*FROM A GOLD STANDARD TO A GOLD EXCHANGE STANDARD*
For once it seemed that the problem of a depreciating rupee was
satisfactorily solved. The anxieties and difficulties that extended
over a long period of a quarter of a century could not but have been
fully compensated by the adoption of a remedy like the one described in
the last chapter. But by an unkind turn of events, the system
originally contemplated failed to come into being. In its place there
grew up a system of currency in India which was in every way the very
reverse of it. Some thirteen years after legislative sanction had been
given to the recommendations of the Fowler Committee, the Chamberlain
Commission on Indian Finance and Currency reported that
“in spite of the fact the Government adopted and intended to
carry out the recommendations of the Committee of 1898, the
Indian currency system to-day differs considerably from that
contemplated by the Committee, whilst the mechanism tor
maintaining the exchange has some important features in common
with the suggestions made to the Committee by Mr. A. M.
Lindsay.”²⁷⁶
²⁷⁶ Report, P.P.Cd. 7068 of 1913, p. 13.
It will be recalled²⁷⁷ that in Mr. Lindsay’s scheme Indian currency was
to be entirely a rupee currency; the Government was to give rupees in
every case in return for gold, and gold for rupees only in case of
foreign remittances. The scheme was to be worked through the
instrumentality of two offices, one located in London and the other
located [pg 165] in India, the former to sell drafts on the latter when
rupees were wanted and the latter to sell drafts on the former when gold
was wanted. Surprisingly similar is the system prevailing in India
to-day. Corresponding to Mr. Lindsay’s proposals, which, be it noted,
were rejected in 1898, the Government of India has built up two
reserves, one of gold and the other of rupees, out of the cash balances,
the paper currency, and the gold-standard reserve. Each of these is, by
the nature of the currency system, composite. The cash balances, which
are fed from revenue receipts, gather in their net rupees as well as
sovereigns, both being legal tender. Notes being issuable against both,
the paper-currency reserve always contains sovereigns and rupees. Up to
August, 1915, the gold-standard reserve was also held partly in gold and
partly in rupees.²⁷⁸ By a system of sorting, technically called
“transfers,” the Government secures the command over rupees and
sovereigns necessary for discharging the obligations it has
undertaken.²⁷⁹ The location of these funds is also very much as designed
by Mr. Lindsay. The cash balances, being the till-money of the
Government, are necessarily distributed between the Government of India
in India and the Secretary of State in London, the portion held by the
latter being entirely in gold and that held by the former being in
silver. The gold-standard reserve, like the cash balances, is not a
statutory reserve. Consequently its location is perfectly within the
competence of the Executive. That being so, it has been so arranged.
that the gold portion of the fund shall be held by the Secretary of
State in London, and the rupee portion, so long as it was maintained, by
the Government of India in India. The only reserve which did not easily
lend itself to currency manipulation was the paper-currency reserve, for
the reason that its disposition and location were governed by law. In
that behalf, legal power has been taken to alter the location of the
gold part of that reserve by making permanent the [pg 166] provision of
the temporary Act II of 1898, which authorized the issue of notes in
India against gold tendered to the Secretary of State in London. Thus
the Secretary of State and the Government of India, under the new system
of currency, hold two reserves, one of gold, mainly in the possession of
the former and located in London, and the other of rupees, entirely in
the possession of the latter and held in India. But the similarity of
the existing system to that of Mr. Lindsay is not confined to the
maintenance of these funds and their location. It extends even to the
modes of operating these two funds. For, as suggested by Mr. Lindsay,
when rupees are wanted in India the Secretary of State sells what are
called “Council Bills,” encashable into rupees at the Government
Treasuries in India, thereby providing the rupee currency in India.
When gold is wanted the Government of India sells what are called
“Reverse Councils” on the home Treasury in London, which are encashed by
the Secretary of State, thereby providing gold for foreign remittances.
The result of the sale of “Council Bills” and of the “Reverse Councils”
on the two funds has been to transform the Indian currency from being a
gold standard with a gold currency, as desired by the Fowler Committee,
into what is called a gold standard without a gold currency, as wished
for by Mr. Lindsay.
²⁷⁷ _See_ Chap. IV, _supra_.
²⁷⁸ The rupee branch has been discontinued since that date, on the
recommendation of the Chamberlain Commission.
