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Title: The Problem Of The Rupee
Author: Ambedkar, Bhimrao Ramji
Language: English
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                        THE PROBLEM OF THE RUPEE

                      ITS ORIGINS AND ITS SOLUTION


                             B. R. AMBEDKAR

   Sometime Professor of Political Economy at the Sydenham College of
                    Commerce and Economics, Bombay.


                         P. S. KING & SON, LTD.




                            TO THE MEMORY OF


                           FATHER AND MOTHER


 _Printed in Great Britain by_ Butler & Tanner Ltd., _Frome and London_


In the following pages I have attempted an exposition of the events
leading to the establishment of the exchange standard and an examination
of its theoretical basis.

In endeavouring to treat the historical side of the matter I have
carefully avoided repeating what has already been said by others.  For
instance, in treating of the actual working of the exchange standard I
have contented myself with a general treatment just sufficiently
detailed to enable the reader to follow the criticism I have offered. If
more details are desired they are given in all their amplitude in other
treatises.  To have reproduced them would have been a work of
supererogation; besides it would have only obscured the general trend of
my argument.  But in other respects I have been obliged to take a wider
historical sweep than has been done by other writers.  The existing
treatises on Indian currency do not give any idea, at least an adequate
idea, of the circumstances which led to the reforms of 1893.  I think
that a treatment of the early history is quite essential to furnish the
reader with a perspective in order to enable him to judge for himself
the issues involved in the currency crisis and also of the solutions
offered. In view of this I have gone into that most neglected period of
Indian currency extending from 1800 to [pg vi] 1893.  Not only have
other writers begun abruptly the story of the exchange standard, but
they have popularised the notion that the exchange standard is the
standard originally contemplated by the Government of India.  I find
that this is a gross error.  Indeed the most interesting point about
Indian currency is the way in which the gold standard came to be
transformed into a gold exchange standard. Some old but by now forgotten
facts had therefore to be recounted to expose this error.

On the theoretical side there is no book but that of Professor Keynes
which makes any attempt to examine its scientific basis.  But the
conclusions he has arrived at are in sharp conflict with those of mine.
Our differences extend to almost every proposition he has advanced in
favour of the exchange standard.  This difference proceeds from the
fundamental fact, which seems to be quite overlooked by Professor
Keynes, that nothing will stabilise the rupee unless we stabilise its
general purchasing power.  That the exchange standard does not do. That
standard concerns itself only with symptoms and does not go to the
disease: indeed, on my showing, if anything, it aggravates the disease.

When I come to the remedy I again find myself in conflict with the
majority of those who like myself are opposed to the exchange standard.
It is said that the best way to stabilise the rupee is to provide for
effective convertibility into gold.  I do not deny that this is one way
of doing it.  But I think a far better way would be to have an
inconvertible rupee with a fixed limit of issue.  Indeed, if I had any
say in the matter I would propose that the Government of India should
melt the rupees, sell them as [pg vii] bullion and use the proceeds for
revenue purposes and fill the void by an inconvertible paper.  But that
may be too radical a proposal, and I do not therefore press for it,
although I regard it as essentially sound.  In any case the vital point
is to close the Mints not merely to the public, as they have been, but
to the Government as well.  Once that is done I venture to say that the
Indian currency, based on gold as legal tender with a rupee currency
fixed in issue, will conform to the principles embodied in the English
currency system.

It will be noticed that I do not propose to go back to the
recommendations of the Fowler Committee.  All those who have regretted
the transformation of the Indian currency from a gold standard to a gold
exchange standard have held that everything would have been all right if
the Government had carried out _in toto_ the recommendations of that
Committee.  I do not share that view.  On the other hand, I find that
the Indian currency underwent that transformation _because_ the
Government carried out those recommendations.  While some people regard
that Report as classical for its wisdom, I regard it as classical for
its nonsense.  For I find that it was this Committee which, while
recommending a gold standard, also recommended and thereby perpetuated
the folly of the Herschell Committee, that Government should coin rupees
on its own account according to that most naïve of currency principles,
the requirements of the public, without realising that the latter
recommendation was destructive of the former.  Indeed, as I argue, the
principles of the Fowler Committee must be given up if we are to place
the Indian currency on a stable basis. [pg viii]

I am conscious of the somewhat lengthy discussions on currency
principles into which I have entered in treating the subject.  My
justification of this procedure is two-fold.  First of all, as I have
differed so widely from other writers on Indian currency, I have deemed
it necessary to substantiate my view-point even at the cost of being
charged with over-elaboration.  But it is my second justification which
affords me a greater excuse.  It consists in the fact that I have
written primarily for the benefit of the Indian public, and, as their
grasp of currency principles does not seem to be as good as one would
wish it to be, an over-statement, it will be agreed, is better than an
understatement of the argument on which I have based my conclusions.

Up to 1913, the Gold Exchange Standard was not the avowed goal of the
Government of India in the matter of Indian Currency, and although the
Chamberlain Commission appointed in that year had reported in favour of
its continuance, the Government of India had promised not to carry its
recommendations into practice till the war was over and an opportunity
had been given to the public to criticize them.  When, however, the
Exchange Standard was shaken to its foundations during the late war, the
Government of India went back on its word and restricted,
notwithstanding repeated protests, the terms of reference to the Smith
Committee to recommending such measures as were calculated to ensure the
stability of the Exchange Standard, as though that standard had been
accepted as the last word in the matter of Indian Currency.  Now that
the measures of the Smith Committee have not ensured the stability of
the Exchange Standard, it is given [pg ix] to understand that the
Government, as well as the public, desire to place the Indian Currency
System on a sounder footing.  My object in publishing this study at this
juncture is to suggest a basis for the consummation of this purpose.

I cannot conclude this preface without acknowledging my deep sense of
gratitude to my teacher, Prof. Edwin Cannan, of the University of London
(School of Economics).  His sympathy towards me and his keen interest in
my undertaking have placed me under obligations which I can never repay.
I feel happy to be able to say that this work has undergone close
supervision at his hands, and although he is in no way responsible for
the views I have expressed, I can say that his severe examination of my
theoretic discussions has saved me from many an error.  To Professor
Wadia, of Wilson College, I am thankful for cheerfully undertaking the
dry task of correcting the proofs. [pg x]

[pg xi]


                      _By Professor Edwin Cannan_

I am glad that Mr. Ambedkar has given me the opportunity of saying a few
words about his book.

As he is aware, I disagree with a good deal of his criticism.  In 1893 I
was one of the few economists who believed that the rupee could be kept
at a fixed ratio with gold by the method then proposed, and I did not
fall away from the faith when some years elapsed without the desired
fruit appearing (see _Economic Review_, July 1898, pp. 400—403).  I do
not share Mr. Ambedkar’s hostility to the system, nor accept most of his
arguments against it and its advocates.  But he hits some nails very
squarely on the head, and even when I have thought him quite wrong, I
have found a stimulating freshness in his views and reasons.  An old
teacher like myself learns to tolerate the vagaries of originality, even
when they resist “severe examination” such as that of which Mr. Ambedkar

In his practical conclusion I am inclined to think he is right.  The
single advantage offered to a country by the adoption of the
gold-exchange system instead of the simple gold standard is that it is
cheaper, in the sense of requiring a little less value in the shape of
metallic currency than the gold standard.  But all that can be saved in
this way is a trifling amount, almost infinitesimal beside the advantage
of having a currency more difficult for [pg xii] administrators and
legislators to tamper with.  The recent experience both of belligerents
and neutrals certainly shows that the simple gold standard, as we
understood it before the war, is not fool-proof, but it is far nearer
being fool-proof and knave-proof than the gold-exchange standard.  The
percentage of administrators and legislators who understand the gold
standard is painfully small, but it is and is likely to remain ten or
twenty times as great as the percentage which understands the
gold-exchange system.  The possibility of a gold-exchange system being
perverted to suit some corrupt purpose is very considerably greater than
the possibility of the simple gold standard being so perverted.

The plan for the adoption of which Mr. Ambedkar pleads, namely that all
further enlargement of the rupee issue should be permanently prohibited,
and that the mints should be open at a fixed price to importers or other
sellers of gold, so that in course of time India would have, in addition
to the fixed stock of rupees, a currency of meltable and exportable gold
coins, follows European precedents.  In eighteenth-century England the
gold standard introduced itself because the legislature allowed the
ratio to remain unfavourable to the coinage of silver: in
nineteenth-century France and other countries it came in because the
legislatures definitely closed the mints to silver when the ratio was
favourable to the coinage of silver.  The continuance of a mass of full
legal tender silver coins beside the gold would be nothing novel in
principle, as the same thing, though on a somewhat smaller scale, took
place in France, Germany, and the United States.

It is alleged sometimes that India does not want [pg xiii] gold coins. I
feel considerable difficulty in believing that gold coins of suitable
size would not be convenient in a country with the climate and other
circumstances of India.  The allegation is suspiciously like the old
allegation that the “Englishman prefers gold coins to paper,” which had
no other foundation than the fact that the law prohibited the issue of
notes for less than £5 in England and Wales, while in Scotland, Ireland,
and almost all other English-speaking countries notes for £1 or less
were allowed and circulated freely.  It seems much more likely that
silver owes its position in India to the decision which the Company made
before the system of standard gold and token silver was accidentally
evolved in 1816 in England, and long before it was understood: and that
the position has been maintained not because Indians dislike gold, but
because Europeans like it so well that they cannot bear to part with any
of it.

This reluctance to allow gold to go to the East is not only despicable
from an ethical point of view.  It is also contrary to the economic
interest not only of the world at large, but even of the countries which
had a gold standard before the war and have it still or expect soon to
restore it.  In the immediate future gold is not a commodity the use of
which it is desirable for these countries either to restrict or to
economize.  From the closing years of last century it has been produced
in quantities much too large to enable it to retain its purchasing power
and thus be a stable standard of value unless it can constantly be
finding existing holders willing to hold larger stocks, or fresh holders
to hold new stocks of it.  Before the war the accumulation of hoards by
[pg xiv] various central banks in Europe took off a large part of the
new supplies and prevented the actual rise of general prices being
anything like what it would otherwise have been, though it was serious
enough.  Since the war the Federal Reserve Board, supported by all
Americans who do not wish to see a rise of prices, has taken on the new
“White Man’s Burden” of absorbing the products of the gold mines, but
just as the United States failed to keep up the value of silver by
purchasing it, so she will eventually fail to keep up the value of gold.
In spite of the opinion of some high authorities, it is not at all
likely that a renewed demand for gold reserves by the central banks of
Europe will come to her assistance.  Experience must gradually be
teaching even the densest of financiers that the value of paper
currencies is not kept up by stories of “cover” or “backing” locked up
in cellars, but by due limitation of the supply of the paper.  With
proper limitation enforced by absolute convertibility into gold coin
which may be freely melted or exported, it has been proved by theory and
experience that small holdings of gold are perfectly sufficient to meet
all internal and international demands.  There is really more chance of
a great demand from individuals than from the banks.  It is conceivable
that the people of some of the countries which have reduced their paper
currency to a laughing stock may refuse all paper and insist on having
gold coins.  But it seems more probable that they will be pleased enough
to get better paper than they have recently been accustomed to, and will
not ask for hard coin with sufficient insistence to get it. On the whole
it seems fairly certain that the demand of Europe and [pg xv]
European-colonised lands for gold will be less rather than greater than
before the war, and that it will increase very slowly or not at all.

Thus on the whole there is reason to fear a fall in the value of gold
and a rise of general prices rather than the contrary.

One obvious remedy would be to restrict the production of gold by
international agreement, thus conserving the world’s resources in
mineral for future generations.  Another is to set up an international
commission to issue an international paper currency so regulated in
amount as to preserve an approximately stable value.  Excellent
suggestions for the professor’s classroom, but not, at present at any
rate nor probably for some considerable period of time, practical

A much more practical way out of the difficulty is to be found in the
introduction of gold currency into the East.  If the East will take a
large part of the production of gold in the coming years it will tide us
over the period which must elapse before the most prolific of the
existing sources are worked out.  After that we may be able to carry on
without change or we may have reached the possibility of some better

This argument will not appeal to those who can think of nothing but the
extra profits which can be acquired during a rise of prices, but I hope
it will to those who have some feeling for the great majority of the
population, who suffer from these extra and wholly unearned profits
being extracted from them.  Stability is best in the long run for the

                                                           EDWIN CANNAN.

[pg xvii]


    Author’s Preface ..................................................
    Foreword by Professor Edwin Cannan ................................
    From a Double Standard to a Silver Standard .......................
    The Silver Standard and the Dislocation of its Parity .............
    The Silver Standard and the Evils of Its Instability ..............
    Towards a Gold Standard ...........................................
    From A Gold Standard to a Gold Exchange Standard ..................
    Stability of the Exchange Standard ................................
    A Return to the Gold Standard .....................................

    CHART I: Discount Rates in India
    CHART II: Fall of the Rupee-Sterling Exchange
    CHART III: Relative Values and Relative Production of Gold and
    CHART IV: Prices and Wages in India and England, 1873–93
    CHART V: Monthly Fluctuations of The Rupee-Sterling Exchange
    CHART VI: Comparative Price Levels, Indian and Foreign, 1893–1922

[pg 1]

                       *THE PROBLEM OF THE RUPEE*



Trade is an important apparatus in a society based on private property
and pursuit of individual gain; without it, it would be difficult for
its members to distribute the specialised products of their labour.
Surely a lottery or an administrative device would be incompatible with
its nature.  Indeed, if it is to preserve its character, the only mode
for the necessary distribution of the products of separate industry is
that of private trading.  But a trading society is unavoidably a
pecuniary society, a society which of necessity carries on its
transactions in terms of money.  In fact, the distribution is not
primarily an exchange of products against products, but products against
money. In such a society, money therefore necessarily becomes the pivot
on which everything revolves.  With money as the focusing-point of all
human efforts, interests, desires and ambitions, a trading society is
bound to function in a régime of price where successes and failures are
results of nice calculations of price-outlay as against price-product.

Economists have no doubt insisted that “there cannot … be intrinsically
a more significant thing than money,” which at best is only “a great
wheel by means of which every individual in society has his subsistence,
conveniences and amusements regularly distributed to him [pg 2] in their
proper proportions.”  Whether or not money values are the definitive
terms of economic endeavour may well be open to discussion.¹ But this
much is certain, that without the use of money this “distribution of
subsistence, conveniences and amusements,“ far from being a matter of
course, will be distressingly hampered if not altogether suspended.  How
can this trading of products take place without money?  The difficulties
of barter have ever formed an unfailing theme with all economists,
including those who have insisted that money is only a cloak.  Money is
not only necessary to facilitate trade by obviating the difficulties of
barter, but is also necessary to sustain production by permitting
specialisation.  For who would care to specialise if he could not trade
his products for those of others which he wanted?  Trade is the handmaid
of production, and where the former cannot flourish the latter must
languish.  It is therefore evident that if a trading society is not to
be out of gear and is not to forego the measureless advantages of its
automatic adjustments in the great give-and-take of specialised
industry, it must provide itself with a sound system of money.²

At the close of the Moghul Empire, India, judged by the standards of the
time, was economically an advanced country.  Her trade was large, her
banking institutions were well developed, and credit played an
appreciable part in her transactions.  But a medium of exchange and a
common standard of value were among others the most supreme desiderata
in the economy of the Indian people when they came, in the middle of the
eighteenth century, under the sway of the British.  Before the
occurrence of this event, the money of India consisted of both gold and
silver.  Under the Hindu emperors the emphasis was laid on gold, while
under the Mussalmans silver formed a large [pg 3] part of the
circulating medium.³  Since the time of Akbar, the founder of the
economic system of the Moghul Empire in India, the units of currency had
been the gold _mohur_ and the silver _rupee_. Both coins, the mohur and
the rupee, were identical in weight, i.e. 175 grs. troy,⁴ and were
“supposed to have been coined without any alloy, or at least intended to
be so.”⁵   But whether they constituted a single standard of value or
not is a matter of some doubt.  It is believed that the mohur and the
rupee, which at the time were the common measure of value, circulated
without any fixed ratio of exchange between them.  The standard,
therefore, was more of the nature of what Jevons called a parallel
standard⁶ than a double standard.⁷ That this want of ratio could not
have worked without some detriment in practice is obvious.  But it must
be noted that there existed an alleviating circumstance in the curious
contrivance by which the mohur and the rupee, though unrelated to each
other, bore a fixed ratio to the _dam_, the copper coin of the Empire.⁸
So that it is permissible to hold that, as a consequence of being fixed
to the same thing, the two, the mohur and the rupee, circulated at a
fixed ratio.

    ¹ Cf. W. C. Mitchell. “The Rationality of Economic Activity,”
      _Journal of Political Economy_, 1910, Vol. XVIII, pp. 97 and 197;
      also “The Rôle of Money in Economic Theory,” by the same, in the
      _American Economic Review_ (Supplement), Vol. VI, No. 1, March

    ² For the whole of this discussion, cf. H. J. Davenport, _The
      Economics of Enterprise_ (1913), Chapters II and III.

    ³ Prinsep, J., _Useful Tables_, Calcutta, 1834, pp. 15–16.

    ⁴ Robert Chalmers, _History of Colonial Currency_, 1893, pp. 336,

    ⁵ Dr. P. Kelly, _The Universal Cambist_, 1311, p. 115.

    ⁶ _Money and Mechanism of Exchange_ (1890), p. 95.

    ⁷ Dr. P. Kelly’s view is that they circulated at their market ratio
      (_loc. cit._).  On the other hand, Sir R. Temple says: “In ancient
      and mediaeval India the relative value of the coins of each metal
      was fixed by the State, and all were legal tender virtually
      without any formal limitation” (“General Monetary Practice in
      India,” _Journal of the Institute of Bankers_, Vol. II, p. 406).
      On another occasion he said: “The earliest Hindu currency was in
      gold with a single standard. The Mohammedans introduced silver,
      and in later times up to British rule there was a double standard,
      gold and silver” (_ibid._, Vol. XV, p. 9).  In contrast to this it
      may be noted that the Preamble to currency Regulation XXXV of 1793
      and other currency Regulations of early date make it a point to
      emphasize that under pre-British régime there was no fixed ratio
      between the mohur and the rupee.

    ⁸ Cf. Prof. S. V. Venkateswara, on “Moghul Currency and Coinage” in
      the _Indian Journal of Economics_, July, 1918, p. 169; and F.
      Atkinson, _The Indian Currency Question_ (1894), p. 1.

In Southern India, to which part the influence of the [pg 4] Moghuls had
not extended, silver as a part of the currency system was quite unknown.
The pagoda, the gold coin of the ancient Hindu kings, was the standard
of value and also the medium of exchange, and continued to be so till
the time of the East India Company.

The right of coinage, which the Moghuls always held as _inter jura
Majestatis,_⁹ be it said to their credit was exercised with due sense of
responsibility.  Never did the Moghul Emperors stoop to debase their
coinage.  Making allowance for the imperfect technology of coinage, the
coins issued from the various Mints situated even in the most distant
parts of their Empire¹⁰ did not materially deviate from the standard.

   Name of the Rupee       Weight    Name of the Rupee       Weight
                           in pure                           in pure
                           Grs.                              Grs.
   Akabari of Lahore         175·0   Delhi Sonat               175·0
   Akabari of Agra           174·0   Delhi Alamgir             175·0
   Jehangiri of Agra         174·6   Old Surat                 174·0
   Jehangiri of              173·6   Murshedabad               175·9
   Jehangiri of Kandahar     173·9   Persian Rupee of 1745     174·5
   Shehajehani of Agra       175·0   Old Dacca                 173·3
   Shehajehani of            174·2   Muhamadshai               170·0
   Shehajehani of Delhi      174·2   Ahamadshai                172·8
   Shehajehani of Delhi      175·0   Shaha Alam (1772)         175·8
   Shehajehani of Lahore     174·0
[pg 5] The table on p. 4 of the assays of the Moghul rupees shows how
the coinage throughout the period of the Empire adhered to the standard
weight of 175 grs. pure.¹¹

    ⁹ According to the Mohammedan historian, Khafi Khan, it enraged the
      Emperor Aurangzeb when the East India Company in 1694 coined some
      rupees at Bombay “with the name of their impure king” (_Imperial
      Gazetteer of India_, Vol. IV, p. 515).

   ¹⁰ It is stated in the _Imperial Gazetteer of India_ (Vol. IV., p.
      514), that in the early days of the Moghul rule there was only one
      Mint—at Delhi—which struck the Imperial coins.  The Emperor Sher
      Sha was the first to introduce a plurality of Mints for coinage
      purposes—a practice continued and extended by the later emperors
      until between the reigns of Akbar and Bahadur Sha II the Mints
      numbered about 200.  From the _East India Moral and Material
      Progress Report for_ 1872–73 it is clear that not every Mint was
      open to the coinage of all three metals, gold, silver and copper;
      but that some Mints coined only gold, others silver, and the rest
      copper (_see_ Report, pp. 11–12).

   ¹¹ Prinsep, J., op. cit., p. 18.

So long as the Empire retained unabated sway there was advantage rather
than danger in the plurality of Mints, for they were so many branches of
a single department governed by a single authority.  But with the
disruption of the Moghul Empire into separate kingdoms these branches of
the Imperial Mint located at different centres became independent
factories for purposes of coinage.  In the general scramble for
independence which followed the fall of the Empire, the right to
coinage, as one of the most unmistakable insignia of sovereignty, became
the right most cherished by the political adventurers of the time.  It
was the last privilege to which the falling dynasties clung, and was
also the first to which the adventurers rising to power aspired.  The
result was that the right, which was at one time so religiously
exercised, came to be most wantonly abused.  Everywhere the Mints were
kept in full swing, and soon the country was filled with diverse coins
which, while they proclaimed the incessant rise and fall of dynasties,
also presented bewildering media of exchange.  If these money-mongering
sovereigns had kept up their issues to the original standard of the
Moghul Emperors the multiplicity of coins of the same denomination would
not have been a matter of much concern.  But they seemed to have held
that as the money used by their subjects was made by them, they could do
what they liked with their own, and proceeded to debase their coinage to
the extent each chose without altering the denominations.  Given the
different degrees of debasement, the currency necessarily lost its
primary quality of general and ready acceptability.

The evils consequent upon such a situation may well be imagined.  When
the contents of the coins belied the value indicated by their
denomination they became mere merchandise and there was no more a
currency by tale to act as a ready means of exchange.  The bullion value
of each coin had to be ascertained before it could be accepted as a
final [pg 6] discharge of obligations.¹²  The opportunity for defrauding
the poor and the ignorant thus provided could not have been less¹³ than
that known to have obtained in England before the great re-coinage of
1696.  This constant weighing, valuing, and assaying the bullion
contents of coins was, however, only one aspect in which the evils of
the situation made themselves felt.  They also presented another
formidable aspect.  With the vanishing of the Empire there ceased to be
such a thing as an Imperial legal tender current all through India.  In
its place there grew up local tenders current only within the different
principalities into which the Empire was broken up.  Under such
circumstances exchange was not liquidated by obtaining in return for
wares the requisite bullion value from the coins tendered in payment.
Traders had to be certain that the coins were also legal tender of their
domicile.  The Preamble to the Bengal Currency Regulation XXXV, of 1793,
is illuminating on this point.  It says:—

    “The principal districts in Bengal, Bihar and Orissa, have each
    a distinct silver currency … which are the standard measure of
    value in all transactions in the districts in which they
    respectively circulate.


    “In consequence of the Ryots being required to pay their rent in
    a particular sort of rupee they of course demanded it from
    manufacturers in payment of their grain, or raw [pg 7]
    materials, whilst the manufacturers, actuated by similar
    principles with the Ryots, required the same species of rupee
    from the traders who came to purchase their cloth or their

    “The various sorts of old rupees, accordingly, soon became the
    established currency of particular districts, and as a necessary
    consequence the value of each rupee was enhanced in the district
    in which it was current, for being in demand for all
    transactions.  As a further consequence, every sort of rupee
    brought into the district was rejected from being a different
    measure of value from that by which the inhabitants had become
    accustomed to estimate their property, or, if it was received, a
    discount was exacted upon it, equal to what the receiver would
    have been obliged to pay upon exchanging it at the house of a
    shroff for the rupee current in the district, or to allow
    discount upon passing it in payment to any other individual.


    “From this rejection of the coin current in one district when
    tendered in payment in another, the merchants and traders, and
    the proprietors and cultivators of land in different parts of
    the country, are subjected in their commercial dealings with
    each other to the same losses by exchange, and all other
    inconveniences that would necessarily result were the several
    districts under separate and independent governments, each
    having a different coin.”

   ¹² It was this necessity for ascertaining the true bullion value of
      the debased coins which gave rise to that class of money-changers
      known as Shroffs, who specialised in the business of evaluating
      the coins at their proper discount from the standard purity by
      means of the dates and other characteristics engraved upon them.

   ¹³ It is stated that Dr. Roxburgh, who was an eye-witness, was so
      much impressed by the sufferings of the poor owing to the bad
      state of the currency that he urged upon A. Dalrymple in a letter
      dated June 30, 1791, to give prominence to the evils by inserting
      a paper in his _Oriental Repertory_ (2 vols., London, 1808), “on
      the current coin in circulation over the Company’s Territories
      which might be productive of the most solid and lasting advantage
      to the Governing and the Governed,” and added, “You may be able to
      correct the evil, by which you will certainly go to heaven, if the
      prayers of the poor avail, and I may get a step nearer paradise.”
      _Observations on the Copper Coinage wanted in the Circars_, by A.
      Dalrymple, London, 1794, p. 1.

Here was a situation where trade was reduced to barter, whether one
looks upon barter as characterised by the absence of a common medium of
exchange or by the presence of a plurality of the media of exchange; for
in any case, it is obvious that the want of a “double coincidence” must
have been felt by people engaged in trade.  One is likely to think that
such could not have been the case as the medium was composed of metallic
counters.  But it is to be remembered that the circulating coins on
India, by reason of the circumstance attendant upon the diversity in
their fineness and legal tender, formed so many different species that
an exchange against a particular species did not necessarily close the
transaction; the coin must, in certain circumstances, have been only an
intermediate to be further bartered against another, and so on till the
one of the requisite species was [pg 8] obtained.  This is sufficient
indication that society had sunk into a state of barter.  If this alone
was the flaw in the situation, it would have been only as bad as that of
international trade under diversity of coinages.  But it was further
complicated by the fact that although the denomination of the coins was
the same, their metallic contents differed considerably.  Owing to this,
one coin bore a discount or a premium in relation to another of the same
name.  In the absence of knowledge as to the amount of premium or
discount, every one cared to receive a coin of the species known to him
and current in his territory.  On the whole the obstacles to commerce
arising from such a situation could not have been less than those
emanating from the mandate of Lycurgus, who compelled the Lacedæmonians
to use iron money in order that its weight might prevent them from
overmuch trading.  The situation, besides being irritating, was
aggravated by the presence of an element of gall in it.  Capital
invested in providing a currency is a tax upon the productive resources
of the community.  Nevertheless, wrote James Wilson¹⁴ no one would

    “that the time and labour which are saved by the interposition
    of coin, as compared with a system of barter, form an ample
    remuneration for the portion of capital withdrawn from
    productive sources, to act as a single circulator of
    commodities, by rendering the remainder of the capital of the
    country so much the more productive.”

   ¹⁴ _Capital, Currency and Banking_, 1847, p. 15.

What is, then, to be said of a monetary system which did not obviate the
evil consequences of barter, although enormous capital was withdrawn
from productive sources, to act as a single circulator of commodities?
Diseased money is worse than want of money.  The latter at least saves
the cost.  But society must have money, and it must be good money, too.
The task, therefore, of evolving good money out of bad money fell upon
the shoulders of the English East India Company, who had in the
meanwhile succeeded to the Empire of the Moghuls in India.

The lines of reform were first laid down by the Directors [pg 9] of the
Company in their famous Despatch, dated April 25, 1806,¹⁵ to the
authorities administering their territories in India. In this historic
document they observed:—

   ¹⁵ H. of C. Return 127 of 1898.

    “17. It is an opinion supported by the best authorities, and
    proved by experience, that coins of gold and silver cannot
    circulate as legal tenders of payment at fixed relative values …
    without loss; this loss is occasioned by the fluctuating value
    of the metals of which the coins are formed.  A proportion
    between the gold and silver coin is fixed by law, according to
    the value of the metals, and it may be on the justest
    principles, but owing to the change of circumstances gold may
    become of greater value in relation to silver than at the time
    the proportion was fixed, it therefore becomes profitable to
    exchange silver or gold, so the coin of that metal is withdrawn
    from circulation; and if silver should increase in its value in
    relation to gold, the same circumstances would tend to reduce
    the quantity of silver coin in circulation.  As it is impossible
    to prevent the fluctuation in the value of the metals, so it is
    also equally impracticable to prevent the consequences thereof
    on the coins made from these metals … To adjust the relative
    values of gold and silver coin according to the fluctuations in
    the values of the metals would create continual difficulties,
    and the establishment of such a principle would of itself tend
    to perpetuate inconvenience and loss.”

They therefore declared themselves in favour of monometallism as the
ideal for the Indian currency of the future, and prescribed:—

    “21. … that silver should be the universal money of account [in
    India], and that all … accounts should be kept in the same
    denominations of rupees, annas and pice …”

The rupee was not, however, to be the same as that of the Moghul
Emperors in weight and fineness.  They proposed that

    “9. … the new rupee … be of the gross weight of—

                    Troy grains                 180
                    Deduct one-twelfth alloy    15
                    An contain of fine silver   165
                    troy grs.

[pg 10] Such were the proposals put forth by the Court of Directors for
the reform of Indian currency.

The choice of a rupee weighing 180 grs. troy and containing 165 grs.
pure silver as the unit for the future currency system of India was a
well-reasoned choice.

The primary reason for selecting this particular weight for the rupee
seems to have been the desire to make it as little of a departure as
possible from the existing practice.  In their attempts to reduce to
some kind of order the disorderly currencies bequeathed to them by the
Moghuls by placing them on a bimetallic basis, the Governments of the
three Presidencies had already made a great advance by selecting out of
the innumerable coins then circulating in the country a species of gold
and silver coin as the exclusive media of exchange for their respective
territories.  The weights and fineness of the coins selected as the
principal units of currency, with other particulars, may be noted from
the summary table opposite.

To reduce these principal units of the different Presidencies to a
single principal unit, the nearest and the least inconvenient magnitude
of weight which would at the same time be an integral number was
obviously 180 grs., for in no case did it differ from the weights of any
of the prevailing units in any marked degree.  Besides, it was believed
that 180, or rather 179·5511, grs. was the standard weight of the rupee
coin originally issued from the Moghul Mints, so that the adoption of it
was really a restoration of the old unit and not the introduction of a
new one.¹⁶ Another advantage claimed in favour of a unit of 180 grs. was
that such a unit of currency would again become what it had ceased to
be, the unit of weight also.  It was agreed¹⁷ that the unit of weight in
India had at all times previously been linked up with that of the
principal coin, so that the _seer_ and the manual weights were simply
multiples of the rupee, which originally weighed 179·6 grs. troy.  Now,
if the weight of the [pg 11]

                                TABLE I

_Principal Units of Currency_

Issued       Territory    Date          Silver Coins                         Gold Coins
by           in           and         ──────────────────────────────────────────────────────────────────────────
the          which        Authority     Name           Gross    Pure         Name       Gross        Pure
Government   it           of                           Weight   Contents                Weight       Contents
of           circulated   Issue.                       Troy     Troy Grs.               Troy Grs.    Troy Grs.
Bombay       Presidency                 Surat          179·0    164·740      Mohur      179          164·740
Madras       Presidency                 Arcot          176·4    166·477      Star       52·40        42·55
                                        Rupee                                Pagoda
             Bengal,      Regulations   Sicca
             Bihar and    XXXV of       Rupee
             Orissa       1793          (19th          179·66   175·927      Mohur      190·804      189·40
           ──────────────────────────── Sun)
             Cuttock      XII of 1805
             Ceded                      Furrakabad
             Provinces                  Rupee
Bengal     ──────────────               (Lucknow
             Conquered    XLV of 1803   Sicca          173      166·135      —          —            —
             Provinces                  of
             Benares      III of 1806   Benares        175      168·875      —          —            —
             Provinces                  Rupee

   ¹⁶ Cf. The Despatch, op. cit., par. 8.

   ¹⁷ Cf. para. 26–28 of the letter from James Prinsep to the Calcutta
      Mint Committee, printed in the Appendix to the Indian Tables by
      John Muller, Calcutta, 1836.

   ¹⁸ _Ibid._ par. 28.  How the English and the Indian systems of
      weights were made to correspond to each other may be seen from the

                        _Indian._             _English._
             8          =    1 massa          =    15 troy grs.
             12         =    1 tola (or       =    180 troy grs.
             massas          sicca)
             80 tolas   =    1 seer           =    2½  troy
             40 seers   =    1 maund (or      =    100 troy
                             mun)                  pounds.

[pg 12] principal coin to be established was to be different from 180
grs. troy, it was believed there would be an unhappy deviation from the
ancient practice which made the weight of the coin the basis of other
weights and measures.  Besides, a unit of 180 grs. weight was not only
suitable from this point of view, but had also in its favour the added
convenience of assimilating the Indian with the English units of

While these were the reasons in favour¹⁹ of fixing the weight of the
principal unit of currency at 180 grs. troy, the project of making it
165 grs. fine was not without its justification.  The ruling
consideration in selecting 165 grs. as the standard of fineness was, as
in the matter of selecting the standard weight, to cause the least
possible disturbance in existing arrangements.  That this standard of
fineness was not very different from those of the silver coins
recognised by the different Governments in India as the principal units
of their currency, may be seen from the following comparative statement
on p. 13.

   ¹⁹ Attention may be drawn in this connection to the dissenting
      opinion of Captain Jervis on the project of 180 grs. troy as the
      unit of weight for the rupee.  Cf. his most exhaustive treatise
      called _The Expediency and Facility of establishing the
      Metrological and Monetary Systems throughout India on a Scientific
      and Permanent Basis, grounded on an Analytical Review of the
      Weights, Measures and Coins of India_ …, Bombay, 1836, pp. 49–64.

It will thus be seen that, with the exception of the Sicca and the
Benares rupees, the proposed standard of fineness agreed so closely with
those of the other rupees that the interest of obtaining a complete
uniformity without considerable dislocation overruled all possible
objections to its adoption.  Another consideration that seemed to have
prevailed upon the Court of Directors in selecting 165 grs. [pg 13] as
the standard of fineness was that, in conjunction with 180 grs. as the
standard weight, the arrangement was calculated to make the rupee
eleven-twelfths fine.  To determine upon a particular fineness was too
technical a matter for the Court of Directors.  It was, however, the
opinion of the British Committee on Mint and Coinage, appointed in 1803,
that²⁰ “one–twelfth alloy and eleven–twelfths fine is by a variety of
extensive experiments proved to be the best proportion, or at least as
good as any which could have been chosen.”  This standard, so
authoritatively upheld, the Court desired to incorporate in their new
scheme of Indian currency.  They therefore desired to make the rupee
eleven–twelfths fine.  But to do so was also to make the rupee 165 grs.
pure—a content which they desired, from the point of view stated above,
the rupee to possess.

   ²⁰ Cf. The Despatch, op. cit., par. 9.

                                TABLE II

_Deviations of the Proposed Standard of Fineness from that
        of the Principal Recognized Rupees_

 Silver Coins recognized                More valuable    Less valuable
 as Principal Units and      Standard   than the         than the
 their Fineness.             Fineness   Proposed         proposed
                             of         Rupee.           Rupee.
 ─────────────────────────── the      ─────────────────────────────────
 Name of the   Its Pure      Proposed   In       By      In      By
 Coin.         Contents.     Rupee.     Grs.     p.c.    Grs.    p.c.
               Troy Grs.
 Surat Rupee   164·74        165        —        —       ·26     ·157
 Arcot Rupee   166·477       165        1·477    ·887    —       —
 Sicca Rupee   175·927       165        10·927   6·211   —       —
 Furrukabad    166·135       165        1·135    ·683    —       —
 Benares       169·251       165        4·251    2·511   —       —

Reviewing the preference of the Court of Directors for monometallism
from the vantage-ground of latter-day events, one might be inclined to
look upon it as a little too short-sighted.  At the time, however, the
preference was well founded.  One of the first measures the three
Presidencies, into which the country was divided for [pg 14] purposes of
administration, had adopted on their assuming the government of the
country, was to change the parallel standard of the Moghuls into a
double standard by establishing a legal ratio of exchange between the
mohur, the pagoda, and the rupee.  But in none of the Presidencies was
the experiment a complete success.

In Bengal²¹ the Government, on June 2, 1766, determined upon the issue
of a gold mohur weighing 179·66 grs. troy, and containing 149·92 grs.
troy of pure metal, as legal tender at 14 Sicca rupees, to relieve the
currency stringency caused largely by its own act of locking up the
revenue collections in its treasuries, to the disadvantage of commerce.
This was a legal ratio of 16·45 to 1, and as it widely deviated from the
market ratio of 14·81 to 1, this attempt to secure a concurrent
circulation of the two coins was foredoomed to failure.  Owing to the
drain of silver on Bengal from China, Madras, and Bombay, the currency
stringency grew worse, so much so that another gold mohur was issued by
the Government on March 20, 1769, weighing 190·773 grs. troy and
containing 190·086 grs. pure gold with a value fixed at 16 Sicca rupees.
This was a legal ratio of 14·81 to 1.  But, as it was higher than the
market ratio of the time both in India (14 to 1) and in Europe (14·61 to
1), this second effort to bring about a concurrent circulation fared no
better than the first.  So perplexing seemed to be the task of accurate
rating that the Government reverted to monometallism by stopping the
coinage of gold on December 3, 1788, and when the monetary stringency
again compelled it to resume in 1790 the coinage of gold, it preferred
to let the mohur and the rupee circulate at their market value without
making any attempt to link them by a fixed ratio.  It was not until 1793
that a third attempt was made to forge a double standard in Bengal.  A
new mohur was issued in that year, weighing 190·895 grs. troy and
containing 189·4037 grs. of pure gold, and made legal tender at 16 Sicca
rupees.  This [pg 15] was a ratio of 14·86 to 1, but, as it did not
conform to the ratio then prevalent in the market, this third attempt to
establish bimetallism in Bengal failed as did those made in 1766 and

   ²¹ F. C. Harrison, “The Past Action of the Indian Government with
      regard to Gold,” in _Economic Journal_, Vol. III, p. 54 _et seq_.
      Also Minute by Sir John Shore, in Bengal Public Consultations,
      dated September 29, 1796.

The like endeavours of the Government of Madras²² proved more futile
than those of Bengal.  The first attempt at bimetallism under the
British in that Presidency was made in the year 1749, when 350 Arcot
rupees were legally rated at 100 Star pagodas.  As compared with the
then market ratio this rating involved an under-valuation of the pagoda,
the gold coin of the Presidency.  The disappearance of the pagoda caused
a monetary stringency, and the Government in December, 1750, was obliged
to restore it to currency.  This it did by adopting the twofold plan of
causing an import of gold on Government account, so as to equalise the
mint ratio to the market ratio, and of compelling the receipts and
payments of Government treasuries to be exclusively in pagodas.  The
latter device proved of small value; but the former by its magnitude was
efficacious enough to ease the situation.  Unluckily the ease was only
temporary.  Between 1756 and 1771 the market ratio of the rupee and the
pagoda again underwent a considerable change.  In 1756 it was 364 to
100, and in 1768 it was 370 to 100.  It was not till after 1768 that the
market ratio became equal to the legal ratio fixed in 1749 and remained
steady for about twelve years.  But the increased imports of silver
rendered necessary for the prosecution of the second Mysore war once
more disturbed the ratio, which at the close of the war stood at 400
Arcot rupees to 100 Star pagodas.  After the end of the war the
Government of Madras made another attempt to bring about a concurrent
circulation between the rupee and the pagoda.  But instead of making the
market ratio of 400 to 100 the legal ratio it was led by the then
increasing imports of gold into the Presidency to hope that the market
ratio would in time rise to that legally established in 1749.  In an
expectant mood so induced it decided, in 1790, to anticipate the event
by fixing the ratio first at 365 to 100.  [pg 16] The result was bound
to be different from that desired, for it was an under-valuation of the
pagoda.  But instead of rectifying the error, the Government proceeded
to aggravate it by raising the ratio still further to 350 to 100 in
1797, with the effect that the pagoda entirely went out of circulation,
and the final attempt at bimetallism thus ended in a miserable failure.

   ²² H. Dodwell, “Substitution of Silver for Gold in South India,” in
      the _Indian Journal of Economics_, January, 1921.

The Government of Bombay seemed better instructed in the mechanics of
bimetallism, although that did not help it to overcome the practical
difficulties of the system.  On the first occasion when bimetallism was
introduced in the Presidency²³ the mohur and the rupee were rated at the
ratio of 15·70 to 1.  But at this ratio the mohur was found to be
over-rated, and accordingly, in August, 1774, the Mint Master was
directed to coin gold mohur of the fineness of a Venetian and of the
weight of the silver rupee.  This change brought down the legal ratio to
14·83 to 1, very nearly, though not exactly, to the then prevailing
market ratio of 15 to 1, and had nothing untoward happened, bimetallism
would have had a greater success in Bombay than it actually had in the
other two Presidencies.  But this was not to be, for the situation was
completely altered by the dishonesty of the Nawab of Surat, who allowed
his rupees, which were of the same weight and fineness as the Bombay
rupees, to be debased to the extent of 10, 12, and even 15 per cent.
This act of debasement could not have had any disturbing effect on the
bimetallic system prevalent in the Bombay Presidency had it not been for
the fact that the Nawab’s (or Surat) rupees were by agreement admitted
to circulation in the Company’s territories at par with the Bombay
rupees.  As a result of their being legal tender the Surat rupees, once
they were debased, not only drove out the Bombay rupees from
circulation, but also the mohur, for as rated to the debased Surat
rupees the ratio became unfavourable to gold, and the one chance for a
successful bimetallic system vanished away.  The question of fixing up a
bimetallic [pg 17] ratio between the mohur and the rupee again cropped
up when the Government of Bombay permitted the coinage of Surat rupees
at its Mint.  To have continued the coinage of the gold mohur according
to the Regulation of 1774 was out of the question.  One Bombay mohur
contained 177·38 grs. of pure gold, and 15 Surat rupees of the standard
of 1800 contained 247,110 grs. of silver.  By this Regulation the
proportion of silver to gold would have been \frac{247,110}{177·38} i.e.
13·9 to 1.  Here the mohur would have under-valued.  It was therefore
resolved to alter the standard of the mohur to that of the Surat rupee,
so as to give a ratio of 14·9 to 1.  But as the market ratio was
inclined towards 15·5 to 1, the experiment was not altogether a success.

   ²³ Report of Dr. Scott on the History of Coinage in the Bombay
      Presidency, with Appendices, Public Consultations (Bombay, dated
      January 27, 1801).

In the light of this experience before them the Court of Directors of
the East India Company did well in fixing upon a monometallic standard
as the basis of the future currency system of India.  The principal
object of all currency regulations is that the different units of money
should bear a fixed relation of value to one another.  Without this
fixity of value the currency would be in a state of confusion, and no
precaution would be too great against even a temporary disturbance of
that fixity.  Fixity of value between the various components of the
currency is so essential a requisite in a well-regulated monetary system
that we need hardly be surprised if the Court of Directors attached
special importance to it, as they may well have done, particularly when
they were engaged in the task of placing the currency on a sound and
permanent footing.  Nor can it be said that their choice of
monometallism was ill-advised, for it must be admitted that a single
standard better guarantees this fixity than does the double standard.
Under the former it is spontaneous; under the latter it is forced.

These recommendations of the Court of Directors were left to the
different Governments in India to be carried into effect at their
discretion as to the time and manner of doing it.  But it was some time
before steps were taken in consonance with these orders, and even then
it was on the realisation of those parts of the program of the Court
which pertained [pg 18] to the establishment of a uniform currency that
the efforts of the different Governments were first concentrated.

The task of reducing the existing units of currency to that proposed by
the Court was first accomplished in Madras.  On January 7, 1818, the
Government issued a Proclamation²⁴ by which its old units of
currency—the Arcot rupee and the Star pagoda—were superseded by new
units, a gold rupee and a silver rupee, each weighing 180 grs. troy and
containing 165 grs. of fine metal.  Madras was followed by Bombay six
years later by a Proclamation²⁵ of October 6, 1824, which declared a
gold rupee and a silver rupee of the new Madras standard to be the only
units of currency in that Presidency.  The Government of Bengal had a
much bigger problem to handle.  It had three different principal units
of silver currency to be reduced to the standard proposed by the Court.
It commenced its work of reorganisation by a system of elimination and
alteration.  In 1819, it discontinued²⁶ the coinage of the Benares rupee
and substituted in its place the Furrukabad rupee, the weight and
fineness of which were altered to 180·234 and 135·215 grs. troy
respectively.  Apparently this was a step away from the right direction.
But even here the purpose of uniformity, so far as fineness was
concerned, was discernible, for it made the Furrukabad rupee like the
new Madras and Bombay rupees, eleven-twelfths fine.  Having got rid of
the Benares rupee, the next step was to assimilate the standard of the
Furrukabad rupee to that of Madras and Bombay, and this was done in

   ²⁴ Cf. Fort St. George Public Depart. Consultations, No. 19, dated
      January 7, 1818.

   ²⁵ Cf. Bombay Financial Consultations, dated October 6, 1824.

   ²⁶ Bengal Regulation XI of 1819.

   ²⁷ Bengal Regulation VII of 1833.

Thus, without abrogating the bimetallic system, substantial steps were
taken in realising the ideal unit proposed by the Court, as may be seen
from the table on opposite page.

Taking stock of the position as it was at the end of 1833, we find that
with the exception of the Sicca rupee and the gold mohur of Bengal, that
part of the scheme of the Directors which pertained to the uniformity of
coinage was an accomplished fact.  Nothing more remained to carry it [pg

                               TABLE III

_Uniformity of Coinage at the end of A.D. 1833_

Issued         Silver                              Gold Coins.
by             Coins.                                                                    Legal
the        ───────────────────────────────────────────────────────────────────────────── Ratio
Government   Denomination.   Weight.   Fineness.   Denomination.   Weight.   Fineness.
              Sicca Rupee      192     176 or      Mohur           204·710   187·651     1 to
                                       11⁄12                                             15
Bengal     ────────────────────────────────────────────────────────────────────────────────────
              Furrukabad       180     165 or      —               —         —           —
              Rupee                    11⁄12
Bombay       Silver Rupee      180     165 or      Gold Rupee      180       165 or      1 to
                                       11⁄12                                 11⁄12       15
Madras       Silver Rupee      180     165 or      Gold Rupee      180       165 or      1 to
                                       11⁄12                                 11⁄12       15

to completion than to discontinue the Sicca rupee and to demonetise
gold.  At this point, however, arose a conflict between the Court of
Directors and the three Governments in India.  Considerable reluctance
was shown to the demonetisation of gold.  The Government of Madras,
which was the first to undertake the reform of its currency according to
the plan of the Court, not only insisted upon continuing the coinage of
gold along with that of the rupee,²⁸ but stoutly refused to deviate from
the system of double legal tender at a fixed ratio prevalent in its
territories,²⁹ notwithstanding the repeated remonstrance’s addressed by
the Court.³⁰ The Government of Bengal clung to the bimetallic standard
with equal tenacity.  Rather than demonetise the gold mohur it took
steps to alter its standard³¹ by reducing its pure contents³² from
189·4037 to 187·651 troy [pg 20] grs., so as to re-establish a
bimetallic system on the basis of the ratio adopted by Madras in 1818.
So great was its adherence to the bimetallic standard that in 1833 it
undertook to alter³³ the weight and fineness of the Sicca rupee to 196
grs. troy and 176 grs. fine, probably to rectify a likely divergence
between the legal and the market ratios of the mohur to the rupee³⁴.

   ²⁸ The Court of Directors were willing to permit the coinage and
      circulation of gold _unlinked_ to the rupee, for they had observed
      in their Despatch:—

      “16. Although we are fully satisfied of the propriety of the
      silver rupee being the principal measure of value and the money of
      account, yet we are by no means desirous of checking the
      circulation of gold, but of establishing a gold coin on a
      principle fitted for general use.  This coin in our opinion should
      be called a gold rupee and be made of the same standard as the
      silver rupee.”

   ²⁹ Cf. Fort St. George Public Consultations of August 19, 1817,
      particularly the letter of the Accountant-General entered thereon.

   ³⁰ Cf. The Public Despatches to Madras dated March 6, 1810; July 10,
      1811; and June 12, 1816.

   ³¹ Preamble to the Bengal Regulation XIV of 1818.

   ³² It, however, increased its weight from 190·895 to 204·710 troy

   ³³ Bengal Regulation VII of 1833.

   ³⁴ It may be that this alteration was also intended to make the Sicca
      rupee eleven-twelfths fine.

But in another direction the Government in India wanted to go further
than the Court desired.  The Court thought a uniform currency (i.e. a
currency composed of like but independent units) was all that India
needed.  Indeed, they had given the Governments to understand that they
did not wish for more in the matter of simplification of currency and
were perfectly willing to allow the Sicca and the mohur to remain as
they were, unassimilated.³⁵ A uniform currency was no doubt a great
advance on the order of things such as was left by the successors of the
Moghuls.  But that was not enough, and the needs of the situation
demanded a common currency based on a single unit in place of a uniform
currency.  Under the system of uniform currency each Presidency coined
its own money, and the money coined at the Mints of the other
Presidencies was not legal tender in its territories except at the Mint.
This monetary independence would not have been very harmful if there had
existed also financial independence between the three Presidencies.  As
a matter of fact, although each Presidency had its own fiscal system,
yet they depended upon one another for the finance of their deficits.
There was a regular system of “supply” between them, and the surplus in
one was being constantly drawn upon to meet the deficits in others.  In
the absence of a common currency this resource operation was
considerably hampered.  The difficulties caused by the absence of a
common currency in the way of the “supply” operation made themselves
felt in two different ways.  Not being able to use as legal tender the
money of other Presidencies, each was [pg 21] obliged to lock up, to the
disadvantage of commerce, large working balances in order to be
self-sufficient.³⁶ The very system which imposed the necessity of large
balances also rendered relief from other Presidencies less efficacious.
For the supply was of necessity in the form of the currency of the
Presidency which granted it, and before it could be utilised it had to
be re-coined into the currency of the needy Presidency.  Besides the
loss on re-coinage, such a system obviously involved inconvenience to
merchants and embarrassment to the Government.³⁷

   ³⁵ Cf. Despatch to Bengal dated March 11, 1829.

   ³⁶ The Accountant-General of Bengal, in a letter to the Calcutta Mint
      Committee, dated November 21, 1823 wrote:—

      “Par. 32. The amount of the balance must also necessarily depend
      upon the state of the currency. If the Madras, Bombay, and
      Furrukabad rupees instead of differing in weight and intrinsic
      value were coined of one standard weight and value bearing one
      inscription and in no way differing, the surplus of one Presidency
      would at all times be available for the deficiency of another,
      without passing through the Mint, and the balance of India might
      be reduced in proportion to the increased availability of currency
      for the disbursements of the three Presidencies” (Bombay Financial
      Consultations, February 25, 1824).

   ³⁷ The evil of the system had already made itself felt in Bombay,
      where the Government had been obliged by a Proclamation dated
      April 9, 1824, to declare the Furrukabad rupee of 1819 standard as
      legal tender within its territories on a par with the Bombay
      rupee, in order to facilitate the supply operation from Bengal.
      Cf. Bombay Financial Consultations, dated April 14, 1824.

At the end of 1833, therefore, the position was that the Court desired
to have a uniform currency with a single standard of silver, while the
authorities in India wished for a common currency with a bimetallic
standard.  Notwithstanding these divergent views, the actual state of
the currency might have continued as it was without any substantial
alteration either way.  But the year 1833 saw an important
constitutional change in the administrative relations between the three
Presidential Governments in India.  In that year by an Act of
Parliament³⁸ there was set up an Imperial system of administration with
a centralisation of all legislative and executive authority over the
whole of India.  This change in the administrative system, perforce,
called forth a change in the prevailing monetary systems. [pg 22] It
required local coinages to be replaced by Imperial coinage.  In other
words, it favoured the cause of a common currency as against that of a
mere uniform currency.  The authorities in India were not slow to
realise the force of events.  The Imperial Government set up by
Parliament was not content to act the part of the Dewans or agents of
the Moghuls, as the British had theretofore done, and did not like that
coins should be issued in the name of the defunct Moghul emperors who
had ceased to govern.  It was anxious to throw off the false garb³⁹ and
issue an Imperial coinage in its own name, which being common to the
whole of India would convey its common sway. Accordingly, an early
opportunity was taken to give effect to this policy.  By an Act of the
Imperial Government (XVII of 1835) a common currency was introduced for
the whole of India, as the sole legal tender.  But the Imperial
Government went beyond and, as if by way of concession to the Court—for
the Court did most vehemently protest against this common currency in so
far as it superseded the Sicca rupee⁴⁰—legislated “_that no gold coin
shall henceforward be a legal tender of payment in any of the
territories of the East India Company_.”⁴¹

That an Imperial Administration should have been by force of necessity
led to the establishment of a common currency for the whole of India is
quite conceivable.  But it is not clear why it should have abrogated the
bimetallic system after having maintained it for so long.  Indeed, when
it is recalled how the authorities had previously set their faces
against the destruction of the bimetallic system, and how careful they
were not to allow their coinage reforms to disturb it any more violently
than they could help, the provision of the Act demonetising gold was a
grim surprise.  However, for the sudden _volte-face_ displayed therein,
the Currency Act (XVII of 1835) will ever remain memorable in the annals
of the Indian history.  It marked [pg 23] the culminating-point of a
long and arduous process of monetary reform and placed India on a silver
monometallic basis with a rupee weighing 180 grs. troy and containing
165 grs. fine as the common currency and sole legal tender throughout
the country.

   ³⁸ 3 & 4 Will, IV, c; 85.

   ³⁹ Cf. the sentiments of Tucker in his _Memorials of Indian
      Government_ (ed. by Kaye), 1853, pp. 17–19.

   ⁴⁰ Cf. their Financial Despatch to India, No. 9, dated July 27, 1836.

   ⁴¹ Section 9 of Act XVII of 1835.

No piece of British India legislation has led to a greater discontent in
later years than this Act XVII of 1835.  In so far as the Act abrogated
the bimetallic system, it has been viewed with a surprising degree of
equanimity.  Not all its critics, however, are aware⁴² that what the Act
primarily decreed was a substitution of bimetallism by monometallism.
The commonly entertained view of the Act seems to be that it replaced a
gold standard by a silver standard.  But even if the truth were more
generally known, it would not justify any hostile attitude towards the
measure on that score.  For what would have been the consequences to
India of the gold discoveries of California and Australia in the middle
of the nineteenth century if she had preserved her bimetallic system? It
is well known how this increase in the production of gold relatively to
that of silver led to a divergence in the mint and the market ratios of
the two metals after the year 1850. The under-valuation of silver,
though not very great, was great enough to confront the bimetallic
countries with a serious situation in which the silver currency,
including the small change, was rapidly passing out of circulation.  The
United States⁴³ was obliged by the law of 1853 to reduce the standard of
its small silver coins sufficiently to keep them dollar for dollar below
their gold value in order to keep them in circulation.  France, Belgium,
Switzerland, and Italy, which had a uniform currency based on the
bimetallic model of the French with reciprocal legal tender⁴⁴ were faced
with [pg 24] similar difficulties.  Lest a separatist policy on the part
of each nation,⁴⁵ to protect their silver currency and particularly the
small change, should disrupt the monetary harmony prevailing among them
all, they were compelled to meet in a convention, dated November 20,
1865, which required the parties, since collectively called the Latin
Union, to lower, in the order to maintain them in circulation, the
silver pieces of 2 francs, 1 franc, 50 centimes and 20 centimes from a
standard of 900 ⁄ 1000 fine to 835 ⁄ 1000 and to make them subsidiary
coins.⁴⁶ It is true that the Government of India also came in for
trouble as a result of this disturbance in the relative [pg 25] value of
gold and silver, but that trouble was due to its own silly act.⁴⁷ The
currency law of 1835 had not closed the Mints to the free coinage of
gold, probably because the seignorage on the coinage of gold was a
source of revenue which the Government did not like to forego.  But as
gold was not legal tender, no gold was brought to the Mint for coinage,
and the Government revenue from seignorage fell off.  To avoid this loss
of revenue the Government began to take steps to encourage the coinage
of gold.  In the first place, it reduced the seignorage⁴⁸ in 1837 from 2
per cent. to 1 per cent. But even this measure was not sufficient to
induce people to bring gold to the Mint, and consequently the revenue
from seignorage failed to increase.  As a further step in the same
direction the Government issued a Proclamation on January 13, 1841,
authorising the officers in charge of public treasuries to receive the
gold coins at the rate of 1 gold mohur equal to 15 silver rupees.  For
some time no gold was received, as at the rate prescribed by the
Proclamation gold was undervalued.⁴⁹ But the Australian and Californian
gold discoveries altered the situation entirely.  The gold mohur, which
was undervalued at Rs. 15, became overvalued, and the Government, which
was at one time eager to receive gold, was alarmed at its influx.  By
adopting the course it did of declaring gold no longer legal tender, and
yet undertaking to receive it in liquidation of Government demands, it
laid itself under the disadvantage of being open to be embarrassed with
a coin which was of no use and must ordinarily have been paid for above
its value.  Realising its position, it left aside all considerations of
augmenting revenue by increased coinage, and promptly issued on December
25, 1852, another Proclamation withdrawing that of 1841.  Whether it
would not have been better to have escaped the embarrassment by making
gold general legal tender than depriving it of its partial legal-tender
power is another matter.  But, in so far as India was saved the trials
and tribulations undergone by the bimetallic countries to preserve the
silver part of their [pg 26] currency, the abrogation of bimetallism was
by no means a small advantage.  For the measure had the virtue of
forearming the country against changes which, though not seen at the
time, soon made themselves felt.

   ⁴² To mention only one, cf. S. V. Doraiswami, _Indian Currency_,
      Madras, 1915. _passim_.

   ⁴³ Laughlin, J. L, _History of Bimetallism_, New York, 1886, pp.

   ⁴⁴ The cultural influence of France had led the other countries of
      Latin origin to adopt the French monetary system.  The political
      independence acquired by Belgium in 1831 was followed by a change
      in her monetary system.  By the law of 1832, Belgium from a
      monetary point of view, became a satellite of France.  By that law
      she adopted in its entirety the monetary system of France, and
      even went so far as to give the French gold pieces of 20 and 40
      francs and to the French silver 5-franc pieces the power of legal
      tender in Belgium. In Switzerland, Art. 36 of the Constitution of
      1848 had vested in the Federal Government the authority to coin
      money.  The law of May 7, 1850, adopted the French monetary system
      for Switzerland: Art. 8 declared “that such foreign silver coins
      as were minted in sufficiently close proximity with the French
      system might be granted a legal status as regular media for the
      payment of debts in Switzerland.”  The various Italian States,
      prior to unification, had, like the Swiss Cantons, each its own
      currency.  But with the desire for uniformity of coinage
      consequent upon unification there arose a problem either of
      selecting one of the old systems or of adopting a new one which
      would be common to the whole country.  Some form of a grateful
      memorial to France was uppermost in the minds of the Italians for
      the help the French gave in the matter of their independence, and
      the adoption of the French monetary system for Italy was deemed to
      serve the purpose. Fortunately, Sardinia already possessed the
      French system, and the law of August 24, 1862, extended it to the
      whole of Italy, with the lire as the unit, and also conferred
      legal-tender power on the coins of France, Belgium, and
      Switzerland. Cf. H. P. Willis, _History of the Latin Monetary
      Union_, Chicago, 1910, pp. 15, 27, 36–37.

   ⁴⁵ Switzerland was the first to reduce the amount of silver in her
      small coins in order to keep them in circulation.  But these Swiss
      coins of reduced fineness crossed the national frontier and, as
      they were legal tender in other countries of Latin origin, began
      to displace their dearer coins of similar denominations, which
      contained more silver but which passed current at the same nominal
      value.  This brought forth a decree in France (April 14, 1864)
      which revoked the legal-tender power of these debased Swiss coins
      in French territory.  This, of course, compelled resort to a
      concerted action on the part of all the Latin countries concerned.

   ⁴⁶ For more particulars of the Latin Union, cf. Laughlin, op. cit.,
      pp. 146–9.

   ⁴⁷ Cf. H. of C. Return, East Indian (Coinage) 254 of 1860.

   ⁴⁸ _Ibid_., p. 8.

   ⁴⁹ _Ibid_., p. 10.

The abrogation of bimetallism in India accomplished by the Act of 1835,
cannot therefore be made a ground for censure.  But it is open to
argument that a condemnation of bimetallism is not _per se_ a
justification of silver monometallism.  If it was to be monometallism it
might well have been gold monometallism.  In fact, the preference for
silver monometallism is not a little odd when it is recalled that Lord
Liverpool, the advocate of monometallism,⁵⁰ whose doctrines the Court
had sought to apply to India, had prescribed gold monometallism for
similar currency evils then prevalent in England. That the Court should
have deviated from their guide in this particular has naturally excited
a great deal of hostile comment as to the propriety of this grave
departure.⁵¹ At the outset any appeal to ulterior motives must be
baseless, for Lord Liverpool was not a “gold bug,” nor was the Court
composed of “silver men.”  As a matter of fact, neither of them at all
considered the question from the standpoint as to which was a better
standard of value, gold or silver. Indeed, in so far as that was at all
a consideration worth attending to, the choice of the Court, according
to the opinion of the time, was undoubtedly a better one than that of
Lord Liverpool.  Not only were all the theorists, such as Locke, Harris,
and Petty, in favour of silver as the standard of value, but the
practice of the whole world was also in favour of silver.  No doubt
England had placed herself on a gold basis in 1816.  But that Act, far
from closing the English Mint to the free coinage of silver, left it to
be opened by a Royal Proclamation.⁵² The Proclamation, it is true, was
never issued, but it is not to be supposed that therefore Englishmen [pg
27] of the time had regarded the question of the standard as a settled
issue. The crisis of 1825 showed that the gold standard furnished too
narrow a basis for the English currency system to work smoothly, and, in
the expert opinion of the time,⁵³ the gold standard, far from being the
cause of England’s commercial superiority, was rather a hindrance to her
prosperity, as it cut her off from the rest of the world, which was
mostly on a silver basis.  Even the British statesmen of the time had no
decided preference for the gold standard.  In 1826 Huskisson actually
proposed that Government should issue silver certificates of full legal
tender.⁵⁴ Even as late as 1844 the question of the standard was far from
being settled, for we find Peel in his Memorandum⁵⁵ to the Cabinet
discussing the possibility of abandoning the gold standard in favour of
the silver or a bimetallic standard without any compunction or
predilection one way or the other. The difficulties of fiscal isolation
were evidently not so insuperable as to compel a change of the standard,
but they were great enough to force Peel to introduce his famous proviso
embodying the Huskisson plan in part in the Bank Charter Act of 1844,
permitting the issue of notes against silver to the extent of one-fourth
of the total issues.⁵⁶ Indeed, so great was the universal faith in the
stability of silver that Holland changed in 1847 from what was
practically a gold monometallism⁵⁷ to silver monometallism because her
statesmen believed that

    “it had proved disastrous to the commercial and industrial
    interests of Holland to have a monetary system identical with
    that of England, whose financial revulsions, after its adoption
    [pg 28] of the gold standard, had been more frequent and more
    severe than in any other country, and whose injurious effects
    were felt in Holland scarcely less than in England.  They
    maintained that the adoption of the silver standard would
    prevent England from disturbing the internal trade of Holland by
    draining off its money during such revulsions and would secure
    immunity from evils which did not originate in and for which
    Holland was not responsible.”⁵⁸

But stability was not the ground on which either the Court or Lord
Liverpool made their choice of a standard metal to rest.  If that had
been the case, both probably would have selected silver.  As it was, the
difference in the choice of the two parties was only superficial.
Indeed, the Court differed from Lord Liverpool, not because of any
ulterior motives, but because they were both agreed on a fundamental
proposition that not stability but popular preference should be the
deciding factor in the choice of a standard metal.  Their differences
proceeded logically from the agreement.  For on analysing the
composition of the currency it was found that in England it was largely
composed of gold and in India it was largely composed of silver.
Granting their common premise, it is easy to account why gold was
selected for England by Lord Liverpool and silver for India by the
Court.  Whether the actual composition of the currency is an evidence of
popular preference cannot, of course, be so dogmatically asserted as was
done by the Court and Lord Liverpool.  So far as England is concerned,
the interpretation of Lord Liverpool has been questioned by the great
economist David Ricardo.  In his _High Price of Bullion_, Ricardo

   ⁵⁰ The author of _A Treatise on the Coinage of the Realm_ was
      anticipated by Sir John Shore, the Governor of Bengal, in his
      Minute, op. cit., par. 55.

