INDIAN CURRENCY AND FINANCE

MACMILLAN AND CO., Limited

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THE MACMILLAN CO. OF CANADA, Ltd.

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INDIAN CURRENCY
AND FINANCE

BY

JOHN MAYNARD KEYNES

FELLOW OF KING’S COLLEGE, CAMBRIDGE

MACMILLAN AND CO., LIMITED
ST. MARTIN’S STREET, LONDON

1913

COPYRIGHT

PREFACE

When all but the last of the following chapters were already in type, I was offered a seat on the Royal Commission (1913) on Indian Finance and Currency. If my book had been less far advanced, I should, of course, have delayed publication until the Commission had reported, and my opinions had been more fully formed by the discussions of the Commission and by the evidence placed before it. In the circumstances, however, I have decided to publish immediately what I had already written, without the addition of certain other chapters which had been projected. The book, as it now stands, is wholly prior in date to the labours of the Commission.

J. M. KEYNES.

King’s College, Cambridge,
12th May 1913.

CONTENTS

CHAPTER I

  PAGE The Present Position of the Rupee 1

CHAPTER II

The Gold–Exchange Standard 15

CHAPTER III

Paper Currency 37

CHAPTER IV

The Present Position of Gold in India and Proposals for a Gold Currency 63

CHAPTER V

Council Bills and Remittance 102

CHAPTER VI

The Secretary of State’s Reserves and the Cash Balances 124

CHAPTER VII

Indian Banking 195

CHAPTER VIII

The Indian Rate of Discount 240  

INDEX

261

————————

Chart Showing the Rate of Discount at the Presidency Bank of Bengal Face page 240

CHAPTER I

THE PRESENT POSITION OF THE RUPEE

1. On the broad historical facts relating to Indian currency, I do not intend to spend time. It is sufficiently well known that until 1893 the currency of India was on the basis of silver freely minted, the gold value of the rupee fluctuating with the gold value of silver bullion. By the depreciation in the gold value of silver, extending over a long period of years, trade was inconvenienced, and Public Finance, by reason of the large payments which the Government must make in sterling, gravely disturbed; until in 1893, after the breakdown of negotiations for bimetallism, the Indian Mints were closed to the free mintage of silver, and the value of the rupee divorced from the value of the metal contained in it. By withholding new issues of currency, the Government had succeeded by 1899 in raising the gold value of the rupee to 1s. 4d., at which figure it has remained without sensible variation ever since.

2. There can be no doubt that at first the Government of India did not fully understand the nature of the new system; and that several minor mistakes were made at its inception. But few are now found who dispute on broad general grounds the wisdom of the change from a silver to a gold standard.

Time has muffled the outcries of the silver interests, and time has also dealt satisfactorily with what were originally the principal grounds of criticism, namely,—

(1) that the new system was unstable,

(2) that a depreciating currency is advantageous to a country’s foreign trade.

3. The second of these complaints was urged with great persistency in 1893. The depreciating rupee acted, it was said, as a bounty to exporters; and the introduction of a gold standard, so it was argued, would greatly injure the export trade in tea, corn, and manufactured cotton. It was plainly pointed out by theorists at the time (a) that the advantage to exporters was largely at the expense of other members of the community and could not profit the country as a whole, and (b) that it could only be temporary.

The recent spell of rising prices in India has shown clearly in how many ways a depreciating currency damages large sections of the community, although it may temporarily benefit other sections. In fact, some recent complaints against the existing currency policy have been occasioned by the tendency of prices to rise; whereas it is plain that the great change of 1893 must have tended to make them fall, and that rupee prices would, in all probability, be higher than they now are, if the change had not been effected.

With regard to the temporary nature of the effect on exporters, experience has decisively supported theory. The nature of this experience was admirably summed up by Mr. J. B. Brunyate in the Legislative Council (February 25, 1910), speaking in reply to the similar line of argument brought forward by the Bombay mill–owning interests in connexion with the imposition in 1910 of a duty on silver.[1]

4. The criticisms of 1893, therefore, are no longer heard, and the Currency Problems with which we are now confronted are new. The evolution of the Indian currency system since 1899 has been rapid, though silent. There have been few public pronouncements of policy on the part of Government, and the legislative changes have been inconsiderable. Yet a system has been developed, which was contemplated neither by those who effected nor by those who opposed the closing of the Mints in 1893, and which was not favoured either by the Government or by the Fowler Committee in 1899, although something like it was suggested at that time. It is not possible to point to any one date at which the currency policy now in force was deliberately adopted.

The fact that the Government of India have drifted into a system and have never set it forth plainly is partly responsible for a widespread misunderstanding of its true character. But this economy of explanation, from which the system has suffered in the past, does not make it any the worse intrinsically. The prophecy made before the Committee of 1898 by Mr. A. M. Lindsay, in proposing a scheme closely similar in principle to that which was eventually adopted, has been largely fulfilled. “This change,” he said, “will pass unnoticed, except by the intelligent few, and it is satisfactory to find that by this almost imperceptible process the Indian currency will be placed on a footing which Ricardo and other great authorities have advocated as the best of all currency systems, viz., one in which the currency media used in the internal circulation are confined to notes and cheap token coins, which are made to act precisely as if they were bits of gold by being made convertible into gold for foreign payment purposes.”

5. In 1893 four possible bases of currency seemed to hold the field: debased and depreciating currencies usually of paper; silver; bimetallism; and gold. It was not to be supposed that the Government of India intended to adopt the first; the second they were avowedly upsetting; the third they had attempted, and had failed, to obtain by negotiation. It seemed to follow that their ultimate objective must be the last—namely, a currency of gold. The Committee of 1892 did not commit themselves; but the system which their recommendations established was generally supposed to be transitional and a first step towards the introduction of gold. The Committee of 1898 explicitly declared themselves to be in favour of the eventual establishment of a gold currency.

This goal, if it was their goal, the Government of India have never attained. The rupee is still the principal medium of exchange and is of unlimited legal tender. There is no legal enactment compelling any authority to redeem rupees with gold. The fact that since 1899 the gold value of the rupee has only fluctuated within narrow limits is solely due to administrative measures which the Government are under no compulsion to undertake. What, then, is the present position of the rupee?

6. The main features of the Indian system as now established are as follows:—

(1) The rupee is unlimited legal tender and, so far as the law provides, inconvertible.

(2) The sovereign is unlimited legal tender at £1 to 15 rupees, and is convertible at this rate, so long as a Notification issued in 1893 is not withdrawn, i.e., the Government can be required to give 15 rupees in exchange for £1.

(3) As a matter of administrative practice, the Government is, as a rule, willing to give sovereigns for rupees at this rate; but the practice is sometimes suspended and large quantities of gold cannot always be obtained in India by tendering rupees.

(4) As a matter of administrative practice, the Government will sell in Calcutta, in return for rupees tendered there, bills payable in London in sterling at a rate not more unfavourable than 1s. 3²⁹/₃₂d. per rupee.

The fourth of these provisions is the vital one for supporting the sterling value of the rupee; and, although the Government have given no binding undertaking to maintain it, a failure to do so might fairly be held to involve an utter breakdown of their system.

Thus the second provision prevents the sterling value of the rupee from rising above 1s. 4d. by more than the cost of remitting sovereigns to India, and the fourth provision prevents it from falling below 1s. 3²⁹/₃₂d. This means in practice that the extreme limits of variation of the sterling value of the rupee are 1s. 4⅛d. and 1s. 3²⁹/₃₂.

7. The important characteristics of the Indian system are so much a matter of notification and administrative practice that it is impossible to point to single Acts which have made the system what it is. But the following list of dates may be useful for purposes of reference:—

1892. Herschell Committee on Indian Currency.

1893. Act closing the Indian mints to the coinage of silver on private account. Notifications by Government fixing the rate, at which rupees or notes would be supplied in exchange for the tender of gold, at the equivalent of 1s. 4d. the rupee.

1898. Fowler Committee on Indian Currency. Exchange value of rupee touched 1s. 4d.

1899. Act declaring the British sovereign legal tender at 1s. 4d. to the rupee.

1899–1903. Negotiations for coinage of sovereigns in India (dropt indefinitely Feb. 6, 1903).

1900. Gold Standard Reserve instituted out of profits of coinage.

1904. Secretary of State’s notification of his willingness to sell Council Bills on India at 1s. 4⅛d. the rupee without limit.

1905. Act authorising the establishment of the Currency Chest of “earmarked” gold at the Bank of England as part of the Currency Reserve against notes,[2] and the investment of a stated part of the Currency Reserve in sterling securities.

1906. The Notification withdrawn which had directed the issue of rupees against the tender of gold (as distinguished from British gold coin).

1907. Rupee branch of the Gold Standard Reserve instituted.

1908. Sterling drafts sold in Calcutta on London at 1s. 3²⁹/₃₂d. the rupee, and cashed out of funds from the Gold Standard Reserve.

1910. Act rendering Currency notes of Rs. 10 and 50 universal legal tender,[3] and directing the issue of notes in exchange for British gold coins.

1913. Royal Commission on Indian Finance and Currency.

8. In § 6 I have stated the practical effect of these successive measures. But the legal position is so complicated and peculiar, that it will be worth while to state it quite precisely. Previous to 1893 the Government were bound by the Coinage Act of 1870 to issue rupees, weight for weight, in exchange for silver bullion. There was also in force a Notification of the Governor–General in Council, dating from 1868, by which sovereigns were received at Government Treasuries as the equivalent of ten rupees and four annas. This Notification, which had superseded a Notification of 1864 fixing the exchange at ten rupees, had long been inoperative (as the gold exchange value of ten rupees four annas had fallen much below a sovereign). The Act of 1893 was merely a repealing Act, necessary in order to do away with those provisions of the Act of 1870 which provided for the free mintage of silver into rupees. At the same time (1893) the Notification of 1868 was superseded by a new Notification fixing fifteen rupees as the rate at which sovereigns would be accepted at Government Treasuries; and a Notification was issued under the Paper Currency Act of 1882, directing the issue of currency notes in exchange for gold at the Rs. 15 to £1 ratio. The direct issue of rupees against the tender of gold also has been regulated by a series of Notifications, of which the first was published in 1893, up to 1906 rupees being issued against either gold coin or gold bullion; and since 1906 against sovereigns and half–sovereigns only. Apart from Notifications, an Act of 1899 declared British sovereigns legal tender at the Rs. 15 to £1 ratio, an indirect effect of which was to make it possible for Government, so far as Acts are concerned, to redeem notes in gold coin and refuse silver. And lastly, the Paper Currency Act of 1910 bound the Government to issue notes against the tender of British gold coin.

The convertibility of the sovereign into rupees at the Rs. 15 to £1 ratio is not laid down, therefore, in any Act whatever. It depends on Notifications withdrawable by the Executive at will. Further, the management of the Gold Standard Reserve is governed neither by Act nor by Notification, but by administrative practice solely; and the sale of Council Bills on India and of sterling drafts on London is regulated by announcements changeable at administrative discretion from time to time.

All this emphasises the gradual nature of the system’s growth, and the transitional character of existing legislation. As matters now are, there is something to be said for a new Act, which, while leaving administrative discretion free where there is still good ground for this, might consolidate and clarify the position.

9. As a result of these various measures, the rupee remains the local currency in India, but the Government take precautions for ensuring its convertibility into international currency at an approximately stable rate. The stability of the Indian system depends upon their keeping sufficient reserves of coined rupees to enable them at all times to exchange international currency for local currency; and sufficient liquid resources in sterling to enable them to change back the local currency into international currency, whenever they are required to do so. The special features of the system, although, as we shall see later, these features are not in fact by any means peculiar to India, are: first, that the actual medium of exchange is a local currency distinct from the international currency; second, that the Government is more ready to redeem the local currency (rupees) in bills payable in international currency (gold) at a foreign centre (London) than to redeem it outright locally; and third, that the Government, having taken on itself the responsibility for providing local currency in exchange for international currency and for changing back local currency into international currency when required, must keep two kinds of reserves, one for each of these purposes.

I will deal with these characteristics in successive chapters. It is convenient to begin with the second of them and at the outset to discuss in a general way the system of currency, of which the Indian is the most salient example, known to students as the Gold–Exchange Standard. Then we will take the first of them in Chapters III. and IV. on Paper Currency and on the Present Position of Gold in India and Proposals for a Gold Currency; and the third in Chapter VI. on the Secretary of State’s Reserves.

10. But before we pass to these several features of the Indian system, it will be worth while to emphasise two respects in which this system is not peculiar. In the first place a system, in which the rupee is maintained at 1s. 4d. by regulation, does not affect the level of prices differently from the way in which it would be affected by a system in which the rupee was a gold coin worth 1s. 4d., except in a very indirect and unimportant way to be explained in a moment. So long as the rupee is worth 1s. 4d. in gold, no merchant or manufacturer considers of what material it is made when he fixes the price of his product. The indirect effect on prices, due to the rupee’s being silver, is similar to the effect of the use of any medium of exchange, such as cheques or notes, which economises the use of gold. If the use of gold is economised in any country, gold throughout the world is less valuable—gold prices, that is to say, are higher. But as this effect is shared by the whole world, the effect on prices in any country of economies in the use of gold made by that country is likely to be relatively slight. In short, a policy which led to a greater use of gold in India would tend, by increasing the demand for gold in the world’s markets, somewhat to lower the level of world prices as measured in gold; but it would not cause any alteration worth considering in the relative rates of exchange of Indian and non–Indian commodities.

In the second place, although it is true that the maintenance of the rupee at or near 1s. 4d. is due to regulation, it is not true, when once 1s. 4d. rather than some other gold value has been determined, that the volume of currency in circulation depends in the least upon the policy of the Government or the caprice of an official.[4] This part of the system is as perfectly automatic as in any other country. The Government has put itself under an obligation to supply rupees whenever sovereigns are tendered, and it often permits or encourages the tender of sovereigns in London as well as in India; but it has no power or opportunity of forcing rupees into circulation otherwise. In two matters only does the Government use a discretionary power. First, in order that it may always be possible to fulfil this obligation, it is necessary to keep a certain reserve of coined rupees, just as some authority in this country—in point of fact the Bank of England—must keep some reserve of token silver and coined sovereigns and not hold in its vaults too large a proportion of uncoined or foreign gold. The magnitude of this reserve is within the discretion of the Indian Government. To a certain extent they must anticipate probable demands on the output of the Mint. But if they miscalculate and mint more than they need, the new rupees must lie in the Government’s own chests until they are wanted, and the date at which they emerge into circulation it is beyond the power of the Government to determine. In the second place, the Government can postpone for a short time a demand for rupees by refusing to supply them in return for sovereigns tendered in London and by insisting upon the sovereigns being sent to Calcutta. Sometimes they do this, but very often it is worth their while, for reasons to be explained in detail later on, to accept the tender of sovereigns in London. In either of these cases the permanent effect of their action one way or the other on the volume of circulation is inconsiderable. The kind of difference it makes is comparable to the difference which would be made if it lay within the discretion of a government to charge or not, as it saw fit, a small brassage not much greater than the cost of coining.[5]

CHAPTER II

THE GOLD–EXCHANGE STANDARD

1. If we are to see the Indian system in its proper perspective, it is necessary to digress for a space to a discussion of currency evolution in general.

My purpose is, first, to show that the British system is peculiar and is not suited to other conditions; second, that the conventional idea of “sound” currency is chiefly derived from certain superficial aspects of the British system; third, that a somewhat different type of system has been developed in most other countries; and fourth, that in essentials the system which has been evolved in India conforms to this foreign type. I shall be concerned throughout this chapter with the general characteristics of currency systems, not with the details of their working.

2. The history of currency, so far as it is relevant to our present purpose, virtually begins with the nineteenth century. During the second quarter of this century England was alone in possessing an orthodox “sound” currency on a gold basis. Gold was the sole standard of value; it circulated freely from hand to hand; and it was freely available for export. Up to 1844 bank notes showed a tendency to become a formidable rival to gold as the actual medium of exchange. But the Bank Act of that year set itself to hamper this tendency and to encourage the use of gold as the medium of exchange as well as the standard of value. This Act was completely successful in stopping attempts to economise gold by the use of notes. But the Bank Act did nothing to hinder the use of cheques, and the very remarkable development of this medium of exchange during the next fifty years led in this country, without any important development in the use of notes or tokens, to a monetary organisation more perfectly adapted for the economy of gold than any which exists elsewhere. In this matter of the use of cheques Great Britain has been followed by the rest of the English–speaking world—Canada, Australia, South Africa, and the United States of America. But in other countries currency evolution has been, chiefly, along different lines.

3. In the early days of banking of the modern type in England, gold was not infrequently required to meet runs on banks by their depositors, who were always liable in difficult times to fall into a state of panic lest they should be unable to withdraw their deposits in case of real need. With the growth of the stability of banking, and especially with the growth of confidence in this stability amongst depositors, these occasions have become more and more infrequent, and many years have now passed since there has been any run of dangerous proportions on English banks. Gold reserves, therefore, in Great Britain are no longer held primarily with a view to emergencies of this kind. The uses of gold coin in Great Britain are now three—as the medium of exchange for certain kinds of out–of–pocket expenditure, such as that on railway travelling, for which custom requires cash payment; for the payment of wages; and to meet a drain of specie abroad.

Fluctuations in the demand for gold in the first two uses are of secondary importance, and can usually be predicted with a good deal of accuracy,—at holiday seasons, at the turn of the quarter, at the end of the week, at harvest. Fluctuations in the demand in the third use are of greater magnitude and, apart from the regular autumn drain, not so easily foreseen. Our gold reserve policy is mainly dictated, therefore, by considerations arising out of the possible demand for export.

To guard against a possible drain of gold abroad, a complicated mechanism has been developed which in the details of its working is peculiar to this country. A drain of gold can only come about if foreigners choose to turn into gold claims, which they have against us for immediate payment, and we have no counterbalancing claims against them for equally immediate payment. The drain can only be stopped if we can rapidly bring to bear our counterbalancing claims. When we come to consider how this can best be done, it is to be noticed that the position of a country which is preponderantly a creditor in the international short–loan market is quite different from that of a country which is preponderantly a debtor. In the former case, which is that of Great Britain, it is a question of reducing the amount lent; in the latter case it is a question of increasing the amount borrowed. A machinery which is adapted for action of the first kind may be ill suited for action of the second. Partly as a consequence of this, partly as a consequence of the peculiar organisation of the London Money Market, the “bank rate” policy for regulating the outflow of gold has been admirably successful in this country, and yet cannot stand elsewhere unaided by other devices. It is not necessary for the purposes of this survey to consider precisely how changes in the bank rate affect the balance of immediate indebtedness. It will be sufficient to say that it tends to hamper the brokers, who act as middlemen between the British short–loan fund and the foreign demand for accommodation (chiefly materialised in the offer of bills for discount), and to cause them to enter into a less volume of new business than that of the short loans formerly contracted and now falling due, thus bringing to bear the necessary counterbalancing claims against foreign countries.

4. The essential characteristics of the British monetary system are, therefore, the use of cheques as the principal medium of exchange, and the use of the bank rate for regulating the balance of immediate foreign indebtedness (and hence the flow, by import and export, of gold).

5. The development of foreign monetary systems into their present shapes began in the last quarter of the nineteenth century. At that time London was at the height of her financial supremacy, and her monetary arrangements had stood the test of time and experience. Foreign systems, therefore, were greatly influenced at their inception by what were regarded as the fundamental tenets of the British system. But foreign observers seem to have been more impressed by the fact that the Englishman had sovereigns in his pocket than by the fact that he had a cheque–book in his desk; and took more notice of the “efficacy” of the bank rate and of the deliberations of the Court of Directors on Thursdays, than of the peculiar organisation of the brokers and the London Money Market, and of Great Britain’s position as a creditor nation. They were thus led to imitate the form rather than the substance. When they introduced the gold standard, they set up gold currencies as well; and in several cases an official bank rate was established on the British model. Germany led the way in 1871–73. Even now apologists of the Reichsbank will sometimes speak as if its bank rate were efficacious by itself in the same manner as the Bank of England’s. But, in fact, the German system, though ostensibly modelled in part upon the British system, has become, by force of circumstances, essentially different.

It is not necessary for this survey to consider individual systems in any detail. But, confining ourselves to European countries, whether we consider, for example, France, Austria–Hungary, Russia, Italy, Sweden, or Holland, while most of these countries have a gold currency and an official Bank Rate, in none of them is gold the principal medium of exchange, and in none of them is the bank rate their only habitual support against an outward drain of gold.