²⁷⁹ Besides, if the Government falls short of rupees, it has the legal
power to convert the gold in the paper-currency reserve into
rupees to replenish the stock.
This system which has grown up in place of the system originally
contemplated by the Government of India is called the gold-exchange
standard. Whatever that designation may mean it was not the plan
originally contemplated by the Government of India in 1898. How the
departure came about we shall deal with in another place. Here it is
enough to state—one may also say necessary, for many writers seem to
have fallen into an error on this point—_that the Government did not
start to establish a gold-exchange standard_. Rather it was
contemplating the establishing of a true gold standard, which, however
inadequately understood by the men who framed it, was in essential
agreement with the principles governing the English Bank Charter Act of
1844,
What are we to say about the new system? The Chamberlain [pg 167]
Commission, while reporting that there was a departure from the ideal of
a gold standard with a gold currency, observed²⁸⁰:—
²⁸⁰ Report, par. 46.
“But to state that there has been this departure is by no means
to condemn the action taken, or the system actually in force...”
Now why not? Is not the system the same as that proposed by the
Government in India in 1878 and condemned by the Committee of 1879? It
is true the arguments urged against that plan by the Committee of 1879
were not of much weight.²⁸¹ None the less the plan was essentially
unsound. The material point in the introduction of a gold standard must
be said to be one of limitation on the volume of rupees, and it is from
this point of view that we must judge the plan. But there was nothing
in the plan of 1878 that could be said to have been calculated to bring
that about. Far from putting any limitation on the volume of rupees,
the plan had deliberately left the Mints open to the free coinage of
silver. A matter of some interest in the plan was the projection of a
system of seignorage so arranged so to make the bullion value of the
rupee equal to the gold value given to it. But as a means of limiting
the coinage of rupees it was futile. The mere levy of a seignorage
cannot be regarded as sufficient in all circumstances to effect a
limitation of coinage. Everything would have depended upon how closely
the seignorage corresponded with the difference between the mint and
market price of silver in terms of gold. If the seignorage fell short
of the difference it would have given a direct impetus to increased
coinage of rupees until their redundancy had driven them to a discount.
In this respect the plan was a reproduction in a worse form of the
English Gold Standard Act of 1816. Like the Government of India’s plan
of 1878, that Act, while purporting to introduce a gold standard, had
authorized the opening of the Mint, which was closed, to the free
coinage of silver with a seignorage charge. It is not generally
recognized how stupid were the provisions of that Act,²⁸² the ideal [pg
168] of all orthodox gold monometallists, in so far as they contemplated
the free coinage of silver. Fortunately for England the Royal
Proclamation, compelling the Mint Master to coin all silver brought to
the Mint, was never issued. Otherwise the working of the gold standard
would have been considerably jeopardized.²⁸³ The Act of 1816 had at
least taken one precaution, and that was a limit on the legal-tender
power of silver. In the scheme of the Government of India, not only
free coinage of silver was permitted, but silver was conceded the right
of full legal tender. In so far, therefore, as the plan did not provide
for controlling the volume of rupees it was subversive of the gold
standard it had in view.
²⁸¹ _See supra_, Chap. IV.
²⁸² Cf., however, R. G. Hawtrey, _Currency and Credit_, 1919, pp.
302–3.
²⁸³ Some witnesses before the Lords Committee on Cash Payments,
appointed in 1819, raised doubts whether, having regard to the
silver clause of the Act of 1816, resumption of cash payments was
worth while as a means of establishing a gold standard in England.
Cf. particularly the evidence of Mr. Fletcher and also Mr. Mushet
before the Committee.
The only difference between this plan of 1878 and the system now in
operation in India is that under the former the Mints were open to the
public, while under the latter they are open to the Government alone. In
other words, in the one case rupees were coined on behalf of the public,
and in the other they are being coined on behalf of the Government. It
is not to be supposed that the plan of closing the Mints to the public
was not thought of by the Government in 1878. On the other hand, the
Government of India had then considered the feasibility of taking over
into its hands the coinage of rupees, and had rejected it on some very
excellent grounds. In their despatch outlining the scheme the
Government of the day observed:—
“48. The first point to be guarded in attempting to carry out
the proposed change, is to provide for complete freedom for any
expansion of the currency which the trade requirements of the
country demand. This, we think, could not be properly secured
if the Mints were wholly closed for the coining of silver for
the public. If this measure were adopted, the responsibility
for supplying the silver demand would be thrown on the
Government, and [pg 169] in the present position of the market
for gold and silver bullion in India it would not be possible to
accept such a duty.
