within twenty years, from 1877 to 1897, it could probably be

correctly stated that the power of money to earn dividends was

reduced to one-half, or in nearly that proportion. That

reduction of the earning power of capital affected injuriously

everybody who depended upon investments for a living. It

affected also the profits and enterprises of the captains of

industry and the kings of finance. In England and in France the

price of Government securities rose to a point which made it no

longer possible for the man of small means to invest in them and

acquire an adequate support during his declining years.”²²³

²²³ Report on the Introduction of the Gold-exchange Standard into

China and other Silver-using Countries by the Commission on

International Exchange, 58th Congress, 2nd Session, House of

Representatives Document, No. 144, Washington, 1903, p. 101.

It is, of course, open to doubt whether the conclusion drawn is the

right one. But the fact remains that owing to monetary disturbances the

field for the investment of English capital had become considerably

restricted. And, as a way of getting a living, capital investment was

an important resource to the English people.

To mend such a situation there were convened one after another three

International Monetary Conferences to establish a bimetallic par between

gold and silver. The first International Monetary Conference was

convened at Paris in the year 1878 at the invitation of the United

States. The second met at the same place in 1881 at the joint call of

France and the United States. The third and the last assembled by the

wish of the United States in Brussels during the year 1892.

From the gravity of the situation nothing could have been more natural

than to expect these Conferences to fructify into an agreement upon the

consummation of the project for which they were called into being. But,

far from reaching any agreement, the deliberations of these Conferences

proved [pg 136] to be entirely futile. Only the second Conference

showed any sign of agreement. The first and the third marked a strong

deviation in the opposite direction. The advance, if any, that was

made, as a result of these deliberations, was summed up in the pious

opinion that it was necessary to retain and enlarge the monetary use of

silver. But so weak on the whole was the response that practice failed

to testify as to the sincerity of this solemn declaration.

The reasons for the failure of these Conferences to reach a bimetallic

agreement have not been properly understood. One cannot read the

debates on bimetallism at these Conferences without observing that the

opposing parties approached the subject with different objectives. To

one the principal objective was the maintenance of a stable ratio of

exchange between gold and silver irrespective of the question whether

one or both remained in circulation; to the other it was the maintenance

of the two metals in concurrent circulation. As a consequence of this

difference in the lines of their approach an agreement on a bimetallic

project became wellnigh impossible.

The workability of bimetallism in the sense of maintaining a stable

ratio between gold and silver is necessarily an indefinite proposition.

None the less, it cannot be said, if the debates at these Conferences

are taken as a guide, that the possibility of a successful bimetallic

system in the stable-ratio sense of the term had been denied by the

majority of economic theorists, or by the Governments who met at these

Conferences. On the other hand, the Conference of 1881, the most

important of the three, was remarkable by its confession regarding the

workability of the system. All Governments, barring a few minor ones,

were in favour of it. Even the British Government, in consenting to

bring into operation the silver clause of the Bank Charter Act, must be

said to have given its word of approval.

But what did bimetallism promise, as a piece of mechanism, to maintain

the two metals in concurrent circulation? The bimetallists used to cite

the example of France in support of the stability of the double

standard. But was there a concurrent circulation of the two metals [pg

137] in France under the bimetallic system? Far from it. For, although

it was a virtue of the system that changes in the production of the two

metals made no appreciable variations in the fixed ratio of exchange,

yet the slightest of such as did occur were sufficient to effect the

greatest revolution in the relative circulation of the two metals, as

the following table clearly brings out:—

TABLE XXIV

_Mintage of Gold and Silver in France_²²⁴

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

Gold. Silver.

Period. ─────────────────────────────── Ratio of of

Million Million Value.

Francs. Francs.

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

1803 to 1820 868 1,091 1 : 15·58

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

1821 to 1847 301 2,778 1 : 15·80

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

1848 to 1852 448 543 1 : 15·67

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

1853 to 1856 1,795 102 1 : 15·35

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

1857 to 1866 3,516 55 1 : 15·33

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

1867 to 1873 876 587 1 : 15·62

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

²²⁴ Table submitted to the Paris International Monetary Conference of

1881 by M. Pierson, Delegate for the Netherlands.

In mitigation of this the bimetallists had nothing to offer. There

were, no doubt, such schemes as the one proposed by Prof. Marshall,

consisting of paper based on a linked bar of gold and silver in certain

fixed proportions,²²⁵ having the object of converting this

“either-metallism” into double-metallism. But such schemes apart, the

free-mintage-cum-fixed-ratio plan of bimetallism gave no guarantee

against alternation in the circulation. Indeed, under that plan the

alternation is the very soul of the mechanism which keeps the ratio from

being disturbed. The only thing the [pg 138] bimetallists could say in

mitigation of this was that²²⁶ the alternation in currency would confine

itself to bank reserves and would not be extended to the pockets of the

people. This was only an eyewash,²²⁷ for how could the banks arrange

their reserves except in conformity with the prejudices of the people?

Even international agreement to use gold and silver at a fixed ratio was

no guarantee that this concurrent circulation would be maintained.

Stability of ratio did depend to a large extent upon an international

agreement, for, although it could be maintained by the action of one

nation, the deviations of the ratio in that case would probably be

greater. But mere international agreement has no virtue of itself to

prevent one metal driving out the other. To suppose that Gresham’s Law

is powerless under international agreement is a gross mistake.

Gresham’s Law is governed by the relative production of the two metals

to the total currency needs of the moment. Supposing the production of

one metal relatively to the other was so enormous as to more than

suffice for the currency needs, how could international agreement

prevent the former from driving the latter entirely out of circulation?

On the other hand, international agreement, far from discouraging, would

encourage the process.

²²⁵ Cf. _Contemporary Review_ for March, 1887. It is interesting to

note that essentially the same plan was suggested 115 years before

Prof Marshall by James Stewart when his advice was sought by the

East India Company as to the method of reforming the then chaotic

currency of Bengal. He refrained from pressing it upon the

Company because he thought “mankind were not all philosophers.”

Cf. his _Principles of Money as applied to the Present State of

the Coin of Bengal_ (2nd Edition, 1772), pp. 8–11; cf. also

William Ward, _On Monetary Derangements, in a Letter addressed to

the Proprietors of Bank Stock_, London, 1840, p. 8.

²²⁶ Cf. Prof. Foxwell, _Oxford Economic Review_, 1893, Vol. III, p.

297.

²²⁷ Cf. the reply by Prof. Cannan, _ibid._, p. 457.

