_TABLE XLVI__The Problem of the Rupee, Its Origin and Its Solution

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

Date. Reverse Drawings of the S. of

Councils (in £, S. (in Lakhs of Rs.).

000).

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

April Nil 270

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

May Nil 61

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

June Nil 68

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

July Nil 66

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

1914. August 2,778 72

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

September 1,515 25

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

October 1,895 41

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

November 1,044 32

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

December 1,250 30

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

January 225 29

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

1915. February Nil 181

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

March Nil 287

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

Total 8,707 1,162

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

April Nil 1,53

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

May Nil 1,03

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

June 651 17

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

July 3,377 8

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

1915. August 815 23

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

September 50 2,17

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

October Nil 2,25

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

November Nil 2,02

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

December Nil 3,28

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

January Nil 5,26

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

1916. February Nil 6,02

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

March Nil 6,33

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

Total 4,893 30,37

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

[pg 223]

_III. Redemption in 1920_

_TABLE XLVII_

_Sale of Reverse Councils (Figures in Thousands of

Pounds)_

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

Date of Sale. Amount Amount Amount Progressive

offered applied sold at Total of

at each for at each Amount

Sale. each Sale. Sale. sold.

January 2 1,000 770 770 770

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

January 8 1,000 8,499 990 1,760

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

January 15 2,000 300 300 2,060

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

January 22 2,000 4,890 2,000 4,060

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

January 29 2,000 1,334 5,000 5,394

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

February 5 2,000 32,390 2,000 7,394

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

February 2,000 41,312 2,000 12,394

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

February 2,000 122,335 2,000 14,394

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

February 2,000 78,417 2,00 16,394

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

March 3 2,000 64,931 2,000 18,394

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

March 11 2,000 117,185 2,000 20,394

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

March 18 2,000 153,559 2,000 22,394

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

March 25 2,000 56,295 2,000 24,394

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

March 31

────────────── 2,000 35,050 1,988 26,382

April 1

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

April 8 2,000 16,721 1,000 28,382

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

April 15 2,000 48,270 2,000 30,382

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

April 22 2,000 59,020 2,000 32,382

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

April 29 1,000 53,210 1,000 33,382

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

1920. May 6 1,000 89,514 1,000 34,382

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

May 13 1,000 101,625 1,000 35,382

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

May 20 1,000 122,279 1,000 36,382

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

May 26 1,000 85,620 1,000 37,382

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

June 3 1,000 101,821 1,000 38,382

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

June 10 1,000 109,245 1,000 39,382

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

June 15 1,000 122,991 1,000 40,382

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

June 24 1,000 73,391 1,000 41,382

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

July 1 1,000 106,751 1,00 42,382

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

July 8 1,000 63,690 1,000 43,382

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

July 15 1,000 101,830 1,000 44,382

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

July 22 1,000 103,960 1,000 45,382

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

July 29 1,000 75,486 1,000 46,382

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

August 5 1,000 101,260 1,000 47,382

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

August 12 1,00 112,230 1,000 48,382

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

August 19 1,000 114,767 1,000 49,382

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

August 26 1,000 117,390 1,000 50,382

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

Sept. 2 1,000 126,425 1,000 51,382

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

Sept. 7 1,000 117,200 1,000 52,382

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

Sept. 13 1,000 115,095 1,000 53,382

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

Sept. 21 1,000 112,590 1,000 54,382

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

Sept. 28 1,000 120,050 1,000 55,382

[pg 224] Not only did the Government sell reverse councils on a large

scale, but it also sold gold for rupees for internal circulation, a

thing which it seldom did before.

_III. Redemption in 1920_

_TABLE XLVIII_

_Sale of Gold_

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

No. Date of Minimum Rate Average Rate Quantity Price of

of Sale. of accepted of accepted sold Country Bar

Sale. Tenders. Tenders. (in Gold in the

Tolas). Bombay

Bazaar.

Rs. A. P. Rs. A. P. Rs. A. P.

1 1919, September 25 8 0 26 12 1 3,29,130 28 10 0

2 September 24 8 0 24 10 0 3,96,640 26 1 0

3 October 6 25 8 0 25 9 8 3,26,000 27 0 0

4 October 26 15 3 27 0 2 3,34,000 28 0 0

5 November 27 14 6 27 15 6 3,25,000 28 5 0

6 November 26 15 0 27 0 11 5,18,500 28 2 0

7 December 26 0 6 26 4 6 10,00,650 27 10 0

8 1920. January 5 26 4 3 26 7 9 7,63,300 27 3 0

9 January 26 13 3 26 14 7 8,00,000 27 5 0

10 February 25 2 3 25 9 7 7,56,450 25 6 0

11 February 16 2 3 21 9 1 9,60,590 23 4 0

12 March 3 18 8 0 18 12 4 12,96,125 21 7 0

13 March 17 21 6 0 21 7 7 12,53,325 22 13 0

14 April 7 22 7 3 22 9 4 12,46,200 24 0 0

15 April 21 23 7 4 23 8 6 10,68,175 24 4 0

16 May 5 20 13 3 21 3 2 11,96,750 21 8 0

17 May 19 21 0 3 21 1 7 12,46,050 21 12 0

18 June 9 21 8 9 21 9 8 11,32,350 22 2 6

19 June 23 20 14 10 21 0 5 12,25,250 21 8 0

20 July 7 21 1 4 22 2 2 12,81,500 21 6 0

21 July 21 22 0 1 22 0 11 12,42,000 22 5 0

22 August 4 22 5 6 23 6 3 12,78,950 22 7 0

23 August 19 23 9 4 23 10 2 5,54,500 23 7 0

24 September 22 8 3 22 10 8 8,27,700 23 1 6

25 September 23 9 4 23 12 11 2,30,500 23 8 0

Total 2,15,89,635

During 1920 no council bills were drawn by the Secretary of State on the

Government of India.

The success of this mechanism on the two previous occasions had

strengthened the belief that it had the virtue of restoring the value of

the rupee. But the failure of this mechanism in the crisis of 1920

compels one to adopt an attitude of reserve towards its general

efficacy. It cannot be said that exchange gave way because this

mechanism [pg 225] was not brought into operation. On the other hand,

the view of the Government regarding the sale of reverse councils in

1920 had undergone a profound modification as compared with the view it

held during the crisis of 1907–8. In that crisis the Government behaved

like a miser, sitting tight on its gold reserve and refusing to use it

for the very purpose which it was designed to serve. An

Accountant-General had “to go on his knees” to persuade the Government

of India, to release its gold.³⁴³ It was probably because it was rebuked

by the Chamberlain Commission for failing to make use of its gold

reserve in 1907 that in the crisis of 1920 the policy of selling reverse

councils was so boldly conceived. There was a great deal of ignorant

criticism of that policy from the general public that it was an

“organized loot.” But the Finance Minister was undaunted, and

argued³⁴⁴:—

³⁴³ Evidence of Mr. F. C. Harrison before the Chamberlain Commission,

Q. 10,209.

³⁴⁴ Speech on the resolution _re_ “Reverse Councils,” March 10, 1920.

_S.L.C.P._, Vol. LVIII, p. 1291.

“It is an essential feature of our exchange policy … that we

should not only provide for remittances from London to India

through council bills at approximately gold point, but from

India to London in time of exchange weakness also at gold point,

through the sale of sterling remittance known as reverse

councils. It is simply an alternative to the export of gold.

This is no new matter—we have been selling reverse councils for

years … and unless we do so the exchange policy does not become

effective. … This is the reason, and the only reason, why we

have sold reverse councils. … It is an effort in fact to

maintain exchange as near as possible to the gold point. … What

would be the consequence if we yielded to the pressure placed on

us and ceased to sell reverse councils at all? I can understand

a demand that reverse councils should be sold by some different

method, or at rates different from those at present in force,

but I must confess that I cannot understand the demand that the

facilities for the exchange of rupees into external currency

should be entirely withdrawn. I see that in Bombay it is urged

that we should let exchange find its ‘natural level.’ That is a

catchword which does not impress me. Used in the sense in which

that phrase has been recently [pg 226] used, there is no such

thing as a ‘natural level’ in exchange, for, when one translates

the internal currency into another currency, there must be some

sort of common denominator to which both currencies can be

brought; it may be gold, it may be silver, it may be sterling or

it may be Spanish pesetas, which we take as our basis. The

rupee must be linked on to _something_,³⁴⁵ and if it is so

linked, then it must be at some definite rate, and this

necessarily involves that we must sometimes be prepared to sell

reverse councils in order to maintain that rate. If reverse

councils be withdrawn entirely, then we should have neither a

gold standard, nor a gold-exchange standard, nor any kind of

standard at all.”

³⁴⁵ By Ordinance III of June 21, 1920, the gold coins referred to in

Section 11 of the Indian Coinage Act (III of 1906) ceased to be

legal tender in payment or on account, but provision was made for

their acceptance by Government at the ratio of Rs. 15 during a

moratorium of twenty-one days. This Ordinance continued till

September 9, 1920, when by Act XXXVI of 1920 the sovereign was

again made legal tender. During this period gold had no legal

status in India.

But that only raises the question: If the sale of reverse councils is

efficacious in righting the exchange, why was its effect such a

disastrous failure? The Finance Minister answered the point tersely and

cogently when he said:—

“If we have failed in narrowing the gap between the market price

and the theoretical gold par of the rupee … it is not because we

have sold too many reverse councils; it is because we have sold

too few. I put it to any member of the commercial community

here, and I put it without fear of contradiction, that if our

resources had enabled us … to sell straight away 20, 30, or 40

millions of reverse councils, we should probably have had no gap

between the market price of the rupee and the theoretical gold

price of the rupee at all. One of our difficulties has been,

not that we have sold too many reverse councils, but that we

have been obliged to sell too few.”³⁴⁶

³⁴⁶ _Ibid._, p. 1301.