   ⁵¹ Cf. H. M. Dunning, _Indian Currency_, 1898, _passim_; also S. V.
      Doraiswami, op. cit., _passim_.

   ⁵² Cf. Dana Norton, _The Silver Pound_, 1887, p. 161.

   ⁵³ Cf. the evidence of A. Baring (afterwards Lord Ashuburton) before
      the Committee for Coin (1828), H. of C. Return 31 of 1830.

   ⁵⁴ See his Memorandum to the Cabinet printed by Gibbs, _A Colloquy on
      Currency_ (1894), Appendix, p. xlvii.

   ⁵⁵ For which, see Andréadès, _History of the Bank of England_,
      Supplement I.

   ⁵⁶ For the original purpose of this defunct proviso, _see_ Peel’s
      Speech on the Bank Charter Act, dated May 20, 1844, Hansard, Vol.
      LXXIV, pp. 1334–35.

   ⁵⁷ In theory Holland had adopted bimetallism in 1816.  But the legal
      ratio of 15·873 to 1 had undervalued silver so much that it had
      made gold the chief circulating medium of Holland.

   ⁵⁸ _Report of the U. S. Silver Commission of_ 1876, p. 68.

    “For many reasons given by Lord Liverpool, it appears proved
    beyond dispute that gold coin has been for near a century the
    principal measure of value; but this is, I think, to be
    attributed to the inaccurate determination of the mint
    proportions.  Gold has been valued too high; no silver can
    therefore remain in circulation which is of its standard weight.
    If a new regulation were to take place, and silver be valued too
    high … gold would then disappear, and silver become the standard
    money.”⁵⁹ [pg 29]

   ⁵⁹ _Works_, p. 271

And it is possible that mint proportions rather than popular
preference⁶⁰ could have equally well accounted for the preponderance of
silver in India.⁶¹

   ⁶⁰ Mr. Dodwell, in his otherwise excellent article, op. cit., seems
      to convey that silver was substituted for gold in Southern India
      as a result of the natural preference of the people for the former
      metal.  So eager is he in meeting the contentions of writers like
      Mr. Doraiswami that he fails to see how his own facts controvert
      his own thesis.

   ⁶¹ The total coinage of India from 1800 to 1835 was, according to Mr.
      F. C. Harrison’s estimate in the _Calcutta Review_, July, 1892:—

                       Gold           3,845,000 ounces
                       Silver     3,781,250,000 ounces

      N.B.—In the case of silver, rupees are converted into ounces for

Whether any other criterion besides popular preference could have led
the Court to adopt gold monometallism is a moot question.  Suffice it to
say that the adoption of silver monometallism, though well supported at
the time when the Act was passed, soon after proved to be a measure
quite inadequate to the needs of the country.  It is noteworthy that
just about this time great changes were taking place in the economy of
the Indian people.  Such a one was a change from kind economy to cash
economy.  Among the chief causes contributory to this transformation the
first place must be given to the British system of revenue and finance.
Its effects in shifting Indian society on to a cash nexus have not been
sufficiently realized,⁶² although they have been very real.  Under the
native rulers most payments were in kind.  The standing military force
kept and regularly paid by the Government was small.  The bulk of the
troops consisted of a kind of militia furnished by Jageerdars and other
landlords, and the troops or retainers of these feudatories were in
great measure maintained on the grain, forage, and other supplies
furnished by the districts in which they were located.  The hereditary
revenue and police officers were generally paid by grants of land on
tenure of service.  Wages of farm servants and labourers were in their
turn distributed in grain.  Most of its officers being paid in kind, the
State collected very little [pg 30] of its taxes in cash.  The
innovations made by the British in this rude revenue and fiscal system
were of the most sweeping character.  As territory after territory
passed under the sway of the British, the first step taken was to
substitute in place of the rural militia of the feudatories a regularly
constituted and well-disciplined standing army located at different
military stations, paid in cash; in civil employ, as in military, the
former revenue and police officers with their followers, who paid
themselves by perquisites and other indirect gains received in kind,
were replaced by a host of revenue collectors and magistrates with their
extensive staff, all paid in current coin.  The payments to the army,
police, and other officials were not the only payments which the British
Government had placed on a money basis.  Besides these charges, there
were others which were quite unknown to native Governments, such as the
“Home Charges” and “Interest on Public Debt,” all on a cash basis. The
State, having undertaken to pay in cash, was compelled to realize all
its taxes in cash, and as each citizen was bound to pay in cash he in
his turn stipulated to receive nothing but cash, so that the entire
structure of the society underwent a complete transformation.

   ⁶² Cf. the article “The Silver Question as regards India,” in the
      _Bombay Quarterly Review_, April, 1857.

Another important change that took place in the economy of the Indian
people about this time was the enormous increase of trade.  For a
considerable period the British tariff policy and the navigation laws
had put a virtual check on the expansion of Indian trade.  England
compelled India to receive her cotton and other manufactures at nearly
nominal (2½ per cent.) duties, while at the same time she prohibited the
entry of such Indian goods as competed with hers within her territories
by prohibitory duties ranging from 50 to 500 per cent. Not only was no
reciprocity shown by England to India, but she made a discrimination in
favour of her colonies in the case of such goods as competed with
theirs.  A great agitation was carried on against this unfair
treatment,⁶³ and finally Sir Robert Peel admitted [pg 31] Indian produce
to the low duties levied by the reformed tariff of 1842.  The repeal of
the navigation laws gave further impetus to the expansion of Indian
commerce.  Along with this the demand for Indian produce had also been
growing.  The Crimean War of 1854 cut off the Russian supplies, the
place of which was taken by Indian produce, and the failure of the silk
crop in 1853 throughout Europe led to the demand for Asiatic, including
Indian, silks.

   ⁶³ Cf. Debates at the East India House on Duties affecting Indian
      Commerce, _vide_ the _Asiatic Journal and Monthly Register for
      British and Foreign India, China, Australia_ (London, New Series,
      Vol. XXXVII, January, and Vol. XXXVIII, May, 1842).

The effect of these two changes on the currency situation is obvious.
Both called forth an increased demand for cash.  But cash was the one
thing most difficult to obtain.  India does not produce precious metals
in any considerable quantity.  She has had to depend upon her trade for
obtaining them.  Since the advent of the European Powers, however, the
country was not able to draw enough of the precious metals.  Owing to
the prohibitions on the export of precious metals then prevalent in
Europe,⁶⁴ one avenue for obtaining them was closed.  But there was
little chance of obtaining precious metals from Europe, even in the
absence of such prohibition; indeed, precious metals did not flow to
India when such prohibitions were withdrawn.⁶⁵ The reason of the check
to the inflow of precious metals was well pointed out by Mr. Petrie in
his Minute of November, 1799, to the Madras Committee of Reform:⁶⁶ until
their territorial acquisitions the Europeans

   ⁶⁴ For the history of those imposed by England, cf. Ruding, _Annals
      of Coinage_, 3rd ed. Vol. I, pp. 353–4, 372, 376, 386–7; Thomas
      Violet, _An Appeal to Cæsar_, London, 1660, p. 26.

   ⁶⁵ The following figures of the export of precious metals to India
      from England are interesting:—

              1652–1703   £1,131,653 (from Mr. Petrie’s Minute).
              1747–1795   £1,519,654 (from Mr. Petrie’s Minute).

   ⁶⁶ For the Proceedings of the Committee, see _India Office Records_,
      “Home Miscellaneous” Series, Vol. 456.

    “purchased the manufactures of India with the metals of Europe:
    but they were henceforward to make these purchases with gold and
    silver of India, the revenues supplied the place of foreign
    bullion and paid the native the price of his industry with his
    own money.  At first this revolution in the principles of
    commerce was but little felt, but when [pg 32] opulent and
    extensive dominions were acquired by the English, when the
    success of war and commercial rivalship had given them so
    decided a superiority over the other European nations as to
    engross the whole of the commerce of the East, when a revenue
    amounting to millions per annum was to be remitted to Europe in
    the manufactures of the East, then were the effects of this
    revolution severely felt in every part of India.  Deprived of so
    copious a stream, the river rapidly retired from its banks and
    ceased to fertilise the adjacent fields with overflowing water.”

The only way open when the prohibitions were withdrawn to obtain
precious metals was to send more goods than this amount of tribute, so
that the balance might bring them in.  This became possible when Peel
admitted Indian goods to low tariff, and the country was for the first
time able to draw in a sufficient quantity of precious metals to sustain
her growing needs.  But this ease in the supply of precious metals to
serve as currency was short-lived.  The difficulties after 1850,
however, were not due to any hindrance in the way of India’s obtaining
the precious metals.  Far from being hindered, the export and import of
precious metals was entirely free, and India’s ability to procure them
was equally great.  Neither were the difficulties due to any want of
precious metals, for, as a matter of fact, the increase in the precious
metals after 1850 was far from being small.  The difficulty was of
India’s own making, and was due to her not having based her currency on
that precious metal, which it was easy to obtain.  The Act of 1835 had
placed India on an exclusive silver basis.  But, unfortunately, it so
happened that after 1850, though the total production of the precious
metals had increased, that of silver had not kept pace with the needs of
the world, a greater part of which was then on a silver basis, so that
as a result of her currency law India found herself in an embarrassing
position of an expanding trade with a contracting currency, as is shown
on the opposite page.

On the face of it, it seems that there need have been no monetary
stringency.  The import of silver was large, and [pg 33]

                                TABLE IV

_Trade and Currency_⁶⁸

          Merchandise.              Treasure.                Total                  Excess (+) or Defect      Annual
                                    Net                      Coinage                (―) of Coinage on         Production (in
                                    Imports                  of                     Net Imports of            £, 00,000
Years                               of                                                                        omitted) of
           Imports.     Exports.    Silver.      Gold.       Silver.      Gold.     Silver. £    Gold. £      Gold.    Silver.
           £            £           £            £           £            £
1850–51   11,558,789   18,164,150   2,117,225    1,153,294   3,557,906    123,717   +1,440,681   −1,029,577   8,9      7,8
1851–52   12,240,490   19,879,406   2,865,257    1,267,613   5,170,014    62,553    +2,304,657   −1,205,060   13,5     8,0
1852–53   10,070,863   20,464,633   3,605,024    1,172,301   5,902,648    Nil       +2,297,624   −1,172,301   36,6     8,1
1853–54   11,122,659   19,295,139   2,305,744    1,061,443   5,888,217    145,679   +3,582,473   −915,764     31,1     8,1
1854–55   12,742,671   18,927,222   29,600       731,490     1,890,055    2,676     +1,860,455   −728,814     25,5     8,1
1855–56   13,943,494   23,038,259   8,194,375    2,506,245   7,322,871    167,863   +871,504     −2,338,382   27,0     8,1
1856–57   14,194,587   25,338,451   11,073,247   2,091,214   11,220,014   128,302   +146,767     −1,962,912   29,5     8,2
1857–58   15,277,629   27,456,036   12,218,948   2,783,073   12,655,308   43,783    +436,360     −2,739,290   26,7     8,1
1858–59   21,728,579   29,862,871   7,728,342    4,426,453   6,641,548    132,273   −1,086,794   −4,294,180   24,9     8,1
1859–60   24,265,140   27,960,203   11,147,563   4,284,234   10,753,068   64,307    −394,495     −4,219,927   25,0     8,2

   ⁶⁸ Prepared from figures given in Palgrave’s “Memorandum on Currency
      and Standard of Value,” Appendix B to _Third Report of the Royal
      Commission on Depression of Trade and Industry_. C4797 of 1886.
      Figures for the production of gold and silver, which are for
      calendar years, are added from the “Silver Question and the Gold
      Question,” by R. Barclay.

[pg 34] so was the coinage of it.  Why then should there have been any
stringency at all?  The answer to this question is not far to seek. If
the amount of silver coined had been retained in circulation it is
possible that the stringency could not have arisen.  India has long been
notoriously the sink of the precious metals.  But in interpreting this
phenomenon, it is necessary to bear in mind the caution given by Mr.
Cassels that

    “its silver coinage has not only had to satisfy the requirements
    of commerce as the medium of exchange, but it has to supply a
    sufficiency of material to the silversmith and the jeweller.
    The Mint has been pitted against the smelting-pot, and the coin
    produced by so much patience and skill by the one has been
    rapidly reduced into bangles by the other.”⁶⁷

   ⁶⁷ Minute on Gold Currency for India, dated December 8, 1863, in the
      _Report of the Bombay Chamber of Commerce_, 1863–64. App. I, p.

Now it will be seen from the figures given that all the import of silver
was coined and used up for currency purposes.  Very little or nothing
was left over for the industrial and social consumption of the people.
That being the case, it is obvious that a large part of the coined
silver must have been abstracted from monetary to non-monetary purposes.
The hidden source of this monetary stringency thus becomes evident.  To
men of the time it was as clear as daylight that it was the rate of
absorption of currency from monetary to non-monetary purposes that was
responsible as to why

    “notwithstanding such large importations [to quote from the same
    authority], the demand for money has so far exceeded … that
    serious embarrassment has ensued, and business has almost come
    to a stand from the scarcity of circulating medium.  As fast as
    rupees have been coined they have been taken into the interior
    and have there disappeared from circulation, either in the
    Indian substitute for stocking-foot or in the smelting-pot for
    conversion into bangles.”⁶⁹

   ⁶⁹ Minute on Gold Currency for India, dated December 1, 1863. Report,
      op. cit., p. 184.

The one way open was to have caused such additional imports of silver as
would have sufficed both for the monetary [pg 35] as well as the
non-monetary needs of the country.  But the imports of silver were
probably already at their highest. For, as was argued by Mr. Cassels,

    “the annual production of silver of the whole world does not
    exceed ten million sterling.  During the last few years,
    therefore, India alone has annually taken, and to a great extent
    absorbed, more of the metal than has been produced by the whole
    world.  It is clear that this cannot long continue without
    producing serious embarrassment.  Either the European markets
    will be unable or unwilling to supply us, or the value of silver
    will rise to an extravagant extent.  Under such circumstances it
    is not difficult to foresee that the present crisis must
    continually recur, and the commerce in this country must be
    periodically, if not permanently, crippled by the scarcity of
    the circulating medium.”⁷⁰

   ⁷⁰ Report, op. cit. p. 189.

Had there been any credit media the contraction of currency might not
have been felt as severely as it was.  But there was no credit money
worth the name.  The Government issued interest-bearing Treasury notes,
which formed a part of the circulating medium of the country. But, apart
from being insignificant in amount,⁷¹ these Treasury notes had

   ⁷¹ Amount of Indian Treasury notes outstanding:—

       On April 30, 1850     £804,988
       On April 30, 1851     £802,036   Extracted from Table No. 2 of
       On April 30, 1852     £770,301   the Return relating to East
       On April 30, 1853     £850,432   India Revenues, etc.,
       On April 30, 1854     £850,627   Parliamentary Paper 201, VIII,
       On April 30, 1855     £889,875   1858.
       On April 30, 1856     £967,711

    “proved a failure, owing, firstly, to the condition that they
    would not be received in payment of revenue for twelve months;
    secondly, they would be paid off or received only where issued,
    so that as the issues were confined to Calcutta, Madras and
    Bombay, their use and employment for purposes of circulation
    were limited to those cities …  and lastly, because their
    amounts were too large and their period of running at interest
    too short.”⁷² [pg 36]

   ⁷² _How to Meet the Financial Difficulties of India_, by A. C. B.,
      London, 1859, p. 13.  This is in many ways a most remarkable
      pamphlet which suggested many of the later reforms in Indian
      currency and banking.

Nor was banking so widely developed as to satisfy the currency needs of
commerce.  The chief hindrance to its growth was the attitude of the
Court.  Being itself a commercial body largely dealing in exchange, the
Court was averse to the development of banking institutions lest they
should prove rivals.  As this traditional policy of hostility continued
even after the Court had ceased to be a body of merchant princes, banks
did not grow with the growth of trade. Indeed, as late as 1856 banks in
India numbered few and their issues were small, as shown in the table on
opposite page.

The insufficiency of silver and the want of credit currency caused such
an embarrassment to trade that there grew up a change in the attitude
towards the Currency Act of 1835, and people, for once, began to ask
whether, although it was well to have changed from bimetallism to
monometallism, it would not have been better to have preferred gold
monometallism to silver monometallism.  As more and more of gold was
imported and coined the stronger grew the demand for giving it a legal
status in the existing system of Indian currency.⁷³ All were agreed on
the principle of a gold currency: whatever difference there was, was
confined to the method of its adoption.  The introduction of gold on a
bimetallic basis was out of the question, for the Government refused to
make what it deemed to be the “hopeless attempt” to fix the value of
gold and silver and compel their acceptance at that value.⁷⁴ The
projects which the Government was willing to consider⁷⁵ were: (1) to
introduce the “sovereign” or some other gold coin and to let it
circulate at its market price from day to day as measured in silver; (2)
to issue a new gold coin, bearing the exact value of a given number of
[pg 37]

   ⁷³ The matter was first broached by the native shroffs and merchants
      of Calcutta in April, 1859, in a letter to the President of the
      Bengal Chamber of Commerce.  Both agreed to urge upon the
      Government the necessity of a gold currency in India.  Cf. _Papers
      relating to the Introduction of a Gold Currency in India_,
      Calcutta, 1866, pp. 1–3.

   ⁷⁴ _Ibid._, p. 6.

   ⁷⁵ Cf. Minute by the Rt. Hon. James Wilson, dated December 25, 1859,
      _ibid._, p. 23.

                                TABLE V

_Banks in India_⁷⁶

Name                                                  Capital.                  Notes          Specie
of             Year            Head       Branches  ─────────────────────────── in             in          Bills under
the            of              Offices    and         Subscribed.   Paid        Circulation.   Coffers.    Discount. £
Bank           Establishment              Agencies    £             up.         £              £
Bank           1809            Calcutta               1,070,000     1,070,000   1,714,771      851,964     125,251
Bank           1843            Madras                 300,000       300,000     123,719        139,960     59,871
Bank           1840            Bombay                 522,000       522,000     571,089        240,073     195,836
Oriental       1851                                   1,215,000     1,215,000   199,279        1,146,529   2,918,399
Agra and       1833            Calcutta   Agra,       700,000       700,000     —              74,362      —
U.P.                                      Madras,
  N. W. Bank   1844            Calcutta   Bombay,     220,560       220,000     —              —           —
                                          in Delhi
London &       1854                                   250,000       —           325,000        —           —
Eastern Bank
Commercial     1854            Bombay     Agents      1,000,000     456,000     —              —           —
Bank                                      in
Delhi Bank     1844            Delhi      Agents in   —             180,000     —              —           —
Simla Bank     1844                                   —             63,850      —              —           —
Dacca Bank     1846                                   30,000        —           —              —           —
Mercantile                     Bombay     London,     500,000       328,826     777,156        77,239      109,547
Bank                                      Calcutta,
India, China                                          had not commenced business

   ⁷⁶ R. M. Martin, _The Indian Empire_, Vol. I, p. 565.  N.B.—The table
      in original does not specify dates, but internal evidence shows
      that it is about 1856.

[pg 38] rupees, and make it a legal tender for a limited period, when it
might be readjusted and again valued, and made a legal tender for a
similar period at the new rate; (3) to introduce the English sovereign
as a legal tender for Rs. 10, but limited in legal tender to the amount
of Rs. 20 or two sovereigns; or (4) to substitute a gold standard for
the silver standard.

Of these projects the first three were evidently unsafe as currency
expedients.  Fixity of value between the various components of the
currency is an essential requisite in a well-regulated monetary system.
Each coin must define a fixed value, in terms of the others realizable
by the most untutored intellect.  When it ceases to do so it becomes a
mere commodity, the value of which fluctuates with the fluctuations of
the market.  This criterion ruled out the first two projects.  To have
introduced a coin as money, the value of which could not be vouched
for—as would have been the case under the first project—from one day to
another, apart from the trouble of computing and ascertaining the
fluctuations, would have been a source of such embarrassment that the
Government, it must be said, acted wisely in not adopting it.  There was
no saving grace in the second project to recommend its adoption in
preference to the first.  If it had been adopted the result would have
been that during the period that a rate was fixed, gold would have been
forced into circulation supposing that its market value was lower, and
at the end of the year, if it was known that the rate would be revised
and the value of the coin be reduced in conformity with the fall of
gold, a general struggle to get rid of the overrated gold coin and shift
the inevitable loss to the shoulders of others would have certainly
ensued.  The third was a somewhat strange proposal.  It is possible with
a low-priced metal to strike coins of less than full value for the
purposes of small payments and limit their tender.  But this is not
possible with a high-priced metal, the _raison d’être_ of which is to
facilitate large transactions.  The objections to the plan could hardly
be concealed. So long as gold was undervalued it would not circulate at
all.  But once it became overvalued owing to changes in [pg 39] the
market ratio the rupee would go out of circulation, and shopkeepers and
traders would remain possessed of a coin which would be of no use in
liquidating large transactions.

The only project free from these faults was the adoption of a gold
standard, with silver as a subsidiary currency.  The strongest argument
the Government could oppose to this demand was that “in a country where
all obligations have been contracted to be paid in silver, to make a law
by which they could forcibly be paid in anything else would simply be to
defraud the creditor for the advantage of the debtor, and to break
public faith.”⁷⁷ However sound the argument might have been, it was
hopelessly inadequate to meet the growing demand to place the Indian
currency on an expanding basis.  Indeed, it cannot be said that the
Government was really serious in its opposition to a gold currency.  For
the strength of its position it relied not so much on the soundness of
its arguments against gold, but on its discovery that a better solution
than a gold currency existed at hand.  If what was wanted was a
supplement to the existing currency, then the remedy proposed by the
Government was unassailable. Gold would have been uneconomical and
inconvenient.  Silver backed by paper would make the currency
economical, convenient, and expansive. Indeed, the advantages were so
much in favour of the official alternative that this first attempt
against the silver standard resulted not in the establishment of a gold
standard, but in the introduction of a Government paper currency to
supplement the existing silver standard.

   ⁷⁷ _Ibid._, p. 26.

None the less, the desire for a gold standard on the part of the people
was too great to be altogether ignored, though the demand for it was
supposed to have been met by the alternative measure.  The paper
currency, as originally conceived by Mr. Wilson, was a complete
counterblast to the gold agitation.  But his successor, Mr. Laing,
differed from him in what he regarded as the “barbarous” exclusion of
gold from Indian currency.  He therefore introduced two important
provisos in the original Bill, when the task of [pg 40] carrying it
through fell upon him, owing to the untimely death of Mr. Wilson.  One
was to raise the lowest denomination of notes from Rs. 5 to Rs. 20.  The
other was

    “to authorize the Governor-General in Council from time to time
    to direct by order to be published in the Gazettes of Calcutta,
    Madras and Bombay, that notes to an extent not exceeding
    one-fourth of the total amount of issues represented by coin and
    bullion … be issued in exchange for gold coin … or bullion
    computed at rates to be fixed by such order …”

The Act which afterwards embodied the Bill adopted the second proviso
_in toto_, and the first after being modified so as to fix Rs. 10 as the
lowest denomination of notes to be issued.  Although its general tenor
is clear the immediate aim of the second proviso does not become quite
clear from a perusal of the official papers.  The Select Committee on
the Paper Currency Bill seems to have held that the proviso was
innocuous if not good.  It thought

    “that on special occasions and in particular transactions it
    might be a great advantage to the mercantile community to know
    that gold could be made available as money at a fixed rate. If,
    on the other hand, at the rate fixed gold did not enter into
    circulation it would prove that silver, with a secure and
    convertible paper currency, gave perfect confidence and answered
    all the wants of the trade and of the community, and the
    enactment would remain a dead letter and be perfectly harmless.”

But there is no doubt that Mr. Laing looked upon it as an easy means of
making a transition to the gold standard. In his Minute on Currency and
Banking, dated May 7, 1862, he wrote:

    “The object of this proviso was simply to leave the door open
    for cautious and tentative experiments with regard to the future
    use of gold.  The importation of gold already exists and is
    increasing, and the metal is much appreciated by the native
    population as generally to command a premium. … Thus, after a
    time, if the use of gold becomes more general, and its value
    more fixed, some further step might be taken.” [pg 41]

And such seems to have been the impression of the Secretary of State at
the time, for he understood the force of the recommendation in favour of
issuing notes against gold was that it would “effectually contribute to
the introduction of a gold currency in India.”⁷⁸

   ⁷⁸ Par. 59 of the Secretary of State’s Despatch, No. 158, dated
      September 16, 1862.

But whether conceived as a relief to the mercantile community or as an
avenue for introducing a gold currency the proviso was not put into
effect.  The Secretary of State objected⁷⁹ to any action being taken
with regard thereto.  In the meantime the paper currency did not prove
the panacea it was avowed to be.  The extent it reached and the economy
it effected were comparatively insignificant.

   ⁷⁹ _See_ par. 64 of his Despatch, _supra_.

                                TABLE VI

_Extent and Economy of Paper Currency_

 Presidencies.   Bullion.      Coin.         Government    Value of
                                             Securities.   Notes in
 Calcutta on     —             1,84,55,922   1,10,44,078   2,95,00,000
 Oct. 31, 1863
 Madras on       —             73,00,000     —             73,00,000
 Oct. 31, 1863
 Bombay on       1,17,00,000   1,19,00,000   —             2,36,00,000
 Jan. 4, 1864
 Total           1,17,00,000   3,76,55,022   1,1,44,078    6,04,00,000

As was pointed out by Mr. Cassels⁸⁰ the currency notes, after three
years, had been taken only to the extent of about 6 per cent. of the
whole metallic currency, which was then estimated by Mr. Wilson to be
£100,000,000 in sterling, and that they had actually fulfilled their
primary object of releasing the reproductive capital of the country only
to [pg 42] the extent of a million sterling or 1 per cent. of the whole.
On the other hand, the demand for currency grew apace.  Owing to the
demand for Indian cotton in the Liverpool market to take the place of
American cotton, the export of which was stopped during the Civil War,
the growing foreign trade assumed enormous proportions.  And as the
paper currency gave no relief the entire stress fell upon silver.  The
production of silver, however, was not increasing much faster than it
did previously, and its absorption by India had not slackened.  The
inadequacy of a currency medium therefore continued to be felt as
acutely as before, notwithstanding the introduction of a paper currency.
This inadequacy was made good by increased imports of gold.  Not only
was gold imported in large quantities, but was employed for monetary
purposes, although it was not legal tender.  The fact was brought to the
notice of the Government of India by the Bombay Chamber of Commerce⁸¹ in
a memorial praying for the introduction of a gold currency in India, in
which it was pointed out

   ⁸⁰ Cf. his letter to the Government of Bombay dated January 1, 1864,
      _Vide_ Papers, etc., on the Introduction of Gold in India, pp.

   ⁸¹ _Report of the Bombay Chamber of Commerce_, 1863–64, App. I, p.

    “that there is an increasing tendency to the creation of a gold
    ingot currency, by the natives of this country, as a rude remedy
    for the defects of the existing silver one,”


    “that gold bars, stamped with the mark of Bombay banks, are for
    this purpose circulated in several parts of the country.”

This led to an agitation for requiring the Government to give effect to
the proviso in the Paper Currency Act,⁸² and the movement assumed such
dimensions that it forced the hands of the Government. On this occasion
the plan for effecting the change was boldly conceived. Sir Charles
Trevelyan [pg 43]

   ⁸² This time the Government was memorialized by all the Chambers of
      Commerce—Bengal, Bombay, and Madras. Action was also urged by the
      Bombay Association and the Manchester Chamber of Commerce. But the
      movement derived its greatest strength from the support of the
      Government of Bombay, particularly by Sir William Mansfield’s
      famous Minute on Gold Currency for India.

                               TABLE VII

_Trade and Currency_⁸³

          Merchandise.              Treasure.                Total                  Excess (+)                Annual
                                    Net                      Coinage of             or Defect                 Production
                                    Imports of                                      (-) of                    (in £,
                                                                                    Coinage on                00,000
Years                                                                               Net Imports               omitted)
                                                                                    of                        of
          Imports.     Exports.     Silver.      Gold.       Silver.      Gold.     Silver.      Gold.        Gold.   Silver.
          £            £            £            £           £            £         £            £            £       £
1860–61   23,493,716   32,970,605   5,328,009    4,232,569   5,297,150    65,038    −30,859      −4,167,531   23,9    8,2
1861–62   22,320,432   36,317,042   9,086,456    5,184,425   7,470,030    58,667    −1,616,426   −5,125,758   22,8    8,5
1862–63   22,632,384   47,859,645   12,550,155   6,848,156   9,355,405    130,666   −3,194,750   −6,717,490   21,6    9,0
1863–64   27,145,590   65,625,449   12,796,717   8,898,306   11,556,720   54,354    −1,239,997   −8,843,952   21,4    9,8
1864–65   28,150,923   68,027,016   10,078,798   9,839,964   10,911,322   95,672    +832,524     −9,744,292   22,6    10,3
1865–66   29,599,228   65,491,123   18,668,673   5,724,476   14,639,353   17,665    −4,029,320   −5,706,811   24,0    10,4
1866–67   29,038,715   41,859,994   6,963,073    3,842,328   6,183,113    27,725    −779,960     −3,814,603   24,2    10,1
1867–68   35,705,783   50,874,056   5,593,961    4,609,466   4,385,080    21,534    −1,208,881   −4,587,932   22,8    10,8
1868–69   35,990,142   53,062,165   8,601,022    5,159,352   4,269,305    25,156    −4,331,717   −5,134,196   22,0    10,0
1869–70   32,927,520   52,471,376   7,320,337    5,592,016   7,510,480    78,510    +190,143     −5,513,506   21,2    9,5

   ⁸³ Sources same as those used in the case of Table IV.

[pg 44] saw through the weak point of the proviso on which the
Government was called upon to act.  He argued that the currency notes
were payable only in the current coin of the country, which in India was
the silver rupee, and to hold a portion of the reserve in gold which
could not be tendered in payment of the notes was seriously to endanger
their convertibility in times of political distrust or commercial
panic.⁸⁴ He therefore ventured beyond the scope of the agitation, and
pronounced that instead of allowing gold a back-door entry into the
currency system it ought to be made the standard of value in India.  He
did not agree with Mr. Wilson that the substitution of gold for the
silver standard would be “to break faith with the creditor.”  Nor was he
much deterred by the fact that before the silver currency could be
reduced to a subsidiary position the introduction of gold in India would
give rise to a double standard for the time being; for he argued that
“all nations must pass through a transition stage of a double standard
before they arrive at a single standard.”  Accordingly he proposed that
(1) sovereigns and half-sovereigns of British or Australian standard
should be legal tender in India, at the rate of one sovereign for Rs.
10; and that (2) Government currency notes should be exchangeable either
for rupees or sovereigns at the rate of one sovereign for Rs. 10, but
that they should not be exchangeable for bullion.

   ⁸⁴ Cf. his Minute dated June 20, 1864.  _Vide_ Papers, etc., on Gold
      in India, p. 147 _et seq_.  He was even opposed to holding silver
      _bullion_ in the paper currency reserve, for this involved on the
      Currency Department the obligation to get the silver coined, which
      was a matter of time having regard to the limited capacity of the
      Indian Mints at the time, while the notes issued were payable _in
      coin on demand_. There was a run on the Paper Currency Department,
      which found itself short of coin.

His proposals were accepted by the Government of India and were
communicated to the Secretary of State⁸⁵ for his sanction.  But the
Secretary of State, impatient and intolerant of any deviation from a
monometallic system, whittled down the whole project with scant
courtesy.  His [pg 45] reply⁸⁶ is a grotesque piece of reasoning and
terribly shallow.  He was unwilling to allow the measure, because he
felt satisfied that the rate of Rs. 10 to a sovereign underrated the
sovereign too much to permit its circulation.  Here he was on solid
ground.  The cost of producing a sovereign at a Mint in India was
estimated⁸⁷ at the time to be Rs. 10–4–8; while the cost of importing it
to Calcutta from England was estimated at Rs. 10–4–10, and from
Australia at Rs. 10–2–9.  Whichever was the proper rate, it was certain
that sovereigns could not circulate at the rate of Rs. 10 to 1.  It was
a pity that Sir Charles Trevelyan did not propose a higher ratio⁸⁸ so as
to make the circulation of the sovereign an assured event.  But the
Secretary of State would have been averse to the measure just the same
even if the ratio had been favourable to the sovereign.  To the
Secretary of State, the measure, based as it was on an unfavourable
ratio, was useless.  But if based on a favourable ratio it was none the
less pernicious, for it portended the possibility of what he considered
as the most vicious system of double standard, however temporary it
might have been.  The mere contingency of giving rise to a bimetallic
system was enough to frighten the Secretary of State into opposition to
the whole measure, for he refused to admit that “it may be for the
public advantage to pass through a period of double standard in order to
change the basis of the currency from silver to gold.”

   ⁸⁵ Cf. Government of India’s Despatch, No. 89, dated Simla, July 14,

   ⁸⁶ Financial Despatch from the Secretary of State, No, 224, dated
      September 26, 1864.

   ⁸⁷ Cf. Letter from the Hon. Claud Brown to the Hon. Sir C. E.
      Trevelyan, dated Calcutta, May 28, 1864. _Vide_ Papers, etc., on
      Gold, p. 265.

   ⁸⁸ The reason why he preferred the ratio of 10 to 1 was that that was
      the prevalent market ratio in India.  His argument was that “the
      sovereign must be rated for circulation in India, not with
      reference to its English, but to its Indian price estimated in
      silver.”  Probably he was unwilling to overrate the sovereign
      because of his fear that “the existing Indian currency would be
      rapidly revolutionized and creditors would receive much less than
      their due.”  Cf. his Minute dated November 23, 1864. _Vide_
      Papers, etc., on Gold in India,

The only concession that the Secretary of State was willing to make was
to permit “that gold coin should be received [pg 46] into public
treasuries at a rate to be fixed by Government and publicly announced by
Proclamation” without making it a general legal tender in India. It will
be recalled that this was a revival of that foolish measure which was
abandoned in 1852 for having embarrassed the Government.  To offer to
receive coin which you cannot pay back is to court trouble, and it was
to obviate the too-well-known danger inherent in the project that this
more complete measure was proposed.  But the currency stringency was so
great that the Government of India, rather than obstinately cling to
their view, consented to avail themselves of the suggestion of the
Secretary of State, and issued a Government Notification in November,
1864, which proclaimed that

    “sovereigns and half-sovereigns coined at any authorized Royal
    Mint in England or Australia of current weight, shall until
    further notice be received in all the Treasuries of British
    India and its dependencies in payment of sums due to Government,
    as the equivalent of 10 and 5 Rs. respectively; and that such
    sovereigns and half-sovereigns shall, whenever available at any
    Government Treasury, be paid at the same rates to any person
    willing to receive them in payment of claims against the

The real par, however, was somewhat above Rs. 10 to the sovereign,⁸⁹ and
the notification was therefore inoperative.  The currency situation, on
the other hand, continued to be as acute as ever, and the Government of
India was again moved in 1866 by the Bengal Chamber of Commerce to take
steps to make the circulation of gold effective. This time the Chamber
insisted on the institution of a Commission of Inquiry “as to the
expediency of introducing gold into the monetary system of India.”  But
the Government of India held⁹⁰ that “instead of a gold a paper currency
has been introduced, in the expectation that it would prove a more
convenient and acceptable circulating medium then either [pg 47] of the
precious metals,” and consequently “it must be shown that paper has not
proved and is not likely to prove a circulating medium adequate to the
wants and suitable to the habits of the country before an endeavour is
made to introduce gold in supersession of, or in addition to, paper.”  A
commission was therefore appointed to inquire into the “operation of the
existing currency arrangements which were established under Act XIX of
1861,” and to report as to “what may be the advantage, as based on
expediency, of the introduction of the legal tender of gold into India,
in addition to that of silver.” After an exhaustive investigation the
Commission came to the conclusion⁹¹ that owing to several causes the
paper currency had failed to establish itself among the circulating
media of the country, but that gold was finding a larger place in the
transactions of the people.  The Commission ended by urging upon the
Government “to cause a legal tender of gold to be a part of the currency
arrangements of India.”  Now it was the turn of the Government to give
effect to the recommendation.  But, curiously enough, it did not go to
the extent of adopting the recommendation of the Commission which it had
itself appointed. Instead of making gold legal tender, as advised by the
Commission, the only action the Government took was to issue another
Notification on October 28, 1868, which simply altered the rate of the
sovereign to Rs. 10–8 without doing anything further to avoid the evil
consequence attendant upon that one-sided measure.  Fortunately for the
Government, even this correction of the rate did not induce any flow of
gold into the circulation of the country.  The currency troubles had by
then subsided, and as no new pressure was exerted upon the Government
this proved the last of two abortive attempts the Government made to
introduce gold into India.

   ⁸⁹ Cf. Appendix A to the Minute by Sir William Mansfield on Gold
      Currency for India, H. of C. Return 79 of 1865.

   ⁹⁰ Resolution in the Financial Department dated February 3, 1866, in
      the _Fort William Gazette_ of the same date, under Notification
      No. 592.

   ⁹¹ For the Report of the Commission, _see_ H. of C. Return 148 of

For the time being the problem was solved by the natural course of
events.  But, as subsequent events showed, the change to a gold standard
would have been better for India⁹² [pg 48] and would have been
welcomed⁹³ in the interest of Europe, which was then suffering from high
prices due to the superfluity of gold.  At this particular juncture the
Government of India was really at the crossing of ways, and could have
averted the misfortunes that were to befall it and its people if it had
sided with the forces of change and replaced the silver standard by a
gold standard, as it could most easily have done.  That those in charge
of Indian affairs should have thrown the weight of their authority
against the change was no dishonest act deserving of reproach,⁹⁴ but it
does furnish one more illustration of those disastrous human ways which
often lead people to regard the situation in which they live as most
secure just when it is most precarious.  So secure did they feel about
the currency situation that in 1870, when the Mint Law came to be
revised and consolidated, they were content, as though nothing had
happened or was likely to happen, to allow the silver standard of 1835
to continue pure and unsullied by any admixture of gold.⁹⁵

   ⁹² It is true Prof. J. E. Cairnes was against the introduction of a
      gold standard in India; but later he withdrew his objections.  Cf.
      his _Essays in Political Economy_ (London, 1873, pp. 88–90).

   ⁹³ Cf. J. R. McCulloch, _Dictionary of Commerce_, Ed. 1869, p. 1131.

   ⁹⁴ Mr. H. B. Russell says that they retained the silver standard
      because they profited by it on their remittances.  Cf. his
      _International Monetary Conferences_, 1898, p. 32.

   ⁹⁵ The original mint and coinage bill contained clauses embodying the
      notification of 1868, compelling the Government to receive
      sovereigns at Public Treasuries.  Cf. _Gazette of India_, Part V,
      dated July 23, 1870.  But such was the degree of indifference
      shown that they were afterwards dropped by the Select Committee,
      which preferred to leave the matter to the discretion of the

Alas! those who then said⁹⁶ that they were not called upon to take more
than a “juridical” view of the Indian currency question knew very little
what was in store for them. [pg 49]

   ⁹⁶ Cf. the speech of the Hon. Mr. Stephen on September 6, 1870,
      introducing the coinage and mint bill. Vide _Supreme Legislative
      Council Proceedings_ (abbreviated into _S.L.C.P._), Vol. IX, p.



It is clear how the clear how the evolutionary process with respect to
the Indian currency culminated in the establishment of a silver standard
and how the agitation for a gold currency ended in the silver standard
being supplemented by a paper currency.  Before proceeding to inquire
into the working of such a mixed system, it would be useful to review
briefly the nature of its framework.

The metallic part of it was regulated by Act XXIII of 1870, The coins
authorized and legalized thereunder were as shown on p. 50. [pg 50]

   ⁹⁷ This may be seen from the following:—

        (a) _Gold Coins_.  (i), (ii), and (iii) were authorized by
            Section VII of Act XVII of 1835.  Only (iv) was an addition
            made by this Consolidating Act of 1870.
        (b) _Silver Coins_.  (i), (ii), and (iii) were authorized by
            Section I of Act XVII of 1835.  This Act had also authorized
            the issue of a silver coin called “Double Rupee,” but this
            was discontinued by Section II of Act XIII of 1862, which
            substituted in its place the silver coin No. iv.
        (c) _Copper Coins_.  (i), (ii), and (iv) were first authorized
            by Section I of Act XXI of 1835, which, however, restricted
            their circulation to the Presidency of Bengal.  They were
            afterwards universalized for the whole of India by Act XXII
            of 1844.  Coin No. (iii) was first introduced by Section II
            of Act XI of 1854.


Denomination    Gross   Remedy    Fineness   Remedy      Legal-tender
of Coins        Wt.     in        Troy       in          power
issued by the   Troy    Weight    Grs.       Fineness.
Mint.           Grs.
I. _Gold
Coins_ (a)
(i) Mohur       180     2 ⁄       165        2 ⁄
                        1000ths              1000ths
(ii) Third of   60      2 ⁄       65         2 ⁄
a Mohur                 1000ths              1000ths
──────────────────────────────────────────────────────── Not Legal
(iii)           120     2 ⁄       110        2 ⁄         Tender at all.
Two-thirds of           1000ths              1000ths
a Mohur
(iv) Double     360     2 ⁄       330        2 ⁄
Mohur                   1000ths              1000ths
II. _Silver
Coins_ (b)
(i) Rupee       180     5 ⁄       165        2 ⁄
                        1000ths              1000ths     Unlimited
──────────────────────────────────────────────────────── Legal Tender
(ii)            90      5 ⁄       82·5       2 ⁄
Half-rupee              1000ths              1000ths
(iii)           45      7 ⁄       41·25      3 ⁄         Legal Tender
Quarter-rupee           1000ths              1000ths     for Fractions
──────────────────────────────────────────────────────── of a Rupee
(iv) Eighth     22·5    10 ⁄      20·625     3 ⁄         only.
of a Rupee              1000ths              1000ths
III. _Copper
Coins_ (c)
(i) Pice        100     1 ⁄       —          —           Legal Tender
                        40th                             for
                                                         part of a
(ii) Double     200     1 ⁄       —          —           Legal Tender
Pice                    40th                             for
                                                         part of a
(iii)           50      1 ⁄       —          —           Legal Tender
Half-pice               40th                             for
                                                         part of a
(iv) Pie        33·3    1 ⁄       —          —           Legal Tender
                        40th                             for
                                                         part of a

The Act made no innovations either in regard to the number of coins
issued by the Mints or their legal-tender powers.  Identical though it
was with the earlier enactments in the matter of coins,⁹⁷ its juridical
provisions were designed to perfect the monetary law of the country as
had never been done before.  The former Acts which it repealed were [pg
51] very sparing in their recognition of the principle of mint “remedy”
or “toleration,” as it is called.  The point has been largely deemed to
be one of mere mint technique.  That is so; but it is not without its
monetary significance.  When the precious metals were current by weight
the question of a mint toleration could not possibly have arisen, for it
was open to every one to ascertain the same by weighing the value of his
return.  But since the invention of coinage, when currency came to be by
tale, every one has trusted that the coins contained the value they were
certified to contain.  The actual value of the coin cannot, however,
always be in exact agreement with its certified value.  Such differences
are bound to exist, and even with all the improvements in the art of
coinage it would be difficult to avoid them.  What matters is the extent
of the deviation from the true mint standard.  The mint laws of all
countries, therefore, contain provisions which declare that coins shall
not be legal tender at their certified value if they err from their
legal standard beyond a certain margin.  Indeed, to make coins legal
tender without prescribing a limit to their toleration is to open a way
to fraud.  In so far as the Act laid down a limit of toleration to the
coins it authorized to be issued from the Mint, it was a salutary
measure.  It is to be regretted, however, that the Act instituted no
machinery with which to ascertain that the coinage conformed to the
law.⁹⁸ Another important improvement made by the Act was the recognition
of the principle of free coinage.  The principle, though it has not
received the attention it deserves, is the very basis of a sound
currency in that it has an important bearing on the cardinal question of
the quantity of currency necessary [pg 52] for the transactions of the
community.  Two ways may be said to be open by which this quantity can
be regulated.  One way is to close the Mint and to leave it to the
discretion of the Government to manipulate the currency to suit the
needs.  The other is to keep the Mint open and to leave it to the
self-interest of individuals to determine the amount of currency they
require.  In the absence of unfailing tests to guide the exercise of
discretion necessary in the case of closed Mints, the principle of open
Mints has been agreed upon as the superior of the two plans.  When every
individual can obtain coin for bullion and convert coin into bullion, as
would be the case under open Mints, the quantity is automatically
regulated.  If the increasing demands of commerce require a large amount
of circulating medium, it is for the interest of the community to divert
a larger quantity of its capital for this purpose; if, on the contrary,
the state of trade is such as to require less, a portion of the coin is
withdrawn, and applied as any other commodity for purposes other than
those of currency.  Because the Act of 1870 expressly recognized the
principle of open Mint, it is not to be supposed that the Mints were
closed before that date.  As a matter of fact they were open to the free
coinage of both gold and silver, although the latter alone was legal
tender.  But, strange as it may seem, none of the earlier Acts contained
a word as to the obligation of the Mint Master to coin all the metal
presented to him—a condition which is of the essence of the open mint
system.  The provisions of the Act on this point are unmistakable.  It

   ⁹⁸ This machinery is provided in England by what is known as the
      “Trial of the Pyx.”  For a history of this institution and the way
      it functions, cf. H. of C. Return 203 of 1866.  During the time of
      the East India Company the maintenance of the standard purity of
      the Indian coins always formed a most anxious concern of the Court
      of Directors.  The coins of Indian mintage were regularly required
      to be sent over to England, where they were tested at a special
      Trial of the Pyx and the verdict reported back for the future
      guidance of the Mint Masters in India.  Cf. H. of C. Return 14 of
      1849.  Since the winding-up of the Company there is no machinery
      to bring the Mint Masters to book.

    “Section 19.  Subject to the Mint-rules for the time being in
    force, the Mint Master shall receive all gold and silver bullion
    and coin brought to the Mint:

    “Provided that such bullion and coin be fit for coinage;

    “Provided also that the quantity so brought at one time by one
    person is not less, in case of gold, than fifty tolas, and, in
    the case of silver, than one thousand tolas.

    “Section 20.  A duty shall be levied at the rate of one rupee
    per cent. at the Mint on the produce of all gold bullion and on
    all gold coin brought for coinage to the Mint in accordance with
    the said Mint-rules. [pg 53]

    “Section 21.  All silver bullion or coin brought for coinage to
    the Mint, in accordance with the said Mint-rules, shall be
    subject to a duty at the rate of 2 per cent. on the produce of
    such bullion or coin, and the amount of such duty shall be
    deducted from the return to be made to the proprietor.

    “Section 22.  A charge of one-fourth per mille on gold bullion
    and coin, and of one per mille on silver bullion and coin, shall
    also be levied for melting or cutting such bullion and coin so
    as to render the same fit for receipt into the Mint.

    “Section 23.  All gold and silver bullion and coin brought to
    the Mint for coinage, and which is inferior to the standard
    fineness prescribed by this Act, or which, from brittleness or
    other cause, is unfit for coinage, shall, in case it is refined,
    be subject, in addition to the duty and charge aforesaid, to
    such charge on account of the loss and expense of refining as
    the Governor-General in Council prescribes in this behalf.

    “Section 24.  The Mint Master, on the delivery of gold or silver
    bullion or coin into the Mint for coinage, shall grant to the
    proprietor a receipt which shall entitle him to a certificate
    from the Assay Master for the net produce of such bullion or
    coin payable at the General Treasury.

    “Section 25.  For all gold bullion and coin, in respect of which
    the Assay Master has granted a certificate, payment shall be
    made, as nearly as may be, in gold coins coined under this Act
    or Act No. XVII of 1835; and the balance (if any) due to the
    proprietor shall be paid in silver, or in silver and copper,
    coins current in British India.”

In the matter of paper currency the Government, it is to be noted, did
not proceed upon the principle of freedom of issue which then obtained
in the country.  There prevails the erroneous view that before the
introduction of the Government paper currency the right of note issue
was confined to the three Presidency banks in India.  As a matter of
fact there existed in India what is called the free banking system, in
which every bank was at liberty to issue its notes.  It is true that
notes of the Presidency banks enjoyed a status slightly superior to that
enjoyed by the notes of other banks in that they were received by the
Government to some extent in payment of revenue⁹⁹—a privilege for which
the Presidency banks had to submit to a stringent legislative control
[pg 54] on their business¹⁰⁰ from which other banks whose issues were
not so privileged were immune.  But this disadvantage was not sufficient
to discourage other banks from indulging in the right of issue which was
left open to them by law. However, this freedom of issue does not seem
to have been exercised by any of the banks on any very large scale, not
even by the Presidency Banks,¹⁰¹ and was taken away from all in 1861,¹⁰²
when there was established a national issue for [pg 55] the whole of
India entrusted to the management of a Government Department called the
Department of Paper Currency.  But if private interest was not allowed
to play the same part in determining the quantity of paper currency as
was the case with regard to metallic currency, neither was any
discretion left to the Government Department in the regulation of the
paper currency.  The Department of Paper Currency had no more discretion
in the matter of paper currency than the Mint Master had in the matter
of metallic currency.

   ⁹⁹ Cf. F. C, Harrison, _Economic Journal_, 1891, Vol. I, p. 726.

  ¹⁰⁰ The reasons for such control are to be found in the peculiar
      relationship that subsisted between the Government and the
      Presidency banks.  Prior to 1862, as a safeguard against their
      insolvency, the Presidency Bank charters restricted the kind of
      business in which they were to engage themselves. Put very
      briefly, the principal restrictions imposed prohibited the banks
      from conducting foreign-exchange business, from borrowing or
      receiving deposits payable out of India, and from lending for a
      longer period than six months, or upon mortgage, or on the
      security of immovable property, or upon promissory notes bearing
      less than two independent names, or upon goods unless the goods or
      title to them were deposited with the banks as security.  The
      Government held shares in the banks and appointed a part of the
      Directorate. In 1862, when the right of note issue was withdrawn,
      these statutory limitations on the business of the banks were
      greatly relaxed, though the Government power of control remained
      unchanged.  But, the banks having in some cases abused their
      liberty, nearly all the old restrictions of the earlier period
      were reimposed in 1876 by the Presidency Banks Act, Government,
      however, abandoning direct interference in the management, ceasing
      to appoint official directors, and disposing of its shares in the
      banks.  Some of these limitations have been incorporated in Act
      XLVII of 1920, which amalgamated the three Presidency banks into
      the Imperial Bank of India.  Banks other than Presidency banks
      have been entirely immune from any legislative control whatsoever,
      except in so far as they are made amenable to the provisions of
      the Indian Companies Act.  Cf. in this connection Minutes by Sir
      Henry Maine, No. 47, and the accompanying note by W. Stokes.  The
      control of these banks is one of the important problems of banking
      legislation in India.

  ¹⁰¹ It should, however, be noted that in 1860 the circulation Of notes
      of the three Presidency banks was larger than their current
      accounts, as is evident from the following:—

              _Name of the Bank_   _Accounts    _Notes in in
                                   Current._    Circulation._
              Bank of Bengal       £1,254,875   £1,283,946
              Bank of Bombay       £438,459     £765,234
              Bank of Madras       £161,959     £192,291
                      (_Bankers’ Magazine_, April, 1893, p 547.)

  ¹⁰² For a summary of the controversy _re_ Bank issue _v._ Government
      issue, see _Report of the Bombay Chamber of Commerce for_ 1859–60,
      Appendix L, pp. 284–318.

The Department’s duty was confined by law¹⁰³ to the issue of notes in
exchange for the amount thereof: (1) in current silver coin of the
Government of India; (2) in standard silver bullion or foreign silver
coin computed according to standard at the rate of 979 rupees per 1,000
tolas of standard silver fit for coinage; (3) in other notes of the
Government of India, payable to bearer on demand of other amounts issued
within the same circle; and (4) in gold coin of the Government of India,
or for foreign gold coin or bullion, computed at such ratio and
according to such rules and conditions as may be fixed by the
Governor-General, provided that the notes issued against gold did not
exceed one-fourth of the total amount of issues represented by coin and
bullion.  The whole of this amount was required by law to be retained as
a reserve for the payment of notes issued with the exception of a fixed
amount which was invested in Government securities, the interest thereon
being the only source of profit to the Government.  The limit to the sum
to be so invested was governed “by the lowest amount to be estimated to
which, according to all reasonable experience, the paper currency might
be expected to fall.”¹⁰⁴ Estimating on this basis, the limit to the
investment portion was fixed at 4 crores in 1861,¹⁰⁵ at 6 crores in
1871,¹⁰⁶ and at 8 crores in 1890.¹⁰⁷ But notwithstanding the growing
increase in the investment portion, never was the fiduciary issue based
[pg 56] thereon so great¹⁰⁸ as to abrogate the essential principle of
the Indian Paper Currency Law, the object of which was to so regulate
the volume of paper currency that it should always preserve its value by
contracting and expanding in the same manner and to the same extent as
its metallic counterpart.

  ¹⁰³ Sect. IV of Act XIX of 1861.

  ¹⁰⁴ Cf. Sir Richard Temple’s speech introducing the Paper Currency
      Bill, dated March 25, 1870.  _Supreme Legislative Council
      Proceedings_, Vol. IX. pp. 151–52.

  ¹⁰⁵ Act XIX, Sec. X.

  ¹⁰⁶ Act III, Sec. 16.

  ¹⁰⁷ Act XV, Sec. I.

  ¹⁰⁸ The following table shows the distribution of the paper currency
      reserve at three different periods:

                           Composition of the                      Percentage of each
                           Reserve.                                Component of the
Period.     Note                                                   Reserve to the
            Circulation.                                           Total Circulation.
                           Silver.   Gold.   Securities.   Total   Silver.   Gold.   Securities.
1862–1871   7·63           4·80      0·03    2·80          7·63    63        —       37
1872–1881   11·82          5·98      —       5·84          11·82   51        —       49
1882–1891   15·74          9·64      —       6·10          15·74   61        —       39

Such was the organization of the mixed currency that existed in India
before it underwent a profound change during the closing years of the
nineteenth century.  Though of a mixed character, the paper portion
formed a comparatively small part of the total.  The principal reasons
why the paper currency did not assume a large proportion are to be found
in the organization of the paper currency itself.¹⁰⁹ One such reason was
that the lowest denomination of the notes was too large to displace the
metallic currency.  By the law of 1861 the denomination of notes ranged
upwards from Rs. 10 as the lowest to Rs. 20, 50, 100, 500, and 1,000.
In a country where the average range of transactions did not exceed R. 1
and were as low as 1 anna or even lower, it is impossible to expect that
paper currency could to any great extent figure in the dealings of the
people.  Even Rs. 5 notes, the issue of which was first sanctioned in
the year 1871,¹¹⁰ were not low enough to penetrate into the economic
life of the people. The other impediment to the increase of [pg 57]
paper currency was the difficulty of encashing notes.  One of the
infelicitous incidents of the paper currency in India consisted in the
fact that they were made legal tender everywhere within a circle, but
encashable only at the office of issue.  For such a peculiar
organization of the paper currency in India, what was largely
responsible was the prevalence of internal exchange¹¹¹ in the country.
It raised a serious problem for the Government to cope with.  If notes
were to be made universally encashable it was feared that merchants,
instead of using notes as currency, might use them as remittance on
different centres to avoid internal exchange, and the Government be
obliged to move funds between different centres to and fro lest it
should have to suspend cash payments.  To undertake resource operations
on such a vast scale between such distant centres when facilities for
quick transport were so few was obviously impossible,¹¹² and the
Government therefore decided to curtail the encashment facilities of the
notes it [pg 58] issued.  For the purposes of the paper currency the
Government divided the country into a number of circles of issue, and
each currency circle was further subdivided into sub-circles,¹¹³ and the
notes issued bore on their face the name of the circle or sub-circle
from which they originated.  Notes issued from any agency of issue
situated in the territory comprised within a circle of issue were not
legal tender in the territory of any other currency circle, nor were
they encashable outside their own circle.  Nay more, the notes issued
from sub-circles subject to the same chief circle were legal tender in
one another’s territory, but were not encashable except at their office
of issue or at the issue office of their chief circle.  The sub-circle
notes could thus be cashed at two places, but the notes of the issue
office of the chief circle, though legal tender in the entire territory
covered by it, were encashable nowhere except at its own counter, not
even at any of its own sub-circles.¹¹⁴ This want of universal
encashability, though it saved the Government from the possibility of
embarrassment, proved so great a hindrance to the popularity of the
notes that it may be doubted whether the paper currency could have made
a progress greater than it did even if the lowest denomination of the
notes had been lower than it actually was.

  ¹⁰⁹ For a clear and concise sketch of the organization of the paper
      currency in India, _see_ the Note of the Government of India in
      the Report of the U.S. Director of the Mint, Washington, 1894, pp.

  ¹¹⁰ Sec. 3 of Act III.

  ¹¹¹ It may be pointed out that although the Presidency banks had
      ceased to issue notes, yet under the agreements made with the
      Government in virtue of Act XXIV of 1861 the banks were employed
      by the Government “for superintending, managing and becoming
      agents for the issue, payment and exchange of promissory notes of
      the Government of India, and for the carrying on the business of
      an agency of issue” on a remuneration of ¾ per cent. per annum “on
      the daily average amount of Government currency notes outstanding
      and in circulation through the agency of the bank.”  In the
      conflict that ensued between the Government of India and the
      Secretary of State as to the propriety of thus employing the
      banks, the former was in favour of the plan because it believed
      that it would help the extension and popularization of the notes,
      while the latter disliked the arrangement because it seemed to him
      to compromise the principle of complete separation between the
      business of issue and the business of banking. Neither of the two,
      however, grasped the fact that the profit on remittances on
      different centres owing to the prevalence of internal exchange was
      so great that the commission allowed to the banks was an
      insufficient inducement to cause them to promote the circulation
      of notes by providing facilities at their branches for the free
      encashment of them.  So high was the internal exchange, and so
      reluctant seemed the banks to popularize the notes, that
      Government finally discharged them from being their agents for
      paper currency from January 2, 1866.  _See_ House of Commons
      Return, East Indian (Paper Money) 215 of 1862.

  ¹¹² Cf. the speech of the Hon. Mr. Laing on the Paper Currency Bill
      dated February 16, 1861, _S.L.C.P._, Vol. VII, pp. 73–74.

  ¹¹³ Each sub-circle had within it a number of agencies of issue; but
      the agencies were centres not of encashment but only of issue.

  ¹¹⁴ For the inconveniences of the “circle” system and the various
      measures contemplated by Government to facilitate the encashment
      of notes, see _Report of the Bombay Chamber of Commerce for_
      1868–69, Appendix X, pp. 309–16.

It must, however, be borne in mind that it was not the intention of the
Indian Legislature to make the Indian currency as economical¹¹⁵ as was
desired by the Executive Government. The Legislature was no doubt
appealed to by the original author of the paper currency to turn India
into a new Peru, where as much currency could be had with as little
cost,¹¹⁶ but the Legislature showed a rather prudent reserve on the
matter of aiding the consummation of such a [pg 59] policy.  As the
centres of encashment were so few, and the area included within each so
large as to separate the furthest point in a circle by a distance of
about 700 miles from the centre of encashment of the circle, it viewed
with dread the authorizing of notes of smaller denomination which the
poor could not refuse and yet could not cash.¹¹⁷ Besides the hardship
involved in the want of encashability in the notes, the Legislature
feared they would prove a “fugitive treasure” in the hands of the Indian
peasant.  Not being able to preserve them from rain and ants, he might
have had to pay a heavy discount to be rid of the notes he could have
been forced to accept.¹¹⁸ So opposed was the Legislature to the
economizing clauses of the Paper Currency Bill as contrived to drive out
metallic currency that it gave the Government an option to choose
between legal-tender notes but of higher denomination and
lower-denomination notes but of no legal-tender power.¹¹⁹ And as the
Government chose to have legal-tender notes, the Legislature in its turn
insisted on their being of higher denomination.  At first it adhered to
notes of Rs. 20 as the lowest denomination, though it later on yielded
to bring it down to 10, which was the lowest limit it could tolerate in
1861. Not till ten years after that did the Legislature consent to the
issue of Rs. 5 notes, and that, too, only when the Government had
promised to give extra legal facilities for their encashment.¹²⁰ On the
whole, the desire of the Indian Legislature was to make the Indian
currency safer, rather than economical, and such it undoubtedly was. [pg

  ¹¹⁵ Cf. the whole speech of the Hon. Mr. Sconce dated September 22,
      1860, _S.L.C.P._, Vol. VI, p. 1143 _et seq_.

  ¹¹⁶ Cf. the speech of Mr. Wilson, the originator of paper currency in
      India, dated March 3, 1860, where he says: “In short, to abstract
      so much coin from the mere mechanical purpose of the circulation,
      supplying its place with convertible paper, would be exactly the
      game in effect as if suddenly, in the control of the Maidan, a
      rich silver mine had been discovered which produced silver at
      little or no cost.”  _Supreme Legislative Council Proceedings_,
      Vol. VI, p. 250.

  ¹¹⁷ Cf. the speech of the Hon. Mr. Forbes, dated September 22, 1860,
      _ibid._, p. 1154,

  ¹¹⁸ Cf. the speech of the Hon. Mr. Forbes, dated July 13, 1861.
      _Supreme Legislative Council Proceedings_, Vol. VII, p. 768.

  ¹¹⁹ Cf. the speech of the Hon. Mr. Sconce, September 22, 1880,
      _S.L.C.P._, Vol. VI, p. 1151.

  ¹²⁰ For such extra legal facilities, and measures adopted to
      materialize them, cf. the interesting speech of the Hon. Sir
      Richard Temple on the Paper Currency Bill dated January 13, 1871,
      _S.L.C.P._, Vol. X, pp. 22–25.

How did the currency system thus constituted work?  Stability of value
is one of the prime requisites of a good currency system.  But if we
judge the Indian currency from this point of view we find that there
existed such variations in its value that it is difficult to escape the
conclusion that the system was a failure.