6. With the use of substitutes for gold I will deal in Chapter IV. in treating of the proper position of gold in the Indian system. But what props are commonly brought to the support of an “ineffective” Bank Rate in countries other than Great Britain? Roughly speaking, there are three. A very large gold reserve may be maintained, so that a substantial drain on it may be faced with equanimity; free payments in gold may be partially suspended; or foreign credits and bills may be kept which can be drawn upon when necessary. The Central Banks of most European countries depend (in varying degrees) upon all three.

The Bank of France uses the first two,[6] and her holdings of foreign bills are not, at normal times, important.[7] Her bank rate is not fixed primarily with a view to foreign conditions, and a change in it is usually intended to affect home affairs (though these may of course depend and react on foreign affairs).

Germany is in a state of transition, and her present position is avowedly unsatisfactory. The theory of her arrangements seems to be that she depends on her bank rate after the British model; but in practice her bank rate is not easily rendered effective, and must usually be reinforced by much unseen pressure by the Reichsbank on the other elements of the money market. Her gold reserve is not large enough for the first expedient to be used lightly. Free payment in gold is sometimes, in effect, partially suspended,[8] though covertly and with shame. To an increasing extent the Reichsbank depends on variations in her holding of foreign bills and credits. A few years ago such holdings were of small importance. The table given below shows with what rapidity the part taken by foreign bills and credits in the finance of the Reichsbank has been growing. The authorities of the Reichsbank have now learnt that their position in the international short loan market is not one which permits them to fix the bank rate and then idly to await the course of events.

Reichsbank’s Holdings of Foreign Bills (excluding Credits).

 

Average

for Year.

Maximum.

Minimum.

1895

£120,000

£152,000

£100,000

1900

1,270,000

3,540,000

160,000

1905

1,580,000

2,490,000

970,000

1906

2,060,000

2,990,000

830,000

1907

2,223,000

3,000,000

1,130,000

1908

3,544,000

6,366,000

977,800

1909

5,362,000

7,978,000

2,824,800

1910

^a

7,032,000

8,855,000

4,893,300

(a): Since 1910 these figures have not been stated in the Reichsbank’s annual reports.

Reichsbank’s Holdings of Foreign Bills and Credits with Foreign Correspondents on last Day of each Year.

31st Dec.

Bills.

Credits.

Total.

1906

£3,209,000

£993,000

£4,202,000

1907

1,289,000

503,000

1,792,000

1908

6,457,000

1,234,000

7,691,000

1909

6,000,000

3,369,000

9,369,000

1910

8,114,000

4,205,000

12,309,000

1911

7,114,000

1,439,000

8,553,000

1912

...

...

...

7. If we pass from France, whose position as a creditor country is not altogether unlike Great Britain’s, and from Germany, which is at any rate able to do a good deal towards righting the balance of immediate indebtedness by the sale of securities having an international market, to other countries of less financial strength, we find the dependence of their Central Banks on holdings of foreign bills and on foreign credits, their willingness to permit a premium on gold, and the inadequacy of their bank rates taken by themselves, to be increasingly marked. I will first mention very briefly one or two salient facts, and will then consider their underlying meaning, always with an ultimate view to their bearing on the affairs of India.

8. To illustrate how rare a thing in Europe a perfect and automatic gold standard is, let us take the most recent occasion of stringency—November 1912. The Balkan War was at this time at an acute stage, but the European situation was only moderately anxious. Compared with the crisis at the end of 1907, the financial position was one of comparative calm. Yet in the course of that month there was a premium on gold of about ¾ per cent in France, Germany, Russia, Austria–Hungary,[9] and Belgium. So high a premium as this is as effective in retaining gold as a very considerable addition to the bank rate. If, for example, the premium did not last more than three months, it would add to the profits of a temporary deposit of funds for that period as much as an addition of 3 per cent to the discount rate; or, to put it the other way round, there would need to be an additional profit of 3 per cent elsewhere if it were to be worth while to send funds abroad.

9. The growing importance of foreign bills in the portfolios of the Reichsbank has been shown above. The importance of foreign bills and credits in the policy of the Austro–Hungarian Bank is of longer standing and is better known. They always form an important part of its reserves, and the part first utilised in times of stringency.[10] It was supposed that in the third quarter of 1911 the Bank placed not less than £4,000,000 worth of gold bills at the disposal of the Austro–Hungarian market in order to support exchange. Amongst European countries, Russia now keeps the largest aggregate of funds in foreign bills and in balances abroad—amounting in November 1912 to £26,630,000.[11] Account being taken of their total resources, however, the banks of the three Scandinavian countries, Sweden, Norway, and Denmark, hold the highest proportion in the form of balances abroad—amounting in November 1912, for the three countries in the aggregate, to about £7,000,000. These are enough examples for my purpose.

10. What is the underlying significance of this growing tendency on the part of European State Banks to hold a part of their reserves in foreign bills or foreign credits? We saw above that the bank–rate policy of the Bank of England is successful because by indirect means it causes the Money Market to reduce its short–period loans to foreign countries, and thus to turn the balance of immediate indebtedness in our favour. This indirect policy is less feasible in countries where the Money Market is already a borrower rather than a lender in the international market. In such countries a rise in the bank–rate cannot be relied on to produce the desired effect with due rapidity. A direct policy on the part of the Central Bank, therefore, must be employed. If the Money Market is not a lender in the international market, the Bank itself must be at pains to become to some extent one. The Bank of England lends to middlemen who, by holding bills or otherwise, lend abroad. A rise in the bank rate is equivalent to putting pressure on these middlemen to diminish their commitments. In countries where the Money Market is neither so highly developed nor, in relation to foreign countries, so self–supporting, the Central Bank, if it is to be secure, must take the matter in hand itself and, by itself entering the international money market as a lender at short notice, place itself in funds, at foreign centres, which can be rapidly withdrawn when they are required. The only alternative would be the holding of a much larger reserve of gold, the expense of which would be nearly intolerable. The new method combines safety with economy. Just as individuals have learnt that it is cheaper and not less safe to keep their ultimate reserves on deposit at their bankers than to keep them at home in cash, so the second stage of monetary evolution is now entered on, and nations are learning that some part of the cash reserves of their banks (we cannot go further than this at present) may be properly kept on deposit in the international money market. This is not the expedient of second–rate or impoverished countries; it is the expedient of all those who have not attained a high degree of financial supremacy—of all those, in fact, who are not themselves international bankers.

11. In the forty years, therefore, during which the world has been coming on to a gold standard (without, however, giving up for that reason its local currencies of notes or token silver), two devices—apart from the bullion reserve itself and the bank rate—have been evolved for protecting the local currencies. The first is to permit a small variation in the ratio of exchange between the local currency and gold, amounting perhaps to an occasional premium of ¾ per cent on the latter; this may help to tide over a stringency which is seasonal or of short duration without raising to a dangerous level the rate of discount on purely local transactions. The second is for the Government or Central Bank to hold resources available abroad, which can be used for maintaining the gold parity of the local currency, when there is the need for it.

12. We are now more nearly in a position to come back to the currency of India herself, and to see it in its proper relation to those of other countries. At one end of the scale we have Great Britain and France—creditor nations in the short–loan market.[12] In an intermediate position comes Germany—a creditor in relation to many of her neighbours, but apt to be a debtor in relation to France, Great Britain, and the United States. Next come such countries as Russia and Austria–Hungary—rich and powerful, with immense reserves of gold, but debtor nations, dependent in the short–loan market on their neighbours. From the currencies of these it is an easy step to those of the great trading nations of Asia—India, Japan, and the Dutch East Indies.

13. I say that from the currencies of such countries as Russia and Austria–Hungary to those which have explicitly and in name a Gold–Exchange Standard[13] it is an easy step. The Gold–Exchange Standard is simply a more regularised form of the same system as theirs. In their essential characteristics and in the monetary logic which underlies them the currencies of India and Austria–Hungary (to take these as our examples) are not really different. In India we know the extreme limits of fluctuation in the exchange value of the rupee; we know the precise volume of reserves which the Government holds in gold and in credits abroad; and we know at what moment the Government will step in and utilise these resources for the support of the rupee. In Austria–Hungary the system is less automatic, and the Bank is allowed a wide discretion. In detail, of course, there are a number of differences. India keeps a somewhat higher proportion of her reserves in foreign credits, and keeps some part of these credits in a less liquid form. She also keeps a portion of her gold reserve in London—a practice made possible by the fact that for India London is not strictly a foreign centre. On the other hand, India is probably more willing than the Bank of Austria–Hungary to supply gold on demand. If we are to judge from the experience of recent years, India inclines to use her gold reserves, Austria–Hungary her foreign credits, first. But in the essentials of the Gold–Exchange Standard—the use of a local currency mainly not of gold, some degree of unwillingness to supply gold locally in exchange for the local currency, but a high degree of willingness to sell foreign exchange for payment in local currency at a certain maximum rate, and to use foreign credits in order to do this—the two countries agree.

14. To say that the Gold–Exchange Standard merely carries somewhat further the currency arrangements which several European countries have evolved during the last quarter of a century is not, of course, to justify it. But if we see that the Gold–Exchange Standard is not, in the currency world of to–day, anomalous, and that it is in the main stream of currency evolution, we shall have a wider experience, on which to draw, in criticising it, and may be in a better position to judge of its details wisely. Much nonsense is talked about a gold standard’s properly carrying a gold currency with it. If we mean by a gold currency a state of affairs in which gold is the principal or even, in the aggregate, a very important medium of exchange, no country in the world has such a thing.[14] Gold is an international, but not a local currency. The currency problem of each country is to ensure that they shall run no risk of being unable to put their hands on international currency when they need it, and to waste as small a proportion of their resources on holdings of actual gold as is compatible with this. The proper solution for each country must be governed by the nature of its position in the international money market and of its relations to the chief financial centres, and by those national customs in matters of currency which it may be unwise to disturb. It is as an attempt to solve this problem that the Gold–Exchange Standard ought to be judged.

15. We have been concerned so far with transitional systems of currency. I will conclude this chapter with a brief history in outline of the Gold–Exchange Standard itself. It will then be time to pass from high generalities to the actual details of the Indian system.

The Gold–Exchange Standard arises out of the discovery that, so long as gold is available for payments of international indebtedness at an approximately constant rate in terms of the national currency, it is a matter of comparative indifference whether it actually forms the national currency.

The Gold–Exchange Standard may be said to exist when gold does not circulate in a country to an appreciable extent, when the local currency is not necessarily redeemable in gold, but when the Government or Central Bank makes arrangements for the provision of foreign remittances in gold at a fixed maximum rate in terms of the local currency, the reserves necessary to provide these remittances being kept to a considerable extent abroad.

A system closely resembling the Gold–Exchange Standard was actually employed during the second half of the eighteenth century for regulating the exchange between London and Edinburgh. Its theoretical advantages were first set forth by Ricardo at the time of the Bullionist Controversy. He laid it down that a currency is in its most perfect state when it consists of a cheap material, but having an equal value with the gold it professes to represent; and he suggested that convertibility for the purposes of the foreign exchanges should be ensured by the tendering on demand of gold bars (not coin) in exchange for notes,—so that gold might be available for purposes of export only, and would be prevented from entering into the internal circulation of the country. In an article contributed to the Contemporary Review of 1887, Dr. Marshall again brought these advantages to the notice of practical men.

16. The first crude attempt in recent times at establishing a standard of this type was made by Holland. The free coinage of silver was suspended in 1877. But the currency continued to consist mainly of silver and paper. It has been maintained since that date at a constant value in terms of gold by the Bank’s regularly providing gold when it is required for export and by its using its authority at the same time for restricting so far as possible the use of gold at home. To make this policy possible, the Bank of Holland has kept a reserve, of a moderate and economical amount, partly in gold, partly in foreign bills.[15] During the long period for which this policy has been pursued, it has been severely tried more than once, but has stood the test successfully.

It must be noticed, however, that although Holland has kept gold and foreign bills as a means of obtaining a credit abroad at any moment, she has not kept a standing credit in any foreign financial centre. The method of keeping a token currency at a fixed par with gold by means of credit abroad was first adopted by Count Witte for Russia in the transitional period from inconvertible paper to a gold standard;—in the autumn of 1892 the Department of Finance offered to buy exchange on Berlin at 2·18 marks and to sell at 2·20. In the same year (1892) the Austro–Hungarian system, referred to above, was established. As in India their exchange policy was evolved gradually. The present arrangements, which date from 1896, were made possible by the strong preference of the public for notes over gold and by the provision of the law which permitted the holding of foreign bills as cover for the note issue. This exchange policy is the easier, because the Austro–Hungarian Bank is by far the largest dealer in exchange in Vienna;—just as the policy of the Government of India is facilitated by the commanding influence which the system of Council Bills gives it over the exchange market.

17. But although India was not the first country to lead the way to a Gold–Exchange Standard, she was the first to adopt it in a complete form. When in 1893, on the recommendation of the Herschell Committee, following upon the agitation of the Indian Currency Association, the Mints were closed to the free coinage of silver, it was believed that the cessation of coinage and the refusal of the Secretary of State to sell his bills below 1s. 4d. would suffice to establish this ratio of exchange. The Government had not then the experience which we have now; we now know that such measures are not by themselves sufficient, except under the influence of favouring circumstances. As a matter of fact the circumstances were, at first, unfavourable. Exchange fell considerably below 1s. 4d., and the Secretary of State had to sell his bills for what he could get. If there had been, at the existing level of prices, a rapidly expanding demand for currency at the time when the Mints were closed, the measures actually taken might very well have proved immediately successful. But the demand did not expand, and the very large issue of currency immediately before and just after the closure of the Mints proved sufficient to satisfy the demand for several years to come;—just as a demand for new currency on an abnormally high scale from 1903 to 1907, accompanied by high rates of discount, was followed in 1908 by a complete cessation of demand and a period of comparatively low rates of discount. Favourable circumstances, however, came at last, and by January 1898 exchange was stable at 1s. 4d. The Fowler Committee, then appointed, recommended a gold currency as the ultimate objective. It is since that time that the Government of India have adopted, or drifted into, their present system.

18. The Gold–Exchange Standard in the form in which it has been adopted in India is justly known as the Lindsay scheme. It was proposed and advocated from the earliest discussions, when the Indian currency problem first became prominent, by Mr. A. M. Lindsay, Deputy–Secretary of the Bank of Bengal, who always maintained that “they must adopt my scheme despite themselves.” His first proposals were made in 1876 and 1878. They were repeated in 1885 and again in 1892, when he published a pamphlet entitled Ricardo’s Exchange Remedy. Finally, he explained his views in detail to the Committee of 1898.

Lindsay’s scheme was severely criticised both by Government officials and leading financiers. Lord Farrer described it as “far too clever for the ordinary English mind with its ineradicable prejudice for an immediately tangible gold backing to all currencies.” Lord Rothschild, Sir John Lubbock (Lord Avebury), Sir Samuel Montagu (the late Lord Swaythling) all gave evidence before the Committee that any system without a visible gold currency would be looked on with distrust. Mr. Alfred de Rothschild went so far as to say that “in fact a gold standard without a gold currency seemed to him an utter impossibility.” Financiers of this type will not admit the feasibility of anything until it has been demonstrated to them by practical experience. It follows, therefore, that they will seldom give their support to what is new.

19. Since the Indian system has been perfected and its provisions generally known, it has been widely imitated both in Asia and elsewhere. In 1903 the Government of the United States introduced a system avowedly based on it into the Philippines. Since that time it has been established, under the influence of the same Government, in Mexico and Panama. The Government of Siam have adopted it. The French have introduced it in Indo–China. Our own Colonial Office have introduced it in the Straits Settlements and are about to introduce it into the West African Colonies. Something similar has existed in Java under Dutch influences for many years. The Japanese system is virtually the same in practice. In China, as is well known, currency reform has not yet been carried through. The Gold–Exchange Standard is the only possible means of bringing China on to a gold basis, and the alternative policy (the policy of our own Foreign Office) is to be content at first with a standard, as well as a currency, of silver. A powerful body of opinion, led by the United States, favours the immediate introduction of a gold standard on the Indian model.

It may fairly be said, therefore, that in the ten years the Gold–Exchange Standard has become the prevailing monetary system of Asia. I have tried to show that it is also closely related to the prevailing tendencies in Europe. Speaking as a theorist, I believe that it contains one essential element—the use of a cheap local currency artificially maintained at par with the international currency or standard of value (whatever that may ultimately turn out to be)—in the ideal currency of the future. But it is now time to turn to details.

CHAPTER III

PAPER CURRENCY

1. The chief characteristics of the Indian system of currency have been roughly sketched in the first chapter. I will now proceed to a description of the system of note issue.

2. In existing conditions the rupee, being a token coin, is virtually a note printed on silver. The custom and convenience of the people justify this, so far as concerns payment in small sums. But in itself it is extravagant. When rupees are issued, the Government, instead of being able to place to reserve the whole nominal value of the coin, is able to retain only the difference between the nominal value and the cost of the silver.[16] For large payments, therefore, it is important to encourage the use of notes to the utmost extent possible,—from the point of view of economy, because by these means the Government may obtain a large part of the reserves necessary for the support of a Gold–Exchange Standard, and also because only thus will it be possible to introduce a proper degree of elasticity in the seasonal supply of currency.

3. By Acts of 1839–43 the Presidency Banks of Bengal, Bombay, and Madras were authorised to issue notes payable on demand; but the use of the notes was practically limited to the three Presidency towns.[17] These Acts were repealed in 1861, when the present Government Paper Currency was first instituted. Since that time no banks have been allowed to issue notes in India.

Proposals for a Government Paper Currency were instituted in 1859 by Mr. James Wilson on his going out to India as the first Financial Member.[18] Mr. Wilson died before his scheme could be carried into effect, and the Act setting up the Paper Currency scheme, which became law in 1861, differed in some important respects from his original proposals.[19] The system was eventually set up under the influence of the very rigid ideas as to the proper regulation of note issue prevailing, as a result of the controversies which had culminated in the British Bank Act of 1844, amongst English economists of that time. According to these ideas, the proper principles of note issue were two—first, that the function of note issue should be entirely dissociated from that of banking; and second, that “the amount of notes issued on Government securities should be maintained at a fixed sum, within the limit of the smallest amount which experience has proved to be necessary for the monetary transactions of the country, and that any further amount of notes should be issued on coin or bullion.”[20] These principles were orthodox and all others “unsound.” “The sound principle for regulating the issue of a Paper Circulation,” wrote the Secretary of State, “is that which was enforced on the Bank of England by the Act of 1844.” In England, of course, bankers immediately set themselves to recover the economy and elasticity, which the Act of 1844 banished from the English system, by other means; and with the development of the cheque system to its present state of perfection they have magnificently succeeded. In foreign countries all kinds of new principles have been tried for the regulation of note issue, and some of them have been very successful. In India the creed of 1861 is still repeated; but by unforeseen chance the words have changed their meanings, and have permitted the old system to acquire through inadvertence a certain degree of usefulness. The coin, in which the greater part of the reserve had to be held, was, of course, the rupee. In 1861 this was a freely minted coin worth no more than its bullion value. When the rupee became an artificially valued token, rupees tacitly remained the legitimate form of the reserve (although after a time sovereigns were added as an optional alternative). Thus the authorities are free, if they like, to hold the whole of the Currency Reserve in rupee–tokens, and this reserve has become, therefore (as we shall see below), an important part of the mechanism by which the supply of silver rupees to the currency is duly regulated. While, however, the note issue has managed to evolve an important function for itself, I think the time has come when the usefulness of the Currency Reserve may be much increased by a deliberate consideration of the place it might fill in the organism of the Indian Money Market. I return to this later in the chapter. In the meantime I pass to a description of the Paper Currency as it now is—insisting, however, that when we come to consider how it may be improved, the circumstances of its origin be not forgotten.

4. For the first forty years of their existence the Government notes, though always of growing importance, took a very minor place in the currency system of the country. This was partly due to an arrangement, now in gradual course of abolition, by which for the purposes of paper currency India has been divided up in effect into several separate countries. These ‘circles,’ as they are called, now seven[21] in number, correspond roughly to the principal provinces of India, the offices of issue being as follows:—

Calcutta

for

Bengal, Eastern Bengal, and Assam.

Cawnpore

”

the United Provinces.

Lahore

”

the Punjab and North–West Frontier Province.

Madras

”

the Madras Presidency and Coorg.

Bombay

”

Bombay and the Central Provinces.

Karachi

”

Sind.

Rangoon

”

Burma.

The currency notes[22] are in the form of promissory notes of the Government of India payable to the bearer on demand, and are of the denominations Rs. 5, 10, 50, 100, 500, 1000, and 10,000. Thus the lowest note is of the face value of 6s. 8d. They are issued without limit from any Paper Currency office in exchange for rupees or British gold coin, or (on the requisition of the Comptroller–General) for gold bullion.[23]

5. Up to 1910 the following arrangements were in force.

Every note was legal tender in its own circle. Payment of dues to the Government could be made in the currency notes of any circle; and railway companies could, if they accepted notes of any circle in payment of fares and freight, recover the value of them from the Government.