There would have been some force in this argument if the amount of

reverse bills sold were “too few.” Not 20, 30, or 40 millions, but 554

millions of reverse councils were sold, besides the large issue of gold

internally, and the complete [pg 227] stoppage of council bills, and yet

the rupee did not rise above 1s. 4d. sterling, let alone reaching 2s.

gold. Why did not the sale of reverse councils suffice to rectify the

exchange? This leads us to examine the whole question of the efficacy

of this redemption. It is necessary to premise at the outset that

redemption may result in mere substitution of one form of currency by

another, or it may result in the retirement of currency. In so far as it

results in substitution it is of no consequence at all, for substitution

of currency is not a shrinkage of currency.³⁴⁷ To the restoration of the

value of a currency what is essential is its shrinkage, i.e. its

retirement, cancellation. The important question with regard to this

mechanism is not to what extent the currency can be redeemed, but to

what extent it can be retired. In the prevalent view of this question it

seems to be accepted without question that this extent is determined by

the magnitude of the gold resources of the Government of India and the

Secretary of State. Let us first make it clear how these gold resources

are located and distributed. It will be recalled that these gold

resources are distributed between (1) the paper-currency reserve, (2)

the gold-standard reserve, and (3) the cash balances of the Secretary of

State. It has been the habit to speak of these resources as being three

“lines of defence” on which the Government can safely rely when an

exchange crisis takes place. But are they? They can be, for the

purposes of retirement, only if they were all “free” resources; in other

words, if they were not appropriated resources. To what extent are they

unappropriated? Can the Secretary of State take gold from the

paper-currency reserve? He can, but then he must replace it by

something else, or must cancel notes to that extent. Can the Secretary

of State take gold out of his cash balances? He can, but then he must

either borrow to fill his Treasury or draw upon the Government of India

[pg 228] if there is anyone to buy his bills, which is tantamount to

issuing rupee currency. The gold in the paper-currency reserve and that

in the cash balances is of no use at all, for it does not permit of the

cancellation of the rupee currency, which is what is wanted in restoring

its value when it suffers a fall. It is therefore sheer nonsense to

speak of the effectiveness of redemption as being commensurate with the

gold resources of the Secretary of State. The matter is important, and

an illustration may not be out of place. Suppose A, a holder of rupees,

wants to get gold for them. He can go to three counters: (1) that of

the controller in charge of cash balances; (2) that of the controller of

currency in charge of the paper-currency reserve; or (3) that of the

custodian of the gold-standard reserve. If A goes to the first, what is

the result? The cash balance is _pro tanto_ reduced. On the assumption

that the cash balance is at its minimum, as it should be, the controller

must reimburse himself immediately to maintain his solvency by drawing a

bill on India and thereby releasing rupees received for gold again in

circulation, so that in this case there is no shrinkage of currency. If

A goes to the controller of currency, what happens? The controller

gives him gold, but on the assumption that the paper-currency account is

a separate statutory account he must put the rupees received from A in

place of the gold issued from his reserve, so that here again what

happens is that the composition of the reserve undergoes a change, but

the total paper currency remains the same. It must therefore be borne

in mind that to the extent the gold in the paper-currency reserve and

the cash balances are operated upon the result is not a retirement of

currency. To speak of them as “lines of defences,” as is so often done,

is to overlook the fact that these two are not free resources but are

appropriated resources.

³⁴⁷ The most notable example is that of American greenbacks. Under the

law of 1875 they were by 1879 retired in sufficient numbers to

restore parity with gold. But by a counter-law of 1878,

347,000,000 of them have been kept in circulation. As soon as

redeemed, they must be reissued; they cannot be retired.

What is, then, the resource left to the Government to _retire_ the rupee

currency? Only the gold-standard reserve. That is the only reserve the

amount of which is unappropriated for any particular use. It is free

cash, and only to that extent is it possible for the Government to

restore the rupee currency when a fall in its gold value eventuates, Of

course [pg 229] it is important to bear in mind that this is the extent

to which it can retire the currency. Not that it will, for it may not,

and there is no want of cases in which it has not. Two instances will

suffice. During the first period of the Mint closure, 1893–98, it will

be recalled how a large number of rupees had accumulated in the hands of

the Government, and in the interest of raising the value of the rupee

they should have been locked away. Instead the Government of India

released that money in circulation in extending railways and other

public works, as though the spending of rupees by itself produced an

effect different to what would have been produced had they been spent by

the public. Similarly irresponsible conduct marked the sale of reverse

councils in 1920. To meet these reverse councils the Secretary of State

took the gold from the paper-currency reserve. But instead of

cancelling notes to the extent of the gold that was taken out of the

reserve, the Government took powers under an Act XXI of 1920 to fill the

gap by manufacturing securities _ad hoc_, so that though there was

redemption there was no retirement, and so much gold was merely wasted,

for it produced no effect on prices or the exchange. This Act, passed

in March, 1920, was of temporary duration, and would have obliged the

Government to retire the currency by October, 1920, when it was to

expire. Rather than do this the Government altered the paper-currency

law, not temporarily but permanently (Act XLV of 1920), changing the

provisions in such a manner as to require the Government to cancel the

currency to the smallest degree possible by retiring their “created

securities.” Even this was not done, owing to deficits in the

Government Budget.

But even if such indiscretions were not repeated the fact remains that

Government cannot effect a greater retirement than is permitted by the

gold-standard reserve. If that reserve fails Government has only two

resources left: (1) to melt down the rupees and sell them as bullion or

gold and to go on further contracting the currency, and so on till its

value is restored; or (2) to borrow gold. Both these are evidently

costly methods. To sell rupees as [pg 230] bullion is bound to result

in loss unless the bullion in the rupee fetched more at the time of sale

than what it cost when it was purchased for manufacturing it into

bullion. The second process, that of borrowing, cannot be lightly

resorted to for the purpose of creating a reserve fund to retire the

currency. Indeed, so costly are such methods, and so complete would be

the proof they would afford of the instability of the exchange standard

if they were resorted to, that Government has never contemplated them as

possible lines of defence in an exchange crisis. It seems certain,

however, that Government does recognize that the gold-standard reserve

by itself cannot suffice for the maintenance of exchange. For we find

that from the year 1907–8 dates a complete change in the distribution of

Government balances between London and India. Up to that period it was

the policy of the Secretary of State to draw only as much as necessary

to finance his Home Treasury. After that date the practice was

originated of drawing as much as the Government of India could provide,

and as the Government of India has been supreme in financial matters it

provided large sums for council drawings by increased taxation and

budgeting for surpluses. The effect of this was to swell the cash

balances of the Secretary of State.³⁴⁸ No official explanation of a

satisfactory character has ever been given for this novel way of

financing the Home Treasury,³⁴⁹ but we shall not be very far wrong if we

say that the object in accumulating these balances is to provide a

second gold reserve to supplement the true gold-standard reserve.

Whatever strength the Government may derive for the time being from this

adventitious resource, it is obvious that it cannot be permanent. Under

a more popular control of Government finances the cash balances will

have to be kept down to a minimum necessary to work the Treasury, and

the gold-standard reserve will be the only reserve on which the

Government will have to depend.

³⁴⁸ For figures, _see_ Chap. VII.

³⁴⁹ Cf. Memorandum on India Office Balances, Cd. 6619 of 1913.

The gold-standard reserve is to the rupee what the paper-currency

reserve is to the notes. The purport of both is to [pg 231] prevent the

respective currencies they support from falling or going to discount.

But the treatment accorded by the Government to the rupee and the paper

in respect of reserve shows a remarkable degree of contrast. In the

case of the paper, as has been previously noted, the reserve is a

statutory reserve, and even when the whole basis of Indian paper

currency has been changed the provisions as to reserve are none the less

strict and cannot be disregarded by the Government without infringing

the law. Now, the rupee is nothing but a note printed on silver.³⁵⁰ As

such, the provisions as to reserve should be analogous to those

governing the paper currency. Strange as it may seem, any regulation is

conspicuous by its absence in regard to the gold-standard reserve.³⁵¹

Not only is it not obligatory on the Government to redeem the rupee, but

it does not seem that the Government is even bound to maintain the

reserve, And that it has maintained such a reserve is no guarantee that

it will replace it supposing that the reserve was dissipated.³⁵² Such

differences apart, is the gold-standard [pg 232] reserve an adequate

reserve? Figures of the magnitude of the gold-standard reserve, as

usually given in official publications, are a meaningless array. What

is the use of displaying assets without at the same time exhibiting the

liabilities? To be able to judge of the adequacy of that reserve we

must know what is the total circulation of rupees. When, however, we

compare the circulation of the rupees with the reserve, the proportion

between the two is not sufficiently large so as to inspire confidence in

the stability of the system (_see_ p. 233).

³⁵⁰ “We have virtually relegated our rupee currency to the position of

a token currency, and we are now practically in the position of

bankers who have issued a certain amount of fiduciary currency

(whether paper or metal is immaterial), and to maintain the value

of this fiduciary currency we are bound to be in a position to

exchange it for gold when presented to meet legitimate trade

requirements,” said the Financial Statement for 1903–4, p. 14.

³⁵¹ The Chamberlain Commission said: “There are disadvantages in

restricting the freedom of the Government in a crisis, and it is

undesirable that the disposition and amount of the reserve should

be stereotyped. … We therefore do not regard that the

gold-standard reserve should be regulated by statute.”—Report,

Sec. 101.

³⁵² In the course of his speech on the Indian Paper Currency

(Temporary Amendment) Bill, dated March 17, 1920, the Finance

Minister observed: “… from a practical point of view, it is

desirable to leave the gold-standard reserve until the

paper-currency reserve has been re-transferred, in case … the

Secretary of State finds it impossible to keep himself in funds by

Councils for his heavy home liabilities. He will then be able to

use the gold-standard reserve, and we can credit the gold-standard

reserve out here. There is a third point, and I think a

conclusive one. When you operate against the paper-currency

reserve you have to operate within the paper-currency reserve;

when you operate against the gold-standard reserve it disappears;

it melts, and we are under no obligation to replace it; whereas we

are under a statutory obligation to replace the paper-currency

reserve.”—_S.L.C.P._, Vol. LVIII, p. 1416.

How can a reserve so small as this carry through the process of

retirement to any sufficient extent? That it will not always do it the

crisis of 1920 gives abundant proof. But the supporters of the exchange

standard maintain that the smallness of the reserve is a matter of no

consequence, for the reserve is kept only for the purpose of foreign

remittances. That being the case, it is said the reserve need not be

large. Granting that it is so, what must govern the magnitude of the

reserve in order that it may prove adequate in any and every case? The

only attempt made to enunciate a rule of guidance is that by Prof.