In adopting bimetallism, therefore, the nations had to make a choice

between a stable ratio and a concurrent circulation, for there might

arise a situation in which there was a stable ratio but no concurrent

circulation of both the metals. If the Conferences broke down, it was

not because they did not recognize the possibility which was unanimously

upheld by such an impartial tribunal as the Gold and Silver Commission

of 1886 of a stable ratio being maintained under a bimetallic regime.

They broke down because the bimetallic system did not guarantee the

concurrent circulation of the two metals. However, it is certain the

impossibility of concurrent circulation could not have been such a

drawback if the immediate effect of bimetallism would have been a flow

of gold into circulation. But as matters [pg 139] then stood the

immediate effect would have been to bring silver into circulation. It

was this more than anything else which scared away most of the nations

from the adoption of the bimetallic system. Now, it is a curious thing

that nations which had assembled together to wring about a stable ratio

between gold and silver should have rejected a system which gave a

promise of such a stability on the comparatively less significant ground

that it had the effect of altering the composition of the circulation

from gold to silver. But the fact must be recognized that at the time

the question of reconstituting the bimetallic system was agitating the

public mind, in most of the European countries gold and silver had

ceased to be regarded as equally good for currency purposes. The

superiority of gold to silver as a carrier of large value in small bulk

was coming more and more to be appreciated in the latter part of the

nineteenth century, and no plan of stabilization which did not provide

for the unhindered circulation of gold was likely to meet with common

approval. This prejudice was in no way confined to a gold-standard

country like England. The closing of the Mints by the Latin Union is

proof positive of the change in the attitude of the bimetallic

countries. As Jevons argued²²⁸:—

²²⁸ _Money and Mechanism of Exchange_, 1890, p. 1423.

“So long … as its operation resulted in substituting a beautiful

coinage of napoleons, half-napoleons, and five-franc pieces in

gold for the old heavy silver écus, there was no complaint, and

the French people admired the action of their compensatory

system. But when [after 1873] it became evident that the heavy

silver currency was coming back again … the matter assumed a

different form.”

So great was the prejudice in favour of gold that the interests of the

chief Powers in the various Conferences, it may be truly said, waxed and

waned with the changes in the volume of their gold reserves.²²⁹ In 1878

the United States took the lead in calling the Conference because the

[pg 140] working of the Bland Allison Act checked the inflow of gold

necessary for its cash payments. Germany was indifferent because she

had enough gold and was confident of selling off her demonetized silver

without loss. In 1881 France and Germany showed more anxiety for reform

because the former had lost all her gold and the latter was unable to

palm off her silver. By 1892 none was so poorly supplied with gold as

was the United States, largely as a result of a reckless policy which

did her harm without doing good to anyone else, and she was therefore

left alone to support the cause of silver.

²²⁹ Cf. _The Report of the Indian Delegates to the International

Monetary Conference of_ 1881, C. 3229 of 1882, p. 7; also Russell,

op. cit., pp. 374–5.

Possessed as almost every Government was by this prejudice for gold, it

was not an ineradicable prejudice. What the countries wanted was a lead

from an influential nation. Throughout the debates at these Conferences

one thing stood out very clearly. If England could have brought herself

to adopt a bimetallic system, others, like sheep, would have followed

suit. But she was too much wedded to her system to make a change, with

the result that bimetallism, as a way out of the currency difficulties,

became a dead project. The vanishing of the prospect of re-establishing

the bimetallic system as a result of her obstinacy was a small matter to

the European countries. They had virtually made gold, the international

form of money, as the basis of their currency, and were therefore quite

indifferent as to the issue; but it was a terrible blow to the hopes of

India. After the proposal of 1878 had been turned down, bimetallism was

considered by the Government of India as the remedy, and its advent

looked forward to for salvation. It is true that in the beginning of

bimetallic discussions the attitude of the Indian Government was rather

lukewarm. In a despatch dated June 10, 1881,²³⁰ to the Secretary of

State, it was revealed that the Government of the time was divided in

its opinion regarding the merits of bimetallism. The Viceroy and

another member of Council refused their support on the ground that

bimetallism was unsound in principle,²³¹ and even the majority who

thought differently on this aspect of the question were not then

prepared to go to the [pg 141] length of joining a bimetallic union,

although they did not see any objection to doing so “if a sufficiently

large number of other Governments were prepared to join” in it. With

the growth of their financial difficulties, however, this slender faith

in bimetallism considerably deepened, so much so that in 1886 the

Government addressed to the Secretary of State a despatch²³² urging him

to take the initiative in calling an International Monetary Conference

to establish a stable ratio between gold and silver. So intense was its

interest in the consummation of bimetallism that it did not hesitate to

administer a sharp rebuke to the Treasury when they negatived its

suggestion referred to them for consideration by the Secretary of

State.²³³ With such feelings of faith and hope the Government of India

entered these international Conferences and watched their fortunes. But

no Government could have been treated with such suspicion and injustice

as was the Government of India. Its admission to the bimetallic union

was desired by none of the Powers, not even by England.²³⁴ It was

treated as a villain whose advances were nothing but manœuvres to pounce

upon the already dwindling stock of gold. Not only was it planned to

keep India out of the bimetallic union, but she was to be required to

pledge herself not to take a mean advantage of the union after its

efforts had succeeded in establishing a stable ratio by making gold

legal tender.²³⁵ All these guarantees the Government of India had

offered in a pathetic faithfulness to the cause of bimetallism, on the

success of which it had depended so much. Consequently, when the

attempt failed, the disappointment caused to the Government of India

almost broke its heart. It is nut too severe to say that the part

played by the British authorities in causing this disappointment was

highly irresponsible—one might almost say wicked. They forced India

against her declared wishes to keep to the silver standard, partly to

trail her off from [pg 142] making any demand for gold, and partly to

silence the criticisms of other nations that Britain was not taking her

share in the matter of rehabilitating silver.²³⁶ This was not the only

advantage exacted from a country bound to obey. On the one hand it

restrained the Government of India from taking any independent line of

action in the matter of currency reform, and on the other such means as

were calculated to make good the losses which arose from a depreciating

currency were subjected to Parliamentary censure. The House of Commons

was twice moved, once in 1877 and again in 1879, to resolve that the

Government of India should lower its tariff, ostensibly in the interest

of free trade, but really in the interests of relief to the depressed

condition of Lancashire. The consequence was that the Government could

not tap one important source of its revenue in times of its greatest

adversity. The only adequate recompense the British authorities could

have made to a Government so completely paralysed by their dictations,

and of whose interests they so loudly claimed to be the lawful trustees,

was to have consented to join the bimetallic union, the consummation of

which only waited upon their grace. But, as is well known, they did

nothing of the kind, so that, after a period of enforced waiting and by

no means unavoidable suffering, the Government of India, at the end of

1893, found itself just where it was at the beginning of 1878.