But, until recently, no notes were legal tender outside their own circle, and were payable only at the offices of issue of the town from which they were originally issued.

Beyond this the law imposed no obligation to pay. For the accommodation of the public, however, notes of other circles could be cashed at any Paper Currency office to such extent as the convenience of each office might permit. In ordinary circumstances every Government treasury, of which there are about 250, has cashed or exchanged notes if it could do so without inconvenience; and when this could not be done conveniently for large sums, small sums have generally been exchanged for travellers.

6. It is easy to understand the reasons for these restrictions. India is an enormously large country, over which the conditions of trade lead coins to ebb and flow within each year. At the beginning of the busy season when the autumn crops are harvested, rupees flow in great volume from the Presidency towns up country; in early spring they are carried to Burma for the rice crop; and so on—slowly finding their way back again to the Presidency towns during the summer. If the Government had made its notes encashable at a great variety of centres, it would have been taking on itself the expense and responsibility of carrying out these movements of coin at different seasons of the year. When a country is habituated to the use of notes for making payments, they can be very usefully employed for purposes of remittance also. But a note–issuing authority puts itself in a difficulty if it provides facilities for remittance before a general habit has grown up of using notes for other purposes. If, on the other hand, the notes had been made universal legal tender, but only encashable at Presidency towns, there would undoubtedly have been a premium on coin at certain times of the year. And this would have greatly hindered the growth of the notes’ popularity.

The Government, therefore, did what it could to make the notes useful and popular for purposes other than those of remittance; and it facilitated remittance so far as the proceeds of taxation, accumulating in its treasuries, permitted it to do this without expense. But it shrank from taking upon itself further responsibility. Its practice may be compared with that of the branches of the Reichsbank.

On the other hand, the objections to a policy, which divided the country up for the purposes of paper currency, are also plain. The limitation of the areas of legal tender and of the offices where the notes were encashable on demand greatly restricted the popularity of the notes. It might well have seemed worth while to popularise them, even at the expense of temporary loss. As soon as the public had become satisfied that the notes could be turned into coin readily and without question, their desire to cash them would probably have been greatly diminished. It is not certain that Government would have lost in the long–run if it had undertaken the responsibility and expense of regulating the flow of coin to the districts where it might be wanted at the different seasons of the year.

7. After the establishment of the Gold–Exchange Standard the importance of enlarging the functions of the note issue became apparent; and since 1900 the question of increasing the availability of the notes has been constantly to the front. In 1900 the Government issued a circular asking for opinions on certain proposals, including one for “universalising” the notes or making them legal tender in all circles. Some authorities thought that notes of small denominations (Rs. 5 and Rs. 10) might be safely universalised, without risk (on account of the trouble involved) of their being used for remittance on a large scale. It is on these lines that the use of the notes has been developed. In 1903 five–rupee notes were universalised except in Burma—that is to say, five–rupee notes of any circle were legal tender and encashable at any office of issue outside Burma; and in 1909 the Burmese limitation was removed.

In 1910 a great step forward was taken, and the law on the subject was consolidated by a new Act. Notes of Rs. 10 and Rs. 50 were universalised; and power was taken to universalise notes of higher denominations by executive order. In pursuance of this authority notes of Rs. 100 were universalised in 1911. “At the same time the receipt of notes of the higher denominations in circles other than the circle of issue, in payment of Government dues and in payments to railways, post and telegraph offices, was stopped by executive orders”; and “with a view to minimise any tendency to make use of the new universal notes for remittance purposes, it was decided concurrently with the new Act to offer facilities to bankers and merchants to make trade remittances between the currency centres by means of telegraphic orders granted by Government at a reduced rate of premium.”[24] In the following year the Comptroller of Paper Currency reported that no difficulty whatever was experienced as the result of universalising the Rs. 10 and Rs. 50 notes; and the inconveniences, the fear of which had retarded the development of the note system for many years, were not realised.

8. The effect of these successive changes has been to make the old system of circles virtually inoperative. With notes of Rs. 100 universal legal tender it is difficult to see what can prevent the public from using them for purposes of remittance if they should wish to do so. The “circles” can no longer serve any useful purpose, and it would help to make clear in the public mind the nature of the Indian note issue if they were to be abolished in name as well as in effect.

9. There must have been many occasions under the old system, on which ignorant persons suffered inconvenience through having notes of foreign circles passed off on them; and a long time may pass before distrust of the notes, as things not readily convertible, bred out of the memories of these occasions, entirely disappears. But, in combination with other circumstances, the universalising of the notes has had already a striking effect on the volume of their circulation, as is shown in the figures given below. It should be explained that by gross circulation (in the Government Statistics) is meant the value of all notes that have been issued and not yet paid off; that the net circulation is this sum less the value of notes held by Government in its own treasuries; and that the active circulation is the net reduced by the value of notes held by the Presidency banks at their head offices.[25] For some purposes the active circulation is the most important. But it is the reserve of rupees held against the gross circulation which is the best indication of the surplus volume of coined silver available, if necessary, for the purposes of circulation. The following table gives for various years the average of the circulation on the last day of each month:—

 

(In lakhs of rupees.)

(In £ million at 1s. 4d.

the rupee throughout.)

Gross.

Net.

Active.

Gross.

Active.

1892–1893

2710

2333

1953

18

13

1893–1894

2829

2083

1785

19

12

1899–1900

2796

2367

2127

18½

14

1900–1901

2888

2473

2205

19½

14½

1902–1903

3374

2735

2349

22½

15½

1904–1905

3920

3276

2811

26

18½

1906–1907

4514

3949

3393

30

22½

1908–1909

4452

3902

3310

29½

22

1909–1910

4966

4535

3721

33

25

1910–1911

5435

4648

3875

36

26

1911–1912

5737

4949

4189

38

28

The following table gives in £ million the gross circulation of currency notes on March 31 of each year:—

£ million. £ million.

1900

19

│

1909

30½

1902

21

│

1910

36½

1904

25½

│

1911

36½

1906

30

│

1912

41

1908

31½

│

1913

46

The following table gives the average monthly gross circulation in £ million (at 1s. 4d. the rupee throughout):—

£ million.

Five years ending

1880–1881

———

8

½

”

———

”

—

1885–1886

9

½

”

———

”

—

1890–1891

11

½

”

———

”

—

1895–1896

19

”

———

”

—

1900–1901

17

½

”

———

”

—

1905–1906

24

”

———

”

—

1910–1911

32

The year

1911–1912

38

10. The rules governing the reserves which must be held against currency notes are very simple. A certain fixed maximum, the amount of which is determined from time to time by law, may be held invested, chiefly in Government of India rupee securities. Up to 1890 the invested portion of the reserve amounted to 600 lakhs (Rs. 600,00,000). This was increased to 700 lakhs in 1891, to 800 lakhs in 1892, to 1000 lakhs in 1897; to 1200 lakhs, of which 200 lakhs might be in English Government securities, in 1905; and to 1400 lakhs (£9,333,000), of which 400 lakhs (£2,666,000) might be in English securities, in 1911. The interest thus accruing on the invested portion of the reserve, less the expenses of the Paper Currency Department, is credited to the general revenues of the Government under the head “Profits of Note Circulation.” This interest now amounts to £300,000 annually.

Up to 1898 the whole of the rest was held in silver coin in India. Under the Gold Note Act of 1898 the Government of India obtained authority to hold any part of the metallic portion of the reserve in gold coin. An Act of 1900 gave authority to hold part of this gold in London; but this power was only intended to be used for purposes of temporary convenience, and, although some gold was held in London in 1899 and 1900, this was not part of a permanent policy. An Act of 1905, however, gave full power to the Government to hold the metallic portion of the reserve, or any part of it, at its free discretion, either in London or in India, or partly in both places, and also in gold coin or bullion, or in rupees or silver bullion, subject only to the exception that all coined rupees should be kept in India and not in London. The actual figures, showing where the gold reserve has been held at certain dates, are given below.

Gold in Paper Currency Reserve (£ Million).

March 31.

In India.

In London.

Total.

1897

nil

–

nil

–

nil

–

1898

¼

nil

¼

1899

2

nil

2

1900

7

½

1

½

9

1901

6

nil

6

1902

7

nil

7

1903

10

nil

10

1904

11

nil

11

1905

10

½

nil

10

½

1906

4

7

11

1907

3

½

7

10

½

1908

2

½

3

½

6

1909

nil

1

½

1

½

1910

6

2

½

8

½

1911

6

5

11

1912

15

½

5

½

21

1913

19

½

6

25

½

Distribution of Reserve, March 31, 1913.

Rupees

£11,000,000

Gold in India

19,500,000

Gold in London

6,000,000

Securities

9,500,000

—————

£46,000,000

═══════

11. Gold was originally accumulated in the reserve in India through the automatic working of the rule by which rupees could be obtained in exchange for sovereigns. After exchange touched par in 1898, we see from the above table that gold began to flow in. When in 1900 the accumulations reached £5,000,000, attempts were made, in accordance with the recommendations of the Fowler Committee, to force it into circulation.[26] After the comparative failure of this attempt, and the passing of the Act of 1905, as described above, the Paper Currency Chest in England was instituted, and by 1906 about two–thirds of the gold which had been accumulated up to that time was transferred to this fund. This stock is kept at the Bank of England, but is not included in the Bank of England’s own reserve. Gold which is thus transferred is said to be “ear–marked.” The fund is under the absolute control of the Secretary of State for India in Council, and transferences to it are, so far as the accounts of the Bank of England are concerned, reckoned as exports. Policy as to how much of the gold should be kept in London and how much in India has fluctuated from time to time. I shall discuss it in Chapter VI.

12. These are the chief relevant facts of law. Important considerations of policy do not lie so plainly on the surface. Since 1899 the circulation of notes has more than doubled, but the invested portion of the reserve has been increased by only 40 per cent. As the note issue has become more firmly established and more widely used, a growing and not a diminishing proportion of the reserves has been kept in liquid form. This is due to a deliberate change of policy, and to the use of the liquid part of the reserve for a new purpose. The bullion reserve is no longer held solely with the object of securing the ability to meet the obligation to cash notes in legal tender (rupees or gold) on demand. It is now utilised for holding gold by means of which the Secretary of State can support exchange in times of depression and maintain at par the gold value of the rupee. For the sake of this object the Government are content to forego the extra profit which might be gained by increasing the investments, and have steadily increased instead (as shown in the table on p. 49) the gold portion of the reserve. The Paper Currency Reserve is thus used to provide the gold which is the first line of defence of the currency system as a whole, and hence can hardly be distinguished from the resources of the Gold Standard Reserve proper.

It is not profitable to discuss the reserve policy of the Paper Currency under existing conditions in isolation from the other reserves which the Government now hold. The whole problem of the reserves, regarded as a current practical question, is dealt with in Chapter VI. In this chapter I wish to look at the matter from a broad standpoint, with an eye to the proper policy in a future, possibly remote.

13. The present policy was designed in its main outlines at a time when notes formed an insignificant part of the country’s currency, and when the system of circles still greatly restricted their usefulness. The notes were at first, and were intended to be, little more than silver certificates. The rules governing the Reserve were framed (see § 3) at a time which, to the modern student of currency, is almost prehistoric, under the influence of the Bank of England’s system of note issue and of the British Bank Act,—an Act which had the effect of destroying the importance of notes as a form of currency in England, and which it has been found impossible, in spite of some attempts, to imitate in the note–using countries of Europe. As has been urged in Chapter II., England is in matters of currency the worst possible model for India; for in no country are the conditions so wholly different. A good deal of experience with regard to note issues has now been accumulated elsewhere which ought some day to prove useful to India if her English rulers can sufficiently free themselves from their English traditions and preconceptions. Let me first give a short account of the nature of the seasonal demand for money in India; and then discuss the salient respects in which her system of note issue differs from those of typical note–using countries.

14. In contrast to what happens in the case of most note systems, the gross circulation in India diminishes instead of increasing during the busy seasons of autumn and spring. This is due to the fact that the Government Treasuries, the Presidency Banks, and possibly other banks and large merchants, use the notes as a convenient method of avoiding the custody of large quantities of silver during the slack season when rupees are not wanted.[27] That is to say, they deposit their surplus rupees during the summer in the Currency Reserve, holding their own reserves in the form of notes; and when the drain of rupees begins up country for moving the crops these notes have to be cashed. Thus in the dull season currency is largely in the hands of a class of persons and institutions which finds it most convenient to hold it in the form of notes, and in the busy season it is dissipated through the country and is, temporarily, in the hands of smaller men—cultivators who have sold their crops, small moneylenders and others, who habitually deal in small sums for which the rupee is the most convenient unit, or who do not yet understand the use of notes and still prefer, therefore, to be paid in actual coin.

15. Notes themselves, however, are used also, and to an increasing extent, for moving crops; and, although the gross circulation falls during the busy season for the reasons just given, the active circulation (i.e., excluding the holdings of the Government Treasuries and the Presidency Banks) does, as we should expect, increase at this time of year. When, therefore, we are considering what proportion of liquid reserves ought to be maintained, or what part the note issue plays in supplying the much needed element of elasticity in the busy season, it is of the active rather than of the gross circulation that we must take account. The figures are given below in lakhs of rupees:—

Months of

Minimum

and Maximum

active

circulation.

1906–1907.

1907–1908.

^(a)

1908–1909.

1909–1910.

1910–1911.

1911–1912.

1.

2.

1.

2.

1.

2.

1.

2.

1.

2.

1.

2.

Min.—

June

31,15

14,41

35,04

13,01

31,13

14,12

34,19

15,10

36,58

20,37

38,44

19,78

July

32,43

12,87

34,34

15,89

31,58

16,52

34,31

17,22

36,56

22,60

39,15

21,14

August

32,11

13,59

34,30

17,47

31,90

12,71

35,49

16,25

36,86

21,20

40,99

18,70

Max.—

January

35,54

9,11

33,20

8,62

33,67

8,54

41,47

10,37

39,67

11,45

44,14

10,56

Feb

36,07

9,42

33,28

9,38

34,36

9,50

41,42

9,12

40,95

12,57

44,58

12,61

March

36,45

10,50

32,61

14,28

34,95

10,54

39,98

14,43

40,17

14,82

44,61

16,75

Columns(1): Active circulation. Columns(2): Holdings of Treasuries and Presidency
Banks, i.e., excess of gross over active circulation.

(a) An abnormal year.

We see, therefore, that, while the notes held by the Presidency Banks and the Treasury fall in the busy season by 700 to 1000 lakhs below their highest figure in the slack season, the active circulation increases in the busy season over its lowest figure in the slack season by about 400 lakhs (in the latest year for which we have figures, 1911–1912, by more than 600 lakhs). Of course this is not a very high proportion of the total increase in the volume of currency which is required in the busy season. But it is an amount well worth considering, and these figures put the note issue in a more favourable light as a source of currency in the busy season than is usually realised. The relative importance of notes and rupees[28] in supplying the seasonal needs of trade is well shown in the following table:—

Net Absorption (in Lakhs of Rupees) of Currency into Circulation (+) or Return of Currency from Circulation (–).^(a)

Year.

April to June.

July to Sept.

Oct. to Dec.

Jan. to March.

Whole Year.

Rupees.

Notes.

Rupees.

Notes.

Rupees.

Notes.

Rupees.

Notes.

Rupees.

Notes.

1905–1906

–

116

+

83

+

339

+

58

+

1139

+

175

+

88

+

101

+

1450

+

417

1906–1907

–

24

–

148

+

600

+

220

+

1068

+

310

+

156

0

+

1800

+

382

1907–1908

+

182

–

141

+

145

+

29

+

735

–

126

–

670

–

146

+

392

–

384

1908–1909

–

798

–

148

–

718

+

198

+

339

+

112

–

311

+

72

–

1488

+

234

1909–1910

+

47

–

76

–

58

+

286

+

1065

+

130

+

268

+

163

+

1322

+

503

1910–1911

–

287

–

340

–

100

+

147

+

722

+

144

–

1

+

68

+

334

+

19

1911–1912

–

130

–

173

+

220

+

262

+

499

+

356

+

565

–

1

+

1154

+

444

(a) In this table rupees (but not notes) in the Presidency Banks are treated as being in circulation. It would be a troublesome piece of work to exclude them, and would make, I think, very little difference to the result. The main variable element in the reserves of the Presidency Banks is the notes, and these are duly allowed for in the above table.

The above table is exceedingly instructive. It shows that the notes supply an increasingly important proportion of the seasonal demand for additional currency. It shows also that the demand for notes from one year to another has been of a steadier character than the demand for rupees. In the period of depression from the winter of 1907 until the autumn of 1908 the active rupee circulation was much harder hit than the active note circulation; for in the six months January to June 1908 the rupee circulation fell by 1468 lakhs, while the active note circulation fell by 294 lakhs, and for the nine months January to September 1908 the former fell by 2186 lakhs, while the latter fell by only 96 lakhs.[29]

16. Let me now turn to three salient characteristics, all closely connected with one another, and chiefly distinguishing the Indian system of paper currency from those of most note–using countries.

In the first place, the function of note–issue is wholly dissociated in India from the function of banking. To discount bills is one of the functions of banks. Where there are Central Banks with the right of note issue, they are usually able, subject to various restrictions, to increase their note issue at certain seasons of the year in order to discount more bills.

In the second place, as there is no Central Bank in India, there is no Government Banker. It is true that the Government keep some funds (rather more than £2,000,000, as a rule) at the three Presidency Banks. But the bulk of their floating resources is held either in London or in cash in their own Treasuries in India. Thus, as in the United States, the Government maintains an independent Treasury system. This means, just as it does in the United States, that, at certain seasons of the year when taxes are flowing in fastest, funds may sometimes be withdrawn from the money market. The difficulty and inconvenience to which this system has given rise in the United States are well known to those who are acquainted with the recent financial history of that country. The ill effects of it are to a certain extent counteracted, in the case of India, by a transference of these funds to London and a release of the accumulating currency in India through the sale of Council Bills. But this is not a perfect solution.

The third and most important point arises out of the first two. The Indian currency is internally (i.e., apart from the import of funds from foreign countries) absolutely inelastic. There is no method whatever by which the volume of currency can be temporarily expanded by some credit device within the country to meet the regularly recurrent seasonal demands of trade. Cheque–using countries meet the difficulty by increasing the volume of credit created by the banks; most note–using countries meet it by the Central Bank’s discounting a greater volume of home bills than usual, and thus increasing its note circulation temporarily, without a corresponding increase in its metallic reserves. Except for a certain proportion of the business which is transacted by cheque (chiefly in the Presidency towns), there is nothing corresponding to this in India. Additional currency, whether notes or rupees, can be obtained in two ways only—by buying Council Bills in London or by bringing in sovereigns. Additional notes or rupees can be obtained in payment of Council Bills or in exchange for sovereigns, but not otherwise. The fact that a temporary increase in the media of exchange can only be obtained by bringing in funds from abroad partly explains the high rate of discount in India during the busy season. This question will be more fully dealt with in Chapter VIII. But the main point can be put briefly thus:—If funds are to be attracted from abroad for a short period (say three months), the rate of interest must be high enough to repay the cost of remittance both ways, which in the case of places so remote from one another as India and London is considerable. If there were some authority which could create credit money in India during the busy season, it would not be necessary for the rate of discount to rise so high.

17. The objections to the existing arrangements largely arise, therefore, out of the absence of a State Bank. This question is further discussed in Chapters VI. and VII. I feel little doubt that India ought to have a State Bank, associated in a greater or less degree with the Government. The Government is drifting year by year into doing more business of an essentially banking character; and as time goes on it will become increasingly objectionable to dissociate some of the functions of modern State Banking from others. But there is a considerable weight of opinion in favour of the view that the time for the establishment of a Central Indian Bank is not yet ripe. In the meantime is any partial remedy possible for the evils dealt with above?