Keynes. That rule he finds³⁵³ in the possible variations in the balance

of trade of India. Now, does this make the problem of regulating the

reserve more definite? As has been explained previously, the adverse

balance of trade would be due to the depreciation of the currency, so

that Mr. Keynes’s statement amounts to this, that the reserve should

vary with the depth of the depreciation. But how is a Government to do

this? Only by adverting to the movement of the price level. But in all

its currency management the Government of India never pays any attention

to the price problem. Indeed, as was pointed out above, its conception

of the underlying causes of the fall of exchange is totally at variance

with the only true conception, nothing but a firm grasp of which can

enable it to avert a crisis. Being ignorant of the true conception it

blindly goes on issuing currency until there occurs what is called an

adverse balance of trade. All it aims at is to maintain a gold reserve,

and so long as it has that reserve it [pg 233]

³⁵³ Op. cit., pp. 166–7.

_TABLE XLIX_

_Distribution of the Gold-standard Reserve and its

Proportion to Rupee Circulation (in Thousands of Pounds

Sterling)_

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

In England. In India. Percentage

─────────────────────────────────────────────────────────────────────────────────────────────────────────────── of

Purchase Cash Temporary Gold Total. Coined Outstanding Temporary Gold. Total. Volume Reserve

March value at Loan deposited Rupees Debt Loan Total of to

31 of Short to at in from to Reserve, Rs. Rs.

in Sterling Notice. the the India. Treasury Treasury England in in

each Securities. Home Bank Balances. Balances. and Circulation Circulation

Year. Treasury. of India. in (£

England. Crores. =

15)³⁵⁴

(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14)

1901 — — — — — — 1,831 — 1,200 3,031 3,031 143 3·1

1902 3,454 — — — 3,454 — — — - — 3,454 138 3·7

1903 3,810 — — — 3,810 — 1 — — 1 3,811 136 3·4

1904 6,377 — — — 6,377 — 167 — — 167 6,544 144 6·8

1905 8,377 — — — 8,377 — 152 — — 152 8,529 152 8·4

1906 12,165 — — — 12,165 — 287 — — 287 12,452 164 10·7

1907 12,519 — — — 12,519 4,000 301 — 22 4,323 16,842 178 10·6

1908 13,187 — 1,131 — 14,318 4,000 — — — 4,000 18,318 191 11·2

1909 7,414 — 470 — 7,884 10,587 — — — 10,587 18,471 187 7·1

1910 13,219 3,011 — — 16,230 2,534 — — — 2,534 18,764 186 13·8

1911 15,849 1,477 — — 17,326 1,934 — — — 1,934 19,260 184 14·8

1912 16,748 1,074 — — 17,822 1,934 — — — 1,934 19,956 182 14·9

1913 15,946 1,006 — 1,620 18,572 4,000 35 — — 4,035 22,607 191 14·8

1914 17,165 25 — 4,320 21,510 4,000 22 — — 4,022 25,532 187 17·2

1915 12,149 8 — 1,250 13,407 — 70 7,000 5,238 13,308 25,715 204 18·9

1916 16,219 5,792 — — 22,011 — 1 4,000 239 4,240 26,251 212 15·7

1917 25,406 6,001 — — 31,407 — — — 103 103 31,510 227 20·8

1918 28,453 6,000 — — 34,453 — — — — — 34,453 219 23·5

1919 29,729 6,016 — — 35,7245 — — — — — 35,745 228 23·5

³⁵⁴ In striking the proportion the rupee portion of the reserve has

been omitted.

[pg 234] does not stop to think how much currency it issues. The

proportion of the issues and the reserve not being correlated the

stability of the exchange standard, in so far as it depends upon the

reserve, must always remain in the region of vagueness, far too

problematical to inspire confidence of the system. Nay, the liability

of redemption for foreign remittances, small as it appears, may become

so indefinite as entirely to jeopardize the restoration of stability to

the exchange standard.

But is a gold reserve such an important thing for the maintenance of the

value of a currency? All supporters of the exchange standard must be

said to be believers in that theory. But the view cannot stand a

moment’s criticism. To look upon a gold reserve as an efficient cause

why all kinds of money remain at par with gold is a gross fallacy.³⁵⁵ To

take such a view is to invert the causal order. It is not the gold

reserve which maintains the value of the circulating medium, but it is

the limitation on its volume which not only suffices to maintain its own

value, but also makes possible the accumulation and retention of

whatever gold reserve there is in the country. Remove the limit on the

volume of currency, and not only will it fail to maintain its value, but

will prevent the accumulation of any gold reserve whatever. So little

indeed is the importance of a gold reserve to the cause of the

preservation of the value of currency that provided there is a rigid

limit on its issue the gold reserve may be entirely done away with

without impairing in the least the value of the currency. The

Chamberlain Commission recommended that the Government of India should

accumulate a reserve to maintain the value of the rupee because it was

by means of their reserves that European banks maintained the value of

their currencies. Nothing can be a greater perversion of the truth.

What the European banks did was just the opposite of what the Commission

recommended. Whenever their gold tended to disappear they reduced their

currencies not only [pg 235] relatively but absolutely. It was by

limitation of their currencies that they protected the value of the

currencies and also their gold reserves.

³⁵⁵ Cf. in this connection the brilliant paper by F. A. Fetter, “The

Gold Reserve: its Function and its Maintenance,” in the _Political

Science Quarterly_, 1896, Vol. XI, No. 2.

The existence of a reserve, therefore, cannot lend any strength to the

gold-exchange standard. On the other hand, if we inquire into the

genesis of the reserve, its existence is an enormous source of weakness

to that standard. For how does the Government obtain its gold-standard

reserve? Does it increase its reserve in the same way as the banks do,

by reducing their issues? Quite the contrary. So peculiar is the

constitution of the Indian gold-standard reserve that in it the assets,

i.e. the reserve, and the liabilities, i.e. the rupee, are dangerously

concomitant. In other words, the reserve cannot increase without an

increase in the rupee currency. This ominous situation arises from the

fact that the reserve is built out of the profits of rupee coinage.

That being its origin, it is obvious that the fund can grow only as a

consequence of increased rupee coinage. What profit the rupee coinage

yields depends upon how great is the difference between the cost price

of the rupee and its exchange value. Barring the minting charges, which

are more or less fixed, the most important factor in the situation is

the price of silver. Whether there shall be any profit to be credited to

the reserve depends upon the price paid for the silver to be

manufactured into rupees.³⁵⁶

³⁵⁶ See footnote³⁵⁷, page 236.

Not only is the reserve an evil by the nature of its origin, but having

regard to its documentary character the reserve cannot be said to be

absolutely dependable in a time of crisis. There is no doubt that the

intention of the Government in investing the reserve is to promote its

increase by adding to it the interest accruing from the securities in

which it is invested. The critics of the Government want a _large_ and

at the same time a _metallic_ reserve. But they do not realize that

having regard to the origin of the reserve the two demands are

incompatible. If the reserve needs to be large then it must be

invested. Indeed, if the reserve had not been invested it would have

remained distressingly [pg 236] meagre.³⁵⁸ But is there no danger in a

reserve of this kind? [pg 237]

³⁵⁷ In answer to Mr. M. L. Reddi Garu, the following statement was

laid on the table:—

Statement showing the average cost of silver

purchased by the—³⁵⁹

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

Year. Royal Mint India Office Financial

Average Cost for Average Cost for Year.

Standard Ounce. Standard Ounce.

d. d.

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

1893 36 5/16 No purchase 1893–94

1894 29¼ No purchase 1894–95

1895 30⅜ No purchase 1895–96

1896 30 5/16 No purchase 1896–97

1897 27⅞ No purchase 1897–98

1898 27¼ No purchase 1898–99

1899 27½ 28 1899–1900

1900 28¼ 29 1900–01

1901 27 15/16 No purchase 1901–02

1902 24 5/16 22·80 1902–03

1903 23 11/16 27·19 1903–04

1904 26½ 27·14 1904–05

1905 27 7/16 29·74 1905–06

1906 31 1/16 31·59 1906–07

1907 30 9/16 31·27 1907–08

1908 24 7/16 No purchase 1908–09

1909 23 11/16 No purchase 1909–10

1910 24⅞ No purchase 1910–11

1911 24 13/16 No purchase 1911–12

1912 27 15/16 28·71 1912–13

1913 28 1/16 28·71 1913–14

1914 24 15/16 No purchase 1914–15

1915 24¼ 33·96 1915–16

1916 30⅝ 33·96 1916–17

1917 39 15/16 42·78 1917–18

1918 47 15/16 48·20 1918–19

1919 49⅝ 52·04 1919–20

1920 50⅞ Silver purchased 1920–21

at special rates

from the Baldwin

mines and the

Perth mint.

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

In the absence of information whether the price is F.O.B. or

C.I.F. it is difficult to say that the Secretary of State has had

to pay higher prices for silver than were paid by the Master of

the Royal Mint.

³⁵⁸ From 1900–1 to 1920–21 the profits on coinage credited to the

gold-standard reserve amounted to £28,573,606 only: while during

the same period Interest and Discount gave £13,306,847 or nearly

one-half the profits on coinage. Cf. _East India: Accounts and

Estimates_, 1921–22, _Cmd_, 1517 of 1921, p. 20.

³⁵⁹ _Legislative Assembly Debates_, Vol. II, No. 3, September, 10

1921, p. 181.

The source of a danger in a reserve such as this was well pointed out by

Jevons when he said:³⁶⁰

³⁶⁰ _Money,_ p. 227.

