Indian Currency and Finance
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Title: Indian Currency and Finance
Author: John Maynard Keynes
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*** START OF THE PROJECT GUTENBERG EBOOK INDIAN CURRENCY AND FINANCE ***
INDIAN CURRENCY AND FINANCE
[Illustration]
MACMILLAN AND CO., LIMITED
LONDON · BOMBAY · CALCUTTA
MELBOURNE
THE MACMILLAN COMPANY
NEW YORK · BOSTON · CHICAGO
DALLAS · SAN FRANCISCO
THE MACMILLAN CO. OF CANADA, LTD.
TORONTO
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. 3–29/32d. 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.
3–29/32d. This means in practice that the extreme limits of variation
of the sterling value of the rupee are 1s. 4⅛d. and 1s. 3–29/32d.
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. 3–29/32d. 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 8½
” ” 1885–1886 9½
” ” 1890–1891 11½
” ” 1895–1896 19
” ” 1900–1901 17½
” ” 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 │ 7½ │ 1½ │ 9 │
│ 1901 │ 6 │ nil │ 6 │
│ 1902 │ 7 │ nil │ 7 │
│ 1903 │ 10 │ nil │ 10 │
│ 1904 │ 11 │ nil │ 11 │
│ 1905 │ 10½ │ nil │ 10½ │
│ 1906 │ 4 │ 7 │ 11 │
│ 1907 │ 3½ │ 7 │ 10½ │
│ 1908 │ 2½ │ 3½ │ 6 │
│ 1909 │ nil │ 1½ │ 1½ │
│ 1910 │ 6 │ 2½ │ 8½ │
│ 1911 │ 6 │ 5 │ 11 │
│ 1912 │ 15½ │ 5½ │ 21 │
│ 1913 │ 19½ │ 6 │ 25½ │
└───────────┴───────────┴────────────┴────────┘
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 │ 1906–1907. │ 1907–1908.(a) │ 1908–1909. │
│ Minimum ├───────┬───────┼───────┬───────┼───────┬───────┤
│and Maximum │ │ │ │ │ │ │
│ active │ 1. │ 2. │ 1. │ 2. │ 1. │ 2. │
│circulation.│ │ │ │ │ │ │
├────────────┼───────┼───────┼───────┼───────┼───────┼───────┤
│Min.— │ │ │ │ │ │ │
│ June │ 31,15 │ 14,41 │ 35,04 │ 13,01 │ 31,13 │ 14,12 │
│ July │ 32,43 │ 12,87 │ 34,43 │ 15,89 │ 31,58 │ 16,52 │
│ August │ 32,11 │ 13,59 │ 34,30 │ 17,47 │ 31,90 │ 12,71 │
│ │ │ │ │ │ │ │
│Max.— │ │ │ │ │ │ │
│ January │ 35,54 │ 9,11 │ 33,20 │ 8,62 │ 33,67 │ 8,54 │
│ Feb │ 36,07 │ 9,42 │ 33,28 │ 9,38 │ 34,36 │ 9,50 │
│ March │ 36,45 │ 10,50 │ 32,61 │ 14,28 │ 34,95 │ 10,54 │
└────────────┴───────┴───────┴───────┴───────┴───────┴───────┘
┌────────────┬───────────────┬───────────────┬───────────────┐
│ Months of │ 1909–1910. │ 1910–1911. │ 1911–1912. │
│ Minimum ├───────┬───────┼───────┬───────┼───────┬───────┤
│and Maximum │ │ │ │ │ │ │
│ active │ 1. │ 2. │ 1. │ 2. │ 1. │ 2. │
│circulation.│ │ │ │ │ │ │
├────────────┼───────┼───────┼───────┼───────┼───────┼───────┤
│Min.— │ │ │ │ │ │ │
│ June │ 34,19 │ 15,10 │ 36,58 │ 20,37 │ 38,44 │ 19,78 │
│ July │ 34,31 │ 17,22 │ 36,56 │ 22,60 │ 39,15 │ 21,14 │
│ August │ 35,49 │ 16,25 │ 36,86 │ 21,20 │ 40,99 │ 18,70 │
│ │ │ │ │ │ │ │
│Max.— │ │ │ │ │ │ │
│ January │ 41,47 │ 10,37 │ 39,67 │ 11,45 │ 44,14 │ 10,56 │
│ Feb │ 41,45 │ 9,12 │ 40,95 │ 12,57 │ 44,58 │ 12,61 │
│ March │ 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)
Key
R. = Rupees.
N. = Notes.
┌─────────┬───────────┬───────────┬───────────┬───────────┬───────────┐
│ │ April to │ July to │ Oct. to │ Jan. to │ │
│ │ June. │ Sept. │ Dec. │ March. │Whole Year.│
│ Year. ├─────┬─────┼─────┬─────┼─────┬─────┼─────┬─────┼─────┬─────┤
│ │ R. │ N. │ R. │ N. │ R. │ N. │ R. │ N. │ R. │ N. │
├─────────┼─────┼─────┼─────┼─────┼─────┼─────┼─────┼─────┼─────┼─────┤
│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)│ (2) │(3)=(4)+(5)│ (4) │ (5) │
│ │ │Net Addition│ │ │ │
│ │ │ to Gold │ Net │ Net │ Net │
│ │Net Addition│ in Paper │ Addition │Addition │ Addition │
│ │to Stock of │ Currency │ to Stock │ to │ to │
│ │ Gold:— │ Reserve │ of │ Bullion │Sovereigns│
│ │ Imports – │ and │ Gold │ in Hands│ in │
│ │ Exports + │ Treasuries.│ in Hands │ of │ Hands of │
│ │ Production.│ (a) │ of Public.│ Public. │ 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.
4–3/32d.), 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. 4–5/32d. 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. 3–31/32d. 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. 3–15/16d.,
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. 3–15/16d. 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. 4–1/16d., 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. 3–29/32d. 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. 3–29/32d.
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. 3–29/32d., 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. 3–29/32d., 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 │ Average│ Maximum│ Minimum│Fluctuation.│
│ │of Council Bills.│ Rate. │ Rate. │ Rate. │ │
├——────——┼————────────————–┼—────———┼—────———┼——────——┼——──────————┤
│ │ £ │ 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 ¼–5/32. 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. 3–29/32d. 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 ⅓–11/16. 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
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