²³⁰ P.P.C, 3229 of 1882, p. 33 _et seq_.

²³¹ _Ibid._, p. 37.

²³² Dated February 2, 1886, _see_ C. 4868 of 1886, p. 5 _et seq_.

²³³ Cf. the despatch of September 4 1886, App. II to the _First Report

of the Royal Commission on Gold and Silver_, 1886.

²³⁴ Cf. the evidence before the Gold and Silver Commission of 1886 of

Mr. S. Smith, Q. 4,825–30; also of Mr. Watney, Q. 9,427.

²³⁵ Cf. _The Report of the Indian Delegates_, p. 12.

²³⁶ Cf. the speech of Mr. Goschen at the International Monetary

Conference of 1878, Third Session. Report of the American

Delegates, Senate Executive Document, No. 58, Forty-fifth

Congress, Third Session, Washington, 1879, pp. 50–52.

Like all common-sense people who pray and yet do not fail to keep their

powder dry, this interval was utilized by the silver-ridden countries,

with the exception of the United States, in strengthening their gold

basis no less than in attending the deliberations of the Monetary

Conferences on the amusing plans for extending the use of silver.²³⁷,

Mr. Goschen, at the Conference of 1878, had quite philosophically [pg

143] remarked that States feared to employ silver because of its

depreciation, and the depreciation continued because the States feared

to employ it. Now, if the first part of the diagnosis was correct, we

should have found the States seriously engaged in the task of

rehabilitating silver when its price was propped up by the silver

legislation of the United States. On the other hand, just so far as the

monthly purchases of silver, under the Bland Allison Act of 1878, or the

Sherman Act of 1890, held up the price of silver, not only did they not

feel anxious to take steps to restore it to its former position, but

they actually took advantage of the rise to discard it.²³⁸ And it is not

possible to blame them either, for with the prospect of a bimetallic

union vanishing into thin air the accumulation of this dead weight would

have only ended in a gratuitous embarrassment. India alone refused to

profit by the squeeze which the United States took vicariously for other

nations, and allowed precious time to slip by, with the result that it

was thrown back upon the same remedy, the adoption of which was

negatived in 1878.

²³⁷ Cf. for the variety of plans suggested at the Conferences _The

Report of the American Delegates to the International Monetary

Conference of_ 1892, Washington, 1893.

²³⁸ Cf. Russell, op. cit., p. 410; also Prof. F. A. Walker, “The Free

Coinage of Silver,” in _The Journal of Political Economy_

(Chicago), Vol. I, p. 174.

If it was to be a gold standard it would have been better if it had been

done in 1878. The plan then outlined by the Government of India was no

doubt too complicated and too flimsy to be practicable. But its

rejection should not have altogether suspended the introduction of a

gold standard. If it was to be one of an orthodox kind on the English

pattern, it would have no doubt involved some cost to the Government in

being obliged to sell at a reduced price a part of the silver stock of

the country in order to give the rupee a subsidiary position and to fill

the void by a gold currency. The cost of this conversion in 1878 would

have been inconsiderable, for the fall of silver from its normal gold

price was only 12½ per cent. On the other hand, if it was to be on such

an unorthodox plan as that of Colonel Smith, it would have involved no

cost at all to the Government²³⁹ beyond [pg 144] that involved in the

installation of new machinery for the coinage of gold at the Mint. But

in 1893 both these processes of bringing about a gold standard seemed

quite hopeless. The impossibility of the plan of conversion was quite

out of the question. The fall in the value of silver in 1893 was nearly

35 per cent. Even the prospect of the Smith plan did not appear very

bright owing to the enormous addition of rupees to the circulation of

the country. If it had been adopted in 1878, all the subsequent

additions to the currency would have been in gold, with the result that

by 1893 the proportion of gold to silver would have been large enough to

have endowed the whole currency system with the desired stability in

relation to countries on a purely gold basis. In 1893 the mass of

silver currency had grown to enormous proportions, so that it looked

certain that it would take decades before the stoppage of silver coinage

could make the rupee a stable and secure form of currency.

²³⁹ So evident was this the case that the London _Times_, although it

did not agree that any change was then urgently called for, yet

observed in the leading article in its issue of October 25, 1876,

p. 9, cl. 2: “The Governor-General in Council dismisses the

suggestion of a gold standard on the ground that the present

condition of affairs, bad as it is, does not call for so costly a

remedy; but this involves a misconception of the proposal. The

substitution of a gold for a silver currency in India would be a

most extensive and costly operation, but to refuse to coin silver

and to offer to coin gold for all comers would involve no cost

beyond that of new machinery. If it was announced that after a

certain day the coinage of silver was suspended, and that gold

could be coined instead, for whoever might bring it, in coins that

would be exchangeable for rupees at a fixed rate, there would be

introduced into India the bimetallic system prevailing in France,

and a change in the currency would be gradually introduced. At

first no gold would be brought to be coined, but as the suspense

of the coinage of silver operated to raise the value of the rupees

in existence to the par value defined by the fixed rate of

exchange of rupees and gold, gold would be more and more brought

to the Mint, and would find its way into circulation. The process

would be automatic and not costly, but it would be extremely slow,

etc.”

The plans showing a way out of an _impasse_ such as this were legion.

One was the issue of heavier rupees.²⁴⁰ The second was to make silver

limited legal tender and to authorize the Secretary of State to sell in

London gold or silver Indian stock to the extent of his gold payments,

to be liquidated by [pg 145] the Government of India by the issue of

unlimited legal-tender notes called “bons.”²⁴¹ The third was that

England and India should, as between them, adopt a bimetallic standard

on a new basis,²⁴² or to admit the rupee as full legal tender in the

United Kingdom.²⁴³ The fourth was to regulate the opening and closing of

Mints to coinage on the basis of deviations of actual exchange rates

from the rate of exchange fixed at the opening of each year for the

Council drafts of the Secretary of State. Under this scheme, so long as

the actual rate did not exceed the fixed rate by less than 5 per cent.,

the free coinage of silver was to be suspended.²⁴⁴ The fifth was to

provide that on the one hand the Secretary of State should fix a minimum

rate for his drafts, and that the Government of India on the other

should levy a duty on all imports of silver equal to the difference

between the daily official quotations of bar silver in London and the

price of silver corresponding to the rate fixed for the Council

drafts.²⁴⁵ The sixth was to introduce a bimetallic coin, to be called

the Imperial florin or rupee, made of the value of 2 _s_. and containing

4 per cent. weight in gold and the balance in silver.²⁴⁶ The seventh was

to establish independent gold and silver standards without any fixed

ratio of exchange between them,²⁴⁷ or with some slight inducement for

the use of gold in transactions of larger denominations.²⁴⁸ Although the

Government of India was not in agreement with these clever if not crazy

plans of currency reforms, it agreed in the aim they had in view,

namely, to place India on gold basis without involving the actual use of

gold in place of the existing rupees in circulation. With this aim in

view it revived for adoption the more simple and more scientific plan of

Colonel Smith. As a preliminary, the Government reverted to the policy

of the resolution of the Bengal Chamber of Commerce, to the adoption of

which it saw such “fatal [pg 146] objections” in 1876. In the despatch

dated June 21, 1892, which contained the proposals, the Government of

India asked for nothing more. In the words of their author²⁴⁹ they

proposed

²⁴⁰ By Aston and also by R. West, I.C.C., 1893. App. III, pp. 281 and

325.