“… good government funds and good bills can always be sold at

some price so that a banking firm with a strong reserve of this

kind might always maintain their solvency. But the remedy might

be worse for the community than the disease, and the forced sale

of the reserve might create such a disturbance in the money

market as would do more harm than the suspension of payment. …”

In the same manner, who can say that all the increase of reserve from

interest will not be wiped out by a slump in the value of the securities

if put upon the market for conversion into gold at a time when there

takes place an exchange crisis? Supposing, however, the full value of

the securities is realized, the number of rupees the reserve will “sink”

when occasion for redemption arrives depends upon what is the price at

which the rupees are bought back. If the fall of the rupee is small, it

may help to retire a large volume of currency and thus restore its

value. On the other hand, if the fall is great, it will suffice to

retire only a small part of the currency and may fail to restore its

value as it did in 1920, so that what may appear to be a big reserve may

turn out to be very inadequate. But, apart from considerations of the

relative magnitude of the reserve that can be built up, the point that

seems to have been entirely overlooked is _that the process of building

up the reserves directly involves the process of augmenting the

currency_. The Chamberlain Commission was cognizant of the fact that

the gold-standard reserve could not be built up except by coining

rupees. Indeed, it cautioned those desirous of a gold currency to

remember that if gold took the place of “new rupees which it would be

necessary otherwise to mint, the effect is to diminish the strength of

the gold-standard reserve by the amount of the profit which would have

been made from new coinage.”³⁶¹ Rather than recommend a policy which

“would bring to an end the natural growth of the gold-standard reserve,”

the Committee permitted the Government to coin rupees. But is there no

[pg 238] danger involved in such a reserve? What is the use of a

reserve which creates the very evil which it is supposed afterwards to

mitigate? Indeed, those who have been agitating for an increase in the

Indian gold-standard reserve cannot be said to have been alive to the

dangers involved in the existence of such a reserve. The smaller the

gold-standard reserve the better it would be, for there would be no

inflation, no fall in the purchasing power of the rupee, and no

necessity for its retirement.

³⁶¹ Report, par. 63.

Having regard to its origin, the gold-standard reserve, instead of

acting as a brake upon reckless issue of rupee currency, is the direct

cause of it and tends to aggravate the effects of an inconvertible

currency rather than counteract them. Perversity cannot go further. If

the fact that a mechanism like that of the gold-standard reserve, set up

for the purpose of limiting the currency, cannot be made to function

without adding to the currency, does not render the system an unsound

currency, one begins to wonder what would. Great names have been

invoked in support of the exchange standard. After trying hard to find

authoritative precedents for his plan,³⁶² Mr. Lindsay [pg 239] claimed

before the Fowler Committee that it was founded upon the Report of the

Parliamentary Committee on Irish Exchange.³⁶³ There he was on firm

ground. Among other things, the Committee did recommend that for

stabilizing the exchange between England and Ireland the Bank of Ireland

should open credit at the Bank of England and sell drafts on London at a

fixed price. In so far as the exchange standard rests on gold reserve

in London, Lindsay must be said to have faithfully copied the plan of

the Irish Committee on exchange. But he totally neglected to give

prominence to another and the most vital recommendation of the

Committee, in which it is observed:³⁶⁴ “_But all the benefits proposed

by this Mode of Remedies would be of little Avail and very limited

Duration if it_ [i.e. Bank of Ireland] _did not promise at the same

time to cure the Depreciation of Paper in Ireland by diminishing its

over issue_.” Indeed, so great, was the stress laid on the limitation

of issue that when Parnell, in his resolution in the House of Commons on

the reform of the Irish currency, regretted the non-adoption of the

recommendations of the Committee,³⁶⁵ Thornton in his reply pointed out

that nothing would help to stabilize Irish exchange so long as the vital

condition laid down by the Committee was disregarded. The recent

experience in pegging the exchanges well illustrates the importance of

that vital condition. Pegging the exchange is primarily a device to

prevent the external value of the currency falling along with its

internal value. The way in which pegging effects this divorce is

important to note.³⁶⁶ The primary effect of the peg is to permit the

purchases of foreign goods by procuring foreign currency for home

currency at a fixed price, which is higher than would be the case if it

were determined by the general purchasing-power parity of the two

currencies. By enabling people to buy [pg 240] foreign goods with

foreign currency obtained at a cheaper price the peg virtually raises

foreign prices more to the level of the home prices, so that if the

exchange is stable it is not because there is a peg, but because the

price-levels in the two countries have reached a new equilibrium.

Essentially the exchange is stable because it is an artificial

purchasing-power parity. Whether it will continue to be so depends upon

the movements in the home prices. If the home prices rise more than the

rise brought about by the peg in the foreign prices the mechanism must

break. It is from this point of view that the condition laid down by

the Irish Committee on exchange regarding the limitation on issue must

be held as one of vital character. In omitting to advert to that

condition the Indian currency contradicts what is best in that Report of

the Irish Committee.

³⁶² In 1876, when Mr. Lindsay first set out his scheme in the pages of

his _Calcutta Review_, he mentions no parallel at all. In 1892,

in his _Ricardo’s Exchange Remedy_, he uttered the name of Ricardo

as an authority for his plan, but in 1898 he shifted his ground,

so much so that he blamed (_Economic Journal_, _supra_) Probyn for

taking Ricardo’s gold-bar plan as a basis. The reason why he

disavowed Ricardo as his authority most probably lies in the fact

that Ricardo’s general views of currency were rather damaging to

his position. In view of the fact that there are so many people

who assert, no doubt, from the title of his _Proposals for an

Economical and Secure Currency_, that Ricardo wrote against a

metallic standard, it is worth while recording the following

passage from his _Proposals_, in which he says: “During the late

discussion on the bullion questions, it was almost justly

contended that a currency, to be perfect, should be absolutely

invariable in value. But it was said, too, that ours had become

such a currency, by the Bank Restriction Bill; for by that bill we

had wisely discarded gold and silver as the standard of our money

… Those who supported this opinion did not see that such a

currency, instead of being variable, was subject to the greatest

variations—that the only use of a standard is to regulate the

quantity, and by the quantity the value of the currency—and that

without a standard it would be exposed to all the fluctuations to

which the ignorance or the interests of the issuers might subject

it.”

³⁶³ The Report, which is a masterly document, was eclipsed by the

Bullion Report, though both contain the same doctrine, by reason

of its not being printed till 1826. _See_ Lords Paper 48 of 1826.

³⁶⁴ Report, p. 16. Italics not in the original.

³⁶⁵ See _Hansard Parliamentary Debates_, Vol. XIV, pp. 75–91.

³⁶⁶ Cf. the succinct statement by T. E. Gregory, _Foreign Exchanges_,

p. 86.

The reason why Mr. Lindsay paid no attention to the question of

limitation in setting up his exchange standard is largely that,

notwithstanding the great reputation he has achieved as an author of a

new system, he was profoundly ignorant of the true doctrine regarding

the value of a currency. Neither he nor the hosts of currency-mongers

who during the nineties exercised their ingenuity to devise plans for

remedying Indian exchange troubles,³⁶⁷ understood that to stabilize the

exchange was essentially a problem of stabilizing the purchasing power

of currency by controlling its volume.³⁶⁸ The gold-exchange standard

ignores the fact that in the long run it is the general purchasing power

of a currency that will ultimately govern its exchange value. Its aim

is to stabilize exchange and allow the problem of purchasing power to go

hang. The true policy should be to stabilize the purchasing power of

the currency and let exchange take care of itself. Had the Chamberlain

Commission considered the exchange standard from this point of view it

could not have called it a sound standard when in its fundamentals it

was the very reverse of it. [pg 241]

³⁶⁷ _See_ Chap. IV.

³⁶⁸ Cf. evidence of Mr. Lindsay before the Fowler Committee, Q.

4,190–95, where he asserted that exchange had nothing to do with

the quantity of money in circulation.

Now some one who remains unconvinced of the weakness of the exchange

standard may say that in examining its stability we have taken only

those occasions on which the standard has broken down. Thinking such a

treatment to be unfair, he might say: How about the years during which

stability was maintained? Is there nothing to be said in favour of a

system that maintained the gold value of the rupee from 1901 to 1907, or

from 1909 to 1914? The question is a pertinent one, and the position

that underlies it is supposed to be so strong that those who hold it

have asked the opponents of the exchange standard either to admit that

it is a stable standard or to show that under that standard the rupee

has _invariably_ failed to maintain its gold value.³⁶⁹

³⁶⁹ Dodwell, “A Gold Currency for India,” _Economic Journal_, 1911;

_Report on the Enquiry into the Rise of Prices in India_, 1914, p.

94.

The validity of this position depends upon assumptions so plausible and

so widespread that the argument urged so far against the exchange

standard will not be of full effect until their futility is fully

demonstrated. The first assumption is that there cannot be a

depreciation of a currency unless it has depreciated in terms of gold.

In other words, if the excess has not produced a fall in the value of a

currency in terms of a particular commodity such as gold, then there has

been no excess at all in terms of commodities in general. Now there was

a time, particularly during the discussion on the Bullion Report, when

the conception of a change in the value of the currency in relation to

things in general was not quite clear even to the most informed

minds,³⁷⁰ and was even pronounced invalid by high authorities.³⁷¹ In

view of the absence of the system of index numbers, this simple [pg 242]

faith in the summary method of ascertaining depreciation by some one

typical article, gold for instance, as a measure of value, was

excusable. But the same view is without any foundation to-day. No one

now requires to be shown that the price of each commodity has varied to

the same extent and in the same direction as prices of commodities in

general before admitting that there has been a change in the value of a

currency. Why assume a single commodity like gold as a measure of

depreciation? It would be allowable, although it is short-sighted to do

so, if the depreciation of gold was an accurate measure of the

depreciation of a currency in terms of all other commodities. But such

is not the case. Commenting upon the experience of the United States

with the greenbacks during the Civil War, Prof. W. C. Mitchell

observes³⁷²:—

³⁷⁰ Canning’s castigation of Lord Castlereagh’s definition of standard

as “a sense of value” during the Bullion debates must be

attributed to his ignorance on this matter.

³⁷¹ Ricardo, in his _Proposals for an Economical and Secure Currency_,

says: “It has indeed been said that we might judge of the value of

a currency by its relation not to one but to the mass of the

commodities. … Such a test would be of no use whatever. … To

determine the value of a currency by the test proposed … is

evidently impossible.”

³⁷² _Gold, Prices and Wages under the Greenback Standard_, 1908, pp.

39–41.