18. I am inclined to think that such a remedy is possible. The manner in which the reserve against the note issue must be kept is needlessly restricted. Apart from that portion which is permanently invested, the whole must be kept in gold and silver. This is in imitation of the rules governing the Bank of England’s note–issue. But the note–issuing banks of Europe afford a better model. It might be proper to prescribe by law the holding of a certain proportion of the reserve (say one–third[30]) in gold or silver coin. A further amount might be held, as at present, permanently invested in Government of India securities. With regard to the rest the Government should, I think, permit itself much greater latitude. It should be free to lend it out on suitable security, either in India or London, for periods not exceeding three months. In London it should be lent out on the same conditions as the Cash Balances and the Gold–Exchange Standard (see Chapter VI.) are lent out at present. To lend in London would be technically convenient (for the reasons given on p. 172), but it would not cure the inelasticity of the Indian system. Part of the reserve should, therefore, be lent out in India. Suitable security for this purpose would be Government of India securities (which would have indirectly the effect of increasing the market for Rupee Paper) and Bills of Exchange of the highest class. It is not worth while to discuss here in detail the precise methods which it would be proper for the Government to adopt in lending out funds in India either from the Cash Balances or from the Paper Currency Reserve. Whether it were done through the Presidency Banks only, or whether an approved list of borrowers of Government funds were to be drawn up for India as is already the case for London, the effect on the Indian Money Market would be much the same. The needed element of elasticity would be obtained, and the present absolute dependence of India on London for an expansion of currency would be modified. I shall return to this proposal again in Chapters VI. and VIII. Its full force cannot be shown until we have discussed the question of the Secretary of State’s reserves as a whole, and have studied in detail the movements of the Indian bank rate.

A good deal of opinion has been expressed in India lately in favour of loans being made there from the Government’s Cash Balances. In so far as this opinion demands some new machinery by which on suitable occasions the Government can lend out funds in India herself, the evil which it seeks to remedy is a real one. And the method proposed above is, I believe, the right way in which to approach the problem’s solution.

19. The discussion of this question will be concluded in Chapters VI., VII., and VIII. But it will be well to say a few words at once with a view to avoiding misunderstandings on two points. It has been necessary in the immediate past to use the Paper Currency Reserve as a part of the general reserves held for ensuring the absolute stability of the rupee. I do not advocate the lending out in India of any part of this reserve, or of the Cash Balances, at the expense of the stability of the Gold Standard, or until adequate measures can be taken in other ways to ensure this. But I think the time has practically arrived when the whole of the liquid portion of the Paper Currency Reserve is not required, in addition to the Gold Standard Reserve proper, for this purpose. A busy season will soon come when the Government might lend some part of its reserves in India without endangering in the least the stability of its system and to the great advantage of Indian trade. It ought, at least, to have the power to do this.

20. The remaining point is this. A provision of the above kind for introducing some degree of elasticity into the Indian currency system would not be very useful in a season such as that of the autumn and winter of 1905–6 or of the autumn of 1912–13, when there was a demand for rupees on so great a scale that it could only be met from the Mint. Additions to the currency of this kind can only be made by importing funds from abroad. But these are permanent not temporary additions. Every such addition makes a similar demand for new coinage in succeeding seasons less likely. They are abnormal, and recent history seems to show that these permanent additions to the Indian currency are not made by slow and steady accretions year by year, but in great bursts of activity at considerable intervals. In years of normal activity, therefore, there may be considerable stores of rupees lying idle in the reserves beyond what is required for the safety of the currency. Indian bankers and merchants can only get at these rupees, so as to obtain a net addition to the currency, by buying sovereigns or Council Bills in London. If the use for the additional currency is only temporary, the cost of transport or remittance is great enough to make it not worth their while to get this addition until the Indian rate of discount has been forced up to a high level. If the Government were free on such occasions to lend out some part of the rupees, against high–class security, at 5 or even 6 per cent, this would be profitable to the Government, and would prevent the discount rate from reaching a level which is caused, not by anxiety, but merely by the expense arising out of the distance between London and Calcutta.

CHAPTER IV

THE PRESENT POSITION OF GOLD IN INDIA AND PROPOSALS FOR A GOLD CURRENCY

1. The Fowler Committee of 1898 avowed themselves in favour of the ultimate establishment of a gold currency in India as well as a gold standard. Paragraph 54 of their Report runs as follows:—

We are in favour of making the British sovereign a legal tender and a current coin in India. We also consider that, at the same time, the Indian mints should be thrown open to the unrestricted coinage of gold on terms and conditions such as govern the three Australian branches of the Royal Mint. The result would be that, under identical conditions, the sovereign would be coined and would circulate both at home and in India. Looking forward as we do to the effective establishment in India of a gold standard and currency based on the principles of the free in–flow and out–flow of gold, we recommend these measures for adoption.

The first part of their proposal was carried out immediately, and, in 1899, British gold was declared legal tender at the rate of a sovereign to 15 rupees. It appeared at first as if their further object of a gold currency might soon be attained also. The principle of minting gold in India was accepted both by the Secretary of State and by the Viceroy’s Council, and in 1900 Sir Clinton Dawkins actually announced that it had been decided to constitute a branch of the Mint at Bombay for this purpose. In the meantime an attempt was made, described in §4, to force sovereigns into circulation. But the attempt failed, and Sir Clinton Dawkins’s proposal was never carried out. As Sir G. Fleetwood Wilson explained in the Legislative Council in 1911—

A number of technical and other difficulties were raised by the Royal Mint, which ultimately wore out the patience of Lord Curzon’s Government. In the interval the Kolar gold mining companies had mostly entered into agreements for the sale of their produce in England; and the prospect of their bringing their gold to be refined and coined at Bombay—which was to be the pièce de résistance of our gold mint—was thus deferred. In the circumstances it was decided in 1902 to drop the project, and to wait until a stronger demand for a local gold coinage should arise.

This account of the matter, however, scarcely does justice to the part played by the British Treasury in defeating the project. The official correspondence lately published,[31] shows that for two years (from 1899 to 1901) they made, as Sir G. F. Wilson states, a succession of technical difficulties in a spirit of scarcely veiled hostility to the whole proposal. But eventually (in May 1901) a scheme was arranged, acceptable both to the Mint at home and to the authorities in India. At this point in the negotiations the natural instincts of the Treasury officials became uncontrollable, and respect for the independence of the India Office had to be abandoned. Their first line of defence in the form of technical difficulties having been overcome, they fell back upon open argument as to the wisdom from the Indian point of view of the whole project:—

While expressing their satisfaction that an agreement has now been reached, my Lords think it desirable, before practical steps are taken to carry out the scheme, to invite Lord George Hamilton to review the arguments originally advanced in favour of the coinage of the sovereign in India, and to consider whether the course of events, in the two years which have elapsed since the proposal was made, has not tended to diminish their force, and to render such advantages as are likely to accrue from the establishment of a branch mint wholly incommensurate with the expense to be incurred.... The gold standard is now firmly established, and the public requires no proof of the intention of the Indian Government not to go back on their policy, which is beyond controversy. Sovereigns are readily attracted to India when required under existing conditions.... On the other hand, the estimates of the Government of India of gold available for coinage in that country are less than was anticipated, nor is any considerable increase expected, at any rate for some time.... The staff would have to be maintained in idleness for a large part of the year at considerable cost to the Indian Exchequer.... It is of course for Lord George Hamilton to decide whether, in spite of these objections, the scheme is to be proceeded with.

The India Office answered thus:—

The establishment of a mint for the coinage of gold in India is the clearest outward sign that can be given of the consummation of the new currency system; and to abandon the proposal now must attract attention and provoke criticism and unrest.... His Lordship is not inclined to abandon the scheme at the stage which it has now reached.

The Treasury’s reply was cogent:—

My Lords cannot believe that the position of the gold standard in India will be strengthened, or public confidence in the intentions of the Government confirmed, by providing machinery for obtaining gold coins which is neither demanded nor required by the mercantile community; while, on the other hand, the failure or only partial success of a gold mint would undoubtedly be pointed to by the opponents of the gold standard policy (although without justification) as evidence of the breakdown of that policy.

The Treasury’s arguments were, as they deserved to be, successful. After consultation with the Government of India, who drew attention to the agreements (referred to by Sir G. F. Wilson above) entered into by the mining companies, the Secretary of State agreed (Feb. 6, 1903) to the project’s indefinite postponement. “No public explanation was given in India of this sudden recession from what has hitherto been regarded as an essential feature of the currency policy inaugurated in 1893 and definitely established on the recommendations of the Currency Committee of 1898.”[32]

2. From 1903 up to 1910 little was heard of proposals for an active encouragement of the circulation of gold. But the intention had never been repudiated, and in the Budget debate of 1910 Sir James Meston, then Financial Secretary to the Government, spoke as follows:—

The broad lines of our action and our objects are clear and unmistakable, and there has been no great or fundamental sacrifice of consistency in progress towards our ideal. Since the Fowler Commission that progress has been real and unbroken. There is still one great step forward before the ideal can be reached. We have linked India with the gold countries of the world, we have reached a gold–exchange standard, which we are steadily developing and improving. The next and final step is a true gold currency. That, I have every hope, will come in time, but we cannot force it. The backwardness of our banking arrangements, the habits and suspicions of the people, the infancy of co–operation—all stand in the way. But the final step will come when the country is ripe for it. I trust that will not long be delayed; for when it comes, it will obliterate all the mistakes, all the inconveniences, all the artificialities, of our present position.

In March 1911 matters were carried a step further, Sir Guy Fleetwood Wilson replying in the Legislative Council to Sir Vithaldas Thackersey (who had argued that a 10–rupee gold coin ought to be minted and put into active circulation in India) that “much has happened since 1902 which justifies the reopening of the question.” In a despatch to the Secretary of State, dated May 16, 1912, the Government of India proposed to open the Bombay Mint to the coinage of sovereigns. This is an exceedingly confused document. It is mainly directed to showing that an increased use of gold as currency in India would be advantageous to the system. But, apart from the validity of this argument, it is not clearly shown in what way the establishment of a mint would effect the desired purpose; indeed it is explicitly admitted that “in proposing to open a gold mint it is not our intention to induce thereby an increased flow of gold to India. Indeed were that our purpose we recognise that it would certainly fail.” The despatch reads as though it were an attempt to reconcile divergent and contradictory views which had received expression. The British Treasury, however, has again come to the rescue. They have stipulated either that the branch mint should be under Imperial management, which would be inconvenient, or that it should be wholly separate, which would be expensive. Accordingly, in a despatch, dated October 18, 1912, the Secretary of State suggested to the Government of India that instead of sovereigns Indian gold coins of the nomination of, say, 10 rupees should be coined at Bombay. The Government of India have replied that they prefer this proposal to the conditions demanded by the Treasury, and that they contemplate making inquiries as to Indian opinion on it. This is how the matter stands at present.

The actual policy of the Government of India since 1900 as regards gold currency has been, in my opinion, well judged. But these negotiations show that the authorities are still doubtful as to the advantages of the existing system.

3. Up to 1870 the English currency system was the envy of the rest of the world, and it was supposed that the excellencies of the practical working of this system were due to the fact that the actual circulating medium of the country was gold. This, it was thought, must be the only really safe way of maintaining absolute stability. Germany, accordingly, when she instituted her gold standard, prohibited the issue of notes of a less denomination than 100 marks, in order that gold might actually circulate from hand to hand to a maximum possible amount. For similar reasons the business community showed themselves immovably hostile to Lord Goschen’s proposals for the issue of one–pound notes in England. While other countries, who have, with few exceptions, found the expense of a gold medium of exchange prohibitively heavy, have nevertheless envied those who could afford it, and have adapted their laws, even when they could not afford to adapt their practice, to a currency of gold.

But in recent years the evolution of currency has, for reasons which I have elaborated in Chapter II., embarked upon a new stage of development, and all this is changed. In England the use of a cheque currency has grown so universal that the composition of the metallic coin has become a matter of secondary importance. In Germany the policy of 1876 has been deliberately reversed by a recent revision of the Bank Act, and 20–mark notes are now issued with the deliberate object of keeping as much gold as possible in the bank and wasting as little as possible in circulation. This new policy is likely to be extended in the future. The President of the Reichsbank, addressing the Budget Committee of the Reichstag in January 1913, argued that the rule laid down in 1906, forbidding the free issue of 20–and 50–mark notes to an amount exceeding £15,000,000, would have to be repealed, the issue of these notes in 1912 having exceeded the limit by £11,500,000; and he went on to say that they must, in the interests of sound policy, increase the issue of notes and thus hold a larger quantity of gold in their reserves.

In other countries, where actual currency is the principal medium of exchange, the attempt to introduce gold as the medium passing from hand to hand has been for the most part abandoned. A great part of the new gold has flowed, during the last ten years, into the reserves of the State Banks, and a comparatively small amount only can have found its way into circulation. In Austria–Hungary, for example, after the currency reform of 1892, attempts were made to force gold into circulation just as they were in India. They luckily failed. The authorities of the Austro–Hungarian Bank now keep all the gold they can in their central reserves, and they are not likely to make another attempt to dissipate it. The same kind of thing occurred in Russia. After establishing with difficulty a gold standard, they began with the theory, and have since abandoned it, that a gold currency was the natural corollary. Other examples could be given. A gold standard is the rule now in all parts of the world; but a gold currency is the exception. The “sound currency” maxims of twenty or thirty years ago are still often repeated, but they have not been successful, nor ought they to have been, in actually influencing affairs. I think I am right in saying that Egypt is now the only country in the world in which actual gold coins are the principal medium of exchange.[33]

The reasons for this change are easily seen. It has been found that the expense of a gold circulation is insupportable, and that large economies can be safely effected by the use of some cheaper substitute; and it has been found further that gold in the pockets of the people is not in the least available at a time of crisis or to meet a foreign drain. For these purposes the gold resources of a country must be centralised.

This view has long been maintained by economists.[34] Ricardo’s proposals for a sound and economical currency were based on the principle of keeping gold out of actual circulation. Mill (Political Economy, Bk. III. chap. xxii. § 2) argued that “gold wanted for exportation is almost invariably drawn from the reserves of banks, and is never likely to be taken from the outside circulation while the banks remain solvent.” While Goschen spoke as follows in 1891 before the London Chamber of Commerce:—

We only have as an effective circulation that which is required for the daily wants of the people. You cannot tap that to any extent so as to increase your central stock of gold. You may raise your rate of interest to 6 per cent or 8 per cent, but the bulk of the people will not carry less gold in their pockets than they did before, and I doubt whether, from other quarters, you would be able to get much addition to your central store.

But while it is no new theory that gold in the pockets of the people is absolutely useless for the purposes for which a currency reserve is held, all but the highest authorities have believed until fairly recently that no gold standard can be really stable, unless gold actually circulates in the country. The contrary view was distrusted by practical financiers, and only of late years has it become powerful enough to dictate policies. At last, however, Governments have been converted to it, and it is now as much their anxiety to keep gold out of circulation and in their reserves as it was formerly the opposite.

A preference for a tangible gold currency is no longer more than a relic of a time when Governments were less trustworthy in these matters than they are now, and when it was the fashion to imitate uncritically the system which had been established in England and had seemed to work so well during the second quarter of the nineteenth century.

4. Let us now apply these general considerations to the case of India. In 1900 an attempt was seriously made to get sovereigns into active circulation, in accordance with the recommendations of the Committee of 1898. It was decided to pay out gold to the public as soon as the stock should exceed five millions sterling, and such payments commenced on January 12, 1900, at the currency offices in Calcutta, Madras, and Bombay. The instructions issued were to tender gold to all presenters of notes, but to give rupees if they were preferred. Later on the Comptroller–General was authorised to send sovereigns to the larger district treasuries. And in March the Post Offices in the Presidency towns began to give gold in payment of money orders, and the Presidency Banks were requested to issue sovereigns in making payments on Government account. These arrangements continued in force throughout the financial year 1900–1901, and by March 31, 1901, the amount put into the hands of the public reached the considerable total of £6,750,000. But of this amount part was exported, not far short of half was returned to Government, and it was supposed that the greater part of the remainder went into the hands of bullion dealers.[35] Further attempts to force gold into circulation were, therefore, abandoned, and a large part of the gold which had accumulated in the currency reserve in India was, a little later on, shipped to England in order to be held “ear–marked” at the Bank of England.

Since that time the provisions of the Indian system regarding gold (as already given in Chapter I.) have been as follows:—(1) The sovereign is legal tender in India at 15 rupees to £1; (2) the Government has bound itself by Notification to give rupees for sovereigns at this rate; (3) it is willing, as a rule, to give sovereigns for rupees at this rate, but is under no legal obligation to do so, and will not always exchange large quantities.

5. The defeat of the experiment of 1900–1901 was due to a variety of causes, but mainly, I should suppose, to the long habituation of the Indian public to the use of silver, and to the unsuitability of the sovereign, by reason of its high value, for so poor a country as India.

But it is not by any means so certain that an attempt at the present time to put a 10–rupee gold coin into circulation would not meet with more success. Its value would be somewhat less. But, more important than this, the taste of India for gold, as against silver, has been very considerably developed during the last ten years. It will be worth while to summarise the available evidence as to the present position of gold in India.

6. We know, of course, what the annual net addition to the total stock of gold in India (i.e., the imports and the production less the exports) approximately is—although the amount of the steady leakage across the land frontiers is usually neglected.[36] We know also how much of this addition is in the form of sovereigns, and how much in the form of gold bars. By making allowance, therefore, for the increase or decrease of sovereigns in the Paper Currency Reserve and the Government Treasuries, we can calculate how many sovereigns have found their way each year into the hands of the public. But as to the uses to which the public put the sovereigns our information is exceedingly vague and unprecise. By far the most careful and valuable discussions of the question are to be found in the Reports of the Comptroller–General of Paper Currency for 1910–11 (written by Mr. R. W. Gillan) and for 1911–12 (written by Mr. M. F. Gauntlett); and I have made free use of these in what follows. First, it will be useful to have before us the statistical information referred to above:—

(1)=(2)+(3)

Net Addition

to Stock of

Gold:—

Imports—

Exports +

Production.

(2)

Net Additio

to Gold

in Paper

Currency

Reserve and

Treasuries.

^(a)

(3)=(4)+(5)

Net Addition

to Stock of

Gold of

Public.

(4)

Net Addition

to Bullion

in Hands

of Public.

(5)

Net Addition

to Sovereigns

in Hands

of Public.

£

£

£

£

£

1901–02

3,223,000

–5,000

3,228,000

2,261,000

967,000

1902–03

7,882,000

2,870,000

5,012,000

2,814,000

2,198,000

1903–04

8,963,000

944,000

8,019,000

4,741,000

3,278,000

1904–05

8,841,000

38,000

8,803,000

5,866,000

2,937,000

1905–06

2,698,000

–6,840,000

9,538,000

5,806,000

3,732,000

1906–07

12,061,000

–193,000

12,254,000

7,098,000

5,156,000

1907–08

13,677,000

–993,000

14,670,000

7,243,000

7,427,000

1908–09

5,022,000

–2,843,000

7,865,000

4,422,000

3,443,000

1909–10

16,620,000

6,347,000

10,273,000

7,407,000

2,866,000

1910–11

18,153,000

71,000

18,082,000

9,991,000

8,091,000

1911–12

27,345,000

9,347,000

17,998,000

9,117,000

8,881,000

1912–13

^(b)

24,551,000

4,231,000

20,320,000

9,320,000

11,000,000

(a) Since 1908 the whole of this has been held in sovereigns.
(b) Estimate.

7. The enormous amount of wealth which the Indian people are now devoting to the barren accumulation of gold is brought out very strikingly by the figures in the third column. We know that it is hoarded, used as jewellery, as gilding, even (according to Messrs. Samuel Montagu) as medicine. But these figures are not relevant to our present purpose, and we must turn to the figures in the last column, giving the flow of sovereigns into the hands of the public. What part of this total is employed for ornament, what part for hoarding, what part is melted down, and what part is left truly to serve as currency?

In the first place it is estimated that about £1,000,000 “shield” sovereigns are now imported annually. These are sought after for purposes of ornament and stand at a premium.[37] It may be safely assumed, therefore, that they are not used as currency. Further, it is certain that a large number are melted every year and used as bullion. There are two causes of this. “As regards melting,” writes Mr. Gillan,[38] “it is to be noted that for certain purposes the sovereign has at all times an advantage. Gold being sold in 5–and 10–ounce bars, if a jeweller wants only a small quantity, a full–weight sovereign meets his purpose very well, as he knows its exact weight, fineness, and value, and has no trouble in obtaining it. And the sovereign is presumably cheaper than the same quantity of gold in out–of–the–way parts.” There is also another cause, connected with the exchanges;[39] at some times of year the cheapest way of getting gold is to buy sovereigns for rupees from the Government. This explanation is borne out by the fact that there is a steady demand for sovereigns from the Government’s reserves during the summer months. This is the time when the exchanges make it most advantageous to get gold in this way, and when there is least likely to be a demand for sovereigns as a medium of exchange. Many sovereigns, therefore, are melted. But we should be making rather a random guess if we were to attempt to say how many.