Taking the rate of discount as an evidence of the adequacy of currency
for internal commerce, it was the opinion of such a high financial
authority as Mr. Van Den Berg that the unexpected contortions and sudden
transitions in the Indian money market were unparalleled in the annals
of any other money market in any other part of the world.¹²¹ India is
pre-eminently a country subject to seasonal swings.¹²² Mid-summer [pg
61] is naturally a period of diminished activity, while autumn brings
renewed vigour in all activities of social and economic life.  Not
production alone is affected by seasons.  On the side of consumption
Indian social life is also subject to seasonal variations.  There are
marriage seasons, holiday seasons, and holy seasons.  Even distribution
has assumed in India quite a seasonal character.  The practice of paying
rents, wages, dividends, and settling accounts at stated intervals has
been gaining ground as a result of contact with Western economic
organization.  All these generate a kind of rhythm in the social demand
for money, rising at certain periods of the year and falling at others.
Having regard to the seasonal character of the economic and social life,
the fluctuations caused by the discount rate soaring high during busy
months when it should have been low enough to liquidate the
transactions, and falling low during slack months when it should have
been high enough to prevent the market from being demoralized, are
unavoidable.  But what made the contortions of the Indian money market
so obnoxious was the circumstance that the seasonal fluctuations in the
discount rate were so abnormal.¹²³

  ¹²¹ _The Money Market and Paper Currency of British India_, Batavia,
      1884, p. 3.

  ¹²² It should be noted that the slack and the busy seasons are not
      uniformly distributed over the whole surface of the country.  The
      distribution is roughly as follows:—

           Eastern India          Western      Northern India.       Southern
  Months ──────────────────────── India.     ─────────────────────── India.
           Rangoon.   Calcutta.   Bombay and   Cawnpore.   Lahore.   Madras.
  Busy     3 months   4 months    6 months     6 months    9         6 months
  Slack    9 months   8 months    6 months     6 months    3         6 months

  Jan.     Busy       Slack       Busy         Slack       Busy      Slack
  Feb.     Busy       Slack       Busy         Busy        Busy      Busy
  March    Busy       Slack       Busy         Busy        Busy      Busy
  April    Slack      Slack       Busy         Busy        Busy      Busy
  May      Slack      Slack       Slack        Slack       Busy      Busy
  June     Slack      Slack       Slack        Slack       Busy      Busy
  July     Slack      Slack       Slack        Slack       Slack     Busy
  Aug.     Slack      Busy        Slack        Slack       Slack     Slack
  Sept.    Slack      Busy        Slack        Busy        Slack     Slack
  Oct.     Slack      Busy        Slack        Busy        Busy      Slack
  Nov.     Slack      Busy        Busy         Busy        Busy      Slack
  Dec.     Slack      Slack       Busy         Slack       Busy      Slack

  Busy     Jan. to    Aug. to     Nov. to      Feb. to     April     Feb. to
           March      Nov.        April        April       to June   July
  Slack    April to   Dec. to     May to       May to      July to   April to
           Dec.       July        Oct.         Aug.        Sept.     Dec.
  Busy     —          —           —            Sept. to    Oct. to   —
                                               Nov.        March
  Slack    —          —           —            Dec. to     —         —

  ¹²³ The rate of discount of the Bank of Bengal for private paper
      running thirty days and after was altered—

      In 1876 16 times, with 6½ per cent. as minimum and 13½ per cent.
              as maximum.
      In 1877 21 times, with 7½ per cent. as minimum and 14½ per cent.
              as maximum.
      In 1878 10 times, with 5½ per cent. as minimum and 11½ per cent.
              as maximum.
      In 1879 15 times, with 6½ per cent. as minimum and 11½ per cent.
              as maximum.
      In 1880  8 times, with 5½ per cent. as minimum and  9½ per cent.
              as maximum.
      In 1881  9 times, with 5½ per cent. as minimum and 10½ per cent.
              as maximum.
      In 1882  9 times, with 6½ per cent. as minimum and 12½ per cent.
              as maximum.
      In 1883 14 times, with 7½ per cent. as minimum and 10½ per cent.
              as maximum.

                                             (_Van Den Berg, loc. cit._)

The explanation for such a market phenomenon is to be sought in the
irregularity of the money supply of the country.  In order that money
may be had at a uniform price, its supply should be regulated according
to the variations in the demand for it.  It is well to recognize that
the demand for money is never fixed.  But it will avail nothing until it
is realized that the changes in the demand for money [pg 62] which take
place from year to year with the growth of population, trade, etc.,
belong essentially to a different category from the fluctuations in the
demand for money which occur within the course of a year owing to
seasonal influences.  In any well-regulated currency it is necessary to
distinguish these two categories of changes in monetary demand, the one
requiring steadiness and expansibility and the other elasticity.  On a
comparative view it seems more than plausible that a metallic money is
as especially adapted to furnish this element of steadiness and
stability as paper money is to furnish that of elasticity.  Indeed, so
appropriate seem to be their respective functions that it has been
insisted¹²⁴ that in an ideal system these two forms of money cannot
interchange their functions without making the currency burdensome or
dangerous.  The proof of the soundness of this view, it may be said, is
found in the fact that, excluding the small transactions which take
place by direct barter, the purchasing medium of any commercially
advanced country is always a compound of money and credit.

  ¹²⁴ Cf. Prof. R. P. Falkner in _A Discussion of the Interrogatories of
      the Monetary Commission of the Indianapolis Convention_, 1898,
      Publications of the University of Pennsylvania in Political
      Economy and Public Law, No. 13, pp. 26–26.

On the face of it the Indian currency is also a compound of money and
credit, and as such it may be supposed that it contained provisions for
expansibility as well as elasticity.  But when we come to analyse it we
find that it makes no provision whatever for elasticity.  Far from
allowing the credit part of it to expand and contract with the seasonal
demands, the Paper Currency Act placed a rigid limit upon the volume of
its issue regardless of any changes in the volume of the demand.  Here,
then, is to be found one of the causes for the “convulsions” in the
discount rates prevalent in the Indian money market.  As was pointed out
by Mr. Van Den Berg:—

    “The paper currency established by the Indian legislator fully
    answers the purpose, so far as business requires an easier means
    of exchange than gold or silver coin; but no connection whatever
    exists between the issue of the fiduciary currency and the wants
    of the public to have their bills or [pg 63] other commodities
    converted into a current medium of exchange … and this is the
    sole cause of the unexpected convulsions and sudden transitions
    in the money market so utterly detrimental to business to which
    the British Indian trade is constantly exposed.”¹²⁵

  ¹²⁵ Op. cit., p. 7.

It may, however, be objected that such a view is only superficial. The
Indian Paper Currency Act is a replica of the English Bank Act of 1844
in all its essentials.  Like the English Bank Act, it set a definite
limit to the fiduciary issue of notes.  Like it, it separated the Issue
Business from the Banking Business,¹²⁶ and if it made the banks in India
mere banks of discount it is because it copied the Bank Charter Act,
which deprived banks in England, including the Bank of England, from
being banks of issue.  And yet it cannot be said that the English money
market is affected by such “convulsions and sudden transitions” as has
been the case with the Indian money market.  On the other hand, it was
the considered opinion of Jevons¹²⁷ that “the Bank of England and
bankers generally have just the same latitude in increasing or
diminishing their advances now (i.e. under the Act of 1844) as they
would have under a[n un]restricted system”; for, as he elsewhere argued,
if the limitation on fiduciary issue is arbitrary, and if people want
more money, “it is always open to them to use metallic money instead.
The limitation is imposed not upon money itself, but upon the
representative part.”¹²⁸ What, then, is the [pg 64] reason that the
Indian Paper Currency Act should produce the evils which its English
prototype did not? _À priori_ there need be no such convulsions in a
money market subject to such a law.  The Act, by limiting the issue of
notes, did seem to leave no choice but to use metallic money even for
seasonal demand.  This would be true if notes were the only form in
which credit could be used.  As a matter of fact, this is not so.
Credit could take the form of a promise to pay issued by a bank as well
as it could take the form of an order on the bank to pay, without making
any difference to the social economy of the people who used them.
Consequently, if under the provisions of the Act banks are restricted
from issuing promises to pay, it does not follow that the only way open
to them is a resort “to use metallic money instead,” for they are
equally free to consent to honour as many orders to pay as they like.
Indeed, the success or failure of the Act depends upon which of the two
alternatives the banks adopt.  It is obvious that those who will submit
to the ruling of the Act and resort to metallic money will have to bear
the “convulsions,” and those who will circumvent the Act by utilizing
other forms of credit will escape them.  The chief reason, then, why the
Act has worked so well in England and so badly in India is due to the
fact that, whereas English banks have succeeded in implanting the order
or cheque system of using credit in place of the note system, Indian
banks have unfortunately failed.  That they should have failed was,
however, inevitable.  A cheque system presupposes a literate population,
and a banking system which conducts its business in the vernacular of
the people.  Neither of these two conditions obtains in India.  The
population is mostly illiterate, and even were it otherwise it could not
have availed itself of the cheque system, because Indian banks refuse to
conduct their business in any other medium but English.  Besides, the
growth of the cheque system presupposes a widespread network of banks, a
condition which is far from being fulfilled in India.  In the absence of
banking, a cheque is the worst instrument that could be handled.  If not
presented within a certain time a cheque may become stale and valueless,
and is therefore [pg 65] inferior to a note as a store of wealth.  In
such circumstances as these it is no wonder that in India cheques did
not come into being on a sufficiently large scale to amend the
inelasticity of the notes.

  ¹²⁶ The Indian Paper Currency Act carried the principle of separation
      further than did the English Bank Charter Act. It not only
      prevented the Issue Department being conducted under the ægis of a
      Banking Department, but also disallowed the two being housed under
      the same roof. Such an ideal of separation was held out by Sir
      Charles Wood during the debate on the Bank Charter Act.  Cf.
      _Hansard Parliamentary Debates_, Vol. LXXIV, p. 1363.  Though he
      was then disappointed, he did not fail to realize his ideal when
      he became the Secretary of State for India.

  ¹²⁷ Cf. his Essay on the “Frequent Autumnal Pressure in the Money
      Market and the Action of the Bank of England,” _Investigations in
      Currency and Finance_ (ed. Foxwell), 1884, p. 179.  Italics by
      Jevons.  There is, however, an apparent misprint in the original,
      which at the close of the quotation reads “as they would have
      under a restricted system.”

  ¹²⁸ _Money and the Mechanism of Exchange_, Kegan Paul, London, 1890,
      p. 225.

But even if Indian banks had succeeded in making use of credit in a form
other than that of notes, they could not have eased the money market to
the same extent as the English banks have been able to do. One of the
incidents of banking consists in the liability of banks to pay cash on
demand.  If all their deposits were received in cash this liability
would involve no risk.  As a matter of fact, a large part of their
deposits consists of bills which they make it their business to
undertake to pay in cash.  One of the first things, therefore, that a
banker has to look to is the proportion which his cash deposits bear to
his credit deposits.  Now, this proportion may be adversely affected
either by an increase in his credit deposits or by diminution in his
cash deposits.  In either case his ability to pay cash is _pro tanto_
weakened by lowering the ratio of his total cash to his total
liabilities.  Against an undue expansion of credit a banker may
effectually guard himself.  But, notwithstanding the development of the
cheque system, there is always lurking the possibility of withdrawal of
some cash at some time or other.  A banker must, therefore, provide by
keeping on hand a certain minimum reserve.  How large should be the
reserve depends upon what the possibilities for the withdrawal of cash
are.  The point is that to the extent of the reserve the power of the
bank to grant credit is curtailed.  If the reserve of the bank is
already at the minimum it must stop discounting or must strengthen its
position by recovering the cash withdrawn from its coffers.  Now it is
obvious that if the amount of money withdrawn is kept in the current of
business where the banks can get at it, they of course can strengthen
their position again immediately, and not only always keep themselves
well away from the danger line of minimum reserve, but be always
prepared to meet the needs of the money market. What was the position of
the Indian banks from this point of view? Owing to the absence of a
cheque system the [pg 66] possibilities for the withdrawal of cash are
great, and the reserve was required to be large in consequence thereof.
A large part of their funds being thus held for a reserve, their
resources for discounting were small.  But there was a further weakening
of their position as lenders by reason of the fact that the cash
withdrawn did not speedily return to them. The result was the Indian
banks were obliged to curtail their discounts to a far greater extent
than were the English banks, in order to preserve a due proportion
between their cash and their credits.  The absence of branch banking was
an important desideratum in this regard.  But, even if there were branch
banks, the money withdrawn could not have returned, for it was not left
in the current channels of business.  It was locked up in Government
treasuries whose operations were independent of the banking transactions
of the country.  Of course there could be nothing inherently wrong in
the maintenance by a Government of an Independent Treasury, and if its
operations were to have a resultant connection with the operations of
the business community no harm need arise.  But the operations of the
Indian Treasury ran counter to the needs of business.  It locked up when
it should have released its hoards, and released its hoards when it
should have locked them up.

The causes that “convulsed” the Indian money market had therefore been
the inelasticity of the credit media and the working of the Independent
Treasury System in so far as they were the prime factors affecting the
money supply of the country (_see_ Chart I).  The evil effects of such
convulsions of the discount rate can hardly be exaggerated.¹²⁹ In an
economy in which almost every business man must rely, at certain seasons
if not all the year round, on borrowed capital, the margin of profit may
be wiped out by a sudden rise or augmented by a sudden fall in the rate
of discount leading to under-trading or over-trading.  Such fluctuations
increase business risks, lead to higher business expenses and a greater
cost to the consumer.

  ¹²⁹ For American experience, cf. E. W. Kemmerer, “Seasonal Variations
      in the New York Money Market,” in _The American Economic Review_,
      March, 1911.

[Illustration: CHART I: Discount Rates in India]

[pg 67] They bring about swings in prices, promote speculation, and
prepare for panics.  Evils such as these would have in any other country
compelled the authorities to take proper steps to deal with them.  But
it is a curious fact that in India no serious attempts were made to
alleviate the sufferings they inflicted upon the trading community.  A
reform of the paper currency or the abolition of the Independent
Treasury System would have eased the situation, though a reform of both
would have been better.  The general community, however, was not
desirous for a change of the paper currency,¹³⁰ but was anxious for the
abolition of the Independent Treasury.  The Government, on the other
hand, refused to do away with its Independent Treasury System,¹³¹ and
[pg 68] repudiated even its moral obligation to help the business
community on the somewhat pedantic plea that in locking up currency it
did not lock up capital.¹³² Nor is it possible [pg 69] to say, since it
was not called upon to enunciate a policy, how far it would have gone to
modify the Paper Currency Act so as to relieve the situation.  Before,
however, this controversy could end in a satisfactory solution for
imparting to the currency system that element of elasticity which it
needed, there developed another and a greater evil which affected its
metallic counterpart in a degree sufficient to destroy its most vital
element of steadiness and stability of value which it was its virtue to
furnish.  So enormous did the evil grow, and so pervasive were its
effects, that it absorbed all attention to the exclusion of everything
else.  What fixity of value between the different units of its currency
is to the internal transactions of a country, a par of exchange is to
its external transactions.  A par of exchange between any two countries
expresses the relative exchange values of their respective currencies in
terms of each other. [pg 70]

  ¹³⁰ Cf. _India in_ 1880, by Sir Richard Temple, p. 469; Sir Charles
      Wood’s _Administration of Indian Affairs_, p. 89; also _The Indian
      Statesman_, January 15 (1884).

  ¹³¹ It should, however, be noted that between 1862 and 1876, at some
      centres comprising the head offices and branch offices of the
      Presidency banks, the Independent Treasury System was suspended.
      By way of compensation for the loss of their right of note issue,
      the Presidency banks were given certain concessions by the
      Government under agreements entered into in accordance with Act
      XXIV of 1861.  Among the concessions one was the use by the banks
      of Government balances.  The first agreement, that of 1862,
      conceded to the banks the following privileges in regard to the
      Government balances: (1) The unrestricted use for banking purposes
      “of all moneys and balances which but for the agreement would have
      been received or held at the General Treasury” up to the limit of
      70 lakhs in the case of the Bank of Bengal, 40 lakhs in the case
      of the Bank of Bombay, and 15 lakhs in the case of the Bank of
      Madras. (2) The option of setting aside the excess over these sums
      in a separate strong room for production when demanded, or of
      investing it in Government paper or other authorized securities,
      the power of investment being subject to the condition that the
      banks should be “at all times answerable and accountable to
      Government for the surplus cash balance for the time being.” (3)
      The right to interest from Government on the difference between
      the actual balance and 50 lakhs in the case of the Bank of Bengal,
      30 lakhs in the case of the Bank of Bombay, and 10 lakhs in the
      case of the Bank of Madras, whenever the balances at these banks
      fell below these minima. (4) Permission to the banks to use the
      Government balances at their branches on similar terms, suitable
      limits being fixed in each case, as in the head office agreements.

      A year after the agreements were executed difficulties arose with
      the Bank of Bengal, which had locked up the funds to such an
      extent that it was unable to meet the demands of the Government on
      the public balances it held.  Negotiations were therefore opened
      in 1863 for the revision of the agreements, and the revised
      agreements came into force on January 2, 1866.  They contained the
      following provisions regarding the public balances: (1)
      Undertaking by Government to maintain in the hands of the banks at
      their head offices an “average cash balance” of 70 lakhs at the
      Bank of Bengal, 40 lakhs at the Bank of Bombay, and 25 lakhs at
      the Bank of Madras, “so far as the same may conveniently be done.”
      (2) Permission to the banks to use the whole balances for the time
      being deposited with them for banking purposes. (3) The right to
      interest from Government when the Government balance at the head
      offices of the Bank of Bengal, Bank of Bombay, and Bank of Madras
      fell below the minima of 45 lakhs, 25 lakhs, and 20 lakhs
      respectively. (4) Permission to employ “the whole of the balances
      (at branches) however large for the time being” for banking
      purposes, subject to the condition that each branch should “at all
      times be ready to meet the drafts of the Government" to the extent
      of the Government balances at the branch.

      These revised agreements were to remain in force till March 1,
      1874.  In 1874 the question of the revision of the charters of the
      Presidency banks was under consideration, and it was the aim of
      the Government to continue to the banks the right to use the whole
      Government balances.  Just at this time (1874) difficulties
      occurred with the Bank of Bombay and the Government could not draw
      upon their balances.  This led to a reconsideration of the policy
      of merging the Government balances with the bank balances and
      leaving them in the custody of the banks.  After a somewhat
      lengthy discussion the Government of India reverted to the system
      of Independent Treasury by instituting what were called Reserve
      Treasuries at the headquarters of the Presidencies which held the
      Government balances previously held by the Presidency banks. For a
      history of this episode _see_ House of Commons Returns 109 and 506
      of 1864; also J. B. Brunyate, _An Account of the Presidency
      Banks_, Chap. VII.

  ¹³² In the despatch of May 6, 1875, sanctioning the re-establishment
      of the Independent Treasury System, the banks were admonished by
      the Secretary of State thus: “Capital supplied by Government, and
      not representing the savings of the community, is a resource on
      whose permanence no reliance can be placed, and which therefore
      tends to lead traders into dangerous commitments.  It gives ease
      for a time, and produces prosperity which is at the mercy of an
      accident.  A political exigency suddenly withdraws the
      adventitious resource, and the commerce which trusted to it finds
      itself pledged beyond what its own resources can make good.”
      Under the arrangements of 1876 leading to the establishment of the
      Reserve Treasuries, the Government agreed as before to pay
      interest to the banks when their balances at the banks fell below
      certain minima.  The Government entered into no formal undertaking
      as regards maxima, and gave the banks to understand “that the
      Government will ordinarily not leave with the headquarters of the
      banks, otherwise than temporarily, more than the following sums:
      Bank of Bengal 100 lakhs, Bank of Madras 30 lakhs, and Bank of
      Bombay 50 lakhs.  But this condition will not be inserted in the
      contract, which will impose no obligation upon the Government to
      leave any balances whatever with the banks. … The Government will
      not undertake to give to the banks the exclusive custody of all
      the public balances where the Government banks with the banks.”
      The question of the amount of balances which the Government would
      leave with the banks in the ordinary course being thus settled,
      the only way left open to give help to the banks to meet seasonal
      demands was to grant loans to the Presidency banks for its
      balances held in the Reserve Treasuries.  Up to 1900 the
      Government had refused to make any loans to the banks.  After 1900
      it agreed to make such loans of a limited amount at the bank rate.
      Up to 1913 only six loans were made, which shows that the terms of
      such loans were rather onerous.  The Chamberlain Commission of
      1913 recommended loans rather than the abolition of the
      Independent Treasury system.  The war, however, hastened the
      course of events.  It proved the necessity of co-operation between
      the Presidency banks and the Government, and also the need of a
      large and powerful Banking Institution.  This was accomplished by
      the amalgamation of the Presidency banks into an Imperial Bank of
      India (Act XLVII of 1920), with the inauguration of which the
      Independent Treasury system is again in the process of abolition.
      For a history of episodes of the Independent Treasury after 1876,
      _see_ Appendices to the _Interim Report of the Chamberlain
      Commission_, Vol. I, Cd. 7070 of 1913, Nos. I and II.

It is obvious from this that the par of exchange between any two
countries will be stable if they employ the same metal functioning as
their standard money freely convertible into and exportable as bullion,
for in that case they would have as a measure of value a common medium,
the value of which could not differ, given freedom of commerce, in the
two countries by more than the cost of its transhipment, i.e. within
specie points.  On the other hand, there can be no fixed par of exchange
between two countries having different metals as their currency
standards of value.  In that case their exchange is governed by the
relative values of gold and silver, and must necessarily fluctuate with
changes in their value relation.  The limit to the exchange fluctuations
between them will be as wide or as narrow as the limit to fluctuations
in the relative values of the two metals may happen to be.  When,
therefore, two countries such as England and India are separated by
differences in their metallic standards, theoretically there could be no
possibility for a stable par of exchange between them.  But, as a matter
of fact, notwithstanding the difference in their metallic standards, the
rate of exchange between England and India seldom deviated¹³³ from the
normal¹³⁴ rate of 1 _s_. 10½ _d_. for R.1.  So steady was the rate up to
1873 that few people were conscious of the fact that the two countries
had different currency standards.  After 1873, however, the
rupee-sterling exchange suddenly broke loose from this

  ¹³³ It appears, however, from the chart that the rupee-sterling
      exchange before 1873 was not quite stable.  But the fluctuations
      in it are to be attributed to quite a different set of factors.
      It should be noted that the rates of exchange used for reducing
      the Indian moneys into sterling during the time of the East India
      Company had been various: moreover, they had so little relation to
      the intrinsic value of the coins exchanged that the actual rates
      officially given were far from the actual market rates.  As having
      a bearing on this interesting subject, consult H. of C. Sessional
      Papers 735 II of 1831–32; Appendix No. 20, _Correspondence, etc.,
      relating to the rates of exchange at which the currencies of India
      are converted into sterling_; also Tucker, H. St. George, _Remarks
      on the Plans of Finance_, 1821, _passim_, and _Memorials of Indian
      Government_, 1853, by the same, pp. 382–85.

  ¹³⁴ Normal only if 15½ to 1 be taken as the normal ratio between gold
      and silver, which was the case for nearly seventy years.

[Illustration: CHART II: Fall of the Rupee-Sterling Exchange]

[pg 71] normal parity, and the dislocation it caused was so great and so
disorderly (Chart II) that no one knew where it would stop.

The rupee-sterling exchange was in reality a reflection of the
gold-silver exchange.  When, therefore, it is said that the
rupee-sterling before 1873 was stable at 1 _s_. 10½ _d_., it merely
meant that the gold-silver exchange before 1873 was stable at the ratio
of 1 to 15½; and that the rupee-sterling exchange was dislocated after
1873 meant that the gold-silver exchange lost its old moorings. The
question which therefore arises is why was the ratio of exchange between
gold and silver disturbed after 1873, as it never was before that year?
Two factors have been appealed to as affording a sufficient explanation
of what then appeared as a strange phenomenon.  One was the
demonetization of silver as the standard money medium by the principal
countries of the world.  This movement in favour of demonetization of
silver was the outcome of an innocent agitation for uniformity of
weights, measures, and coinages.  In so far as the agitation was aimed
at such uniformity it was in every way beneficial. But it also
exemplifies how the pursuit of good sometimes leaves behind a legacy of
evils.  At the Great Exhibition held in London in 1851 the great
difficulty of comparing the different exhibits owing to the differences
of weights, measures, and coinages as between the countries of their
origin and other countries was amply demonstrated to the representatives
of the different nations assembled at that exhibition.¹³⁵ The question
of international uniformity in weights, measures, and coins was
discussed by the various scientific assemblies gathered at this
exhibition, and although nothing tangible came out of it, the question
was not allowed to be dropped: it was taken up at the Brussels
International Statistical Congress held two years after.  Opinion had so
far advanced that the next Statistical Congress, held at Paris, issued a
declaration, which was confirmed by the Vienna Statistical Congress of
1859, strongly urging the necessity of bringing about the desired [pg
72] uniformity in the weights, measures, and coinages of different
countries.¹³⁶ Encouraged by the action of England, which had made in
1862 the metric system of weights and measures optional, the 1863
International Statistical Congress of Berlin resolved to invite the
different Governments “to send to a special Congress delegates
authorized to consider and report what should be the relative weights in
the … gold and silver coins, and to arrange the details by which the
monetary systems of the different countries might be fixed, upon a
single unit decimally subdivided.”¹³⁷ The significance of this Congress
can hardly be overlooked.  It made a departure.  At the former
Congresses the question debated was largely one of uniformity in weights
and measures.  But at this Congress “that phase of it was subordinated
to uniform coinage and was well-nigh laid aside.”¹³⁸ Though the
resolution was a departure it should not have been fraught with serious
consequences if the reform had been confined to the question of
uniformity of coinage.  But there occurred a circumstance which extended
its application to the question of currency.  When this agitation for
uniform coinage grew apace the French quite naturally wished that their
coinage system, which had already been extended over the area comprised
by the Latin Union, should be taken as a model to be copied by other
countries outside the Union in the interest of uniformity.  With this
end in view the French Government approached the British Government of
the time, but was told in reply that the British Government could not
consider the suggestion until France adopted the single gold
standard.¹³⁹ Far from being taken aback, the French Government, then so
anxious to cultivate the goodwill of England, proved so complacent that
it felt no compunction in conceding to the British the pre-requisite it
demanded, and indeed went so far out of the way, when the Conference met
in Paris in [pg 73] 1867, that it actually manœuvred¹⁴⁰ the Assembly
into passing a resolution “that for uniform international coinage it was
necessary that gold alone should be the principal currency of the
world.”  So much importance was attached to the question of uniformity
of coinage that those who passed the resolution seemed not to have
noticed what sacrifice they were called upon to make for its
achievement.  Perhaps it would be more correct to say that they did not
know that they were affecting by their decision the currency system of
the world.  All they thought they were doing at the time was to promote
uniformity of coinage and nothing more.¹⁴¹ But whatever the extenuating
circumstances, the result was disastrous, for when the resolution came
to be acted upon by the different countries assembled, the real end of
the Conference, namely uniformity of coinage, was completely lost sight
of, and the proposed means eventually became the virtual end.

  ¹³⁵ _Report of the Royal Commission on International Coinage_, 1868,

  ¹³⁶ Cf. Russell, H. B., _International Monetary Conferences_, 1898,
      pp. 18–25.

  ¹³⁷ Quoted by Russell, op. cit., p. 25.

  ¹³⁸ Russell, loc. cit.

  ¹³⁹ Cf. evidence of Prof. Foxwell, Q. 23,876, Royal Commission on
      Agricultural Depression in England, 1892.

  ¹⁴⁰ For which cf. Russell, op. cit., p. 46.

  ¹⁴¹ An honourable exception must be made in the case of Dr. Mees, the
      representative of Holland, who drew attention to the harm likely
      to result from this resolution.

The ball once set rolling, the work of demonetizing silver began to grow
apace.  First in the field was Germany.  Having vanquished France in the
war of 1870, she utilized the war indemnity in the reform of her chaotic
currency¹⁴² by hastening to adopt a gold currency for the United Empire
of Germany.  The law of December 4, 1871, authorized the change, with
the mark as the unit of currency.  Silver was demonetized by this
enactment; but the existing silver coins continued to be legal tender,
though their further coinage was stopped, along with the new gold coins
at the legal ratio of 15½ to 1.  This full legal-tender power of the
silver coins was taken away from them by the law of June 9, 1873, which
reduced them to the position of a subsidiary currency.¹⁴³ This policy
was immediately copied by other [pg 74] countries of Germanic
culture.¹⁴⁴ In 1872 Norway, Sweden, and Denmark formed a Scandinavian
Monetary Union, analogous to the Latin Monetary Union, by which they
agreed to demonetize silver as was done by Germany.  This treaty, which
established a gold standard and reduced the existing silver currency to
a subsidiary status, was ratified by Sweden and Denmark in 1873 and by
Norway in 1875.  Holland also followed the same course.  Till 1872 she
had a pure silver standard.  In that year she closed her Mint to the
free coinage of silver, although the old silver money continued to be
legal tender to any amount.  In 1875 she went a step further and opened
her Mints to the free coinage of gold.  Her policy differed from that of
the Germanic countries in that she only suspended the free coinage of
silver, while the latter had demonetized it.  Even the Latin Union was
unable to resist this tide against silver.  As a consequence of this
exclusion of silver, the Latin Union, enlarged as it was by additional
members, naturally desired to take precautionary measures against being
flooded by the influx of this depreciated silver.  Nor was this fear
unfounded, for the silver tendered for coinage at the Belgian Mint in
1873 was three times greater than what was tendered in 1871. Rather than
be embarrassed, Belgium, by the law of December 8, 1873, suspended the
free coinage of her silver five-franc pieces.  This action of Belgium
forced the hands of the other members of the Union to adopt similar
measures.  The delegates of the Union met in Paris in January, 1874, and

  ¹⁴² For a history of the movement for the unification of German
      currency prior to 1870, cf. H. P. Willis, “The Vienna Monetary
      Treaty of 1857,” in the _Journal of Political Economy_, Vol. IV,
      p. 187 _et seq_.

  ¹⁴³ For the text of the Laws, _see_ Appendix to _History of
      Bimetallism_, by Prof. J. L. Laughlin, New York, 1886,

  ¹⁴⁴ Cf. _Report of the Committee on the Depreciation of Silver_, 1876,
      p. xxix.

    “agreed to a treaty supplementary to that originally framed in
    1865, and determined on withdrawing from individuals the full
    power of free coinage by limiting to a moderate sum the silver
    five-franc pieces which should be coined by each State of the
    Union during the year 1874.”¹⁴⁵

  ¹⁴⁵ Laughlin, op. cit., p. 155.

The respective quotas fixed for 1874 were slightly increased [pg 75] in
1875, but were reduced in 1876.¹⁴⁶ But the actual coinage did not even
reach these small quotas.  So greatly was the Union perturbed by the
silver situation that during 1877 the coinage of silver five-franc
pieces was, with the exception of Italy,¹⁴⁷ entirely suspended.  This
action was, however, only a preliminary to the Treaty of November 5,
1878, by which the Latin Union agreed to close its Mints to the free
coinage of silver till further action.  Though at first _sine die_, the
closure proved in the end perpetual.¹⁴⁸ Simultaneously with the
precautionary measures of the Latin Union, Russia suspended, in 1876,
the free coinage of silver except to such an amount as was necessary for
the purposes of her trade with China,¹⁴⁹ and the Imperial Decree of
November 22, 1878, directed that all customs duties above 5 roubles and
15 copecks should be payable in gold.¹⁵⁰ Austria in like manner
suspended the free coinage of silver in 1879.¹⁵¹

  ¹⁴⁶ The quotas fixed at the Conferences for the several members of the
      Union were:—

                           _In Millions of Francs._

                                    1874.          1875.          1876.
      France                           60             75             54
      Belgium                          12             50             36
      Italy                            40             15             10
      Switzerland                       8             10              7
      Greece                            —              —              3
                                        ⸺              ⸺              ⸺
                                      120            150            110

      In 1874 Italy was allotted an extra 20 million francs. _Ibid_., p.

  ¹⁴⁷ She was allowed to coin 10 millions of them.

  ¹⁴⁸ _Ibid_., p. 158.

  ¹⁴⁹ _Report of the Directors of the Mint_, Washington, 1893, p. 23.

  ¹⁵⁰ Cf. P. Willis, “Monetary Reform in Russia,” in the _Journal of
      Political Economy_, Vol. V, p. 291.

  ¹⁵¹ Cf. F. Wieser, “Resumption of Specie Payment in Austria-Hungary,”
      in _Journal of Political Economy_, Vol. I, pp. 380–7.

On the other side of the Atlantic an important event had taken place in
the United States.  In 1870 that Government resolved to consolidate the
Mint laws, which had not been revised since 1837, in a comprehensive
statute.  Since the legislation of 1853 the silver dollar was the only
coin which the United States Mints coined freely. But in the new
consolidated Mint Statute of 1873 the silver dollar was deleted from the
list of coins to be issued from the Mint, [pg 76] so that it virtually
amounted to suspension of the free coinage of silver in the United
States.¹⁵² The silver dollars previously coined continued to circulate
as full legal tender, but that power was taken away by the law of June,
1874, which declared that “the silver coins of the United States shall
be a legal tender at their nominal value for any amount not exceeding
five dollars in any one payment.”

  ¹⁵² This measure was the subject of a strange controversy.  The gold
      men argued that it was deliberately adopted, while the silver men
      decried it as a surreptitious act due to a “combination of
      rascally contrivance and rascally connivance.”  Prof. Laughlin has
      well cleared the mystery surrounding this Act.  He shows by
      reference to debates in Congress on the legislation of 1853 that
      Congress knew that by refusing to alter the ratio between gold and
      silver it was placing the country on a gold standard.  Too much
      consideration, he thinks, has been wasted on the Act of 1873,
      which merely took legal notice of the consequences of the Act of
      1853.  Cf. his _History of Bimetallism_, pp. 80 and 93–95.

The other factor appealed to in explanation of the dislocation of the
relative values of gold and silver was the great increase in the
production of silver as compared to gold.

                                TABLE IX

_Relative Production of Gold and Silver (Ounces)_

            Total Production.             Annual Average           Index Number for
                                          Production               Average Annual
Period                                                             Production.
            Gold.         Silver.         Gold.       Silver.      Gold.     Silver.
1493–1600   24,266,820    734,125,960     224,693     6,797,463    100       100
1601–1700   29,330,445    1,197,073,100   293,304     11,970,731   130·5     176·1
1701–1800   61,088,215    1,833,672,035   610,882     18,336,720   271·8     269·7
1801–1840   20,488,552    801,155,495     512,217     20,028,887   227·9     293·1
1841–1870   143,186,294   931,091,326     4,772,876   31,038,378   2,124·1   456·6
1871–1890   106,950,802   1,715,039,955   5,347,545   85,751,998   2,375·4   1,261·5

The history of the production of the precious metals in modern times
begins from the year 1493, a date which marks the discovery of the
American continent.  Reviewing the results of the production from 1493
to 1893, a period in all of 400 years, we find that during the first
hundred years the [pg 77] production of gold and silver rises at a
uniform rate of progression.  Assuming the annual average production of
each during the first century (1493–1600) in the modern history of their
production to be 100, it will be seen that in the next century
(1601–1700) the index number for the production of gold rises to 130 and
that of silver to 176.  This rate of progression is also kept up in the
succeeding century (1700–1800), during which the figure for both gold
and silver approximates to 270, and continues without much disturbance
up to 1840, when the respective index numbers stood at 228 for gold and
293 for silver.  From this point onwards the relative production of the
two metals underwent a complete revolution.  During the next thirty
years (1841–70) the production of gold reached unprecedented heights,
while that of silver lagged behind, relatively speaking.  The index
number for silver production advanced only to 450, but that for gold
went up to 2,124.  This revolution was followed by a counter-revolution,
as a result of which the position as it stood at the end of 1870 was
well-nigh reversed.  The production of gold received a sudden check, and
though it had increased enormously between 1840–70 it remained
stationary between 1870–93.  On the other hand, the production of
silver, which was steady between 1841–70, increased threefold between
1870–93, so that the index number for its average annual production
during the latter period stood at 1,260.

In the controversy which arose over the reasons which brought about this
dislocation and decline in the value of silver in terms of gold, there
were parties to whom one of these two factors was a sufficient cause.
One side argued that had suspension or demonetization of silver not
taken place its value could never have fallen.  This position was
vehemently challenged by the other side, which believed in the
over-supply of silver as the primary cause of its depreciation. Now was
the argument from relative over-supply sufficient to account for the
fall in the gold value of silver?  On the face of it the explanation has
the plausibility of a simple proposition.  It is one of the elementary
theorems of political economy that the value of a thing varies inversely
[pg 78] with its supply, and if the supply of silver had largely
increased, what could be more natural than that its value in terms of
gold should fall?  The following were the relevant facts which formed
the basis of the argument:—

                                TABLE X

_Gold and Silver_¹⁵³
        _Relative Production and Relative Value_

            Ratio of     Ratio                            between Relative
            Production   of                               Production and
            (by          Value                   Index    Relative Value.
            Weight)      of        Index         Number ────────────────────────
            of Gold      Gold      Number        for      Relative     Relative
Period.     to           to        for the       the      Production   Value
            Silver.      Silver.   Ratio of      Ratio    of           of
            As 1         As 1      Production.   of       Silver.      Silver.
            Grain        Grain                   Value.   Falls -      Falls
            to:          to:                              Rises +      -
1681–1700   31·8         14·95     100           100      —            —
1701–1720   27·7         15·21     87            101·7    −13          −1·7
1721–1740   22·6         15·10     71            101      −29          −1·0
1741–1760   21·7         14·70     67            98·3     −33          +1·7
1761–1780   31·5         14·40     99            96·3     −1           +3·7
1781–1800   49·4         15·08     155·6         100·8    +55·6        −.8
1801–1810   50·3         15·67     158·0         104·8    +58·0        −4·8
1811–1820   47·2         15·68     148·0         104·9    +48·0        −4·9
1821–1830   32·4         15·82     101·9         105·8    +1·9         −5·8
1831–1840   29·4         15·77     92·4          105·4    −7·6         −5·4
1841–1850   14·2         15·81     44·6          105·8    −55·4        −5·8
1851–1855   4·4          15·45     13·8          103·3    −86·2        −3·3
1856–1860   4·5          15·28     14·0          102·2    −86·0        −2·2
1861–1865   5·9          15·42     18·55         103·1    −81·5        −3·1
1866–1870   6·9          15·52     21·7          103·8    −78·3        −3·8
1871–1875   11·3         16·10     35·5          107·6    −64·5        −7·6
1876–1880   13·2         17·79     41·5          119·0    −58·5        −19·0
1881–1886   17·3         18·81     54·4          125·8    −45·6        −25·8
1886–1890   19·9         20·98     62·6          140·3    −37·4        −40·3
1891–1895   20·0         26·75     62·9          178·9    −37·1        −78·9

The facts thus presented led to two conclusions. The first is that the
supposed enormous increase in the relative production of silver was an
assumption which had no foundation [pg 79] in reality.  On the contrary,
glance at the figures for relative production discloses the curious fact
that since the beginning of the eighteenth century silver, instead of
rising, has been falling in proportion.  With the exception of the first
quarter of the nineteenth century, silver had formed, throughout the two
centuries covered by the table, a diminishing proportion as compared
with gold.¹⁵⁴ Indeed, never was the proportion of silver so low as it
was in the latter half of the nineteenth century, and even when after
1873 it began to grow it did not reach half the magnitude it had reached
in the beginning of the eighteenth century.  The second conclusion which
these facts were claimed to sustain was that the value of silver in
terms of gold did not move in sympathy with its supply relative to that
of gold. According to theory, the value of silver should have been
rising because the relative volume of its production had been
diminishing. On the other hand, a closer examination of the figures of
relative values and relative productions, as given in the foregoing
table, instead of showing any close correlation (_see_ Chart III)
between them, pointed to the contrary.  Instead of supply and value
being inverse in proportion, it showed that as its supply was falling
there was also a fall in its value.  Such being the facts of history, it
was contended that they gave no support to those who rested their case
on over-supply rather than on demonetization as a sufficient explanation
for the depreciation of silver.

  ¹⁵³ The table is based on figures of M. de Foville of the French Mint,
      as given by Mr. F. B. Forbes in _The Bimetallist_ of July, 1897,
      pp. 125–28.

  ¹⁵⁴ In view of this, it is a matter of some surprise that such an
      eminent economist as Prof. W. Lexis should have ceased to be
      bimetallist on the ground that the enormous increase of silver
      militated against the establishment of a permanently high ratio
      with gold.  Cf. his essay on “The Present Monetary Situation,” in
      the _Economic Studies of the American Economic Association_, 1896,
      Vol. I, No. 4, pp. 273–77.  The habit of measuring the production
      of silver in terms of value is no doubt largely responsible for
      this quite unfounded notion.

[Illustration: CHART III: Relative Values and Relative Production of
Gold and Silver]

Apart from such minor points, the issue was considerably narrowed by the
peculiarity of the events of the twenty years preceding and following
the year 1873.¹⁵⁵ Compare, it was said, the period commencing with 1848
and ending [pg 80] with the year 1870 with the period following 1870,
and there emerges the arresting fact that these two periods, though they
have been the opposite of each other with reference to the relative
values of the two metals, were alike with reference to the changes in
their relative supply.  The period between 1870 and 1893 on the side of
relative production was marked by the preponderance of silver.  The
period between 1848 and 1870 is an exact parallel to the above period
with respect to changes in the relative supply of the two precious
metals, only in this case it was gold that had increased in volume.
Now, if it is over-supply that governed the value relations of the two
metals in the second period (1870–93) the same should be true of their
value relations in the first period (1848–70).  Was there, then, a
disturbance in the relative values of the two metals in the first period
anything like what took place in the second period?  It was insisted
that the disturbance in the ratios of production of the two metals in
the first period was enormously greater than that which occurred in the
second period.  Indeed, comparatively speaking, the disturbance in the
second period was nothing to speak of.  And yet their relative (value
during the first period was well-nigh constant at the ratio of 1 to 15½,
while in the second it fluctuated between 16·10 and 26·75.  Those who
argued that the value of silver fell after 1873 because of its
over-supply were thus faced with the problem as to why the value of gold
did not fall when its supply had become so abundant before 1873.  The
whole controversy was therefore centred into the question as to what
could have made this difference in the two situations?  If the colossal
increase in the production of gold in the first period did not raise the
value of silver by more than 2 per cent., how was it that a
comparatively insignificant rise in the relative production of silver in
the second period led to such an enormous rise in the price of gold?
What was the controlling influence present in the one case which was
absent in the other? Those who held that it was demonetization of silver
that was responsible for its depreciation argued that, though alike in
every way, the two periods differed in one important [pg 81] particular.
What distinguished them was the fact that in the former it was a common
practice to define the standard money of a country as a certain quantity
of gold _or_ a certain quantity of silver.  Prior to 1803 the two metals
were rated differently in different countries,¹⁵⁶ but since that date
the rating of 1 to 15½ became more uniform, with the result that the
monetary standard throughout that period was either 1 gr. of gold or 15½
grs. of silver.  On the other hand, during the second period, the “_or_”
which characterized the first period was deleted by the
silver-demonetizing and suspending decrees.  In other words, the first
period was characterized by the prevalence of bimetallism under which
the two metals could be used interchangeably at a fixed given ratio. In
the second period they could not be so used owing to the fact that the
fixed ratio necessary for interchange had been abrogated.  Now, could
the existence or non-existence of a fixed ratio be said to be such a
powerful influence as to make the whole difference that set the two
periods in such marked contrast?  That this was the factor which made
the whole difference was the view of the bimetallists.  It was said
that, by virtue of the monetary system prevalent during the first
period, gold and silver were rendered substitutes and were regarded as
“one commodity of two different strengths.”  So related, the conditions
of supply had no effect upon their ratio of exchange, as would have been
the case in respect of a commodity without a substitute.  In the case of
commodities which are substitutes, the relative scarcity of one can give
it no greater value in terms of the other than that defined by their
ratio of exchange, because by reason of the freedom of substitution the
scarcity can be made good by the abundance of the other.  On the other
hand, the relative abundance of one can not depreciate its value in
terms of the other below the ratio of exchange, because its superfluity
can be absorbed by the void created in consequence of a paucity of the
other.  So long as they remain substitutes with a fixed ratio of
substitution, nothing originating in demand or supply could disturb
their [pg 82] ratio. The two being one commodity, whatever changes take
place in the demand or supply of either system beyond the needs of
commerce express themselves in the price level exactly as though one of
them alone was the money medium; but their ratio of exchange will be
preserved intact in any case.

  ¹⁵⁵ Cf. H. S. Foxwell, “Bimetallism: Its Meaning and Aims,” in _The
      (Oxford) Economic Review_ (1893), Vol. III, p. 302.

  ¹⁵⁶ For these ratios, _see_ Appendix, Table B, to _A Colloquy on
      Currency_, by H. H. Gibbs.

In support of this was cited the authority of Jevons, who said:¹⁵⁷

    “Whenever different commodities are thus applicable to the same
    purposes their conditions of demand and exchange are not
    independent.  Their mutual ratio of exchange cannot vary much
    for it will be closely defined by the ratio of their utilities.
    Beef and mutton differ so slightly that people eat them almost
    indifferently. But the wholesale price of mutton, on an average,
    exceeds that of beef in the ratio of 9 to 8, and we must
    therefore conclude that people generally esteem mutton more than
    beef in this proportion, otherwise they would not buy the dear
    meat. … So long as the equation of utility holds true, the ratio
    of exchange between mutton and beef will not diverge from that
    of 8 to 9.  If the supply of beef falls off people will not pay
    a higher price for it, but will eat more mutton; and if the
    supply of mutton falls off, they will eat more beef. … We must,
    in fact, treat beef and mutton as one commodity of two different
    strengths—just as gold at 18 carats and gold at 20 carats are
    hardly considered as two but rather as one commodity, of which
    twenty parts of one are equivalent to eighteen of the other.

    “It is upon this principle that we must explain, in harmony with
    Cairnes’ views, the extraordinary permanence of the ratio of
    exchange of gold and silver, which from the commencement of the
    eighteenth century up to recent years never diverged much from
    15 to 1.  That this fixedness of ratio did not depend entirely
    upon the amount or cost of production is proved by the very
    slight effect of the Australian and Californian gold
    discoveries, which never raised the gold price of silver more
    than about 4⅔ per cent., and failed to have more than a
    permanent effect of 1½ per cent.  This permanence of relative
    values may have been partially due to the fact that gold and
    silver can be employed for [pg 83] exactly the same purposes,
    but that the superior brilliancy of gold occasions it to be
    preferred, unless it be about 15 or 15½ times as costly as
    silver. Much more probably, however, the explanation of the fact
    is to be found in the fixed ratio of 15½ to 1, according to
    which these metals are exchanged in the currency of France and
    some other continental countries. The French Currency Law of the
    year XI established an artificial¹⁵⁸ equation—

    Utility of gold = 15½ × utility of silver

    [pg 84] and it is probably not without some reason that Wolowski
    and other recent French economists attributed to this law of
    replacement an important effect in preventing disturbance in the
    relations of gold and silver.”

  ¹⁵⁷ _Theory of Political Economy_, 4th ed., 1911, pp. 134–36.

  ¹⁵⁸ It is this artificiality of the bimetallic system which
      unfortunately befogs the minds of some people and prejudices those
      of others.  Some do not understand why the price determination of
      two commodities used as money should be so different from the
      price determination of any other two commodities as to be governed
      by a ratio fixed by law. Others are puzzled as to why, if gold and
      silver are a pair of substitutes, should they require a legal
      ratio while other pairs of substitutes circulate without a legal
      ratio, merely on the basis of the ratio of their utility.  These
      difficulties are well explained away by Prof. Fisher thus:

          “… two forms of money differ from a random pair of
          commodities in being substitutes.  Two substitutes proper
          are regarded by the consumer as a single commodity. Thus
          lumping together of the two commodities reduces the number
          of demand conditions, but does not introduce any
          indeterminateness into the problem because the missing
          conditions are at once supplied by a _fixed ratio of
          substitution_.  Thus if ten pounds of cane sugar serve the
          same purpose as eleven pounds of beet-root sugar, their
          fixed ratio of substitution is ten to eleven. … In these
          cases the fixed ratio is based on the relative capacities
          of the two commodities to fill a common need, and is quite
          antecedent to their prices. … The substitution ratio is
          fixed by nature, and in turn fixes the price ratio.

          “In the single case of money, however, there is no fixed
          ratio of substitution. … We have here to deal not with
          relative sweetening power, nor relative nourishing power,
          nor with any other capacity to satisfy wants—no capacity
          inherent in the metals and independent of their prices.
          We have instead to deal only with relative _purchasing
          power_.  We do not reckon a utility in the metal itself,
          but in the commodities it will buy.  We assign their
          respective desirabilities or utilities to the sugars …
          before we know their prices, but we must inquire the
          relative circulating value of gold and silver before we
          can know at what ratio we ourselves prize them.  To us the
          ratio of substitution is incidentally the price ratio.
          The case of the two forms of money is unique. They are
          substitutes, but have no natural ratio of substitution,
          dependent on consumers’ preferences.

          “The foregoing considerations … are overlooked by those
          who imagine that a fixed legal ratio is merely
          superimposed upon a system of supply and demand already
          determinate, and who seek to prove thereby that such a
          ratio is foredoomed to failure … the … analogy … is
          unsound. … Gold and silver … are not completely analogous
          even to two substitutes, because for two forms of money
          there is no consumers’ natural ratio of substitution.
          There seems, therefore, room for an artificial ratio.
          …”—_Purchasing Power of Money_. 1911. pp. 376–77.

But granting that before 1873 the ratio was preserved owing to the
compensatory action of the bimetallic law, can it be said that it would
have been maintained after 1873 if the law had not been suspended?  To
give an uncompromising affirmative as the bimetallists did is to suppose
that bimetallism can work under all conditions.  As a matter of fact,
though it is workable under certain conditions it is not workable under
other conditions.  These conditions are well described by Prof.
Fisher.¹⁵⁹ The question under bimetallism is whether the market ratio
between gold and silver bullion will always be the same as the legal
ratio between gold and silver coins freely minted and possessing
unlimited legal-tender power.  Now supposing the supply of silver
bullion has increased relatively to that of gold bullion, the result
will obviously be a divergence in the mint and the market ratio.  Will
the compensatory action of the bimetallic law restore the equilibrium?
It may succeed in [pg 85] doing it or it may not.  If the increase in
the supply of silver bullion and the decrease in that of gold bullion
are such that a decrease in that of silver caused by its inflow into the
currency and an increase in that of gold caused by its outflow from
currency can restore then to their old levels as bullion, bimetallism
would succeed; in other words, the market ratio of the two bullions
would tend to return to the mint ratio.  But if the increase in the
supply of silver bullion and the decrease in that of gold is such that
the outflow of silver bullion into currency reduces the level of the
silver bullion to the old level, but the outflow of gold bullion from
currency does not suffice to raise the level of the gold bullion to the
old level, or if the outflow of gold from currency raises the level of
the gold bullion to the old level, but the inflow of silver into
currency does not result in the reduction of the level of silver bullion
to its old level, bimetallism must fail; in other words, the market
ratio of the two bullions will remain diverted from the mint ratio
legally established between their coins.

  ¹⁵⁹ _Elementary Principles of Economics_, 1912, pp. 228–29.  In the
      illustrations given by Prof. Fisher he appears, although he does
      not mean it, to make the success or failure of bimetallism hang
      upon the question whether or not the two metals are maintained in
      circulation.  For in illustration which he gives to show the
      failure of bimetallism—Fig. 14 (b)—his film _f_ shows gold to be
      entirely thrown out of circulation; while in the illustration he
      gives to show the success of bimetallism—Fig. 15 (b)—his film _f_
      shows gold to be only partially thrown out of circulation.  But
      there seems to be no reason to suppose that there cannot be a
      third possibility, namely, that while the position of the film _f_
      is as in Fig. 14 (b) the level of the gold bullion and silver
      bullion may be as in Fig. 15 (b)—a possibility in which
      bimetallism succeeds although one of the two metals is entirely
      pushed out of circulation.  For the success of bimetallism it is
      not necessary that both the metals should remain in circulation.
      Its success depends upon whether or not the compensatory action
      succeeds in restoring the relative values of the two bullions to
      that legally established between the two coins.  If it succeeds in
      achieving that, the ratio would be preserved even if the
      compensatory action drives one metal entirely out of circulation.

Under which of these two possibilities could the circumstances arising
after 1873 have fallen? That is a question about which no one can say
anything definitely. Even Jevons, who admitted the success of the
bimetallic law in the earlier period, was not very sanguine about its
success in the latter period.  It was he who observed¹⁶⁰

    “that the question of bimetallism is one which does not admit of
    any precise and simple answer.  It is essentially an
    indeterminate problem.  It involves several variable quantities
    and many constant quantities, the latter being either
    inaccurately known or, in many cases, altogether unknown. …”

  ¹⁶⁰ _Investigations_, etc. (ed. Foxwell), p. 317.

None the less, it is certain that the divergence between the mint ratio
and the market ratio under a bimetallic system must be smaller than may
be the case where there is no bimetallic system.  Whenever the market
ratio diverges from the mint ratio the compensatory action under the
bimetallic law tends to restore the equilibrium, and even where it fails
in restoring it, it does succeed in abridging the [pg 86] gulf between
the two ratios.  That being the case, it is safe to argue that had there
been no demonetization of silver after 1873 the ratio between gold and
silver would have probably been preserved as it was during the monetary
disturbances of the earlier period.  At any rate, this much is certain,
that the market ratio between the two metals could not have diverged
from the mint ratio to the extent it actually did.¹⁶¹

  ¹⁶¹ Fisher, _Purchasing Power of Money_, 1911, pp. 134–35.

It is therefore a sad commentary on the monetary legislation of the
seventies that if it did not actually help to create, for no purpose, a
problem unknown before, it certainly helped to make worse a bad
situation.  Prior to 1870 not all countries had a common currency. There
were India and countries of Western Europe which were exclusively on a
silver basis, and others, like England and Portugal, which were
exclusively on a gold basis, and yet none of them felt the want of a
common standard of value in their mutual dealings.  So long as there
existed the fixed-ratio system in France and the Latin Union the problem
was really provided for, for under it the two metals behaved as one and
thereby furnished a common standard, although all countries did not use
the same metal as their standard money.  It was therefore a matter of
comparative indifference to most countries which metal they used so long
as there was some one country which used either at a certain defined
ratio.  With the destruction of this fixed ratio what was thus a matter
of comparative indifference became a matter of supreme concern.  Every
country which had before enjoyed the benefits of a common international
standard without having a common currency was faced with a crisis in
which the choice lay between sacrificing its currency to securing a
common standard or hugging its currency and foregoing the benefits of a
common standard.  That exigencies of a common standard ultimately led to
its accomplishment was as it should have been, but it was not a fact
before a great deal of harm and some heavy burdens had brought home to
people what the want of it really meant to them. [pg 87]



The economic consequences of this rupture of the par of exchange were of
the most far-reaching character.  It divided the commercial world into
two sharply defined groups, one using gold and the other using silver as
their standard money.  When so much gold was always equal to so much
silver, as was the case previous to 1873, it mattered very little, for
the purposes of international transactions, whether a country was on a
gold or on a silver standard; nor did it make any difference in which of
the two currencies its obligations were stipulated and realized.  But
when, owing to the dislocation of the fixed par, it was not possible to
define how much silver was equal to how much gold from year to year or
even from month to month, this precision of value, the very soul of
pecuniary exchange, gave place to the uncertainties of gambling.  Of
course all countries were not drawn into this vortex of perplexities in
the same degree and to the same extent, yet it was impossible for any
country which participated in international commerce to escape from
being dragged into it.  This was true of India as it was of no other
country.  She was a silver-standard country intimately bound to a gold
standard country, so that her economic and financial life was at the
mercy of blind forces operating upon the relative values of gold and
silver which governed the rupee-sterling exchange.

The fall increased the burden of those who were under an obligation to
make gold payments.  Amongst such the most [pg 88] heavily charged was
the Government of India.  Owing to the exigencies of its political
constitution, that Government has been under the necessity of making
certain payments in England to meet: (1) Interest on debt and on the
stock of the guaranteed railway companies; (2) expenses on account of
the European troops maintained in India; (3) pensions and non-effective
allowances payable in England; (4) cost of the home administration;¹⁶²
and (5) stores purchased in England for use or consumption in India.
England being a gold-standard country, these payments were necessarily
gold payments.  But the revenues of the Government of India out of which
these payments were met were received in silver, which was the sole
legal-tender money of the country.  It is evident that even if the gold
payments were a fixed quantity their burden must increase _pari passu_
with the fall in the gold value of silver.  But the gold payments were
not a fixed quantity.  They have ever been on the increase, so that the
rupee cost of the gold payments grew both by reason of the growth in
their magnitude, and also by reason of the contraction of the medium,
i.e. the appreciation of gold, in which they were payable.  How greatly
this double levy diminished the revenues of India, the figures on the
opposite page give a convincing testimony.

  ¹⁶² Since the Reform Act of 1920 that part of this cost which was
      “political” has been placed upon the British Estimates.

                                TABLE XI

_The Increase in the Rupee Cost of Gold Payments_¹⁶³

                            Total Excess    Amount of this Excess due
                            of Rupees       to
                            needed to     ─────────────────────────────
                            provide for     (1) Fall in   (2)
              Average       the net         the Rate of   Increase in
              Rate of       Sterling        Exchange      gold
              Exchange      Payments of     over that     Payments
  Financial   for the       the Year over   of 1874–75.   over those
  Year        Year.         those                         of the Year
                            required to                   1874–75.
                            meet the
                            Payments of
              s.    d.      R               R             R
  1875–76     1     9·626   86,97,980       41,13,723     45,84,257
  1876–77     1     8·508   3,15,06,824     1,44,68,234   1,70,38,590
  1877–78     1     8·791   1,30,05,481     1,14,58,670   1,15,46,811
  1878–79     1     7·794   1,85,23,170     1,04,16,718   81,06,452
  1879–80     1     7·961   39,23,570       1,65,37,394   −1,26,13,824
  1880–81     1     7·956   3,12,11,981     1,92,82,582   1,19,29,399
  1881–82     1     7·895   3,18,19,685     1,98,76,786   1,19,42,899
  1882–83     1     7·525   −62,50,518      1,86,35,246   −2,48,85,764
  1883–84     1     7·536   3,44,16,,685    2,33,46,040   1,10,70,645
  1884–85     1     7·308   1,96,25,981     2,48,03,423   51,77,442
  1885–86     1     6·254   −1,82,11,346    2,54,95,337   −4,37,06,683
  1886–87     1     5·441   4,69,16,788     4,46,68,299   −33,47,376
  1887–88     1     4·898   4,63,13,161     4,96,60,536   −33,47,376
  1888–89     1     4·379   9,00,38,166     6,59,71,998   2,40,66,168
  1889–90     1     4·566   7,75,96,889     6,06,98,370   1,68,98,519
  1890–91     1     6·090   9,06,11,857     4,65,48,302   4,40,63,555
  1891–92     1     4·733   10,44,44,529    6,54,52,999   3,89,91,530

  ¹⁶³ Compiled from figures in Appendix II, p. 270, of the Indian
      Currency Committee of 1893.

The effect of such a growing burden on the finance of the Government may
well be imagined; the condition of the Government, embarrassing at
first, later became quite desperate under this continuously increasing
burden.  It enforced a policy of high taxation and rigid economy in the
finances of the Government.  Analysing the resource side of the Indian
Budgets from the year 1872–73, we find that there was hardly any year
which did not expire without making an addition to the existing imposts
of the country.  In 1872–73 there commenced the levy of what were called
Provincial Rates.  The fiscal year 1875–76 witnessed the addition of R.1
per gallon in the excise duty on spirits.  In 1877–78 the Pass Duty on
Malwa opium was raised from [pg 89] Rs. 600 to Rs. 650 per chest.  An
addition of a Licence Tax and Local Rates was made in the year 1878–79,
and an increase of Rs. 50 per chest took place in the Malwa Opium Duty
in the following year. With the help of these imposts the Government
expected to place its finances on an adequate basis.  By the end of 1882
it felt quite secure and even went so far as to remit some of the taxes,
which it did by lowering the customs duties and the Patwari Cess in the
North-Western Provinces.  But the rapid pace in the fall of the exchange
soon showed that a resort to further taxation was [pg 90] necessary to
make up for the increased cost of the sterling payments. To the existing
burdens, therefore, was added in 1886 an Income Tax, a duty of 5 per
cent. on imported and also on non-illuminating petroleum.  The Salt Duty
was raised in 1888 in India from Rs. 2 to Rs. 2½, and in Burma from 3
annas to R. 1 per maund.  The Patwari Cess of the North-Western
Provinces, repealed in 1882, was re-imposed in 1888.  The rates of duty
on imported spirit and the excise duties on spirits were not only raised
in 1890, but were afterwards added to in every province.  An excise duty
on malt liquor was levied in 1893, and another on salted fish at the
rate of 6 annas per maund.  The yield of the taxes and duties levied
from 1882–83 was¹⁶⁴ as follows:—

  ¹⁶⁴ _Report of the Indian Currency Committee_, 1893, App. II, p. 263.

   Sources                  1882–83.              1892–93.
                            Rs.                   Rs.
   Salt                     5,67,50,000           8,14,90,000
   Excise                   3,47,50,000           4,97,90,000
   Customs                  1,08,90,000           1,41,80,000
   Assessed Taxes           48,40,000             1,63,60,000

All this additional burden was due to the enhanced cost of meeting the
gold payments, and “would not have been necessary but for the fall in
the exchange.”¹⁶⁵

  ¹⁶⁵ J. E. O’Conor, _Report of the Indian Currency Committee_, 1898,
      App. II, p. 182.

Along with this increase of resources the Government of India also
exercised the virtue of economy in the cost of administration.  For the
first time in its history the Government turned to the alternative of
employing the comparatively cheaper agency of the natives of the country
in place of the imported Englishmen.  Prior to 1870 the scope of
effecting economy along this line was very limited.  By the Civil
Service Reforms of 1853¹⁶⁶ the way was cleared for the appointment of
Indians to the posts reserved for the members of the covenanted Civil
Service by the statute of [pg 91] 1793.¹⁶⁷ But this reform did not
conduce to any economy in the cost of the administration, because the
Indian members carried the same high scale of salaries as did the
English members of the Civil Service.  It was when the statute of 1870
(33 Vic. c. 3) was passed permitting the appointment by nomination of
non-covenanted Indians to places reserved for the covenanted Civil
Service on a lower scale of salary, that a real scope for economy
presented itself to the Government of India.  Hard pressed, the
Government of India availed itself of the possibilities for economy held
out by this statute.  So great was the need for economy and so powerful
was the interest of the Government in reducing its expenditure that it
proceeded, notwithstanding increased demands for efficient
administration, to substitute the less expensive agency of
non-covenanted civilians in place of the more expensive agency of the
covenanted civilians.  The scale on which this substitution was effected
was by no means small, for we find that between 1874 and 1889 the
strength of the covenanted service recruited in England was reduced by
more than 22 per cent., and was further expected to be reduced by about
12 per cent., by the employment of uncovenanted Indians to the posts
usually reserved for covenanted civilians.¹⁶⁸ Besides substituting a
cheap for a dear agency in the administration, the Government also
sought to obtain relief by applying the pruning knife to the rank growth
in departmental extravagances.¹⁶⁹ Even with such heroic efforts to
increase the revenue and reduce the expenditure the finances of the
Government throughout the period of the falling exchange were never in a
flourishing state.