“The fluctuations in the price of gold which attracted so much

attention were much more moderate than the extreme fluctuations

in the prices of commodities. The gold quotations lay all the

time well within the outer limits of the field covered by the

variations of commodity prices. … During the war gold moved up

or down in price more quickly than the mass of commodities. …

When gold was rising in price the majority of the commodities

followed, but more slowly. … When gold was falling in price the

majority of commodities stood still or followed more slowly. …

This more sluggish movement of commodity prices appears still

more clearly after the war. Rapid as was the fall of prices it

was not so rapid as the falling gold. A more curious fact is

that the price-level for commodities continued for ten years to

be higher than the price-level for gold.”

This shows that the test sought to be applied by the adherents of the

exchange standard is a false one and gives an inaccurate reading of the

value of a currency. There can be no doubt that people who have urged

its application to that standard would not have pressed for it so much

as they have done if they had taken proper care to distinguish between

_specific_ depreciation of a currency and its _general_ [pg 243]

depreciation.³⁷³ The experience of the Bank of England during the

suspension period is a capital instance of the phenomenon where a

currency is generally depreciated, although it showed no sign of

specific depreciation:—

³⁷³ Cf. Prof. Nicholson’s _Principles of Political Economy_ (1897),

Vol. II, Chap. XV, § 4; and Walker, F. A., _Money_, 1878, pp.

387–91.

_TABLE L_

_Depreciation of the Notes of the Bank of England_³⁷⁴

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

Percentage Values of Bank Notes in Terms of

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

(1) Gold. (2) Commodities.

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

1797 100·0 110

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

1798 100·0 118

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

1799 — 130

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

1800 107·0 141

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

1801 109·0 153

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

1802 — 119

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

1803 — 128

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

1804 103·0 122

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

1805 103·0 136

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

1806 — 133

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

1807 — 132

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

1808 — 149

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

1809 — 161

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

1810 — 164

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

1811 123·9 147

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

1812 130·2 148

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

1813 136·4 149

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

1814 124·4 153

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

1815 118·7 132

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

1816 102·9 109

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

1817 102·2 120

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

1818 104·6 135

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

³⁷⁴ From Hawtrey’s _Credit and Currency_, p. 269. On the values of

the notes in terms of gold Prof. Foxwell says: “It is admitted by

the severest critics of the bank that there is no substantial

ground for complaint as to its conduct during the restriction

until 1808–9. There does not seem, indeed, to have been any real

depreciation of its paper until that date. The price of £4 per

ounce, which figures monotonously for the years 1803–9, was really

an arbitrary price, fixed by the bank itself as one at which it

would purchase foreign gold.” _Preface to Andréadès_, p. xvi.

Some people seem to doubt that there was no specific depreciation

of the inconvertible notes of the Bank of England till 1810.

Unfortunately data are not available to give direct evidence of

the fact. But circumstantial evidence there is. It is to be

remembered that the premium on gold was the only method then known

of measuring depreciation and that Horner, Ricardo and others were

open enemies of the Bank of England. That being the case, it does

not seem probable that Horner would have waited to introduce his

Resolution in the House of Commons till 1810 if the bank notes had

shown signs of specific depreciation before that time.

[pg 244] Which kind of depreciation is the greater evil we will discuss

in the next chapter. Dealing for the present with this experience of

the Bank of England, we have the fact that there can be a general

depreciation without a specific depreciation. In view of this, the

upholders of the exchange standard have no reason to be proud of the

fact that the rupee has not shown signs of specific depreciation over

periods of long duration. That a bank note absolutely inconvertible and

unregulated as to issue should have maintained its par for very nearly

thirteen years may speak far more in favour of the suspension system

than the experience of the rupee can in favour of the exchange standard.

There is a greater wonder in the former than there is in the latter, for

the value of the rupee is sustained, apart from the fact that gold in

terms of which it was measured was itself undergoing a depreciation, as

is evident from the foregoing figures of general prices in England, and

by a hope in some kind of convertibility, however slight or however

remote but which had no place in the case of the Bank of England notes.

Yet no one is known to have admired or justified the currency system of

the suspension period, although it had not given rise to a specific

depreciation for a long time.

This mode of measuring depreciation in terms of gold would be,

relatively speaking, a harmless idea if it was not made the basis of

another assumption on which the exchange standard is made to rest, that

the general and specific depreciations of a currency are unrelated

phenomena. As against this it is necessary to urge that the chief

lesson to be drawn from this experience of the Bank of England for the

benefit of the upholders of the exchange standard consists in

demonstrating that although their movements are [pg 245] not perfectly

harmonious, yet they are essentially interrelated. That lesson may be

summed up in the statement that when the general depreciation of

currency has taken place the occurrence of a specific depreciation,

other things being equal, is only a matter of time, if the general

depreciation proceeds beyond a certain limit. What will be the interval

before specific depreciation will supervene upon general depreciation

depends upon a variety of circumstances. Like the surface of a rising

lake, general depreciation touches different commodities at different

times according as they are located in the general scheme of things as

determined by the relative strength of demand for them. If there is no

demand for gold for currency purposes or for industrial purposes, the

depreciation of the currency in terms of gold may be delayed. It is

only to make foreign remittances that the demand for gold first makes

itself felt, and it is there that specific depreciation primarily

arises. But there again it need not, for everything depends upon

whether other commodities equally good, which the foreigner would take

as readily as gold, are forthcoming or not. Now, in the case of India

all these three factors tending to postpone specific depreciation are

more or less operative. The rupee is a full legal-tender currency and

can effectively discharge debts without compelling resort to gold. The

industrial demand for gold in a poor country like India cannot be very

great.³⁷⁵ Consequently, the [pg 246] generally depreciated rupee does

not show immediate signs of depreciation in the internal trade of the

country. As for foreign payments, the position of India is equally

strong, not because, as is absurdly supposed, she has a favourable

balance of trade, but because she has certain _essential_ commodities

which a foreigner is obliged to accept³⁷⁷ in place of gold. Specific

depreciation of the rupee will occur chiefly when the general

depreciation has overtaken the commodities that enter into India’s

foreign trade. That the depreciation should extend to them is

inevitable, for, as is well said,

³⁷⁵ The following table regarding the consumption of gold in different

countries is interesting:—

_Consumption of Gold (millions of pounds sterling at 85s. per fine

ounce)_³⁷⁶

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

1915. 1916. 1917. 1918. 1919. 1920.

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

Industrial Arts 17·0 18·0 16·0 17·0 22·0 22·0

(Europe and

America)

India (Year to 1·4 5·1 19·6 −3·3 27·7 5·1

March 31

following)

China −1·7 2·6 2·6 0·4 11·5 −3·7

Egypt −0·8 −0·2 −0·1 −0·0 −0·0 ?

Balance 80·5 68·0 48·2 64·9 13·8 46·6

available as

money

(difference)

World 96·4 93·5 86·3 79·0 75·0 70·0

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

³⁷⁶ The figures are those of Mr. Joseph Kitchin in _The Review of

Economic Statistics_, Preliminary volume 3, No. 8 for August,

1921, p.257. If figures previous to 1914 are desired, _see_ table

_ibid._, p. 268.)

Omitting the abnormal years of 1917 and 1919 and reducing the

figures to _per capita_ basis the consumption of gold by India

must be said to be remarkably small. Besides, it is to be noted

that figures for India include industrial as well as monetary

consumption. Further, in making comparison account must be taken

of the difference in the period taken as unit in the case of India

and other countries. Of course in these days when gold is so very

greatly depreciated in terms of commodities in general, neither is

there any necessity to shed tears if its production were to fall

off, nor can it be anything but a welcome event if its use were to

be extended. It would therefore be unwise to resent an increase,

if it were to take place, in the importation and use of gold by

India. The greater the use of gold and the less the production of

it, the better for the world as it is circumstanced to-day. Cf.

in this connection the remarks of Prof. Cannan on Mr. Shirras’s

Paper in the _J.R.S.S_ for July, 1920, pp. 623–24,

³⁷⁷ Evidence of Prof. Marshall, I.C.C., 1898, Q. 11,793.

“in a modern community the prices of different goods constitute

a completely organized system, in which the various parts are

continually being adjusted to each other by intricate business

process. Any marked change in the price of important goods

disturbs the equilibrium of this system, and business processes

at once set going a series of readjustments in the prices of

other goods to restore it.”³⁷⁸

³⁷⁸ Mitchell, _ibid._, p. 258.

It is true that in the case of India the interconnection between

production for internal trade and production for external trade is not

so closely knit as in the case of other countries. The only difference

that this can make in the situation is to moderate the pace of general

depreciation [pg 247] so that it does not affect foreign trade

commodities too soon. But it cannot prevent its effect from ultimately

raising their price. And once their price is risen the foreigner will

not accept them, however essential. A demand for gold must arise,

resulting in the specific depreciation of the currency.

This statement of the case agrees closely with the experience of the

Bank of England and that of India as well. In the case of the Bank of

England the “great evil,” i.e. the specific depreciation of the bank

notes, of which Horner complained so much, made its appearance in 1809,

some thirteen years after the suspension was declared. Similarly, we

find in the case of India specific depreciation tends to appear at

different intervals, thereby completely demonstrating that, even for the

purpose of avoiding specific depreciation, it is necessary to pay

attention to the general depreciation of a currency.

Having regard to these facts, supported as they are by theory as well as

history, the incident that the rupee has maintained its gold value over

periods of some duration need not frighten anyone into an admission that

the exchange standard is therefore a stable standard. Indeed, a

recognition of that fact cannot in the least discredit what has been

said above. For our position is that in the _long run_ general

depreciation of a currency will bring about its specific depreciation in

terms of gold. That being our position, even if we are confronted with

the absence of specific depreciation of the rupee, we are not driven to

retract from the opinion that the best currency system is one which

provides a brake on the general depreciation of the unit of account.

The exchange standard provides no such controlling influence; indeed,

its gold reserve, the instrument which controls the depreciation, is the

direct cause of such depreciation. The absence of specific depreciation

for the time being is not more than a noteworthy and an interesting

incident. To read into it an evidence of the security of the exchange

standard is to expose oneself, sooner or later, to the consequences that

befall all those who choose to live in a fool’s paradise. [pg 248]

CHAPTER VII

*A RETURN TO THE GOLD STANDARD*

We have examined the exchange standard in the light of the claim made on

behalf of it, that it is capable of maintaining the gold parity of the

rupee. This was the criterion laid down by the Chamberlain Commission

as a fitting one by which to judge the merits or demerits of that

standard. But is the adequacy of that criterion beyond dispute? In

other words, supposing the rupee has maintained its gold parity, which

it has only as often as not, does it follow that all the purposes of a

good monetary system are therefore subserved?