“49. What might at first sight appear the simplest, and
therefore the best way of allowing for the expansion of the
Indian silver currency with a gold standard, would be for the
Government to undertake to give silver coin in exchange for gold
coin to all comers, at the rates fixed by the new system, and to
open the Mints for the coinage of gold, while they were closed
for silver. But in the absence of any supply of silver in India
from which to obtain the necessary material for coinage, such an
obligation could not be accepted, without involving the
Government in complicated transactions in the purchase and
storing of bullion which it would be very inexpedient to enter
on.”
With these reasons, interesting in so far as they were prophetic of the
scandals connected with the recent silver purchases by the India
Office,²⁸⁴ we are not directly concerned. What is of importance is
whether this difference in the mode of issue makes any vital difference
to the question of an effective limit on the volume of rupees. Now,
there is a great deal of confused thinking as to the precise virtue of
the closing of the Mints to the private coinage of silver. It was
generally believed, the closing of the Mints having given a monopoly to
the Government in the matter of issuing rupees, that this monopoly would
somehow sustain the value of the rupees in terms of gold by preventing
their over-issue. The closing of the Mints, it must be admitted, has
given the Government the position of a monopolist. But how a monopoly
prevents an over-issue is not easy to grasp. The closing of the Mints
to the free coinage of silver is the same as depriving banks of the
liberty of issuing notes and giving it exclusively to a central bank.
But nobody has ever argued that because a central bank has a monopoly of
issue it cannot therefore over-issue. Similarly, because the Government
of India is a monopolist it would be absurd to argue that it cannot
therefore over-issue. Indeed, a monopolist can issue as [pg 170] much
as private people put together, if not more. Again, from the standpoint
of influence of profits on coinage the present plan is much inferior to
that of 1878. It is true in both cases profits depend upon the volume
of coinage. But in the former the amount of profit was no incentive to
coinage, either to the Government, because it had no power to coin, or
to the people who determined the volume of coinage, because the
regulation of seignorage practically controlled it by making it
unprofitable to bring additional bullion to the Mint. In the present
case, the coinage being entirely in the hands of the Government, a
hankering after profits, generated by the silly notion of the necessity
of a “backing” to the currency, might create an impulse to undertake
additional coinage, especially if the price of silver fell very low and
produced a wide margin between the Mint and the market price of the
rupee.²⁸⁵
²⁸⁴ _See_ P.P. 400 of 1912.
²⁸⁵ From this point of view the proposition of Prof. Keynes, that the
gold value of the rupee may be fixed irrespective of the cost
price of silver, must, having regard to the existing system of
currency, be looked upon as a somewhat unsafe position. Cf. his
evidence before the Indian Currency Committee of 1919, Q. 2,688.
If it is argued, as it well may be, that the will of the Government of
India as a monopolist, i.e. its desire to see that its currency is not
depreciated, may bring about a limitation on the issue of rupees which
could not have been possible had the Mints remained open to the public
in general, the reply is that this will to limit could be effective only
if the Government had the power to refuse to issue. Central banks limit
their currencies so far as will is concerned, because they are not
obligated to issue to anyone and every one. But the position of the
Government of India is lamentably weak in this respect. It is bound to
issue currency when asked for. It is true that every issue does not
involve a net addition to the existing volume of currency; for a portion
of the new issue is a re-issue of what is returned from circulation.
None the less, it cannot be said that the Government by reason of its
monopoly has put an effective limit on the volume of rupee currency. On
the other hand, having no escape from the liability to issue currency,
the exercise of this cherished privilege has recoiled on the [pg 171]
Government, so much so that this monopoly of issue, instead of
strengthening the position of the Government, has weakened it
considerably.²⁸⁶ The view of the Chamberlain Commission²⁸⁷
²⁸⁶ The danger involved in this indefinite liability to issue rupee
currency was recognized by the Smith Currency Committee of 1919,
which recommended that this obligation should be withdrawn. _See_
Report, par. 68. Of course its motive was different.
²⁸⁷ Report, par. 182.