  ¹⁶⁶ Cf. _Report of the Public Service Commission_, C. 5327 of 1887.

  ¹⁶⁷ This clause of the statutes has been re-enacted into the statute
      of 1861.

  ¹⁶⁸ Cf. evidence of Mr. Jenkins, Q. 12. Mit. of Evid. of the Select
      Committee on East India (Civil Servants), H. of C. 327 of 1890.

  ¹⁶⁹ Cf. _Calcutta Civil Finance Committee’s Report_, 1886; also _The
      Report of the Civil Finance Commissioner_ (1887), who completed
      the work of the Committee after it was dissolved.

Much more regrettable was the inability of the Government, owing to its
financial difficulties, to find money for useful public works. The
welfare of the Indian people [pg 92]

                               TABLE XII

_Revenue and Expenditure of the Government of India_

                      In India.                               In England.              Final
          Average                                                                      Result.
          Rate      ──────────────────────────────────────────────────────────────────────────────
          of          Net          Net           Surplus      Net          Exchange.   Surplus
Year.     Exchange.   Revenue.     Expenditure   Revenue.     Sterling                 (+) or
                                   excluding                  Revenue.                 Deficit
                                   Exchange.                                           (−)
          d.          R.           R.            R.           £            R.          R.
1874–75   22·156      39,564,216   25,897,098    13,667,118   12,562,101   1,045,239   59,778
1875–76   21·626      40,053,419   24,541,923    15,511,496   12,544,813   1,377,428   1,589,255
1876–77   20·508      38,253,366   25,355,285    12,898,081   13,229,646   2,252,611   −2,584,176
1877–78   20·791      39,275,489   27,658,021    11,617,468   13,756,478   2,123,030   −4,262,040
1878–79   19·794      44,415,139   25,778,928    18,636,211   13,610,211   2,891,902   2,134,098
1879–80   19·961      45,258,197   29,384,030    15,874,167   14,223,891   2,878,169   −1,227,893
1880–81   19·956      44,691,119   34,880,434    9,810,085    11,177,231   2,264,848   −3,031,394
1881–82   19·895      45,471,887   27,717,249    17,754,638   11,737,688   2,421,499   3,595,451
1882–83   19·525      42,526,173   25,500,437    17,025,736   13,299,976   3,050,923   674,837
1883–84   19·536      43,591,273   23,566,381    20,024,892   14,770,257   3,375,158   1,879,477
1884–85   19·308      41,585,347   24,763,779    16,821,568   13,844,028   3,363,986   −386,446
1885–86   18·254      42,635,953   27,352,132    15,283,821   13,755,659   4,329,888   −2,801,726
1886–87   17·441      44,804,774   25,124,335    19,680,439   14,172,298   5,329,714   178,427
1887–88   16·898      45,424,150   25,968,025    19,456,125   15,128,018   6,356,939   −2,028,832
1888–89   16·379      46,558,354   25,051,147    21,507,207   14,652,590   6,817,599   37,018
1889–90   16·566      50,005,810   26,367,855    23,637,955   14,513,155   6,512,767   2,612,033
1890–91   18·090      49,403,819   25,579,727    23,824,092   15,176,866   4,959,055   3,688,171
1891–92   16·733      50,023,142   27,013,618    23,009,524   15,716,780   6,825,909   467,535

[pg 93] depends upon turning to best account the resources which the
country possesses.  But the people have had very little of the necessary
spirit of enterprise in them.  The task, therefore, has fallen upon the
Government of India to provide the country with the two prime requisites
of a sustained economic life, namely a system of transport and a network
of irrigation.  With this object in view the Government had inaugurated
a policy of developing what were called “Extraordinary Public Works,”
financed by capital borrowings.  For such borrowings India, as was to be
expected, hardly offered any market, the people being too poor and their
savings too scanty to furnish a modicum of the required capital outlay.
Like all Governments of poor peoples, the Government of India had
therefore to turn to wealthier countries who had surplus capital to
lend.  All these countries unfortunately happened to be on the gold
standard.  As long as it was possible to say that so much gold was equal
to so much silver the English investor was indifferent whether the
securities of the Government of India were rupee securities or sterling
securities. But the fall in the gold value of silver was also a fall in
the gold value of the rupee securities, and what was once a secure
investment ceased to be so any more.  This placed the Government in a
difficult position in the matter of financing its extraordinary public

The English investor would not invest in the rupee securities.  An
important customer for the Indian rupee securities was thus lost.  The
response of the Indian money market was inadequate.  To issue sterling
securities was the only alternative to enable the Government to tap a
bigger and a more constant reservoir for the drawing of capital to
India; but as it was bound to increase the burden of the gold payments,
which it was the strongest interest of the Government to reduce, the
resort to the London money market, unavoidable as it became, was
somewhat restrained,¹⁷⁰ [pg 94]

  ¹⁷⁰ During the period of falling exchange the distribution of the debt
      of India was as follows:—

                            _Sterling Debt._         _Rupee Debt._
      End of 1873–74        41,117,617               66,41,72,900
      End of 1898–99        124,268,605              1,12,65,04,340
               _Indian Currency Committee_ (1898), Appendix II, p. 179.

                               TABLE XIII

_Price Movements of the Rupee and Sterling Securities of
        the Government of India_¹⁷¹

                             Price of 4 per cent.                      Price of Sterling India
        Rates of             Rupee Paper.                              Stock.
        Exchange.          ─────────────────────────────────────────────────────────────────────────────────────────────────────────
Year.                        In                   In                   4 per                3½ per               3 per
                             Calcutta.            London.              cent.                cent.                cent.
        Highest.   Lowest.   Highest.   Lowest.   Highest.   Lowest.   Highest.   Lowest.   Highest.   Lowest.   Highest.   Lowest.
          d.         d.
1873    22⅞        21⅝       105        101⅞      97         94½       106½       101¼
1874    23⅛        21¾       104½       99½       98         94½       103¾       101
1875    22 3⁄16    21¼       102⅞       101¾      94         91        106¼       103¼
1876    22⅜        18½       101⅞       98¾       89¾        78        105⅞       101⅞
1877    22¼        20 9⁄16   98⅞        93¼       88½        81        104⅝       102¼
1878    21         18¾       96⅞        93½       82½        75⅜       104⅝       99
1879    20⅝        18⅝       94⅞        91¼       80         77¼       105⅜       100⅞
1880    20⅜        19¾       100        92        81⅜        77¾       105⅝       102⅛
1881    20 1⁄16    19½       104⅝       100       86         81½       106⅜       103⅞      103⅞       100¾
1882    20 3⁄16    19 1⁄16   102 1⁄16   95⅝       85         81        105⅛       102⅞      101⅞       99¾
1883    19 9⁄16    19 3⁄16   101⅛       97 9⁄16   82         79¾       104⅝       102       103⅛       101⅜
1884    19¾        18        100⅝       95 5⁄16   81¾        78¼       104⅜       101⅝      107⅛       101¾      96¼        91¾
1885    19 3⁄16    17        98 7⁄16    92¼       77½        73¼       103 1⁄16   98¾       102¾       97½       91½        85¾
1886    18         16⅛       97¾        97 3⁄16   73         66¼       103½       101¼      102¾       99¾       90⅛        86⅝
1887    18 3⁄16    15⅝       99 3⁄16    95 5⁄16   71 11⁄16   67⅞       102¾       100½      103¼       100¼      92¾        95⅜
1888    17⅛        16        100 3⁄16   97¾       69⅜        66¼       102⅞       100½      107¼       104⅝      98         95
1889    16 15⁄16   16        100⅜       97 1⁄16   69⅛        66⅜                            109½       106⅞      101⅛       99
1890    20 29⁄32   16⅞       103⅞       96        87¼        68¾                            108½       105¼      100¾       95¼
1891    18¼        16⅝       107        104       80¾        74¼                            109½       105       99         94½
                             13⁄16      1⁄16
1892    16 11⁄16   14⅝       108        103       74½        62                             109½       106⅛      98½        94⅞
                             15⁄16      11⁄15

  ¹⁷¹ Appendix II to the _Report of the Indian Currency Committee_ of
      1893, p. 272.  These prices differ slightly from those given in
      Appendix IV to the First Report of the Gold and Silver Commission,
      1886, and also from those in the Statistics of British India
      (First Issue) for 1906–07, Part IV, (_a_) Finance Tables 7 and 8
      of the division called Prices.

[pg 95] with the result that the expansion of extraordinary public works
did not proceed at a pace demanded by the needs of the country. The
effects of this financial derangement, consequent on the fall of the
exchange, were not confined to the Government of India.  They were
immediately felt by the municipalities and other local bodies who were
dependent upon the Government for financial aid.  So long as the cash
balances were overflowing in the Treasury of the Government, “one of the
most useful ways” to employ them was found in lending a portion of them
to these local institutions.  As they had just then been inaugurated
under the local self-government policy of Lord Ripon’s régime, and were
looked upon only as an experiment, their taxing and borrowing powers
were rigidly limited.  Consequently, this financial aid from the Central
Government by way of temporary advances was a resource of inestimable
value to them.  When, however, the cash balances of the Central
Government began to diminish owing to the continued losses by exchange,
these facilities were severely¹⁷² curtailed, so that the very vitality
of these institutions was threatened just at the moment when they needed
all help to foster their growth and strengthen their foundations.

Addressing the Secretary of State, the Government of India, in a
despatch of February 2, 1886, observed¹⁷³:—

  ¹⁷² Cf. _Financial Statement_, 1876–77, p. 94.

  ¹⁷³ See C. 4868 of 1886, p. 8.

    “10. We do not hesitate to repeat that the facts set forth in
    the preceding paragraphs are, from the point of Indian
    interests, intolerable; and the evils which we have enumerated
    do not exhaust the catalogue.  Uncertainty regarding the future
    of silver discourages the investment of capital in India, and we
    find it impossible to borrow in silver except at an excessive

    “On the other hand, the Frontier and Famine Railways which we
    propose to construct, and the Coast and Frontier defences which
    we have planned, are imperatively required and cannot be
    postponed indefinitely.

    “We are forced, therefore, either to increase our sterling
    liabilities, to which course there are so many objections, or
    [pg 96] to do without the railways required for the commercial
    development of the country, and its protection against invasion
    and the effects of famine.


    “11. Nor can the difficulties which local bodies experience in
    borrowing in India be overlooked.  The Municipalities of Bombay
    and Calcutta require large sums for sanitary improvements, but
    the high rate of interest which they must pay for silver loans
    operates to deter them from undertaking expensive works, and we
    need hardly remind your Lordship that it has quite recently been
    found necessary for Government to undertake to lend the money
    required for the construction of docks at Calcutta and Bombay,
    and that when the Port Commissioners of Calcutta attempted to
    raise a loan of 75 lakhs of rupees in September, 1885,
    guaranteed by the Government of India, the total amount of
    tenders was only Rs. 40,200, and no portion of this
    insignificant amount was offered at par. …”

The importation of capital on private account was hampered for similar
reasons, to the great detriment of the country.  It was urged on all
hands, and was even recommended by a Royal Commission,¹⁷⁴ that one
avenue of escape from the ravages of recurring famines, to which India
so pitifully succumbed at such frequent intervals, was the
diversification of her industries.  To be of any permanent benefit such
diversified industrial life could be based on a capitalistic basis
alone.  But that depended upon the flow of capital into the country as
freely as the needs of the country required.  As matters then stood, the
English investor, the largest purveyor of capital, looked upon the
investment of capital in India as a risky proposition. It was feared
that once the capital was spread out in a silver country every fall in
the price of silver would not only make the return uncertain when drawn
in gold, but would also reduce the capital value of his investment in
terms of gold, which was naturally the unit in which he measured all his
returns and his outlays.  This check to the free [pg 97] inflow of
capital was undoubtedly the most serious evil arising out of the rupture
of the par of exchange.

  ¹⁷⁴ Cf. _The Report of the Famine Commission of_ 1880, Part II, C.
      2735 of 1880, pp. 175–76.

Another group of people who suffered from the fall of exchange because
of their obligation to make gold payments was composed of the European
members of the Civil Service in India.  Like the Government to which
they belonged, they received their salaries in silver, but had to make
gold remittances in support of their families, who were often left
behind in England.  Before 1873, when the price of silver in terms of
gold was fixed, this circumstance was of no moment to them.  But as the
rupee began to fall the face of the situation was completely altered.
With every fall in the value of silver they had to pay more rupees out
of their fixed salaries to obtain the same amount of gold. Some relief
was no doubt given to them in the matter of their remittances.  The
Civil Servants were permitted, at a sacrifice to the Government, to make
their remittances at what was called the Official Rate of Exchange.¹⁷⁵
It is true the difference between the market rate and the official rate
was not very considerable.  None the less, it was appreciable enough for
the Civil Servants to have gained by 2½ per cent. on the average of the
years 1862–90¹⁷⁶ at the cost of the Government.  The Military Servants
obtained a similar relief to a greater degree, but in a different way.
Their salary was fixed in sterling, though payable in rupees.  It is
true the Royal Warrant which fixed their salary also fixed the rate of
exchange between the sterling and the rupee for that purpose.  But as it
invariably happened that the rate [pg 98] of exchange fixed by the
Warrant was higher than the market rate the Military Servants were
compensated to the extent of the difference at the cost of the Indian
Exchequer.¹⁷⁷ This relief was, comparatively speaking, no relief to
them.  The official or the warrant rates of exchange, though better than
the market rates of exchange, were much lower than the rate at which
they were used to make their remittances before 1873.  Their burden,
like that of the Government, grew with the fall of silver, and as their
burden increased their attitude became alarmist.  Many were the
memorialists who demanded from the Government adequate compensation for
their losses on exchange.¹⁷⁸ The Government was warned¹⁷⁹ that

  ¹⁷⁵ As was explained by Mr. Waterfield before the Select Committee on
      East India (Civil Servants), H.C. Return 327 of 1890, Q. 1905–17,
      it was first instituted in 1824 and was arrived at as follows: In
      December of each year a calculation was made at the India Office
      of the cost of sending a rupee to India, based on the market price
      of silver in London, and of the cost of bringing a rupee from
      India, based on the price of bills on London in Calcutta.  A mean
      between the two was struck and taken as the adjusting rate for the
      coming official year between the India Office and the British
      Treasury in regard to such transactions or payments undertaken by
      one Government as the agent of the other.  It was fixed anew for
      each and formed a fair average rate, although it was sometimes
      above and sometimes below the market rate of exchange.

  ¹⁷⁶ _Ibid._, Q. 1925–26,

  ¹⁷⁷ Cf. F.S. 1887–8, pp. 39–40.  This cost was as follows:

      1874–75      Rs. 6,400,000            1885–86      Rs. 4,00,000
      1884–85      Rs. 18,43,000            1886–87      Rs. 5,15,000

  ¹⁷⁸ Cf. _Report of the Indian Currency Committee_, 1893, App. I, pp.
      185–90 and p. 202, for memorials of the European Civil Servants.

  ¹⁷⁹ Cf. Col. Hughes-Hallett, M.P., _The Depreciation of the Rupee: its
      Effect on the Anglo-Indian Official—the Wrong and the Remedy_,
      London, 1887, p. 14.

    “the ignorant folk who think India would be benefited by
    lowering present salaries are seemingly unable to comprehend
    that such a step would render existence on this reduced pay
    simply impossible, and that recourse would of necessity be had
    to other methods of raising money.”

Such, no doubt, was the case in the earlier days of the East India
Company, when the Civil Servants fattened on pickings because their pay
was small,¹⁸⁰ and it was to put a stop to their extortions that their
salaries were raised to what appears an extraordinary level.  That such
former instances of extortions should have been held out as monitions
showed too well how discontented the Civil Service was owing to its
losses through exchange.

  ¹⁸⁰ The connection between the rapacious conduct of the early European
      Civil Servants and the smallness of their salaries was well
      brought out by Clive in his speech dated March 30, 1772, during
      the course of the debate in the House of Commons on the East India
      Judicature Bill, _Hansard_, Vol. XVII, pp. 334–39.

Quite a different effect the fall had on the trade and industry of the
country. It was in a flourishing state as [pg 99] compared with the
affairs of the Government or with the trade and industry of a
gold-standard country like England.  Throughout the period of falling
silver there was said to be a progressive decline relatively to
population in the employment afforded by various trades and industries
in England.  The textile manufactures and the iron and coal trade were
depressed as well as the other important trades, including the hardware
manufactures of Birmingham and Sheffield, the sugar-refining of
Greenock, Liverpool, and London, the manufactures of earthenware, glass,
leather, paper, and a multitude of minor industries.¹⁸¹ The depression
in English agriculture was so widespread that the Commissioners of 1892
were “unable to point to any part of the country in which [the effects
of the depression] can be said to be entirely absent,” and this
notwithstanding the fact that the seasons since 1882 “were on the whole
satisfactory from an agricultural point of view.”¹⁸² Just the reverse
was the case with Indian trade and industry. The foreign trade of [pg

  ¹⁸¹ Report by Dunraven, Farrer, Muntz, and Lubbock in the _Final
      Report of the Royal Commission on Depression of Trade and
      Industry_, par. 54, C. 4893,

  ¹⁸² _Final Report of the Royal Commission on Agricultural Depression
      in England_, C. 8540 of 1897, par. 28,

                               TABLE XIV

_Imports and Exports (Both Merchandise and Treasure)_¹⁸³

          Exports.     Imports.        Year.     Exports.      Imports.
Year.   ───────────────────────────  ─────────────────────────────────────
            R.           R.                        R.            R.
───────────────────────────────────  ─────────────────────────────────────
1870–71   57,556,951   39,913,942      1881–82   83,068,198    60,436,155
───────────────────────────────────  ─────────────────────────────────────
1871–72   64,685,376   43,665,663      1882–83   84,527,182    65,548,868
───────────────────────────────────  ─────────────────────────────────────
1872–73   56,548,842   36,431,210      1883–84   89,186,397    68,157,311
───────────────────────────────────  ─────────────────────────────────────
1873–74   56,910,081   39,612,362      1884–85   85,225,922    69,591,269
───────────────────────────────────  ─────────────────────────────────────
1874–75   57,984,549   44,363,160      1885–86   84,989,502    71,133,666
───────────────────────────────────  ─────────────────────────────────────
1875–76   60,291,731   44,192,378      1886–87   90,190,633    72,830,670
───────────────────────────────────  ─────────────────────────────────────
1876–77   65,043,789   48,876,751      1887–88   92,148,279    78,830,468
───────────────────────────────────  ─────────────────────────────────────
1877–78   67,433,324   58,819,644      1888–89   98,333,879    83,285,427
───────────────────────────────────  ─────────────────────────────────────
1878–79   64,919,741   44,857,343      1889–90   105,366,720   86,656,990
───────────────────────────────────  ─────────────────────────────────────
1879–80   69,247,511   52,821,398      1890–91   102,350,526   93,909,856
───────────────────────────────────  ─────────────────────────────────────
1880–81   76,021,043   62,104,984      1891–92   111,460,278   84,155,045

  ¹⁸³ From Appendix II (Nos. 1 and 2) to the _Report of the Indian
      Currency Committee_ of 1898.

                                TABLE XV

_Nature of Industrial Pursuits in England and India_¹⁸⁴

       Distribution of _Indian_                                        Distribution of _English_
       Exports exclusive of                                            Exports exclusive of
       Treasure.                                                       Treasure.
       Manufactured   Raw          Food        Unclassified   Total.   Manufactured   Raw          Food        Unclassified   Total.
       Articles.      Materials.   Articles.   Articles.               Articles.      Materials.   Articles.   Articles.
1857   11             34           22          23             100      90·9           4            4·9         ·2             100
1858   6              35           26          33             100      91·4           3·4          5·1         ·1             100
1859   6·5            40           15·5        38             100      91·5           3·8          4·6         ·1             100
1860   5·7            43·6         17·7        33             100      91·9           3·6          4·4         ·3             100
1861   5·8            46·5         15·3        32·4           100      90·4           4·8          4·8         —              100
1862   5              52           16          27             100      90·3           4            4·8         ·9             100
1863   3·7            58·7         10·6        27             100      91·0           4            4           1·0            100
1864   4              69·2         9·3         17·5           100      92·5           3·7          3·7         ·1             100
1865   3·5            68           12          16·6           100      92·1           3·6          3·6         ·7             100
1866   4·2            67·2         10·3        18·3           100      92             3·7          3·7         ·4             100
1867   4              58           11          27             100      92·2           3·8          3·7         ·3             100
1868   4              58·5         11·5        26             100      92             4·4          3·4         ·2             100
1869   4·8            60·5         14          20·7           100      92             4·2          3·1         ·7             100
1870   4·4            63·6         9           23             100      91             4            4           1·0            100
1871   3·7            65·3         11          20             100      90             4·4          4·9         ·7             100
1872   3·3            61·4         13·5        21·8           100      91·2           5·4          3·5         ·9             100

  ¹⁸⁴ The figures for India are calculated from the _Statistical
      Abstract for British India_, Second Number (1857–1866), Table No.
      34, and the Eighth Number (1864–1873), Table No. 24. Figures for
      England are taken from Appendix C (Statement 6) to the _First
      Report of the Royal Commission of the Depression of Trade and
      Industry_, 1885, with this alteration—that the separate figures in
      the original under “Manufactured” and “Partially Manufactured” are
      here grouped under “Manufactured.”  The “Unclassified Articles”
      under Indian Exports are for the most part “Jewellery.”

[pg 101] the country, which had bounced up during the American Civil
War, showed greater buoyancy after 1870, and continued to grow
throughout the period of the falling exchange at a rapid pace.  During
the short space of twenty years the total imports and exports of the
country more than doubled in their magnitude, as is shown by Table XIV.,
p. 99.

Not only had the trade of India been increasing, but the nature of her
industries was also at the same time undergoing a profound change. Prior
to 1870 India and England were, so to say, non-competing groups. Owing
to the protectionist policy of the Navigation Laws, and owing also to
the substitution of man by machinery in the field of production, India
had become exclusively an agricultural and a raw-material-producing
country, while England had transformed herself into a country which
devoted all her energy and her resources to the manufacturing of raw
materials imported from abroad into finished goods.  How marked was the
contrast in the industrial pursuits in the two countries is well
revealed by the analysis of their respective exports on opposite page.

After 1870 this distribution of their industrial pursuits was greatly
altered, and India once again began to assume the rôle of a
manufacturing country.  Analysing the figures for Indian imports and
exports for the twenty years succeeding 1870 (_see_ table below), we
find that the progress in [pg 102] the direction of manufactures formed
one of the most significant features of the period.

                               TABLE XVI

_Changes in Industrial Pursuits of India_¹⁸⁵

             Imports.                       Exports.
Years        Manufactured.   Raw.           Manufactured.   Raw.
             Rs.             Rs.            Rs.             Rs.
1879         25,98,65,827    13,75,55,837   5,27,80,340     59,67,27,991
1892         36,22,31,872    26,38,18,431   16,42,47,566    85,52,09,499
Percentage of increase
Total        39              91             211             43
Annual       2·8             6·5            15              3

  ¹⁸⁵ From Ranade’s _Essays on Indian Economics_, p. 104.

This change in the industrial evolution was marked by the growth of two
principal manufactures.  One of them was the manufacture of cotton.  The
cotton industry was one of the oldest industries of India, but during
100 years between 1750 and 1850 it had fallen into a complete state of
decrepitude.  Attempts were made to resuscitate the industry on a
capitalistic basis in the sixties of the nineteenth century and soon
showed signs of rapid advance.  The story of its progress is graphically
illustrated in the following summary table:—

                               TABLE XVII

_The Development of Indian Cotton Trade and Industry_

                      Growth of Trade (Average Annual Quantities
                      in each Quinquennium).
                      1870–71    1875–76    1880–81    1885–86    1890–91
                      to         to         to         to         to
                      1874–75.   1879–80.   1884–85.   1889–90.   1894–95.
Imports of raw        23         52         51         74         89
cotton—thousands of
Exports of raw        5,236      3,988      5,477      5,330      4,660
cotton—thousands of
Imports of twist      33·55      33·55      44·34      49·09      44·79
and yarn
                      Growth of Industry (at end of each fifth
Number of mills       48         58         81         114        143
Number of             1,000      1,471      2,037      2,935      3,712
Number of looms—000   10         13         16         22         34
Number of persons     —          39,537     61,836     99,224     —

Another industry which figured largely in this expansion of Indian
manufactures was jute. Unlike the cotton industry [pg 103] of India, the
jute industry was of a comparatively recent origin.  Its growth,
different from that of the cotton industry, was fostered by the
application of European capital, European management, and European
skill, and it soon took as deep roots as the cotton industry and
flourished as well as it did, if not better.  Its history was one of
continued progress.

                              TABLE XVIII

_Development of Jute Industry and Trade_

                   Average Annual of each Quinquennium.
Growth of Trade.   1870–71    1875–76    1880–81    1885–86    1890–91
                   to         to         to         to         to
                   1874–75.   1879–80.   1884–85.   1889–90.   1894–95.
Raw, million       5·72       5·58       7·81       9·31       10·54
Gunny bags,        6·44       35·96      60·32      79·98      120·74
Cloth, million     —          4·71       6·44       19·79      54·20
_Growth of Industry_.
Number of —
Mills              —          21         21         24         26
Looms, 000         —          5·5        5·5        7          8·3
Spindles, 000      —          88         88         138·4      172·4
Persons            —          38·8       38·8       52·7       64·3
employed, in

This increasing trend towards manufactures was not without its indirect
effects on the course of Indian agriculture.  Prior to 1870 the Indian
farmer, it may be said, had no commercial outlook.  He cultivated not so
much for profit as for individual self-sufficiency. After 1870 farming
tended to become a business and crops came more and more to be
determined by the course of market prices than by the household needs of
the farmer. [pg 104]

                               TABLE XIX

_Growth of Agricultural Exports of India_

         1868–69.   1873–74.   1877–78.   1882–83.   1887–88.   1891–92.
Wheat    100        637·41     2,313·47   5,152·36   4,914·37   11,001·44
Opium    100        118·38     123·83     122·47     120·20     116·82
Seeds    100        111·26     305·87     239·97     403·60     480·99
Rice     100        131·66     119·84     203·28     185·55     220·36
Indigo   100        116·91     121·57     142·17     140·76     126·33
Tea      100        169·35     293·17     507·25     775·09     1,075·75
Coffee   100        86·04      69·98      85·31      64·59      74·11

Such was the contrast in the economic conditions prevalent in the two
countries.  This peculiar phenomenon of a silver standard country
steadily progressing, and a gold-standard country tending to a
standstill, exercised the minds of many of its observers.  The chief
cause was said to be the inability of the English manufacturers to hold
out in international competition.  This inability to compete with his
European rivals was attributed to the prevalence of protective tariffs
and subsidies which formed an essential part of the industrial and
commercial code of the European countries.  Nothing of the kind then
existed in India, where trade was as free and industry as unprotected as
any could have been, and yet the Lancashire cotton-spinner, the Dundee
jute manufacturer, and the English wheat-grower complained that they
could not compete with their rivals in India.  The cause, in this case,
was supposed to be the falling exchange.¹⁸⁶ So much were some people
impressed by this view that even the extension of the Indian trade to
the Far East was attributed to this cause.  Already, it was alleged, the
dislocation of the par of exchange between gold and silver had produced
a kind of segregation of gold-using countries and silver-using countries
to the exclusion of each other.  In a transaction between two countries
using the same metal as standard it was said the element of uncertainty
arising from the use of two metals varying in terms of each other [pg
105] was eliminated.  Trade between two such countries could be carried
on with less risk and less inconvenience than between two countries
using different standards, as in the latter case the uncertainty entered
into every transaction and added to the expense of the machinery by
which trade was carried on.  That the Indian trade should have been
deflected to other quarters¹⁸⁷ where, owing to the existence of a common
standard the situation trade had to deal with was immune from
uncertainties, was readily admitted.  But it was contended that there
was no reason why, as a part of the segregation of commerce it should
have been possible for the Indian manufacturer to oust his English rival
from the Eastern markets to the extent he was able to do (_see_ Table
XX, p. 106). [pg 106]

  ¹⁸⁶ Cf. The _Final Report of the Royal Commission on Gold and Silver_
      Part I, pars. 99–101, for a summary of the argument.

  ¹⁸⁷ The distribution of Indian trade during this period was as

                        _Distribution of Indian Trade_

         Annual Average for each Quinquennium in Millions of Rupees.

                 1875–76 to 1879–80.            1880–81 to 1884–85.
   Countries   ──────────────────────────────────────────────────────────────
                 Imports.   Exports.   Total.   Imports.   Exports.   Total
   United        323·68     278·15     601·83   434·45     344·22     778·67
   China         14·05      132·27     146·32   19·23      134·94     154·17
   Japan         ·02        ·33        ·35      ·19        2·09       2·28
   Ceylon        5·74       22·97      28·71    5·35       16·37      21·72
   Straits       10·83      26·11      36·94    15·88      33·65      49·53

         Annual Average for each Quinquennium in Millions of Rupees.

                 1885–86 to 1889–90.            1890–91 to 1894–95.
   Countries   ──────────────────────────────────────────────────────────────
                 Imports.   Exports.   Total.   Imports.   Exports.   Total
   United        510·47     360·59     871·06   526·24     338·40     864·64
   China         21·64      134·54     156·18   28·69      133·30     161·90
   Japan         ·25        7·27       7·52     1·51       14·44      15·95
   Ceylon        5·86       20·56      26·42    6·42       31·18      37·60
   Straits       20·09      42·54      62·63    23·32      52·66      75·88

                                TABLE XX

_Exports of Cotton Goods to Eastern Markets_

               Yarn, lb., 000 omitted.     Piece-goods, yds., 000
    Years.                                 omitted.
               From India.    From U.K.    From India.    From U.K.
    1877       7,927          33,086       15,544         394,489
    1878       15,600         36,467       17,545         382,330
    1879       21,332         38,951       22,517         523,921
    1880       25,862         46,426       25,800         509,099
    1881       26,901         47,479       30,424         587,177
    1882       30,786         34,370       29,911         454,948
    1883       45,378         33,499       41,534         415,956
    1884       49,877         38,856       55,565         439,937
    1885       65,897         33,061       47,909         562,339
    1886       78,242         26,924       51,578         490,451
    1887       91,804         35,354       53,406         618,146
    1888       113,451        44,643       69,486         652,404
    1889       128,907        35,720       70,265         557,004
    1890       141,950        37,869       59,496         633,606
    1891       169,253        27,971       67,666         595,258

The causes which effected such trade disturbances formed the subject of
a heated controversy.¹⁸⁸ The point in dispute was whether the changes in
international trade such as they were, were attributable to the monetary
disturbances of the time.  Those who held to the affirmative explained
their position by arguing that the falling exchange gave a bounty to the
Indian producer and imposed a penalty on the English producer.  The
existence of this bounty, which was said to be responsible for the
shifting of the position of established competitors in the field of
international commerce, was based on a simple calculation.  It was said
that if the gold value of silver fell the Indian exporter got more
rupees for his produce and was therefore better off, while by reason of
the same fact the English producer got fewer sovereigns and was
therefore worse off.  Put in [pg 107] this naïve form the argument that
the falling exchange gave a bounty to the Indian exporters and imposed a
penalty on the English exporters had all the finality of a rule of
arithmetic.  Indeed, so axiomatic was the formula regarded by its
authors that some important inferences as to its bearing on the trade
and industrial situation of the time were drawn from it.  One such
inference was that it stimulated exports from and hindered imports into
the silver using countries.  The second inference was that the fall of
exchange exposed some English producers more than others to competition
from their rivals in silver-using countries.  Now, can such results be
said to follow from the fall of exchange?  If we go behind the bald
statement of a fall of exchange and inquire as to what determined the
gold price of silver the above inferences appear quite untenable.  That
the ratio between gold and silver was simply the inverse of the ratio
between gold prices and silver prices must be taken to be an
unquestionable proposition.  If therefore the gold price of silver was
falling it was a counterpart of the more general phenomenon of the fall
of the English prices which were measured in gold, and the rise of the
Indian prices which were measured in silver.  Given such an
interpretation of the event of the falling exchange, it is difficult to
understand how it can help to increase exports and diminish imports.
International trade is governed by the relative advantages which one
country has over another, and the terms on which it is carried on are
regulated by the comparative cost of articles that enter into it.  It
is, therefore, obvious that there cannot be a change in the real terms
of trade between countries except as a result of changes in the
comparative cost of these goods.  Given a fall in gold prices _all
round_, accompanied by a rise in silver prices _all round_, there was
hardly anything in the monetary disturbance that could be said to have
enabled India to increase her exportation of anything except by
diminishing her exportation or increasing her importation of something
else.  From the same view of the question of the falling exchange it
follows that such a monetary disturbance could not depress one trade
more than another.  If the falling or rising exchange was simply [pg
108] an expression of the level of _general_ prices, then the producers
of all articles were equally affected.  There was no reason why the
cotton trade or the wheat trade should have been more affected by the
fall of exchange than the cutlery trade.

  ¹⁸⁸ _See_ the evidence and memoranda by Profs. Marshall and Nicholson
      before the Royal Commission on Gold and Silver (1886); also Prof.
      Lexis, “The Agio on Gold and International Trade,” in the
      _Economic Journal_, Vol. V, 1895.

Not only was there nothing in the exchange disturbance to disestablish
existing trade relations in general or in respect of particular
commodities, but there was nothing in it to cause benefit to the Indian
producer and injury to the English producer.  Given the fact that the
exchange was a ratio of the two price-levels, it is difficult to see in
what sense the English producer, who got fewer sovereigns but of high
purchasing power, was worse off than the Indian producer, who got more
rupees but of low purchasing power.  The analogy of Prof. Marshall was
very apt.  To suppose that a fall of exchange resulted in a loss to the
former and a gain to the latter was to suppose that, if a man was in the
cabin of a ship only ten feet high, his head would be broken if the ship
sank down twelve feet into a trough.  The fallacy consisted in isolating
the man from the ship when, as a matter of fact, the same force, acting
upon the ship and the passenger at one and the same time, produced like
movements in both.  In like manner the same force acted upon the Indian
producer and the English producer together, for the change in the
exchange was itself a part of the more sweeping change in the general
price-levels of the two countries.  Thus stated, the position of the
English and Indian producer was equally good or equally bad, and the
only difference was that the former used fewer counters and the latter a
larger number in their respective dealings.

A bounty to the Indian producer and a penalty to the English producer,
it is obvious, could have arisen only if the fall of silver in England
in terms of gold was greater than the fall of silver in terms of
commodities in India.  In that case the Indian producer would have
obtained a clear benefit by exchanging his wares for silver in England
and thus securing a medium which had a greater command over goods and
services in India.  But _à priori_ there could be no justification for
such an assumption.  There was no reason why gold price of silver should
have fallen at a different [pg 109] rate from the gold price of
commodities in general, or that there should have been a great
difference between the silver prices in England and in India. Statistics
show that such _à priori_ assumptions were not groundless.

It is obvious that if silver was falling faster than commodities, and if
silver prices in India were lower than silver prices in England, we
should have found it evidenced by an inflow of silver from England to
India.  What were the facts?  Not only was there no extraordinary flow
of silver to India, but the imports of silver during 1871–93 were much
smaller than in the twenty years previous to that period.¹⁸⁹ This is as
complete a demonstration as could be had of the fact that the silver
prices in India were the same as they were outside, and consequently the
Indian producer had very little chance of a bounty on his trade.

  ¹⁸⁹ Cf. figures for imports of silver in Chap. I.  It will, however,
      be noted how closely the flow of silver into India between 1872
      and 1893 followed the fall in gold price of silver.

Although such must be said to be the _à priori_ view of the question,
the Indian producer was convinced that his prosperity was due to the
bounty he received.  Holding such a position he was naturally opposed to
any reform of the Indian currency, for the falling exchange which the
Government regarded a curse he considered a boon.  But however plausible
was the view of the Indian producer, much sympathy would not have been
felt for it had it not been coupled with a notion, most commonly held,
that the bounty arose from the _export trade_, so that it became an
article of popular faith that the fall of exchange was a source of gain
to the _nation as a whole_.  Now was it true that the bounty arose from
the export trade? If it were so, then every fall of exchange ought to
give a bounty.  But supposing that the depreciation of silver had taken
place in India _before_ it had taken place in Europe, could the fall of
exchange thus brought about have given a bounty to the Indian exporter?
As was explained above, the Indian exporter stood a chance of getting a
bounty only if with the silver he obtained for his produce he was able
to buy more goods and [pg 110]

                               TABLE XXI

_Movements of Prices, Wages and Silver Between India and

Net Imports of         Index              Index                  Index
Silver into            No.                No. for       Index    No. for       Index
India.                 for                Silver        No.      Gold          No.
────────────────────── Gold      Years.   Prices        for      Prices        for
Years.    Amount.      Price              of            Wages    of            Wages
          Rs.          of                 Commodities   in       Commodities   in
                       Silver.            in            India.   in            England
                                          India.                 England.
(1)       (2)          (3)       (4)      (5)           (6)      (7)           (8)
1871–72   6,587,296    99·7      1871     100           —        100           100
1872–73   739,244      99·2      1872     105           —        109           105·8
1873–74   2,530,824    97·4      1873     107           100      111           112
1874–75   4,674,791    95·8      1874     116           101      102           113
1875–76   1,640,445    93·3      1875     103           97       96            111·6
1876–77   7,286,188    86·4      1876     107           98       95            110
1877–78   14,732,194   90·2      1877     138           97       94            109·8
1878–79   4,057,377    86·4      1878     148           99       87            107
1879–80   7,976,063    84·2      1879     135           100      83            105·8
1880–81   3,923,612    85·9      1880     117           99       88            106·5
1881–82   5,381,410    85·0      1881     106           99       85            106·5
1882–83   7,541,427    84·9      1882     105           100      84            106·5
1883–84   6,433,886    83·1      1883     106           102      82            108
1884–85   7,319,581    83·3      1884     114           101      76            109
1885–86   11,627,028   79·9      1885     113           106      72            108
1886–87   7,191,743    74·6      1886     110           105      69            107
1887–88   9,319,421    73·3      1887     111           114      68            108
1888–89   9,327,529    70·4      1888     119           112      70            109·8
1889–90   11,002,078   70·2      1889     125           112      72            113
1890–91   14,211,408   78·4      1890     125           113      72            118
1891–92   9,165,684    74·3      1891     128           118      72            118
1892–93   12,893,499   65·5      1892     141           110      68            117·4
1893–94   13,759,273   58·5      1893     138           119      68            117·4

  ¹⁹⁰ Col. (2) is from Appendix II, Table No. 2 of the I.C.C. of 1898.
      Cols (3), (5), (6), and (7) are from Atkinson’s “Silver Prices in
      India,” in the _Journal of the Statistical Society_, March, 1897.
      Col. (8) is based on the figures given by W. T. Layton in his
      _Introduction to the Study of Prices_ (1912), Table I, Col. 1, p.
      150, re-scaled to 1871 as 100.

[pg 111] services in India.  To put the same in simpler language, his
bounty was the difference between the price of his product and the price
of his outlay.  Bearing this in mind, we can confidently assert that in
the supposed case of depreciation of silver having taken place in India
first, such a fall in the Indian exchange would have been accompanied by
a penalty instead of a bounty on his trade.  In that case the exporter
from India would have found that though the Indian exchange, i.e. the
gold price of silver, had fallen, yet the ratio which gold prices in
England bore to silver prices in India had fallen more, i.e. the price
he received for his product was smaller than the outlay he had incurred.
It is not quite established whether silver had fallen in Europe before
it had fallen in India.¹⁹¹ But even if that were so the possibility of a
penalty through the fall of exchange proves that the bounty, if there
was any, was not a bounty on the export trade as such, but was an
outcome of the disharmony between the general level of prices and the
prices of particular goods and services within the country, and _would
have existed even if the country had no export trade_.

  ¹⁹¹ _See infra_, Chap. IV.

Thus the bounty was but an incident of the general depreciation of the
currency.  Its existence was felt because prices of _all_ goods and
services in India did not move in the same uniform manner.  It is well
known that at any one time prices of certain commodities will be rising,
while the general price level is falling.  On the other hand, certain
goods will decline in price at the same time that the general price
level is rising.  But such opposite movements are rare.  What most often
happens is that prices of some goods and services, though they move in
the same direction, yet do not move at the same pace as the general
price level.  It is notorious that when general prices fall wages and
other fixed incomes which form the largest item in the total outlay of
every employer do not fall in the same proportion; and when general
prices rise they do not rise as fast as general prices, but generally
lag behind.  And this was just what was happening in a silver-standard
country like India and a gold-standard [pg 112] country like England
during the period of 1873–93 (_see_ Chart IV).  Prices had fallen in
England, but wages had not fallen to the same extent. Prices had risen
in India, but wages had not risen to the same extent. The English
manufacturer was penalized, if at all, not by any act on the part of his
Indian rival, but by reason of the wages of the former’s employees
having remained the same, although the price of his products had fallen.
The Indian producer got a bounty, if any, not because he had an English
rival to feed upon, but because he did not have to pay higher wages,
although the price of his product had risen.

The conclusion, therefore, is that the falling exchange could not have
disturbed established trade relations or displaced the commodities that
entered into international trade.  The utmost that could be attributed
to it is its incidence in economic incentive.  But in so far as it
supplied a motive force or took away the incentive, it did so by
bringing about changes in the social distribution of wealth.  In the
case of England, where prices were falling, it was the employer who
suffered; in the case of India, where prices were rising, it was the
wage-earner who suffered.  In both cases there was an injustice done to
a part of the community and an easy case for the reform of currency was
made out.  The need for a currency reform was recognized in England; but
in India many people seemed averse to it.  To some the stability of the
silver standard had made a powerful appeal, for they failed to find any
evidence of Indian prices having risen above the level of 1873.  To
others the bounty of the falling exchange was too great a boon to be
easily given away by stabilizing the exchange.  The falsity of both the
views is patent.  Prices in India did rise, and that, too, considerably.
Bounty perhaps there was, but it was a penalty on the wage-earner.  Thus
viewed, the need for the reform of Indian currency was far more urgent
than could have been said of the English currency.  From a purely
psychological point of view there is probably much to choose between
rising prices and falling prices.  But from the point of view of their
incidence on the distribution of wealth, very little can be said in
favour of a standard which changes in its [pg 113] value and which
becomes the _via media_ of transferring wealth from the relatively poor
to the relatively rich. Scrope said: “Without stability of value money
is a fraud.” Surely, having regard to the magnitude of the interests
affected, depreciated money must be regarded as a greater fraud.  That
being so, the prosperity of Indian trade and industry, far from being
evidence of a sound currency, was sustained by reason of the fact that
the currency was a diseased currency.  The fall of exchange, in so far
as it was a gain, registered a loss to a large section of the Indian
people with fixed incomes who suffered from the instability of the
silver standard equally with the Government and its European officers.

[Illustration: CHART IV: Prices and Wages in India and England, 1873–93]

[Illustration: CHART V: Monthly Fluctuations of The Rupee-Sterling

So much for the fall of silver.  But the financial difficulties and
social injustices it caused did not sum up the evil effects produced by
it.  Far more disturbing than the fall were the fluctuations which
accompanied the fall (_see_ Chart V).

The fluctuations greatly aggravated the embarrassment of the Government
of India caused by the fall in the exchange value of the rupee.  In the
opinion of the Hon. Mr. Baring (afterwards Lord Cromer),¹⁹²

  ¹⁹² _Financial Statement_, 1883–84, p. 26.

    “It is not the fact that the value of the rupee is,
    comparatively speaking, low that causes inconvenience.  It would
    be possible, although it might be exceedingly troublesome, to
    adjust the Indian fiscal system to a rupee of any value.  What
    causes inconvenience alike to Government and to trade is that
    the value of the rupee is unstable.  It is impossible to state
    accurately in Indian currency what the annual liabilities of the
    Government of India are.  These liabilities have to be
    calculated afresh every year according to the variations which
    take place in the relative value of gold and silver, and a
    calculation which will hold good for even one year is
    exceedingly difficult to make.”

Owing to such fluctuations, no rate could be assumed in the Budget which
was likely to turn out to be the true market rate.  As matters stood,
the rate realized on an average during a particular year differed so
widely from the Budget rate that the finances of the Government became,
to [pg 114] employ the phraseology of a finance minister, a “veritable
gamble.”  How greatly the annual Budget must have been deranged by the
sudden and unprovided-for changes in the rupee cost of the sterling
payments the table on opposite page may help to give some idea.

If Government finance was subjected to such uncertainties as a result of
exchange fluctuations, private trade also became more or less a matter
of speculation.  Fluctuations in exchange are, of course, a common
incident of international trade.  But if they are not to produce
discontinuity in trade and industry there must be definite limits to
such fluctuations.  If the limits are ascertainable, trade would be
reasonably certain in its calculation, and speculation in exchange would
be limited within the known limits of deviations from an established
par.  Where, on the other hand, the limits are unknown all calculations
of trade are frustrated and speculation in exchange takes the place of
legitimate trading.  Now, it is obvious that fluctuations in the
exchange between two countries will be limited in extent if the two
countries have the same standard of value.  Where there is no such
common standard of value the limits, though they exist, are too
indefinite to be of much practical use.  The rupture of the fixed par of
exchange, having destroyed a common standard of value between gold and
silver countries, removed the limits on the exchange fluctuations
between such countries.  As a result of such variations in the value of
the standard measure, trade advanced by “rushes and pauses,” and
speculation became feverishly active.¹⁹³

  ¹⁹³ Evid. I.C.C., 1898, Q. 6,290, 9,808–10.

That progress of trade depends on stability is a truism which seldom
comes home until it is denied in fact.  It is difficult to appreciate
its importance to healthy enterprise when government is stable, credit
secure, and conditions are uniform.  And yet so great is the handicap of
instability that everywhere business men have been led by a variety of
devices to produce stability in domains enveloped by uncertainty.
Everywhere there have grown up business barometers forewarning business
men of impending changes and so enabling them to forearm against them by
timely [pg 115]

                               TABLE XXII

_Fluctuations of Exchange and Fluctuations in the Rupee
        Cost of Gold Payments_¹⁹⁴

              Estimated       Rate of         Changes in the Rupee
              Rate of         Exchange        Cost of Sterling
              Exchange on     actually        Payments consequent
  Financial   which the       realized on     upon Changes between
  Year.       Budget of the   the Average     the Estimated and the
              Year was        during the      Realized rates of
              framed.         Year.           Exchange.
              s.     d.       s.     d.       Rs.          Rs.
  1874–75     1      10·375   1      10·156   15,91,764    —
  1875–76     1      9·875    1      9·626    19,57,917    —
  1876–77     1      8·5      1      8·508    —            76,736
  1877–78     1      9·23     1      8·791    38,43,050    —
  1878–79     1      8·4      1      7·794    56,87,129    —
  1879–80     1      7        1      7·961    —            84,40,737
  1880–81     1      8        1      7·956    4,24,722     —
  1881–82     1      8        1      7·895    10,17,482    —
  1882–83     1      8        1      7·525    37,46,890    —
  1883–84     1      7·5      1      7·536    —            3,62,902
  1884–85     1      7·5      1      7·308    18,97,307    —
  1885–86     1      7        1      6·254    56,82,638    —
  1886–87     1      6        1      5·441    65,17,721    —
  1887–88     1      5·5      1      4·898    71,90,097    —
  1888–89     1      4·9      1      4·379    77,98,400    —
  1889–90     1      4·38     1      4·566    —            27,31,892
  1890–91     1      4·552    1      6·09     —            2,35,51,744
  1891–92     1      5·25     1      4·733    80,09,366    —

  ¹⁹⁴ Compiled from figures given in the _Final Report of the Gold and
      Silver Commission_, p. 40, and in App. II, p. 270, to the _Report
      of the Indian Currency Committee_, 1893.

[pg 116] changes in their operations. The whole of insurance business is
aimed at giving stability to economic life.  The necessity which
compelled all regularly established Governments to maintain standard
measures by which the true proportion between things as to their
quantities might be ascertained and dealings in them regulated with
certainty was motivated by the same purpose, and the meticulous
precision with which every civilized country defines its standard
measures, and the large machinery it maintains to preserve them from
deviation, are only evidences of the great importance that an economic
society must continue to attach to the matter of providing precision of
expression and assurance of fulfilment with regard to the contracts
entered into by its members in their individual or corporate capacities.
Important as are the standard measures of a community, its measure of
value is by far the most important of them all.¹⁹⁵ The measures of
weight, extension, or volume enter only into particular transactions.
If the pound, the bushel, or the yard were altered the evils would be
comparatively restricted in scope.  But the measure of value is

  ¹⁹⁵ Cf. Harris, _An Essay upon Money and Coins_ (reprinted by J. R.
      McCulloch in his volume of _Scarce Tracts on Money_, Part I, Chap.
      IT, par. 21; Part II, Chap. II, pars. 11, 13, and 20).

    “There is no contract,” Peel declared,”¹⁹⁶ public or private, no
    engagement national or individual, which is unaffected by it.
    The enterprises of commerce, the profits of trade, the
    arrangements made in all domestic relations of society, the
    wages of labour, pecuniary transactions of the highest amount
    and of the lowest, the payment of national debt, the provision
    for national expenditure, the command which the coin of the
    smallest denomination has over the necessaries of life, are all

  ¹⁹⁶ Cf. his speech dated May 6, 1844, delivered during the Commons
      debates on the Bank Charter Act.  Hansard, Vol. XXXIV, p. 720.

by changes in the measure of value.  This is because every contract,
though ultimately a contract in goods, is primarily a contract in value.
It is, therefore, not enough to maintain constancy in the measures of
weight, capacity, or volume.  A contract as one of goods may remain
exact to the measure [pg 117] stipulated, but may nevertheless be
vitiated as a contract in values by reason of changes in the measure of
values.  The necessity of preserving stability in its measure of value
falls on the shoulders of every Government of an orderly society.  But
its importance grows beyond dispute as society advances from status to
contract.  The conservation of the contractual basis of society then
becomes tantamount to the conservation of an invariable measure of

The work of reconstituting a common measure of value in some form or
other which those misguided legislators of the seventies helped to
destroy, it was found, could not be long delayed with impunity.  The
consequences that followed in the wake of that legislation, as recounted
before, were too severe to allow the situation to remain unrectified.
That efforts for reconstruction should have been launched before much
mischief was done only shows that a world linked by ties of trade will
insist, if it can, that its currency systems must be laid on a common
gauge. [pg 118]


                       *TOWARDS A GOLD STANDARD*

The establishment of stable monetary conditions was naturally enough
dependent upon the restoration of a common standard of value.  Plain as
was the aim, its accomplishment was by no means an easy matter. Two ways
seemed at first to be open for carrying it out in practice. One was to
adopt a common metal as currency, and since all important countries of
the world had gone over to the gold standard it meant the
silver-standard countries should abandon their standard in favour of
gold.  The other was to let the gold and silver standard countries keep
to their currencies and to establish between them a fixed ratio of
exchange so as to make the two metals into a common standard of value.

The history of the agitation for the reform of the Indian currency is a
history of these two movements.  The movement for the introduction of a
gold standard was, however, the first to occupy the field.  The failure
of the notification of 1868 may be said to have marked the failure of a
policy, but the movement for a gold currency in India started in the
sixties was not altogether stamped out of the country. That the movement
still had life in it is shown by the fact that it was revived four years
later by Sir R. Temple, when he became the Finance Minister of India, in
a memorandum¹⁹⁷ dated May 15, 1872. The important particular in which he
differed from his predecessors consisted in the fact that while they all
aimed to make the British sovereign the principal [pg 119] unit of the
gold currency in India, he desired to give that place to the Indian gold
coin, the “mohur.” Why his predecessors did not do the same when the
problem of correctly rating the sovereign was said to have baffled them
so much is a little surprising when it is recalled that the Indian Mints
had been since long past issuing the “mohur,” which, as it was possible
to rate it correctly, could as well have been made the principal unit of
the gold currency in India.  That they did not can only be explained on
the assumption that they were anxious to kill two birds with one stone.
The adoption of the sovereign, besides supporting a gold currency in
India, was also calculated to promote the movement of international
uniformity of coinage then in vogue.  The utility of the “mohur” was in
this respect comparatively inferior to that of the sovereign.  But when
Sir Richard Temple came upon the scene the prospect of some universal
coin being internationally adopted seemed to be fast vanishing.  At all
events the Report of the English Commission on International Coinage,
presided over by Lord Halifax, had pronounced adversely as to any change
in the standard of the English sovereign. Untrammelled by any
considerations for such a wider issue, Sir R. Temple was free to
recommend the adoption of the “mohur” as the unit of currency in place
of the sovereign.¹⁹⁸

  ¹⁹⁷ Printed as Appendix I, No. 12, to the _Report of the Indian
      Currency Committee_ of 1898.

  ¹⁹⁸ Nevertheless, he said, “I would not object to make the sovereign a
      legal tender for 10 rupees and 4 annas.  But, the sovereign being
      worth 10 rupees and a fraction over, there might be some slight
      trouble of calculation in changing it for silver, and this would
      be a drawback in respect of the use of the sovereign as currency
      in India.  And if this objection were urged, I would not press for
      the sovereign being declared legal tender.  But we should
      continue, under any circumstances, to receive the sovereign in our
      Treasuries at the present rating.”

    “We have,” he wrote, “gold pieces representing fifteen, ten and
    five rupees respectively; and believed to represent these
    several sums very correctly, as regards the relative value of
    gold and silver … that … we should take the first opportunity to
    declare the gold coins legal tender to unlimited amount; that
    gold pieces should continue to bear the fixed relation to the
    rupee; that for a time it might be necessary to permit the rupee
    to remain legal [pg 120] tender to an unlimited amount, which
    would involve temporarily the difficulty of a double standard;
    that the transition period of double standard should be as short
    as possible, silver being reduced to a token coinage, and being
    made legal tender up to a small amount only; and that gold
    should be ultimately the one legal standard.”

He proposed the ratio of 10 rupees tor 120 grs. of standard i.e. 110
grs. of fine gold,¹⁹⁹ but he did not share the temerity of Sir Charles
Trevelyan.²⁰⁰ So intent was he on the project of a gold currency that he
was prepared to alter the ratio so as to make it favourable to gold. The
question of ratio, he observed, was one which

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

  ²⁰⁰ _Supra_, Chap. I.

    “the Government of India ought to be able to determine.  These
    are questions which have been determined by every nation that
    has adopted a gold currency.  No doubt it is a difficult and
    important problem, but it cannot be insoluble, and it ought to
    be solved.”

Such in outline was the first proposal for a gold currency.  It was
projected before the fall in the value of silver had commenced, and was
therefore more a culmination of the past policy than a remedy against
the ensuing depreciation of silver.  In that consisted, probably, the
chief strength of the proposal.  It was in good time to avoid the cost
of hauling up the currency which later on proved so very deterrent and
caused the defeat of so many other projects. Besides, it cannot be said
that at the time the memorandum was presented the Government was not
warned of the impending crisis; for the wave of demonetizing silver had
already commenced two years before.²⁰¹ But, for some reason not known to
the public, no action was taken on the proposal. [pg 121]

  ²⁰¹ Lord Northbrook, who was the Viceroy of India when this proposal
      was made, in his evidence before the I.C.C. of 1898, Q. 8,447,
      suggested that the reason for his not adopting it then was that
      “that was a time when gold was appreciating, and it was impossible
      to do.”  This is, of course, historically untrue except on the
      hypothesis that the proposal came for consideration long after it
      was submitted.

The second plan for the introduction of a gold currency was that of
Colonel J. T. Smith, the able Mint Master of India.  His plan was
avowedly a remedy for the falling exchange.²⁰² The plan was set forth in
the first essay in his brochure, _Silver and the Indian Exchanges_,²⁰³
and may be described in his own words as follows:—

  ²⁰² He had previously taken part in the agitation for the introduction
      of a gold standard in India during the sixties with the sovereign
      as the unit.  But that was as an advocate of the movement for
      uniformity of international coinage. Cf. his _Remarks on a Gold
      Currency for India and Proposal of Measures for the Introduction
      of the British Sovereign_, etc., etc., London, 1868.

  ²⁰³ London, Effingham Wilson, 1876.

    “6. Although it cannot be denied that the difficulty of
    effecting this object of restoring the Indian exchange to its
    normal condition is much greater now than it would have been
    some years ago, owing to the decline which has already taken
    place, yet there seems to be sufficient ground for belief that,
    even now, if decided measures were adopted, it would not be too
    late to restore the currency to its former value for home
    (India) payments; and that, too, without any shock or
    disturbance; the principal step being that of putting a stop to
    the coinage of silver on private account, at the same time
    taking measures to discourage the importation, or at the least
    the circulation, of foreign-made silver coins, and opening the
    Mints for the receipt of gold bullion for coinage.

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

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

    “9. Whatever may be the cause, the internal trade of India has,
    ever since the beginning of this century, required constant and
    steady additions to her currency, averaging during the last
    thirty-eight years upwards of five millions of pounds sterling
    per annum in value.  Besides this, the returns show that the
    balance of imports over exports of gold bullion, during the same
    period, exceeded an average of two and a half millions sterling
    annually, having been, during the last twenty years, more than
    four millions per annum.

    “10.  Such being the case, it appears to be a necessary
    consequence that, if the supply of rupees were put a stop to,
    [pg 122] the remainder must increase in local value, as compared
    with commodities, till they resumed the position which they held
    on a par with gold, at the rate of 10 rupees to a sovereign, for
    the fifteen years previous to 1870.

    “11. After that point had been attained, it would be the
    interest of merchants to take gold into the Indian Mints for
    coinage; and they would do so, indeed, before the attainment of
    this improvement of the exchanges, owing to the premium or
    ‘batta’ which would at first be obtained for the gold coins.

    “12. By this means gold would gradually be brought into India;
    and, as it has been shown that an addition to the circulating
    medium of at least five million sterling per annum is necessary,
    and no more silver coins being admitted [into the currency], it
    would slowly accumulate there. …

    “13, The proposal therefore is that, after due notice, the
    coinage of silver on behalf of private individuals and advances
    upon silver bullion should be suspended; that part of the Act 23
    of 1870, which makes it incumbent on the Government to receive
    and coin it, being repealed; the Government retaining in their
    own hands the power of replenishing the silver currency whenever
    they may deem it expedient.  That gold bullion should be
    received by the Government at the mint rate of 38 rupees 14
    annas per standard ounce, and coined into sovereigns and
    half-sovereigns (representing 38 rupees 15 annas), or ten or
    five rupee-pieces of the same value, which should be declared
    legal tender, but not demandable, the present silver rupees
    continuing to be legal tender, as before.”²⁰⁴

  ²⁰⁴ This was calculated to make the rupee-sterling exchange 2s. gold.
      The average rupee-sterling exchange in 1876 was about 1s. 9·645d.
      This would have placed a small premium on gold which would have no
      doubt soon disappeared owing to the appreciation of the rupee
      consequent upon the stoppage of its coinage.

At the time the Smith plan was presented the fall of silver had made
itself felt so that a considerable support in favour of the plan was
forthcoming.  The support of the trading community was embodied in the
resolution, dated July 15, 1876, of the Bengal Chamber of Commerce,
which urged “that it was expedient, in view of any ultimate measures
that the Government may adopt, that Clause 19 of Act XXIII of 1870,
making it obligatory on the Mints [pg 123] in India to receive all
silver tendered for coinage, and also Section II, Clause (_b_) of Act
III of 1871, making it obligatory on the Currency Department to issue
notes against silver bullion sent in, be temporarily suspended, at the
discretion of Government, and that during each such suspension or till
further notice it be not lawful to import coined rupees from any foreign
port.”  A similar feeling was voiced by the Calcutta Trades Association.
By this time the fall of exchange had also commenced to tell upon the
finances of the Government of India, so much so that Sir William Muir,
in his Financial Statement for 1876–77, was led to observe:—

    “The sudden depreciation of silver and the consequent
    enhancement of charge to the Government of India in laying down
    yearly the sum required in England of about fifteen millions
    sterling, without doubt cast a grave shadow on the future.  In
    truth, it may be said that the danger, from whatever point of
    view considered, is the gravest which has yet threatened the
    finances of India.  War, famine, and drought have often
    inflicted losses on the Exchequer far greater than the charge
    which threatens us in the present year.  But such calamities
    pass away; the loss is limited; and when it has been provided
    for, the finances are again on sure and stable ground. This is
    not the case with the present cause of anxiety.  Its immediate
    effects are serious enough. … But that which adds significance
    to it is that the end cannot be seen; the future is involved in

  ²⁰⁵ P. 93.

In the face of such a situation nothing would have been more natural
than to expect the Government precipitating into some kind of action to
save itself, if not others, from an impending calamity.  On the
contrary, the Government not only failed to take any initiative, but
showed, when pressed by the Bengal Chamber of Commerce to act upon the
foregoing resolution, a surprising degree of academic somnolence only to
be expected from an uninterested spectator.  No doubt the proposal of
the Bengal Chamber was defective in that it did not suggest the opening
of the Indian Mints to the coinage of gold. The Government of India was
sharp [pg 124] enough to fasten upon this defect.  It made plain to the
Chamber that if it had proposed the free coinage of gold

    “such a recommendation would not have been open to the
    objections that appear fatal, _in limine_, to the adoption of
    the resolution actually adopted … viz. to close the Mints
    temporarily to the free coinage of the one metal into
    legal-tender money, without simultaneously opening them to the
    free coinage of the other into legal-tender money.”

Did it, then, adopt the proposal of Colonel Smith, which contained such
a recommendation?  Not at all!  Why did it not, then, adopt a remedy to
which it saw no objections?  The reason was that it had arrived at a
different diagnosis of the causes of the monetary disturbances.  To the
Government the possibilities of explaining “the disturbance in the
equilibrium of the precious metals” seemed to be many and varied.²⁰⁶ (1)
The value of gold being unchanged, the value of silver had fallen; (2)
the value of silver being unchanged, the value of gold had risen; (3)
the value of gold had risen, and the value of silver had fallen; (4) the
value of both metals had risen, but the value of gold more than that of
silver; (5) the value of both metals had fallen, but the value of silver
more than that of gold.  In the midst of such possibilities, marked more
by pedantry than logic, the Government warned the currency reformers

    “the character of the remedies indicated, if the disturbance is
    found to be due to a rise in the value of gold, will obviously
    differ from what would be suitable in the case of a fall in the
    value of silver.”²⁰⁷

  ²⁰⁶ Cf. The Resolution of the Government of India relating to the
      Depreciation in the Value of Silver, dated September 22, 1876,
      par. 6. Commons Paper 449 of 1893.

  ²⁰⁷ _Ibid_.

Out of these possibilities what seemed to it to be proven was that “gold
had risen in value since March, 1872,”²⁰⁸ and therefore if any reform
was to be effected it should fall upon the gold-standard countries to
undertake it.  Situated as the Government of India then was, it could
have suffered [pg 125] itself without incurring much blame to be hurried
into some kind of currency reform that promised to bring relief.  To
have refused to allow the exigencies of a crisis to rule its decisions
on such a momentous issue as the reform of currency, need not imply a
spirit of obstinacy.  On the other hand, it bespeaks a spirit of caution
which no reader of that illuminating despatch of October 13, 1876,
conveying to the Secretary of State its decision to wait and watch, can
fail to admire.  But it is hardly possible to speak in a similar
commendatory manner of the underlying attitude of the Government of
India.  Whether it is possible to hold that gold had appreciated but
that silver had not depreciated may be left for logicians to decide
upon.  But for a silver-standard country to refuse to undertake the
reform of her currency system on the plea that it was gold that had
appreciated was no doubt a tactical error. In military matters there is
probably such a thing as depending on a position; but in currency
matters there cannot be such a thing.  The reason is that in the former
strength sometimes lies in the weakness of the other.  But in the case
of the latter the weakness of one becomes the weakness of all.  There
can be no doubt, therefore, that the Government, in discarding its
responsibility to do the needful in the matter, committed the same kind
of mistake as a man who, in the words of Prof. Nicholson,²⁰⁹ “should
suppose that the ship cannot sink because there is no leak in the
particular cabin in which he happens to sleep.”