²⁴¹ By Atkins, _ibid._, p. 282.

²⁴² By Chapman, _ibid._, p. 282.

²⁴³ By Woodhouse, _ibid._, p. 33.

²⁴⁴ By Graham, _ibid._, p. 305.

²⁴⁵ By M. Schilizzi, _ibid._, 319.

²⁴⁶ By Stalkartt, _ibid._, p. 322; also a very similar one by

Merington, _ibid._, p. 316.

²⁴⁷ By Perry, _ibid._, p. 323.

²⁴⁸ By Claremont Daniell, _ibid._, p. 292.

²⁴⁹ Sir David Barbour, _The Standard of Value_, 1912, pp. 202–3.

Italics not in the original.

“… that the Indian Mints should be closed to the unlimited

coinage of silver, and _no further steps_ taken until the effect

of closing the Mints had been ascertained.

“The ratio at which the change from silver to the gold standard

should be made was subsequently to be settled and it was said

that a ratio based on the average price of silver during a

limited period before the Mints had been closed would probably

be the safest and most equitable. When this ratio had been

settled, the Mints were to be opened to the coinage of gold at

that ratio, and gold coins were to be made legal tender to any

amount.”

These proposals were submitted for examination to a Departmental

Committee, commonly known as the Herschell Committee. They were said to

be defective in one important particular, and that was the absence of

due recognition of the necessity of a gold reserve for the maintenance

of the value of the rupee. Many people felt doubtful of the success of

the proposals unless backed by an adequate gold reserve. But the

Herschell Committee, after an extended investigation into the working of

the currency systems of different countries, reported²⁵⁰:—

²⁵⁰ Report, par. 93.

“It is impossible … to review foreign systems of currency,

without feeling that, however admirable may be the precautions

of our own [English] currency system, other nations have adopted

different systems which appear to have worked without

difficulty, and enabled them to maintain for their respective

currencies a gold standard and a substantial parity of exchange

with the gold-using countries of the world”

with little or no gold. The Committee, therefore, was completely

satisfied with the proposals of the Government [pg 147] of India, and

not only sanctioned their adoption,²⁵¹ but added, by way of introducing

a modification in them, that

²⁵¹ Report, par. 155.

“The closing of the Mints against the free coinage of silver

should be accompanied by an announcement that, though closed to

the public, they will be used by the Government for the coinage

of rupees in exchange for gold at a ratio to be then fixed, say

1s. 4d. per rupee, and that at the Government Treasuries gold

will be received in satisfaction of public dues at the same

ratio.”²⁵²

²⁵² Report, par. 156.

These recommendations were carried into effect on June 26, 1893, which

forms as great a landmark in the history of Indian currency as did the

year 1835. On that date were promulgated one legislative enactment and

three executive notifications, together calculated to accomplish the

object in view. The Act (VIII) of 1893 was only a repealing Act. It

repealed:—

(i) The Indian Coinage Act XXIII of 1870.

Sections 19 to 26 (both inclusive), requiring the Mint Masters

to coin all silver brought to their Mints for coinage.²⁵³

(ii) The Indian Paper Currency, 1882.²⁵⁴

(a) Section 11, Clause (_b_), requiring the Paper Currency

Department to issue notes against silver coin made under the

Portuguese Convention Act, 1881.²⁵⁵ [pg 148]

(b) Section 11, Clause (_d_), requiring the Paper Currency

Department to issue notes against silver bullion or foreign

silver coin.²⁵⁶

the Paper Currency Reserve to one fourth of the Total

Reserve.²⁵⁷

²⁵³ These sections also contained provisions for the coinage of all

gold brought to the Mints for the purpose by private persons. The

quantity brought to the Mints was quite trifling, and the gold

coins, i.e. the mohurs struck, were not legal tender. As they

were to be superseded by sovereigns to be coined at the Mints upon

their being subsequently thrown open to the free coinage of gold,

it was thought undesirable that any more of these mohurs should be

coined. Consequently, along with silver, Mints were also closed

to gold.

²⁵⁴ The repeal of these sections of the Act also called for the repeal

of other sections depending upon them, such as Sections 14 and 15

and alterations in Sections 21 and 28, to bring the whole Act in

accord with the policy of a gold standard then inaugurated.

²⁵⁵ The Convention had come to an end and the retention of the clause

was therefore unnecessary.

²⁵⁶ The retention of this clause would have been inconsistent with the

closure of the Mints.

²⁵⁷ As gold was to be the future standard of India, this limitation

was no longer necessary.

These repeals by the Act were supplemented by an executive Notification

No. 2663, announcing in conformity with the suggestion of the Herschell

Committee that the Government Treasuries would receive sovereigns and

half-sovereigns of current weight in payment of public dues at the rate

of 15 rupees and 7 rupees 8 annas respectively.

Since gold was not made general legal tender by any of the above

measures, it was feared that the Government might be embarrassed by the

accumulation in its Treasuries of a stock money which it could not pay

out in discharge of its obligations. To enable Government to rid the

Treasuries of gold, should it accumulate in them to an inconvenient

extent, there followed another Notification, No. 2664, requiring that

the Currency Department should issue, on the requisition of the

Controller-General, currency notes in exchange for gold coin or gold

bullion, at the rate of one Government rupee for 7·53344 grs. troy of

fine gold, or sovereigns or half-sovereigns at the rate of 15 rupees and

7 rupees 8 annas respectively.

To give effect to the second modification introduced by the Herschell

Committee, there was issued a third Notification, No. 2662, to the

effect that

“The Governor-General in Council hereby announces that, until

further orders, gold coins and gold bullion will be received by

the Mint Masters of the Calcutta and Bombay Mints respectively,

in exchange for Government rupees, at the rate of 7·53344 grs.

troy of fine gold for one rupee on the following conditions:—

(1) Such coins or bullion must be fit for coinage.