“that while the Government are very large dealers in the
exchange market, they are not monopolists (!) and it seems
doubtful if they could successfully stand out for any such
[fixed minimum rate] at all times of the year,”
is therefore interesting as a confession that the closing of the Mints
has not had the virtue of so limiting the coinage of rupees as to enable
the Government to dictate at all times the price of the rupee, which
none but it alone can manufacture.
Thus the present standard is different from the standard proposed in
1878 only in name. If this one is characterized by the adoption of the
rate of exchange as an index for regulating the volume of currency, the
same must be said of the former. But, as Mr. Hawtrey remarks,²⁸⁸
whatever means are adopted for the manipulation of the currency,
“the value of the rupee will be determined by the quantity in
circulation.”
²⁸⁸ _Currency and Credit_, 1919, p. 341.
In other words, what must be said to be essential for the safety of a
gold standard is a provision against over-issue of rupees. But, as we
saw, neither the plan of 1878 nor the present one can be said to be free
from that danger. Consequently we must conclude that, being essentially
alike, the arguments that are valid against the former are also valid
against the latter.
But the Chamberlain Commission will not allow that the exchange standard
is a resuscitation of a condemned plan. On the other hand, it has
sought to inspire confidence in that standard by holding out²⁸⁹ [pg 172]
²⁸⁹ Report, par. 46.
“that the present Indian system has close affinities with other
currency systems in some of the great European countries and
elsewhere. …”
To get an idea as to what these affinities are, or rather were, we must
look into Chapter II of Mr. Keynes’s interesting treatise on _Indian
Currency and Finance_. In that treatise of his, Mr. Keynes has
attempted to show that there is a fundamental likeness between the
operations of the Indian currency system and the operations as they used
to be of the central banks of some of the important countries of Europe.
He found that it used to be the practice of these banks to hold foreign
bills of exchange for the purpose of making remittances to foreign
countries. Between the selling of such foreign bills and the selling of
reverse councils by the Government of India he observed a close
fundamental likeness, inasmuch as both involved
“the use of a local currency mainly not of gold, some degree of
unwillingness to supply gold locally in exchange for the local
currency, but a high degree of willingness to sell foreign
exchange for payment in local currency at a certain maximum
rate.”²⁹⁰
²⁹⁰ Keynes, _Indian Currency and Finance_, p. 29.
But, as Prof. Kemmerer points out,²⁹¹ it is difficult to see what
likeness there is between the Government of India selling reverse
councils and the European banks holding foreign bills. Far from being
alike, the two practices must be regarded as the opposite of each other.
In selling reverse councils
²⁹¹ Cf. his review of Keynes in the _Quarterly Journal of Economics_,
February, 1914, p. 374.
“the Government sells drafts against its foreign gold credit
(i.e. its gold reserve), when money at home is relatively
redundant, as evidenced by exchange having reached the gold
export point. Thereby it relieves the redundancy through the
withdrawing from circulation and locking up the local money
received in payment for the drafts. Under the practice of
holding foreign bills to protect the money market, the central
bank sells its foreign bills, when money at home is relatively
scarce, as means of securing gold for [pg 173] importation or
preventing its exportation. In the former case, the sale of
drafts takes the place of an exportation of gold, and the
resulting withdrawal of local money from circulation is in
essentials an exportation; in the latter case the sale of the
drafts abroad is part of a process for securing gold for
importation, or for preventing its exportation.”
The Indian currency system therefore bears no analogy to the European
currency systems, as Mr. Keynes would have us believe. But if a
parallel is needed, then the true parallel to the Indian system of
currency is that system which prevailed in England during the Bank
Suspension period (1797–1821). The fundamental likeness between the two
systems becomes quite unmistakable if we keep aside for the moment the
remittance operations of the Government of India and the Secretary of
State, which becloud the true features of the Indian currency system.
If we tear this veil and take a closer view, the following appear to be
the prominent features of the Indian system:—
(1) The gold sovereign is full legal tender.
(2) The silver rupee is also full legal tender.
(3) The Government undertakes to give rupees for sovereigns, but does
not undertake to give sovereigns for rupees, i.e. the rupee is an
inconvertible currency unlimited in issue.
Turning to the English system of currency during the period of the Bank
Suspension, we find:—
(1) The gold sovereign was full legal tender.