In the exchange standard, “as the system is now operated, the coinage is

manipulated to keep it at par with gold”³⁷⁹ as though money is only

important for the amount of gold it will procure. But what really

concerns those who use money is not how much gold that money is worth,

but how much of things in general (of which gold is an infinitesimal

part) that money is worth. Everywhere, therefore, the attempt is to

keep money stable in terms of commodities in general, and that is but

proper, for what ministers to the welfare of people is not so much the

precious metals as commodities and services of more direct utility.

Stability of a currency in terms of gold is of importance only to the

dealers in gold, but its stability in terms of commodities in general

affects all, including the bullion-dealers. Even Prof. Keynes, in his

testimony before the Indian Currency Committee of 1919, observed³⁸⁰:—

[pg 249]

³⁷⁹ Fischer, _Purchasing Power of Money_, 1911, p. 340.

³⁸⁰ Q. 2,690.

“I should aim always … at keeping Indian prices stable in

relation to commodities rather than in relation to any

particular metallic or particular foreign currency. That seems

to me of far greater importance to India.”

It is, of course, a little difficult to understand how the remedy of

high exchange which he supported was calculated to achieve that object.

Raising the exchange was a futile project, in so far as it was not in

keeping with the purchasing power of the rupee. As an influence

governing prices it could hardly be said to possess the virtue he

attributed to it. The existing price-level it could affect in no way;

nor could a high exchange prevent a future rise of prices. It could only

change the base from which to measure prices. Future prices could vary

as easily from the new high base-line as prices did in the past from the

old base-line. In other words, Mr. Keynes seems to have overlooked the

fact that exchange was only an index of the price-level, and to control

it, it was necessary to control the price-level and not merely give it

another name which it cannot bear and will not endure, as was proved in

1920 when the rupee was given in law the value of 2s. (gold) when in

practice it could not fetch even 1s. 4d. sterling, with the result that

the rupee exchange sank to the level determined by its purchasing power.

But, apart from this question, we have the admission of the ablest

supporter of the exchange standard that the real merit of a currency

system lies in maintaining the standard of value stable in terms of

commodities in general.

Given that this is the proper criterion by which to judge a currency

system, we must ask what has been the course of prices in India since

the Mint closure in 1893? This is a fundamental question, and yet not

one among the many who have praised the virtues of the exchange standard

has paid any attention to it. In vain may one search the pages of Prof.

Keynes, Prof. Kemmerer, or Mr. Shirras for what they have to say of the

exchange standard from this point of view. The Chamberlain Commission

or the Smith Committee on Indian currency never troubled about [pg 250]

the problem of prices in India,³⁸¹ and yet without being satisfied on

that score it is really difficult to understand how anyone can give an

opinion of any value as to the soundness or otherwise of that standard.

³⁸¹ Perhaps an exception may be made in the case of the latter

Committee; but its object was only to make it a ground for high

exchange.

In proceeding to consider the exchange standard from the standpoint of

prices, it is as well to premise that one of the important reasons why

the Indian Mints were closed to the free coinage of silver was that the

rupee was a depreciating currency resulting in high prices.³⁸² The

closing of the Mints, therefore, should have been followed by a fall of

prices in India; for, to adopt the phraseology of Prof. Fisher,³⁸³ the

pipe-connection between the money reservoir and the silver-bullion

reservoir was owing to the Mint closure cut off or stopped, thereby

preventing the passage of silver from the bullion reservoir to the money

reservoir. In other words, the newly-mined silver could not become

money after the Mint closure and lower the purchasing power of the

rupees in circulation. If this is so, then how very disappointing has

been the effect of the Mint closure! From the standpoint of prices the

rupee has become a problem as it had never been before. The rise of

prices in India since the Mint closure (_see_ Chart VI) has been quite

unprecedented in the history of the country. Indeed, the rise of prices

in India before the Mint closure, when the pipe-connection between the

silver-bullion reservoir and the rupee-currency reservoir was intact,

must be regarded as very trifling compared with the rise of prices after

the Mint closure when the pipe-connection was cut off. From the

standpoint of prices the Mint closure has therefore turned out to be a

curse rather than a blessing, and literally so, for, under an

ever-rising price-level, life in India is rendered quite unbearable. No

people have undergone so much misery owing to high prices as the Indian

people have done. During the war period the price-level reached such a

giddy height that the reports of suicide by men and women [pg 251] who

were unable to buy food and clothing were in no way few and far between.

It may, however, be argued that the rise of prices in India would have

been greater if the Mints had not been closed and India had remained a

purely silver-standard country. A good deal, no doubt, can be said in

favour of this view. It is absolutely true that silver, being

universally discarded, has become unfit for functioning as a standard of

value. To that extent an exchange standard is better than a pure-silver

standard. But is it as good as a gold standard?

³⁸² _See supra_, Chap. III.

³⁸³ _Purchasing Power of Money_, 1911, p. 128.

[Illustration: CHART VI: Comparative Price Levels, Indian and Foreign,

1893–1922]

On the basis of the doctrine of purchasing power parities as an

explanation of actual exchange rates, one may be led to answer the

question in the affirmative. For it may be argued that if the gold

value of the rupee was maintained it is because gold prices and rupee

prices were equal.³⁸⁴ This, it may be said, is all that the exchange

standard aims at doing and can be claimed to have done, for the fact

that the gold-standard reserve was seldom depleted is a proof that the

general prices inside India were on the same level as those ruling

outside India. On _à priori_ considerations such as these, the exchange

standard may be deemed to be as good as a gold standard.

³⁸⁴ It is, however, to be noted that neither Prof. Kemmerer nor Prof.

Keynes has set up this claim in favour of the exchange standard.

If anything, both have argued against the assumption of there

being equality of _all_ prices.

One may ask as to why Indian prices should have been kept as high, if

they were no higher than gold prices, and whether it would not have been

better to have kept Indian prices on a lower level. But we shall not

raise that question. We shall be satisfied if Indian prices were only

as high as gold prices. Now did Indian prices rise only as much as gold

prices? A glance at the chart reveals the surprising phenomenon that

prices in India not only rose as much as gold prices, but rose more than

gold prices. Of course in comparing Indian prices with gold prices to

test the efficacy of the exchange standard we must necessarily eliminate

the war period, for the reason that gold had been abandoned as a

standard of value by most of the countries. And, even [pg 252] if we do

take that period into account, it does not materially affect the

conclusion, for although India was not a belligerent country, yet prices

in India were not very much lower than prices in countries with most

inflated currencies during the war, and, barring a short period, were

certainly higher than gold prices in U.S.A.

It is obvious that the facts do not agree with the _à priori_ assumption

made in favour of the exchange standard. So noticeable must be said to

be the local rise in Indian prices above the general price level in

England that even Prof. Keynes, not given to exaggerate the faults of

the exchange standard, was, as a result of his own independent

investigation, convinced that³⁸⁵

“a comparison with Sauerbeck’s index number for the United

Kingdom shows that the change in India is much greater than can

be accounted for by changes occurring elsewhere.”

³⁸⁵ “Recent Economic Events in India,” in _The Economic Journal_,

March, 1909, p. 4. Italics not in the original.

What is then the explanation of this discrepancy between the _à priori_

assumption and the facts of the case. The explanation is that the

actual exchange rates correspond to the purchasing power parities of two

currencies not with regard to _all_ commodities but with regard to

_some_ only. In this connection it is better to re-state the doctrine

of the relation of the purchasing power parities to exchange rates with

the necessary qualification. A rigorously strict formulation of the

doctrine should require us to state that Englishmen and others value

Indian rupees inasmuch as and in so far as those rupees will buy _such

Indian goods as Englishmen want_; while Indians value English pounds

inasmuch as and in so far as those pounds will buy _such English goods

as the Indians want_. So stated it follows that the actual exchange

rates are related to purchasing power parities of the two currencies

with regard to such commodities only as are internationally traded. To

assume that the actual exchange rate is an exact index of the purchasing

power parity of the two currencies with regard to _all_ the commodities

is to suppose that the variations in [pg 253] the purchasing power of a

currency over commodities which are traded and which are not traded are

the same.³⁸⁶ There is certainly a tendency for movements in the prices

of these two classes of goods to influence one another _in the long

run_; so that it becomes possible to say that the exchange value of a

currency will be determined by its internal purchasing power. The

doctrine of purchasing power parity as an explanation of exchange rates

is valuable as an instrument of practical utility for controlling the

foreign exchanges _and_ it is as such that the doctrine was employed in

an earlier portion of this study to account for the fall in the gold

value of the rupee. But to proceed, on the basis of this relationship

between the purchasing power of a currency and its exchange value, to

argue that at any given time the exchange is more or less an exact

measure of general purchasing power of the two currencies, is to assume

what cannot always be true, namely, that the prices of traded and

non-traded goods move in sympathy. This assumption is too large and can

only be said to be more or less true according to circumstances. Now as

Prof. Kemmerer³⁸⁷ points out:

³⁸⁶ Prof. Cassel, the modern exponent of this old doctrine of the

relation of exchange rates to purchasing power parities, admits

that the correspondence between the two depends upon the

fulfilment of this assumption, for he says:

“Our calculation of the purchasing power parity rests strictly on

the proviso that the rise in prices in the countries concerned has

affected all commodities in a like degree. If that proviso is not

fulfilled, then the actual exchange rate may deviate from the

calculated purchasing power parities.”—_Money and Foreign Exchange

after_ 1914, London, 1922, p. 164.

³⁸⁷ Op. cit., p. 64.

“While India’s exports and imports in the absolute are large,

still, in the main, the people of India live on their own

products, and a large part of those products run their life

history from production to consumption in a very small

territory. They have only the remotest connection with foreign

trade, gold, and the gold exchanges. In time, of course, any

substantial disturbance in the equilibrium of values in the

country’s import and export trade will make itself felt in these

local prices, but, allowing for exceptions [pg 254] it may be

said that in a country like India the influences of such

disturbances travel very slowly and lose much of their momentum

in travelling.”