(2) The quantity tendered at one time must not be less than 50

tolas. [pg 149]

(3) A charge of one-fourth per mille will be made on all gold

coin or bullion which is melted or cut so as to render the same

fit for receipt into the Mint.

(4) The Mint Master, on receipt of gold coin or bullion into the

Mint, shall grant to the proprietor a receipt which shall

entitle him to a certificate from the Mint and Assay Masters for

the amount of the rupees to be given in exchange for such coin

or bullion payable at the General (Reserve) Treasury, Calcutta,

or Bombay. Such certificates shall be payable at the General

Treasury after such lapse of time from the issue thereof as the

Comptroller-General may fix, from time to time.”

Before the policy adumbrated by these measures was carried to completion

there came up a move for the undoing of it. After the failure of the

International Monetary Conference of 1892 the United States and France,

two countries most heavily burdened with an overvalued stock of silver,

opened negotiation with the British Government, asking the latter to

agree to certain conditions on the grant of which they were to open

their Mints to the free coinage of silver at the ratio of 15½ to 1.

These conditions included:²⁵⁸

²⁵⁸ Cf. Correspondence respecting the Proposals on Currency made by

the Special Envoys from the United States, P.P.C. 8667 of 1897, p.

(1) Opening of the Indian Mints, which had been closed. to the free

coinage of silver, and an undertaking not to make gold legal

tender in India.

(2) Placing one-fifth of the bullion in the Issue Department of the

Bank of England in silver.

(3) (a) Raising the legal-tender limit of silver in England to £10.

(b) Issuing the 20s. notes based on silver, which shall be legal

tender.

substitution of paper based on silver.

(4) Agreement to coin annually a certain quantity of silver.

(5) Opening of English Mints to the coinage of rupees and for coinage

of British dollars, which shall be full legal tender in Straits

Settlements and other silver-standard [pg 150] Colonies, and

tender in the United Kingdom to the limit of silver legal tender.

(6) Colonial action, and coinage of silver in Egypt.

(7) Something having the general scope of the Huskisson plan.

In these negotiations the Treasury again reverted to its old pose. It

refused to discuss the conditions requiring a change in the British

currency, but argued that the opening of the Indian Mints, if brought

about, should be regarded as an adequate “contribution which could be

made by the British Empire towards any international agreement with the

object of securing” a stable monetary par of exchange between gold and

silver,²⁵⁹ and the representatives of the United States and France

seemed to have concurred in that view. The negotiations, however,

failed, because of the firm stand taken by the Government of India. The

Government had suffered too long to be the scapegoat of the Treasury.

Nor did it see any reason why it should be called upon to pull the

chestnuts off the fire for the benefit of France and the United States.

In a letter commenting upon the proposals, the Government of India

observed²⁶⁰:—

²⁵⁹ Cf. letter dated October 16, 1897, to the Foreign Office, _ibid._,

p. 15.

²⁶⁰ Despatch dated September 16, 1897, to the Secretary of State,

_ibid._, p. 9. Italics not in the original.

“The changes which are involved in the arrangements proposed to

Her Majesty’s Government are the following: France and the

United States are to open their Mints to the free coinage of

silver, continuing the free coinage of gold and the unlimited

legal tender of coins of both metals, the ratio remaining

unchanged in France and being altered to the French ratio of 15½

to 1 in the United States. _India is to open her Mints to

silver, to keep them closed to gold, and to undertake not to

make gold legal tender. France and the United States would thus

be bimetallic; India would be monometallic (silver); whilst most

of the other important countries of the world would be

monometallic (gold)._

――――――――

“The first result of the suggested measures, if they even

temporarily succeed in their object, would be an immense [pg

151] disturbance of Indian trade and industry, by the sudden

rise from about 16d. to about 23d. the rupee. Such a rise is

enough to kill our export trade, for the time at least … such an

arrangement as is proposed is an infinitely more serious

question for India than for either of the other two countries,

for it seems clear that practically the whole risk of disaster

from failure would fall on India alone. What would happen in

each of the three countries if the agreement broke down and came

to an end? France possesses a large stock of gold, and the

United States are at present in much the same situation as

France, though the stock of that metal is not so large. It may

be admitted that if no precautions were taken these gold

reserves might disappear under the operation of the agreement,

and in that case, if the experiment ultimately failed, the two

countries concerned would suffer great loss. But it is

inconceivable that precautions would not be taken, at all

events, so soon as the danger of the depletion of the gold

reserves manifested itself, and, therefore, it is probable that

no particular change would take place in the monetary system of

France or the United States, the only effect of the agreement

being a coinage of silver which would terminate with the

termination of the agreement. Thus the whole cost of the

failure, if the experiment should fail, would be borne by India.

Here the rupee would rise with great swiftness, it would keep

steady for a time, and then, when the collapse came, it would

fall headlong. What course could we then adopt to prevent the

fluctuation of the exchange value of our standard of value with

the fluctuations in the price of silver? We do not think that

any remedy would be open to us, for if the Indian Mints were

reopened to silver now, it would … be practically impossible for

the Government of India ever to close them again, and even if

they were closed it would only be after very large additions had

been made to the amount of silver in circulation.”

But soon after it had refused to be diverted from the goal it had placed

before itself, namely the introduction of a gold standard, it was faced

with a crucial problem in its existing monetary arrangements. The rupee

stock, the addition to which was stopped since 1893 by the closure of

the Mints, was large enough to meet the needs of the people [pg 152] for

some considerable time. In the first few years after the closure, the

rupee currency was not only abundant but was also redundant. Soon it

ceased to be redundant, and indeed by the end of 1898 it became scarce,

so much so that the discount rate in the Indian money market rose to 16

per cent., and continued at that pitch during the larger part of the

year. Such was the outcry against what was called the policy of

“starving” the currency, that the Government was obliged to pass an Act

(No. II) of 1898 to permit currency notes being issued in India against

gold tendered in London to the Secretary of State. The Act was doubly

easeful to the then starved condition of the Indian money market. By

the measures adopted in 1893 gold was not general legal tender, so it

could not be used when the rupee currency fell short of the needs of the

time. The new Act, it is true, did not make gold general tender, but

permitted it to be used in behalf of the general public²⁶¹ as a backing

for the issue of currency notes which were general legal tender. The

Act, however, could have required that gold be laid down _in India_

before notes could be issued. But as the remittance of gold to India

took some three or four weeks, it was feared²⁶² that the remedy might

“prove too tardy to be effective” unless the interval was done away with

by providing that gold with the Secretary of State in London was

lawfully tantamount to gold with the Paper Currency Department in India

for the purposes of note issue.