There must still remain, as the result of recent importations, a large number of sovereigns retained in the hands of the public in that form. But we cannot assume that even this reduced total is truly employed as a medium of exchange. There is a good deal of evidence for supposing that in some parts of the country sovereigns are displacing rupees for the purpose of hoards. This may be the case even when in the first instance the gold is used for currency. The crops may be sold for gold, because the cultivator wants gold for his hoard. “It is quite conceivable,” Mr. Gillan points out, “that the acceptance by the cultivator of gold in payment of his crops is in the nature of barter; that is to say, he takes the gold not as coin merely but for some other purpose, and the return of gold in payment of revenue may be no more than the return of so much as he finds himself unable to retain.”

8. It is clear, then, that we must not fly from a glance at column (1) of the table on p. 76, or even from a glance at column (5), to extravagant conclusions as to the present position of the sovereign in the Indian currency system. Many heavy deductions must be made from the first totals. What direct evidence is there as to the use of gold as currency?

“The best indication” (to quote Mr. Gillan again) “of the extent to which sovereigns have established themselves as a regular part of the currency, is to be found in the figures of receipts at Post Offices and Railways.” These have been as follows:—

Post Offices.

Railways.

1906–07

£553,000

^(a)

£468,000

^(a)

1907–08

1,358,000

1,045,000

1908–09

1,001,000

710,000

1909–10

265,000

134,000

1910–11

638,000

597,000

1911–12

1,363,000

1,222,000

(a) Second half–year only.

It has been estimated by the Paper Currency Department[40] that in 1907, as a result of the absorption of earlier years, not less than two millions were in circulation. But it is supposed that by the end of 1908 nearly the whole of that amount had disappeared. Owing to the depression of that year and the low level of the exchanges, the most profitable employment of the sovereigns was as bullion. This is strikingly borne out by the almost negligible receipts of gold (given below) by Post Offices and Railways in 1909–10. Until 1910 the absorption of sovereigns was not sufficient to restore them to a position of any importance as currency. We have chiefly to consider, therefore, the imports of sovereigns since 1910. It is from this source that the sovereigns now circulating as currency are likely to have come.

9. When we proceed to detail, it appears that there are several important parts of India in which the use of the sovereign is still negligible—in Bengal, Eastern Bengal, Assam, the Central Provinces, and Burma. In these provinces it has not begun to make any serious headway. In the United Provinces (for the purchase of wheat) and in certain districts of Madras, on the other hand, sovereigns seem to circulate to some extent, to be received freely by the general public, and to be increasing, though at no sensational rate. In Bombay and the Punjab, particularly in the latter, their use is, however, much more important. Most of the detailed evidence, which is available, refers to the Punjab; and care must be taken not to apply to the whole of India opinions from witnesses in that province as to the present position of gold. The following extract from a resolution passed by the Punjab Chamber of Commerce on June 4, 1912, is interesting. The Chamber “are able to state authoritatively that sovereigns are becoming popular and that their circulation is increasing. They are accepted as legal tender in the bazaars, and this may be attributed to the intelligence of the people and to the fact that all over the East (in China and the Straits Settlements), where the Punjab Sepoys serve in the army and the police, the sovereign is popular. These men remit their earnings in gold, and as there is hardly a village in the Punjab that has not sent a man to these services, it is not surprising that the value of the sovereign is understood It is difficult to say to what extent sovereigns are being hoarded, but that they are held up by the well–to–do to a very considerable amount is undoubtedly the case; and hoarding will continue among the rural population for years to come. With regard to the probable effect this importation of sovereigns may have on exchange, they are of opinion that Government should not rely on the sovereigns that are being absorbed by the districts in exchange for produce and in the shape of savings coming out at any time in any appreciable quantity to support the stability of the rupee.” In 1911–12 the Comptroller of Currency collected a number of district reports as to the growing popularity of gold in the Punjab. They completely corroborate the above summary.

10. Before we pass on to other aspects of the question, a word may be added with special reference to the very large gold imports of quite recent date (i.e., in 1912). Popular attention has been attracted by the figures for that year, which are indeed truly remarkable.[41] The gold imports of 1911–12 and 1912–13 (see table on p. 76) were noteworthy as compared with those of former years by reason of their huge aggregate amount; but they were even more noteworthy if regard be had to the very high proportion of sovereigns.

I do not believe, however, that a conclusion can fairly be drawn from these figures as to any startling change in the position of the sovereign in India has experienced two very good seasons and has been able, therefore, to accumulate savings unusually large extent for investment in gold ornaments and hoards. Is this altogether inadequate a partial explanation of the recorded figures? I do not, for the following reasons, think it is.

In the first place the gold imports for 1911–12 fall short of, and those for 1912–13 do not much exceed, those for 1910–11 if we exclude the additions to the Paper Currency Reserve. Imports of gold for this purpose are, for reasons to be explained in Chapter V., quite independent of the effective desire of India for gold, and occur merely because gold happens in some circumstances to be a cheaper means of remittance to India than Council Bills or any other method. In the second place the conditions of 1912 were somewhat abnormal on account of the unusually large supplies of gold which were available from Australia and Egypt, it is a matter of importing gold from England, those who want it for bullion purposes will generally find it cheaper to buy gold bars than to buy gold coin. But if there are sovereigns on their way from Australia and ready to be diverted to India, or if there are surplus sovereigns available for export at Alexandria, it may be a good deal cheaper to buy these sovereign than to get gold bars from London. The explanation of this, depending on the foreign exchanges, is fully discussed in Chapter V. I suspect, therefore, that a higher proportion than usual of the sovereigns imported in 1912 were put to non–currency uses for which gold bars would have served just as well. If sovereigns rather than bars are imported from London it is reasonable to draw the conclusion that the importer (since he must pay a higher price) definitely prefers them. But if sovereigns are imported from Egypt or Australia rather than bars from London, no such conclusion can be drawn. Of the £21,500,000 sovereigns imported into India in 1912 only about £5,000,000 came from London—the rest from Egypt and Australia.[42] From the gross figures of gold imports into India in 1912 even heavier deductions than usual must be made, therefore, before we have an indication of the extent to which additional sovereigns have really found their way into the currency.[43]

11. Perhaps we may fairly sum this evidence up by saying that it goes to show the existence in India at the present time of an enormous demand for gold bullion, a very considerable demand for sovereigns for purposes of hoarding, and a relatively smaller demand for them, chiefly confined to the United Provinces, the Punjab, Madras, and Bombay, for purposes of currency.

Those who think that this tendency to use gold coins should be further encouraged have advocated three methods of doing so: by making arrangements for the coinage of sovereigns at Bombay; by the mintage there of some distinctively Indian coin of the denomination of 10 rupees; by a deliberate attempt on the part of Government, as in 1900–1901, to force sovereigns into circulation and to familiarise parts of the country with them where they are at present unfamiliar, even to the extent of refusing to issue more rupees on demand.

12. I have placed these proposals in the order of their probable efficacy to effect their purpose. I see no reason why the first—the coinage of sovereigns at Bombay—should have any effect at all towards increasing the use of sovereigns as currency. Four types of occasion can be distinguished on which gold bars might be presented at Bombay for coinage:—

(a) Gold might be deliberately imported from England for the purpose; or it might occasionally happen that importers of gold bars, having temporarily miscalculated the demand for bars, would wish to sell these bars to the Government.

(b) Owners of Indian gold mines might conceivably find it worth their while to suspend the arrangements they have made in recent years with English refiners and might sell their gold (about £2,000,000 annually) to the Bombay Mint. Whether or not they would find it worth while to do this would presumably depend on the facilities for refining in India and the terms offered by the Bombay Mint.

(c) The habits of the people might be changing, the importation of new bars from England ceasing, and the people wishing to get rid of the bars and ornaments they already had.

(d) In times of famine or depression the people might sell their bars and ornaments to the Mint when they were driven to turn their ultimate resources into money.

Provided the Bombay Mint did not offer to coin on more favourable terms than the British Mint, which presumably it would not do, it seems exceedingly unlikely that bar gold would be imported from England on purpose to be coined in India rather than in England. But if this were to happen, it would have no consequences worth thinking about. The place of mintage is a matter of indifference. In all the other eventualities, suggested above, the gold is brought to the Mint, not to satisfy a demand for new gold currency, but because the owners of the gold wish to sell it. The sellers would take payment in sovereigns, notes, or rupees (since the former can always be exchanged for the latter), as might suit their convenience. In cases (c) and (d) the Government would probably be forced in the end to export the sovereigns it had itself minted, and to bear the cost of export as well as the cost of minting.

The chief result of mintage at Bombay, therefore (assuming that the terms for coming were substantially the same as in England), would be a small saving of expense to sellers of gold in India. Importers of gold bars would be saved occasionally a small loss of interest due to miscalculation; owners of Indian gold mines might conceivably pay, at the expense of Government, infinitesimally higher dividends; the people turning their hoards into money would be able to save the expense of sending the gold to England. A corresponding cost would fall on the Government, for mintage in the first instance and sometimes for export afterwards. These consequences, whether desirable or not, have very little to do with currency questions. The last of them—the making it easier to turn hoards into money—is very likely desirable. But all of them could be brought about more cheaply without the establishment of a Bombay Mint. It would be sufficient if the Government were to publish terms on which it was ready to buy gold bars. It might be a real convenience if Government notified its readiness to purchase bars tendered in India at Rs. 58 annas 5 per ounce[44] (payable in silver or notes or sterling drafts on London or in sovereigns, on the present system, if they were available).[45] The Government would be involved, from time to time, in the cost of export; but this cost it would have to bear, I believe, just as often if there were a mint, while the cost of the mint itself would be saved. Such a notification, as is suggested above, would be much more in the true spirit of the Indian currency system than the establishment of a gold mint would be; and it would serve the convenience of the public just as efficiently, at less expense to Government. The establishment of a Mint, however, would flatter at small expense an ignorant vanity. The Government by granting it in response to popular appeal (though I doubt whether, in fact, there is any such appeal) would have a pleasant feeling of being democratic on an occasion when to yield involves no more evil than any other expenditure on a piece of fairly cheap ostentation.

13. To the second proposal for the mintage of a distinctively Indian gold coin many of the above comments apply equally. But the existence of a 10–rupee gold piece (13s. 4d.) might very possibly do something to popularise the use of gold as currency, largely because it would be of a smaller and therefore more convenient denomination.[46] It is very difficult to prophesy with regard to the local popularity of a new coin. On the other hand—apart from the general objections, to be dealt with later, against popularising gold—it is generally a bad thing to introduce a new coin and add to the confusion of currencies. For purposes of export, at times of depression, the 10–rupee piece would be worth less than two–thirds of a sovereign. The sovereign, moreover, is fast becoming the international gold coin par excellence far beyond the bounds of the British Empire. In 1911, 43,305,722 British sovereigns were minted, or a good deal more than the whole gold coinage in that year of the rest of the world, viz. £33,375,455. A rival coin ought not to be set up in India unless some evident advantage is to be obtained from it.

14. The third policy—that of active measures on the part of Government to get more gold into circulation—is not likely to be adopted. If it were, it is difficult to say if it would be successful or not. To force a coin on people is not always the best way to popularise it; and if rupees were to be refused, there would probably be a small premium on them or a small discount on gold—a position which would not help gold.

15. It is probably the case, however, that if it were desirable to popularise the use of gold, a means could be found of effecting this in some degree. The main question is whether this is, in fact, the right policy. Lord Crewe looks forward (see his speech in the House of Lords, November 14, 1912) “with some confidence to the increased use of gold currency in India among the people, although it may be a long and indefinite time before it becomes the habitual and favourite coin in the country at large.” Ought he to expect this result with satisfaction as well as confidence?

My own answer to this question is unhesitatingly in the negative. The principal arguments against such a policy are two,—first, the general argument that it is extravagant and wasteful to have gold coins as the actual media of circulation, and second, the argument, more especially applicable to India, that it would diminish, and not, as its advocates claim for it, increase the stability of the currency system as a whole.

16. Let us consider first how heavy a loss and expense the popularity of a gold currency might involve. During the last twelve years the Government have been able to accumulate a sum of about £21,000,000 sterling from the profits of rupee coinage; and the interest on the invested portion of the Paper Currency Reserve is now about £300,000 annually. Thus the annual income, derivable from the interest on the sums set free by the use of cheap forms of currency, amounts already to about £1,000,000. With the rapidly increasing use of notes, this income should show a steady growth in the future. Both these sources of profit would be gravely jeopardised if the introduction of an Indian gold coin were to meet with any considerable measure of success. It would be specially unfortunate if a competitor to the paper currency were to be introduced, before the virtual abolition of the system of circles has had time to have its full effect in the direction of popularising the use of notes.

17. Advocates of a gold currency, however, would not, I think, deny that it might involve the country in some extra expense. They support their policy on the ground that it would do a great deal to ensure the stability of the currency system, and that it is worth while to incur some expense for this object. I think it is possible to show that such a policy is likely on the whole to have an exactly opposite effect.

It is suggested that the currency should be composed of rupees, gold, and paper, with rupees still predominating, but consisting of gold in a considerably higher proportion than at present. This greater infusion of gold would necessarily be at the expense either of the Currency Reserve or of the Gold Standard Reserve. If the gold replaced notes, the former would be diminished, and, if it replaced rupees, the latter.

It is tacitly assumed that the greater part of what has to be withdrawn from the circulation at a time of crisis would come from the gold portion of the circulation.

This assumption seems to me to be unwarranted and contrary to general experience. At a time of crisis it is the fiduciary coins with which the public are most eager to part. Bankers and others would keep as much of their surplus currency as they possibly could in the form of gold, and it would be rupees (in great part) and not gold that would be paid into the Government Treasuries.

Thus the infusion of more gold into the circulation would necessarily weaken the existing reserves and would not correspondingly reduce the amount of such reserves which Government ought in prudence to keep. When it became necessary to contract the volume of currency, Government would be in a worse position than at present, unless the greater part of what was withdrawn came from the gold portion of the circulation and not from the rupee or paper portion. This is not an expectation upon which it would be prudent to act.

I have already quoted the late Lord Goschen’s authority in support of the centralisation of gold reserves. A further passage from the address he delivered on the same occasion (in proposing a scheme of one–pound notes for England) is relevant here:—“I would much prefer for national and monetary purposes to have £20,000,000 of gold under our command at the Bank of England than 30,000,000 sovereigns in the hands of the public.... If the issue (of one–pound notes) took place, and were taken up, we should have £20,000,000 more central gold—an immeasurably stronger reserve than 30,000,000 sovereigns on which we could not place our hands.”

18. There are, in fact, two ways of maintaining stability in a country whose demand for currency varies widely from year to year—either it must consist almost wholly of gold, or a sufficient reserve must be concentrated in the hands of Government. If only one–quarter or one–fifth of the circulation consists of gold, I do not think that a Government can rely on getting more than a fraction of this, when it becomes necessary to contract the circulation by one–sixth or one–seventh; whereas if the gold is in the Government’s reserves, the whole of it is available.

For obvious reasons of convenience and of economy the greater part of the Indian circulation must continue in any case to consist of rupees. It is vain to suppose that the advantages of a true gold currency can be obtained by the compromise of somewhat increasing the gold element. If the Government dissipates some part of its sterling resources over the country—and any proposal for a greater infusion of gold into the currency amounts to this—it must plainly stand in a weaker position to meet a crisis than if they are concentrated in its own chests.

19. The encouragement of gold, therefore, would involve expense, and, at the same time, diminish safety. There is a further argument against it, connected nevertheless with the above, which is of great importance.

If gold were to supplant rupees only and not notes, and were to supplant them to so great an extent that sovereigns would tend to flow out of the currency at times of depression, there might be something to be said for it. It is certainly the case that it is a disadvantageous thing for India to have so large a part of her currency in the form of expensive tokens,—the issue of rupees strengthens the reserves by less than a half of their nominal value. The degree of damage to the Government’s reserves, therefore, would be much less if the gold were to supplant rupees than if it were to supplant notes. But this is most unlikely to be the case. It is for comparatively large payments that the sovereign may gradually come into use, and for these it is essentially a rival to the note. For small payments, which in India make in the aggregate an enormous total, the sovereign can no more supplant the rupee than it can supplant the shilling in England.

Reports collected by the Comptroller of Currency in 1911–12 already show in a striking way the tendency of gold to take the place which is, or might be, occupied by notes. The rapidity with which gold is becoming popularised in the Punjab is probably due in very great part to the fact that notes have never become acclimatised there.[47] The inconvenience of making large payments in silver is obvious;[48] and facilities for obtaining gold are naturally welcomed. The events of the last two or three years may have done very great harm in the direction of postponing the development of the use of notes in Northern India. In Bengal and Eastern Bengal, on the other hand, the slow progress made by gold is to be explained by the fact that the people of these provinces are much more accustomed to the use of notes, which are even used in some cases for the purpose of hoarding (cf. p. 165). If the Government were to attempt to further in any way the circulation of gold in the Bengals, they would be aiming a dangerous blow at their own note issue; whereas if notes could be encouraged in place of rupees in the jute trade, there would be a huge increase in their circulation. It is also reported that the use of gold in the rice trade in Burma would displace notes mainly. The following quotations from the reports (collected in 1911–12 by the Comptroller of Currency from districts in the Punjab), referred to above, illustrate the point that gold is preferred to silver because it is more convenient to carry, and that notes are distrusted because there is no universally spread assurance of their ready convertibility.[49]

Gujranwala.—The zamindar prefers to have his price for the grain in gold, as he can easily carry it and easily exchange it and, if necessary, easily put it away. He shies at currency notes of any value, as they cannot be easily exchanged, and to receive payment in silver means cost of carriage and a greater risk of being robbed. Contractors of the Canal Department are very glad to receive payment of their cheques in gold. Some have remarked that sovereigns can be exchanged even in the village most remote from civilisation, but notes, even of the value of Rs. 5, are looked upon with distrust by the village yokel and even by the village sahukar. With a sovereign there is no trouble, no awkward questions are asked and no discount taken.

Jhang.—The people prefer gold because it is less troublesome than silver money.

Gurdaspur.—The facility of transit is the reason why corn merchants prefer sovereigns to silver.

Ambala.—Both in cities and villages, sovereigns are replacing notes more than rupees.

Bannu.—Gold is slowly but steadily replacing currency notes.

Rohtak.—(With the increase of gold) a corresponding decrease in the use of currency notes has been observed during 1911–12.

Ludhiana.—(With the increase of gold) the issues of notes have correspondingly decreased.

These particular statements are corroborated by general statistics. The most recent statistics of the use of 10–rupee notes in the Punjab and in Bombay, as compared with Bengal, strongly suggest that the recent development of gold circulation in these provinces has been at the expense of these notes. “In the Punjab it is reported (in 1911–12) that large payments for agricultural produce are never made in notes, and that gold is replacing notes to some extent even in ordinary payments among merchants and traders.” In the light of these facts, it is a wonderful tribute to the enduring power of the “sound” currency maxims of the middle of last century that responsible officials should have welcomed the outflow of gold as the salvation of their system.

Before leaving this topic I wish to emphasise, in close connexion with it, a special reason why it is so important to develop the use of notes in India at the present time. It is desirable to encourage the popularity of the note issue, and to avoid encouraging its rivals, not only for reasons of immediate economy or because, by the centralisation of the reserves, the stability of the currency is increased, but also because, in a country where cheques are not likely for many years to come to be used to a dominating extent, it is only thus that a proper degree of seasonal elasticity in the currency can possibly be secured. This question has been already raised in Chapter III., and I shall return to it again in Chapters VI. and VII.

20. One minor indirect consequence of the existing system is worth reference. Gold flows into the Currency Reserve when this is a cheaper way of getting notes or rupees than by buying Council Bills or Transfers (see Chapter V.). It flows out of the Currency Reserve when sovereigns are wanted for circulation or for hoarding, or when this is the cheapest way in which bullion dealers can get gold. There is reason for thinking that a good deal flows out for the last reason, and it is the occasion of this outflow which I wish to examine in a little more detail. The Currency Department publishes figures which show the number of sovereigns withdrawn from the Treasuries each month. It appears from these that, while some are withdrawn in the winter months during the busy season, when the demand for currency and for hoarding (since it is then that the cultivators sell their crops and realise their savings in coin) is at its height, there is in the summer also, when it is most improbable that an extra supply is required for these purposes, a steady and, in the aggregate, a heavy drain. A brief arithmetical calculation provides what must, I think, be the explanation of this. Since the price of bullion in London is (normally) £3:17:9. per oz., while the price of sovereigns is £3:17:10½, the bullion import point of Indian exchange will be a little below the sovereign import point. Thus when exchange is fairly high, an Indian purchaser of gold finds it more profitable to buy drafts on London, purchase gold in the bullion market and ship it to India, than to purchase sovereigns from the Treasury at 1s. 4d.; but when exchange is low, the reverse is the case and it is cheaper to get as much gold as the Treasury will let you have at 1s. 4d. I do not know exactly where the dividing line comes;[50] but when telegraphic transfers are at 1s. 4⅛d. it is certainly more profitable to get gold bullion in London, and when they are at 1s. 4–¹/₃₂d. it may pay to get it in India.