  ²⁰⁸ _Ibid._, par. 16.

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

That the attitude of inaction was unwise was soon brought home to the
Government of India.  Within a short space of two years it was obliged
to reconsider the position taken in 1876.  In a despatch dated November
9, 1878,²¹⁰ the Government of India observed:—

  ²¹⁰ P.P., C. 4868 of 1886, p. 18.

    “6. It was to have been expected that a subject so encompassed
    with difficulties should not receive any early settlement, and
    it was probably the wisest, as it was certainly the most natural
    course, to allow further time to elapse before attempting any
    final solution of the grave problem it [pg 126] involved.  The
    improvement that took place in the value of silver in the year
    1877 favoured this policy of inaction; and it is only now, when
    a fresh fall has brought down the rupee to a value hardly
    greater than that which it had in July, 1876, that the serious
    nature of the risk which our existing currency law entails on us
    is once more forced on our attention by its practical effects on
    the Home remittances.

    “21. The uncertainty that has now for some years prevailed with
    reference to the value of silver, and the consequent
    disturbances in the exchange, have … been causes of continued
    financial difficulty to the Government … and it is not possible
    to doubt that similar results must have been produced by these
    disturbances in the trade transactions of the country, or that
    investments of foreign capital in India, either for trading or
    other purposes, must have been very seriously interfered with by
    their influence.

    “23. Such we hold to be a true statement of the present
    difficulties and prospective risks of maintaining the existing
    Currency Law, and we feel assured that they have not been in any
    way overstated.  It remains for us to inquire whether any
    practical remedy could be devised that should not be open to
    serious objections, or the risks attending the adoption of which
    should not be so great as to prohibit it.  We feel most fully
    the heavy responsibility that will rest on us in dealing with
    the currency of India; but it is plain that the responsibility
    for doing nothing is no less great.  Whether the law is left as
    it is, or whether it is changed, the result will be equally due
    to our action, and we cannot, if we would, avoid facing this
    grave question.

    “24. To obtain fixity of exchange by the adoption of a gold
    standard, and the substitution of a gold for a silver currency
    through the direct action of the Government, has, we think, been
    conclusively shown to be impracticable by the despatch of the
    Government of India of October last, and this plan therefore
    calls for no further notice.  The increase in the weight of the
    rupee, also noticed in that despatch, is equally undeserving of
    attention, as, in fact, it would give no security for the
    future, and would entail a heavy charge without accomplishing
    the essential point to be aimed at.  There remains the simpler,
    and first proposed suggestion, the limitation of the coinage of
    silver, which, though rejected in 1876 by the Government of
    India … appears to us to call now for a closer examination. [pg

    “25. This suggestion in its main features is, that the Coinage
    Act shall be so far modified as to withdraw the free right of
    the public to take silver bullion to the Mint for coinage, and
    either to suspend it entirely in future, or limit it for a time.

    “26. It is obviously an essential part of any such scheme, if it
    is to have the effect of fixing the exchange value of the rupee,
    that the power of obtaining that coin in future shall be
    regulated in some manner by a gold payment, and that the
    relation between sterling and rupee currency shall thus be fixed
    irrespective of the fluctuations in the relative value of the
    metals of which the coins are formed.

    “27. It is not, on the other hand, an essential part of such a
    plan that any particular relation of value should be thus fixed
    at two shillings … or at any smaller or larger proportion. All
    that is necessary is that the rate, being once fixed, shall
    remain for the future unchanged. …

    “33. Probably the most important question is … whether or not it
    is practicable to maintain a silver coinage as the principal
    element in our currency, with a very limited gold coinage, or
    without a legal-tender gold coinage at all.  The Government of
    India, in its despatch of 1876, expressed an opinion adverse to
    the possibility of maintaining such a system. … On a full
    reconsideration of this point, we are led to take the opposite
    view, and to think that such a system would be perfectly
    practicable and would lead to no material difficulty.  It is
    true that there is no country in which such a condition of
    things actually exists.  But those countries, and there are many
    of them, in which an inconvertible paper currency exists or has
    existed, give proof that the far greater anomaly of a currency
    devoid of any intrinsic value whatever is capable of performing
    the work of a metallic currency satisfactorily, and of
    maintaining its local exchange value, so long as an excessive
    issue is only guarded against.

    “37. [Such] instances [as the British shilling and the French
    five franc piece] seem to show that neither in the way of
    surreptitious coinage, nor of discredit from depreciation of
    intrinsic value, is it probable that there would be any serious
    difficulty in keeping the rupee in circulation at its present
    weight, at a nominal value of two shillings, with a gold
    standard and a partial gold coinage.

    “46. We are thus led to the general conclusion that it will be
    practicable, without present injury to the community [pg 128] as
    a whole, or risk of future difficulties, to adopt a gold
    standard, while retaining the present silver currency of India,
    and that we may thereby in the future fully protect ourselves
    from the very real and serious dangers impending over us so long
    as the present system is maintained.  We consequently desire to
    recommend to Her Majesty’s Government the adoption of such a
    change at the earliest moment possible, and we shall proceed to
    explain, in all necessary detail, the measures by which we
    advise that it should be effected.

    “50. It has to be borne in mind that it is not the object of our
    action to force on India a gold currency, or to displace the
    silver currency, but rather to avoid such a result, or to check
    the tendency in that direction, so far as it can be done
    consistently with the adoption of the gold standard.  We are
    consequently led to the conclusion that, while we give certain
    facilities for the introduction of gold coins into India, we
    should not yet go so far as to declare them a general legal
    tender; and that we should, at the same time, make provision for
    the coining of silver, without limit as to quantity, but on
    terms that will give no advantage to the introduction of silver
    in relation to gold.

    “51. These objects we propose to attain as follows:— We first
    take power to receive British or British Indian gold coin in
    payment for any demands of the Government, at rates to be fixed
    from time to time by the Government, till the exchange has
    settled itself sufficiently to enable us to fix the rupee value
    in relation to the pound sterling, permanently at two shillings.
    Simultaneously with this, the seignorage on the coining of
    silver would be raised to such a rate as would virtually make
    the cost of a rupee, to persons importing bullion, equal in
    amount to the value given to the rupee in comparison with the
    gold coins above spoken of.  We should thus obtain a self-acting
    system under which silver would be admitted for coinage, at the
    fixed gold rate, as the wants of the country required; while a
    certain limited scope would be given for the introduction and
    use of gold coin, so far as it was found convenient or

Such was the scheme outlined by the Government of India.  The reason why
it rejected the Smith plan, although it was simple, economical, and
secure, was because it contemplated a demand by India on the world’s
dwindling stock of gold.  Now, in the circumstances then existing, [pg
129] this was a fatal defect, and the powers that be had already decided
that at all cost India must be kept out of what was called the “scramble
for gold.”  Therefore, to have proposed an effective gold standard was
to have courted defeat.  A mild and diluted edition of a gold standard
such as was proposed by the Government was all that stood any chance of
success.  But even this timid attempt did not fare well at the hands of
the Committee²¹¹ appointed jointly by the Secretary of State and the
Chancellor of the Exchequer to examine and report upon the proposals.
The members of the Committee were “unanimously of opinion that they
cannot recommend them for the sanction of Her Majesty’s Government.”²¹²
The reasons which led to the rejection of the proposals we are not
permitted to know.  Although the Report of the Committee was made
public, the proceedings have never seen the light of day.  Indeed, there
has been a most stern and obstinate refusal on the part of the officials
to allow a peep into them.  Why they should be regarded as confidential
after a lapse of nearly half a century it is difficult to imagine.
Enough, however, was revealed by Sir Robert Giffen, who was a member of
this Committee, in evidence before the Indian Currency Committee of
1898²¹³ for us to know the contents of this closely guarded document.
It seems that the Committee declared against the proposals because it
thought they wore calculated to make the Indian currency a “managed”
currency.  At the time when the Committee delivered its opinion the
current prejudice was unanimously against such a system. All
acknowledged writers on currency were pronounced opponents of an
artificially regulated system.²¹⁴ A naturally automatic currency was
their ideal.  In addition to being misled by [pg 130] this prejudice,
the Committee felt convinced that the situation would soon ease itself
by the natural working of economic forces without necessitating a reform
of the Indian currency.  This conviction on the part of the Committee
was founded on the high authority of the late Mr. Walter Bagehot²¹⁵ that
the disturbance could not but be temporary.  His argument was that the
depreciation would encourage exports from India, and discourage imports,
and the unfavourable balance of trade thus brought about would induce a
flow of silver to India, tending to raise its price.  He was also of
opinion that increased demand for silver would also arise from outside
India.  He argued that the reduction of demand caused by the
demonetization of silver by some countries would be more than
compensated for by the adoption of silver by other countries then on a
paper basis for their impending resumptions of specie payment.

  ²¹¹ It was composed of Louis Mallet, Edward Stanhope, T. L. Seccombe,
      R. E. Welby, T. H. Farrer, R. Giffen, and A. J. Balfour.

  ²¹² For Report of the Committee, _see_ Commons Paper C. 4868 of 1886,
      p. 26.

  ²¹³ Q. 10,025–50.

  ²¹⁴ So novel was the idea at the time that the United States Monetary
      Commission, 1876, was surprised when some of the witnesses
      expressed themselves in favour of regulating the principal
      metallic unit of account in the currency system of a country by
      Governmental agency.  _See_ 44 Congress 2nd Session Senate
      Document, No. 703, pp. 47–48.

  ²¹⁵ Cf. his _Some Articles on the Depreciation of Silver, and on
      Topics connected with it_, London, 1877, pp. 10, 65, and 80; also
      his evidence before the _Select Committee on the Depreciation of
      Silver_, Lords Paper 178 of 1876, Q. 1,361–1,450.

Whatever might be said with regard to the Committee’s preference of a
natural to an artificial system of currency, there can be no doubt that
in turning down the proposals of the Government, in the hope that silver
would recover, it was grossly deceived.  The basic assumptions on which
the Committee was led to act failed to come true.  To the surprise of
everybody India refused to absorb this “white dirt.” Indeed, it was one
of the puzzles of the time to know why, if silver had fallen so much in
Europe, it did not go to India in larger quantities.  Many blamed the
Secretary of State for the sale of his Council Bills.²¹⁶ These bills, it
was said, presented an alternative mode of remittance so much better as
to prevent the sending of silver to India, and thereby caused a
diminution in the demand for it.  That this was not a correct view is
obvious.²¹⁷ Silver could not have [pg 131] gone to India more than it
did even if Council Bills had been abolished.  Council Bills must be
regarded as ordinary trade bills drawn against services and commodities,
and could not be said to have competed with the transmission of bullion
in any special manner different to that attributable to the trade bills.
The only bearing the Council Bills may be said to have had upon the
issue in question lies in the fact that to the extent they figured in
the transactions they prevented India from buying other commodities.
But there was nothing to prevent her residual buying power left over
after paying for the Council Bills from being utilized in the purchase
of silver in preference to other commodities.  That this buying power
would be used in purchasing silver because it was depreciated in Europe
was theoretically an unsound assumption on the part of Mr. Bagehot.  The
deciding factor which could have caused such a diversion of this
residual buying power to the purchase of silver was whether it was
_appreciated in India_.  Only on that condition could there have been a
flow of it to India.  But as matters then stood, it was the opinion of
Prof. Pierson²¹⁸ that when the general depreciation of silver commenced
all over the world, it had been forestalled in that part of the globe.
India was already glutted with silver.  Under ordinary circumstances
India would have sent back a large portion of its silver to Europe.  But
the general depreciation prevented her from doing so; and now there were
two opposing forces, one tending to produce an export of silver from
India to Europe and the other tending to produce an export of silver
from Europe to India; and, although the latter was the stronger of the
two, the former was sufficiently powerful to prevent any considerable
quantity of silver from being exported from Europe to India.  If the
Committee was, deceived in one part of its assumptions, it was also
disappointed in others.  Far from resuming specie payments in terms of
silver, as Mr. Bagehot expected the countries then on paper basis to do,
they one and all demonetized [pg 132] silver to the great disappointment
of all those who adhered to the policy of “wait and see.”

  ²¹⁶ This argument was prominently put forth in the _Report_ (pp.
      xxx-xxxv) _of the Select Committee on the Depreciation of Silver_,
      1876; and also by Monometallic Members of the Gold and Silver
      Commission, 1886.  Cf. pp. 77–79 of the Final Report, Part II.

  ²¹⁷ Cf. evidence of Professor Marshall before the Gold and Silver
      Commission, 1886, Q. 10,164~76.

  ²¹⁸ Cf. his reply to the Circular of the Gold and Silver Commission,
      1886. Second Report, App. VII (1), p. 254.

The falsification by India and other countries of such anticipations led
to a change in the angle of vision of most of the European countries who
had theretofore shown no inclination to do anything by way of reducing
the chaotic currencies to some kind of order. They were advised by
eminent authorities not to hurry. Jevons said²¹⁹:—

  ²¹⁹ Op. cit., p. 354.

    “We only need a little patience and a little common sense to
    surmount the practical difficulties.  Within the next few years
    good harvests in India will, in all probability, enable that
    country to buy up all our surplus silver, as it has been in the
    habit of doing, with rare exceptions, since the time of Pliny. …
    In future years any amount of silver could be got rid of without
    loss, if it be sold gradually and cautiously.”

When, however, it was found that the waiting period would be more
painful if not longer than what it pleased the proverbial peasant to
undergo, in order to let the stream run dry so as to permit of his
fording it without wetting his feet, there grew up an agitation in
Europe to undertake the necessary reform to prevent the depreciation of

Far from being sentimental, the agitation was real and derived its force
from the evils which arose out of the existing currency conditions.  The
monetary condition of most of these countries was very unhealthy.  Their
schemes of an effective gold standard with silver as token currency were
arrested in the midst of their progress. Germany, when she demonetized
silver, had retained her silver thalers as full legal tender at the old
ratio with gold, only to get time to be rid of them to the extent
necessary to reduce them to a truly subsidiary position.  But, before
she could do so, her policy of demonetization had commenced to tell upon
the value of silver, and the continued fall thereof compelled Germany to
retain the thalers as legal tender at their old value, despite the fact
that their metallic value was fast sinking.  Precisely the same was the
result of the action of the Latin Union on their system of currency.
They had [pg 133] stopped their further coinage of the silver five-franc
pieces; but they could do nothing with those that were already coined
except to permit them to circulate at the old mint par, although the
metallic par continued to change with changes in the market values of
gold and silver.  The United States was also involved in similar evils,
although they arose from choice rather than from necessity.  Yielding to
an agitation of the silver men, it passed in 1878 a law called the Bland
Allison Act, requiring the Secretary of the Treasury to purchase and
coin each month not less than $2,000,000 and not more than $4,000,000
worth of silver bullion into standard silver dollars, which were to be
full legal tender for all debts public and private, “except where
otherwise expressly stipulated in the contract.”²²⁰ As the metallic
value of these dollars fell with every fall, while their legal value
remained as before, they became, like the thalers and the francs,
overvalued coins.  It is clear²²¹ that when the stock of a country’s
currency is not equally good for all purposes it is relatively speaking
in an unsatisfactory condition.  Though good for internal purposes,
these coins were useless for international payments.  Besides making the
whole currency system unstable and top-heavy, they could not be made to
serve the purpose of banking reserves, which it is the _prime_ function
of a metallic currency to perform in modern times.  The possibilities
they opened for illicit coinage were immense.  But what made their
existence such a source of menace was the fact that a large proportion
of the total metallic money of these countries was of this sort.  The
figures given by Ottomar Haupt (see p. 134) prove sufficiently the
difficulties that these countries had to face in regulating and
controlling such a mass of token currency.

  ²²⁰ _Report of the Monetary Commission of the Indianapolis
      Convention_, Chicago, 1898, pp. 138–145.

  ²²¹ Cf. the speech of Prof. Pierson, Delegate of the Netherlands at
      the International Monetary Conference of 1881, _Report of the
      Delegates of the United States_, Cincinnati, 1881, pp. 77–84.

If a gold-standard country like England had escaped these difficulties
it was only to meet others equally embarrassing.  As has been pointed
out before, the continued fall of prices, the reflex part of the
appreciation of gold, [pg 134]

                              TABLE XXIII

_Distribution of the Stock of Money in Different

                Monetary Circulation at the _Beginning_ of 1892.
Countries ──────────────────────────────────────────────────────────────────────────
            Gold.           Silver.         Uncovered     Fractional    Billon
                                            Notes         Currency.     Money.
Austria     65,000,000      197,000,00      601,000,000   40,000,000    14,000,000
England £   118,000,000     —               10,000,000    26,000,000    1,900,000
France      3,900,000,000   3,200,000,000   572,000,000   280,000,000   280,000,000
Germany     2,500,000,000   430,000,000     450,000,000   457,000,000   57,000,000
Holland     64,000,000      135,000,000     98,000,000    7,600,000     1,800,000
Italy li.   485,000,000     81,000,000      847,000,000   150,000,000   75,000,000
Russia £    59,500,000      —               51,200,000    8,200,000     1,000,000
Spain       160,000,000     646,000,000     548,000,000   190,000,000   157,000,000
U.S.A       671,000,000     458,000,000     419,000,000   77,000,000    18,000,000

  ²²² The figures are as given by Ottomar Haupt (London: Effingham,
      Wilson & Co., 1892, p. 160.)

[pg 135] had produced a depression in the trade and industry of the
country never known before in its history.  Apart from this, the
monetary disturbances affected the yield on capital investment, the
mainstay of so many of her people, by reducing the field for its
employment.  Said the American Commission:—

    “Within twenty years, from 1877 to 1897, it could probably be
    correctly stated that the power of money to earn dividends was
    reduced to one-half, or in nearly that proportion.  That
    reduction of the earning power of capital affected injuriously
    everybody who depended upon investments for a living.  It
    affected also the profits and enterprises of the captains of
    industry and the kings of finance.  In England and in France the
    price of Government securities rose to a point which made it no
    longer possible for the man of small means to invest in them and
    acquire an adequate support during his declining years.”²²³

  ²²³ Report on the Introduction of the Gold-exchange Standard into
      China and other Silver-using Countries by the Commission on
      International Exchange, 58th Congress, 2nd Session, House of
      Representatives Document, No. 144, Washington, 1903, p. 101.

It is, of course, open to doubt whether the conclusion drawn is the
right one.  But the fact remains that owing to monetary disturbances the
field for the investment of English capital had become considerably
restricted.  And, as a way of getting a living, capital investment was
an important resource to the English people.

To mend such a situation there were convened one after another three
International Monetary Conferences to establish a bimetallic par between
gold and silver.  The first International Monetary Conference was
convened at Paris in the year 1878 at the invitation of the United
States.  The second met at the same place in 1881 at the joint call of
France and the United States.  The third and the last assembled by the
wish of the United States in Brussels during the year 1892.

From the gravity of the situation nothing could have been more natural
than to expect these Conferences to fructify into an agreement upon the
consummation of the project for which they were called into being. But,
far from reaching any agreement, the deliberations of these Conferences
proved [pg 136] to be entirely futile.  Only the second Conference
showed any sign of agreement.  The first and the third marked a strong
deviation in the opposite direction.  The advance, if any, that was
made, as a result of these deliberations, was summed up in the pious
opinion that it was necessary to retain and enlarge the monetary use of
silver.  But so weak on the whole was the response that practice failed
to testify as to the sincerity of this solemn declaration.

The reasons for the failure of these Conferences to reach a bimetallic
agreement have not been properly understood.  One cannot read the
debates on bimetallism at these Conferences without observing that the
opposing parties approached the subject with different objectives.  To
one the principal objective was the maintenance of a stable ratio of
exchange between gold and silver irrespective of the question whether
one or both remained in circulation; to the other it was the maintenance
of the two metals in concurrent circulation.  As a consequence of this
difference in the lines of their approach an agreement on a bimetallic
project became wellnigh impossible.

The workability of bimetallism in the sense of maintaining a stable
ratio between gold and silver is necessarily an indefinite proposition.
None the less, it cannot be said, if the debates at these Conferences
are taken as a guide, that the possibility of a successful bimetallic
system in the stable-ratio sense of the term had been denied by the
majority of economic theorists, or by the Governments who met at these
Conferences.  On the other hand, the Conference of 1881, the most
important of the three, was remarkable by its confession regarding the
workability of the system.  All Governments, barring a few minor ones,
were in favour of it.  Even the British Government, in consenting to
bring into operation the silver clause of the Bank Charter Act, must be
said to have given its word of approval.

But what did bimetallism promise, as a piece of mechanism, to maintain
the two metals in concurrent circulation? The bimetallists used to cite
the example of France in support of the stability of the double
standard.  But was there a concurrent circulation of the two metals [pg
137] in France under the bimetallic system?  Far from it.  For, although
it was a virtue of the system that changes in the production of the two
metals made no appreciable variations in the fixed ratio of exchange,
yet the slightest of such as did occur were sufficient to effect the
greatest revolution in the relative circulation of the two metals, as
the following table clearly brings out:—

                               TABLE XXIV

_Mintage of Gold and Silver in France_²²⁴

                        Gold.          Silver.
   Period.            ─────────────────────────────── Ratio of of
                        Million        Million        Value.
                        Francs.        Francs.
   1803 to 1820         868            1,091          1 : 15·58
   1821 to 1847         301            2,778          1 : 15·80
   1848 to 1852         448            543            1 : 15·67
   1853 to 1856         1,795          102            1 : 15·35
   1857 to 1866         3,516          55             1 : 15·33
   1867 to 1873         876            587            1 : 15·62

  ²²⁴ Table submitted to the Paris International Monetary Conference of
      1881 by M. Pierson, Delegate for the Netherlands.

In mitigation of this the bimetallists had nothing to offer.  There
were, no doubt, such schemes as the one proposed by Prof. Marshall,
consisting of paper based on a linked bar of gold and silver in certain
fixed proportions,²²⁵ having the object of converting this
“either-metallism” into double-metallism.  But such schemes apart, the
free-mintage-cum-fixed-ratio plan of bimetallism gave no guarantee
against alternation in the circulation.  Indeed, under that plan the
alternation is the very soul of the mechanism which keeps the ratio from
being disturbed.  The only thing the [pg 138] bimetallists could say in
mitigation of this was that²²⁶ the alternation in currency would confine
itself to bank reserves and would not be extended to the pockets of the
people.  This was only an eyewash,²²⁷ for how could the banks arrange
their reserves except in conformity with the prejudices of the people?
Even international agreement to use gold and silver at a fixed ratio was
no guarantee that this concurrent circulation would be maintained.
Stability of ratio did depend to a large extent upon an international
agreement, for, although it could be maintained by the action of one
nation, the deviations of the ratio in that case would probably be
greater.  But mere international agreement has no virtue of itself to
prevent one metal driving out the other.  To suppose that Gresham’s Law
is powerless under international agreement is a gross mistake.
Gresham’s Law is governed by the relative production of the two metals
to the total currency needs of the moment.  Supposing the production of
one metal relatively to the other was so enormous as to more than
suffice for the currency needs, how could international agreement
prevent the former from driving the latter entirely out of circulation?
On the other hand, international agreement, far from discouraging, would
encourage the process.

  ²²⁵ Cf. _Contemporary Review_ for March, 1887.  It is interesting to
      note that essentially the same plan was suggested 115 years before
      Prof Marshall by James Stewart when his advice was sought by the
      East India Company as to the method of reforming the then chaotic
      currency of Bengal.  He refrained from pressing it upon the
      Company because he thought “mankind were not all philosophers.”
      Cf. his _Principles of Money as applied to the Present State of
      the Coin of Bengal_ (2nd Edition, 1772), pp. 8–11; cf. also
      William Ward, _On Monetary Derangements, in a Letter addressed to
      the Proprietors of Bank Stock_, London, 1840, p. 8.

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

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

In adopting bimetallism, therefore, the nations had to make a choice
between a stable ratio and a concurrent circulation, for there might
arise a situation in which there was a stable ratio but no concurrent
circulation of both the metals.  If the Conferences broke down, it was
not because they did not recognize the possibility which was unanimously
upheld by such an impartial tribunal as the Gold and Silver Commission
of 1886 of a stable ratio being maintained under a bimetallic regime.
They broke down because the bimetallic system did not guarantee the
concurrent circulation of the two metals.  However, it is certain the
impossibility of concurrent circulation could not have been such a
drawback if the immediate effect of bimetallism would have been a flow
of gold into circulation.  But as matters [pg 139] then stood the
immediate effect would have been to bring silver into circulation.  It
was this more than anything else which scared away most of the nations
from the adoption of the bimetallic system.  Now, it is a curious thing
that nations which had assembled together to wring about a stable ratio
between gold and silver should have rejected a system which gave a
promise of such a stability on the comparatively less significant ground
that it had the effect of altering the composition of the circulation
from gold to silver.  But the fact must be recognized that at the time
the question of reconstituting the bimetallic system was agitating the
public mind, in most of the European countries gold and silver had
ceased to be regarded as equally good for currency purposes.  The
superiority of gold to silver as a carrier of large value in small bulk
was coming more and more to be appreciated in the latter part of the
nineteenth century, and no plan of stabilization which did not provide
for the unhindered circulation of gold was likely to meet with common
approval.  This prejudice was in no way confined to a gold-standard
country like England.  The closing of the Mints by the Latin Union is
proof positive of the change in the attitude of the bimetallic
countries.  As Jevons argued²²⁸:—

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

    “So long … as its operation resulted in substituting a beautiful
    coinage of napoleons, half-napoleons, and five-franc pieces in
    gold for the old heavy silver écus, there was no complaint, and
    the French people admired the action of their compensatory
    system.  But when [after 1873] it became evident that the heavy
    silver currency was coming back again … the matter assumed a
    different form.”

So great was the prejudice in favour of gold that the interests of the
chief Powers in the various Conferences, it may be truly said, waxed and
waned with the changes in the volume of their gold reserves.²²⁹ In 1878
the United States took the lead in calling the Conference because the
[pg 140] working of the Bland Allison Act checked the inflow of gold
necessary for its cash payments.  Germany was indifferent because she
had enough gold and was confident of selling off her demonetized silver
without loss.  In 1881 France and Germany showed more anxiety for reform
because the former had lost all her gold and the latter was unable to
palm off her silver.  By 1892 none was so poorly supplied with gold as
was the United States, largely as a result of a reckless policy which
did her harm without doing good to anyone else, and she was therefore
left alone to support the cause of silver.

  ²²⁹ Cf. _The Report of the Indian Delegates to the International
      Monetary Conference of_ 1881, C. 3229 of 1882, p. 7; also Russell,
      op. cit., pp. 374–5.

Possessed as almost every Government was by this prejudice for gold, it
was not an ineradicable prejudice.  What the countries wanted was a lead
from an influential nation.  Throughout the debates at these Conferences
one thing stood out very clearly.  If England could have brought herself
to adopt a bimetallic system, others, like sheep, would have followed
suit.  But she was too much wedded to her system to make a change, with
the result that bimetallism, as a way out of the currency difficulties,
became a dead project.  The vanishing of the prospect of re-establishing
the bimetallic system as a result of her obstinacy was a small matter to
the European countries.  They had virtually made gold, the international
form of money, as the basis of their currency, and were therefore quite
indifferent as to the issue; but it was a terrible blow to the hopes of
India.  After the proposal of 1878 had been turned down, bimetallism was
considered by the Government of India as the remedy, and its advent
looked forward to for salvation.  It is true that in the beginning of
bimetallic discussions the attitude of the Indian Government was rather
lukewarm. In a despatch dated June 10, 1881,²³⁰ to the Secretary of
State, it was revealed that the Government of the time was divided in
its opinion regarding the merits of bimetallism.  The Viceroy and
another member of Council refused their support on the ground that
bimetallism was unsound in principle,²³¹ and even the majority who
thought differently on this aspect of the question were not then
prepared to go to the [pg 141] length of joining a bimetallic union,
although they did not see any objection to doing so “if a sufficiently
large number of other Governments were prepared to join” in it.  With
the growth of their financial difficulties, however, this slender faith
in bimetallism considerably deepened, so much so that in 1886 the
Government addressed to the Secretary of State a despatch²³² urging him
to take the initiative in calling an International Monetary Conference
to establish a stable ratio between gold and silver.  So intense was its
interest in the consummation of bimetallism that it did not hesitate to
administer a sharp rebuke to the Treasury when they negatived its
suggestion referred to them for consideration by the Secretary of
State.²³³ With such feelings of faith and hope the Government of India
entered these international Conferences and watched their fortunes.  But
no Government could have been treated with such suspicion and injustice
as was the Government of India.  Its admission to the bimetallic union
was desired by none of the Powers, not even by England.²³⁴ It was
treated as a villain whose advances were nothing but manœuvres to pounce
upon the already dwindling stock of gold.  Not only was it planned to
keep India out of the bimetallic union, but she was to be required to
pledge herself not to take a mean advantage of the union after its
efforts had succeeded in establishing a stable ratio by making gold
legal tender.²³⁵ All these guarantees the Government of India had
offered in a pathetic faithfulness to the cause of bimetallism, on the
success of which it had depended so much.  Consequently, when the
attempt failed, the disappointment caused to the Government of India
almost broke its heart.  It is nut too severe to say that the part
played by the British authorities in causing this disappointment was
highly irresponsible—one might almost say wicked.  They forced India
against her declared wishes to keep to the silver standard, partly to
trail her off from [pg 142] making any demand for gold, and partly to
silence the criticisms of other nations that Britain was not taking her
share in the matter of rehabilitating silver.²³⁶ This was not the only
advantage exacted from a country bound to obey.  On the one hand it
restrained the Government of India from taking any independent line of
action in the matter of currency reform, and on the other such means as
were calculated to make good the losses which arose from a depreciating
currency were subjected to Parliamentary censure.  The House of Commons
was twice moved, once in 1877 and again in 1879, to resolve that the
Government of India should lower its tariff, ostensibly in the interest
of free trade, but really in the interests of relief to the depressed
condition of Lancashire.  The consequence was that the Government could
not tap one important source of its revenue in times of its greatest
adversity.  The only adequate recompense the British authorities could
have made to a Government so completely paralysed by their dictations,
and of whose interests they so loudly claimed to be the lawful trustees,
was to have consented to join the bimetallic union, the consummation of
which only waited upon their grace.  But, as is well known, they did
nothing of the kind, so that, after a period of enforced waiting and by
no means unavoidable suffering, the Government of India, at the end of
1893, found itself just where it was at the beginning of 1878.

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

  ²³¹ _Ibid._, p. 37.

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

  ²³³ Cf. the despatch of September 4 1886, App. II to the _First Report
      of the Royal Commission on Gold and Silver_, 1886.

  ²³⁴ Cf. the evidence before the Gold and Silver Commission of 1886 of
      Mr. S. Smith, Q. 4,825–30; also of Mr. Watney, Q. 9,427.

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

  ²³⁶ Cf. the speech of Mr. Goschen at the International Monetary
      Conference of 1878, Third Session.  Report of the American
      Delegates, Senate Executive Document, No. 58, Forty-fifth
      Congress, Third Session, Washington, 1879, pp. 50–52.

Like all common-sense people who pray and yet do not fail to keep their
powder dry, this interval was utilized by the silver-ridden countries,
with the exception of the United States, in strengthening their gold
basis no less than in attending the deliberations of the Monetary
Conferences on the amusing plans for extending the use of silver.²³⁷,
Mr. Goschen, at the Conference of 1878, had quite philosophically [pg
143] remarked that States feared to employ silver because of its
depreciation, and the depreciation continued because the States feared
to employ it.  Now, if the first part of the diagnosis was correct, we
should have found the States seriously engaged in the task of
rehabilitating silver when its price was propped up by the silver
legislation of the United States.  On the other hand, just so far as the
monthly purchases of silver, under the Bland Allison Act of 1878, or the
Sherman Act of 1890, held up the price of silver, not only did they not
feel anxious to take steps to restore it to its former position, but
they actually took advantage of the rise to discard it.²³⁸ And it is not
possible to blame them either, for with the prospect of a bimetallic
union vanishing into thin air the accumulation of this dead weight would
have only ended in a gratuitous embarrassment.  India alone refused to
profit by the squeeze which the United States took vicariously for other
nations, and allowed precious time to slip by, with the result that it
was thrown back upon the same remedy, the adoption of which was
negatived in 1878.

  ²³⁷ Cf. for the variety of plans suggested at the Conferences _The
      Report of the American Delegates to the International Monetary
      Conference of_ 1892, Washington, 1893.

  ²³⁸ Cf. Russell, op. cit., p. 410; also Prof. F. A. Walker, “The Free
      Coinage of Silver,” in _The Journal of Political Economy_
      (Chicago), Vol. I, p. 174.

If it was to be a gold standard it would have been better if it had been
done in 1878.  The plan then outlined by the Government of India was no
doubt too complicated and too flimsy to be practicable.  But its
rejection should not have altogether suspended the introduction of a
gold standard.  If it was to be one of an orthodox kind on the English
pattern, it would have no doubt involved some cost to the Government in
being obliged to sell at a reduced price a part of the silver stock of
the country in order to give the rupee a subsidiary position and to fill
the void by a gold currency.  The cost of this conversion in 1878 would
have been inconsiderable, for the fall of silver from its normal gold
price was only 12½ per cent.  On the other hand, if it was to be on such
an unorthodox plan as that of Colonel Smith, it would have involved no
cost at all to the Government²³⁹ beyond [pg 144] that involved in the
installation of new machinery for the coinage of gold at the Mint.  But
in 1893 both these processes of bringing about a gold standard seemed
quite hopeless.  The impossibility of the plan of conversion was quite
out of the question. The fall in the value of silver in 1893 was nearly
35 per cent.  Even the prospect of the Smith plan did not appear very
bright owing to the enormous addition of rupees to the circulation of
the country.  If it had been adopted in 1878, all the subsequent
additions to the currency would have been in gold, with the result that
by 1893 the proportion of gold to silver would have been large enough to
have endowed the whole currency system with the desired stability in
relation to countries on a purely gold basis.  In 1893 the mass of
silver currency had grown to enormous proportions, so that it looked
certain that it would take decades before the stoppage of silver coinage
could make the rupee a stable and secure form of currency.

  ²³⁹ So evident was this the case that the London _Times_, although it
      did not agree that any change was then urgently called for, yet
      observed in the leading article in its issue of October 25, 1876,
      p. 9, cl. 2: “The Governor-General in Council dismisses the
      suggestion of a gold standard on the ground that the present
      condition of affairs, bad as it is, does not call for so costly a
      remedy; but this involves a misconception of the proposal.  The
      substitution of a gold for a silver currency in India would be a
      most extensive and costly operation, but to refuse to coin silver
      and to offer to coin gold for all comers would involve no cost
      beyond that of new machinery.  If it was announced that after a
      certain day the coinage of silver was suspended, and that gold
      could be coined instead, for whoever might bring it, in coins that
      would be exchangeable for rupees at a fixed rate, there would be
      introduced into India the bimetallic system prevailing in France,
      and a change in the currency would be gradually introduced.  At
      first no gold would be brought to be coined, but as the suspense
      of the coinage of silver operated to raise the value of the rupees
      in existence to the par value defined by the fixed rate of
      exchange of rupees and gold, gold would be more and more brought
      to the Mint, and would find its way into circulation.  The process
      would be automatic and not costly, but it would be extremely slow,

The plans showing a way out of an _impasse_ such as this were legion.
One was the issue of heavier rupees.²⁴⁰ The second was to make silver
limited legal tender and to authorize the Secretary of State to sell in
London gold or silver Indian stock to the extent of his gold payments,
to be liquidated by [pg 145] the Government of India by the issue of
unlimited legal-tender notes called “bons.”²⁴¹ The third was that
England and India should, as between them, adopt a bimetallic standard
on a new basis,²⁴² or to admit the rupee as full legal tender in the
United Kingdom.²⁴³ The fourth was to regulate the opening and closing of
Mints to coinage on the basis of deviations of actual exchange rates
from the rate of exchange fixed at the opening of each year for the
Council drafts of the Secretary of State.  Under this scheme, so long as
the actual rate did not exceed the fixed rate by less than 5 per cent.,
the free coinage of silver was to be suspended.²⁴⁴ The fifth was to
provide that on the one hand the Secretary of State should fix a minimum
rate for his drafts, and that the Government of India on the other
should levy a duty on all imports of silver equal to the difference
between the daily official quotations of bar silver in London and the
price of silver corresponding to the rate fixed for the Council
drafts.²⁴⁵ The sixth was to introduce a bimetallic coin, to be called
the Imperial florin or rupee, made of the value of 2 _s_. and containing
4 per cent. weight in gold and the balance in silver.²⁴⁶ The seventh was
to establish independent gold and silver standards without any fixed
ratio of exchange between them,²⁴⁷ or with some slight inducement for
the use of gold in transactions of larger denominations.²⁴⁸ Although the
Government of India was not in agreement with these clever if not crazy
plans of currency reforms, it agreed in the aim they had in view,
namely, to place India on gold basis without involving the actual use of
gold in place of the existing rupees in circulation.  With this aim in
view it revived for adoption the more simple and more scientific plan of
Colonel Smith.  As a preliminary, the Government reverted to the policy
of the resolution of the Bengal Chamber of Commerce, to the adoption of
which it saw such “fatal [pg 146] objections” in 1876.  In the despatch
dated June 21, 1892, which contained the proposals, the Government of
India asked for nothing more.  In the words of their author²⁴⁹  they

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

  ²⁴¹ By Atkins, _ibid._, p. 282.

  ²⁴² By Chapman, _ibid._, p. 282.

  ²⁴³ By Woodhouse, _ibid._, p. 33.

  ²⁴⁴ By Graham, _ibid._, p. 305.

  ²⁴⁵ By M. Schilizzi, _ibid._, 319.

  ²⁴⁶ By Stalkartt, _ibid._, p. 322; also a very similar one by
      Merington, _ibid._, p. 316.

  ²⁴⁷ By Perry, _ibid._, p. 323.

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

  ²⁴⁹ Sir David Barbour, _The Standard of Value_, 1912, pp. 202–3.
      Italics not in the original.

    “… that the Indian Mints should be closed to the unlimited
    coinage of silver, and _no further steps_ taken until the effect
    of closing the Mints had been ascertained.

    “The ratio at which the change from silver to the gold standard
    should be made was subsequently to be settled and it was said
    that a ratio based on the average price of silver during a
    limited period before the Mints had been closed would probably
    be the safest and most equitable.  When this ratio had been
    settled, the Mints were to be opened to the coinage of gold at
    that ratio, and gold coins were to be made legal tender to any

These proposals were submitted for examination to a Departmental
Committee, commonly known as the Herschell Committee.  They were said to
be defective in one important particular, and that was the absence of
due recognition of the necessity of a gold reserve for the maintenance
of the value of the rupee.  Many people felt doubtful of the success of
the proposals unless backed by an adequate gold reserve.  But the
Herschell Committee, after an extended investigation into the working of
the currency systems of different countries, reported²⁵⁰:—

  ²⁵⁰ Report, par. 93.

    “It is impossible … to review foreign systems of currency,
    without feeling that, however admirable may be the precautions
    of our own [English] currency system, other nations have adopted
    different systems which appear to have worked without
    difficulty, and enabled them to maintain for their respective
    currencies a gold standard and a substantial parity of exchange
    with the gold-using countries of the world”

with little or no gold. The Committee, therefore, was completely
satisfied with the proposals of the Government [pg 147] of India, and
not only sanctioned their adoption,²⁵¹ but added, by way of introducing
a modification in them, that

  ²⁵¹ Report, par. 155.

    “The closing of the Mints against the free coinage of silver
    should be accompanied by an announcement that, though closed to
    the public, they will be used by the Government for the coinage
    of rupees in exchange for gold at a ratio to be then fixed, say
    1s. 4d. per rupee, and that at the Government Treasuries gold
    will be received in satisfaction of public dues at the same

  ²⁵² Report, par. 156.

These recommendations were carried into effect on June 26, 1893, which
forms as great a landmark in the history of Indian currency as did the
year 1835.  On that date were promulgated one legislative enactment and
three executive notifications, together calculated to accomplish the
object in view.  The Act (VIII) of 1893 was only a repealing Act. It

(i) The Indian Coinage Act XXIII of 1870.

    Sections 19 to 26 (both inclusive), requiring the Mint Masters
    to coin all silver brought to their Mints for coinage.²⁵³

(ii) The Indian Paper Currency, 1882.²⁵⁴

    (a) Section 11, Clause (_b_), requiring the Paper Currency
    Department to issue notes against silver coin made under the
    Portuguese Convention Act, 1881.²⁵⁵ [pg 148]

    (b) Section 11, Clause (_d_), requiring the Paper Currency
    Department to issue notes against silver bullion or foreign
    silver coin.²⁵⁶

    (c) Section 13. Only the proviso limiting the gold portion of
    the Paper Currency Reserve to one fourth of the Total

  ²⁵³ These sections also contained provisions for the coinage of all
      gold brought to the Mints for the purpose by private persons.  The
      quantity brought to the Mints was quite trifling, and the gold
      coins, i.e. the mohurs struck, were not legal tender.  As they
      were to be superseded by sovereigns to be coined at the Mints upon
      their being subsequently thrown open to the free coinage of gold,
      it was thought undesirable that any more of these mohurs should be
      coined.  Consequently, along with silver, Mints were also closed
      to gold.

  ²⁵⁴ The repeal of these sections of the Act also called for the repeal
      of other sections depending upon them, such as Sections 14 and 15
      and alterations in Sections 21 and 28, to bring the whole Act in
      accord with the policy of a gold standard then inaugurated.

  ²⁵⁵ The Convention had come to an end and the retention of the clause
      was therefore unnecessary.

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

  ²⁵⁷ As gold was to be the future standard of India, this limitation
      was no longer necessary.

These repeals by the Act were supplemented by an executive Notification
No. 2663, announcing in conformity with the suggestion of the Herschell
Committee that the Government Treasuries would receive sovereigns and
half-sovereigns of current weight in payment of public dues at the rate
of 15 rupees and 7 rupees 8 annas respectively.

Since gold was not made general legal tender by any of the above
measures, it was feared that the Government might be embarrassed by the
accumulation in its Treasuries of a stock money which it could not pay
out in discharge of its obligations. To enable Government to rid the
Treasuries of gold, should it accumulate in them to an inconvenient
extent, there followed another Notification, No. 2664, requiring that
the Currency Department should issue, on the requisition of the
Controller-General, currency notes in exchange for gold coin or gold
bullion, at the rate of one Government rupee for 7·53344 grs. troy of
fine gold, or sovereigns or half-sovereigns at the rate of 15 rupees and
7 rupees 8 annas respectively.

To give effect to the second modification introduced by the Herschell
Committee, there was issued a third Notification, No. 2662, to the
effect that

    “The Governor-General in Council hereby announces that, until
    further orders, gold coins and gold bullion will be received by
    the Mint Masters of the Calcutta and Bombay Mints respectively,
    in exchange for Government rupees, at the rate of 7·53344 grs.
    troy of fine gold for one rupee on the following conditions:—

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

    (2) The quantity tendered at one time must not be less than 50
    tolas. [pg 149]

    (3) A charge of one-fourth per mille will be made on all gold
    coin or bullion which is melted or cut so as to render the same
    fit for receipt into the Mint.

    (4) The Mint Master, on receipt of gold coin or bullion into the
    Mint, shall grant to the proprietor a receipt which shall
    entitle him to a certificate from the Mint and Assay Masters for
    the amount of the rupees to be given in exchange for such coin
    or bullion payable at the General (Reserve) Treasury, Calcutta,
    or Bombay. Such certificates shall be payable at the General
    Treasury after such lapse of time from the issue thereof as the
    Comptroller-General may fix, from time to time.”

Before the policy adumbrated by these measures was carried to completion
there came up a move for the undoing of it.  After the failure of the
International Monetary Conference of 1892 the United States and France,
two countries most heavily burdened with an overvalued stock of silver,
opened negotiation with the British Government, asking the latter to
agree to certain conditions on the grant of which they were to open
their Mints to the free coinage of silver at the ratio of 15½ to 1.
These conditions included:²⁵⁸

  ²⁵⁸ Cf. Correspondence respecting the Proposals on Currency made by
      the Special Envoys from the United States, P.P.C. 8667 of 1897, p.

  (1) Opening of the Indian Mints, which had been closed. to the free
      coinage of silver, and an undertaking not to make gold legal
      tender in India.
  (2) Placing one-fifth of the bullion in the Issue Department of the
      Bank of England in silver.
  (3) (a) Raising the legal-tender limit of silver in England to £10.
      (b) Issuing the 20s. notes based on silver, which shall be legal
      (c) Retirement, gradual or otherwise, of the 10s. gold pieces, and
          substitution of paper based on silver.
  (4) Agreement to coin annually a certain quantity of silver.
  (5) Opening of English Mints to the coinage of rupees and for coinage
      of British dollars, which shall be full legal tender in Straits
      Settlements and other silver-standard [pg 150] Colonies, and
      tender in the United Kingdom to the limit of silver legal tender.
  (6) Colonial action, and coinage of silver in Egypt.
  (7) Something having the general scope of the Huskisson plan.

In these negotiations the Treasury again reverted to its old pose.  It
refused to discuss the conditions requiring a change in the British
currency, but argued that the opening of the Indian Mints, if brought
about, should be regarded as an adequate “contribution which could be
made by the British Empire towards any international agreement with the
object of securing” a stable monetary par of exchange between gold and
silver,²⁵⁹ and the representatives of the United States and France
seemed to have concurred in that view.  The negotiations, however,
failed, because of the firm stand taken by the Government of India. The
Government had suffered too long to be the scapegoat of the Treasury.
Nor did it see any reason why it should be called upon to pull the
chestnuts off the fire for the benefit of France and the United States.
In a letter commenting upon the proposals, the Government of India

  ²⁵⁹ Cf. letter dated October 16, 1897, to the Foreign Office, _ibid._,
      p. 15.

  ²⁶⁰ Despatch dated September 16, 1897, to the Secretary of State,
      _ibid._, p. 9.  Italics not in the original.

    “The changes which are involved in the arrangements proposed to
    Her Majesty’s Government are the following: France and the
    United States are to open their Mints to the free coinage of
    silver, continuing the free coinage of gold and the unlimited
    legal tender of coins of both metals, the ratio remaining
    unchanged in France and being altered to the French ratio of 15½
    to 1 in the United States. _India is to open her Mints to
    silver, to keep them closed to gold, and to undertake not to
    make gold legal tender.  France and the United States would thus
    be bimetallic; India would be monometallic (silver); whilst most
    of the other important countries of the world would be
    monometallic (gold)._


    “The first result of the suggested measures, if they even
    temporarily succeed in their object, would be an immense [pg
    151] disturbance of Indian trade and industry, by the sudden
    rise from about 16d. to about 23d. the rupee.  Such a rise is
    enough to kill our export trade, for the time at least … such an
    arrangement as is proposed is an infinitely more serious
    question for India than for either of the other two countries,
    for it seems clear that practically the whole risk of disaster
    from failure would fall on India alone.  What would happen in
    each of the three countries if the agreement broke down and came
    to an end?  France possesses a large stock of gold, and the
    United States are at present in much the same situation as
    France, though the stock of that metal is not so large.  It may
    be admitted that if no precautions were taken these gold
    reserves might disappear under the operation of the agreement,
    and in that case, if the experiment ultimately failed, the two
    countries concerned would suffer great loss.  But it is
    inconceivable that precautions would not be taken, at all
    events, so soon as the danger of the depletion of the gold
    reserves manifested itself, and, therefore, it is probable that
    no particular change would take place in the monetary system of
    France or the United States, the only effect of the agreement
    being a coinage of silver which would terminate with the
    termination of the agreement.  Thus the whole cost of the
    failure, if the experiment should fail, would be borne by India.
    Here the rupee would rise with great swiftness, it would keep
    steady for a time, and then, when the collapse came, it would
    fall headlong.  What course could we then adopt to prevent the
    fluctuation of the exchange value of our standard of value with
    the fluctuations in the price of silver?  We do not think that
    any remedy would be open to us, for if the Indian Mints were
    reopened to silver now, it would … be practically impossible for
    the Government of India ever to close them again, and even if
    they were closed it would only be after very large additions had
    been made to the amount of silver in circulation.”

But soon after it had refused to be diverted from the goal it had placed
before itself, namely the introduction of a gold standard, it was faced
with a crucial problem in its existing monetary arrangements.  The rupee
stock, the addition to which was stopped since 1893 by the closure of
the Mints, was large enough to meet the needs of the people [pg 152] for
some considerable time.  In the first few years after the closure, the
rupee currency was not only abundant but was also redundant.  Soon it
ceased to be redundant, and indeed by the end of 1898 it became scarce,
so much so that the discount rate in the Indian money market rose to 16
per cent., and continued at that pitch during the larger part of the
year.  Such was the outcry against what was called the policy of
“starving” the currency, that the Government was obliged to pass an Act
(No. II) of 1898 to permit currency notes being issued in India against
gold tendered in London to the Secretary of State.  The Act was doubly
easeful to the then starved condition of the Indian money market.  By
the measures adopted in 1893 gold was not general legal tender, so it
could not be used when the rupee currency fell short of the needs of the
time.  The new Act, it is true, did not make gold general tender, but
permitted it to be used in behalf of the general public²⁶¹ as a backing
for the issue of currency notes which were general legal tender.  The
Act, however, could have required that gold be laid down _in India_
before notes could be issued.  But as the remittance of gold to India
took some three or four weeks, it was feared²⁶² that the remedy might
“prove too tardy to be effective” unless the interval was done away with
by providing that gold with the Secretary of State in London was
lawfully tantamount to gold with the Paper Currency Department in India
for the purposes of note issue.

  ²⁶¹ By Notification No. 2664 of 1893, notes could be issued against
      gold only to the Comptroller-General.

  ²⁶² Cf. the speech of the Hon. Sir James Westland introducing the
      Bill, dated January 14, 1898.

In doing this the Act only testified to the urgency of the situation. A
sound currency system must be capable of expansion as well as
contraction.  The Government, by the closure of the Mints in 1893, had
contracted the currency to the point of danger.  In 1898 it was called
upon to undertake measures to provide for its expansion.  Now, there
were two methods open to bring about this desired result.  One was to
keep the Mints closed and to permit [pg 153] additions to currency
through the use of the gold by making the sovereign general legal
tender.  This was the plan proposed by the Government of India.  In
their despatch dated March 8, 1898,²⁶³ they argued:—

  ²⁶³ Cf. correspondence respecting the Proposals on Currency made by
      the Government of India, C. 8840 of 1898, p. 3.

    “Our present intention is rather to trust to the automatic
    operations of trade.  The amount of coin required for the needs
    of commerce increases every year: and as we permit no increase
    in the amount of silver coin, we may reasonably expect that the
    effect of the increasing demand for coin will raise exchange to
    a point at which gold will flow into the country, and remain in
    circulation. The position will thus become stronger and stronger
    as time goes on, but at the beginning, at least, gold will not
    be in circulation in the country to more than the extent
    necessary to secure stability of exchange.  The mass of the
    circulation will be a silver circulation, maintained at an
    appreciated value (just as it is at present), and we can be
    content to see gold coin remain little more than a margin,
    retained in circulation by the fact that its remittance out of
    the country could create a scarcity of coin which would have the
    effect of raising the exchange value of the silver rupee in such
    manner as to bring it back, or, at the very best, stop the
    outward current of remittance.  We shall have attained a gold
    standard under conditions not dissimilar from those prevailing
    in France, though not a gold circulation in the English sense;
    and this last may possibly not be necessary at all.”

Besides expanding the currency through the use of gold, there was also
another mode of effecting the same object.  It was urged that this
increase of currency might as well take place by Government coining
rupees whenever there arose a need for additional currency.  Though the
Mints were closed, the Government, by Notification No. 2662, had
undertaken to give rupees to anyone desiring to have them at the rate of
7·53344 grs. troy of fine gold per rupee.²⁶⁴ The Government had only to
give effect to that notification to augment the currency to any extent
desired.  Prominent [pg 154] in the advocacy of this plan of expanding
the currency were Mr. Probyn and Mr. A. M. Lindsay.  Both claimed that
the plan of the Government of India was defective because, although it
provided for the expansion of currency by making gold legal tender, it
made the rupee entirely inconvertible, and thereby likely to defeat the
policy of stabilizing its exchange value. On the other hand, they deemed
their plans to be superior to that of the Government of India because
they recognized the obligation to provide for the conversion of the
rupee currency on certain terms. Although the plans of both of them had
contemplated some kind of convertibility, yet they materially differed
in the particular mode in which conversion was to be effected.  Mr.
Probyn proposed²⁶⁵:—

  ²⁶⁴ _See supra_.

  ²⁶⁵ Cf. his _Indian Coinage and Currency_, Effingham Wilson, London,
      1897, _passim_, particularly p. 121.  Also the summary by Lindsay
      in the _Economic Journal_, Vol. VII, pp. 574–75.

  1. That legislative effect should be given to the notification of
     1893, under which the public can obtain rupees at the Indian Mints
     and Reserve Treasuries in exchange for gold, at the rate of 1s. 4d.
  2. That the gold so received should be part of the paper currency
     reserve, and should be held either in the form of full legal-tender
     gold coins of the United Kingdom, or gold bars representing not
     less than Rs. 1,000 each.
  3. That in order to give the rupee currency automatic power of
     contraction, Government should be empowered (though not required)
     so soon as the portion of the paper currency reserve has
     continuously for one year been less than that held in gold, to give
     gold in exchange for rupees or rupee notes at the rate of 1s. 4d.,
     if presented for the purpose in quantities of Rs. 10,000.
  4. That the existing Rs. 10,000 notes should be called in, and, in
     future, notes of Rs. 10,000, payable at the option of the holder
     either in gold or in silver rupees, should be issued in exchange
     for gold alone, gold in the form of bars being specially reserved
     to meet any such notes outstanding.

Mr. Lindsay, on the other hand, followed on lines quite [pg 155]
different from those adopted by Mr. Probyn.  He proposed²⁶⁶ that the
Government should offer to sell, without limit on the one hand, rupee
drafts on India at the exchange of 16 1⁄16d. the rupee, and on the other
hand, sterling drafts on London at the rate of exchange of 15¾d. the
rupee.  The funds necessary for the transactions were to be kept
separate from the ordinary Government balances in “Gold Standard”
Offices in London and in India.  The London Office was to be kept in
funds to meet the drafts drawn on it—

  (1) By borrowing in gold to the extent of five or ten million
  (2) by the receipts realized by the sale of drafts on India;
  (3) by the receipts realized by the sale of silver bullion in rupees
      melted down;²⁶⁷ and
  (4) when necessary, by further gold borrowing.

  ²⁶⁶ The earliest elaboration of his plan is to be found in his article
      in the _Calcutta Review_ for October, 1878, under the title, “A
      Gold Standard without a Gold Coinage in England and India,” and
      the latest, in his pamphlet called _Ricardo’s Exchange Remedy_,
      Effingham Wilson, 1892.  The plan was further developed in the
      newspaper _Pioneer_ of Allahabad (India), dated January 6, 1898,
      full extracts from which are given in C. 8840 of 1898, p. 13.

  ²⁶⁷ Mr. Lindsay contemplated that when the demand for gold drafts on
      London became so great as to indicate the necessity, the volume of
      the rupee currency should be contracted by melting down the rupees
      and selling the silver for gold to be deposited in the London
      “Gold Standard” Office.

The Indian Gold Standard Office was to be kept in funds to meet the
drafts drawn on them—

  (1) By the receipts realized by the sale of drafts on London;
  (2) by the coinage when necessary of new rupees from bullion,
      purchased by the London Gold Standard Office and sent to India.

The principal point of difference between the scheme of currency
advocated by the Government of India on the one hand and that put forth
by Messrs. Probyn and Lindsay consisted in the fact that the former
proposed to establish a gold standard _with_ a gold currency, while the
latter proposed to establish a gold standard _without_ a gold currency.
[pg 156]

To adjudicate upon the relative merits of a gold standard with a gold
currency and a gold standard without a gold currency, the Secretary of
State appointed another departmental Committee, under the chairmanship
of Sir Henry Fowler.  After taking a mass of important evidence, the
Committee observed²⁶⁸:—

  ²⁶⁸ Report of the Committee appointed to inquire into the Indian
      Currency, P.P.C. 9390 of 1899, p. 15.

    “50. On this scheme [of Mr. Probyn] we remark that, while
    bullion may be regarded as the international medium of exchange,
    there is no precedent for its permanent adoption for purposes of
    internal currency; nor does it accord with either European or
    Indian usage that the standard metal should not pass from hand
    to hand in the convenient form of current coin.  No real support
    for such a scheme is to be drawn from the purely temporary
    provisions of ‘Peel’s Act’ of 1819, whereby, for a limited
    period, the Bank of England, as a first step to the resumption
    of cash payments, was authorized to cash, in stamped gold bars,
    its notes, when presented in parcels of over £200.  Little or no
    demand for gold bullion appears to have been made on the Bank
    itself in 1821.

    “53. It is evident that the arguments which tell against the
    permanent adoption of Mr. Probyn’s bullion scheme, and in favour
    of a gold currency for India, tell more strongly against Mr.
    Lindsay’s ingenious scheme for what has been termed ‘an exchange
    standard.’ We have been impressed by the evidence of Lord
    Rothschild, Sir John Lubbock, Sir Samuel Montagu and others,
    that any system without a visible gold currency would be looked
    upon with distrust.  In face of this expression of opinion, it
    is difficult to avoid the conclusion that the adoption of Mr.
    Lindsay’s scheme would check that flow of capital to India upon
    which her economic future so greatly depends.  We are not
    prepared to recommend Mr. Lindsay’s scheme, or the analogous
    schemes proposed by the late Mr. Raphael and by Major Darwin,
    for adoption as a permanent arrangement; and existing
    circumstances do not suggest the necessity for adopting any of
    these schemes as a provisional measure for fixing the sterling

The Committee preferred the scheme of the Government [pg 157] of India,
and outlined a course of action to be adopted for placing it on a
permanent footing, which may be stated in the Committee’s own language
as follows:—

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

These recommendations were accepted by the Secretary of State,²⁶⁹ who
decided that

  ²⁶⁹ _See_ despatch dated July 25, 1899, No. 140 (Financial), C. 9421
      of 1899.

    “the policy of keeping the Indian Mints closed to the
    unrestricted coinage of silver shall be maintained,”

and called upon the Government of India as soon as it deemed expedient

    “take the necessary steps for making the British sovereign a
    legal tender and a current coin, and make preparations for the
    coinage of gold under the conditions suggested by the

The first recommendation of the Committee was given effect to by the
Government passing an Act commonly called the Indian Coinage and Paper
Currency Act (XXII) of 1899.  That Act made the sovereign and
half-sovereign legal tender throughout India at the rate of Rs. 15 and
Rs. 7½ respectively, and authorized the issue of currency notes in
exchange for them.

Along with placing the Indian currency on a gold basis, the Government
was anxious to open a Mint for the free coinage of gold.  But as the
coin to be issued from the Mint was the English “sovereign” the
Government of India was [pg 158] entirely in the hands of the British
Treasury.  According to the provisions of the English Coinage Act of
1870, it was necessary to issue a Royal Proclamation in order to
constitute an Indian Mint a branch of the Royal Mint, a matter entirely
dependent on the consent of the Treasury.  It was the intention of the
Government of India to announce the Proclamation simultaneously with the
passing of the Act making the sovereign legal tender.  Indeed it held
back the legislation pending the arrival of the Proclamation,²⁷⁰ and
proceeded with it reluctantly when it was advised that there was likely
to be “some further delay over the Proclamation owing to legal and
technical questions.”  The objections raised by the Treasury, though
merely technical, at first seemed to be quite insuperable,²⁷¹ and had it
not been for the conciliatory attitude of the India Office the
negotiations would have broken down. But the Treasury was not willing to
give the project a chance.  Just when a compromise was arrived at on the
technical side of the question, the Treasury turned round and raised the
question whether a Mint for gold coinage was at all necessary in India.
The Treasury argued:—

  ²⁷⁰ Cf. the speech of the Hon. Mr. Dawkins on the Indian Coinage and
      Paper Currency Bill, dated September 8, 1899.

  ²⁷¹ Cf. H. of C. Return 495 of 1913, p. 14.

    “While expressing their satisfaction that an agreement has now
    been reached, my Lords think it desirable, before practical
    steps are taken to carry out the scheme, to invite Lord George
    Hamilton to review the arguments originally advanced in favour
    of the coinage of the sovereign in India, and to consider
    whether the course of events, in the two years which have
    elapsed since the proposal was made, has not tended to diminish
    their force, and to render such advantages as are likely to
    accrue from the establishment of a branch Mint wholly
    incommensurate with the expense to be incurred. … The gold
    standard is now firmly established, and the public requires no
    proof of the intention of the Indian Government not to go back
    on their policy, which is beyond controversy. Sovereigns are
    readily attracted to India when required under existing
    conditions. … On the other hand, the estimates of the Government
    [pg 159] of India of gold available for coinage in that country
    are less than was anticipated, nor is any considerable increase
    expected, at any rate for some time. … The staff would have to
    be maintained in idleness for a large part of the year, at a
    considerable cost to the Indian Exchequer. … It is, of course,
    for Lord George Hamilton to decide whether, in spite of these
    objections, the scheme is to be proceeded with.”

The India Office replied:—

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

The Treasury sent a trenchant rejoinder, in which it remarked:—

    “Indian currency needs are provided from other sources, and
    there is no real demand for the local coinage of sovereigns. …
    My Lords cannot believe that the position of the Gold Standard
    in India will be strengthened, or public confidence in the
    intention of the Government confirmed, by providing machines for
    obtaining gold coins. … The large measure of confidence already
    established is sufficiently indicated by the course of exchange
    since the Committee’s Report and still more by the readiness
    with which gold has been shipped to India. …”

That the Treasury acted “in a spirit of scarcely veiled hostility to the
whole proposal” is unmistakable.  But it cannot be denied that the
Treasury used arguments that were perfectly sound.  It was
inconsequential to the working of the gold standard whence the coined
sovereigns came.  So long as a Mint was open to the free coinage of
sovereigns the Indian gold standard would have been complete
irrespective of the location of the Mint.  Indeed, to have obtained
coined sovereigns from London would have not only sufficed, but would
have been economical.