(2) The paper notes of the Bank of England circulated as money of
general acceptability by common custom if not by law.²⁹²
(3) The Bank of England undertook to give notes for gold or mercantile
bills or any other kind of good equivalent, but did not give gold
for notes, i.e. the notes formed an inconvertible currency
unlimited in issue.
²⁹² Cf. Andréadès, _History of the Bank of England_, p. 198.
Only in one respect can the analogy be said to be imperfect. The Indian
Government has undertaken—not, be it noted, as a statutory obligation,
but merely as a matter subject to the [pg 174] will of the executive, to
convert the rupee into gold at a fixed rate for foreign remittances if
the exchange falls below par. This, it must be allowed, the Bank of
England did not do during the suspension period. Everything, therefore,
turns upon the question whether this much convertibility is a sufficient
distinction to mark off the Indian currency from the English currency of
the suspension period into a separate category and invalidate the
analogy herein said to exist between the two systems. To be able to
decide one way or the other we must firmly grasp what is the true import
of convertibility. Prejudice against an inconvertible currency is so
strong that people are easily satisfied with a system which provides
some kind of convertibility, however small. But to assume this attitude
is to trifle with a very crucial question. We must keep clear in our
mind what it is that essentially marks off a convertible from an
inconvertible currency. The distinction commonly drawn, that the one is
an automatic and the other is a managed currency, must be discarded as a
gross error. For, if by a managed currency we mean a currency the issue
of which depends upon the discretion of the issuer, then a convertible
currency is as much a managed currency as an inconvertible currency is.
The only point of contrast lies in the fact that in the management of a
convertible currency the discretion as to issue is regulated, while in
an inconvertible currency it is unregulated. But even if regulated the
issue remains discretionary and to that extent a convertible currency is
not so safe as to mark it off from an inconvertible currency. The
enlargement of its issue being discretionary, and the effect of such
issues being to drive specie out of circulation, a convertible currency
may easily become inconvertible. The difference between a convertible
and an inconvertible currency is therefore ultimately a distinction
between a prudent and an imprudent management of the right to issue
currency. In other words, convertibility is a brake on the power of
issue. Bearing this in mind, and also the fact that a convertible
currency by reason of mismanagement has the tendency to become
inconvertible, it is possible for us to imagine how severe must be the
obligations as to [pg 175] convertibility in order to prevent prudent
management of currency from degenerating into an imprudent management
resulting in over-issue. If, therefore, it is true that in countries
having a convertible currency the affairs were so prudently managed that
when specie left the country the paper money not only did not increase
to take its place, but actually diminished, and that usually by a
greater absolute amount than the gold currency, it was because the
obligations as to convertibility were those of “effective absolute
immediate convertibility.”²⁹³ We can now appreciate why Prof. Sumner
said²⁹⁴ that
²⁹³ “No single word can convey the full meaning,” says Prof.
Nicholson, _War Finance_, 2nd ed., 1918, p. 36.
²⁹⁴ _A History of American Currency_, New York. 1874, p. 116.
“convertibility in the currency is like conscientiousness in a
man: it has many grades and is valuable in proportion as it is
strict and pure.”
That being so, it would be foolish to assume that we are immune from the
consequences of an inconvertible currency until we know what is the
grade of the convertibility that is provided. Now, what is the
character of the convertibility of the rupee in India? It is a
deferred, delegalized, delocalized, and therefore a devitalized kind of
convertibility. Indeed, really speaking it is not a convertibility, but
rather it is a moratorium which is a negation of convertibility, for
what does the provision for convertibility for foreign remittances mean
in practice? It simply means that until a fall of exchange takes place
there is a moratorium or inconvertibility in respect of the rupee. Not
only is there a moratorium as long as exchange does not fall, but there
is no guarantee that the moratorium will be lifted when a fall does
occur. It may not be lifted, for it is a matter of conscience and not
of law.²⁹⁵ Is such a grade of convertibility, if [pg 176] one has a
predilection for that term, very far removed from the inconvertibility
of the bank notes during the suspension period? Let those who will say
so. For a person not endowed with high and subtle imagination the
distinction between such a convertibility and absolute inconvertibility
is too thin to persuade him that the two systems are radically
different; indeed, when we come to analyse the problem of prices in
India and outside India we shall find another piece of evidence to show
that they are not different, and that the analogy between the two is
perfect enough for all practical purposes. It may, however, be said
that an inconvertible currency may be so well managed as not to give
rise to a premium on gold, so that there may be little to choose between
it and a perfectly convertible currency. But whether an inconvertible
currency will be so well managed is a question of practical working.