These considerations are modified in practice by the fact that many Indian purchasers of bullion have a preference for small gold bars which are manufactured in England. Thus these bars are worth more than an equivalent weight of sovereigns, and consequently importation of bullion in this form takes place throughout the year. But for many non–currency purposes sovereigns are as good or nearly as good as other forms of bullion, and for these purposes the Indian Treasury is the bullion dealer’s cheapest source of supply when exchange is relatively low. Thus in the summer months the bullion dealers will always draw their supplies from the Treasury, so long as the Treasury is willing to supply them. Whenever, therefore, gold in India is available to the public throughout the year, the Government will lose during the summer months whatever amount the bullion dealers require. On every sovereign thus drawn out, the Government loses about 1½d. For the gold could have been kept in England by selling bills at a rate more advantageous than the par of exchange by about this amount. The annual amount which is drawn out by bullion dealers when gold is available all the year round is probably not less than £2,000,000. Thus an important indirect effect of the present practice is to allow bullion dealers in the summer months to get their gold at the Government’s cost slightly cheaper than they otherwise could.

21. India, as we all know, already wastes far too high a proportion of her resources in the needless accumulation of the precious metals. The Government ought not to encourage in the slightest degree this ingrained fondness for handling hard gold. By the elimination of both precious metals, to the utmost extent that public opinion will permit, from amongst the hoards and the circulation of the country, they ought to counteract an uncivilised and wasteful habit.

It is interesting to reflect that India’s love of the precious metals, ruinous though it has been to her own economic development, has flourished in the past to the great advantage of Western nations. Every one knows Jevons’s description of India as the sink of the precious metals, always ready to absorb the redundant bullion of the West and to save Europe from the more violent disturbances to her price level. In very recent years, while the South African mines have been reaching the zenith of their production, she has been fulfilling to perfection her rôle of sink. Prices have been rising, as it is, much faster than is healthy and in a way very disadvantageous to such a creditor nation as Great Britain, to whom large sums fixed in terms of gold are annually due. It is reasonable to think that without the assistance of the Indian demand, they would have risen still faster. From its very short period point of view the City is sometimes cross when this Indian demand shows itself in an inconvenient week; but if we take a longer view the Indian demand is, at a time of plentiful gold supply like the present, a true friend to the City and an enemy of inflation.

On the other hand, if a time comes when Indians learn to leave off their unfertile habits and to divert their hoards into the channels of productive industry and to the enrichment of their fields, they will have the money markets of the world at their mercy. A surfeit of gold can do at least as much damage as a shortage. During the past sixty years India is supposed to have absorbed, in addition to her previous accumulations, more than £300,000,000 of gold (apart from enormous quantities of silver). We may presume that, if India ceases to demand fresh gold and begins to disgorge some part of her huge stock, she will do so gradually. Yet if the change comes at a time of big new production, she may involve the world, nevertheless, in a very great inflation of gold prices.

If, however, India is thus to turn the tables on the West, she must not delay too long. The time may not be far distant when Europe, having perfected her mechanism of exchange on the basis of a gold standard, will find it possible to regulate her standard of value on a more rational and stable basis. It is not likely that we shall leave permanently the most intimate adjustments of our economic organism at the mercy of a lucky prospector, a new chemical process, or a change of ideas in Asia.

CHAPTER V

COUNCIL BILLS AND REMITTANCE

1. Remittance by means of what are termed Council Bills is a feature peculiar to the Indian system, and is not, so far as I know, to be paralleled elsewhere. It arises partly from the historical circumstance that the Government of India is the successor of a trading company, partly from the necessity under which the Government lies of making very large annual remittances to England.

2. The Home Charges, that is, the payments which the Government of India must make in England, for interest on debt, pensions, payments to the War Office, Government stores (not chargeable to capital), etc., amount to £19,000,000 or £20,000,000 annually. But the amount which it is necessary to remit, apart from extraordinary remittances to be dealt with later, is usually less than this; for the amount of new capital raised by Government in England usually exceeds their capital expenditure in this country on repayments and on railway materials, etc. Thus the amount which it is necessary to remit to England annually is from £15,000,000 to £18,000,000. Rupees to this amount, being part of the revenue from taxation, etc., accumulate in the Indian Treasuries. This value is remitted to England by selling for sterling in London bills which can be cashed in rupees in Calcutta. Thus the Government of India pays out rupees in Calcutta when the bills are presented, and the Secretary of State’s balances at the Bank of England are swelled by a corresponding amount.

The Government is, therefore, one of the largest dealers in foreign exchange, and does for itself business, which Colonial Governments, for example, who have a certain amount of similar transactions to carry through (though on a far smaller scale), would do through a bank. But while the Government saves for itself the commission which it would otherwise have to pay to a bank, it is not, in any real sense, a competitor with the banks for business. In the first place, it sells exchange, save in exceptional circumstances, in one direction only. And in the second place, the Secretary of State’s method of selling exchange results in his dealing exclusively with the Exchange Banks and financial houses, and not directly with the trading public. The Secretary of State is in effect the ultimate source of supply for bills on India, and the banks, after securing what private bills are available, even up their demands for remittance to India by buying bills from him,—provided he is selling them at a rate which makes this form of remittance cheaper than the alternative one of sending sovereigns. The method by which these bills are sold is as follows.

3. The bills are offered in London for tender at the Bank of England every Wednesday morning, the Secretary of State for India in Council (or, for short, the India Council, whence the name Council Bills) having previously announced the amount (70 lakhs, say) for which tenders are invited. There is a reserve price (not published) below which he will not sell, but this reserve price is seldom operative.[51] The tenders name the amount tendered for and the number of pence per rupee which is offered. The total amount of 70 lakhs is then allotted to the highest bidders, the allotment at the minimum rate accepted being proportionate to the amount applied for at that rate.

If the demand is large and the minimum rate of allotment high (say 1s. 4³/₃₂d.), the amount offered for tender the following week (which is announced at the same time as the result of the previous allotment) is likely to be increased. In the interval between the allotments on successive Wednesdays, the Secretary of State is usually willing to sell what are known as “specials” at a rate ¹/₃₂d. higher than the highest rate of allotment on the preceding Wednesday.

4. It should be added that cash must be paid for the bills in London as soon as they are allotted; but, on account of the time taken by the mail, they cannot be changed into rupees at Calcutta for about a fortnight. A fortnight’s interest is therefore lost, and it is worth paying extra to obtain what are called “telegraphic transfers,” by means of which rupees can be obtained at Calcutta almost as soon as the sovereigns are paid into the Secretary of State’s account at the Bank of England.

The Secretary of State, therefore, is usually willing to sell telegraphic transfers at a rate ¹/₃₂d. per rupee higher than the rate for bills.[52] If the purchaser chooses transfers, the effect to him is that he gets his rupees a fortnight earlier in India and pays for this privilege a sum equal to 5 per cent on the money for a fortnight. The question, whether it is worth the purchaser’s while to pay this extra sum, chiefly depends upon the Indian bank rate, because this governs the amount of interest which can be gained by having the money immediately available in India. It may happen, of course, that a particular bank may have a special urgency for funds in India, or that the rate for fortnightly loans does not closely agree with the bank rate. Generally speaking, however, if the purchaser can lend money out at no higher rate than 3 per cent in India, he will certainly prefer bills; but if he can lend at 7 per cent in India, it will be more profitable for him to buy transfers.

Experience accords with these expectations. When the Indian bank rate is high and the difference of ¹/₃₂d. between the two prices is in force, the demand is almost entirely for transfers. This is convenient to bankers, and, if he has the rupees waiting in India, profitable to the Secretary of State.

5. The bills and transfers are made payable at the option of the purchaser at Calcutta, Bombay, or Madras. The amount drawn on Madras is relatively small, and Calcutta comes first, with about 45 per cent of the whole.

6. Up to 1900 the volume of sales of Council Bills in any year was mainly governed by the amount required to defray the Home Charges, this amount partly depending on the volume of capital borrowings in the year. But the sales also fluctuated, though within comparatively narrow limits in most years, according to the Secretary of State’s opportunities (depending on the activity of business and the balance of trade) of selling his bills at a satisfactory rate. Since 1900, however, the functions of the Council Bill system have been enlarged, and it has now become a very important part of the general mechanism for the maintenance of the Gold Exchange Standard.

7. The way in which this has arisen is easily explained. On account of the provision by which rupees can always be obtained in India in exchange for sovereigns at the rate of 1s. 4d. per rupee, it can never be worth while for the banks to buy Council Bills at a price which exceeds 1s. 4d. by more than the cost of sending gold to India. This cost varies considerably from time to time, but it seldom exceeds ⅛d. If, therefore, the Secretary of State refuses to sell bills at less than 1s. 4⅛d., when the banks are requiring to remit to India, gold will flow. This gold will be presented at the Treasuries in India to be exchanged for rupees or notes. Thus the only effect of the Secretary of State’s refusing to sell remittances at a price which suits the banks is that sterling resources accumulate in his Treasuries in India instead of in England. This may not be convenient to him. For example, if the banks are sending gold to India on a large scale and are exchanging it for rupees, a time may come when this demand can only be met by minting more rupees; the silver for this must be purchased in London and the profit on the coinage must be credited to the Gold Standard Reserve which, for reasons to be discussed in the next chapter, is kept for the most part in London; thus the gold has eventually to be shipped back again to England to pay for the silver and to be credited to the Gold Standard Reserve. In this case a double loss is involved—the cost of sending the gold to India (for the Secretary of State could probably have got 1s. 4⅛d. per rupee if he had sold transfers, whereas if gold flows he gets only 1s. 4d.) and the cost of bringing it back again, say, ³/₃₂d.; thus a refusal to sell bills would mean an eventual loss of nearly ¼d. per rupee or about 1½ per cent. Or, again, the policy of holding some part of the gold in the Currency Reserve in London for possible use in emergency, may lead to the Secretary of State’s preferring gold to accumulate in London rather than in India; otherwise it will have to be sent back again, in pursuance of this policy, and a double loss incurred, as in the former case. Lastly, if the Secretary of State has considerable cash balances in India, it may be worth his while for a time to cash additional Council Bills out of these, thus in effect transferring his balances to London. The reasons that may make him inclined to do this are, first, that to increase the proportion of his cash balances held in sterling puts him in a stronger position in a case of emergency; second, that selling Council Bills at a good price now will enable him to meet the Home Charges later on when he might not be able to sell his Bills at so good a price (in this case the transference of cash balances from India to London is only temporary); third, that it may put him in a stronger position for carrying out impending loan transactions at the most favourable moment; and fourth, that cash balances held in London can be made to earn a small rate of interest.

All these considerations being taken into account, it can only be worth the Secretary of State’s while to refuse to sell bills within the gold export price, when he deliberately wishes either to increase his cash balances in India at the expense of his balances in London, or to replenish that part of the gold portion of the Currency Reserve which is kept in India.

Thus he will endeavour to make as certain as possible of selling within the year the amount budgeted for (i.e., the Home Charges adjusted with reference to the probable capital transactions of the year and the state of the cash balances); but he will sell more than this if the demand for remittance is so great that, on his refusal to sell, the price of remittance will rise to the gold export point In the words of the annual budget, “the estimate of Council drawings is for the amount necessary to provide for the Secretary of State’s requirements, but additional bills will be sold if needed to meet the demands of trade.”

8. Let us sum up the argument so far, and enforce at the same time the contention, brought up at the end of Chapter I., that the volume of currency circulating in India does not depend, as some critics have maintained, on the caprice of the India Office in the amount of Council Bills that it offers for sale. So far as Council Bills are sold for the ordinary purposes of remittance of Government funds from India to London, they are cashed in India out of the general balances of Government. But when they are sold in larger quantities, to obviate the necessity of sovereigns being sent, sufficient rupees are not forthcoming from this source. One expedient is to pay out some of the rupees in the Paper Currency Reserve or in the silver branch of the Gold Standard Reserve, and to pay an equivalent sum into the branches of these reserves which are held in London, “earmarked” at the Bank of England,[53] or in other sterling forms. If, on the other hand, the India Council had refused to sell bills freely, gold would have been exported to India, taken to the Paper Currency Department, and exchanged for rupees in notes or silver. In either case there is a similar increase in the volume of currency in India not held by the Government. The volume of currency which finds its way into circulation in India is, therefore, quite independent of the Secretary of State’s action. Exceptional amounts of Council Bills are only sold when exchange has reached a point at which it is nearly as profitable to remit gold; and if Council Bills were not sold sovereigns would go instead (the expense of sending them being lost), for which the Government of India would have to give rupees in exchange. This point is important, for it is often assumed in controversy regarding the currency and its relation to prices that the issue of rupees into circulation depends in some way upon the amount of Council Bills sold by the Government, and can, therefore, be expanded or contracted by them at will, according to the policy of the moment. Broadly speaking, this is false. Even if the Government were to hasten the flow of rupees into circulation by selling an exceptional quantity of bills at a relatively low rate (which would be equivalent to lowering by a fraction of a penny the normal value of the rupee as measured in sterling), and were to pursue this policy over a long period, the permanent effect could be no more than in proportion to the amount by which they had thus lowered the par value of the rupee in terms of sterling. This is the amount of their conceivable executive power, if the Government were to exercise it. In fact, it has not been exercised.

If, however, the stock of rupees in the reserves is running low (for a considerable quantity of rupees must always be kept there in order to ensure the ready convertibility of the notes in terms of rupees), and more Council Bills are sold in London than can be conveniently cashed in Calcutta in the above ways, more rupees must be issued from the Mint. The silver out of which they are minted is purchased in England out of the proceeds of selling the additional Council Bills, and the surplus due to the fact that rupees are worth more than the silver they contain, is credited to the Gold Standard Reserve. According to the present practice the process in these circumstances also is, therefore, automatic, and the amount of new rupees put into circulation does not depend on the arbitrary action of the Secretary of State in selling or withholding Council Bills. If he did not sell bills, sovereigns would be sent to India, new rupees would have to be coined to meet the obligation under which the Government of India has placed itself of giving rupees in exchange for sovereigns on demand, and a great part of the sovereigns would have to be credited in some form or other to the Gold Standard Reserve or shipped back to England again to pay for the silver.

It is true that, if a different practice were adopted (a practice which was adopted in part in 1907), and if the profits on the coinage of rupees, instead of being credited to the Gold Standard Reserve, were turned into rupees and spent by the Government in India on goods and services (whether for capital or any other purpose), more rupees would be in circulation for the time being than would have been the case otherwise. But even in this case the effect on the volume of circulation must be temporary, so long as the provisions for the maintenance of the rupee at 1s. 4d. are in operation. For this additional issue of rupees would, eventually, have the effect of delaying additional demands for coinage in the future or of precipitating an occasion for the withdrawal of rupees from circulation.

While, therefore, it is to a certain extent within the power of Government (though not at present according to their usual practice) to urge a certain number of rupees into circulation more rapidly than is necessary, they cannot permanently increase the circulation without depreciating its gold value, that is, they cannot permanently increase the circulation beyond what it would otherwise be and at the same time maintain the rupee at 1s. 4d. It may be added that a release of rupees from any other reserve, or even a temporary increase in the amount of capital funds annually raised by Government abroad for use in India, would have a similar effect to the release of rupees from the Gold Standard Reserve. But, however all this might be, at present the Government of India do not, in fact, exert such discretionary powers as they possess for affecting, even temporarily, the volume of circulation.

9. I have said that the cost of sending gold to India does not generally exceed ⅛d. per rupee. The Secretary of State has, therefore, a standing notification (since January 1904) that he will sell bills at 1s. 4⅛d. Up to January 1900 he undertook to sell telegraphic transfers at 1s. 4⁵/₃₂d. without limit of quantity, and since that time he has usually been willing to do so.[54] The cost of sending gold to India depends, however, on complex causes, varying considerably from time to time, and is often a good deal less than ⅛d. It is not easy, therefore, for the Secretary of State to know at exactly what price gold will become a serious competitor of bills as a means of remittance; and not infrequently Council Bills are, unintentionally, at a price which makes it cheaper to send gold. It will be interesting to consider briefly the kinds of causes which influence the gold import point.[55]

10. The expense of remitting gold from one country to another is made up of insurance, freight, and loss of interest. Even the first item is sometimes capable of variation. For example, after the recent robbery of sovereigns in transit from London to Alexandria, the ordinary rate quoted on gold, consigned by the route (Bremen and Trieste) by which the stolen gold had been sent, was doubled, rising from 1s. 3d. to 2s. 6d. per cent. Again, on one recent occasion, it was stated that more gold would have been shipped if it had not been for the fact that the mail–boat was already carrying a million and a half sterling in gold and silver, the underwriters requiring a higher premium than usual if they were to insure a larger sum than this on a single voyage. But if it is a matter of shipping sovereigns from England the variations in the cost of insurance and freight are relatively small. The main part of variation in the gold point arises either out of the possibility of getting sovereigns from other sources, or from variations in the rate of interest.

These other sources are either sovereigns in transit from Australia or sovereigns ready for export from Egypt. As India lies between Australia and England, it is naturally cheaper (mainly on account of the smaller loss of interest) to send sovereigns from Australia to India than from Australia to England. Let us suppose that the state of the Australian exchanges is such that it pays to remit sovereigns from Australia to London anyhow, and assume, for the sake of simplicity (and without, in fact, any substantial sacrifice of truth), that the cost of freight and insurance from Australia to London is the same as from Australia to India. Now if, when the Australian sovereigns are off India, the bank which is remitting them can receive cash in London against their delivery in India, it will get its money at least a fortnight sooner, and will probably accept, therefore, about 1s. 3³¹/₃₂d. in London for 1s. 4d. delivered in India (¹/₃₂d. being the interest on 1s. 4d. for a fortnight at 5 per cent per annum). Gold bought in this way for immediate delivery in India is as good as a telegraphic transfer, i.e., is worth ¹/₃₂d. per rupee more than Council Bills. If, therefore, Council Bills are at a price in excess of 1s. 3¹⁵/₁₆d., gold about to be shipped from Australia competes with them as a means of remittance to India. Normally, of course, an Australian bank is able to get more than 1s. 3¹⁵/₁₆d. for gold delivered in India. I mean only that the Secretary of State cannot hope to undercut Australian gold, when it is available for export in large quantities, unless he is prepared to put down his price for Council Bills to this level. If, in these circumstances, he wants the gold in England rather than in India, his cheapest course, therefore, is to buy the gold in transit himself for delivery in England, selling for it telegraphic transfers at a suitable rate.[56] This was done on a large scale in 1905–6 and 1906–7.

Surplus gold from Egypt is not capable of undercutting Council Bills so seriously as surplus gold from Australia; for in this case it is Egypt which lies between. If we assume, for the sake of precise illustration,[57] that the cost of sending gold from Egypt to London is nearly the same as that of sending it from Egypt to India, an Egyptian bank, about to ship sovereigns in any case, will take any price in excess of 1s. 4d.[58] paid in London for the delivery in India of the value in gold of a rupee. This is the extreme case. If Council Bills are at a higher rate than 1s. 4d., say at 1s. 4¹/₁₆d., the Alexandrian exchanges may be at a level which makes it profitable to ship gold from Egypt to India for payment in London, when it is not profitable to ship gold from Egypt to London. If we still make the above illustrative (but not exactly accurate) assumption, when Council Bills are at about 1s. 4–¹/₁₆d. and the Alexandrian exchange on London below par, Egyptian gold competes with Councils as a means of remittance to India. Of course the supply of remittance from this source is usually somewhat limited; when some Egyptian gold has flowed away to India under the influence of the above conditions, this is likely to have the effect of strengthening the Alexandrian exchange, and therefore, by modifying the conditions, of making the continuance of a flow less likely. The Egyptian gold is of great practical importance, because the busy season in Egypt comes rather earlier than the busy season in India, so that in the winter months the gold which has served the purpose of moving the crops in Egypt can be sent on to be changed into rupees which are to serve the same purpose in India. Of the gold, therefore, which flows from London to Egypt every autumn, very little finds its way back again to London; what is not kept by the cultivators in Egypt travels on in due course to India. The precise moment at which this movement takes place and its extent depend, as we have seen above, on the rate at which Council Bills are being sold in London, and also upon whether the Egyptian cotton crop is dealt with late or early. But when towards the end of their busy season the Egyptian banks find themselves with more gold than they need, Council Bills must be sold at a relatively low rate if the flow of this gold to India is to be prevented. The dealings between the Egyptian and the Indian banks must thus present very delicate problems of arbitrage.

It is probably within the power of the Secretary of State, if he wishes, to regulate the flow of gold direct from London to Bombay by means of the sales of Council Bills. But when gold is available in Australia or Egypt, the matter is not susceptible of such easy control.