The anxiety displayed by the Government was not, [pg 160] however, on
account of the want of a gold Mint.  Indeed, so slight was its faith in
the necessity of it that in view of the opposition of the Treasury it
gracefully consented to drop the proposal.  What troubled it most was
the peculiar position of the rupee in the new system of currency.
Throughout the despatch of the Government of India there ran a strain of
regret that it could not see its way to demonetize the rupee and to
assimilate the Indian currency to that prevailing in England.  A general
perusal of the despatch leaves the impression that though it recommended
the assimilation of the Indian currency to that of France and the United
States, it did so not because it thought that their systems furnished
the best model, but because it believed that a better one was not within
reach.  Having regard to the accepted view of the French and the United
States currency systems, it was natural that the Government of India did
not feel very jubilant about its own. According to that view of the
currency systems of these two countries, the position of the five-franc
piece and the silver dollar has always been presented as being very
anomalous.  Even so great an authority as Prof. Pierson was unable to
assign them a place intelligible in the orthodox scheme of classifying
different forms of money.²⁷² In a well-ordered system of gold standard
of the orthodox type, gold is the only metal freely coined and the only
one metal having full legal-tender power; silver, though coined, is
coined only on Government account in limited amounts, and being of less
intrinsic value than its nominal value, is a limited legal tender.  The
former type of coins are called standard coins and the latter subsidiary
coins, and the two together make up the ideal of a monometallic gold
standard such as has been established in England since 1816.  In a
scheme of things like this writers have found it difficult to fit in the
dollar or the five-franc piece.  Their peculiarity consists in the fact
that although their intrinsic value is less than their nominal value
they have been inconvertible and are also unlimited legal tender.  It is
owing to this anomaly that the title of gold standard has been refused
to the American [pg 161] and French currency systems. Few can have
confidence in what is called the limping standard,²⁷³ in which it is
said that somehow “the silver coin, though intrinsically of less value
than the gold, hobbles along, maintained at equality by being coupled
with its stronger associate.”²⁷⁴

  ²⁷² Cf. _Principles of Economics_, Vol. I, p. 569.

  ²⁷³ It was owing to this want of faith that Germany took away, by the
      law of October 1, 1907, the full legal-tender power from her
      silver thalers.  In the United States the silver dollar is not
      legal tender if it is specifically excluded by the terms of a
      contract.  Cf. A. C. Whitaker, _Foreign Exchange_, Appleton, New
      York, 1920, pp. 8 and 477.

  ²⁷⁴ Cf. F. W. Taussig, _Principles_, 2nd ed., 1918, p. 280.

But was the French system of currency so very different from the English
as to create doubt as to its stability? Whatever may have been the
differences between the two systems a closer analysis shows that they
are fundamentally identical.  If we read together the French bimetallic
law of 1803 and the Mint Suspension Decree of 1878 on the one hand, and
on the other the provisions of the English Gold Standard Act of 1816,
together with the Bank Charter Act of 1844, and compare, do we find any
substantial difference between the French and English systems of
currency?  Prior to 1878 there was an unlimited issue in France of both
gold and silver coins of unlimited legal tender.  Prior to 1844 there
was an unlimited issue in England of both gold sovereigns and Bank of
England notes, both of unlimited legal tender. In 1844 England put a
limit on the issue of bank notes, but did not deprive the issues of
their legal-tender power.²⁷⁵ In 1878 France did precisely the same thing
as England did with her notes in 1844. By the decree of mint suspension
France virtually, though indirectly, put a limit on the silver
five-franc coins without depriving them of their legal-tender power.  If
we regard the French five-franc coins as notes printed on silver, it is
difficult to see what constitutes the difference between the two systems
which leads economists to call one a gold standard and the other a
limping standard.  If the silver franc limps or hobbles along, so does
the bank note, and the former can hobble better than the latter because
of the two it has a [pg 162] comparatively greater intrinsic value.  If,
however, it is argued that the bank note is convertible into gold, while
the five-franc piece is not, the reply is that the comparison must be
made with the fiduciary notes of the Bank of England.  Those notes are
practically inconvertible.  For, at any given time, with the gold the
Bank of England has in its Issue Department the fiduciary portion of the
notes remains uncovered, and may, therefore, be regarded as
inconvertible as the delimited issue of the five francs.  But even if it
is insisted that the fiduciary notes cannot be regarded as inconvertible
as the five-franc pieces, it must be pointed out that the similarity of
the two is not to be determined by considerations of convertibility or
inconvertibility.  The attribute of convertibility with which the
fiduciary notes of the Bank of England are endowed is a superfluous
attribute which in no way improves their position as compared with the
five-franc pieces.  What makes them identical is the fact that they are
both subjected to a fixed limit of issue.  Thus viewed, the French
limping standard and the English gold standard are nothing but two
different illustrations of the “currency principle” in so far as a fixed
limit of issue on a fiduciary currency is a cardinal feature of that

  ²⁷⁵ The Bank of England notes were made legal tender by Lord
      Althorpe’s Act of 1833.

Not only is the French monetary system identical with the English in its
organization, but the design in both cases was identical.  In the
controversy which raged over the Bank Charter Act of 1844, the motives
of Lord Overstone were not quite clearly grasped by his opponents of the
banking school of thought.  Lord Overstone was not very much interested
in providing a method for preventing the depreciation of the note issue,
as his opponents thought him to be.  His supreme concern was to prevent
gold disappearing from circulation.  Starting from a chain of reasoning
the solidity of which can hardly be said to be open to question, he came
to the conclusion that gold would be driven out of circulation by an
increase in the issue of notes.  To keep gold in circulation the only
remedy was to put a limit on the issue of notes, and this was the
purpose of the Bank Charter Act of 1844.  Now, precisely the same was
the object of France in suspending the coinage of silver.  As [pg 163]
has already been pointed out, owing to the fall in the value of silver
after 1873, gold was being rapidly driven out of circulation by the
substitution of this depreciated metal.  To prevent this result from
assuming a vast proportion, the French adopted the same remedy as that
of Lord Overstone, and through their suspension of silver coinage
protected their gold from going out of circulation, which would have
certainly been the case if no limit had been put on silver issues.

It would not, therefore, be amiss to argue that the plan contemplated by
the Government of India, and approved of by the Fowler Committee in
being similar to the French system, was based on the same principles as
governed the English currency system, which, according to Jevons, were a
“monument of sound financial legislation.” [pg 164]



For once it seemed that the problem of a depreciating rupee was
satisfactorily solved.  The anxieties and difficulties that extended
over a long period of a quarter of a century could not but have been
fully compensated by the adoption of a remedy like the one described in
the last chapter.  But by an unkind turn of events, the system
originally contemplated failed to come into being.  In its place there
grew up a system of currency in India which was in every way the very
reverse of it.  Some thirteen years after legislative sanction had been
given to the recommendations of the Fowler Committee, the Chamberlain
Commission on Indian Finance and Currency reported that

    “in spite of the fact the Government adopted and intended to
    carry out the recommendations of the Committee of 1898, the
    Indian currency system to-day differs considerably from that
    contemplated by the Committee, whilst the mechanism tor
    maintaining the exchange has some important features in common
    with the suggestions made to the Committee by Mr. A. M.

  ²⁷⁶ Report, P.P.Cd. 7068 of 1913, p. 13.

It will be recalled²⁷⁷ that in Mr. Lindsay’s scheme Indian currency was
to be entirely a rupee currency; the Government was to give rupees in
every case in return for gold, and gold for rupees only in case of
foreign remittances.  The scheme was to be worked through the
instrumentality of two offices, one located in London and the other
located [pg 165] in India, the former to sell drafts on the latter when
rupees were wanted and the latter to sell drafts on the former when gold
was wanted.  Surprisingly similar is the system prevailing in India
to-day.  Corresponding to Mr. Lindsay’s proposals, which, be it noted,
were rejected in 1898, the Government of India has built up two
reserves, one of gold and the other of rupees, out of the cash balances,
the paper currency, and the gold-standard reserve. Each of these is, by
the nature of the currency system, composite. The cash balances, which
are fed from revenue receipts, gather in their net rupees as well as
sovereigns, both being legal tender. Notes being issuable against both,
the paper-currency reserve always contains sovereigns and rupees.  Up to
August, 1915, the gold-standard reserve was also held partly in gold and
partly in rupees.²⁷⁸ By a system of sorting, technically called
“transfers,” the Government secures the command over rupees and
sovereigns necessary for discharging the obligations it has
undertaken.²⁷⁹ The location of these funds is also very much as designed
by Mr. Lindsay.  The cash balances, being the till-money of the
Government, are necessarily distributed between the Government of India
in India and the Secretary of State in London, the portion held by the
latter being entirely in gold and that held by the former being in
silver.  The gold-standard reserve, like the cash balances, is not a
statutory reserve. Consequently its location is perfectly within the
competence of the Executive.  That being so, it has been so arranged.
that the gold portion of the fund shall be held by the Secretary of
State in London, and the rupee portion, so long as it was maintained, by
the Government of India in India.  The only reserve which did not easily
lend itself to currency manipulation was the paper-currency reserve, for
the reason that its disposition and location were governed by law.  In
that behalf, legal power has been taken to alter the location of the
gold part of that reserve by making permanent the [pg 166] provision of
the temporary Act II of 1898, which authorized the issue of notes in
India against gold tendered to the Secretary of State in London. Thus
the Secretary of State and the Government of India, under the new system
of currency, hold two reserves, one of gold, mainly in the possession of
the former and located in London, and the other of rupees, entirely in
the possession of the latter and held in India. But the similarity of
the existing system to that of Mr. Lindsay is not confined to the
maintenance of these funds and their location.  It extends even to the
modes of operating these two funds.  For, as suggested by Mr. Lindsay,
when rupees are wanted in India the Secretary of State sells what are
called “Council Bills,” encashable into rupees at the Government
Treasuries in India, thereby providing the rupee currency in India.
When gold is wanted the Government of India sells what are called
“Reverse Councils” on the home Treasury in London, which are encashed by
the Secretary of State, thereby providing gold for foreign remittances.
The result of the sale of “Council Bills” and of the “Reverse Councils”
on the two funds has been to transform the Indian currency from being a
gold standard with a gold currency, as desired by the Fowler Committee,
into what is called a gold standard without a gold currency, as wished
for by Mr. Lindsay.

  ²⁷⁷ _See_ Chap. IV, _supra_.

  ²⁷⁸ The rupee branch has been discontinued since that date, on the
      recommendation of the Chamberlain Commission.

  ²⁷⁹ Besides, if the Government falls short of rupees, it has the legal
      power to convert the gold in the paper-currency reserve into
      rupees to replenish the stock.

This system which has grown up in place of the system originally
contemplated by the Government of India is called the gold-exchange
standard.  Whatever that designation may mean it was not the plan
originally contemplated by the Government of India in 1898.  How the
departure came about we shall deal with in another place.  Here it is
enough to state—one may also say necessary, for many writers seem to
have fallen into an error on this point—_that the Government did not
start to establish a gold-exchange standard_.  Rather it was
contemplating the establishing of a true gold standard, which, however
inadequately understood by the men who framed it, was in essential
agreement with the principles governing the English Bank Charter Act of

What are we to say about the new system?  The Chamberlain [pg 167]
Commission, while reporting that there was a departure from the ideal of
a gold standard with a gold currency, observed²⁸⁰:—

  ²⁸⁰ Report, par. 46.

    “But to state that there has been this departure is by no means
    to condemn the action taken, or the system actually in force...”

Now why not?  Is not the system the same as that proposed by the
Government in India in 1878 and condemned by the Committee of 1879? It
is true the arguments urged against that plan by the Committee of 1879
were not of much weight.²⁸¹ None the less the plan was essentially
unsound.  The material point in the introduction of a gold standard must
be said to be one of limitation on the volume of rupees, and it is from
this point of view that we must judge the plan.  But there was nothing
in the plan of 1878 that could be said to have been calculated to bring
that about.  Far from putting any limitation on the volume of rupees,
the plan had deliberately left the Mints open to the free coinage of
silver.  A matter of some interest in the plan was the projection of a
system of seignorage so arranged so to make the bullion value of the
rupee equal to the gold value given to it.  But as a means of limiting
the coinage of rupees it was futile.  The mere levy of a seignorage
cannot be regarded as sufficient in all circumstances to effect a
limitation of coinage.  Everything would have depended upon how closely
the seignorage corresponded with the difference between the mint and
market price of silver in terms of gold.  If the seignorage fell short
of the difference it would have given a direct impetus to increased
coinage of rupees until their redundancy had driven them to a discount.
In this respect the plan was a reproduction in a worse form of the
English Gold Standard Act of 1816.  Like the Government of India’s plan
of 1878, that Act, while purporting to introduce a gold standard, had
authorized the opening of the Mint, which was closed, to the free
coinage of silver with a seignorage charge.  It is not generally
recognized how stupid were the provisions of that Act,²⁸² the ideal [pg
168] of all orthodox gold monometallists, in so far as they contemplated
the free coinage of silver.  Fortunately for England the Royal
Proclamation, compelling the Mint Master to coin all silver brought to
the Mint, was never issued.  Otherwise the working of the gold standard
would have been considerably jeopardized.²⁸³ The Act of 1816 had at
least taken one precaution, and that was a limit on the legal-tender
power of silver.  In the scheme of the Government of India, not only
free coinage of silver was permitted, but silver was conceded the right
of full legal tender.  In so far, therefore, as the plan did not provide
for controlling the volume of rupees it was subversive of the gold
standard it had in view.

  ²⁸¹ _See supra_, Chap. IV.

  ²⁸² Cf., however, R. G. Hawtrey, _Currency and Credit_, 1919, pp.

  ²⁸³ Some witnesses before the Lords Committee on Cash Payments,
      appointed in 1819, raised doubts whether, having regard to the
      silver clause of the Act of 1816, resumption of cash payments was
      worth while as a means of establishing a gold standard in England.
      Cf. particularly the evidence of Mr. Fletcher and also Mr. Mushet
      before the Committee.

The only difference between this plan of 1878 and the system now in
operation in India is that under the former the Mints were open to the
public, while under the latter they are open to the Government alone. In
other words, in the one case rupees were coined on behalf of the public,
and in the other they are being coined on behalf of the Government.  It
is not to be supposed that the plan of closing the Mints to the public
was not thought of by the Government in 1878.  On the other hand, the
Government of India had then considered the feasibility of taking over
into its hands the coinage of rupees, and had rejected it on some very
excellent grounds.  In their despatch outlining the scheme the
Government of the day observed:—

    “48. The first point to be guarded in attempting to carry out
    the proposed change, is to provide for complete freedom for any
    expansion of the currency which the trade requirements of the
    country demand.  This, we think, could not be properly secured
    if the Mints were wholly closed for the coining of silver for
    the public.  If this measure were adopted, the responsibility
    for supplying the silver demand would be thrown on the
    Government, and [pg 169] in the present position of the market
    for gold and silver bullion in India it would not be possible to
    accept such a duty.

    “49. What might at first sight appear the simplest, and
    therefore the best way of allowing for the expansion of the
    Indian silver currency with a gold standard, would be for the
    Government to undertake to give silver coin in exchange for gold
    coin to all comers, at the rates fixed by the new system, and to
    open the Mints for the coinage of gold, while they were closed
    for silver.  But in the absence of any supply of silver in India
    from which to obtain the necessary material for coinage, such an
    obligation could not be accepted, without involving the
    Government in complicated transactions in the purchase and
    storing of bullion which it would be very inexpedient to enter

With these reasons, interesting in so far as they were prophetic of the
scandals connected with the recent silver purchases by the India
Office,²⁸⁴ we are not directly concerned.  What is of importance is
whether this difference in the mode of issue makes any vital difference
to the question of an effective limit on the volume of rupees.  Now,
there is a great deal of confused thinking as to the precise virtue of
the closing of the Mints to the private coinage of silver.  It was
generally believed, the closing of the Mints having given a monopoly to
the Government in the matter of issuing rupees, that this monopoly would
somehow sustain the value of the rupees in terms of gold by preventing
their over-issue.  The closing of the Mints, it must be admitted, has
given the Government the position of a monopolist.  But how a monopoly
prevents an over-issue is not easy to grasp.  The closing of the Mints
to the free coinage of silver is the same as depriving banks of the
liberty of issuing notes and giving it exclusively to a central bank.
But nobody has ever argued that because a central bank has a monopoly of
issue it cannot therefore over-issue.  Similarly, because the Government
of India is a monopolist it would be absurd to argue that it cannot
therefore over-issue.  Indeed, a monopolist can issue as [pg 170] much
as private people put together, if not more.  Again, from the standpoint
of influence of profits on coinage the present plan is much inferior to
that of 1878.  It is true in both cases profits depend upon the volume
of coinage.  But in the former the amount of profit was no incentive to
coinage, either to the Government, because it had no power to coin, or
to the people who determined the volume of coinage, because the
regulation of seignorage practically controlled it by making it
unprofitable to bring additional bullion to the Mint.  In the present
case, the coinage being entirely in the hands of the Government, a
hankering after profits, generated by the silly notion of the necessity
of a “backing” to the currency, might create an impulse to undertake
additional coinage, especially if the price of silver fell very low and
produced a wide margin between the Mint and the market price of the

  ²⁸⁴ _See_ P.P. 400 of 1912.

  ²⁸⁵ From this point of view the proposition of Prof. Keynes, that the
      gold value of the rupee may be fixed irrespective of the cost
      price of silver, must, having regard to the existing system of
      currency, be looked upon as a somewhat unsafe position.  Cf. his
      evidence before the Indian Currency Committee of 1919, Q. 2,688.

If it is argued, as it well may be, that the will of the Government of
India as a monopolist, i.e. its desire to see that its currency is not
depreciated, may bring about a limitation on the issue of rupees which
could not have been possible had the Mints remained open to the public
in general, the reply is that this will to limit could be effective only
if the Government had the power to refuse to issue.  Central banks limit
their currencies so far as will is concerned, because they are not
obligated to issue to anyone and every one.  But the position of the
Government of India is lamentably weak in this respect.  It is bound to
issue currency when asked for.  It is true that every issue does not
involve a net addition to the existing volume of currency; for a portion
of the new issue is a re-issue of what is returned from circulation.
None the less, it cannot be said that the Government by reason of its
monopoly has put an effective limit on the volume of rupee currency.  On
the other hand, having no escape from the liability to issue currency,
the exercise of this cherished privilege has recoiled on the [pg 171]
Government, so much so that this monopoly of issue, instead of
strengthening the position of the Government, has weakened it
considerably.²⁸⁶ The view of the Chamberlain Commission²⁸⁷

  ²⁸⁶ The danger involved in this indefinite liability to issue rupee
      currency was recognized by the Smith Currency Committee of 1919,
      which recommended that this obligation should be withdrawn.  _See_
      Report, par. 68.  Of course its motive was different.

  ²⁸⁷ Report, par. 182.

    “that while the Government are very large dealers in the
    exchange market, they are not monopolists (!) and it seems
    doubtful if they could successfully stand out for any such
    [fixed minimum rate] at all times of the year,”

is therefore interesting as a confession that the closing of the Mints
has not had the virtue of so limiting the coinage of rupees as to enable
the Government to dictate at all times the price of the rupee, which
none but it alone can manufacture.

Thus the present standard is different from the standard proposed in
1878 only in name.  If this one is characterized by the adoption of the
rate of exchange as an index for regulating the volume of currency, the
same must be said of the former.  But, as Mr. Hawtrey remarks,²⁸⁸
whatever means are adopted for the manipulation of the currency,

    “the value of the rupee will be determined by the quantity in

  ²⁸⁸ _Currency and Credit_, 1919, p. 341.

In other words, what must be said to be essential for the safety of a
gold standard is a provision against over-issue of rupees.  But, as we
saw, neither the plan of 1878 nor the present one can be said to be free
from that danger.  Consequently we must conclude that, being essentially
alike, the arguments that are valid against the former are also valid
against the latter.

But the Chamberlain Commission will not allow that the exchange standard
is a resuscitation of a condemned plan.  On the other hand, it has
sought to inspire confidence in that standard by holding out²⁸⁹ [pg 172]

  ²⁸⁹ Report, par. 46.

    “that the present Indian system has close affinities with other
    currency systems in some of the great European countries and
    elsewhere. …”

To get an idea as to what these affinities are, or rather were, we must
look into Chapter II of Mr. Keynes’s interesting treatise on _Indian
Currency and Finance_.  In that treatise of his, Mr. Keynes has
attempted to show that there is a fundamental likeness between the
operations of the Indian currency system and the operations as they used
to be of the central banks of some of the important countries of Europe.
He found that it used to be the practice of these banks to hold foreign
bills of exchange for the purpose of making remittances to foreign
countries.  Between the selling of such foreign bills and the selling of
reverse councils by the Government of India he observed a close
fundamental likeness, inasmuch as both involved

    “the use of a local currency mainly not of gold, some degree of
    unwillingness to supply gold locally in exchange for the local
    currency, but a high degree of willingness to sell foreign
    exchange for payment in local currency at a certain maximum

  ²⁹⁰ Keynes, _Indian Currency and Finance_, p. 29.

But, as Prof. Kemmerer points out,²⁹¹ it is difficult to see what
likeness there is between the Government of India selling reverse
councils and the European banks holding foreign bills.  Far from being
alike, the two practices must be regarded as the opposite of each other.
In selling reverse councils

  ²⁹¹ Cf. his review of Keynes in the _Quarterly Journal of Economics_,
      February, 1914, p. 374.

    “the Government sells drafts against its foreign gold credit
    (i.e. its gold reserve), when money at home is relatively
    redundant, as evidenced by exchange having reached the gold
    export point. Thereby it relieves the redundancy through the
    withdrawing from circulation and locking up the local money
    received in payment for the drafts.  Under the practice of
    holding foreign bills to protect the money market, the central
    bank sells its foreign bills, when money at home is relatively
    scarce, as means of securing gold for [pg 173] importation or
    preventing its exportation.  In the former case, the sale of
    drafts takes the place of an exportation of gold, and the
    resulting withdrawal of local money from circulation is in
    essentials an exportation; in the latter case the sale of the
    drafts abroad is part of a process for securing gold for
    importation, or for preventing its exportation.”

The Indian currency system therefore bears no analogy to the European
currency systems, as Mr. Keynes would have us believe.  But if a
parallel is needed, then the true parallel to the Indian system of
currency is that system which prevailed in England during the Bank
Suspension period (1797–1821).  The fundamental likeness between the two
systems becomes quite unmistakable if we keep aside for the moment the
remittance operations of the Government of India and the Secretary of
State, which becloud the true features of the Indian currency system.
If we tear this veil and take a closer view, the following appear to be
the prominent features of the Indian system:—

  (1) The gold sovereign is full legal tender.
  (2) The silver rupee is also full legal tender.
  (3) The Government undertakes to give rupees for sovereigns, but does
      not undertake to give sovereigns for rupees, i.e. the rupee is an
      inconvertible currency unlimited in issue.

Turning to the English system of currency during the period of the Bank
Suspension, we find:—

  (1) The gold sovereign was full legal tender.
  (2) The paper notes of the Bank of England circulated as money of
      general acceptability by common custom if not by law.²⁹²
  (3) The Bank of England undertook to give notes for gold or mercantile
      bills or any other kind of good equivalent, but did not give gold
      for notes, i.e. the notes formed an inconvertible currency
      unlimited in issue.

  ²⁹² Cf. Andréadès, _History of the Bank of England_, p. 198.

Only in one respect can the analogy be said to be imperfect. The Indian
Government has undertaken—not, be it noted, as a statutory obligation,
but merely as a matter subject to the [pg 174] will of the executive, to
convert the rupee into gold at a fixed rate for foreign remittances if
the exchange falls below par.  This, it must be allowed, the Bank of
England did not do during the suspension period. Everything, therefore,
turns upon the question whether this much convertibility is a sufficient
distinction to mark off the Indian currency from the English currency of
the suspension period into a separate category and invalidate the
analogy herein said to exist between the two systems.  To be able to
decide one way or the other we must firmly grasp what is the true import
of convertibility. Prejudice against an inconvertible currency is so
strong that people are easily satisfied with a system which provides
some kind of convertibility, however small.  But to assume this attitude
is to trifle with a very crucial question.  We must keep clear in our
mind what it is that essentially marks off a convertible from an
inconvertible currency.  The distinction commonly drawn, that the one is
an automatic and the other is a managed currency, must be discarded as a
gross error.  For, if by a managed currency we mean a currency the issue
of which depends upon the discretion of the issuer, then a convertible
currency is as much a managed currency as an inconvertible currency is.
The only point of contrast lies in the fact that in the management of a
convertible currency the discretion as to issue is regulated, while in
an inconvertible currency it is unregulated.  But even if regulated the
issue remains discretionary and to that extent a convertible currency is
not so safe as to mark it off from an inconvertible currency.  The
enlargement of its issue being discretionary, and the effect of such
issues being to drive specie out of circulation, a convertible currency
may easily become inconvertible.  The difference between a convertible
and an inconvertible currency is therefore ultimately a distinction
between a prudent and an imprudent management of the right to issue
currency. In other words, convertibility is a brake on the power of
issue. Bearing this in mind, and also the fact that a convertible
currency by reason of mismanagement has the tendency to become
inconvertible, it is possible for us to imagine how severe must be the
obligations as to [pg 175] convertibility in order to prevent prudent
management of currency from degenerating into an imprudent management
resulting in over-issue.  If, therefore, it is true that in countries
having a convertible currency the affairs were so prudently managed that
when specie left the country the paper money not only did not increase
to take its place, but actually diminished, and that usually by a
greater absolute amount than the gold currency, it was because the
obligations as to convertibility were those of “effective absolute
immediate convertibility.”²⁹³ We can now appreciate why Prof. Sumner
said²⁹⁴ that

  ²⁹³ “No single word can convey the full meaning,” says Prof.
      Nicholson, _War Finance_, 2nd ed., 1918, p. 36.

  ²⁹⁴ _A History of American Currency_, New York. 1874, p. 116.

    “convertibility in the currency is like conscientiousness in a
    man: it has many grades and is valuable in proportion as it is
    strict and pure.”

That being so, it would be foolish to assume that we are immune from the
consequences of an inconvertible currency until we know what is the
grade of the convertibility that is provided.  Now, what is the
character of the convertibility of the rupee in India?  It is a
deferred, delegalized, delocalized, and therefore a devitalized kind of
convertibility.  Indeed, really speaking it is not a convertibility, but
rather it is a moratorium which is a negation of convertibility, for
what does the provision for convertibility for foreign remittances mean
in practice?  It simply means that until a fall of exchange takes place
there is a moratorium or inconvertibility in respect of the rupee.  Not
only is there a moratorium as long as exchange does not fall, but there
is no guarantee that the moratorium will be lifted when a fall does
occur.  It may not be lifted, for it is a matter of conscience and not
of law.²⁹⁵ Is such a grade of convertibility, if [pg 176] one has a
predilection for that term, very far removed from the inconvertibility
of the bank notes during the suspension period?  Let those who will say
so.  For a person not endowed with high and subtle imagination the
distinction between such a convertibility and absolute inconvertibility
is too thin to persuade him that the two systems are radically
different; indeed, when we come to analyse the problem of prices in
India and outside India we shall find another piece of evidence to show
that they are not different, and that the analogy between the two is
perfect enough for all practical purposes.  It may, however, be said
that an inconvertible currency may be so well managed as not to give
rise to a premium on gold, so that there may be little to choose between
it and a perfectly convertible currency.  But whether an inconvertible
currency will be so well managed is a question of practical working.
Again, whether the absence of premium on gold suffices to place an
inconvertible currency on par with a convertible currency, so far as the
price problem is concerned, is also a matter depending on circumstances.
All these questions will be considered in their proper places.²⁹⁶ [pg

  ²⁹⁵ The Finance Member of the Viceroy’s Council, in his Financial
      Statement for 1908–09 (p. 23, italics not in the original),
      observed:— “Had we complied with the demand for issues [of gold]
      without limit, the whole available supply might have been drawn
      off in a few weeks. … _For these reasons we decided to stand by
      our legal rights.  We are not bound to give sovereigns in exchange
      for rupees except at our own convenience_.  The currency offices
      were accordingly instructed _not_ to issue gold in larger
      quantities than £10,000 to any individual on any one day.”  These
      words were used to explain the attitude of the Government
      regarding its sense of obligation as to convertibility of the
      rupee in the exchange crisis of 1907!  The degree of
      convertibility being a matter of administrative discretion it is
      difficult to define the extent to which it is given effect to in
      practice. Official evidence is inclined to impress upon the public
      that practically the rupee is convertible.  If that is so, why not
      make it legally convertible.  For, if convertibility is complete
      in practice a legal convertibility cannot impose upon the
      Government greater obligations than what the official evidence
      suggests the Government to be actually assuming.  It is said that
      Government does not do so because it is afraid that exchange
      speculators will take advantage of it.  By why should they not?
      Are they not holders of rupees? It does not, however, appear to
      have been adequately realized that this defence implies that the
      currency is issued so much beyond the point of “saturation” that
      its value is always on the margin of being affected by an element
      of speculation.

  ²⁹⁶ For reasons giving rise to a premium on gold in terms of the
      rupee, _see_ Chap. VI.  For reasons explaining how there can be a
      general depreciation of the rupee without there being a specific
      depreciation of it in terms of gold, _see_ end of Chap. VI and
      beginning of Chap. VII.

What we are considering at this stage are the inherent potentialities of
an inconvertible currency.  Suffice it to say here that the name Gold
Exchange Standard cannot conceal the true nature of the Indian Monetary
Standard.  Its essence consists in the fact that although gold is
unlimited legal tender there is alongside an unlimited issue of another
form of fiduciary currency well-nigh inconvertible, and also possessing
the quality of unlimited legal tender.

It needs no acute power of penetration to see that, so interpreted, the
existing currency system in India is the opposite of the system outlined
by the Government in 1898 and passed by the Fowler Committee. The two
are opposites of each other for the same reason for which the Bank
Charter Act was the opposite of the Bank Suspension Act in England.
Under both the Acts the currency in England was a mixed currency, partly
gold and partly paper.  The difference was that by the Bank Suspension
Act the issue of gold became limited and that of paper unlimited, while
under the Bank Charter Act the process was reversed, so that the issue
of paper became limited and that of gold unlimited.  In the same manner,
under the original scheme of the Government of India, the issue of
rupees was to be limited and that of gold unlimited.  Under the existing
system the issue of gold has become limited while that of rupees has
become unlimited.

Was this an improvement on the plan originally contemplated by the
Government of India?  The only objection to that plan was that it made
the rupee an inconvertible rupee.²⁹⁷ But is convertibility such a
necessary condition, and, if so, when?  The idea that convertibility is
necessary to maintain the value of a currency is, on the face of it, a
preposterous idea.  No one wants the conversion of bananas into apples
to maintain the value of bananas.  Bananas maintain their value by
reason of the fact that there is a demand for them and their supply is
limited.  There is no [pg 178] reason to suppose that currency forms an
exception to this rule.  Only we are more concerned to maintain the
value of currency at a stable level than we are of bananas because
currency forms a common measure of value.  What is wanted to maintain
the value of currency, or of any other thing for the matter of that, is
an effective limit on its supply. Convertibility is useful, not because
it directly maintains the value of a currency, which is nonsense, but
because it has the effect of putting a limit on the supply of currency.
But convertibility is not the only way of achieving that object.  A plan
which lays down an absolute limit on issue has the same effect—indeed, a
far more powerful effect—on the supply of currency.  Now, had the Mints
remained entirely closed to the coinage of rupees there would have been
placed an absolute limit on the issue of currency, and all the purposes
of convertibility would have been served by such an inconvertible rupee.
Nay, more; such an inconvertible rupee currency would have been
infinitely superior to the kind of pseudo-convertible rupee which we
have in India to-day.²⁹⁸ With an absolute limit there could have been no
danger of a fall in the value of the rupee. If anything there would have
been a danger of an indefinite appreciation of the rupee, but that was
effectually guarded against by gold having been made general legal
tender.  A second effect of an absolute limit on the currency would have
been to free it from management by reason of the fact that all question
regarding the volume of issues had been settled once for all.

  ²⁹⁷ Both Lindsay and Probyn had attacked the plan of the Government of
      India on this score, and had claimed that their plans were
      superior because they had at least provided some sort of

  ²⁹⁸ In his comparison of the Limping Standard with the Exchange
      Standard, Prof. Fisher seems entirely to overlook these
      considerations.  Cf. his _Purchasing Power_, etc., 1911, pp,

In these respects, therefore, the gold-exchange standard is an
impairment of the original plan of an inconvertible rupee with a fixed
limit of issue supplemented by gold.  Again, from the standpoint of
controlling the price-level, the exchange standard cannot be said to
have been an improvement on the original plan.  Of course, it is
possible to say that such a perversion of the original system is no
matter for regret.  Whether gold is a standard of value, or [pg 179]
whether fiduciary money is a standard of value, is a matter of
indifference, for neither can be said to have furnished a stable
standard of value.  A gold standard has proved to be as unstable as a
paper standard, because both are susceptible of contraction as well as
expansion.  All this, no doubt, is true.  Nevertheless it is to be noted
that in any monetary system there is no danger of indefinite
contraction.²⁹⁹ What is to be guarded against is the possibility of
indefinite expansion.  The possibility of indefinite expansion, however,
varies with the nature of money.  When the standard of value is standard
metallic money the expansion cannot be very great, for the cost of
production acts as a sufficient limiting influence.  When a standard of
value is a convertible paper money the provisions as to reserve act as a
check on its expansion.  But when a standard of value consists of a
money the value of which is greater than its cost and is inconvertible,
the currency must be said to be fraught with the fatal facility of
indefinite expansion, which is another name for depreciation or rise of
prices.  It cannot, therefore, be said that the Bank Charter Act made no
improvement on the Bank Restriction Act. Indeed, it was a great
improvement, for it substituted a currency less liable to expansion in
place of a currency far more liable to expansion.  Now the rupee is a
debased coin,³⁰⁰ inconvertible, and is unlimited legal tender.  As such,
it belongs to that order of money which has inherent in it the
potentiality of indefinite expansion, i.e. depreciation and rise of
prices.  As [pg 180] a safeguard against this the better plan was no
doubt the one originally designed, namely of putting a limit on the
issue of rupees, so as to make the Indian currency system analogous to
the English system governed by the Bank Charter Act of 1844.

If there is any force in the line of reasoning adopted above, then it is
not easy to agree with the opinion entertained by the Chamberlain
Commission of the Exchange Standard.  Indeed, it raises a query whether
for all that the Commission said there is not somewhere some weakness in
the system likely to bring about its breakdown.  It therefore becomes
incumbent to examine the foundations of that standard from a fresh point
of view. [pg 181]

  ²⁹⁹ Cf. Hawtrey, R.G., op. cit., Chap. I.

  ³⁰⁰ It is difficult to understand why some writers on Indian currency
      do not like to admit this fact.  Cf. the discussion on Mr. Madan’s
      paper at the annual meeting of the Indian Economic Association
      (_Indian Journal of Economics_, Vol. III, Part 4, Serial No. 12,
      p. 560).  It is true the debasement of the rupee is not so obvious
      as it would have been had it taken the form of continuing the
      weight and making it baser, or of preserving the same fineness and
      making it lighter.  But, as Harris points out in his _Essay upon
      Money and Coins_ (Part II, Chap. I, par. 8), the “altering the
      denominations of the coins, without making any alteration at the
      Mint or in the coins themselves,” “as supposing ninepence, or as
      much silver as there is in ninepence, should be called a
      shilling,” is a mode of debasement not different from that of the
      rupee, and is virtually the same as the other two modes of
      debasement.  So viewed it is difficult to avoid the conclusion
      that the rupee is & debased coin.



It will be recalled that at the time the Indian Mints were closed to the
free coinage of silver there were two parties in the country, one in
favour of and the other opposed to the closure.  Being placed in an
embarrassing position by the fall of the rupee, the Government of the
day was anxious to close the Mints and raise its value with a view to
obtaining relief from the burden of its gold payments.  On the other
hand it was urged, on behalf of the producing interest of the country,
that a rise in the exchange value of the rupee would cause a disaster to
Indian trade and industry.  One of the reasons, it was argued, why
Indian industry had advanced by such leaps and bounds as it did during
the period of 1873–1893 was to be found in the bounty given to the
Indian export trade by the falling exchange.  If the fall of the rupee
was arrested by the Mint closure, it was feared that such an event was
bound to cut Indian trade both ways.  It would give the silver-using
countries a bounty as over against India, and would deprive India of the
bounty which it obtained from the falling exchange as over against
gold-using countries.

Theory had already scoffed at these fears.  It is therefore interesting
to see that later history has also confirmed the verdict of theory.
Indian trade with a gold-standard country like England or a
silver-standard country like China did not suffer a setback,
notwithstanding an arrest in the fall of the rupee.  The following
figures furnish sufficient evidence to support the contrary:— [pg 182]

                              _TABLE XXV_

_Trade of India with United Kingdom (before and after the
        Mint Closure)_

                Exports to U.K.                         Imports from U.K.
Annual          Merchandise.   Bullion     Total.       Merchandise.   Bullion     Total.
Average.                       and                                     and
                               Specie.                                 Specie.
                £              £           £            £              £           £
I 1889–93       31,569,891     1,180,646   32,750,537   31,837,482     7,694,149   39,531,631
II 1894–98      26,329,764     2,215,049   24,544,813   28,963,180     6,750,736   35,713,916
III 1899–1903   28,709,819     2,089,656   30,799,475   33,498,480     7,301,172   40,799,652
IV 1903–8       36,784,628     2,232,857   39,017,485   47,294,311     9,586,706   56,881,017
                —              —           —            —              —           —
Percentage of
Increase (+)
or Decrease
(−) in —
Period II in    −16·598        +87·613     −25·055      −9·028         −12·261     −9·657
with Period I
Period III in   +9·039         −5·661      +25·483      +15·659        +8·154      +14·240
with Period
Period IV in    +28·126        +6·853      +26·682      +41·183        +31·304     +39·415
with Period
Period IV in    +16·518        +89·122     +19·135      +48·549        +24·597     +43·887
with Period I

[pg 183]

                              _TABLE XXVI_

_Trade of India with China_

                Exports to China.                       Imports from China.
Annual        ───────────────────────────────────────────────────────────────────────────────
Average.        Merchandise.   Treasure.   Total.       Merchandise.   Treasure.   Total.
                £              £           £            £              £           £
I 1889–93       9,454,014      20,223      9,474,238    1,666,840      1,992,914   3,659,754
II 1894–98      8,509,284      112,105     8,621,389    1,713,529      503,357     2,216,886
III 1899–1903   9,679,830      183,647     9,863,477    1,309,975      798,053     2,108,028
IV 1903–8       12,461,535     160,879     12,622,414   1,248,822      919,402     2,168,224
                —              —           —            —              —           —
Percentage of
Increase (+)
or Decrease
(−) in —
Period II in    −9·993         +454·333    −9·002       +2·801         −74·743     −39·425
with Period I
Period III in   +13·756        +63·817     +14·407      −23·551        +58·546     −4·910
with Period
Period IV in    +28·737        −12·398     +27·971      −4·668         +15·206     +2·856
with Period
Period IV in    +31·812        +695·508    +33·229      −25·078        −53·866     −40·755
with Period I

[pg 184] That the arrest in the fall of the rupee should have lifted the
burden from Indian finances was just as was expected to follow from the
closure of the Mints.  Notwithstanding important reductions in taxation
and large expenditure of social utility, the annual budgets since the
Mint closure have shown few deficits (_see_ p. 185).

Now there is a tendency among some writers to interpret these facts as
unmistakable proofs of the soundness of the currency system.  It is
argued that if the trade of the country has not received a setback,³⁰¹
and if the finances of the country have improved,³⁰² then the
implication is that the currency of which such results can be predicated
must be good.  It is not necessary to warn students of currency that
such easy views on the soundness of the currency system, however
plausible, are devoid of the logic necessary to carry conviction.  Trade
no doubt is dependent on good money, but the growth of trade is not a
conclusive proof that the money is good.  It should be noted that during
the periods of debased coinages so common at one time the social misery
and nuisance arising there from were intolerable, yet during the same
periods it was possible for countries to make great advance in trade.
Speaking of seventeenth-century England, when that country was afflicted
with debased and constantly changing coinage and when there was,
besides, a long period of civil war and confusion, Lord Liverpool, who
was above all statesmen of his day most alive to the evils of a bad
currency, remarks:—

  ³⁰¹ Keynes, op. cit., p. 3.

  ³⁰² Barbour, D., _The Standard of Value_, p. 224.

    “It is certain, however, that during the whole of this period,
    when our coins were in so great a state of confusion, the
    commerce of the kingdom was progressively improving, and the
    balance of trade almost always in favour of this country.”³⁰³

  ³⁰³ _A Treatise on the Coins of the Realm_ (reprint of 1880), p. 135.

That commerce can increase even when currency is bad is easily supported
from the experience of India herself.  In no period did Indian trade
make such strides as it did [pg 185]

                             _TABLE XXVII_

_Finances of the Government_

          Surplus +                Surplus +             Surplus +              Surplus +              Surplus +
Years.    Deficit −    Years.      Deficit −    Years.   Deficit −    Years.    Deficit −    Years.    Deficit −
        ──────────────           ──────────────        ──────────────         ──────────────         ─────────────
          Rs.                      £                     £                      £                      £
1893–94   −1,546,998   1898–9      +2,640,873   1903–4   +2,996,400   1908–9    −3,737,710   1913–14   +2,312,423
1894–95   +693,110     1899–1900   +2,774,623   1904–5   +3,456,066   1909–10   +?,606,641   1914–15   −1,785,270
1895–96   +1,533,998   1900–1      +1,670,204   1905–6   +2,091,854   1910–11   +3,936,287   1915–16   −1,188,661
1896–97   −1,705,022   1901–2      +4,950,243   1906–7   +1,589,340   1911–12   +3,940,334   1916–17   +7,478,170
1897–98   −5,359,211   1902–3      +3,069,549   1907–8   +300,615     1912–13   +3,107,634   —         —

[pg 186] between 1873 and 1893.  Was the Indian currency of that period
good?  On the other hand, it is possible to hold that if trade is good
it may be _because_ the currency is bad.  The trade of India between
1873 and 1893 flourished because it received a bounty.  But the bounty
was a mulcting of the Indian labourer, whose wages did not rise as fast
as prices, so that the Indian prosperity of that period was founded not
upon production, but upon depredation made possible by the inflation of

Similarly, it cannot be granted without reserve that the new currency
system must be good because it has obviated the burden of the gold
payments and given relief to the Indian taxpayer.  Such a view involves
a misconception of the precise source of the burden of India’s gold
payments during the period of falling exchange.  It has been widely held
that the burden of gold payments was caused by the fall in the gold
value of silver, a view which carried with it the necessary implication
that if India had been a gold-standard country she would have escaped
that heavy burden.  That it is an erroneous view hardly needs
demonstration.³⁰⁴ It is not to be denied that India bore an extra burden
arising from the increased value of the gold payments.  But what is not
sufficiently realized is that it was a burden which weighed on all gold
debtors irrespective of the question whether their standard was gold or
silver.  In this respect the position of a gold-standard country like
Australia was not different from a silver-standard country like India.
In so far as they were gold debtors they suffered each in the same way
from the same cause, namely the appreciation of the standard in which
their debts were measured.  The fact that one discharged her debts in
gold and the other in silver made no difference in their condition,
except that the use of silver by India to discharge her debts served as
a refractory medium through which it was possible to see the magnitude
of the burden she bore.  The fall of silver measured and not caused the
burden of India’s gold payments. The arrest in the fall of the rupee
cannot be accepted as a _prima facie_ [pg 187] proof of a relief to the
taxpayer and therefore an evidence of the soundness of the currency
system.  It is possible that the benefit may have been too dearly paid

  ³⁰⁴ Cf. evidence of Prof. Marshall before the Gold and Silver
      Commission, 1886. Q. 10,140–50.

Although favourably impressed by the increase of trade and the buoyancy
of Government finances under the exchange standard, the Chamberlain
Commission did not care to found its case for it on the basis of such
arguments.  The chief ground on which it rested was that the currency
system was capable of maintaining the exchange value of the rupee at a
fixed par with gold.³⁰⁵  We must therefore proceed to examine this claim
made by the Commission on behalf of the exchange standard.  The table on
p. 188 presents the requisite data for an elucidation of the question.

  ³⁰⁵ Report, pp. 18 and 20.

Assuming, for the moment, the criterion laid down by the Commission to
be correct, can it be said from the data given above that the rupee has
maintained its gold value?  It would be over-confident if not rash to
say that the system, even from the narrow point of view of the
Commission, has been an unquestioned success.

Between June, 1893, and January, 1917, the rupee was rated to gold at
the rate of 1 rupee equal to 7·53344 troy grs. of fine gold.  At that
rate the sovereign should be equal to 15 rupees, the mint price of gold
should be Rs. 23–14–4 per tola (i.e. 180 grs.) of bar gold 100 touch,
and the exchange on London should be 1s. 4d., and should have varied
within 1s, 4·125d., the import point, and 1s. 3·906d., the export point,
for gold. [pg 188]

                             _TABLE XXVIII_

_Gold Value of the Rupee_

As expressed in Terms                 As expressed in Terms of Gold.
of Foreign Exchange                 ─────────────────────────────────────────────────────────────────────────
Rates on London. Par                           (1) Rupee Prices of             (2) Rupee Price of
R. = 1s. 4d.                                   Sovereigns. Par Rs.             Bar Gold. Par Tola =
                                               15 = 1 Sovereign.               Rs. 23–14–4
───────────────────────────────────── Years. ────────────────────────────────────────────────────────────────
Years.      Highest.     Lowest.               Highest.        Lowest.         Highest.        Lowest.
─────────────────────────────────────        ────────────────────────────────────────────────────────────────
            s.   d.      s.   d.               Rs.   A.   P.   Rs.   A.   P.   Rs.   A.   P.   Rs.   A.   P.
1892–93     1    3·969   1    2·625   1893     16    10   6    15    6    0    26    11   0    24    14   0
1893–94     1    4·031   1    1·500   1894     19    0    0    16    1    0    32    4    0    25    9    0
1894–95     1    1·906   1    1·000   1895     19    5    0    18    2    6    30    8    0    27    6    0
1895–96     1    2·875   1    1·100   1896     17    7    0    16    1    0    27    13   6    27    2    0
1896–97     1    3·842   1    1·781   1897     16    10   0    15    3    0    26    12   6    25    4    0
1897–98     1    4·125   1    2·250   1898     15    7    0    15    1    0    24    10   0    24    0    0
1898–99     1    4·156   1    3·094   1899     15    4    0    15    0    0    24    2    0    23    4    0
1899–1900   1    4·375   1    3·875   1900     15    1    3    15    0    0    24    2    0    23    15   6
1900–1901   1    4·156   1    3·875   1901     15    0    0    15    0    0    24    2    0    24    0    0
1901–1902   1    4·125   1    3·875   1902     15    4    6    15    2    6    24    2    6    24    0    0
1902–1903   1    4·156   1    3·875   1903     15    3    0    15    1    6    24    3    0    24    0    0
1903–1904   1    4·156   1    3·875   1904     15    5    0    15    1    3    24    2    0    24    0    3
1904–1905   1    4·156   1    3·970   1905     15    4    0    15    1    6    24    2    0    24    0    0
1905–1906   1    4·156   1    3·937   1906     15    1    0    15    2    0    24    4    6    24    0    0
1906–1907   1    4·187   1    3·937   1907     15    4    0    15    0    0    24    4    0    23    15   6
1907–1908   1    4·187   1    3·875   1908     15    1    0    15    0    0    24    10   0    24    2    0
1908–1909   1    4       1    3·875   1909     Premium between 12              24    3    6    23    15   0
                                               and 3%
1909–1910   1    4·156   1    3·875   1910     15    5    0    15    0    0    24    4    0    23    15   0
1910–1911   1    4·156   1    3·875   1911     15    0    0    15    0    0    24    0    6    23    14   0
1911–1912   1    4·156   1    3·937   1912     15    0    0    15    0    0    24    0    0    23    14   0
1912–1913   1    4·156   1    3·970   1913     15    0    0    15    0    0    24    0    3          —
1913–1914   1    4·156   1    3·937   1914     15    14   0    15    2    0    26    10   0    23    15   6
1914–1915   1    4·094   1    3·937   1915     15    13   6    15    5    0    25    14   0    24    8    0

Taking a general survey of the stability of the rupee with regard to its
value in terms of gold, it will be noticed that from the date of the
Mint closure up to 1898 the rupee was far below par.  The depreciation
of the rupee, measured in terms of exchange or price of gold or
sovereign, ranged somewhere between 25 to 30 per cent.  So great was the
depreciation that it redoubled the difficulties confronting the
Government when the rupee was not fixed to gold.  The financing the Home
Treasury by the usual means of selling Council Bills became well-nigh
impossible.³⁰⁶ The [pg 189] Secretary of State found himself in an
embarrassing position.  Offering to sell below par involved the obloquy
of having led the way to the defeat of the policy of stabilizing
exchange.  Refusing to sell at market rates involved the danger of a dry
Treasury.  The Government of India suggested that the Secretary should
lay down a minimum rate for or a maximum amount of the bills that he put
upon the market.  The Secretary of State agreed to neither, but
consented to reduce his drawings so as not to unduly depress the
exchange rate.  The drawings of the Secretary of State during the first
fiscal year since the Mint closure have been the smallest on record:—

  ³⁰⁶ _See_ Commons Paper 7 of 1894, East India (Currency and Sale of

                              _TABLE XXIX_

_Council Drawings_

   Date of Drawing.        Amount of Drawings.   Rate at which drawn
                           £, 000 omitted.       (Pence per Rupee).
     1893.   June          2,478                 15·039
             July          25                    15·974
             August        78                    15·243
             September     7                     15·350
             October       5                     15·334
             November      617                   15·251
             December      14                    15·242
     1894.   January       98                    14·408
             February      1,023                 13·787
             March         1,915                 13·870
             April         1,368                 13·626

The curtailment of drawings to save the rate of exchange from being
lowered was not an unmitigated good, for it imposed the necessity of a
resort to the by no means inexpensive method of sterling borrowings to
finance the Home Treasury.³⁰⁷ The remittances by drawings fell short of
the net disbursements of the Home Treasury in 1893–94 by £6,588,000,
which deficit was met by permanent sterling [pg 190] borrowings to the
extent of £7,430,000, the interest on which added to the already
over-heavy burden of the gold payments.  Rather than incur such a
penalty the Secretary of State gave up the attempt to dominate the
market and preferred to follow it.  But this let-go policy was not
without its cost.  The drop in the exchange below 1s. 4d. added to the
burden of remittances to the Home Treasury, and also compelled the
Government to grant exchange compensation allowance to its European
officers, civil and military—an aid which it had so far withheld.  The
cost to the Government involved by the fall of the rupee below par was
quite a considerable sum.³⁰⁸

  ³⁰⁷ Evidence of Sir H. Waterfield before the Fowler Committee, Q.

  ³⁰⁸ Evidence of Hon. A. Arthur before the Fowler Committee. Q.

                              _TABLE XXX_

_Cost of the Fall of the Rupee_

          Loss on                      Loss                      Total on all
          Council                      by          Total         Counts for three
          Bills         Loss by        Increase    on each       Years.
Years.    being         Exchange       of pay      Account     ───────────────────────────
          sold          Compensation   of          in each       In             In
          below         Allowance.     British     Year.         Rupees.        Sterling
          par.                         Troops.                                  at 1s.
                                                                 Rs.            £.
1894–95   3,74,15,000   78,02,000      37,84,000   4,90,01,000
1895–96   3,05,91,000   87,18,000      49,38,000   4,42,47,000   11,91,86,000   7,945,733
1896–97   1,66,48,000   48,95,000      44,25,000   2,59,38,000

In the midst of such a situation it is no wonder if the faith of the
Government in the ultimate stability of the rupee had given way, for we
find that in October, 1896, the Financial Member of the Council had
personally come to the conclusion that it would be better in the
interest of stability to substitute 15d. for 16d. as the par of exchange
between the rupee and gold.³⁰⁹ But the suggestion was dropped as the
rupee showed signs of reaching the gold par, which it did in January,
1898, after a period of full five years of depreciation from the
established par.

  ³⁰⁹ Cf. Shirras, _Indian Finance and Banking_, p. 168.

Between January, 1898, and January, 1917, twice did the rupee fall below
its gold par.  The year 1907–8 records the second occasion when the
parity of the rupee under [pg 191] the exchange standard broke down.
The actual rates of exchange prevailing in the market were as follows:—

                              _TABLE XXXI_

_Rates of Exchange, London on India (From “The Times”)_

                         Par R. = 1s. 4d.
                      On Calcutta.               On Bombay.
     Date           ─────────────────────────────────────────────────────
                      Highest.     Lowest.       Highest.     Lowest.
  1907.   September   1 4 1/32     1 3 31/32     1 4 1/32     1 3 31/32
          October     1 4 1/32     1 3 31/32     1 4 1/32     1 3 31/32
          November    1 4          1 3 23/32     1 3 31/32    1 3 23/32
          December    1 3 15/16    1 3 27/32     1 3 15/16    1 3 23/32
  1908.   January     1 3 15/16    1 3 29/32     1 3 15/16    1 3⅞
          February    1 3 31/32    1 3⅞          1 3 31/32    1 3⅞
          March       1 3 29/32    1 3 27/32     1 3 29/32    1 3 27/32
          April       1 3⅞         1 3 27/32     1 3 27/32    1 3 27/32
          May         1 3⅞         1 3 27/32     1 3 15/16    1 3 27/32
          June        1 3 29/32    1 3 27/32     1 3⅞         1 3 27/32
          July        1 3⅞         1 3 27/32     1 3⅞         1 3 27/32
          August      1 3 29/32    1 3 27/32     1 3 29/32    1 3 27/32
          September   1 3 31/32    1 3 29/32     1 3 31/32    1 3⅞
          October     1 3 15/16    1 3⅞          1 3 29/32    1 3 13/16
          November    1 3 29/32    1 3⅞          1 3⅞         1 3⅞
          December    1 3 15/16    1 3 29/32     1 3 31/32    1 3⅞

After a crisis lasting over a year the rupee recovered to its old gold
par and remained fixed at it, though by no means firmly, for another
seven years, only to suffer another fall from its parity during the year
1914–15 (_see_ table, p. 192).

After 1916 the stability of the exchange standard was threatened by a
danger arising from quite unsuspected quarters. The Indian exchange
standard was based upon the view that the gold value of silver was bound
to fall or at least not likely to rise to a level at which the intrinsic
value of the rupee became higher than its nominal value. The price of
silver at which the intrinsic value of the rupee equalled its nominal
value was 43d. per ounce.  So long as [pg 192]

                             _TABLE XXXII_

_Rates of Exchange London on Calcutta (from the National
        Bank of India)_

   Months.   ─────1─9─1─4─.─────────────────────────1─9─1─5─.───────────────────
               Highest.      Lowest.        Highest.      Lowest.
   January     —             —              1 3 15/16     1 3 15/16
   February    —             —              1 4 1/32      1 3 29/32
   March       —             —              1 4           1 3 15/16
   April       —             —              1 3 15/16     1 3 29/32
   May         1 4¼          1 3 15/16      1 3 15/16     1 3 29/32
   June        1 3 31/32     1 3 15/16      1 3⅞          1 3 27/32
   July        1 3 31/32     1 3 13/16      1 3 22/32     1 3 22/32
   August      1 3⅞          1 3 13/16      1 3 15/16     1 3 27/32
   September   1 3 15/16     1 3 13/16      1 4           1 3 15/16
   October     1 3 15/16     1 3 15/16      —             —
   November    1 3 15/16     1 3 15/16      —             —
   December    1 3 15/16     1 3 15/16      —             —

the intrinsic value of the rupee remained below its nominal value, i.e.
the price of silver did not rise above 43d., there was no danger of the
rupee circulating as currency.  Once the price of silver rose above that
point the danger of the rupee passing from currency to the melting-pot
was imminent.  Now, with the exception of a brief period from September,
1904, to December, 1907, the gold price of silver had since 1872 showed
a marked tendency to fall.  The decline in its price was so continuous
and so steady as to create the general impression that the low price had
come to stay.  Indeed, so firm was the impression that the framers of
the exchange standard had never taken into account the contingency of a
rise in the price of silver above 43d.  So little was it anticipated,
that the system was not criticized on this ground by any of the
witnesses who deposed before the successive Committees and Commission on
Indian currency.  But the unexpected may happen, and unfortunately did
happen after 1916, and happened suddenly.  On February 10, 1914, the
cash price in London of silver [pg 193] per ounce of standard fineness
was 26⅝d.  It fell to 22 \frac{11}{16}d. on February 10, 1915, and
though it jumped to 27d. on the same date in 1916, yet it was below the
rupee melting-point.  After the last-mentioned date its rise was
meteoric. On February 9, 1917, it rose to 37⅝d.; on February 8, 1918, to
43d.; and on the same date in 1919 to 48 \frac{7}{16}d., thereby quite
overshooting the rupee melting-point.  But the price of silver broke all
record when on February 11, 1920, it reached the colossal figure of
89½d. per standard ounce.

The rise in the intrinsic value of the rupee above the nominal value at
once raised a problem as to how the rupee could be preserved in
circulation.  Two ways seemed open for the solution of the problem. One
was to scale down the fineness of the rupee, and the other to raise its
gold parity.  All other countries which had been confronted by a similar
problem adopted the former method of dealing with their silver
coinages—a method which was successfully tried in the Philippines and
the Straits Settlements and Mexico in 1904–7, when a rise in those years
in the price of silver had created a similar problem in those
countries.³¹⁰ The Secretary of State for India adopted the second course
of action and kept on altering the rupee par with every rise in the
price of silver.  The alterations of the rupee par following upon the
variations in the price of silver are given below:—

  ³¹⁰ Cf. E. W. Kemmerer, _Modern Currency Reforms_, 1916, pp. 349–354,
      445–49, and 535–47.


    Date of Alteration of the Rupee Par.        Pitch of the Par.
                                                s. d.
    January 3, 1917                             1 4¼
    August 28, 1917                             1 5
    April 12, 1918                              1 6
    May 13, 1919                                1 8
    August 12, 1919                             1 10
    September 15, 1919                          2 0
    November 22, 1919                           2 2
    December 12, 1919                           2 4

[pg 194] After having played with the rupee par, for two years, in this
manner, as though such alterations involved no social consequences, the
Secretary of State, on May 30, 1919, appointed a new Currency Committee
under the chairmanship of Babington Smith, to recommend measures “to
ensure a stable gold exchange standard.” The majority of the Committee,
after half a year of cogitation, reported to the effect³¹¹ that

  ³¹¹ _See_ Report, P.P. Cd. 527 of 1920, par. 59.

    “(i) The object should be to restore stability to the rupee, and
    to re-establish the automatic working of the currency system at
    as early a date as practicable.

    “(ii) The stable relation to be established should be with gold
    and not with sterling.

    “(iii) The gold equivalent of the rupee should be sufficiently
    high to give assurance, so far as is practicable, that the
    rupee, while retaining its present weight and fineness, will
    remain a token coin, or in other words, that the bullion value
    of the silver it contains will not exceed its exchange value.

    “After most careful consideration” (the Committee said) “we are
    unanimous (with the exception of one of our members who signs a
    separate report) in recommending that the stable relation to be
    established between the rupee and gold should be at the rate of
    one rupee to 11·30016 grs. of fine gold both for foreign
    exchange and internal circulation.”

i.e. the rupee to be equal to 2s. (gold).

The minority report, which harped on the old cry of a stimulus of low
exchange and penalty of high exchange, stood out for the maintenance of
the old rate of 15 rupees to the gold sovereign or 113·0016 grs. troy of
pure gold, and recommended the issue of a two-rupee silver coin of
reduced fineness compared with the old rupee, so long as the price of
silver in New York was over 92 cents.³¹² By the announcements of
February 2, 1920, the recommendations of the majority of the Committee
were accepted [pg 195] by the Secretary of State and also by the
Government of India, which abandoned the old parity of 7·53344 grs. per
rupee for the new parity of 11·30016 grs. troy.  Now, has the rupee
maintained its new parity with gold?

  ³¹² Report, p. 41.

In the matter of ascertaining this fact the exchange quotation on London
is no guide, for the value of the rupee was 2s. _gold_ and not 2s.
sterling.  Had gold and sterling been identical the case would have been
otherwise.  But during the war, owing to the issue of virtually
inconvertible money, the pound sterling had depreciated in terms of
gold.  We must therefore take as our standard a currency which had kept
its par with gold.  Such a currency was the American dollar, and the
exchange quotation on New York is therefore more directly helpful in
measuring the gold value of the rupee than is the sterling quotation on
London.  We can also employ the actual rupee-sterling quotation as a
measure by comparing it with the amount of sterling the rupee should
have purchased, as an equivalent of 11·30016 grs. of fine gold, when
corrected by the prevailing cross-rate between New York and London.³¹³

  ³¹³ The formula for this computation is as follows:—

       If x pence                  =     1 rupee
                                   =     11·30016 grs. fine gold,
       23·22 grs. fine gold        =     1 dollar,
       D dollars                   =     1 pound sterling
                                   =     240 pence.
       Then x \frac{11·30016       =     \frac{11·680}{\textrm{D}}
       \times 240}{23·22 \times          pence.

      Cf. Rushforth, F. V., _The Indian Exchange Problem_, 1921, p. 9.

Compared with the par of exchange, the actual exchange, either on New
York or on London, indicates a fall of the rupee which is simply
staggering (_see_ table, p. 196).