In consequence of the thinness of connection between the two it is

obvious that the prices of such Indian goods as do enter into

international trade cannot always be said to move in more or less the

same proportion as those which do not. Besides this thinness of

connection which permits of deviations of the general purchasing power

of a currency from the level indicated by the actual exchange rate, it

is to be noted that the prices of Indian commodities which largely enter

into international trade are not governed by local influences. Such

exports of India as wheat, hides, rice and oil seeds are international

commodities, not solely amenable to influences originating from changes

that may be taking place in the prices of home commodities and services.

The combined effect of these two circumstances, except in abnormal

events such as the war, is to militate against the prices of traded and

non-traded goods moving in quick sympathy.³⁸⁸

³⁸⁸ This is merely re-stating what has previously been stated to

explain why specific depreciation of the rupee does not

immediately follow upon its general depreciation.

If this is true, then, although the maintenance of the exchange standard

does imply a purchasing power parity of the rupee with gold, it is not a

purchasing power parity of the two currencies with respect to _all_ the

commodities. All that it implies is that the purchasing power of the

rupee over such commodities as entered into international trade was on a

par with gold, so that there did not often arise the necessity of

exhausting the gold reserve. The preservation of the gold reserve only

meant that there was equality of prices so far as internationally traded

goods were concerned. Thus interpreted, the fact that the rupee

maintained its gold value does not preclude the possibility of Indian

prices being, on the whole, higher than gold prices, thereby vitiating

the _à priori_ view that the exchange standard is as good as the gold

standard. [pg 255]

It should be pointed out³⁸⁹ that all changes of prices affect more or

less the welfare of the individual. However, the general flexibility of

the modern economic organization, with its mobility of capital and

labour, free competition, power of choice, inventive genius and

intellectual resources of entrepreneurs and merchants, takes care of the

normal and temporary fluctuations of prices. But when a change in the

price-level is general and persistent in one direction the case is

otherwise. Arrangements based on the expectation that the price

movement is only temporary, and that there will be a return to the

former normal position, constantly come to naught. Suffering endured in

holding on for the turn in the movement cannot be offset by gains in

another. In short, such a persistent price movement in one direction is

bound to confound ordinary business sagacity and so vitiate all

calculations for the future as to result in unlimited dislocation or

loss and subject the individual to such powerful and at the same time

incalculable influences that his economic welfare cannot but escape

entirely from his control, and prudence, forethought, and energy become

of no avail in the struggle for existence. Perfect stability of value

in a monetary standard is as yet only an ideal. But the evil

consequences of instability are so great that Prof. Marshall, believing

as he did that the general prejudice against tampering with the monetary

foundations of economic life was a healthy prejudice, yet observed that

much may be done towards safeguarding the economic welfare of

communities by lessening its variability.³⁹⁰ A depreciating standard of

value, as gold has been since 1896, is an evil. But can a standard of

value, undergoing a continuous depreciation as has been the case with

the exchange standard, and that too of a greater depth than the gold

standard—in other words, causing a greater rise of prices—be regarded as

a good standard of value? [pg 256]

³⁸⁹ What follows is condensed from Mayo-Smith’s “Price Movements and

Individual Welfare,” in the _Political Science Quarterly_, Vol.

XV, No. 1 (March, 1900), pp. 14–17.

³⁹⁰ Cf. “Remedies for Fluctuations of General Prices,” in _The

Contemporary Review_, March, 1887, _passim_.

In the light of this it is strange that Prof. Keynes, in his treatise

on _Indian Currency and Finance_, should have maintained that the

exchange standard contained an essential element in the ideal standard

of the future³⁹¹—a view subsequently endorsed by the Chamberlain

Commission. If stability of purchasing power in terms of commodities in

general is the criterion for judging a system of currency, then few

students of economies will be found to agree with Prof. Keynes. Perhaps

it is not too sanguine to say that even the Prof. Keynes of 1920 will

prefer a gold standard to a gold-exchange standard, for under the former

prices have varied much less than has been the case under the latter.

³⁹¹ Op. cit., p. 36.

In this connection attention may be drawn to the prevalent misconception

that India is a gold-standard country. It will be admitted that the

best practical test whether any two countries have the same standard of

value is to be found in the character of the movements in their

price-levels. So sure is the test that Prof. Mitchell, after a very

careful and wide survey of the price-level of different countries and

the American price-level during the greenback period, was led to

observe³⁹² that

“when two countries have a similar monetary system and important

business relations with each other, the movements of their

price-levels as represented by index-numbers are found to agree

rather closely. This agreement is so strong that similarity of

movement is usually found even when comparisons are made with

materials so crude as index-numbers compiled from unlike lists

of commodities and computed on the basis of actual prices in

different years.”

³⁹² _Gold, Prices, and Wages under the Greenback Standard_, 1908, p.

27.

Now, we know that before the war England was a gold-standard country,

and we also know that there was no close correspondence between the

contemporary movements of the price-levels of India and England. In

view of this, it is only a delusion to maintain that India has been a

gold-standard country. On the other hand, it is better to [pg 257]

recognize that India has yet to become a gold-standard country unless we

are to fall into the same error that Prof. Fischer³⁹³ must be said to

have committed in attributing the extraordinary rise of prices in India

to the existence of a gold standard, when, as a matter of fact, it

should have been attributed to the want of a gold standard.

³⁹³ _Purchasing Power_, etc., 1911, p. 340.

How can she become a gold-standard country? The obvious answer is, by

introducing a gold currency. Prof. Keynes scoffs at the view that there

cannot be a gold standard without a gold currency as pure nonsense.³⁹⁴

He seems to hold that a currency and a standard of value are two

different things. Surely there he is wrong. Because a society needs a

medium of exchange, a standard of value, and a store of value to sustain

its economic life, it is positively erroneous to argue that these three

functions can be performed by different instrumentalities. On the other

hand, as Professor Davenport insists,³⁹⁵

“all the different uses of money are merely different aspects or

emphasis of the intermediate function. Deferred payments … are

merely deferred payments of the intermediate. So again of the

standard aspect; whatever is the general intermediate is by that

fact the standard. The functions are not two, but one. …

Clearly, also, the intermediate may be a storehouse of

purchasing power. The second half of the barter may be

deferred. The intermediate is generalized purchasing power.

Delay is one of the privileges which especially the intermediate

function carries with it.”

³⁹⁴ Op. cit., p. 29.

³⁹⁵ Op. cit., pp. 255–56; cf. also F. A. Walker, _Money in its

Relationship to Trade_, p. 27; and C. M. Walsh, _The Fundamental

Problem in Monetary Science_, p. 804.

Thus the rupee by reason of being the currency is also the standard of

value. If we wish to make gold the standard of value in India we must

introduce it into the currency of India. But it may be asked what

difference could it make to the price level in India if gold were made a

part of the Indian currency? To answer this question it is necessary to

lay bare the nature of the rupee currency. Now it will be [pg 258]

granted that a standard of value which is capable of expansion as well

as contraction is likely to be more stable than one which is incapable

of such a manipulation. The rupee currency is capable of easy

expansion, but is not capable of easy contraction by reason of the fact

that it is neither exportable nor meltable, nor is it convertible at

will. The effects of such a currency as compared with those of an

exportable currency were well brought out by the late Hon. Mr. Gokhale

in a speech in which he observed:³⁹⁶

³⁹⁶ _Supreme Legislative Council Proceedings_, Vol. L, p. 642.

“Now, what is the difference if you have an automatic

self-adjusting currency, such as we may have with gold or we had

with silver before the year 1893, and the kind of artificial

currency that we have at present? Situated as India is you will

always require, to meet the demands of trade, the coinage of a

certain number of gold or silver pieces, as the case may be,

during the export season, that is for six months in the year.

When the export season is brisk money has to be sent into the

interior to purchase commodities. That is a factor common to

both situations, whether you have an artificial currency, as

now, or a silver currency, as before 1893. But the difference

is this. During the remaining six months of the slack season

there is undoubtedly experienced a redundancy of currency, and

under a self-adjusting automatic system there are three outlets

for this redundancy to work itself off. The coins that are

superfluous may either come back to the banks and to the coffers

of Government, or they may be exported, or they may be melted by

people for purposes of consumption for other wants. But where

you have no self-adjusting and automatic currency, where the

coin is an artificial token currency, such as our rupee is at

the present moment, two out of three of these outlets are

stopped. You cannot export the rupee without heavy loss, you

cannot melt the rupee without heavy loss, and consequently the

extra coins must return to the banks and coffers of the

Government or they must be absorbed by the people. In the

latter case the situation is like that of a soil which is

water-logged, which has no efficient drainage, and the moisture

from which cannot be removed. In this country the facilities

for banking are very inadequate, and therefore our money does

not swiftly return back to the banks or [pg 259] Government

Treasuries. Consequently, the extra money that is sent into the

interior often gathers here and there like pools of water

turning the whole soil into a marsh. I believe the fact cannot

be gainsaid that the stopping of two outlets out of the three

tends to raise prices by making the volume of currency

redundant.”

Had gold formed a part of the Indian currency it would have not only met

the needs for expansion but would have permitted contraction of currency

in a degree unknown to the rupee. Gold would be superior to the rupee

as a standard of value for the reason that the former is expansible as

well as contractible, while the latter is only expansible but not

contractible. This is merely to state in different language what has

already been said previously, that the Indian monetary standard, instead

of being a gold or a gold-exchange standard, is in all essentials an

inconvertible rupee standard like the paper pound of the Bank Suspension

period, and the extra local rise of prices which, in itself an

incontrovertible proof of the identity of the two systems, is

characteristic of both, is, to use the language of the Bullion

Report,³⁹⁷

³⁹⁷ Prof. Cannan’s Reprint, p. 17.

“the effect of an excessive quantity of a circulating medium in

a country which has adopted a currency not exportable to other

countries, or not convertible at will into a coin which is

exportable.”

Therefore, if some mitigation of the rise in the Indian price-level is

desirable, then the most essential thing to do is to permit some form of

“exportable” currency such as gold to be a counterpart of the Indian

monetary system.