Again, whether the absence of premium on gold suffices to place an
inconvertible currency on par with a convertible currency, so far as the
price problem is concerned, is also a matter depending on circumstances.
All these questions will be considered in their proper places.²⁹⁶ [pg
177]
²⁹⁵ The Finance Member of the Viceroy’s Council, in his Financial
Statement for 1908–09 (p. 23, italics not in the original),
observed:— “Had we complied with the demand for issues [of gold]
without limit, the whole available supply might have been drawn
off in a few weeks. … _For these reasons we decided to stand by
our legal rights. We are not bound to give sovereigns in exchange
for rupees except at our own convenience_. The currency offices
were accordingly instructed _not_ to issue gold in larger
quantities than £10,000 to any individual on any one day.” These
words were used to explain the attitude of the Government
regarding its sense of obligation as to convertibility of the
rupee in the exchange crisis of 1907! The degree of
convertibility being a matter of administrative discretion it is
difficult to define the extent to which it is given effect to in
practice. Official evidence is inclined to impress upon the public
that practically the rupee is convertible. If that is so, why not
make it legally convertible. For, if convertibility is complete
in practice a legal convertibility cannot impose upon the
Government greater obligations than what the official evidence
suggests the Government to be actually assuming. It is said that
Government does not do so because it is afraid that exchange
speculators will take advantage of it. By why should they not?
Are they not holders of rupees? It does not, however, appear to
have been adequately realized that this defence implies that the
currency is issued so much beyond the point of “saturation” that
its value is always on the margin of being affected by an element
of speculation.
²⁹⁶ For reasons giving rise to a premium on gold in terms of the
rupee, _see_ Chap. VI. For reasons explaining how there can be a
general depreciation of the rupee without there being a specific
depreciation of it in terms of gold, _see_ end of Chap. VI and
beginning of Chap. VII.
What we are considering at this stage are the inherent potentialities of
an inconvertible currency. Suffice it to say here that the name Gold
Exchange Standard cannot conceal the true nature of the Indian Monetary
Standard. Its essence consists in the fact that although gold is
unlimited legal tender there is alongside an unlimited issue of another
form of fiduciary currency well-nigh inconvertible, and also possessing
the quality of unlimited legal tender.
It needs no acute power of penetration to see that, so interpreted, the
existing currency system in India is the opposite of the system outlined
by the Government in 1898 and passed by the Fowler Committee. The two
are opposites of each other for the same reason for which the Bank
Charter Act was the opposite of the Bank Suspension Act in England.
Under both the Acts the currency in England was a mixed currency, partly
gold and partly paper. The difference was that by the Bank Suspension
Act the issue of gold became limited and that of paper unlimited, while
under the Bank Charter Act the process was reversed, so that the issue
of paper became limited and that of gold unlimited. In the same manner,
under the original scheme of the Government of India, the issue of
rupees was to be limited and that of gold unlimited. Under the existing
system the issue of gold has become limited while that of rupees has
become unlimited.
Was this an improvement on the plan originally contemplated by the
Government of India? The only objection to that plan was that it made
the rupee an inconvertible rupee.²⁹⁷ But is convertibility such a
necessary condition, and, if so, when? The idea that convertibility is
necessary to maintain the value of a currency is, on the face of it, a
preposterous idea. No one wants the conversion of bananas into apples
to maintain the value of bananas. Bananas maintain their value by
reason of the fact that there is a demand for them and their supply is
limited. There is no [pg 178] reason to suppose that currency forms an
exception to this rule. Only we are more concerned to maintain the
value of currency at a stable level than we are of bananas because
currency forms a common measure of value. What is wanted to maintain
the value of currency, or of any other thing for the matter of that, is
an effective limit on its supply. Convertibility is useful, not because
it directly maintains the value of a currency, which is nonsense, but
because it has the effect of putting a limit on the supply of currency.
But convertibility is not the only way of achieving that object. A plan
which lays down an absolute limit on issue has the same effect—indeed, a
far more powerful effect—on the supply of currency. Now, had the Mints
remained entirely closed to the coinage of rupees there would have been
placed an absolute limit on the issue of currency, and all the purposes
of convertibility would have been served by such an inconvertible rupee.