²⁶¹ By Notification No. 2664 of 1893, notes could be issued against

gold only to the Comptroller-General.

²⁶² Cf. the speech of the Hon. Sir James Westland introducing the

Bill, dated January 14, 1898.

In doing this the Act only testified to the urgency of the situation. A

sound currency system must be capable of expansion as well as

contraction. The Government, by the closure of the Mints in 1893, had

contracted the currency to the point of danger. In 1898 it was called

upon to undertake measures to provide for its expansion. Now, there

were two methods open to bring about this desired result. One was to

keep the Mints closed and to permit [pg 153] additions to currency

through the use of the gold by making the sovereign general legal

tender. This was the plan proposed by the Government of India. In

their despatch dated March 8, 1898,²⁶³ they argued:—

²⁶³ Cf. correspondence respecting the Proposals on Currency made by

the Government of India, C. 8840 of 1898, p. 3.

“Our present intention is rather to trust to the automatic

operations of trade. The amount of coin required for the needs

of commerce increases every year: and as we permit no increase

in the amount of silver coin, we may reasonably expect that the

effect of the increasing demand for coin will raise exchange to

a point at which gold will flow into the country, and remain in

circulation. The position will thus become stronger and stronger

as time goes on, but at the beginning, at least, gold will not

be in circulation in the country to more than the extent

necessary to secure stability of exchange. The mass of the

circulation will be a silver circulation, maintained at an

appreciated value (just as it is at present), and we can be

content to see gold coin remain little more than a margin,

retained in circulation by the fact that its remittance out of

the country could create a scarcity of coin which would have the

effect of raising the exchange value of the silver rupee in such

manner as to bring it back, or, at the very best, stop the

outward current of remittance. We shall have attained a gold

standard under conditions not dissimilar from those prevailing

in France, though not a gold circulation in the English sense;

and this last may possibly not be necessary at all.”

Besides expanding the currency through the use of gold, there was also

another mode of effecting the same object. It was urged that this

increase of currency might as well take place by Government coining

rupees whenever there arose a need for additional currency. Though the

Mints were closed, the Government, by Notification No. 2662, had

undertaken to give rupees to anyone desiring to have them at the rate of

7·53344 grs. troy of fine gold per rupee.²⁶⁴ The Government had only to

give effect to that notification to augment the currency to any extent

desired. Prominent [pg 154] in the advocacy of this plan of expanding

the currency were Mr. Probyn and Mr. A. M. Lindsay. Both claimed that

the plan of the Government of India was defective because, although it

provided for the expansion of currency by making gold legal tender, it

made the rupee entirely inconvertible, and thereby likely to defeat the

policy of stabilizing its exchange value. On the other hand, they deemed

their plans to be superior to that of the Government of India because

they recognized the obligation to provide for the conversion of the

rupee currency on certain terms. Although the plans of both of them had

contemplated some kind of convertibility, yet they materially differed

in the particular mode in which conversion was to be effected. Mr.

Probyn proposed²⁶⁵:—

²⁶⁴ _See supra_.

²⁶⁵ Cf. his _Indian Coinage and Currency_, Effingham Wilson, London,

1897, _passim_, particularly p. 121. Also the summary by Lindsay

in the _Economic Journal_, Vol. VII, pp. 574–75.

1. That legislative effect should be given to the notification of

1893, under which the public can obtain rupees at the Indian Mints

and Reserve Treasuries in exchange for gold, at the rate of 1s. 4d.

2. That the gold so received should be part of the paper currency

reserve, and should be held either in the form of full legal-tender

gold coins of the United Kingdom, or gold bars representing not

less than Rs. 1,000 each.

3. That in order to give the rupee currency automatic power of

contraction, Government should be empowered (though not required)

so soon as the portion of the paper currency reserve has

continuously for one year been less than that held in gold, to give

gold in exchange for rupees or rupee notes at the rate of 1s. 4d.,

if presented for the purpose in quantities of Rs. 10,000.

4. That the existing Rs. 10,000 notes should be called in, and, in

future, notes of Rs. 10,000, payable at the option of the holder

either in gold or in silver rupees, should be issued in exchange

for gold alone, gold in the form of bars being specially reserved

to meet any such notes outstanding.

Mr. Lindsay, on the other hand, followed on lines quite [pg 155]

different from those adopted by Mr. Probyn. He proposed²⁶⁶ that the

Government should offer to sell, without limit on the one hand, rupee

drafts on India at the exchange of 16 1⁄16d. the rupee, and on the other

hand, sterling drafts on London at the rate of exchange of 15¾d. the

rupee. The funds necessary for the transactions were to be kept

separate from the ordinary Government balances in “Gold Standard”

Offices in London and in India. The London Office was to be kept in

funds to meet the drafts drawn on it—

(1) By borrowing in gold to the extent of five or ten million

sterling;

(2) by the receipts realized by the sale of drafts on India;

(3) by the receipts realized by the sale of silver bullion in rupees

melted down;²⁶⁷ and

(4) when necessary, by further gold borrowing.

²⁶⁶ The earliest elaboration of his plan is to be found in his article

in the _Calcutta Review_ for October, 1878, under the title, “A

Gold Standard without a Gold Coinage in England and India,” and

the latest, in his pamphlet called _Ricardo’s Exchange Remedy_,

Effingham Wilson, 1892. The plan was further developed in the

newspaper _Pioneer_ of Allahabad (India), dated January 6, 1898,

full extracts from which are given in C. 8840 of 1898, p. 13.

²⁶⁷ Mr. Lindsay contemplated that when the demand for gold drafts on

London became so great as to indicate the necessity, the volume of

the rupee currency should be contracted by melting down the rupees

and selling the silver for gold to be deposited in the London

“Gold Standard” Office.

The Indian Gold Standard Office was to be kept in funds to meet the

drafts drawn on them—

(1) By the receipts realized by the sale of drafts on London;

(2) by the coinage when necessary of new rupees from bullion,

purchased by the London Gold Standard Office and sent to India.

The principal point of difference between the scheme of currency

advocated by the Government of India on the one hand and that put forth

by Messrs. Probyn and Lindsay consisted in the fact that the former

proposed to establish a gold standard _with_ a gold currency, while the

latter proposed to establish a gold standard _without_ a gold currency.

[pg 156]

To adjudicate upon the relative merits of a gold standard with a gold

currency and a gold standard without a gold currency, the Secretary of

State appointed another departmental Committee, under the chairmanship

of Sir Henry Fowler. After taking a mass of important evidence, the

Committee observed²⁶⁸:—

²⁶⁸ Report of the Committee appointed to inquire into the Indian

Currency, P.P.C. 9390 of 1899, p. 15.