The remaining element which determines the cost of remittance—variation in the market rate of interest—has been dealt with already, ¹/₃₂d. represents the interest on 1s. 4d. for a fortnight at 5 per cent per annum. It is easy to calculate how the gold export point is affected by fluctuations in the market rate of discount in India on either side of 5 per cent.

11. So far we have been dealing with the upper limit of exchange and with the results of a heavy demand for Council Bills. The effects at the lower limit differ in this important respect, that the Government are under no legal obligation to prevent the depreciation of the rupee, and have not undertaken to give sovereigns for rupees in the way that they have undertaken to give rupees for sovereigns. There is nothing in law, therefore, to prevent exchange from falling indefinitely. There has been no change in law in this respect since 1895, when exchange actually did fall below 1s. 1d. The Government has, however, practically pledged its word to do all in its power to prevent the depreciation of the gold value of the rupee and to prevent exchange from falling below the lower limit of 1s. 3²⁹/₃₂d. The business community would rightly regard it as a breach of faith if the Government were to permit exchange to fall below this rate, unless all reasonable resources had been exhausted.

12. We now see how intimately the management of Council Bills and of Government remittance is bound up with the Gold–Exchange Standard. The disadvantages from the point of view of regulating a Gold–Exchange Standard, which arise out of there being no Government bank, are partly compensated by the Secretary of State’s being the largest dealer in foreign exchange. By regulating the amount of bills he offers for tender, he is able to regulate to a great extent the level of exchange. When exchange is falling below par he can support it by greatly restricting his offers; and if he cannot get at least 1s. 3²⁹/₃₂d. for his bills, he withdraws from the market. In the meantime, of course, he has payments to make in England, while on the other hand rupees accumulate in India, as the revenue flows in and no Council Bills are presented for payment. If the cash balances in London are not sufficient to stand the drain on them, gold at the Bank of England may be “un–earmarked” and placed to the Secretary of State’s current account, rupees in India being transferred at the same time from the Government balances to the silver portion of the Paper Currency Reserve—the reverse process from that which has been described already as the result of exceptionally large sales of Council Bills.

If the Secretary of State’s withdrawal from the market and the consequent scarcity of bills on India is insufficient to support exchange at 1s. 3²⁹/₃₂d., more drastic measures are necessary. The method adopted on the last occasion of this kind was the offer by the Government of India in Calcutta of sterling bills on London at the rate of 1s. 3²⁹/₃₂d., these bills being cashed in London out of the Gold Standard Reserve.

These measures were sufficient during the severe crisis of 1908. Their sufficiency for the future will be discussed in Chapter VI. in dealing with the Secretary of State’s Reserves.

13. If we turn from the mechanism of remittance to the question of Government remittance as a whole, this can be explained most clearly by reference to a hypothetical India Office balance–sheet. The whole account for the year balances out in some such manner as this:—

Payments

Home Charges

x

Gold “earmarked,” or securities bought for Currency Reserve in London

y

Cost of silver + profit on coinage credited to Gold Standard Reserve in London

z

Expenditure on stores in London for capital purposes in India

v

Transfer of cash balances from India to London

±

w

—————

x

+

y

+

z

+

v

±

w

═══════

Receipts

Council Bills cashed from balances in India

x

–

u

+

v

±

w

Council Bills cashed from rupees in Currency Reserve in India

y——–––

Council Bills cashed from new coinage

z——–––

——————

Total Council Bills drawn

x

+

y

+

z

–

u

+

v

±

w

Net capital borrowings in London

u

——————

Total receipts in London

x

+

y

+

z

+

v

±

w

════════

14. I will conclude this chapter with some statistics.

1909–10.

1910–11.

1911–12.

1912–13

(revised estimate)

£

£

£

£

Home Charges (net)

^(a)

18,763,000

18,003,000

18,333,000

18,986,000

Capital expenditure in England on material for railways and irrigation works

5,748,000

5,188,000

5,083,000,

7,077,000

Credited to Gold Standard Reserve in England

^(b)

8,090,000

600,000

...

1,200,000

Credited to Paper Currency Reserve in England

1,000,000

2,545,000

1,988,000

400,000

Purchase of silver

...

...

...

7,059,000

Addition to Cash Balances in England

^(c)

4,815,000

3,898,000

1,693,000

...

38,416,000

30,234,000

27,097,000

34,722,000

Council Bills and Transfers

27,096,000

^(d)

26,783,000

27,058,000

25,760,000

Gold from India

...

...

...

1,928,000

Net debt incurred in England

^(e)

11,320,000

3,451,000

39,000

–2,983,000

Reduction of Cash Balances in England

...

...

...

10,017,000

38,416,000

30,234,000

27,097,000

34,722,000

(a) After deduction of certain small sources of revenue in England and various minor adjustments.

(b) Apart from dividends earned and reinvested in England.

(c) Excluding balances in Gold Standard Reserve.

(d) Deducting bills on London sold in India.

(e) Excluding reduction of debt by annuities and sinking funds included in Home Charges.

The table given above analyses the Home Accounts in a way which brings out the essential facts more clearly than the Government’s own published accounts. These actual figures may be compared with the hypothetical balance–sheet given in § 13.

The principal items of the Home Charges are analysed below. As these do not vary much from year to year it has been thought sufficient to give the figures of one recent year, namely, 1911–12. It will be seen that in that year about £5,000,000 was spent on pensions and leave allowances, £11,000,000 on debt services, and £2,250,000 on military services (excluding pensions). Other expenses were of a very small amount.

Analysis of Home Charges in 1911–12

Superannuation and pensions

(Civil)

£2,063,100

”

”

(Military)(net)

2,471,400

Furlough allowances

426,500

Interest on ordinary debt

2,284,700

Interest on railway debt and on capital deposited by companies

5,268,600

Railway annuities and sinking funds

3,623,600

Military services (apart from pensions)

2,277,400

Miscellaneous

1,130,200

————

£19,545,500

Revenue from interest

£448,000

Miscellaneous revenue

141,600

————

589,600

—————

£18,955,900

═══════

The total drawings of Council Bills, the average, maximum and minimum rates of allotment, and the fluctuation between the maximum and minimum in recent years were as follows:—

Total Drawings

of Council Bills.

Average

Rate.

Maximum

Rate.

Minimum

Rate.

Fluctuation.

£

d

d

d

d

1901–02

18,500,000

15·987

16

·

125

15·875

·250

1902–03

18,500,000

16·002

16

·

156

15·875

·281

1903–04

23,900,000

16·049

16

·

156

15·875

·281

1904–05

24,400,000

16·045

16

·

156

15·970

·186

1905–06

31,600,000

16·042

16

·

156

15·937

·219

1906–07

33,400,000

16·084

16

·

1875

15·937

·250

1907–08

15,300,000

16·029

16

·

1875

15·875

·312

1908–09

13,900,000

15·964

16

15·875

·125

1909–10

27,400,000

16·041

16

·

156

15·875

·281

1910–11

26,500,000

16·061

16

·

156

15·875

·281

1911–12

27,100,000

16·082

16

·

156

15·937

·219

1912–13

25,700,000

16·058

16

·

156

15·970

·186

CHAPTER VI

THE SECRETARY OF STATE’S RESERVES AND THE CASH BALANCES

1. The Indian authorities have undertaken a double responsibility. They must be prepared to supply rupees in payment for Council Bills or in exchange for sovereigns. And on the other hand they must be prepared also to supply sterling or sterling drafts in exchange for rupees. The maintenance of the Indian system depends on their ability to fulfil this double obligation to whatever extent may be required of them.

The objects to be attained are simple, but the methods of the Government are, largely for historical reasons, exceedingly complicated. I will discuss, first, the nature of the existing methods; second, their adequacy for their purpose; third, some proposals for making them more orderly and intelligible; and lastly, the management of the cash balances.

2. From the profits of rupee coinage[59] a reserve has been built up expressly for the purpose of supporting exchange. This is known as the Gold Standard Reserve. As the reserve is used in practice, not only for holding sterling reserves but also for holding a part of the rupee reserve, this title is a misnomer.[60]

For some years after the closing of the Mints no fresh coinage was undertaken. By 1900 it had become necessary to mint additional rupees, and from that time until 1907 the profits on coinage rapidly raised the Gold Standard Reserve to a respectable total. The crisis of 1907–8 made it necessary to withdraw a great number of rupees from circulation, and no further coinage was necessary on a significant scale until the autumn of 1912. By October 1912 the aggregate profits arising from coinage amounted to about £18,600,000. Of this, however, about £1,100,000 was diverted in 1907 for capital expenditure on railways—leaving about £17,500,000 for the Gold Standard Reserve. In addition to this the receipts on account of interest on that part which was invested amounted to about £3,250,000, against which is to be set about £1,000,000 depreciation in the value of the investments in October 1912 as compared with their original cost. Thus at that date this reserve stood at about £19,750,000, allowing for depreciation. During the winter of 1912–13 profits on the heavy issues of coinage caused a further increase, and we may conveniently think of the Gold Standard Reserve as being worth about £21,000,000 net at the end of 1912.

Of this total the greater part was held in sterling securities—about £16,000,000 (market price). In recent times the policy has been followed of holding at least half of this in securities of the most liquid possible type. On March 31, 1912, £4,500,000 was held in British Treasury Bills, and £4,735,600 in Exchequer Bonds. Of the rest about £7,000,000 (face value) was in Consols and other stock guaranteed by the British Government, and about £1,500,000 (face value) in various Colonial Government Securities.

Apart from the £16,000,000 thus invested, about £1,000,000 was, at the end of 1912, lent at short notice in the London Money Market; about £3,750,000 was held in India in rupees; and £250,000 in gold was “earmarked” at the Bank of England. The holding of some part in actual gold in England was an innovation introduced in November 1912.

It has been announced that the Gold Standard Reserve is to be allowed to accumulate through coinage profits and interest receipts until it stands at £25,000,000, and that £5,000,000 of this will be held in gold.[61] It is possible that when this figure has been reached, some part of its income may be applied to capital expenditure on railways. This would be a reversion to the policy of 1907–8, since abandoned, when one–half of the profits of coinage was thus diverted.

The form in which the Gold Standard Reserve is held has been subject to much criticism. But it will not be useful to consider this until we are in a position to deal with the reserves as a whole.

3. The second reserve is the Paper Currency Reserve held against the note issue. The constitution of this has been explained in Chapter III. The invested portion may not exceed a stated maximum, of which a part only may be held in sterling securities and the rest must be placed in rupee securities. The whole of the balance must be held in gold or silver bullion, rupees, or sovereigns. But the gold may be held either in London or in India. The actual form in which the Currency Reserve was held at the end of December 1912 was approximately as follows:—

Sterling securities

£2,500,000

Rupee securities

6,500,000

Gold in London

7,250,000

Gold in India

17,500,000

Rupees in India

8,500,000

Silver bullion in India or in transit

1,500,000

—————–

£43,750,000

—————–

4. The Government’s remaining reserve source of supply of cash in the form of rupees or sterling is the Cash Balances. Both the total of these and the proportions held in rupees and sterling respectively vary within wide limits from time to time. Their total amount fluctuates according to the volume of taxes coming in at different seasons of the year, the recency with which loans have been contracted for capital expenditure, the proximity of extraordinary expenditure impending, the receipts of windfalls of income (as, recently, from the opium revenue), the general prosperity of the country, and the degree of caution or optimism which, in the opinion of those responsible for the finances, the general situation warrants. The proportions held in rupees and sterling respectively depend even more on considerations of temporary convenience,—recent or impending capital transactions in London, the likelihood of sterling funds being wanted for the purchase of silver, and trade demands for Council Bills as a means of remittance. The totals of the cash balances at various dates are given below.

Cash Balances^(a)

In India.

In London.

Total.

March 31,

1901

£8,767,687

£4,091,926

£12,859,613

”

1903

12,081,388

5,767,786

17,849,174

”

1905

10,597,770

10,262,581

20,860,351

”

1907

10,026,932

5,606,812

15,633,744

”

1908

12,851,413

4,607,266

17,458,679

”

1909

10,235,483

7,983,898

18,219,381

”

1910

12,295,428

12,799,094

25,094,522

”

1911

13,566,922

16,696,990

30,263,912

”

1912

12,279,689

18,390,013

30,669,702

”

1913

19,543,900

8,372,900

27,916,800

(a) Excluding balances held in the Gold Standard Reserve.

It may be added that the Indian cash balances are kept partly in District Treasuries all over the country, partly in Reserve Treasuries, and partly on deposit at the Presidency Banks. The District Treasuries do not usually contain more resources than they require for ordinary transactions, and the balances in excess of immediate requirements, which are transferred to the Reserve Treasuries, are mainly held in the form of notes. Thus the Government has no large surplus stock of rupees outside the Currency Reserve. The London Balances are held partly at the Bank of England and partly on loan for short periods with certain financial houses on an approved list.[62] No more than a working balance (about £500,000) is ordinarily held at the Bank of England, and this has been reckoned for many years now (though not formerly) amongst the “other” deposits, not amongst the “public” deposits. It will be seen from the table given above that the London Balances fell to a low level in 1908, the Secretary of State making free use of them to aid him in supporting exchange during the critical months of that year. On October 30, 1908, these balances had sunk to £1,196,691. In 1911 and 1912, on the other hand, they reached a very high figure, and in June of both these years exceeded £19,000,000. By the end of 1912 they had sunk again to a more normal level. This abnormally high level in the first half of 1912 gave rise to much criticism in regard both to the amount of the balances and also to the method adopted of lending them out in the London Money Market. Something will be said about this in the concluding paragraphs of this chapter.

5. We are now in a position to see exactly what resources in sterling and rupees respectively the Indian authorities have, on which to draw for the fulfilment of their currency obligations. Since the surplus balances in India, beyond those required by the District Treasuries and those deposited with the Presidency Banks, are mainly held in notes, we may neglect them for the present purpose.

Rupee Reserves are held partly in the Currency Reserve, partly in the Gold Standard Reserve. In December 1912 the amounts were approximately as follows:—

Currency Reserve

^(a)

£10,000,000

Gold Standard Reserve

3,750,000

—————–

£13,750,000

════════

(a) Including silver bullion in India or in transit.

Sterling Reserves are held partly in the Currency Reserve, partly in the Gold Standard Reserve, and partly in the London Cash Balances. The forms in which they are held are gold (in the Currency Reserve, both in India and London, and to a small extent in the Gold Standard Reserve), money lent at short notice (in the Gold Standard Reserve and in the Cash Balances), and sterling securities (in the Currency Reserve and in the Gold Standard Reserve). In December 1912 the amounts were approximately as follows:—

Gold

—

Currency Reserve in India

£17,500,000

Currency Reserve in London

7,250,000

Gold Standard Reserve in London

250,000

—————–

£25,000,000

════════

Money at Short Notice

—

Gold Standard Reserve in London

£1,000,000

Cash Balances in London

7,500,000

—————–

£8,500,000

════════

Sterling Securities

—

Currency Reserve

£2,500,000

Gold Standard Reserve

16,000,000

—————–

£18,500,000

════════

Aggregate Sterling Resources

—

Gold

£25,000,000

Money at Short Notice

8,500,000

Securities

18,500,000

—————–

£52,000,000

════════

6. Before we consider the adequacy of these reserves for their purposes, it will be useful to recall the circumstances of the two recent occasions on which their resources were severely taxed. The Government were hard pressed to supply sufficient rupees in 1906, and hard pressed to supply sufficient sterling in 1908. We can deal with both these occasions in a continuous narrative.

The coinage of rupees recommenced on a significant scale in 1900. For the five years following there was a steady annual demand for fresh coinage (low in 1901–2, high in 1903–4, but at no time abnormal) and the Mints were able to meet it with time to spare, though there was some slight difficulty in 1903–4. In 1905–6 the demand quickened, and from July 1905, when the Government’s silver reserves stood at what was then considered the comfortable figure of 1837 lakhs[63] (£12,250,000), it quite outstript the new supplies arising from the mintage of the uncoined silver reserve. The Government were very slow to buy more silver and, in fact, do not seem to have taken steps to do so until, in December 1905, their bullion reserve was quite exhausted. They had then to buy silver in London hurriedly and at rather a high price. In the meantime the rupee reserves had sunk to the very low figure of 761 lakhs (i.e., about 40% of the holdings six months earlier), and the demand for Council Bills in London, which would have to be cashed in rupees in India, showed no signs of abating. In order to give themselves breathing space, and to allow time for the silver recently bought in London to reach India and be coined, the Government had to raise the price of telegraphic transfers to what was then the unusually high figure of ¹/4_⁵/32. This was the worst that happened. The new coinage very quickly overtook and passed the demand, and by the end of March 1906 the available silver reserves were double what they had been in January.

This slight scare, however, was more than sufficient to make the Government lose their heads. Having once started on a career of furious coinage, they continued to do so with little regard to considerations of ordinary prudence—though their sins did not overtake them immediately. Without waiting to see how the busy season of 1906–7 would turn out, they coined heavily throughout the summer months, and, there being more silver in hand than could be conveniently held in the Currency Reserve, it was maintained, at the expense of the sterling resources, in the Gold Standard Reserve. In July 1906 the silver reserve stood at about 3200 lakhs. As a matter of fact the season of 1906–7 turned out well, and the demand for rupees was on a large scale. Yet the available silver in India hardly fell below 2000 lakhs—nearly three times the minimum at the most critical moment of the preceding year. The more than adequacy of their reserve at the busiest moment of the very busy season 1906–7 did not check, however, the impetuous activity of the Mints. During the summer of 1907, as in the summer of 1906, they continued to coin without waiting until the prosperity of the season 1907–8 was assured. In September 1907 their silver holdings in one form or another stood at the excessive figure of 3148 lakhs. This time they got what they deserved. The season of 1907–8 was a failure, and at the end of 1907 came the crisis in America. In place of there being a demand for new rupees, it was necessary to withdraw from circulation an immense volume of the old ones; and the sterling reserves, not the rupee reserves, were in danger of insufficiency. This leads us to the next chapter of the history.

7. The coinage policy of the Government of India from 1905 to 1907 suggests one obvious reflection. A succession of years, in which there is a heavy demand for currency, makes it less likely that the heavy demand will persist in the year following. The effects of heavy coinage are cumulative. The Indian authorities do not seem to have understood this. They were, to all appearances, influenced by the crude inductive argument that, because there was a heavy demand in 1905–6, it was likely that there would be an equally heavy demand in 1906–7; and, when there actually was a heavy demand in 1906–7, that this made it yet more likely that there would be a heavy demand in 1907–8. They framed their policy, that is to say, as though a community consumed currency with the same steady appetite with which some communities consume beer. In so far as the new currency is to satisfy the demands, not of hoarding, but of trade, it is hardly necessary to point out the fallacy. Moreover, even a superficial acquaintance with the currency history of India brings experience to the support of reason. Even when the rupee was worth no more than its bullion value, so that it was hoarded and melted much more than it is now, years of unusually heavy coinage were nearly always followed by a reaction. India has taken her coinage in great gulps, and it need not have been difficult to see that the demand of 1905–7 was one of these.

8. The Government of India’s silver policy during the early part of 1907 left them, therefore, in a somewhat worse position to meet the crisis which came at the end of the year, than need have been the case. But their sterling reserves were nevertheless fairly high. On September 1, 1907, they seem to have been, approximately, as follows:—

Gold

—

Currency Reserve in India

£4,100,000

Currency Reserve in London

6,200,000

—————–

£10,300,000

════════

Money at Short Notice

—

Gold Standard Reserve in London

£50,000

Cash Balances in London

5,150,000

—————–

£5,200,000

════════

Sterling Securities

—

In Currency Reserve

£1,300,000

^(a)

In Gold Standard Reserve

14,100,000

^(a)

—————–

£15,400,000

════════

Aggregate Sterling Reserves

—

Gold

£10,300,000

Money at Short Notice

5,200,000

Securities

15,400,000

—————–

£30,900,000

════════

(a) Book value.

Thus, to take a round figure, the crisis found the Secretary of State with about £31,000,000 in hand. The storm was soon on him. By the end of October 1907 it had become plain that the Indian harvest would be a bad one, and the financial crisis in the United States was fast developing. On November 4 the Bank of England raised its rate to 6 per cent, and on November 7 (for the first time since 1873) to 7 per cent. On November 6 the Secretary of State could only manage to sell even 30 lakhs of rupees by allowing the rate to drop to the minimum figure of 1s. 3²⁹/₃₂d. For several weeks following, at a time of year when the demand for Council Bills is usually strong, he sold none at all. But beyond withdrawing from the market he took no further steps for the support of exchange. This measure was inadequate to effect its purpose, and there is a good deal to be said for the view that he ought to have taken at once the more drastic steps for maintaining the gold value of the rupee which he had to take a few months later. However, it was a perplexing and unprecedented time for every one, and that it was some weeks before his advisers found their bearings is not to be wondered at.