Nay, more; such an inconvertible rupee currency would have been
infinitely superior to the kind of pseudo-convertible rupee which we
have in India to-day.²⁹⁸ With an absolute limit there could have been no
danger of a fall in the value of the rupee. If anything there would have
been a danger of an indefinite appreciation of the rupee, but that was
effectually guarded against by gold having been made general legal
tender. A second effect of an absolute limit on the currency would have
been to free it from management by reason of the fact that all question
regarding the volume of issues had been settled once for all.
²⁹⁷ Both Lindsay and Probyn had attacked the plan of the Government of
India on this score, and had claimed that their plans were
superior because they had at least provided some sort of
convertibility.
²⁹⁸ In his comparison of the Limping Standard with the Exchange
Standard, Prof. Fisher seems entirely to overlook these
considerations. Cf. his _Purchasing Power_, etc., 1911, pp,
131–32.
In these respects, therefore, the gold-exchange standard is an
impairment of the original plan of an inconvertible rupee with a fixed
limit of issue supplemented by gold. Again, from the standpoint of
controlling the price-level, the exchange standard cannot be said to
have been an improvement on the original plan. Of course, it is
possible to say that such a perversion of the original system is no
matter for regret. Whether gold is a standard of value, or [pg 179]
whether fiduciary money is a standard of value, is a matter of
indifference, for neither can be said to have furnished a stable
standard of value. A gold standard has proved to be as unstable as a
paper standard, because both are susceptible of contraction as well as
expansion. All this, no doubt, is true. Nevertheless it is to be noted
that in any monetary system there is no danger of indefinite
contraction.²⁹⁹ What is to be guarded against is the possibility of
indefinite expansion. The possibility of indefinite expansion, however,
varies with the nature of money. When the standard of value is standard
metallic money the expansion cannot be very great, for the cost of
production acts as a sufficient limiting influence. When a standard of
value is a convertible paper money the provisions as to reserve act as a
check on its expansion. But when a standard of value consists of a
money the value of which is greater than its cost and is inconvertible,
the currency must be said to be fraught with the fatal facility of
indefinite expansion, which is another name for depreciation or rise of
prices. It cannot, therefore, be said that the Bank Charter Act made no
improvement on the Bank Restriction Act. Indeed, it was a great
improvement, for it substituted a currency less liable to expansion in
place of a currency far more liable to expansion. Now the rupee is a
debased coin,³⁰⁰ inconvertible, and is unlimited legal tender. As such,
it belongs to that order of money which has inherent in it the
potentiality of indefinite expansion, i.e. depreciation and rise of
prices. As [pg 180] a safeguard against this the better plan was no
doubt the one originally designed, namely of putting a limit on the
issue of rupees, so as to make the Indian currency system analogous to
the English system governed by the Bank Charter Act of 1844.
If there is any force in the line of reasoning adopted above, then it is
not easy to agree with the opinion entertained by the Chamberlain
Commission of the Exchange Standard. Indeed, it raises a query whether
for all that the Commission said there is not somewhere some weakness in
the system likely to bring about its breakdown. It therefore becomes
incumbent to examine the foundations of that standard from a fresh point
of view. [pg 181]
²⁹⁹ Cf. Hawtrey, R.G., op. cit., Chap. I.
³⁰⁰ It is difficult to understand why some writers on Indian currency
do not like to admit this fact. Cf. the discussion on Mr. Madan’s
paper at the annual meeting of the Indian Economic Association
(_Indian Journal of Economics_, Vol. III, Part 4, Serial No. 12,
p. 560). It is true the debasement of the rupee is not so obvious
as it would have been had it taken the form of continuing the
weight and making it baser, or of preserving the same fineness and
making it lighter. But, as Harris points out in his _Essay upon
Money and Coins_ (Part II, Chap. I, par. 8), the “altering the
denominations of the coins, without making any alteration at the
Mint or in the coins themselves,” “as supposing ninepence, or as
much silver as there is in ninepence, should be called a
shilling,” is a mode of debasement not different from that of the
rupee, and is virtually the same as the other two modes of
debasement. So viewed it is difficult to avoid the conclusion
that the rupee is & debased coin.