“50. On this scheme [of Mr. Probyn] we remark that, while

bullion may be regarded as the international medium of exchange,

there is no precedent for its permanent adoption for purposes of

internal currency; nor does it accord with either European or

Indian usage that the standard metal should not pass from hand

to hand in the convenient form of current coin. No real support

for such a scheme is to be drawn from the purely temporary

provisions of ‘Peel’s Act’ of 1819, whereby, for a limited

period, the Bank of England, as a first step to the resumption

of cash payments, was authorized to cash, in stamped gold bars,

its notes, when presented in parcels of over £200. Little or no

demand for gold bullion appears to have been made on the Bank

itself in 1821.

“53. It is evident that the arguments which tell against the

permanent adoption of Mr. Probyn’s bullion scheme, and in favour

of a gold currency for India, tell more strongly against Mr.

Lindsay’s ingenious scheme for what has been termed ‘an exchange

standard.’ We have been impressed by the evidence of Lord

Rothschild, Sir John Lubbock, Sir Samuel Montagu and others,

that any system without a visible gold currency would be looked

upon with distrust. In face of this expression of opinion, it

is difficult to avoid the conclusion that the adoption of Mr.

Lindsay’s scheme would check that flow of capital to India upon

which her economic future so greatly depends. We are not

prepared to recommend Mr. Lindsay’s scheme, or the analogous

schemes proposed by the late Mr. Raphael and by Major Darwin,

for adoption as a permanent arrangement; and existing

circumstances do not suggest the necessity for adopting any of

these schemes as a provisional measure for fixing the sterling

exchange.”

The Committee preferred the scheme of the Government [pg 157] of India,

and outlined a course of action to be adopted for placing it on a

permanent footing, which may be stated in the Committee’s own language

as follows:—

“54. We are in favour of making the British sovereign a legal

tender and a current coin in India. We also consider that, at

the same time, the Indian Mints should be thrown open to the

unrestricted coinage of gold on terms and conditions such as

govern the three Australian branches of the Royal Mint. The

result would be that, under identical conditions, the sovereign

would be coined and would circulate both at home and in India.

Looking forward, as we do, to the effective establishment in

India of a gold standard and currency, based on the principles

of the free inflow and outflow of gold, we recommend these

measures for adoption.”

These recommendations were accepted by the Secretary of State,²⁶⁹ who

decided that

²⁶⁹ _See_ despatch dated July 25, 1899, No. 140 (Financial), C. 9421

of 1899.

“the policy of keeping the Indian Mints closed to the

unrestricted coinage of silver shall be maintained,”

and called upon the Government of India as soon as it deemed expedient

“take the necessary steps for making the British sovereign a

legal tender and a current coin, and make preparations for the

coinage of gold under the conditions suggested by the

Committee.”

The first recommendation of the Committee was given effect to by the

Government passing an Act commonly called the Indian Coinage and Paper

Currency Act (XXII) of 1899. That Act made the sovereign and

half-sovereign legal tender throughout India at the rate of Rs. 15 and

Rs. 7½ respectively, and authorized the issue of currency notes in

exchange for them.

Along with placing the Indian currency on a gold basis, the Government

was anxious to open a Mint for the free coinage of gold. But as the

coin to be issued from the Mint was the English “sovereign” the

Government of India was [pg 158] entirely in the hands of the British

Treasury. According to the provisions of the English Coinage Act of

1870, it was necessary to issue a Royal Proclamation in order to

constitute an Indian Mint a branch of the Royal Mint, a matter entirely

dependent on the consent of the Treasury. It was the intention of the

Government of India to announce the Proclamation simultaneously with the

passing of the Act making the sovereign legal tender. Indeed it held

back the legislation pending the arrival of the Proclamation,²⁷⁰ and

proceeded with it reluctantly when it was advised that there was likely

to be “some further delay over the Proclamation owing to legal and

technical questions.” The objections raised by the Treasury, though

merely technical, at first seemed to be quite insuperable,²⁷¹ and had it

not been for the conciliatory attitude of the India Office the

negotiations would have broken down. But the Treasury was not willing to

give the project a chance. Just when a compromise was arrived at on the

technical side of the question, the Treasury turned round and raised the

question whether a Mint for gold coinage was at all necessary in India.

The Treasury argued:—

²⁷⁰ Cf. the speech of the Hon. Mr. Dawkins on the Indian Coinage and

Paper Currency Bill, dated September 8, 1899.

²⁷¹ Cf. H. of C. Return 495 of 1913, p. 14.

“While expressing their satisfaction that an agreement has now

been reached, my Lords think it desirable, before practical

steps are taken to carry out the scheme, to invite Lord George

Hamilton to review the arguments originally advanced in favour

of the coinage of the sovereign in India, and to consider

whether the course of events, in the two years which have

elapsed since the proposal was made, has not tended to diminish

their force, and to render such advantages as are likely to

accrue from the establishment of a branch Mint wholly

incommensurate with the expense to be incurred. … The gold

standard is now firmly established, and the public requires no

proof of the intention of the Indian Government not to go back

on their policy, which is beyond controversy. Sovereigns are

readily attracted to India when required under existing

conditions. … On the other hand, the estimates of the Government

[pg 159] of India of gold available for coinage in that country

are less than was anticipated, nor is any considerable increase

expected, at any rate for some time. … The staff would have to

be maintained in idleness for a large part of the year, at a

considerable cost to the Indian Exchequer. … It is, of course,

for Lord George Hamilton to decide whether, in spite of these

objections, the scheme is to be proceeded with.”

The India Office replied:—

“The establishment of a Mint for the coinage of gold in India is

the clearest outward sign that can be given of the consummation

of the new currency system; and to abandon the proposal now must

attract attention and provoke criticism and unrest. … His

Lordship is not inclined to abandon the scheme at the stage

which it has now reached.”

The Treasury sent a trenchant rejoinder, in which it remarked:—

“Indian currency needs are provided from other sources, and

there is no real demand for the local coinage of sovereigns. …

My Lords cannot believe that the position of the Gold Standard

in India will be strengthened, or public confidence in the

intention of the Government confirmed, by providing machines for

obtaining gold coins. … The large measure of confidence already

established is sufficiently indicated by the course of exchange

since the Committee’s Report and still more by the readiness

with which gold has been shipped to India. …”

That the Treasury acted “in a spirit of scarcely veiled hostility to the

whole proposal” is unmistakable. But it cannot be denied that the

Treasury used arguments that were perfectly sound. It was

inconsequential to the working of the gold standard whence the coined

sovereigns came. So long as a Mint was open to the free coinage of

sovereigns the Indian gold standard would have been complete

irrespective of the location of the Mint. Indeed, to have obtained

coined sovereigns from London would have not only sufficed, but would

have been economical.