Consider, along with the external gold value of the rupee, its internal
value in terms of sovereigns and bar gold (_see_ table, p. 197). [pg

                             _TABLE XXXIV_

_Actual Gold Value of the Rupee and the new Parity in Terms
        of Foreign Exchanges_

As          New York on Bombay in                                 Bombay on London in s. d.
in          cents.
the       ───────────────────────────────────────────────────────────────────────────────────────────────────────────────────────────────
Middle    ─────1─9─2─0─.──────────────1─9─2─1─.──────────────1─9─2─2─.──────────────1─9─2─0─.──────────────────────1─9─2─1─.───────────────────1─9─2─2─.───────────────
of          Par      Actual   Par      Actual   Par      Actual   Par          Actual       Par         Actual     Par         Actual
the         Rate.    Rate.    Rate.    Rate.    Rate.    Rate.    Rate.        Rate.        Rate.       Rate.      Rate.       Rate.
January     0·4866   0·4400   0·4866   0·2925   0·4866   0·2800   2 7½         2 3⅝         2 7 5/16    1 5⅝       2 3⅝        1 3 13/16
February    0·4866   0·4850   0·4866   0·2800   0·4866   0·2845   2 10 11/32   2 9⅛         2 5 13/16   1 4⅛       2 2 7/32    1 3 9/16
March       0·4866   0·4850   0·4866   0·2625   0·4866   0·2787   2 7 29/32    2 5¾         2 5 31/32   1 3¼       2 2 29/32   1 3 5/16
April       0·4866   0·4775   0·4866   0·2625   0·4866   0·2785   2 5 7/16     2 3¾         2 5 13/16   1 3⅝       2 2½        1 3⅛
May         0·4866   0·4325   0·4866   0·2675   0·4866   0·2930   2 6 19/32    2 2⅛         2 5 7/32    1 3½       2 2¼        1 3 9/16
June        0·4866   0·4125   0·4866   0·2525   0·4866   0·2900   2 5 31/32    1 10 13/16   2 6 29/32   1 3⅜       2 2⅛        1 3 19/32
July        0·4866   0·3900   0·4866   0·2400   0·4866   0·2900   2 5 31/32    1 8 1/16     2 8 9/32    1 3¼       2 2⅝        1 3⅝
August      0·4866   0·3650   0·4866   0·2475   0·4866   0·2916   2 8 9/32     1 10 1/16    2 7 29/32   1 4¾       2 2 3/16    1 3 19/32
September   0·4866   0·3325   0·4866   0·2675   0·4866   0·2875   2 9 9/16     1 10 1/16    2 7 15/32   1 5 1/16   2 2 6/16    1 3 9/16
October     0·4866   0·3025   0·4866   0·2825   0·4866   —        2 9 21/32    1 7¾         2 6 1/32    1 5 7/16   —           —
November    0·4866   0·3025   0·4866   0·2695   0·4866   —        2 10 9/16    1 7⅛         2 5 16/32   1 4⅛       —           —
December    0·4866   0·2650   0·4866   0·2775   0·4866   —        2 9 9/16     1 5¼         2 4         1 3⅞       —           —

[pg 197]

                              _TABLE XXXV_

_Gold Value of the Rupee and the new Parity in Terms of the
        Price of Sovereigns and Gold_

            Price        Price of        Price of        Price        Price of        Price
            of           Bar Gold        British         of Bar       British         of Bar
            British      per Tola        Sovereigns.     Gold         Sovereigns.     Gold
            Sovereigns   100 touch.                      per                          per
                                                         Tola                         Tola
Months.                                                  100                          100
                                                         touch                        touch
            Par 10 Rs    Par Rs          Par 10 Rs =     Par Rs       Par 10 Rs =     Par Rs
            = 1 Sov.     15–14–10 =      1 Sov.          15–14–10     1 Sov.          15–14–10
                         1 Tola                          = 1                          = 1
                                                         Tola                         Tola
            Rs.  A.      Rs.   A.   P.   Rs.   A.   P.   Rs.   A.     Rs.   A.   P.
            P.                                           P.
January     Nominal      28    0    0    Nominal                      17    14   0
────────────────────────────────────────────────────────            ─────────────────
February    Nominal      22    0    0    Nominal                      17    14   0
────────────────────────────────────────────────────────            ─────────────────
March       Nominal      24    0    0    Nominal                      17    14   0
────────────────────────────────────────────────────────            ─────────────────
April       Nominal      24    8    0    18    12   0                 —
────────────────────────────────────────────────────────            ─────────────────
May         Nominal      22    12   0    19    0    0                 —
──────────────────────────────────────────────────────── Official   ───────────────── Official
June        Nominal      22    4    0    19    12   0    figures      —               figures
──────────────────────────────────────────────────────── not yet    ───────────────── not yet
July        Nominal      23    0    0    20    9    0    published.   —               published.
────────────────────────────────────────────────────────            ─────────────────
August      Nominal      21    8    0    20    9    0                 —
────────────────────────────────────────────────────────            ─────────────────
September   Nominal      25    4    0    19    2    0                 —
────────────────────────────────────────────────────────            ─────────────────
October     Nominal      27    6    0    18    14   0                 —
────────────────────────────────────────────────────────            ─────────────────
November    Nominal      28    10   0    18    8    0                 —
────────────────────────────────────────────────────────            ─────────────────
December    Nominal      27    12   0    18    6    0                 —

The tables need no comment. The rupee is not only far away from 2s.
(gold), but is not even 1s. 4d. (sterling).

Do not the facts furnish an incontrovertible proof of the futility of
the exchange standard?  How can a system which fails to maintain its
value in terms of gold, which it is supposed to do, be regarded as a
sound system of currency?  There must be somewhere some weakness in the
mechanism of a system which is liable to such occasional breakdowns.
The rupee fell or rather was below par in 1893, and did not reach its
parity to any real degree of firmness until 1900.  After an interval of
seven years the rupee again falls below par in 1907. The year 1914
witnesses another fall of the rupee.  A meteoric rise since 1917, and
again a fall after 1920.  This curious phenomenon naturally raises the
question: Why did the rupee fail to maintain its gold parity on these
occasions?  A proper reply to this question will reveal wherein lies the
weakness of the exchange standard. [pg 198]

The only scientific explanation sufficient to account for the fall of
the rupee would be to say that the rupee had lost its general purchasing
power.  It is an established proposition that a currency or unit of
account will be valued in terms of another currency or unit of account
for what it is worth, i.e. for the goods which it will buy.  To take a
concrete example, Englishmen and others value Indian rupees inasmuch and
in so far as those rupees will buy Indian goods.  On the other hand,
Indians value English pounds (and other units of account, for that
matter) inasmuch and in so far as those pounds will buy English goods.
If rupees in India rise in purchasing power (i.e. if the Indian
price-level falls) while pounds fall in purchasing power or remain
stationary or rise less rapidly (i.e. if the English price-level rises
relative to the Indian price-level), fewer rupees would be worth as much
as a pound, i.e. the exchange value of the rupee in terms of the pound
will rise.  On the other hand, if rupees in India fall in purchasing
power (i.e. if the Indian price-level rises) while pounds rise in
purchasing power or remain stationary or fall less rapidly (i.e. if the
English price-level falls relative to the Indian price-level), it will
take more rupees to be worth as much as a pound, i.e. the exchange value
of the rupee in terms of the pound will fall.

On the basis of this theory the real explanation for a fall in the
Indian exchange should be sought for in the movement of the Indian
price-level.  Lest there be any doubt regarding the validity of the
proposition let us take each of the occasions of the fall and find out
whether or not the fall was coincident with the fall in the purchasing
power of the rupee.³¹⁴ [pg 199]

  ³¹⁴ The figures for the following tables are taken, unless otherwise
      stated, from the Report of the Price Inquiry Committee, Calcutta,

                             _TABLE XXXVI_

_Period I, 1893–98_

            Currency in Circulation,                   Index Number
            Rupees + Notes.            Index Number    of Prices in
   Years. ──────────────────────────── of Prices in    England
            Amount in   Index Number   India 1890–94   1890–94 =
            Crores of   1890–94 =      = 100.          100.
            Rs.         100.
   (1)      (2)         (3)            (4)             (5)
   1890     120         92             113             104
   1891     131         100            106             105
   1892     141         108            100             99
   1893     132         101            96              99
   1894     129         99             85              93
   1895     132         101            89              90
   1896     127         97             99              89
   1897     125         96             120             90
   1898     122         93             109             91
   1899     131         100            108             94

                             _TABLE XXXVII_

_Period II, 1900–1908_

            Currency in Circulation,                   Index Number
            Rupees + Notes.            Index Number    of Prices in
   Years. ──────────────────────────── of Prices in    England
            Amount in   Index Number   India 1890–94   1890–94 =
            Crores of   1890–94 =      = 100.          100.
            Rs.         100.
   (1)      (2)         (3)            (4)             (5)
   1900     134         103            126             103
   1901     150         115            120             98
   1902     143         109            115             96
   1903     147         113            111             97
   1904     152         116            110             100
   1905     164         126            120             100
   1906     185         142            134             107
   1907     190         145            138             113
   1908     181         139            147             104

[pg 200]

                            _TABLE XXXVIII_

_Period III, 1909–14_³¹⁵

            Currency in Circulation,                   Index Number
            Rupees + Notes.            Index Number    of Prices in
   Years. ──────────────────────────── of Prices in    England
            Amount in   Index Number   India 1890–94   1890–94 =
            Crores of   1890–94 =      = 100.          100.
            Rs.         100.
   (1)      (2)         (3)            (4)             (5)
   1909     194         152            138             105
   1910     199         152            137             110
   1911     209         160            139             114
   1912     214         164            147             117
   1913     238         182            152             124
   1914     237         182            156             124

  ³¹⁵ Figures for 1913 and 1914 are those of Mr. Shirras given in the
      Appendix to his Indian Finance and Banking.  Figures in column 3
      are calculated from his figures.

                             _TABLE XXXIX_

_Period IV, 1915–21_³¹⁶

            Currency in Circulation,
            Rupees + Notes.            Index Number    Index Number
   Years. ──────────────────────────── of Prices in    of Prices in
            Amount in   Index Number   India 1913 =    England 1913
            Crores of   1913 = 100.    100.            = 100.
   (1)      (2)         (3)            (4)             (5)
   1915     266         104            112             127·1
   1916     297         116            125             159·5
   1917     338         132            142             206·1
   1918     407         155            178             226·5
   1919     463         180            200             241·9
   1920     411         160            209             295·3
   1921     393         114            183             182·4

  ³¹⁶ Index numbers of prices are taken from the League of Nations
      _Memorandum on Currency_, 1913–1921, 2nd Ed. (1922), Table VIII.
      Figures for circulation are taken from H. S. Jevons’ _The Future
      of Exchange and Indian Currency_, 1922, p. 44.  Index numbers of
      circulation are calculated.

[pg 201] Now do these tables confirm, or do they not, the argument that
the fall in the gold value of the rupee is coincident with a fall in the
general purchasing power of the rupee?  What was the general purchasing
power of the rupee when a fall in its gold value occurred? If we
scrutinize the facts given in the above tables in the light of this
query there can be no doubt as to the validity of this argument. From
the tables it will be seen that the gold value of the rupee improved
between 1893–1898 because there was a steady if not unbroken improvement
in its general purchasing power.  Again, on the subsequent occasions
when the exchange fell, as it did in 1908, 1914, and 1920, it will be
observed that those were the years which marked the peaks in the rising
price-level in India; in other words, those were the years in which
there was the greatest depreciation in the general purchasing power of
the rupee.  A further proof, if it be needed, of the argument that the
exchange value of the rupee must ultimately be governed by its general
purchasing power is afforded by the movements of the rupee-sterling
exchange since 1920 (_see_ p. 202).

But, although such is the theoretical view confirmed by statistical
evidence of the causes which bring about these periodic falls in the
gold value of the rupee (otherwise spoken of as the fall of exchange),
it is not shared by the Government of India.  The official explanation
is that a fall in the gold value of the rupee is due to an adverse
balance of trade.  Such is also the view of eminent supporters of the
exchange standard like Mr. Keynes³¹⁷ and Mr. Shirras.³¹⁸

No doubt some such line of reasoning is responsible for the currency
fiasco of 1920.  How is it possible otherwise to explain the policy of
raising the exchange value of the rupee? Both the Smith Committee on
Indian Currency³¹⁹ and the Government of India³²⁰ were aware of the fact
that the rupee was heavily depreciated, as evidenced by the rise of
prices in India. [pg 202]

  ³¹⁷ Op. cit., p. 16.

  ³¹⁸ Op. cit., p. 4.

  ³¹⁹ Cf. Report, pp. 19–21.

  ³²⁰ Memorandum from the Government regarding Indian price movements.
      App. XXVIII to the Report of the Currency Committee of 1919.


Date.                 Rupee       Sterling       Average     Rupee-sterling
                      Prices in   Prices in      Rate of     Purchasing
                      India.      England        Exchange    Power
                                  (_Statist_).   London      Parity.
                      1913 =      1913 =         on          \textrm{16d.}
                      100.        100.           Calcutta.   \times
(1)                   (2)         (3)            (4) d.      (5) d.
  1920.   January     202         289            27·81       22·89
          February    203         306            32·05       24·12
          March       194         301            29·66       25·40
          April       193         300            27·88       26·95
          May         190         298            25·91       25·77
          June        192         293            23·63       25·08
          July        196         282            22·63       24·49
          August      193         263            22·75       24·70
          September   188         244            22·31       24·94
          October     188         232            19·88       24·00
          November    186         215            19·69       22·62
          December    179         209            17·44       21·81
  1921.   January     169         200            17·66       21·96
          February    164         191            16·31       20·98
          March       162         183            15·53       20·40
          April       163         186            15·75       19·63
          May         170         182            15·44       17·98
          June        172         176            15·53       17·14
          July        171         163            15·38       17·40
          August      178         161            16·25       16·36
          September   178         157            17·22       15·82
          October     178         156            17·02       14·65
          November    173         161            16·25       14·89
          December    169         157            15·94       14·86
  1922.   January     162         156            15·88       15·41
          February    159         156            15·59       16·70
          March       160         157            15·34       15·70
          April       160         159            15·19       15·90
          May         162         159            15·59       15·70
          June        169         160            15·63       15·14
          July        170         158            15·69       14·87
          August      166         153            15·66       14·74

Given this fact, any question of raising the gold value of the rupee to
28. gold when the rupee had scarcely the [pg 203] power to purchase 1s.
4d. sterling was out of the question.  The Committee indulged in loose
talk about stabilizing the Indian exchange.  But even from this
standpoint the Committee’s insistence on linking the rupee to gold must
be regarded as a little grotesque.  Stable exchange, to use Prof.
Marshall’s language, is something like bringing the railway gauges of
the world in unison with the main line.  If that is what is expected
from a stable exchange, then what was the use of linking the rupee to
gold which had ceased to be the “main line”?  What people wanted was a
stable exchange in terms of the standard in which prices were measured.
Linking to gold involved unlinking to sterling, and it is sterling which
mattered and not gold.  Given this importance of sterling over gold, was
any policy of exchange stabilization called for?  First of all it should
have been grasped that such a policy could succeed only if it was
possible to make sterling and rupee prices move in unison, for then
alone could the ratio of interchange between them be the same.  What
control had the Government of India over the sterling?  They might have
so controlled the rupee as to produce the effect desired, but all that
might have been frustrated by an adverse move in the sterling.  The
success of the policy of linking to sterling would have been highly
problematical although highly desirable.  But was it called for?  Now
the problem of stabilization is primarily a problem of controlling
abnormal deviations from the purchasing-power parity between two
currencies.  In the case of India there were no abnormal deviations from
the rupee-sterling purchasing power parity.  On the other hand, the
Indian exchange was moving in a more or less close correspondence with
it.  There was therefore no ground for originating any policy of
exchange stabilization.  But, supposing there were abnormal deviations
and that, owing to some reasons known to it, the Committee believed that
the exchange value of the rupee was not likely to return to the point
justified by its general purchasing power, in that case the Committee
should have fixed the exchange value well within the range of the
purchasing power of the rupee.  As it was, the value fixed [pg 204] by
the Committee the rupee never had.  In giving a value to the rupee so
much above its purchasing-power parity, it is obvious the Committee
originated a solution for the simple problem of stabilizing the rupee
which involved the much bigger and quite a different problem of
deflation or raising the absolute value of the rupee.  How was the
object to be attained?  The Committee never considered that problem. And
why?  Was it because the price of silver had gone up?  Maybe.  But it is
doubtful whether the Committee could have believed firmly that the value
of silver was going to be permanently so high as to require a
modification of the gold par.  Anyone who cared to scrutinize the rise
in the price of silver could have found that the rise was largely
speculative and could not have been permanent.

                              _TABLE XLI_

_Price of Silver in Sterling (Pence)_³²¹

   Year      Highest.   Lowest.         Average.        Range of
   1913      29⅜        25 15/16        27 9/16         3 7/16
   1914      27¾        22⅛             25 5/16         5 5/8
   1915      27¼        22 5/16         23 11/16        4 15/16
   1916      37⅛        26 11/16        31 5/16         10 7/16
   1917      55         35 11/16        40 7/8          19 11/16
   1918      49½        42½             47 9/16         7
   1919      79⅛        47¾             57 1/16         31⅜
   1920      89½        38⅞             61 7/16         50⅝
   1921      43⅜        30⅝             37              12¾

  ³²¹ From Kirkaldy’s _British War Finance_, 1921, p. 35.  Figures for
      1921 are added from the Indian Paper Currency Report.

But supposing that the rise in the price of silver was not speculative,
did it follow that the rupee was appreciated?  The diagnosis of the
Committee was an egregious blunder.  With the facts laid before the
Committee it is difficult to understand how anyone with a mere
smattering of the knowledge of price movements could have concluded that
because silver had appreciated the rupee had therefore appreciated.  On
the other hand, what had happened was [pg 205] that the rupee had
depreciated in terms of general commodities, including gold and silver.
Indeed, the appreciation of silver was a depreciation of the rupee.  The
following is conclusive evidence of that fact:—

                              _TABLE XLII_

_Depreciation of the Rupee_

            Price of Bar Gold in India      Price of Silver in    Index
            (Bombay) per Tola of 180 grs.   India (Bombay) per    Number for
                                            100 Tolas.            Prices in
Date.                                                             India
                       Rs.         A.                 Rs.   A.    1913 =
1914                   24          10                 65    11    —
1915                   24          14                 61    2     112
1916                   27          2                  78    10    125
1917                   27          11                 94    10    142
1918        (July)     34          0        (May      117   2     178
1918                                        (Nov.     82    10    —
1918                   30          0                  —           —
1918                   32          4                  —           —
1919,                  32          0                  113   0     200

Thus the rise in the price of silver was a part of the general rise of
prices or the depreciation of the rupee.  The Committee desired to raise
the gold value of the rupee to 10 rupees per sovereign when it cost
twice that number of rupees to purchase a sovereign in the market.  So
marked was the depreciation of the rupee in terms of gold that a few
months before the Committee submitted its report the _Statesman_ (a
Calcutta paper) wrote:—

    “If you land in the country with a sovereign the Government will
    take it away from you and give you eleven rupees three annas in
    return.  If you are in the country and happen to have a
    sovereign and take it to the currency office you will get
    fifteen rupees for it.  On the other hand, if you take it to the
    bazar you will find purchasers at twenty-one rupees.”

These facts were admitted by the Finance Department of [pg 206] the
Government of India to be substantially correct,³²² and yet in the face
of them the Committee recommended the 2s. gold parity for the rupee.
The Committee confused the rupee with the silver, and thus failed to
distinguish the problem of retaining the rupee in circulation and
raising its exchange value in terms of gold.  The latter solution was
applicable only if the _rupee_ had appreciated. But as it was silver
that had appreciated in terms of the rupee, the only feasible solution
was to have proposed the reduction of the fineness of the rupee.  Had
the Committee regarded silver as a commodity distinct from the rupee
like any other commodity to be measured in terms of the rupee as a unit
of account, probably it might have avoided committing the blunder which
it did.  But what is more than probable is that the Committee did not
think that the general purchasing power of the rupee was a factor of any
moment in the consideration of the matter it was asked to report upon.
What was of prime importance in its eyes for the maintenance of the
exchange value of the rupee was a favourable balance of trade, and that
India had at the time the Committee drafted its Report.  For the
Committee, in the course of its general observations on the exchange
standard, remarked:

  ³²² Cf. the reply of the Hon. Mr. Howard to the question of the Hon.
      Mr. Sinha on September 23, 1919.  _S.L.C.P._, Vol. LVII, p. 417.

    “that the system had proved effectual in preventing the fall in
    the value of the rupee below 1s. 4d., and unless there should
    have been profound modifications in India’s position as an
    exporting country with a favourable trade balance, there was no
    reason to apprehend any breakdown in this respect.”³²³

  ³²³ Report, par. 33.

Proceeding on this view of the question it was quite natural for the
Committee to have argued that if a favourable balance of trade sustained
1s. 4d. gold exchange, why should a similar balance of trade not sustain
2s. gold exchange?

Again, it is only on some such hypothesis that one can explain why the
recommendations of the Committee were adopted at all when the necessity
for their adoption had [pg 207] passed away.  Even if the intrinsic
value of the rupee exceeded its nominal value, there was no danger of a
wholesale disappearance of the rupee from circulation in view of the
enormous volume of rupees in India.³²⁴ What would have taken place was
not a wholesale melting of rupees, but a constant dribble of an
irregular and illegal character leading to the contravention of the
orders then issued by the Government of India against the melting or
exportation of the rupee coin.  At the time when the Committee reported
(December, 1919) the price of silver was no doubt high, but it was
certainly falling during 1920 when the Government took action on the
Report.  Indeed, on August 31, 1920, when the Bill to alter the gold
value of the rupee was introduced into the Council, gold was selling at
23¼ rupees to the tola, while if the sovereign was to be equal to 10
rupees, the market price of gold should have been Rs. 15–14–0 per tola,
so that there was a difference of Rs. 7½ or 33 per cent. between the
market ratio of gold to the rupee and the new mint ratio.  Moreover, the
price of silver had also gone down in the neighbourhood of 44d., so that
there was no danger of the rupee being melted out of circulation.³²⁵
But, notwithstanding such a disparity, the Government rushed to fix a
higher gold parity for the rupee.  The financial reason for this rash
act was, of course, obvious.  The impending constitutional changes were
to bring about a complete separation between provincial and imperial
finance in British India.  Under the old system of finance it was open
for the central Government to levy “benevolences” in the form of
contributions on the Provincial Governments to meet such of its
imperious wants as remained unsatisfied with the help of its own
resources, apart from the lion’s share it used to take at every
settlement of the provincial finance. Under the new constitution it was
to be deprived of this power.  The Central Government was therefore in
search of some resource to obtain relief without [pg 208] appearing to
tax anybody in particular.  A high exchange seemed to be just the happy
means of doing it, for it was calculated to effect a great saving on the
“home charges.”  But how was this high exchange to be maintained,
supposing it was desirable to have a high exchange from the financial
point of view?³²⁶ Not only had the price of silver gone down and the
rupee shown evident marks of depreciation in terms of gold, but the
balance of trade had also become adverse to India at the time when the
Government proceeded to take action on the Report of the Committee.  But
this enactment, so singular in its rashness, was none the less founded
upon the hope that the balance of trade would become favourable in time
and thus help to maintain the 2s. gold value of the rupee.  That this is
a correct interpretation of the Governments calculations is borne out by
the following extract from the letter which it addressed to the Bengal
Chamber of Commerce in explanation of the currency fiasco.³²⁷ After
speaking of the necessity for granting international credits to revive
commerce, the letter goes on to say:—

    “But for the rest they [i.e. the Government of India] can now
    only rely on the natural course of events and the return of
    favourable export conditions, combined with the reduction of
    imports … to strengthen the exchange.  Experience has
    demonstrated that in the present condition of the world trade
    stability is at present unattainable, but the Government of
    India see no reason why the operation of natural conditions …
    should not allow of the eventual fixation of exchange at the
    level advocated in the report of the Currency Committee.”

  ³²⁴ Cf. evidence of Mr. Keynes before the Committees of 1919, Q.

  ³²⁵ Cf. the speech of the Hon. Mr. Tata on the Indian Coinage
      (Amendment) Bill, _S.L.C.P._, Vol. LIX, p. 112.

  ³²⁶ In the recent discussions on the Indian exchange it has been
      entirely overlooked that this was the underlying motive of raising
      the Indian exchange to 2s. gold.  But it was laid bare by the
      Finance Member of the Council in his speech on March 10, 1920, in
      the course of the debate on the resolution _re_ Reverse Councils,
      _S.L.C.P._, Vol. LVIII, p. 1292.

  ³²⁷ The letter was published in the _Times of India_, November 20,
      1920, p. 14, col. 6.

Which of the two views is correct?  Is it the low purchasing power of
the rupee which is responsible for its fall, [pg 209] or is it due to an
adverse balance of trade?  Now, it must at once be pointed out that an
adverse balance of trade, as an explanation of the fall of exchange, is
something new in Indian official literature.  A fall of exchange was a
common occurrence between 1873 and 1893, but no official ever offered
the adverse balance of trade as an explanation. Again, can the doctrine
of the adverse balance of trade furnish an ultimate explanation for the
fall that occurred in 1907, 1914, and 1920?  First of all, taking into
consideration all the items visible and invisible, the balance-sheet of
the trade of a country must balance.  Indeed, the disquisitions attached
to the Indian Paper Currency Reports, wherein this doctrine of adverse
balance as a cause of fall in exchange is usually to be found, never
fail to insist that there is no such thing as a “drain” from India by
showing item by item how the exports of India are paid for by the
imports, even in those years in which the exchange has fallen.  The
queer thing is, the same Reports persist in speaking of an adverse
balance of trade.  Given the admission that all Indian exports are paid
for, it is difficult to see what remains to speak of as a balance.  Why
should that part of trade liquidated by money be spoken of as a
“balance”?  One might as well speak of a balance of trade in terms of
cutlery or any other commodity that enters into the trading operations
of the country.  The extent to which money enters into the trading
transactions of two countries is governed by the same law of relative
values as is the case with any other commodity.  If more money goes out
of a country than did previously, it simply means that relatively to
other commodities it has become cheaper.  But if there is such a thing
as an adverse balance in the sense that commodity imports exceed
commodity exports, then there arises the further question: Why do
exports fall off and imports mount up?  In other words, given a normal
equilibrium of trade, what causes an adverse balance of trade?  For this
there is no official explanation.  Indeed, the possibility of such a
query is not even anticipated in the official literature.  But the
question is a fundamental one.  An adverse balance of trade in the above
sense is only another way of stating [pg 210] that the country has
become a market which is good to sell in and bad to buy from.  Now a
market is good to sell in and bad to buy from when the level of prices
ruling in that market is higher than the level of prices ruling outside.
Therefore, if an adverse balance of trade is the cause of the fall of
exchange, and if the adverse balance of trade is caused by internal
prices being higher than external prices, then it follows that the fall
of exchange is nothing but the currency’s fall in purchasing power,
which is the same thing as the rise of prices.  The adverse balance of
trade is an explanation a step short of the final explanation.  Try to
circumvent the issue as one may, it is impossible to escape the
conclusion that the fall in the exchange value of the rupee is a
resultant of the fall in the purchasing power of the rupee.

Now what is the cause of the fall in the purchasing power of the rupee?
In that confused if not absurd document, the Report of the Price Inquiry
Committee,³²⁸ one cause of the rise of prices in India was assigned,
among others,³²⁹ to the decline in supplies relatively to population.
In view of the more or less generally accepted theory of quantity of a
currency as the chief determinant of its value, the line of reasoning
adopted by the Committee is somewhat surprising.  But there is enough
reason to imagine why the Committee preferred this particular
explanation of the rise of prices.  The position of the Government with
regard to the management of the Indian currency is somewhat delicate.
Already the issue of paper currency was in the hands of the Government.
By the Mint closure it took over the management of the rupee currency as
well.  Having the entire control over the issue of currency, rupee and
paper, the Government becomes directly responsible for whatever
consequences the currency might be said to produce.  It must [pg 211]
not, also, be forgotten that the Government is constantly under fire
from an Opposition by no means over-scrupulous in the selection of its
counts.  As a result of this situation the Government walks very warily,
and is careful as to what it admits.  Lord Castlereagh, in the debate on
Horner’s resolution of 1811 stating that bank notes were depreciated by
over-issue, asked the House of Commons to consider what Napoleon would
do if he found the House admitting the depreciation even if it was a
fact.  The Government of India is in the same position, and had to think
what the Opposition would do if it admitted this or that principle.  The
reason why the Government of India adheres to the adverse balance of
trade as an explanation of the fall of exchange is the same which led
the Committee to ascribe the rise of prices to the shortage of goods.
Both the doctrines have the virtue of placing the events beyond the
control of the Government and thus materially absolving the Government
from any blame that might be otherwise cast upon it.  What can the
Government do if the balance of trade goes wrong?  Again, is it a fault
of the Government if the supply of commodities declines?  The Government
can move safely under the cover of such a heavy armour!³³⁰ But does the
explanation offered by the Committee invalidate the excess of currency
as an explanation of the rise of prices in India?  The value of money is
a resultant of an equation of exchange between money and goods.  To that
equation there are obviously two sides, the money side and the commodity
side.  It is an age-worn dispute among economists as to which of the two
is the decisive factor when the result of the equation of exchange
undergoes a change, i.e. when [pg 212] the general price-level changes.
There are economists who when discussing the value or the general
purchasing power of money emphasize the commodity side in preference to
the money side of the equation as the chief determinant of it.  To them
if prices in general fall it may not be due to scarcity of money; on the
other hand, it may be due to an increase in the volume of commodities.
Again, if prices in general rise they prefer to ascribe it to a decrease
in the volume of commodities rather than to an increase in the quantity
of money.  It is possible to take this position, as some economists
choose to do, but to imagine that the quantity theory of money is
thereby overthrown is a mistake.  As a matter of fact, in taking that
position they are not damaging the quantity theory in the least.  They
are merely stating it differently.  The weakness of the position
consists in failing to take note of what the effect on the general
price-level would be if in speaking of increase or decrease of
commodities they _included_ a corresponding increase or decrease of
currency.  If the volume of commodities increases, including the volume
of currency, then there is no reason why general prices should fall.
Similarly if the volume of commodities decreases, including the volume
of currency, then there is no reason why general prices should rise.
The commodity explanation is but the reverse side of the quantity
explanation of the value of money.  Recasting the argument of the
Committee in the light of what is said above, we can say without
departing from its language that the rise of prices in India was due to
the supply of currency not having diminished along with the diminution
in the supply of goods.  In short, the rupee fell in purchasing power
because of currency being issued in excess, and there is scarcely any
doubt that there has been a profuse issue of money in India since the
closing of the Mints in 1893.

  ³²⁸ This Committee was appointed in 1910 to investigate into the rise
      of prices in India and was composed of Messrs. Datta, Shirras, and
      Gupta.  The first and the last named commissioners being members
      of the Finance Department of the Government of India, the
      Committee may be regarded as more or less an official body.  The
      results of its investigations appeared in 1914 in five volumes,
      Vol. I of which contained the Report signed by Mr. Datta.

  ³²⁹ _See_ Report, pars. 126–27.

  ³³⁰ It may, however, be noted that this explanation of a shortage of
      goods, which was apparently offered as most likely to absolve the
      Government from any blame for having inflated the currency, was
      repudiated by the Government in its resolution reviewing the
      Report of the Committee, probably because such an admission on its
      part was likely to be interpreted as an argument to show that
      under it India was getting poorer.  But the Government, in a
      hurry, did not realize that with the repudiation of this doctrine
      no other explanation was left but that of an increased issue of
      money to account for the rise of prices in India.

The first period, from 1893–98, was comparatively speaking the only
period marked by a rather halting and cautious policy in respect of
currency expansion.  The reason no doubt was the well-known fact that at
the time the Mints were closed the currency was already redundant. Yet
the [pg 213] period was not immune from currency expansion.³³¹ At the
time the Mints were closed the silver bullion then in the hands of the
people was depreciated as a result of the fall in its value due to the
closure.  An agitation was set up by interested parties to compel the
Government to make good the loss.  Ultimately, the Government was
prevailed upon by Sir James Mackay (now Lord Inchcape), the very man who
forced Government to close the Mints, to take the silver from the banks.
The Government proposed to the Secretary of State that they be allowed
to sell the silver even at a loss rather than coin and add to the
already redundant volume of currency.  The Secretary of State having
refused, the silver was coined and added to the currency.  The stoppage
of Council Bills in 1893–94 had temporarily accumulated a large number
of rupees in their Treasuries, a transaction which practically amounted
to a contraction of currency. But the Government later decided to spend
them on railway construction—a policy tantamount to an addition to
currency.  The resumption of Council Bills after 1894 had also the same
effect, for a sale of bills involves an addition to currency.  In view
of the heavy cost of financing the Home Treasury by gold borrowings, the
resumption of sale was a pardonable act.  But what was absolutely
unpardonable was the increase in the fiduciary portion of the
paper-currency reserve from 8 to 10 crores,³³² thereby putting 2 crores
of coined rupees into circulation, particularly so because the Finance
Minister refused to pay any heed to its incidence on the currency
policy, arguing:—

  ³³¹ Cf. H. M. Ross, _The Triumph of the Standard_, Calcutta, 1909, pp.

  ³³² By Act XV of 1896.

    “I am a little doubtful whether, in discussing the question of
    the investment of the currency reserve, we are at liberty to
    look at outside considerations of that kind.”³³³

  ³³³ Financial Statement, 1896–97, p. 89.

All told, the additions to the currency during the first period were
negligible as compared to what took place in the second period,
1900–1908.  This period was characterized [pg 214] by a phenomenal
increase in the volume of currency poured by the Government into
circulation.  Speaking of the coinage of rupees during this period, Mr.
Keynes, anything but an unfriendly critic of the Government’s policy,

  ³³⁴ Op. cit., pp. 131–35.

    “The coinage of rupees recommenced on a significant scale in
    1900 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 it quite outstripped the new supplies arising from the
    mintage of the uncoined silver. …  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 … without waiting to see how the busy seasons
    of 1906–7 would turn out, they coined heavily throughout the
    summer months. …  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.”

Evidently in this period the Government framed their policy “as though a
community consumed currency with the same steady appetite with which
some communities consume beer.”  The period also witnessed a material
expansion of the paper currency.  Up to 1903 the use of the currency
notes was limited by reason of the fact that they were not only not
legal tender outside their circle of issue, but also because their
encashability was restricted to the offices of the circles of their
issue.  This was a serious limitation on the extension of paper currency
in India.  By Act VI of 1903 the Rs. 5 was made universal in British
India excepting Burma, i.e. was made legal tender in all circles, and
also encashable at all offices of issue.  Along with this the fiduciary
portion of the paper-currency reserve was increased to Rs. 12 crores by
Act III of 1905.  The first event was only calculated to enlarge the
circulation of the [pg 215] notes, but the second event had the direct
effect of lowering the value of the rupee currency.

The third period (1909–14) was comparatively a moderate but by no means
a slack period from the standpoint of currency expansion in India.  The
first three years of the period were, so to say, years of subdued
emotion with regard to the rupee coinage.  With the exception of the
year 1910, when there was no net addition to rupee coinage, and 1911,
when the addition was a small one, the coinage in the years 1909 and
1912 ranged from 24 to 30 lakhs.  But during the last two years of this
period there was a sudden burst of rupee coinage, when the total reached
264 crores.  The expansion of paper currency took place also on a great
scale during this period.  In 1909 the Rs. 5 were universalized in Burma
as they had previously been in other parts of India.  This process of
universalization was carried further during this period, when, under the
authority granted by the Paper Currency Act (II of 1910), the Government
universalized notes of Rs. 5 and Rs. 50 in 1910, of Rs. 100 in 1911.
Along with the stimulus thus given to the increase of paper currency,
the Government actually expanded the fiduciary portion of the issue from
12 to 14 crores by Act VII of 1911, thereby throwing into circulation 2
crores of additional rupees.

During the fourth period (1915–1920) all prudential restraints were
thrown overboard.³³⁵ The period coincided with the Great War, which
created a great demand for Indian produce and also imposed upon the
Government the necessity for meeting large expenditure on behalf of H.M.
Government.  Both these events necessitated a great increase in the
current means of purchase.  There were three sources open to the
Government to provide for the need: (1) Importation of gold; (2)
increase of rupee coinage; and (3) increase of paper currency.  It must
not be supposed that the Government of India had no adequate means to
provide the necessary currency.  Whatever [pg 216] expenditure the
Government of India incurred in India, the Secretary of State was
reimbursed in London.  So the means were ample.  The difficulty was that
of converting them to proper account.  Ordinarily the Secretary of State
purchases silver out of the gold at his command to be coined in India
into rupees, This usual mode was followed for the first two years of the
period, and the currency was augmented by that means.  But the rise in
the price of silver made that resource less available.  The Secretary of
State had therefore to choose between sending out gold or issuing paper.
Of the two, the former was deemed to be too unpatriotic.  Indeed, the
Secretary of State believed that from an Imperial point of view it was
entirely ungracious even to “earmark” the gold he received in London as
belonging to India.  But how was demand for additional currency in India
to be met?  As a result of deliberation it was agreed that to provide
currency in India without employing gold the best plan was for the
Secretary of State to invest at one end the gold he received on India’s
behalf in the purchase of British Treasury bills, and the Indian
Government to issue currency notes at the other end on the security of
these bills.  Such a procedure, it will be observed, involved a profound
modification in the basic theory of Indian paper currency.  That theory
was to increase the fiduciary issue by investing a portion of the
metallic reserves only when the proportion of the latter to the total of
the notes in active circulation had shown, over a considerable period, a
position sufficiently strong to warrant an extension of the invested
reserves and a corresponding diminution of the metallic reserves.  The
main effect of the principle was that the extent of the paper currency
was strictly governed by the habits of the people, for whatever the
amount of fiduciary issue at any given moment it represented metallic
reserves which were once in existence.  Under the new scheme the old
principle was abandoned and paper currency was issued without any
metallic backing, and what is more important is that its magnitude,
instead of being determined by the habits of the people, was determined
by the necessity of the Government and the amount of security it
possessed. [pg 217]

  ³³⁵ For a view of the currency policy of this period the primary
      source are the Annual Financial Statements, for these years, of
      the Government of India.

This fatal and facile procedure was adopted by the Government of India
with such avidity that within four years it passed one after another
eight Acts, increasing the volume of notes issuable against securities.
The following table gives the changes in the limits fixed by the Act.
and the total issues actually made under them:—

                             _TABLE XLIII_

_Issue of Currency Notes_

Acts prescribing the Fiduciary Issue of Currency Notes.
                          Act     Act     Act     Act     Act     Act      Act
                          V of    IX      XI      XIX     VI      II       XXVI
I. Limits to              1915    of      of      of      of      of       if
fiduciary issues                  1916    1917    1917    1918    1919     1919
                          In Lakhs of Rupees.
          (a) Permanent   14,00   14,00   14,00   14,00   14,00   14,00    14,00
          (b) Temporary   6,00    12,00   36,00   48,00   72,00   86,00    106,00
Total limit               20,00   26,00   50,00   62,00   86,00   100,00   120,00
II. Total issues of       61,63   67,73   86,38           99,79   153,46   179,67³³⁶
currency notes
          Silver          32,34   23,57   19,22           10,79   37,39    47,44
III.    ─────────────────────────────────────────────────────────────────────────────
Reserve   Gold            15,29   24,16   18,67           27,52   17,49    32,70
          Securities      14,00   20,00   48,49           61,48   98,58    99,53

  ³³⁶ On November 30,1919.  The rest of the figures are for March 31.

But this facile procedure could not be carried on _ad infinitum_ except
by jeopardizing the convertibility of the notes.  Consequently the very
increase of paper money, added to the increased demand for currency,
compelled the Government to go in for the provision of metallic money
for providing current means of purchase and also give a backing to the
watered paper issues.  The rising price of silver naturally made the
Government go in for gold.  An Ordinance was issued on June 29, 1917,
requiring all gold imported into India to be sold to Government at a
price based on the sterling exchange, and opened a gold Mint at [pg 218]
Bombay for the coinage of it into mohurs.³³⁷ Frantic efforts were made
to acquire gold from various quarters.  The removal of the embargo on
the export of gold by the U.S.A. on June 9, 1917, and the freeing of the
market for South African and Australian gold, enabled the Government to
obtain some supply of that metal. From July 18, 1919, immediate
telegraphic transfers on India were offered against deposit at the
Ottawa Mint in Canada of gold coin or bullion at a rate corresponding to
the prevailing exchange rate, and at New York at competitive tenders
from August 22, 1919.  Arrangements were also made for the direct
purchase of gold in London and U.S.A. Finally, to encourage the private
import of gold, the acquisition rate was altered from September 15,
1919, so as to make allowance for the depreciation of the sterling.  But
the gold thus obtained was a negligible quantity.  Besides, the issue of
gold did not serve the purpose the Government had in mind—namely its
retention in circulation.  In the nature of things it was impossible.
The rupee was depreciated in terms of gold to an enormous extent, and
consequently at the rate of exchange gold passed out of circulation as
quickly as it was issued by the Government.  What the Government could
do was to make the use of gold and silver coins illegal for other than
currency purposes and to prevent their exportation, which it did by the
Notifications of June 29 and September 3, 1917.  Realizing that it could
not rely upon gold, the Government renewed its efforts to enlarge the
rupee coinage.  To facilitate the purchase of that metal the import of
silver on private account into India was prohibited on September 3,
1917.  This measure, however, removed only a few of the smaller
competitors for the world’s diminished supply of silver, and the
world-demand remained so heavy that the Secretary of State was unable to
obtain sufficient supply notwithstanding the great conservation effected
in the use of silver by substituting nickel coinage for silver coins of
subsidiary order,³³⁸ and by the issue of notes of denominations [pg 219]
as low as that of R.1³³⁹ and of R.2–8.³⁴⁰ The Government of the United
States was therefore approached on the subject of releasing a portion of
the silver dollars held in their reserve.  The American Government
consented and passed the Pittman Act, under which the Government of
India acquired a substantial volume at 101½ cents per fine ounce.  The
total silver purchased during this period was as follows:

  ³³⁷ Act XIV of 1918.

  ³³⁸ Acts IV of 1918 and XXI of 1919.

  ³³⁹ First issued on December 1, 1917.

  ³⁴⁰ First put into circulation on January 2, 1918.

                              _TABLE XLIV_

_Rupee Coinage, 1915–20_

    Year.       Silver purchased    Silver purchased    Total
                in Open Market,     from U.S.A.,        Standard
                Standard Ounces.    Standard Ounces.    Ounces.
    1915–16     8,636,000           —                   —
    1916–17     124,535,000         —                   —
    1917–18     70,923,000          —                   —
    1918–19     106,410,000         152,518,000         —
    1919–20     14,108,000          60,875,000          —
                —                   —                   —
    Total       324,612,000         213,393,000         538,005,000

Now, recalling the fact that from 1900 to 1914 the Government had coined
about 532 million standard ounces of silver,³⁴¹ it means that the
coinage of silver by Government during these five years exceeded the
amount coined in the fourteen preceding years by five million ounces.

  ³⁴¹ Cf. the figures given by L. Abrahms in his evidence to the
      Currency Committee of 1919.  Mit. of Evid., Q. 37–41.

Thus the fall in the gold value of the rupee is an inevitable
consequence of the exercise of the power to issue inconvertible currency
in unlimited quantities.  This is the fate of all inconvertible
currencies known to history.  But it is said that an exception must be
made in the case of the rupee [pg 220] currency, for if the Government
has the liberty of issuing it in unlimited quantities it has also
resources to counteract the effects of a fall when it does occur.  We
must therefore turn to an examination of these resources.

The basis of the reasoning is that the rupee is a token currency, and
that if the value of a token currency is maintained at par with gold by
applying to it the principle of redemption into gold³⁴² it should be
possible to maintain the value of the rupee at par with gold by adopting
a similar mechanism.  What is wanted is an adequate gold fund, and so
long as the Government has it, we are assured that we need have no
anxiety on the score of a possible fall in the value of the rupee.  Such
a fund the Government of India has, and on all the three occasions when
the gold value of the rupee fell below par that fund was operated upon,
The process of redemption is carried on chiefly in three ways: (1) The
sale of what are called reverse councils, by which the Government
receives rupees in India in return for gold in London; (2) the release
of gold internally in receipt for rupees in India; and (3) the stoppage
of the Secretary of State’s council bills to prevent further rupees from
going into circulation. The cumulative effect of these, it is said, is
to contract the currency and raise its value to par.  Although all the
three may be employed, the first is by far the most important means
adopted by the Government in carrying through this process of
redemption.  The extent of the redemption effected on the three
occasions when it was employed may be seen from the three following
tables:— [pg 221]

  ³⁴² _See_ the very interesting discussion by Laughlin of the laws of
      token money in his _Principles of Money_, Chap. XV.  It may be
      said in passing that Laughlin is an opponent of the quantity
      theory of money, but in his discussion of token money he virtually
      admits it.

                  _I. Redemption of Currency, 1907–8._


            By the Sale of           By Release   Private
            Reverse Councils.        of Gold.     Exports
          ────────────────────────── Diminution   of Gold   Drawings
  Date.     Amount       Amount      of Govt.     Coin      of the
            offered.     sold.       Stock of     during    Secretary
                                     Gold         the       of State.
                                     during the   Month.
            £            £           £            £         £
  Sept.     —            —           152,000      14        858,896
  Oct.      —            —           254,000      9,109     921,678
  Nov.      —            —           532,000      3         427,344
  Dec.      —            —           338,000      2,501     571,905
  March     500,000      70,000      226,000      —         172,699
  26                                                        (for the
  April 2   500,000      449,000
  April 9   500,00       340,000
  April     500,000      441,000
  16                                 461,000      —         66,834
  April     500,000      329,000
  April     500,000      205,000
  May 7     500,000      81,000
  May 14    500,000      145,000
  ────────────────────────────────── 645,000      —         62,764
  May 21    820,000      793,000
  May 28    500,000      500,000
  June 4    1,000,000    755,000
  June 11   1,000,000    70,000
  ────────────────────────────────── 334,000      —         169,810
  June 18   500,000      Nil
  June 25   500,000      50,000
  July 2    500,000      470,000
  July 9    500,000      304,000
  July 16   500,000      500,000     16,000       —         186,847
  July 23   1,000,000    968,000
  July 30   1,000,000    860,000
  Aug. 6    1,000,000    418,000
  Aug. 13   500,000      310,000
  ────────────────────────────────── 354,000      —         262,217
  Aug. 20   500,000      Nil
  Aug. 27   500,000      Nil
  Sept. 3   500,000      Nil
  ────────────────────────────────── 502,000      —         1,431,012
  Sept.     500,000      Nil

  Total     15,320,000   8,058,000   4,394,000    249,912
[pg 222]

                      _II. Redemption in 1914–16_


   Date.                    Reverse           Drawings of the S. of
                            Councils (in £,   S. (in Lakhs of Rs.).
             April          Nil               270
             May            Nil               61
             June           Nil               68
             July           Nil               66
     1914.   August         2,778             72
             September      1,515             25
             October        1,895             41
             November       1,044             32
             December       1,250             30
             January        225               29
     1915.   February       Nil               181
             March          Nil               287
   Total                    8,707             1,162
             April          Nil               1,53
             May            Nil               1,03
             June           651               17
             July           3,377             8
     1915.   August         815               23
             September      50                2,17
             October        Nil               2,25
             November       Nil               2,02
             December       Nil               3,28
             January        Nil               5,26
     1916.   February       Nil               6,02
             March          Nil               6,33
   Total                    4,893             30,37

[pg 223]

                       _III. Redemption in 1920_

                             _TABLE XLVII_

_Sale of Reverse Councils (Figures in Thousands of

  Date of Sale.           Amount    Amount       Amount    Progressive
                          offered   applied      sold at   Total of
                          at each   for at       each      Amount
                          Sale.     each Sale.   Sale.     sold.
            January 2     1,000     770          770       770
            January 8     1,000     8,499        990       1,760
            January 15    2,000     300          300       2,060
            January 22    2,000     4,890        2,000     4,060
            January 29    2,000     1,334        5,000     5,394
            February 5    2,000     32,390       2,000     7,394
            February 12   2,000     41,312       2,000     12,394
            February 19   2,000     122,335      2,000     14,394
            February 26   2,000     78,417       2,00      16,394
            March 3       2,000     64,931       2,000     18,394
            March 11      2,000     117,185      2,000     20,394
            March 18      2,000     153,559      2,000     22,394
            March 25      2,000     56,295       2,000     24,394
            March 31
          ─────────────── 2,000     35,050       1,988     26,382
            April 1
            April 8       2,000     16,721       1,000     28,382
            April 15      2,000     48,270       2,000     30,382
            April 22      2,000     59,020       2,000     32,382
            April 29      1,000     53,210       1,000     33,382
            May 6         1,000     89,514       1,000     34,382
    1920.   May 13        1,000     101,625      1,000     35,382
            May 20        1,000     122,279      1,000     36,382
            May 26        1,000     85,620       1,000     37,382
            June 3        1,000     101,821      1,000     38,382
            June 10       1,000     109,245      1,000     39,382
            June 15       1,000     122,991      1,000     40,382
            June 24       1,000     73,391       1,000     41,382
            July 1        1,000     106,751      1,00      42,382
            July 8        1,000     63,690       1,000     43,382
            July 15       1,000     101,830      1,000     44,382
            July 22       1,000     103,960      1,000     45,382
            July 29       1,000     75,486       1,000     46,382
            August 5      1,000     101,260      1,000     47,382
            August 12     1,00      112,230      1,000     48,382
            August 19     1,000     114,767      1,000     49,382
            August 26     1,000     117,390      1,000     50,382
            Sept. 2       1,000     126,425      1,000     51,382
            Sept. 7       1,000     117,200      1,000     52,382
            Sept. 13      1,000     115,095      1,000     53,382
            Sept. 21      1,000     112,590      1,000     54,382
            Sept. 28      1,000     120,050      1,000     55,382

[pg 224] Not only did the Government sell reverse councils on a large
scale, but it also sold gold for rupees for internal circulation, a
thing which it seldom did before.

                       _III. Redemption in 1920_

                             _TABLE XLVIII_

_Sale of Gold_

No.     Date of             Minimum Rate    Average Rate    Quantity      Price of
of      Sale.               of accepted     of accepted     sold          Country Bar
Sale.                       Tenders.        Tenders.        (in           Gold in the
                                                            Tolas).       Bombay
                            Rs.   A.   P.   Rs.   A.   P.                 Rs.   A.   P.
1       1919,   September   25    8    0    26    12   1    3,29,130      28    10   0
2               September   24    8    0    24    10   0    3,96,640      26    1    0
3               October 6   25    8    0    25    9    8    3,26,000      27    0    0
4               October     26    15   3    27    0    2    3,34,000      28    0    0
5               November    27    14   6    27    15   6    3,25,000      28    5    0
6               November    26    15   0    27    0    11   5,18,500      28    2    0
7               December    26    0    6    26    4    6    10,00,650     27    10   0
8       1920.   January 5   26    4    3    26    7    9    7,63,300      27    3    0
9               January     26    13   3    26    14   7    8,00,000      27    5    0
10              February    25    2    3    25    9    7    7,56,450      25    6    0
11              February    16    2    3    21    9    1    9,60,590      23    4    0
12              March 3     18    8    0    18    12   4    12,96,125     21    7    0
13              March 17    21    6    0    21    7    7    12,53,325     22    13   0
14              April 7     22    7    3    22    9    4    12,46,200     24    0    0
15              April 21    23    7    4    23    8    6    10,68,175     24    4    0
16              May 5       20    13   3    21    3    2    11,96,750     21    8    0
17              May 19      21    0    3    21    1    7    12,46,050     21    12   0
18              June 9      21    8    9    21    9    8    11,32,350     22    2    6
19              June 23     20    14   10   21    0    5    12,25,250     21    8    0
20              July 7      21    1    4    22    2    2    12,81,500     21    6    0
21              July 21     22    0    1    22    0    11   12,42,000     22    5    0
22              August 4    22    5    6    23    6    3    12,78,950     22    7    0
23              August 19   23    9    4    23    10   2    5,54,500      23    7    0
24              September   22    8    3    22    10   8    8,27,700      23    1    6
25              September   23    9    4    23    12   11   2,30,500      23    8    0
                                                  Total     2,15,89,635
During 1920 no council bills were drawn by the Secretary of State on the
Government of India.

The success of this mechanism on the two previous occasions had
strengthened the belief that it had the virtue of restoring the value of
the rupee.  But the failure of this mechanism in the crisis of 1920
compels one to adopt an attitude of reserve towards its general
efficacy.  It cannot be said that exchange gave way because this
mechanism [pg 225] was not brought into operation.  On the other hand,
the view of the Government regarding the sale of reverse councils in
1920 had undergone a profound modification as compared with the view it
held during the crisis of 1907–8.  In that crisis the Government behaved
like a miser, sitting tight on its gold reserve and refusing to use it
for the very purpose which it was designed to serve.  An
Accountant-General had “to go on his knees” to persuade the Government
of India, to release its gold.³⁴³ It was probably because it was rebuked
by the Chamberlain Commission for failing to make use of its gold
reserve in 1907 that in the crisis of 1920 the policy of selling reverse
councils was so boldly conceived.  There was a great deal of ignorant
criticism of that policy from the general public that it was an
“organized loot.”  But the Finance Minister was undaunted, and

  ³⁴³ Evidence of Mr. F. C. Harrison before the Chamberlain Commission,
      Q. 10,209.

  ³⁴⁴ Speech on the resolution _re_ “Reverse Councils,” March 10, 1920.
      _S.L.C.P._, Vol. LVIII, p. 1291.

    “It is an essential feature of our exchange policy … that we
    should not only provide for remittances from London to India
    through council bills at approximately gold point, but from
    India to London in time of exchange weakness also at gold point,
    through the sale of sterling remittance known as reverse
    councils.  It is simply an alternative to the export of gold.
    This is no new matter—we have been selling reverse councils for
    years … and unless we do so the exchange policy does not become
    effective. … This is the reason, and the only reason, why we
    have sold reverse councils. …  It is an effort in fact to
    maintain exchange as near as possible to the gold point. …  What
    would be the consequence if we yielded to the pressure placed on
    us and ceased to sell reverse councils at all?  I can understand
    a demand that reverse councils should be sold by some different
    method, or at rates different from those at present in force,
    but I must confess that I cannot understand the demand that the
    facilities for the exchange of rupees into external currency
    should be entirely withdrawn.  I see that in Bombay it is urged
    that we should let exchange find its ‘natural level.’  That is a
    catchword which does not impress me.  Used in the sense in which
    that phrase has been recently [pg 226] used, there is no such
    thing as a ‘natural level’ in exchange, for, when one translates
    the internal currency into another currency, there must be some
    sort of common denominator to which both currencies can be
    brought; it may be gold, it may be silver, it may be sterling or
    it may be Spanish pesetas, which we take as our basis.  The
    rupee must be linked on to _something_,³⁴⁵ and if it is so
    linked, then it must be at some definite rate, and this
    necessarily involves that we must sometimes be prepared to sell
    reverse councils in order to maintain that rate. If reverse
    councils be withdrawn entirely, then we should have neither a
    gold standard, nor a gold-exchange standard, nor any kind of
    standard at all.”

  ³⁴⁵ By Ordinance III of June 21, 1920, the gold coins referred to in
      Section 11 of the Indian Coinage Act (III of 1906) ceased to be
      legal tender in payment or on account, but provision was made for
      their acceptance by Government at the ratio of Rs. 15 during a
      moratorium of twenty-one days.  This Ordinance continued till
      September 9, 1920, when by Act XXXVI of 1920 the sovereign was
      again made legal tender.  During this period gold had no legal
      status in India.

But that only raises the question: If the sale of reverse councils is
efficacious in righting the exchange, why was its effect such a
disastrous failure?  The Finance Minister answered the point tersely and
cogently when he said:—

    “If we have failed in narrowing the gap between the market price
    and the theoretical gold par of the rupee … it is not because we
    have sold too many reverse councils; it is because we have sold
    too few. I put it to any member of the commercial community
    here, and I put it without fear of contradiction, that if our
    resources had enabled us … to sell straight away 20, 30, or 40
    millions of reverse councils, we should probably have had no gap
    between the market price of the rupee and the theoretical gold
    price of the rupee at all.  One of our difficulties has been,
    not that we have sold too many reverse councils, but that we
    have been obliged to sell too few.”³⁴⁶

  ³⁴⁶ _Ibid._, p. 1301.

There would have been some force in this argument if the amount of
reverse bills sold were “too few.”  Not 20, 30, or 40 millions, but 554
millions of reverse councils were sold, besides the large issue of gold
internally, and the complete [pg 227] stoppage of council bills, and yet
the rupee did not rise above 1s. 4d. sterling, let alone reaching 2s.
gold.  Why did not the sale of reverse councils suffice to rectify the
exchange?  This leads us to examine the whole question of the efficacy
of this redemption.  It is necessary to premise at the outset that
redemption may result in mere substitution of one form of currency by
another, or it may result in the retirement of currency. In so far as it
results in substitution it is of no consequence at all, for substitution
of currency is not a shrinkage of currency.³⁴⁷ To the restoration of the
value of a currency what is essential is its shrinkage, i.e. its
retirement, cancellation.  The important question with regard to this
mechanism is not to what extent the currency can be redeemed, but to
what extent it can be retired. In the prevalent view of this question it
seems to be accepted without question that this extent is determined by
the magnitude of the gold resources of the Government of India and the
Secretary of State.  Let us first make it clear how these gold resources
are located and distributed.  It will be recalled that these gold
resources are distributed between (1) the paper-currency reserve, (2)
the gold-standard reserve, and (3) the cash balances of the Secretary of
State.  It has been the habit to speak of these resources as being three
“lines of defence” on which the Government can safely rely when an
exchange crisis takes place.  But are they?  They can be, for the
purposes of retirement, only if they were all “free” resources; in other
words, if they were not appropriated resources.  To what extent are they
unappropriated?  Can the Secretary of State take gold from the
paper-currency reserve?  He can, but then he must replace it by
something else, or must cancel notes to that extent.  Can the Secretary
of State take gold out of his cash balances?  He can, but then he must
either borrow to fill his Treasury or draw upon the Government of India
[pg 228] if there is anyone to buy his bills, which is tantamount to
issuing rupee currency.  The gold in the paper-currency reserve and that
in the cash balances is of no use at all, for it does not permit of the
cancellation of the rupee currency, which is what is wanted in restoring
its value when it suffers a fall. It is therefore sheer nonsense to
speak of the effectiveness of redemption as being commensurate with the
gold resources of the Secretary of State.  The matter is important, and
an illustration may not be out of place.  Suppose A, a holder of rupees,
wants to get gold for them.  He can go to three counters: (1) that of
the controller in charge of cash balances; (2) that of the controller of
currency in charge of the paper-currency reserve; or (3) that of the
custodian of the gold-standard reserve.  If A goes to the first, what is
the result? The cash balance is _pro tanto_ reduced.  On the assumption
that the cash balance is at its minimum, as it should be, the controller
must reimburse himself immediately to maintain his solvency by drawing a
bill on India and thereby releasing rupees received for gold again in
circulation, so that in this case there is no shrinkage of currency.  If
A goes to the controller of currency, what happens?  The controller
gives him gold, but on the assumption that the paper-currency account is
a separate statutory account he must put the rupees received from A in
place of the gold issued from his reserve, so that here again what
happens is that the composition of the reserve undergoes a change, but
the total paper currency remains the same.  It must therefore be borne
in mind that to the extent the gold in the paper-currency reserve and
the cash balances are operated upon the result is not a retirement of
currency.  To speak of them as “lines of defences,” as is so often done,
is to overlook the fact that these two are not free resources but are
appropriated resources.

  ³⁴⁷ The most notable example is that of American greenbacks. Under the
      law of 1875 they were by 1879 retired in sufficient numbers to
      restore parity with gold.  But by a counter-law of 1878,
      347,000,000 of them have been kept in circulation.  As soon as
      redeemed, they must be reissued; they cannot be retired.

What is, then, the resource left to the Government to _retire_ the rupee
currency?  Only the gold-standard reserve.  That is the only reserve the
amount of which is unappropriated for any particular use. It is free
cash, and only to that extent is it possible for the Government to
restore the rupee currency when a fall in its gold value eventuates, Of
course [pg 229] it is important to bear in mind that this is the extent
to which it can retire the currency.  Not that it will, for it may not,
and there is no want of cases in which it has not.  Two instances will
suffice.  During the first period of the Mint closure, 1893–98, it will
be recalled how a large number of rupees had accumulated in the hands of
the Government, and in the interest of raising the value of the rupee
they should have been locked away. Instead the Government of India
released that money in circulation in extending railways and other
public works, as though the spending of rupees by itself produced an
effect different to what would have been produced had they been spent by
the public.  Similarly irresponsible conduct marked the sale of reverse
councils in 1920.  To meet these reverse councils the Secretary of State
took the gold from the paper-currency reserve.  But instead of
cancelling notes to the extent of the gold that was taken out of the
reserve, the Government took powers under an Act XXI of 1920 to fill the
gap by manufacturing securities _ad hoc_, so that though there was
redemption there was no retirement, and so much gold was merely wasted,
for it produced no effect on prices or the exchange.  This Act, passed
in March, 1920, was of temporary duration, and would have obliged the
Government to retire the currency by October, 1920, when it was to
expire.  Rather than do this the Government altered the paper-currency
law, not temporarily but permanently (Act XLV of 1920), changing the
provisions in such a manner as to require the Government to cancel the
currency to the smallest degree possible by retiring their “created
securities.”  Even this was not done, owing to deficits in the
Government Budget.

But even if such indiscretions were not repeated the fact remains that
Government cannot effect a greater retirement than is permitted by the
gold-standard reserve. If that reserve fails Government has only two
resources left: (1) to melt down the rupees and sell them as bullion or
gold and to go on further contracting the currency, and so on till its
value is restored; or (2) to borrow gold. Both these are evidently
costly methods.  To sell rupees as [pg 230] bullion is bound to result
in loss unless the bullion in the rupee fetched more at the time of sale
than what it cost when it was purchased for manufacturing it into
bullion.  The second process, that of borrowing, cannot be lightly
resorted to for the purpose of creating a reserve fund to retire the
currency.  Indeed, so costly are such methods, and so complete would be
the proof they would afford of the instability of the exchange standard
if they were resorted to, that Government has never contemplated them as
possible lines of defence in an exchange crisis. It seems certain,
however, that Government does recognize that the gold-standard reserve
by itself cannot suffice for the maintenance of exchange.  For we find
that from the year 1907–8 dates a complete change in the distribution of
Government balances between London and India.  Up to that period it was
the policy of the Secretary of State to draw only as much as necessary
to finance his Home Treasury.  After that date the practice was
originated of drawing as much as the Government of India could provide,
and as the Government of India has been supreme in financial matters it
provided large sums for council drawings by increased taxation and
budgeting for surpluses.  The effect of this was to swell the cash
balances of the Secretary of State.³⁴⁸ No official explanation of a
satisfactory character has ever been given for this novel way of
financing the Home Treasury,³⁴⁹ but we shall not be very far wrong if we
say that the object in accumulating these balances is to provide a
second gold reserve to supplement the true gold-standard reserve.
Whatever strength the Government may derive for the time being from this
adventitious resource, it is obvious that it cannot be permanent.  Under
a more popular control of Government finances the cash balances will
have to be kept down to a minimum necessary to work the Treasury, and
the gold-standard reserve will be the only reserve on which the
Government will have to depend.

  ³⁴⁸ For figures, _see_ Chap. VII.

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

The gold-standard reserve is to the rupee what the paper-currency
reserve is to the notes.  The purport of both is to [pg 231] prevent the
respective currencies they support from falling or going to discount.
But the treatment accorded by the Government to the rupee and the paper
in respect of reserve shows a remarkable degree of contrast.  In the
case of the paper, as has been previously noted, the reserve is a
statutory reserve, and even when the whole basis of Indian paper
currency has been changed the provisions as to reserve are none the less
strict and cannot be disregarded by the Government without infringing
the law.  Now, the rupee is nothing but a note printed on silver.³⁵⁰ As
such, the provisions as to reserve should be analogous to those
governing the paper currency.  Strange as it may seem, any regulation is
conspicuous by its absence in regard to the gold-standard reserve.³⁵¹
Not only is it not obligatory on the Government to redeem the rupee, but
it does not seem that the Government is even bound to maintain the
reserve, And that it has maintained such a reserve is no guarantee that
it will replace it supposing that the reserve was dissipated.³⁵² Such
differences apart, is the gold-standard [pg 232] reserve an adequate
reserve? Figures of the magnitude of the gold-standard reserve, as
usually given in official publications, are a meaningless array.  What
is the use of displaying assets without at the same time exhibiting the
liabilities?  To be able to judge of the adequacy of that reserve we
must know what is the total circulation of rupees.  When, however, we
compare the circulation of the rupees with the reserve, the proportion
between the two is not sufficiently large so as to inspire confidence in
the stability of the system (_see_ p. 233).

  ³⁵⁰ “We have virtually relegated our rupee currency to the position of
      a token currency, and we are now practically in the position of
      bankers who have issued a certain amount of fiduciary currency
      (whether paper or metal is immaterial), and to maintain the value
      of this fiduciary currency we are bound to be in a position to
      exchange it for gold when presented to meet legitimate trade
      requirements,” said the Financial Statement for 1903–4, p. 14.

  ³⁵¹ The Chamberlain Commission said: “There are disadvantages in
      restricting the freedom of the Government in a crisis, and it is
      undesirable that the disposition and amount of the reserve should
      be stereotyped. … We therefore do not regard that the
      gold-standard reserve should be regulated by statute.”—Report,
      Sec. 101.