The Chamberlain Commission expended much ingenuity in making out a case

against a gold currency in India.³⁹⁸ The arguments it urged were: (1)

Indian people will hoard gold and will not make it available in a

crisis; (2) that India is too poor a country to maintain such an

expensive money material as gold; (3) that the transactions of the

Indian people are too small to permit of a gold circulation; and (4) [pg

260] paper convertible into rupees is the best form of currency for the

people of India as being the most economical, and that the introduction

of a gold currency will militate against the popularity of notes as well

as of rupees. The bogy of hoarding is an old one, and would really be

an argument of some force if hoarding was something which knew no law.

But the case is quite otherwise. Money, being the most saleable

commodity and the least likely, in a well-ordered monetary system, to

deteriorate in value during short periods, is hoarded continually by all

people, i.e. treated as a store of value. But in treating it as a store

of value the possessor of money is comparing the utilities he can get

for the money, by disposing of it now, with those he believes he can get

for it in the future, and if the highest present utility is not so great

as the highest future utility, discounted for risk and time, he will

hoard the money. On the other hand, he will not hoard the money if the

present use was greater than the future use. That being so, it is

difficult to understand why hoarding should be an objection to a gold

currency for the Indian people. If they hoard gold that means they do

not care to spend it on current purchases or that they have another form

of currency which is inferior to gold and which they naturally like to

part with first. On the other hand, if they do wish to make current

purchases and have no other form of currency they cannot hoard gold.

There are instances when precious metals have been exported from India,

when occasion had called for it,³⁹⁹ showing that the hoarding habit of

the Indian peoples is not such an unknown quantity as is often supposed,

and if on some occasions⁴⁰⁰ they hoarded an exportable currency when

they should have released it, it is not the fault of the people but of

the currency system in which the component parts of the total stock of

money are not equally good as a store of value. The argument from [pg

261] hoarding, if it is an argument, can be used against any people, and

not particularly against the Indian people.

³⁹⁸ Report, pp. 15–19. The same arguments will be found in Chap. IV

of Mr. Keynes’s treatise.

³⁹⁹ _See_ the Memorandum by Mr. Dalal to the Chamberlain Commission

Appendices, Vol. III, No. XXXIII, pp. 673–76, for this and other

cognate topics.

⁴⁰⁰ In the crisis of 1907–8 the Indian people were accused of this.

Yet it must be noted that in that crisis some gold was exported on

private account.

The second argument against a gold currency in India has no greater

force than the first. If gold were to disappear from circulation then

the cause can be nothing else but the over-issue of another kind of

money. In the nineties, when the question of establishing a gold

standard in India was being considered, some people used to point to the

vain efforts made by Italy and the Austrian Empire to promote the

circulation of gold. That their gold used to disappear is a fact, but

it was not due to their poverty. It was due to their paper issues. Any

country can maintain a gold currency provided it docs not issue a

cheaper substitute.

Again, if gold will not circulate because transactions are too small the

proper conclusion is not that there should be no gold circulation but

that the unit of currency should be small enough to meet the situation.

The difficulties of circulation raises a problem of coinage. But the

considerations in respect of coinage cannot be allowed to rule the

question as to what should be the standard of value. If the sovereign

does not circulate it cannot follow that India should not have a gold

currency. It merely means that the sovereign is too large for

circulation. The case, if at all there is one, is against the sovereign

as a unit and not against the principle of a gold currency. If the

sovereign is not small enough the conclusion is we must find some other

coin to make the circulation of gold effective.

The fourth argument against a gold currency is one of fact, and can be

neither proved nor disproved except by an appeal to evidence whether or

not gold currency has the tendency ascribed to it. But we may ask, is

there no danger in a system of currency composed of paper convertible

into rupees? Will the paper have no effect on the value of the rupee?

The Commission, if it at all considered that question, which is very

doubtful, was perhaps persuaded by the view commonly held, that as the

paper currency was convertible it could not affect the value or the

purchasing power of the rupee. In holding this view it was wrong; for,

the convertibility of paper currency to the extent it is uncovered [pg

262] does not prevent it from lowering the value of the unit of account

into which it is convertible, because by competition it reduces the

demand for the unit of account and thus brings about a fall in its

value. Thus the paper, although economical as a currency, is a danger

to the value of the rupee. This danger would have been of a limited

character if the rupee had been freely convertible into gold. But the

danger of a convertible paper currency to the value of a unit of account

becomes as great as that of an inconvertible paper currency if that unit

is not protected against being driven below the metal of ultimate

redemption by free convertibility into that metal.⁴⁰¹ The rupee is not

protected by such convertibility, and as the Commission did not want

that it should be so protected it should have realized that it was as

seriously jeopardizing the prospects of the rupee being maintained at

par with commodities in general, and therefore with gold, by urging the

extension of a paper currency, be it ever so perfectly convertible, as

it could have done by making the paper altogether inconvertible. But so

obsessed was the Commission with considerations of economy, and so

reckless was it with considerations of stability of value, that it

actually proposed a change in the basis of the Indian paper currency

from a fixed-issue system to that of a fixed-proportion system.⁴⁰² That,

at the dictates of considerations of economy, the Commission should have

neglected to take account of this aspect of the question, is only one

more evidence of the very perfunctory manner in which it has treated the

whole question of stability of purchasing power so far as the Indian

currency was concerned.

⁴⁰¹ For an illuminating discussion on this topic, cf. _Money: Its

Connection with Rising and Falling Prices_, by Prof. Cannan, 3rd

ed., pp. 47–8.

⁴⁰² Report, Sec. 112.

If there is any force in what has been urged above, then surely a gold

currency is not a mere matter of “sentiment” and a “costly luxury,” but

a necessity dictated by the supreme interest of steadying the Indian

standard of value, and thereby to some extent, however slight,

safeguarding [pg 263] the welfare of the Indian people from the untoward

consequences of a rising price-level.

We now see how very wrong the Chamberlain Commission was from every

point of view in upholding the departure from the plan originally

outlined by the Government of India and sanctioned by the Fowler

Committee. But that raises the question: How did that ideal come to be

so ruthlessly defeated? If the Fowler Committee had proposed that gold

should be the currency of India, how is it that gold ceased to be the

currency? It cannot be said that the door is closed against the entry

of gold, for it has been declared legal tender. Speaking in the

language of Prof. Fisher, the movement of gold in the money reservoir of

India is allowed a much greater freedom so far as law is concerned than

can be said of silver. Silver, in the form of rupees, is admitted by a

very narrow valve which gives it an inlet into that reservoir, but there

is no outlet provided for it. On the other hand, gold is admitted into

the same reservoir by a pipe-connection which gives it an inlet as well

as an outlet. Why, then, does not gold flow into the currency reservoir

of India? A proper understanding on this question is the first step

towards a return to the sound system proposed in 1898.

On an examination of the literature which attempts to deal with this

aspect of the question, it will be found that two explanations are

usually advanced to account for the non-entry of gold into the currency

system of India. One of them is the sale of council bills by the

Secretary of State. The effect of the sale of council bills, it is

said, is to prevent gold from going to India. Mr. Subhedar, said to be

an authority on Indian currency, in his evidence before the Smith

Committee (Q. 3,502), observed:—

“Since 1905 it has been the deliberate attempt of those who

control our currency policy to prevent gold going to India and

into circulation.”

The council bill has a history which goes back to the days of the East

India Company.⁴⁰³ The peculiar position [pg 264] of the Government of

India, arising from the fact that it receives its revenues in India and

is obliged to make payments in England, imposes upon it the necessity of

making remittances from India to England. Ever since the days of the

East India Company the policy has been to arrange for the remittance in

such a way as to avoid the transmission of bullion. Three modes of

making the remittance were open to the Directors of the East India

Company: (1) Sending bullion from India to England; (2) receiving money

in England in return for bills on the Government of India; and (3)

making advances to merchants in India for the purchase of goods

consigned to the United Kingdom and repayable in England to the Court of

Directors of the Company to whom the goods were hypothecated. Out of

these it was on the last two that greater reliance was placed by them.

In time the mode of remittance through hypothecation of goods was

dropped “as introducing a vicious system of credit, and interfering with

the ordinary course of trade.” The selling of bills on India survived

as the fittest of all the three alternatives,⁴⁰⁴ and was continued by

the Secretary of State in Council—hence the name, council bill—when the

Government of India was taken over by the Crown from the Company. In

the hands of the Secretary of State the council bill has undergone some

modifications. The sales as now effected are weekly sales,⁴⁰⁵ and are

managed through the Bank of England, which issues an advertisement on

every Wednesday on behalf of the Secretary of State for India, inviting

tenders to be submitted on the following Wednesday for bills payable on

[pg 265] demand by the Government of India either at Bombay, Madras, or

Calcutta. The minimum fraction of a penny in the price at which tenders

of bills are received has now⁴⁰⁶ been fixed at \frac{1}{32}nd of a

penny. The council bill is no longer of one species as it used to be.

On the other hand there are four classes of bills: (1) Ordinary bills of

exchange, sold every Wednesday, known as “_Councils_”; (2) telegraphic

transfers, sold on Wednesdays, called shortly “_Transfers_”;⁴⁰⁷ (3)

ordinary bills of exchange, sold on any day in the week excepting

Wednesday, called “Intermediates”; and (4) telegraphic transfers, sold

on any day excepting Wednesday, named “_Specials_.” Now, in what way

does the Secretary of State use his machinery of council bills to

prevent gold from going to India? It is said that the price and the

magnitude of the sale are so arranged that gold does not go to India.

Before we examine to what extent this has defeated the policy of the

Fowler Committee, the following figures (Tables LI and LII, pp. 266–7)

are presented for purposes of elucidation.

⁴⁰³ Cf. the Memorandum by Sir Henry Waterfield relating to the system

of effecting remittances from India, Appendix to the Fowler

Committee’s Report, p. 24; also Memorandum by F. W. Newmarch on

the Sale of Council Bills and Telegraphic Transfers, Appendices to

the Interim Report of the Royal Commission on Indian Finance and

Currency, Vol. I, No. VIII. p. 217.

⁴⁰⁴ There was a fourth one, viz., the Government of India purchasing

sterling bills in India on London and sending them to the

Secretary of State for collection. It was employed for a short

period of time in 1877, but was afterwards dropped.