So inadequate was his action that at first the fall in exchange was scarcely stayed at all. Tumbling day by day, it reached on November 25 the rate of ¹/_3¹¹/16. This is below the gold export point (from India), and it could not have fallen so low if the Government had made gold freely available in India. But, as can be seen from the preceding table, their Indian gold reserve was not large. Individuals were not permitted, therefore, to take out more than £10,000 at a time; and in this manner the gold dribbled slowly away over a period of a few months. It would probably have been of more use if it had been allowed to disappear in a week at the moment when it was most badly wanted.

In the meantime the Secretary of State, deprived of his usual source of income from the sale of Council Bills, was meeting his normal expenses from the gold portion of the Currency Reserve in London. But the Gold Standard Reserve, although about £1,000,000 worth of Consols was sold out in order to be ready for use in a more liquid form, was kept so far intact.

Thus matters went on until the end of December 1907, when the authorities nerved themselves, although the immediate necessity had temporarily disappeared through a slight strengthening of exchange, to take whatever drastic steps might be necessary to maintain the gold value of the rupee. It was announced that they would sell in India telegraphic transfers on London at a fixed rate. Before the need arose for acting on this announcement, it was changed into an offer to sell sterling bills on London at the fixed minimum rate of ¹/3_²⁹/32.

By March 1908 the reserves of actual gold were nearly exhausted, but the securities and cash at short notice had not yet been trenched on. Early in April exchange was again weak, and the offer referred to above came into active operation. At first £500,000 a week, and later £1,000,000 a week of sterling bills on London were sold in India at ¹/3_²⁹/32. These were cashed in London from the proceeds of selling securities from the Gold Standard Reserve. By August 1908 about £8,000,000 of bills had been cashed in this way. At the beginning of September 1908 the sterling reserves, which I give for comparison with the amounts in September 1907 quoted above, were, approximately, as follows:—

Gold

—

Currency Reserve in India

£150,000

Currency Reserve in London

1,850,000

—————–

£2,000,000

════════

Money at Short Notice

—

Gold Standard Reserve in London

nil.

Cash Balances in London

£1,850,000

—————–

£1,850,000

════════

Sterling Securities

—

In Currency Reserve

£1,300,000

In Gold Standard Reserve

6,000,000

—————–

£7,300,000

════════

Aggregate Sterling Resources

—

Gold

£2,000,000

Money at Short Notice

1,850,000

Securities

7,300,000

—————–

£11,150,000

════════

9. Thus the Secretary of State’s sterling resources sank in the course of a year from about £31,000,000 to about £11,000,000. But these figures do not supply by themselves a complete explanation of the manner in which he had financed himself in London during this period. Between September 1907 and September 1908 railway loans to the aggregate amount of about £12,500,000 and a loan of £2,000,000 for “general purposes”[64] were raised in sterling.[65] A large part of the former was required for the discharge of some previously existing railway debentures, and for the purchase in England of railway materials chargeable to capital account. In so far as the loan was used for these purposes it did not help the general position. But in so far as it was used for railway construction which could be paid for by rupees in India, it had the effect of increasing the Secretary of State’s sterling resources by a corresponding amount. Altogether, during the period under review, the net assistance obtained by loans amounted, I think, to about £4,500,000; so that the total deterioration in the Secretary of State’s position during the first year of the depression was not far short of £25,000,000.

After October 1908 the market still showed some hesitation. If the season had turned out poorly, it is clear that the Secretary of State must have had recourse to borrowing on a fairly heavy scale. In fact the harvest was satisfactory, and by December 1908 the demand for Council Bills was strong. It may be added to complete the story, that in August and September 1909 there was a short period of weakness when it was again necessary to offer sterling bills in Calcutta. Since that time India has enjoyed a period of very great prosperity, and, so far from the reserves being tested, it has been possible to build up the very strong position analysed above.

10. I have looked at the crisis so far from the point of view of its effect in depleting the sterling resources of the Secretary of State. To the authorities in India it presented its other face. There it was a question of how many rupees they would be able to withdraw from circulation. Unless there is a deficiency in the revenue from taxation, and apart from loans, the extent to which the Secretary of State can draw on sterling resources must exactly equal the extent to which the Government of India can withdraw rupees from circulation. For every transfer from the sterling branch of any of the reserves must be balanced by a corresponding transfer into the rupee branch. The amount of the sterling reserves is a measure of the ability of the authorities to withdraw rupees; and conversely, the volume of rupees which can be spared from the circulation (or from hoards) in bad times sets an upper limit to the extent to which they can be compelled to draw on their sterling reserves for the support of the currency.

Regarded from this standpoint, the facts were as follows:—By March 1908 nearly 115 million rupees had been withdrawn into the currency reserve by the release of gold, and by December 1908 the figure had risen to 154 million. Up to March 1908 it had not been necessary to take rupees into the Gold Standard Reserve; but by the end of November 1908 about 130 million rupees had been withdrawn in this way. There was also a small increase of rupees in that part of the Indian Cash Balances which is held in rupees and not in currency notes. Thus the active circulation was reduced altogether by about 285 million rupees (£19,000,000). This figure agrees closely enough with the figures we reached by studying the state of the sterling resources.

11. This completes the narrative of events up to the end of the crisis of 1908. I have given only such details as are relevant to my main topic—the adequacy of the reserves to fulfil their purpose.

12. Let us consider, first, the adequacy of the reserve of coined rupees. The governing facts of the situation are that every addition to the rupee reserve diminishes to an equivalent extent the amount available for the sterling reserve; that if the rupee reserve is insufficient, nothing worse can happen than some delay and inconvenience to merchants at a time of boom, whereas, if the sterling reserve is insufficient, a dangerous crisis may be aggravated to the pitch of panic; that at the last moment the rupee reserve can always be replenished with no very great delay from the resources of the sterling reserve, whereas the reverse is not the case (the silver being not so saleable at a crisis as the gold is in a boom); and that, therefore, it is desirable to keep the rupee reserve at the lowest possible point consistent with probability and ordinary prudence. The practical information chiefly required for settling the proper policy is in regard to the ease with which new rupees can be supplied as they are wanted—as to how far, that is to say, the Government can safely pursue the policy of living from hand to mouth. This depends upon how fast silver can be bought by the Government without its submitting to extravagant charges, and how fast, in relation to the maximum rates of new demand so far experienced, the Indian Mints can turn the silver into rupees.

13. The Government of India’s recent attempt to solve the first part of the problem unhappily involved its officers in a good deal of obloquy. The silver market is a very narrow one and can only be dealt in through the agency of one or other of a very small number of brokers. A ring of speculators lay waiting to force prices up as soon as the Government should appear as a buyer. Apart from the brokers who acted for the ring, there was only one firm in a position to buy large quantities of silver with the secrecy which was necessary if the speculators were to be defeated. Unfortunately the head of this firm was closely related by blood to the Parliamentary Under–Secretary of State. Two courses were open: to buy openly and pay such extra price as the speculators might find themselves in a position to demand, or to risk charges of venality from any one who might have an interest in discrediting the Government—disappointed speculators, currency malcontents, or members of the political party in opposition. The officials, thinking (bureaucratically) more of the Indian Exchequer and the Indian taxpayer than of the House of Commons, chose, in fact, the second of the two alternatives—in a spirit, perhaps, of too great innocence, bred of long immunity from charges of personal corruption. It turned out that they had made insufficient allowance for the deep interest which the House of Commons takes in suggestions of personal scandal. The question of Indian currency became almost interesting. Members asked one another what the Gold Standard Reserve might be, and, when writers in the Press told them, were duly horrified to learn that it contained no gold. Closer inquiry elicited further facts unsuspected hitherto. It was discovered that a number of the most prominent members of the London Money Market were Jews, and that the Government of India’s holdings of Consols had depreciated in market value since they were bought. But attention was specially concentrated on the fact that the cash balances held in London, after fluctuating considerably from time to time, had risen for a year past to an unusually high level, and had been lent out at low rates of interest to persons many of whom bore foreign names. How was the ordinary member of Parliament to be sure that some cosmopolitan syndicate of Jews was not fattening at the expense of the ryots of India, whose trustee he had often declared himself to be? Indian currency is too complicated a subject to be mastered at a moment’s notice; and many persons, without paying much attention to random charges of corruption, felt, quite legitimately, that there was a great deal going on of which they had no conception, and that they would like to be fully satisfied for themselves, and not merely on the word of the officials, that everything was really in order. The situation in its fundamentals has arisen before, and will arise from time to time in the future so long as the relations of the House of Commons to India combine in a high degree responsibility and ignorance.

14. The circumstances themselves are of very transient importance, but they are likely to have some permanent effect on the particular question which we are now discussing. It will be too much to expect the officials to expose their personal reputations again to a suspicion, however ill–founded, even in the interests of the Indian Exchequer. Next time that the Government of India have to buy silver on a large scale, it is likely that they will do so publicly and pay such extra price as this policy involves. It is not worth a Government’s while to risk its transactions falling into suspicion in order to save half a million pounds. Assuming, therefore, that in future the Government will have to buy publicly, we have to consider whether it is likely to be cheaper for them to buy when the price of silver seems low, and hold stocks in hand, or to wait until the last moment and buy at whatever price is then ruling. I am inclined to think that the second of these two policies is the better—though it is plainly a matter on which it is not possible at present to see one’s way clearly. It is outside the ordinary run of Government officials’ duties to judge whether or not a given time is a good one at which to buy silver. The speculative business of estimating the future of silver is best left to experts in the matter, even though the price ultimately paid has to include some commission to them for their services or their foresight. In the second place the history of the recent speculative ring in silver, so far as it can be known to an outsider, does not suggest that such a transaction is a very easy or profitable thing to carry through, or that the speculators have had a sufficiently striking success to encourage similar attempts on a large scale in the future. I do not know with what profit the ring have emerged from the transaction; but the expense of carrying silver for a long period is great, and the rise in its price in the last two years, though substantial, has not been enough—so far as one can judge—to leave a surplus of profits at all commensurate with the great risks run. In the third place, it does not seem certain that the urgent demands for fresh coinage of rupees, to which India is subject from time to time, will be as frequent in the future as they have been in the immediate past. On the one hand the heavy coinages since 1900 are cumulative in their effect and render further coinages in the future less probable; and on the other hand an increased use (it is to be hoped) of other media of exchange will allow an urgent demand for currency to be met in other ways.

15. I do not think, therefore, that the Government need show a very long foresight lest they should have to buy silver dear. But when their stocks are falling low and there are apparently signs of demand in the immediate future, how long can coinage be delayed safely? To answer this we need to know the maximum rate of output of the Mints, and the maximum rate of absorption of new currency so far experienced.

16. The rates of absorption of rupees in various years have been given in the Table on p. 55. The maximum absorption in the October to December quarter was 11·39 lakhs in 1905–6, and the maximum in the January to March quarter was 2·68 lakhs in 1909–10. It has been estimated that the Indian Mints can turn out 2·25 lakhs of rupees per month without overtime, and 4·50 lakhs per month with overtime. There seems little reason, therefore, for over–anxiety lest the Government be caught short of rupees. If they were to start the busy season with a surplus of 500 or 600 lakhs over what was considered a safe minimum, the reasonable demands of prudence would have been fully satisfied. The safe minimum in question must necessarily depend on circumstances, especially on the volume of the note issue and on the amount of gold held in India; it is impossible to suggest any figure which would be permanently suitable. I am dealing merely with the surplus over this minimum which, on the basis of experience, the Government might reasonably take pains to have in stock at the beginning of a busy season. The calculation refers throughout to their aggregate rupee resources in the Currency Reserve and Gold Standard Reserve combined.

17. We now come to the much more important question of the adequacy of the sterling reserves.

I do not think it has ever been thought out quite clearly for what precise purposes these reserves are held. The difficulty can be put shortly in this question,—Are they held purely as a currency reserve, or are they to fulfil also the purpose of a banking reserve? Is their only purpose, that is to say, to make certain that the Government will always be able to exchange for sterling such rupees and notes as may be presented to them, or are they also intended to ensure India’s being able to meet her international obligations at a time of dangerous crisis? The two purposes are plainly not identical. If all bankers and merchants keep adequate reserves in rupees and notes, then it will be sufficient if the Government are always able to turn these rupees and notes into sterling. But if in a financial crisis the Indian Money Market as a whole is in fact unable to meet its international obligations without Government assistance, is it the Government’s intention to stand calmly aside and permit (for example) a suspension of cash payments by the three Presidency Banks, or will they, if necessary, use their sterling reserves to give some support to the Indian Money Market in extremis?

If the Government’s Reserve is held purely to support the currency, then the maximum volume of rupees and notes, which could, so far as one can anticipate, be spared from the circulation and tendered to the Government for exchange, sets an upper limit to the necessary amount of this Reserve. If, on the other hand, it is intended to act as a banking reserve and to ensure India’s ability to meet her international obligations at all times, then its upper limit is set by the probable maximum amount of the adverse balance which could arise against India for immediate payment.

18. I will begin by discussing this question on the first hypothesis—that what the Government has been accumulating is intended to serve as a currency reserve only—and will return later to the problem of a reserve held for wider purposes, and of the possible magnitude of the balance of international indebtedness against India.

19. To estimate the demand that the reserves might have to meet merely in order to support the currency, the existing volume of currency is what we chiefly require to know. For this sets, or suggests, a limit to the maximum amount which can possibly be spared from the active circulation.

Attempts to estimate the rupee circulation of India have been the occasion of some very interesting calculations. For many years past (since 1875) an annual census of rupees has been taken by examining in each Government Treasury a bag containing 2000. This enabled Mr. F. C. Harrison, when he was Comptroller of Currency, to apply the Jevonian method very fully; and he was also able to corroborate his estimates by reference to the numbers of the older issues, 1835 and 1840 (e.g.), actually withdrawn from circulation on the occasions when the Mint recalled them. Mr. Harrison’s results were checked by the labours of a later Comptroller of Currency, Mr. Adie, who applied to the same material two alternative methods of much greater technical complexity than Mr. Harrison’s.[66]

Jevons’s method is based on the assumptions that the proportions of coins issued at different dates found in the given samples roughly correspond to their proportions in the circulation at large, and that the numbers in circulation of the latest issues do not much differ from the numbers issued from the Mint. In short, if we know the relative proportions of coins of 1860 and of 1912 in the circulation, and if we know, approximately, the absolute number of coins of 1912, we can calculate the absolute number still circulating of the coins of 1860. In applying this method to the Indian data, we are assuming that the proportions of rupees of each date found in the bags examined in a great number of scattered Government Treasuries are a fair sample of the proportions still in circulation throughout the country. In a country such as India, however, there may be great stagnancy in a part of the circulation, and the coins finding their way to the Government Treasuries may be a sample rather of the floating surplus of coinage, which has a relatively high velocity of circulation, than of the total stock, which includes semi–hoards passing from hand to hand comparatively seldom. Since these samples are likely, therefore, to contain an undue proportion of recent issues, estimates of the total circulation, which are based on them, may be expected to fall short of the truth rather than to exceed it. There is reason, also, for supposing that in some cases the officials charged with the duty of examining the samples did not always deal with them conscientiously. A tendency was noticed for the returns of one year to resemble those of the previous year more closely than they should, and not infrequently a batch of coins would be attributed to a year in which it is known that none were minted. Nevertheless the calculations of Mr. Harrison and Mr. Adie, and the data on which they are based, seem on the whole coherent, and bear, so far as one can judge, the marks of substantial accuracy.

A quite different method of estimating the circulation has been adopted by Mr. F. J. Atkinson.[67] His method is direct; and consists in a calculation or estimate of the additions to the currency and the losses from export, melting, etc., year by year, from 1831 when the modern coinage first began. Some of the items in the calculation are definitely known, but others, the amount annually melted, for example, are almost entirely a matter of guesswork. The fact that his calculations contain altogether a great number of separate guesses does not prevent his final result from being a guess too. For the period previous to the closing of the Mints some of his estimates for the amount melted seem very low, and this may possibly explain why his final results yield a much higher total for the circulation than those of Mr. Harrison and Mr. Adie. In recent times, i.e. since the closing of the Mints, and specially since the new equilibrium which was reached in 1900, Mr. Atkinson’s method is much more satisfactory than for earlier years and, since the doubtful items are in these later years a far smaller proportion of the whole, much less likely to lead us wrong. For the earlier years, therefore, I am inclined to prefer Mr. Harrison’s conclusions; but I think they can be brought up to date by a year–to–year method resembling Mr. Atkinson’s. The increase in Mr. Atkinson’s estimate during the ’nineties is due to the fact that, as his figures purport to exclude rupees in hoards, he must make large allowance for the coins from this source then entering into circulation.

The actual figures are as follows:—

Estimate of the Rupee Currency in Crores (10,000,000) Of Rupees

Harrison.

Adie,

1st method.

Adie,

2nd method.

Atkinson.

^(a)

1881

{

about

115

108

...

135

1882

111

108

133

1883

113

110

136

1884

106

107

136

1885

104

105

139

1886

106

110

145

1887

...

109

108

148

1888

120

106

106

152

1889

...

112

112

154

1890

...

121

115

159

1891

...

121

116

166

1892

125

129

121

167

1893

128

132

130

173

1894

...

129

126

176

1895

...

128

127

169

1896

...

121

120

172

1897

...

116

116

178

1898

120

118

113

183

1899

...

118

112

178

1900

...

...

...

177

1901

...

...

...

189

(a) Of Mr. Atkinson’s two separate calculations, made in 1897 and 1903, I have taken the latter. His calculation explicitly excludes rupees in hoards, currency reserves, and Government balances; and is not, therefore, entirely comparable with the others. If it were, the excess would be considerably greater than it actually appears above.

20. These are the data. It is very difficult to estimate the extent to which rupees may have emerged from hoards during the period which succeeded the closing of the Mints. Mr. Atkinson’s figures suggest that rupees from this source not only made good the natural wastage in the active circulation but actually brought about a large increase in it. Judging from the course of prices, I think he must have made an excessive allowance under this head. The figures of Mr. Harrison and Mr. Adie, on the other hand (which refer to the total circulation), point to a more moderate influx out of hoards into current use. I propose to take a middle course, nearer, however, to Mr. Harrison than to Mr. Atkinson, and to assume a public circulation in 1900 (i.e., excluding rupees in the Currency Reserve and Government Balances) of 120 crores of rupees. This estimate is probably near enough to the truth for our purpose. If it is incorrect, I think it is more likely to be an underestimate than an overestimate.

Starting from this assumption, I have worked out the details given in the following table as a guide to the probable circulation at the present time. By public circulation, whether of rupees or notes, I mean the whole circulation not in the hands of the Government—i.e., including that in the hands of the banks. I am primarily concerned with the circulation of rupees; but the public circulation of notes has been added in the last column but one, as it is useful to know at the same time the total public circulation of currency.

Currency in Lakhs of Rupees

Financial

Year,

April 1–

March 31.

Public

Circolation

of Rupees

on April 1.

New

Coinage

less

Recoinage,

^a

etc.

^b

Rupees

released

from

Currency,

Gold

Exchange

Standard,

and

Treasury

Reserves.

Net

^c

Export

Public

Circolation

of Rupees

on March 31.

^d

Public

Circolation

of Notes

on March 31.

Total

Currency

in the hands

of the

Public on

March 31.

^d

1900–1901

120,00

+

13,60

–

4,66

–

35

=128,59

+23,79

=152,38

1901–1902

128,59

+

2,04

–

2,72

–

1,42

=126,49

+24,24

=150,73

1902–1903

126,49

+

60

–

58

–

2,23

=124,28

+28,87

=153,15

1903–1904

124,28

+

11,42

–

45

+

40

=135,65

+31,54

=167,19

1904–1905

135,65

+

6,88

+

55

–

61

=142,47

+33,73

=176,20

1905–1906

142,47

+

16,11

–

2,11

–

78

=155,69

+37,90

=193,59

1906–1907

155,69

+

22,88

–

4,88

–

1,28

=172,41

+41,20

=213,61

1907–1908

172.41

+

15,48

–

11,56

–

41

=175,92

+38,65

=214,57

1908–1909

175,92

+

2

–

14,90

–

29

=160,75

+39,23

=199,98

1909–1910

160,75

+

8

+

13,14

–

1,39

=172,42

+46,51

=218,93

1910–1911

172,42

–

42

+

3,76

–

1,72

=174,04

+45,68

=219,72

1911–1912

174,04

–

7

+

11,61

–

1,13

=184,41

+53,24

=237,65

1912–1913

184,41