The anxiety displayed by the Government was not, [pg 160] however, on

account of the want of a gold Mint. Indeed, so slight was its faith in

the necessity of it that in view of the opposition of the Treasury it

gracefully consented to drop the proposal. What troubled it most was

the peculiar position of the rupee in the new system of currency.

Throughout the despatch of the Government of India there ran a strain of

regret that it could not see its way to demonetize the rupee and to

assimilate the Indian currency to that prevailing in England. A general

perusal of the despatch leaves the impression that though it recommended

the assimilation of the Indian currency to that of France and the United

States, it did so not because it thought that their systems furnished

the best model, but because it believed that a better one was not within

reach. Having regard to the accepted view of the French and the United

States currency systems, it was natural that the Government of India did

not feel very jubilant about its own. According to that view of the

currency systems of these two countries, the position of the five-franc

piece and the silver dollar has always been presented as being very

anomalous. Even so great an authority as Prof. Pierson was unable to

assign them a place intelligible in the orthodox scheme of classifying

different forms of money.²⁷² In a well-ordered system of gold standard

of the orthodox type, gold is the only metal freely coined and the only

one metal having full legal-tender power; silver, though coined, is

coined only on Government account in limited amounts, and being of less

intrinsic value than its nominal value, is a limited legal tender. The

former type of coins are called standard coins and the latter subsidiary

coins, and the two together make up the ideal of a monometallic gold

standard such as has been established in England since 1816. In a

scheme of things like this writers have found it difficult to fit in the

dollar or the five-franc piece. Their peculiarity consists in the fact

that although their intrinsic value is less than their nominal value

they have been inconvertible and are also unlimited legal tender. It is

owing to this anomaly that the title of gold standard has been refused

to the American [pg 161] and French currency systems. Few can have

confidence in what is called the limping standard,²⁷³ in which it is

said that somehow “the silver coin, though intrinsically of less value

than the gold, hobbles along, maintained at equality by being coupled

with its stronger associate.”²⁷⁴

²⁷² Cf. _Principles of Economics_, Vol. I, p. 569.

²⁷³ It was owing to this want of faith that Germany took away, by the

law of October 1, 1907, the full legal-tender power from her

silver thalers. In the United States the silver dollar is not

legal tender if it is specifically excluded by the terms of a

contract. Cf. A. C. Whitaker, _Foreign Exchange_, Appleton, New

York, 1920, pp. 8 and 477.

²⁷⁴ Cf. F. W. Taussig, _Principles_, 2nd ed., 1918, p. 280.

But was the French system of currency so very different from the English

as to create doubt as to its stability? Whatever may have been the

differences between the two systems a closer analysis shows that they

are fundamentally identical. If we read together the French bimetallic

law of 1803 and the Mint Suspension Decree of 1878 on the one hand, and

on the other the provisions of the English Gold Standard Act of 1816,

together with the Bank Charter Act of 1844, and compare, do we find any

substantial difference between the French and English systems of

currency? Prior to 1878 there was an unlimited issue in France of both

gold and silver coins of unlimited legal tender. Prior to 1844 there

was an unlimited issue in England of both gold sovereigns and Bank of

England notes, both of unlimited legal tender. In 1844 England put a

limit on the issue of bank notes, but did not deprive the issues of

their legal-tender power.²⁷⁵ In 1878 France did precisely the same thing

as England did with her notes in 1844. By the decree of mint suspension

France virtually, though indirectly, put a limit on the silver

five-franc coins without depriving them of their legal-tender power. If

we regard the French five-franc coins as notes printed on silver, it is

difficult to see what constitutes the difference between the two systems

which leads economists to call one a gold standard and the other a

limping standard. If the silver franc limps or hobbles along, so does

the bank note, and the former can hobble better than the latter because

of the two it has a [pg 162] comparatively greater intrinsic value. If,

however, it is argued that the bank note is convertible into gold, while

the five-franc piece is not, the reply is that the comparison must be

made with the fiduciary notes of the Bank of England. Those notes are

practically inconvertible. For, at any given time, with the gold the

Bank of England has in its Issue Department the fiduciary portion of the

notes remains uncovered, and may, therefore, be regarded as

inconvertible as the delimited issue of the five francs. But even if it

is insisted that the fiduciary notes cannot be regarded as inconvertible

as the five-franc pieces, it must be pointed out that the similarity of

the two is not to be determined by considerations of convertibility or

inconvertibility. The attribute of convertibility with which the

fiduciary notes of the Bank of England are endowed is a superfluous

attribute which in no way improves their position as compared with the

five-franc pieces. What makes them identical is the fact that they are

both subjected to a fixed limit of issue. Thus viewed, the French

limping standard and the English gold standard are nothing but two

different illustrations of the “currency principle” in so far as a fixed

limit of issue on a fiduciary currency is a cardinal feature of that

principle.

²⁷⁵ The Bank of England notes were made legal tender by Lord

Althorpe’s Act of 1833.

Not only is the French monetary system identical with the English in its

organization, but the design in both cases was identical. In the

controversy which raged over the Bank Charter Act of 1844, the motives

of Lord Overstone were not quite clearly grasped by his opponents of the

banking school of thought. Lord Overstone was not very much interested

in providing a method for preventing the depreciation of the note issue,

as his opponents thought him to be. His supreme concern was to prevent

gold disappearing from circulation. Starting from a chain of reasoning

the solidity of which can hardly be said to be open to question, he came

to the conclusion that gold would be driven out of circulation by an

increase in the issue of notes. To keep gold in circulation the only

remedy was to put a limit on the issue of notes, and this was the

purpose of the Bank Charter Act of 1844. Now, precisely the same was

the object of France in suspending the coinage of silver. As [pg 163]

has already been pointed out, owing to the fall in the value of silver

after 1873, gold was being rapidly driven out of circulation by the

substitution of this depreciated metal. To prevent this result from

assuming a vast proportion, the French adopted the same remedy as that

of Lord Overstone, and through their suspension of silver coinage

protected their gold from going out of circulation, which would have

certainly been the case if no limit had been put on silver issues.

It would not, therefore, be amiss to argue that the plan contemplated by

the Government of India, and approved of by the Fowler Committee in

being similar to the French system, was based on the same principles as

governed the English currency system, which, according to Jevons, were a

“monument of sound financial legislation.” [pg 164]