  ³⁵² In the course of his speech on the Indian Paper Currency
      (Temporary Amendment) Bill, dated March 17, 1920, the Finance
      Minister observed: “… from a practical point of view, it is
      desirable to leave the gold-standard reserve until the
      paper-currency reserve has been re-transferred, in case … the
      Secretary of State finds it impossible to keep himself in funds by
      Councils for his heavy home liabilities.  He will then be able to
      use the gold-standard reserve, and we can credit the gold-standard
      reserve out here.  There is a third point, and I think a
      conclusive one.  When you operate against the paper-currency
      reserve you have to operate within the paper-currency reserve;
      when you operate against the gold-standard reserve it disappears;
      it melts, and we are under no obligation to replace it; whereas we
      are under a statutory obligation to replace the paper-currency
      reserve.”—_S.L.C.P._, Vol. LVIII, p. 1416.

How can a reserve so small as this carry through the process of
retirement to any sufficient extent?  That it will not always do it the
crisis of 1920 gives abundant proof.  But the supporters of the exchange
standard maintain that the smallness of the reserve is a matter of no
consequence, for the reserve is kept only for the purpose of foreign
remittances.  That being the case, it is said the reserve need not be
large.  Granting that it is so, what must govern the magnitude of the
reserve in order that it may prove adequate in any and every case?  The
only attempt made to enunciate a rule of guidance is that by Prof.
Keynes.  That rule he finds³⁵³ in the possible variations in the balance
of trade of India.  Now, does this make the problem of regulating the
reserve more definite?  As has been explained previously, the adverse
balance of trade would be due to the depreciation of the currency, so
that Mr. Keynes’s statement amounts to this, that the reserve should
vary with the depth of the depreciation.  But how is a Government to do
this?  Only by adverting to the movement of the price level.  But in all
its currency management the Government of India never pays any attention
to the price problem.  Indeed, as was pointed out above, its conception
of the underlying causes of the fall of exchange is totally at variance
with the only true conception, nothing but a firm grasp of which can
enable it to avert a crisis.  Being ignorant of the true conception it
blindly goes on issuing currency until there occurs what is called an
adverse balance of trade.  All it aims at is to maintain a gold reserve,
and so long as it has that reserve it [pg 233]

  ³⁵³ Op. cit., pp. 166–7.

                              _TABLE XLIX_

_Distribution of the Gold-standard Reserve and its
        Proportion to Rupee Circulation (in Thousands of Pounds

        In England.                                               In India.                                                                    Percentage
      ───────────────────────────────────────────────────────────────────────────────────────────────────────────────                          of
        Purchase      Cash      Temporary   Gold        Total.    Coined   Outstanding   Temporary   Gold.   Total.              Volume        Reserve
March   value         at        Loan        deposited             Rupees   Debt          Loan                         Total      of            to
31      of            Short     to          at                    in       from          to                           Reserve,   Rs.           Rs.
in      Sterling      Notice.   the         the                   India.   Treasury      Treasury                     England    in            in
each    Securities.             Home        Bank                           Balances.     Balances.                    and        Circulation   Circulation
Year.                           Treasury.   of                                                                        India.     in            (£
                                            England.                                                                             Crores.       =
(1)     (2)           (3)       (4)         (5)         (6)       (7)      (8)           (9)         (10)    (11)     (12)       (13)          (14)
1901    —             —         —           —           —         —        1,831         —           1,200   3,031    3,031      143           3·1
1902    3,454         —         —           —           3,454     —        —             —           -       —        3,454      138           3·7
1903    3,810         —         —           —           3,810     —        1             —           —       1        3,811      136           3·4
1904    6,377         —         —           —           6,377     —        167           —           —       167      6,544      144           6·8
1905    8,377         —         —           —           8,377     —        152           —           —       152      8,529      152           8·4
1906    12,165        —         —           —           12,165    —        287           —           —       287      12,452     164           10·7
1907    12,519        —         —           —           12,519    4,000    301           —           22      4,323    16,842     178           10·6
1908    13,187        —         1,131       —           14,318    4,000    —             —           —       4,000    18,318     191           11·2
1909    7,414         —         470         —           7,884     10,587   —             —           —       10,587   18,471     187           7·1
1910    13,219        3,011     —           —           16,230    2,534    —             —           —       2,534    18,764     186           13·8
1911    15,849        1,477     —           —           17,326    1,934    —             —           —       1,934    19,260     184           14·8
1912    16,748        1,074     —           —           17,822    1,934    —             —           —       1,934    19,956     182           14·9
1913    15,946        1,006     —           1,620       18,572    4,000    35            —           —       4,035    22,607     191           14·8
1914    17,165        25        —           4,320       21,510    4,000    22            —           —       4,022    25,532     187           17·2
1915    12,149        8         —           1,250       13,407    —        70            7,000       5,238   13,308   25,715     204           18·9
1916    16,219        5,792     —           —           22,011    —        1             4,000       239     4,240    26,251     212           15·7
1917    25,406        6,001     —           —           31,407    —        —             —           103     103      31,510     227           20·8
1918    28,453        6,000     —           —           34,453    —        —             —           —       —        34,453     219           23·5
1919    29,729        6,016     —           —           35,7245   —        —             —           —       —        35,745     228           23·5

  ³⁵⁴ In striking the proportion the rupee portion of the reserve has
      been omitted.

[pg 234] does not stop to think how much currency it issues.  The
proportion of the issues and the reserve not being correlated the
stability of the exchange standard, in so far as it depends upon the
reserve, must always remain in the region of vagueness, far too
problematical to inspire confidence of the system.  Nay, the liability
of redemption for foreign remittances, small as it appears, may become
so indefinite as entirely to jeopardize the restoration of stability to
the exchange standard.

But is a gold reserve such an important thing for the maintenance of the
value of a currency?  All supporters of the exchange standard must be
said to be believers in that theory.  But the view cannot stand a
moment’s criticism.  To look upon a gold reserve as an efficient cause
why all kinds of money remain at par with gold is a gross fallacy.³⁵⁵ To
take such a view is to invert the causal order.  It is not the gold
reserve which maintains the value of the circulating medium, but it is
the limitation on its volume which not only suffices to maintain its own
value, but also makes possible the accumulation and retention of
whatever gold reserve there is in the country. Remove the limit on the
volume of currency, and not only will it fail to maintain its value, but
will prevent the accumulation of any gold reserve whatever.  So little
indeed is the importance of a gold reserve to the cause of the
preservation of the value of currency that provided there is a rigid
limit on its issue the gold reserve may be entirely done away with
without impairing in the least the value of the currency.  The
Chamberlain Commission recommended that the Government of India should
accumulate a reserve to maintain the value of the rupee because it was
by means of their reserves that European banks maintained the value of
their currencies.  Nothing can be a greater perversion of the truth.
What the European banks did was just the opposite of what the Commission
recommended.  Whenever their gold tended to disappear they reduced their
currencies not only [pg 235] relatively but absolutely.  It was by
limitation of their currencies that they protected the value of the
currencies and also their gold reserves.

  ³⁵⁵ Cf. in this connection the brilliant paper by F. A. Fetter, “The
      Gold Reserve: its Function and its Maintenance,” in the _Political
      Science Quarterly_, 1896, Vol. XI, No. 2.

The existence of a reserve, therefore, cannot lend any strength to the
gold-exchange standard.  On the other hand, if we inquire into the
genesis of the reserve, its existence is an enormous source of weakness
to that standard.  For how does the Government obtain its gold-standard
reserve?  Does it increase its reserve in the same way as the banks do,
by reducing their issues?  Quite the contrary.  So peculiar is the
constitution of the Indian gold-standard reserve that in it the assets,
i.e. the reserve, and the liabilities, i.e. the rupee, are dangerously
concomitant.  In other words, the reserve cannot increase without an
increase in the rupee currency.  This ominous situation arises from the
fact that the reserve is built out of the profits of rupee coinage.
That being its origin, it is obvious that the fund can grow only as a
consequence of increased rupee coinage.  What profit the rupee coinage
yields depends upon how great is the difference between the cost price
of the rupee and its exchange value.  Barring the minting charges, which
are more or less fixed, the most important factor in the situation is
the price of silver. Whether there shall be any profit to be credited to
the reserve depends upon the price paid for the silver to be
manufactured into rupees.³⁵⁶

  ³⁵⁶ See footnote³⁵⁷, page 236.

Not only is the reserve an evil by the nature of its origin, but having
regard to its documentary character the reserve cannot be said to be
absolutely dependable in a time of crisis.  There is no doubt that the
intention of the Government in investing the reserve is to promote its
increase by adding to it the interest accruing from the securities in
which it is invested.  The critics of the Government want a _large_ and
at the same time a _metallic_ reserve.  But they do not realize that
having regard to the origin of the reserve the two demands are
incompatible.  If the reserve needs to be large then it must be
invested.  Indeed, if the reserve had not been invested it would have
remained distressingly [pg 236] meagre.³⁵⁸ But is there no danger in a
reserve of this kind? [pg 237]

  ³⁵⁷ In answer to Mr. M. L. Reddi Garu, the following statement was
      laid on the table:—

      Statement showing the average cost of silver
              purchased by the—³⁵⁹

      Year.        Royal Mint          India Office        Financial
                   Average Cost for    Average Cost for    Year.
                   Standard Ounce.     Standard Ounce.
                   d.                  d.
      1893         36 5/16             No purchase         1893–94
      1894         29¼                 No purchase         1894–95
      1895         30⅜                 No purchase         1895–96
      1896         30 5/16             No purchase         1896–97
      1897         27⅞                 No purchase         1897–98
      1898         27¼                 No purchase         1898–99
      1899         27½                 28                  1899–1900
      1900         28¼                 29                  1900–01
      1901         27 15/16            No purchase         1901–02
      1902         24 5/16             22·80               1902–03
      1903         23 11/16            27·19               1903–04
      1904         26½                 27·14               1904–05
      1905         27 7/16             29·74               1905–06
      1906         31 1/16             31·59               1906–07
      1907         30 9/16             31·27               1907–08
      1908         24 7/16             No purchase         1908–09
      1909         23 11/16            No purchase         1909–10
      1910         24⅞                 No purchase         1910–11
      1911         24 13/16            No purchase         1911–12
      1912         27 15/16            28·71               1912–13
      1913         28 1/16             28·71               1913–14
      1914         24 15/16            No purchase         1914–15
      1915         24¼                 33·96               1915–16
      1916         30⅝                 33·96               1916–17
      1917         39 15/16            42·78               1917–18
      1918         47 15/16            48·20               1918–19
      1919         49⅝                 52·04               1919–20
      1920         50⅞                 Silver purchased    1920–21
                                       at special rates
                                       from the Baldwin
                                       mines and the
                                       Perth mint.

      In the absence of information whether the price is F.O.B. or
      C.I.F. it is difficult to say that the Secretary of State has had
      to pay higher prices for silver than were paid by the Master of
      the Royal Mint.

  ³⁵⁸ From 1900–1 to 1920–21 the profits on coinage credited to the
      gold-standard reserve amounted to £28,573,606 only: while during
      the same period Interest and Discount gave £13,306,847 or nearly
      one-half the profits on coinage. Cf. _East India: Accounts and
      Estimates_, 1921–22, _Cmd_, 1517 of 1921, p. 20.

  ³⁵⁹ _Legislative Assembly Debates_, Vol. II, No. 3, September, 10
      1921, p. 181.

The source of a danger in a reserve such as this was well pointed out by
Jevons when he said:³⁶⁰

  ³⁶⁰ _Money,_ p. 227.

    “… good government funds and good bills can always be sold at
    some price so that a banking firm with a strong reserve of this
    kind might always maintain their solvency.  But the remedy might
    be worse for the community than the disease, and the forced sale
    of the reserve might create such a disturbance in the money
    market as would do more harm than the suspension of payment. …”

In the same manner, who can say that all the increase of reserve from
interest will not be wiped out by a slump in the value of the securities
if put upon the market for conversion into gold at a time when there
takes place an exchange crisis?  Supposing, however, the full value of
the securities is realized, the number of rupees the reserve will “sink”
when occasion for redemption arrives depends upon what is the price at
which the rupees are bought back.  If the fall of the rupee is small, it
may help to retire a large volume of currency and thus restore its
value.  On the other hand, if the fall is great, it will suffice to
retire only a small part of the currency and may fail to restore its
value as it did in 1920, so that what may appear to be a big reserve may
turn out to be very inadequate.  But, apart from considerations of the
relative magnitude of the reserve that can be built up, the point that
seems to have been entirely overlooked is _that the process of building
up the reserves directly involves the process of augmenting the
currency_.  The Chamberlain Commission was cognizant of the fact that
the gold-standard reserve could not be built up except by coining
rupees.  Indeed, it cautioned those desirous of a gold currency to
remember that if gold took the place of “new rupees which it would be
necessary otherwise to mint, the effect is to diminish the strength of
the gold-standard reserve by the amount of the profit which would have
been made from new coinage.”³⁶¹ Rather than recommend a policy which
“would bring to an end the natural growth of the gold-standard reserve,”
the Committee permitted the Government to coin rupees.  But is there no
[pg 238] danger involved in such a reserve?  What is the use of a
reserve which creates the very evil which it is supposed afterwards to
mitigate? Indeed, those who have been agitating for an increase in the
Indian gold-standard reserve cannot be said to have been alive to the
dangers involved in the existence of such a reserve.  The smaller the
gold-standard reserve the better it would be, for there would be no
inflation, no fall in the purchasing power of the rupee, and no
necessity for its retirement.

  ³⁶¹ Report, par. 63.

Having regard to its origin, the gold-standard reserve, instead of
acting as a brake upon reckless issue of rupee currency, is the direct
cause of it and tends to aggravate the effects of an inconvertible
currency rather than counteract them.  Perversity cannot go further. If
the fact that a mechanism like that of the gold-standard reserve, set up
for the purpose of limiting the currency, cannot be made to function
without adding to the currency, does not render the system an unsound
currency, one begins to wonder what would.  Great names have been
invoked in support of the exchange standard.  After trying hard to find
authoritative precedents for his plan,³⁶² Mr. Lindsay [pg 239] claimed
before the Fowler Committee that it was founded upon the Report of the
Parliamentary Committee on Irish Exchange.³⁶³ There he was on firm
ground.  Among other things, the Committee did recommend that for
stabilizing the exchange between England and Ireland the Bank of Ireland
should open credit at the Bank of England and sell drafts on London at a
fixed price.  In so far as the exchange standard rests on gold reserve
in London, Lindsay must be said to have faithfully copied the plan of
the Irish Committee on exchange.  But he totally neglected to give
prominence to another and the most vital recommendation of the
Committee, in which it is observed:³⁶⁴ “_But all the benefits proposed
by this Mode of Remedies would be of little Avail and very limited
Duration if it_ [i.e.  Bank of Ireland] _did not promise at the same
time to cure the Depreciation of Paper in Ireland by diminishing its
over issue_.”  Indeed, so great, was the stress laid on the limitation
of issue that when Parnell, in his resolution in the House of Commons on
the reform of the Irish currency, regretted the non-adoption of the
recommendations of the Committee,³⁶⁵ Thornton in his reply pointed out
that nothing would help to stabilize Irish exchange so long as the vital
condition laid down by the Committee was disregarded.  The recent
experience in pegging the exchanges well illustrates the importance of
that vital condition.  Pegging the exchange is primarily a device to
prevent the external value of the currency falling along with its
internal value. The way in which pegging effects this divorce is
important to note.³⁶⁶ The primary effect of the peg is to permit the
purchases of foreign goods by procuring foreign currency for home
currency at a fixed price, which is higher than would be the case if it
were determined by the general purchasing-power parity of the two
currencies.  By enabling people to buy [pg 240] foreign goods with
foreign currency obtained at a cheaper price the peg virtually raises
foreign prices more to the level of the home prices, so that if the
exchange is stable it is not because there is a peg, but because the
price-levels in the two countries have reached a new equilibrium.
Essentially the exchange is stable because it is an artificial
purchasing-power parity.  Whether it will continue to be so depends upon
the movements in the home prices.  If the home prices rise more than the
rise brought about by the peg in the foreign prices the mechanism must
break.  It is from this point of view that the condition laid down by
the Irish Committee on exchange regarding the limitation on issue must
be held as one of vital character.  In omitting to advert to that
condition the Indian currency contradicts what is best in that Report of
the Irish Committee.

  ³⁶² In 1876, when Mr. Lindsay first set out his scheme in the pages of
      his _Calcutta Review_, he mentions no parallel at all.  In 1892,
      in his _Ricardo’s Exchange Remedy_, he uttered the name of Ricardo
      as an authority for his plan, but in 1898 he shifted his ground,
      so much so that he blamed (_Economic Journal_, _supra_) Probyn for
      taking Ricardo’s gold-bar plan as a basis.  The reason why he
      disavowed Ricardo as his authority most probably lies in the fact
      that Ricardo’s general views of currency were rather damaging to
      his position.  In view of the fact that there are so many people
      who assert, no doubt, from the title of his _Proposals for an
      Economical and Secure Currency_, that Ricardo wrote against a
      metallic standard, it is worth while recording the following
      passage from his _Proposals_, in which he says: “During the late
      discussion on the bullion questions, it was almost justly
      contended that a currency, to be perfect, should be absolutely
      invariable in value.  But it was said, too, that ours had become
      such a currency, by the Bank Restriction Bill; for by that bill we
      had wisely discarded gold and silver as the standard of our money
      … Those who supported this opinion did not see that such a
      currency, instead of being variable, was subject to the greatest
      variations—that the only use of a standard is to regulate the
      quantity, and by the quantity the value of the currency—and that
      without a standard it would be exposed to all the fluctuations to
      which the ignorance or the interests of the issuers might subject

  ³⁶³ The Report, which is a masterly document, was eclipsed by the
      Bullion Report, though both contain the same doctrine, by reason
      of its not being printed till 1826.  _See_ Lords Paper 48 of 1826.

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

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

  ³⁶⁶ Cf. the succinct statement by T. E. Gregory, _Foreign Exchanges_,
      p. 86.

The reason why Mr. Lindsay paid no attention to the question of
limitation in setting up his exchange standard is largely that,
notwithstanding the great reputation he has achieved as an author of a
new system, he was profoundly ignorant of the true doctrine regarding
the value of a currency.  Neither he nor the hosts of currency-mongers
who during the nineties exercised their ingenuity to devise plans for
remedying Indian exchange troubles,³⁶⁷ understood that to stabilize the
exchange was essentially a problem of stabilizing the purchasing power
of currency by controlling its volume.³⁶⁸ The gold-exchange standard
ignores the fact that in the long run it is the general purchasing power
of a currency that will ultimately govern its exchange value.  Its aim
is to stabilize exchange and allow the problem of purchasing power to go
hang.  The true policy should be to stabilize the purchasing power of
the currency and let exchange take care of itself.  Had the Chamberlain
Commission considered the exchange standard from this point of view it
could not have called it a sound standard when in its fundamentals it
was the very reverse of it. [pg 241]

  ³⁶⁷ _See_ Chap. IV.

  ³⁶⁸ Cf. evidence of Mr. Lindsay before the Fowler Committee, Q.
      4,190–95, where he asserted that exchange had nothing to do with
      the quantity of money in circulation.

Now some one who remains unconvinced of the weakness of the exchange
standard may say that in examining its stability we have taken only
those occasions on which the standard has broken down.  Thinking such a
treatment to be unfair, he might say: How about the years during which
stability was maintained?  Is there nothing to be said in favour of a
system that maintained the gold value of the rupee from 1901 to 1907, or
from 1909 to 1914?  The question is a pertinent one, and the position
that underlies it is supposed to be so strong that those who hold it
have asked the opponents of the exchange standard either to admit that
it is a stable standard or to show that under that standard the rupee
has _invariably_ failed to maintain its gold value.³⁶⁹

  ³⁶⁹ Dodwell, “A Gold Currency for India,” _Economic Journal_, 1911;
      _Report on the Enquiry into the Rise of Prices in India_, 1914, p.

The validity of this position depends upon assumptions so plausible and
so widespread that the argument urged so far against the exchange
standard will not be of full effect until their futility is fully
demonstrated.  The first assumption is that there cannot be a
depreciation of a currency unless it has depreciated in terms of gold.
In other words, if the excess has not produced a fall in the value of a
currency in terms of a particular commodity such as gold, then there has
been no excess at all in terms of commodities in general.  Now there was
a time, particularly during the discussion on the Bullion Report, when
the conception of a change in the value of the currency in relation to
things in general was not quite clear even to the most informed
minds,³⁷⁰ and was even pronounced invalid by high authorities.³⁷¹ In
view of the absence of the system of index numbers, this simple [pg 242]
faith in the summary method of ascertaining depreciation by some one
typical article, gold for instance, as a measure of value, was
excusable.  But the same view is without any foundation to-day.  No one
now requires to be shown that the price of each commodity has varied to
the same extent and in the same direction as prices of commodities in
general before admitting that there has been a change in the value of a
currency.  Why assume a single commodity like gold as a measure of
depreciation?  It would be allowable, although it is short-sighted to do
so, if the depreciation of gold was an accurate measure of the
depreciation of a currency in terms of all other commodities.  But such
is not the case.  Commenting upon the experience of the United States
with the greenbacks during the Civil War, Prof. W. C. Mitchell

  ³⁷⁰ Canning’s castigation of Lord Castlereagh’s definition of standard
      as “a sense of value” during the Bullion debates must be
      attributed to his ignorance on this matter.

  ³⁷¹ Ricardo, in his _Proposals for an Economical and Secure Currency_,
      says: “It has indeed been said that we might judge of the value of
      a currency by its relation not to one but to the mass of the
      commodities. … Such a test would be of no use whatever. … To
      determine the value of a currency by the test proposed … is
      evidently impossible.”

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

    “The fluctuations in the price of gold which attracted so much
    attention were much more moderate than the extreme fluctuations
    in the prices of commodities.  The gold quotations lay all the
    time well within the outer limits of the field covered by the
    variations of commodity prices.  … During the war gold moved up
    or down in price more quickly than the mass of commodities. …
    When gold was rising in price the majority of the commodities
    followed, but more slowly. … When gold was falling in price the
    majority of commodities stood still or followed more slowly. …
    This more sluggish movement of commodity prices appears still
    more clearly after the war.  Rapid as was the fall of prices it
    was not so rapid as the falling gold. A more curious fact is
    that the price-level for commodities continued for ten years to
    be higher than the price-level for gold.”

This shows that the test sought to be applied by the adherents of the
exchange standard is a false one and gives an inaccurate reading of the
value of a currency.  There can be no doubt that people who have urged
its application to that standard would not have pressed for it so much
as they have done if they had taken proper care to distinguish between
_specific_ depreciation of a currency and its _general_ [pg 243]
depreciation.³⁷³ The experience of the Bank of England during the
suspension period is a capital instance of the phenomenon where a
currency is generally depreciated, although it showed no sign of
specific depreciation:—

  ³⁷³ Cf. Prof. Nicholson’s _Principles of Political Economy_ (1897),
      Vol. II, Chap. XV, § 4; and Walker, F. A., _Money_, 1878, pp.

                               _TABLE L_

_Depreciation of the Notes of the Bank of England_³⁷⁴

                Percentage Values of Bank Notes in Terms of
                (1) Gold.             (2) Commodities.
    1797        100·0                 110
    1798        100·0                 118
    1799        —                     130
    1800        107·0                 141
    1801        109·0                 153
    1802        —                     119
    1803        —                     128
    1804        103·0                 122
    1805        103·0                 136
    1806        —                     133
    1807        —                     132
    1808        —                     149
    1809        —                     161
    1810        —                     164
    1811        123·9                 147
    1812        130·2                 148
    1813        136·4                 149
    1814        124·4                 153
    1815        118·7                 132
    1816        102·9                 109
    1817        102·2                 120
    1818        104·6                 135

  ³⁷⁴ From Hawtrey’s _Credit and Currency_, p. 269.  On the values of
      the notes in terms of gold Prof. Foxwell says: “It is admitted by
      the severest critics of the bank that there is no substantial
      ground for complaint as to its conduct during the restriction
      until 1808–9.  There does not seem, indeed, to have been any real
      depreciation of its paper until that date. The price of £4 per
      ounce, which figures monotonously for the years 1803–9, was really
      an arbitrary price, fixed by the bank itself as one at which it
      would purchase foreign gold.” _Preface to Andréadès_, p. xvi.
      Some people seem to doubt that there was no specific depreciation
      of the inconvertible notes of the Bank of England till 1810.
      Unfortunately data are not available to give direct evidence of
      the fact.  But circumstantial evidence there is.  It is to be
      remembered that the premium on gold was the only method then known
      of measuring depreciation and that Horner, Ricardo and others were
      open enemies of the Bank of England.  That being the case, it does
      not seem probable that Horner would have waited to introduce his
      Resolution in the House of Commons till 1810 if the bank notes had
      shown signs of specific depreciation before that time.

[pg 244] Which kind of depreciation is the greater evil we will discuss
in the next chapter.  Dealing for the present with this experience of
the Bank of England, we have the fact that there can be a general
depreciation without a specific depreciation.  In view of this, the
upholders of the exchange standard have no reason to be proud of the
fact that the rupee has not shown signs of specific depreciation over
periods of long duration.  That a bank note absolutely inconvertible and
unregulated as to issue should have maintained its par for very nearly
thirteen years may speak far more in favour of the suspension system
than the experience of the rupee can in favour of the exchange standard.
There is a greater wonder in the former than there is in the latter, for
the value of the rupee is sustained, apart from the fact that gold in
terms of which it was measured was itself undergoing a depreciation, as
is evident from the foregoing figures of general prices in England, and
by a hope in some kind of convertibility, however slight or however
remote but which had no place in the case of the Bank of England notes.
Yet no one is known to have admired or justified the currency system of
the suspension period, although it had not given rise to a specific
depreciation for a long time.

This mode of measuring depreciation in terms of gold would be,
relatively speaking, a harmless idea if it was not made the basis of
another assumption on which the exchange standard is made to rest, that
the general and specific depreciations of a currency are unrelated
phenomena.  As against this it is necessary to urge that the chief
lesson to be drawn from this experience of the Bank of England for the
benefit of the upholders of the exchange standard consists in
demonstrating that although their movements are [pg 245] not perfectly
harmonious, yet they are essentially interrelated.  That lesson may be
summed up in the statement that when the general depreciation of
currency has taken place the occurrence of a specific depreciation,
other things being equal, is only a matter of time, if the general
depreciation proceeds beyond a certain limit.  What will be the interval
before specific depreciation will supervene upon general depreciation
depends upon a variety of circumstances.  Like the surface of a rising
lake, general depreciation touches different commodities at different
times according as they are located in the general scheme of things as
determined by the relative strength of demand for them.  If there is no
demand for gold for currency purposes or for industrial purposes, the
depreciation of the currency in terms of gold may be delayed.  It is
only to make foreign remittances that the demand for gold first makes
itself felt, and it is there that specific depreciation primarily
arises.  But there again it need not, for everything depends upon
whether other commodities equally good, which the foreigner would take
as readily as gold, are forthcoming or not.  Now, in the case of India
all these three factors tending to postpone specific depreciation are
more or less operative.  The rupee is a full legal-tender currency and
can effectively discharge debts without compelling resort to gold.  The
industrial demand for gold in a poor country like India cannot be very
great.³⁷⁵ Consequently, the [pg 246] generally depreciated rupee does
not show immediate signs of depreciation in the internal trade of the
country.  As for foreign payments, the position of India is equally
strong, not because, as is absurdly supposed, she has a favourable
balance of trade, but because she has certain _essential_ commodities
which a foreigner is obliged to accept³⁷⁷ in place of gold.  Specific
depreciation of the rupee will occur chiefly when the general
depreciation has overtaken the commodities that enter into India’s
foreign trade.  That the depreciation should extend to them is
inevitable, for, as is well said,

  ³⁷⁵ The following table regarding the consumption of gold in different
      countries is interesting:—

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

                          1915.   1916.   1917.   1918.   1919.   1920.
       Industrial Arts     17·0    18·0    16·0    17·0    22·0    22·0
       (Europe and
       India (Year to       1·4     5·1    19·6    −3·3    27·7     5·1
       March 31
       China               −1·7     2·6     2·6     0·4    11·5    −3·7
       Egypt               −0·8    −0·2    −0·1    −0·0    −0·0       ?
       Balance             80·5    68·0    48·2    64·9    13·8    46·6
       available as
       World               96·4    93·5    86·3    79·0    75·0    70·0

  ³⁷⁶ The figures are those of Mr. Joseph Kitchin in _The Review of
      Economic Statistics_, Preliminary volume 3, No. 8 for August,
      1921, p.257.  If figures previous to 1914 are desired, _see_ table
      _ibid._, p. 268.)

      Omitting the abnormal years of 1917 and 1919 and reducing the
      figures to _per capita_ basis the consumption of gold by India
      must be said to be remarkably small.  Besides, it is to be noted
      that figures for India include industrial as well as monetary
      consumption.  Further, in making comparison account must be taken
      of the difference in the period taken as unit in the case of India
      and other countries.  Of course in these days when gold is so very
      greatly depreciated in terms of commodities in general, neither is
      there any necessity to shed tears if its production were to fall
      off, nor can it be anything but a welcome event if its use were to
      be extended. It would therefore be unwise to resent an increase,
      if it were to take place, in the importation and use of gold by
      India.  The greater the use of gold and the less the production of
      it, the better for the world as it is circumstanced to-day.  Cf.
      in this connection the remarks of Prof. Cannan on Mr. Shirras’s
      Paper in the _J.R.S.S_ for July, 1920, pp. 623–24,

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

    “in a modern community the prices of different goods constitute
    a completely organized system, in which the various parts are
    continually being adjusted to each other by intricate business
    process.  Any marked change in the price of important goods
    disturbs the equilibrium of this system, and business processes
    at once set going a series of readjustments in the prices of
    other goods to restore it.”³⁷⁸

  ³⁷⁸ Mitchell, _ibid._, p. 258.

It is true that in the case of India the interconnection between
production for internal trade and production for external trade is not
so closely knit as in the case of other countries.  The only difference
that this can make in the situation is to moderate the pace of general
depreciation [pg 247] so that it does not affect foreign trade
commodities too soon.  But it cannot prevent its effect from ultimately
raising their price.  And once their price is risen the foreigner will
not accept them, however essential.  A demand for gold must arise,
resulting in the specific depreciation of the currency.

This statement of the case agrees closely with the experience of the
Bank of England and that of India as well.  In the case of the Bank of
England the “great evil,” i.e. the specific depreciation of the bank
notes, of which Horner complained so much, made its appearance in 1809,
some thirteen years after the suspension was declared. Similarly, we
find in the case of India specific depreciation tends to appear at
different intervals, thereby completely demonstrating that, even for the
purpose of avoiding specific depreciation, it is necessary to pay
attention to the general depreciation of a currency.

Having regard to these facts, supported as they are by theory as well as
history, the incident that the rupee has maintained its gold value over
periods of some duration need not frighten anyone into an admission that
the exchange standard is therefore a stable standard. Indeed, a
recognition of that fact cannot in the least discredit what has been
said above.  For our position is that in the _long run_ general
depreciation of a currency will bring about its specific depreciation in
terms of gold.  That being our position, even if we are confronted with
the absence of specific depreciation of the rupee, we are not driven to
retract from the opinion that the best currency system is one which
provides a brake on the general depreciation of the unit of account.
The exchange standard provides no such controlling influence; indeed,
its gold reserve, the instrument which controls the depreciation, is the
direct cause of such depreciation. The absence of specific depreciation
for the time being is not more than a noteworthy and an interesting
incident.  To read into it an evidence of the security of the exchange
standard is to expose oneself, sooner or later, to the consequences that
befall all those who choose to live in a fool’s paradise. [pg 248]


                    *A RETURN TO THE GOLD STANDARD*

We have examined the exchange standard in the light of the claim made on
behalf of it, that it is capable of maintaining the gold parity of the
rupee.  This was the criterion laid down by the Chamberlain Commission
as a fitting one by which to judge the merits or demerits of that
standard.  But is the adequacy of that criterion beyond dispute?  In
other words, supposing the rupee has maintained its gold parity, which
it has only as often as not, does it follow that all the purposes of a
good monetary system are therefore subserved?

In the exchange standard, “as the system is now operated, the coinage is
manipulated to keep it at par with gold”³⁷⁹ as though money is only
important for the amount of gold it will procure.  But what really
concerns those who use money is not how much gold that money is worth,
but how much of things in general (of which gold is an infinitesimal
part) that money is worth.  Everywhere, therefore, the attempt is to
keep money stable in terms of commodities in general, and that is but
proper, for what ministers to the welfare of people is not so much the
precious metals as commodities and services of more direct utility.
Stability of a currency in terms of gold is of importance only to the
dealers in gold, but its stability in terms of commodities in general
affects all, including the bullion-dealers. Even Prof. Keynes, in his
testimony before the Indian Currency Committee of 1919, observed³⁸⁰:—
[pg 249]

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

  ³⁸⁰ Q. 2,690.

    “I should aim always … at keeping Indian prices stable in
    relation to commodities rather than in relation to any
    particular metallic or particular foreign currency.  That seems
    to me of far greater importance to India.”

It is, of course, a little difficult to understand how the remedy of
high exchange which he supported was calculated to achieve that object.
Raising the exchange was a futile project, in so far as it was not in
keeping with the purchasing power of the rupee.  As an influence
governing prices it could hardly be said to possess the virtue he
attributed to it.  The existing price-level it could affect in no way;
nor could a high exchange prevent a future rise of prices. It could only
change the base from which to measure prices.  Future prices could vary
as easily from the new high base-line as prices did in the past from the
old base-line.  In other words, Mr. Keynes seems to have overlooked the
fact that exchange was only an index of the price-level, and to control
it, it was necessary to control the price-level and not merely give it
another name which it cannot bear and will not endure, as was proved in
1920 when the rupee was given in law the value of 2s. (gold) when in
practice it could not fetch even 1s. 4d. sterling, with the result that
the rupee exchange sank to the level determined by its purchasing power.
But, apart from this question, we have the admission of the ablest
supporter of the exchange standard that the real merit of a currency
system lies in maintaining the standard of value stable in terms of
commodities in general.

Given that this is the proper criterion by which to judge a currency
system, we must ask what has been the course of prices in India since
the Mint closure in 1893?  This is a fundamental question, and yet not
one among the many who have praised the virtues of the exchange standard
has paid any attention to it.  In vain may one search the pages of Prof.
Keynes, Prof. Kemmerer, or Mr. Shirras for what they have to say of the
exchange standard from this point of view.  The Chamberlain Commission
or the Smith Committee on Indian currency never troubled about [pg 250]
the problem of prices in India,³⁸¹ and yet without being satisfied on
that score it is really difficult to understand how anyone can give an
opinion of any value as to the soundness or otherwise of that standard.

  ³⁸¹ Perhaps an exception may be made in the case of the latter
      Committee; but its object was only to make it a ground for high

In proceeding to consider the exchange standard from the standpoint of
prices, it is as well to premise that one of the important reasons why
the Indian Mints were closed to the free coinage of silver was that the
rupee was a depreciating currency resulting in high prices.³⁸² The
closing of the Mints, therefore, should have been followed by a fall of
prices in India; for, to adopt the phraseology of Prof. Fisher,³⁸³ the
pipe-connection between the money reservoir and the silver-bullion
reservoir was owing to the Mint closure cut off or stopped, thereby
preventing the passage of silver from the bullion reservoir to the money
reservoir.  In other words, the newly-mined silver could not become
money after the Mint closure and lower the purchasing power of the
rupees in circulation.  If this is so, then how very disappointing has
been the effect of the Mint closure! From the standpoint of prices the
rupee has become a problem as it had never been before.  The rise of
prices in India since the Mint closure (_see_ Chart VI) has been quite
unprecedented in the history of the country.  Indeed, the rise of prices
in India before the Mint closure, when the pipe-connection between the
silver-bullion reservoir and the rupee-currency reservoir was intact,
must be regarded as very trifling compared with the rise of prices after
the Mint closure when the pipe-connection was cut off.  From the
standpoint of prices the Mint closure has therefore turned out to be a
curse rather than a blessing, and literally so, for, under an
ever-rising price-level, life in India is rendered quite unbearable.  No
people have undergone so much misery owing to high prices as the Indian
people have done.  During the war period the price-level reached such a
giddy height that the reports of suicide by men and women [pg 251] who
were unable to buy food and clothing were in no way few and far between.
It may, however, be argued that the rise of prices in India would have
been greater if the Mints had not been closed and India had remained a
purely silver-standard country.  A good deal, no doubt, can be said in
favour of this view.  It is absolutely true that silver, being
universally discarded, has become unfit for functioning as a standard of
value. To that extent an exchange standard is better than a pure-silver
standard.  But is it as good as a gold standard?

  ³⁸² _See supra_, Chap. III.

  ³⁸³ _Purchasing Power of Money_, 1911, p. 128.

[Illustration: CHART VI: Comparative Price Levels, Indian and Foreign,

On the basis of the doctrine of purchasing power parities as an
explanation of actual exchange rates, one may be led to answer the
question in the affirmative.  For it may be argued that if the gold
value of the rupee was maintained it is because gold prices and rupee
prices were equal.³⁸⁴ This, it may be said, is all that the exchange
standard aims at doing and can be claimed to have done, for the fact
that the gold-standard reserve was seldom depleted is a proof that the
general prices inside India were on the same level as those ruling
outside India.  On _à priori_ considerations such as these, the exchange
standard may be deemed to be as good as a gold standard.

  ³⁸⁴ It is, however, to be noted that neither Prof. Kemmerer nor Prof.
      Keynes has set up this claim in favour of the exchange standard.
      If anything, both have argued against the assumption of there
      being equality of _all_ prices.

One may ask as to why Indian prices should have been kept as high, if
they were no higher than gold prices, and whether it would not have been
better to have kept Indian prices on a lower level.  But we shall not
raise that question.  We shall be satisfied if Indian prices were only
as high as gold prices.  Now did Indian prices rise only as much as gold
prices?  A glance at the chart reveals the surprising phenomenon that
prices in India not only rose as much as gold prices, but rose more than
gold prices.  Of course in comparing Indian prices with gold prices to
test the efficacy of the exchange standard we must necessarily eliminate
the war period, for the reason that gold had been abandoned as a
standard of value by most of the countries.  And, even [pg 252] if we do
take that period into account, it does not materially affect the
conclusion, for although India was not a belligerent country, yet prices
in India were not very much lower than prices in countries with most
inflated currencies during the war, and, barring a short period, were
certainly higher than gold prices in U.S.A.

It is obvious that the facts do not agree with the _à priori_ assumption
made in favour of the exchange standard.  So noticeable must be said to
be the local rise in Indian prices above the general price level in
England that even Prof. Keynes, not given to exaggerate the faults of
the exchange standard, was, as a result of his own independent
investigation, convinced that³⁸⁵

    “a comparison with Sauerbeck’s index number for the United
    Kingdom shows that the change in India is much greater than can
    be accounted for by changes occurring elsewhere.”

  ³⁸⁵ “Recent Economic Events in India,” in _The Economic Journal_,
      March, 1909, p. 4.  Italics not in the original.

What is then the explanation of this discrepancy between the _à priori_
assumption and the facts of the case.  The explanation is that the
actual exchange rates correspond to the purchasing power parities of two
currencies not with regard to _all_ commodities but with regard to
_some_ only.  In this connection it is better to re-state the doctrine
of the relation of the purchasing power parities to exchange rates with
the necessary qualification.  A rigorously strict formulation of the
doctrine should require us to state that Englishmen and others value
Indian rupees inasmuch as and in so far as those rupees will buy _such
Indian goods as Englishmen want_; while Indians value English pounds
inasmuch as and in so far as those pounds will buy _such English goods
as the Indians want_.  So stated it follows that the actual exchange
rates are related to purchasing power parities of the two currencies
with regard to such commodities only as are internationally traded.  To
assume that the actual exchange rate is an exact index of the purchasing
power parity of the two currencies with regard to _all_ the commodities
is to suppose that the variations in [pg 253] the purchasing power of a
currency over commodities which are traded and which are not traded are
the same.³⁸⁶ There is certainly a tendency for movements in the prices
of these two classes of goods to influence one another _in the long
run_; so that it becomes possible to say that the exchange value of a
currency will be determined by its internal purchasing power.  The
doctrine of purchasing power parity as an explanation of exchange rates
is valuable as an instrument of practical utility for controlling the
foreign exchanges _and_ it is as such that the doctrine was employed in
an earlier portion of this study to account for the fall in the gold
value of the rupee.  But to proceed, on the basis of this relationship
between the purchasing power of a currency and its exchange value, to
argue that at any given time the exchange is more or less an exact
measure of general purchasing power of the two currencies, is to assume
what cannot always be true, namely, that the prices of traded and
non-traded goods move in sympathy.  This assumption is too large and can
only be said to be more or less true according to circumstances.  Now as
Prof. Kemmerer³⁸⁷ points out:

  ³⁸⁶ Prof. Cassel, the modern exponent of this old doctrine of the
      relation of exchange rates to purchasing power parities, admits
      that the correspondence between the two depends upon the
      fulfilment of this assumption, for he says:

      “Our calculation of the purchasing power parity rests strictly on
      the proviso that the rise in prices in the countries concerned has
      affected all commodities in a like degree.  If that proviso is not
      fulfilled, then the actual exchange rate may deviate from the
      calculated purchasing power parities.”—_Money and Foreign Exchange
      after_ 1914, London, 1922, p. 164.

  ³⁸⁷ Op. cit., p. 64.

    “While India’s exports and imports in the absolute are large,
    still, in the main, the people of India live on their own
    products, and a large part of those products run their life
    history from production to consumption in a very small
    territory.  They have only the remotest connection with foreign
    trade, gold, and the gold exchanges.  In time, of course, any
    substantial disturbance in the equilibrium of values in the
    country’s import and export trade will make itself felt in these
    local prices, but, allowing for exceptions [pg 254] it may be
    said that in a country like India the influences of such
    disturbances travel very slowly and lose much of their momentum
    in travelling.”

In consequence of the thinness of connection between the two it is
obvious that the prices of such Indian goods as do enter into
international trade cannot always be said to move in more or less the
same proportion as those which do not.  Besides this thinness of
connection which permits of deviations of the general purchasing power
of a currency from the level indicated by the actual exchange rate, it
is to be noted that the prices of Indian commodities which largely enter
into international trade are not governed by local influences. Such
exports of India as wheat, hides, rice and oil seeds are international
commodities, not solely amenable to influences originating from changes
that may be taking place in the prices of home commodities and services.
The combined effect of these two circumstances, except in abnormal
events such as the war, is to militate against the prices of traded and
non-traded goods moving in quick sympathy.³⁸⁸

  ³⁸⁸ This is merely re-stating what has previously been stated to
      explain why specific depreciation of the rupee does not
      immediately follow upon its general depreciation.

If this is true, then, although the maintenance of the exchange standard
does imply a purchasing power parity of the rupee with gold, it is not a
purchasing power parity of the two currencies with respect to _all_ the
commodities.  All that it implies is that the purchasing power of the
rupee over such commodities as entered into international trade was on a
par with gold, so that there did not often arise the necessity of
exhausting the gold reserve.  The preservation of the gold reserve only
meant that there was equality of prices so far as internationally traded
goods were concerned.  Thus interpreted, the fact that the rupee
maintained its gold value does not preclude the possibility of Indian
prices being, on the whole, higher than gold prices, thereby vitiating
the _à priori_ view that the exchange standard is as good as the gold
standard. [pg 255]

It should be pointed out³⁸⁹ that all changes of prices affect more or
less the welfare of the individual.  However, the general flexibility of
the modern economic organization, with its mobility of capital and
labour, free competition, power of choice, inventive genius and
intellectual resources of entrepreneurs and merchants, takes care of the
normal and temporary fluctuations of prices.  But when a change in the
price-level is general and persistent in one direction the case is
otherwise.  Arrangements based on the expectation that the price
movement is only temporary, and that there will be a return to the
former normal position, constantly come to naught.  Suffering endured in
holding on for the turn in the movement cannot be offset by gains in
another.  In short, such a persistent price movement in one direction is
bound to confound ordinary business sagacity and so vitiate all
calculations for the future as to result in unlimited dislocation or
loss and subject the individual to such powerful and at the same time
incalculable influences that his economic welfare cannot but escape
entirely from his control, and prudence, forethought, and energy become
of no avail in the struggle for existence.  Perfect stability of value
in a monetary standard is as yet only an ideal.  But the evil
consequences of instability are so great that Prof. Marshall, believing
as he did that the general prejudice against tampering with the monetary
foundations of economic life was a healthy prejudice, yet observed that
much may be done towards safeguarding the economic welfare of
communities by lessening its variability.³⁹⁰ A depreciating standard of
value, as gold has been since 1896, is an evil.  But can a standard of
value, undergoing a continuous depreciation as has been the case with
the exchange standard, and that too of a greater depth than the gold
standard—in other words, causing a greater rise of prices—be regarded as
a good standard of value? [pg 256]

  ³⁸⁹ What follows is condensed from Mayo-Smith’s “Price Movements and
      Individual Welfare,” in the _Political Science Quarterly_, Vol.
      XV, No. 1 (March, 1900), pp. 14–17.

  ³⁹⁰ Cf. “Remedies for Fluctuations of General Prices,” in _The
      Contemporary Review_, March, 1887, _passim_.

In the light of this it is strange that Prof.  Keynes, in his treatise
on _Indian Currency and Finance_, should have maintained that the
exchange standard contained an essential element in the ideal standard
of the future³⁹¹—a view subsequently endorsed by the Chamberlain
Commission.  If stability of purchasing power in terms of commodities in
general is the criterion for judging a system of currency, then few
students of economies will be found to agree with Prof. Keynes. Perhaps
it is not too sanguine to say that even the Prof. Keynes of 1920 will
prefer a gold standard to a gold-exchange standard, for under the former
prices have varied much less than has been the case under the latter.

  ³⁹¹ Op. cit., p. 36.

In this connection attention may be drawn to the prevalent misconception
that India is a gold-standard country.  It will be admitted that the
best practical test whether any two countries have the same standard of
value is to be found in the character of the movements in their
price-levels.  So sure is the test that Prof. Mitchell, after a very
careful and wide survey of the price-level of different countries and
the American price-level during the greenback period, was led to
observe³⁹² that

    “when two countries have a similar monetary system and important
    business relations with each other, the movements of their
    price-levels as represented by index-numbers are found to agree
    rather closely.  This agreement is so strong that similarity of
    movement is usually found even when comparisons are made with
    materials so crude as index-numbers compiled from unlike lists
    of commodities and computed on the basis of actual prices in
    different years.”

  ³⁹² _Gold, Prices, and Wages under the Greenback Standard_, 1908, p.

Now, we know that before the war England was a gold-standard country,
and we also know that there was no close correspondence between the
contemporary movements of the price-levels of India and England.  In
view of this, it is only a delusion to maintain that India has been a
gold-standard country.  On the other hand, it is better to [pg 257]
recognize that India has yet to become a gold-standard country unless we
are to fall into the same error that Prof. Fischer³⁹³ must be said to
have committed in attributing the extraordinary rise of prices in India
to the existence of a gold standard, when, as a matter of fact, it
should have been attributed to the want of a gold standard.

  ³⁹³ _Purchasing Power_, etc., 1911, p. 340.

How can she become a gold-standard country?  The obvious answer is, by
introducing a gold currency.  Prof. Keynes scoffs at the view that there
cannot be a gold standard without a gold currency as pure nonsense.³⁹⁴
He seems to hold that a currency and a standard of value are two
different things.  Surely there he is wrong.  Because a society needs a
medium of exchange, a standard of value, and a store of value to sustain
its economic life, it is positively erroneous to argue that these three
functions can be performed by different instrumentalities.  On the other
hand, as Professor Davenport insists,³⁹⁵

    “all the different uses of money are merely different aspects or
    emphasis of the intermediate function.  Deferred payments … are
    merely deferred payments of the intermediate.  So again of the
    standard aspect; whatever is the general intermediate is by that
    fact the standard.  The functions are not two, but one. …
    Clearly, also, the intermediate may be a storehouse of
    purchasing power.  The second half of the barter may be
    deferred.  The intermediate is generalized purchasing power.
    Delay is one of the privileges which especially the intermediate
    function carries with it.”

  ³⁹⁴ Op. cit., p. 29.

  ³⁹⁵ Op. cit., pp. 255–56; cf. also F. A. Walker, _Money in its
      Relationship to Trade_, p. 27; and C. M. Walsh, _The Fundamental
      Problem in Monetary Science_, p. 804.

Thus the rupee by reason of being the currency is also the standard of
value.  If we wish to make gold the standard of value in India we must
introduce it into the currency of India.  But it may be asked what
difference could it make to the price level in India if gold were made a
part of the Indian currency?  To answer this question it is necessary to
lay bare the nature of the rupee currency.  Now it will be [pg 258]
granted that a standard of value which is capable of expansion as well
as contraction is likely to be more stable than one which is incapable
of such a manipulation.  The rupee currency is capable of easy
expansion, but is not capable of easy contraction by reason of the fact
that it is neither exportable nor meltable, nor is it convertible at
will.  The effects of such a currency as compared with those of an
exportable currency were well brought out by the late Hon. Mr. Gokhale
in a speech in which he observed:³⁹⁶

  ³⁹⁶ _Supreme Legislative Council Proceedings_, Vol. L, p. 642.

    “Now, what is the difference if you have an automatic
    self-adjusting currency, such as we may have with gold or we had
    with silver before the year 1893, and the kind of artificial
    currency that we have at present?  Situated as India is you will
    always require, to meet the demands of trade, the coinage of a
    certain number of gold or silver pieces, as the case may be,
    during the export season, that is for six months in the year.
    When the export season is brisk money has to be sent into the
    interior to purchase commodities.  That is a factor common to
    both situations, whether you have an artificial currency, as
    now, or a silver currency, as before 1893.  But the difference
    is this.  During the remaining six months of the slack season
    there is undoubtedly experienced a redundancy of currency, and
    under a self-adjusting automatic system there are three outlets
    for this redundancy to work itself off.  The coins that are
    superfluous may either come back to the banks and to the coffers
    of Government, or they may be exported, or they may be melted by
    people for purposes of consumption for other wants.  But where
    you have no self-adjusting and automatic currency, where the
    coin is an artificial token currency, such as our rupee is at
    the present moment, two out of three of these outlets are
    stopped.  You cannot export the rupee without heavy loss, you
    cannot melt the rupee without heavy loss, and consequently the
    extra coins must return to the banks and coffers of the
    Government or they must be absorbed by the people.  In the
    latter case the situation is like that of a soil which is
    water-logged, which has no efficient drainage, and the moisture
    from which cannot be removed.  In this country the facilities
    for banking are very inadequate, and therefore our money does
    not swiftly return back to the banks or [pg 259] Government
    Treasuries.  Consequently, the extra money that is sent into the
    interior often gathers here and there like pools of water
    turning the whole soil into a marsh.  I believe the fact cannot
    be gainsaid that the stopping of two outlets out of the three
    tends to raise prices by making the volume of currency

Had gold formed a part of the Indian currency it would have not only met
the needs for expansion but would have permitted contraction of currency
in a degree unknown to the rupee.  Gold would be superior to the rupee
as a standard of value for the reason that the former is expansible as
well as contractible, while the latter is only expansible but not
contractible.  This is merely to state in different language what has
already been said previously, that the Indian monetary standard, instead
of being a gold or a gold-exchange standard, is in all essentials an
inconvertible rupee standard like the paper pound of the Bank Suspension
period, and the extra local rise of prices which, in itself an
incontrovertible proof of the identity of the two systems, is
characteristic of both, is, to use the language of the Bullion

  ³⁹⁷ Prof. Cannan’s Reprint, p. 17.

    “the effect of an excessive quantity of a circulating medium in
    a country which has adopted a currency not exportable to other
    countries, or not convertible at will into a coin which is

Therefore, if some mitigation of the rise in the Indian price-level is
desirable, then the most essential thing to do is to permit some form of
“exportable” currency such as gold to be a counterpart of the Indian
monetary system.

The Chamberlain Commission expended much ingenuity in making out a case
against a gold currency in India.³⁹⁸ The arguments it urged were: (1)
Indian people will hoard gold and will not make it available in a
crisis; (2) that India is too poor a country to maintain such an
expensive money material as gold; (3) that the transactions of the
Indian people are too small to permit of a gold circulation; and (4) [pg
260] paper convertible into rupees is the best form of currency for the
people of India as being the most economical, and that the introduction
of a gold currency will militate against the popularity of notes as well
as of rupees.  The bogy of hoarding is an old one, and would really be
an argument of some force if hoarding was something which knew no law.
But the case is quite otherwise.  Money, being the most saleable
commodity and the least likely, in a well-ordered monetary system, to
deteriorate in value during short periods, is hoarded continually by all
people, i.e. treated as a store of value.  But in treating it as a store
of value the possessor of money is comparing the utilities he can get
for the money, by disposing of it now, with those he believes he can get
for it in the future, and if the highest present utility is not so great
as the highest future utility, discounted for risk and time, he will
hoard the money.  On the other hand, he will not hoard the money if the
present use was greater than the future use.  That being so, it is
difficult to understand why hoarding should be an objection to a gold
currency for the Indian people.  If they hoard gold that means they do
not care to spend it on current purchases or that they have another form
of currency which is inferior to gold and which they naturally like to
part with first.  On the other hand, if they do wish to make current
purchases and have no other form of currency they cannot hoard gold.
There are instances when precious metals have been exported from India,
when occasion had called for it,³⁹⁹ showing that the hoarding habit of
the Indian peoples is not such an unknown quantity as is often supposed,
and if on some occasions⁴⁰⁰ they hoarded an exportable currency when
they should have released it, it is not the fault of the people but of
the currency system in which the component parts of the total stock of
money are not equally good as a store of value.  The argument from [pg
261] hoarding, if it is an argument, can be used against any people, and
not particularly against the Indian people.

  ³⁹⁸ Report, pp. 15–19.  The same arguments will be found in Chap. IV
      of Mr. Keynes’s treatise.

  ³⁹⁹ _See_ the Memorandum by Mr. Dalal to the Chamberlain Commission
      Appendices, Vol. III, No. XXXIII, pp. 673–76, for this and other
      cognate topics.

  ⁴⁰⁰ In the crisis of 1907–8 the Indian people were accused of this.
      Yet it must be noted that in that crisis some gold was exported on
      private account.

The second argument against a gold currency in India has no greater
force than the first.  If gold were to disappear from circulation then
the cause can be nothing else but the over-issue of another kind of
money.  In the nineties, when the question of establishing a gold
standard in India was being considered, some people used to point to the
vain efforts made by Italy and the Austrian Empire to promote the
circulation of gold.  That their gold used to disappear is a fact, but
it was not due to their poverty.  It was due to their paper issues. Any
country can maintain a gold currency provided it docs not issue a
cheaper substitute.

Again, if gold will not circulate because transactions are too small the
proper conclusion is not that there should be no gold circulation but
that the unit of currency should be small enough to meet the situation.
The difficulties of circulation raises a problem of coinage.  But the
considerations in respect of coinage cannot be allowed to rule the
question as to what should be the standard of value.  If the sovereign
does not circulate it cannot follow that India should not have a gold
currency.  It merely means that the sovereign is too large for
circulation.  The case, if at all there is one, is against the sovereign
as a unit and not against the principle of a gold currency.  If the
sovereign is not small enough the conclusion is we must find some other
coin to make the circulation of gold effective.

The fourth argument against a gold currency is one of fact, and can be
neither proved nor disproved except by an appeal to evidence whether or
not gold currency has the tendency ascribed to it.  But we may ask, is
there no danger in a system of currency composed of paper convertible
into rupees?  Will the paper have no effect on the value of the rupee?
The Commission, if it at all considered that question, which is very
doubtful, was perhaps persuaded by the view commonly held, that as the
paper currency was convertible it could not affect the value or the
purchasing power of the rupee.  In holding this view it was wrong; for,
the convertibility of paper currency to the extent it is uncovered [pg
262] does not prevent it from lowering the value of the unit of account
into which it is convertible, because by competition it reduces the
demand for the unit of account and thus brings about a fall in its
value.  Thus the paper, although economical as a currency, is a danger
to the value of the rupee.  This danger would have been of a limited
character if the rupee had been freely convertible into gold.  But the
danger of a convertible paper currency to the value of a unit of account
becomes as great as that of an inconvertible paper currency if that unit
is not protected against being driven below the metal of ultimate
redemption by free convertibility into that metal.⁴⁰¹ The rupee is not
protected by such convertibility, and as the Commission did not want
that it should be so protected it should have realized that it was as
seriously jeopardizing the prospects of the rupee being maintained at
par with commodities in general, and therefore with gold, by urging the
extension of a paper currency, be it ever so perfectly convertible, as
it could have done by making the paper altogether inconvertible.  But so
obsessed was the Commission with considerations of economy, and so
reckless was it with considerations of stability of value, that it
actually proposed a change in the basis of the Indian paper currency
from a fixed-issue system to that of a fixed-proportion system.⁴⁰² That,
at the dictates of considerations of economy, the Commission should have
neglected to take account of this aspect of the question, is only one
more evidence of the very perfunctory manner in which it has treated the
whole question of stability of purchasing power so far as the Indian
currency was concerned.

  ⁴⁰¹ For an illuminating discussion on this topic, cf. _Money: Its
      Connection with Rising and Falling Prices_, by Prof. Cannan, 3rd
      ed., pp. 47–8.

  ⁴⁰² Report, Sec. 112.

If there is any force in what has been urged above, then surely a gold
currency is not a mere matter of “sentiment” and a “costly luxury,” but
a necessity dictated by the supreme interest of steadying the Indian
standard of value, and thereby to some extent, however slight,
safeguarding [pg 263] the welfare of the Indian people from the untoward
consequences of a rising price-level.

We now see how very wrong the Chamberlain Commission was from every
point of view in upholding the departure from the plan originally
outlined by the Government of India and sanctioned by the Fowler
Committee.  But that raises the question: How did that ideal come to be
so ruthlessly defeated?  If the Fowler Committee had proposed that gold
should be the currency of India, how is it that gold ceased to be the
currency?  It cannot be said that the door is closed against the entry
of gold, for it has been declared legal tender.  Speaking in the
language of Prof. Fisher, the movement of gold in the money reservoir of
India is allowed a much greater freedom so far as law is concerned than
can be said of silver.  Silver, in the form of rupees, is admitted by a
very narrow valve which gives it an inlet into that reservoir, but there
is no outlet provided for it.  On the other hand, gold is admitted into
the same reservoir by a pipe-connection which gives it an inlet as well
as an outlet.  Why, then, does not gold flow into the currency reservoir
of India?  A proper understanding on this question is the first step
towards a return to the sound system proposed in 1898.

On an examination of the literature which attempts to deal with this
aspect of the question, it will be found that two explanations are
usually advanced to account for the non-entry of gold into the currency
system of India.  One of them is the sale of council bills by the
Secretary of State.  The effect of the sale of council bills, it is
said, is to prevent gold from going to India.  Mr. Subhedar, said to be
an authority on Indian currency, in his evidence before the Smith
Committee (Q. 3,502), observed:—

    “Since 1905 it has been the deliberate attempt of those who
    control our currency policy to prevent gold going to India and
    into circulation.”

The council bill has a history which goes back to the days of the East
India Company.⁴⁰³ The peculiar position [pg 264] of the Government of
India, arising from the fact that it receives its revenues in India and
is obliged to make payments in England, imposes upon it the necessity of
making remittances from India to England.  Ever since the days of the
East India Company the policy has been to arrange for the remittance in
such a way as to avoid the transmission of bullion. Three modes of
making the remittance were open to the Directors of the East India
Company: (1) Sending bullion from India to England; (2) receiving money
in England in return for bills on the Government of India; and (3)
making advances to merchants in India for the purchase of goods
consigned to the United Kingdom and repayable in England to the Court of
Directors of the Company to whom the goods were hypothecated.  Out of
these it was on the last two that greater reliance was placed by them.
In time the mode of remittance through hypothecation of goods was
dropped “as introducing a vicious system of credit, and interfering with
the ordinary course of trade.”  The selling of bills on India survived
as the fittest of all the three alternatives,⁴⁰⁴ and was continued by
the Secretary of State in Council—hence the name, council bill—when the
Government of India was taken over by the Crown from the Company.  In
the hands of the Secretary of State the council bill has undergone some
modifications. The sales as now effected are weekly sales,⁴⁰⁵ and are
managed through the Bank of England, which issues an advertisement on
every Wednesday on behalf of the Secretary of State for India, inviting
tenders to be submitted on the following Wednesday for bills payable on
[pg 265] demand by the Government of India either at Bombay, Madras, or
Calcutta.  The minimum fraction of a penny in the price at which tenders
of bills are received has now⁴⁰⁶ been fixed at \frac{1}{32}nd of a
penny.  The council bill is no longer of one species as it used to be.
On the other hand there are four classes of bills: (1) Ordinary bills of
exchange, sold every Wednesday, known as “_Councils_”; (2) telegraphic
transfers, sold on Wednesdays, called shortly “_Transfers_”;⁴⁰⁷ (3)
ordinary bills of exchange, sold on any day in the week excepting
Wednesday, called “Intermediates”; and (4) telegraphic transfers, sold
on any day excepting Wednesday, named “_Specials_.”  Now, in what way
does the Secretary of State use his machinery of council bills to
prevent gold from going to India?  It is said that the price and the
magnitude of the sale are so arranged that gold does not go to India.
Before we examine to what extent this has defeated the policy of the
Fowler Committee, the following figures (Tables LI and LII, pp. 266–7)
are presented for purposes of elucidation.

  ⁴⁰³ Cf. the Memorandum by Sir Henry Waterfield relating to the system
      of effecting remittances from India, Appendix to the Fowler
      Committee’s Report, p. 24; also Memorandum by F. W. Newmarch on
      the Sale of Council Bills and Telegraphic Transfers, Appendices to
      the Interim Report of the Royal Commission on Indian Finance and
      Currency, Vol. I, No. VIII. p. 217.

  ⁴⁰⁴ There was a fourth one, viz., the Government of India purchasing
      sterling bills in India on London and sending them to the
      Secretary of State for collection.  It was employed for a short
      period of time in 1877, but was afterwards dropped.

  ⁴⁰⁵ From January 22, 1862, when the Sale of Council Bills under the
      authority of the Secretary of State first took place, up to
      November, 1862, the sales were effected monthly.  From November,
      1862, the sales were effected fortnightly; and in August, 1876,
      they were made weekly.

  ⁴⁰⁶ From January to March, 1862, the minimum fraction was a farthing;
      it was reduced to ⅛th of a penny in March 1862, to 1/16th in
      January 1875, and to 1/32nd in 1882, at which fraction it has
      continued since then.

  ⁴⁰⁷ First introduced in 1876.

From an examination of these tables two facts at once become clear. One
is the enormous amount of council bills the Secretary of State sells.
Before the closing of the Mints the sales of council bills moved closely
with the magnitude of the home charges, and the actual drawings did not
materially deviate from the amount estimated in the Budget.  Since the
closure of the Mints the drawings of the Secretary of State have not
been governed purely by the needs of the Home Treasury.  Since the
closure, the Secretary of State has endeavoured⁴⁰⁸:—

    “(1) To draw from the Treasuries of the Government of India
    during the financial year the amount that is laid down in the
    Budget as necessary to carry out the Ways and Means programme of
    the year. [pg 266]

  ⁴⁰⁸ Cf. Memorandum on the Sale of Council Bills, by F. W. Newmarch, to
      the Chamberlain Commission, App. Vol. I, No. VII, p. 222,

                               _TABLE LI_

_Balance of Trade, Council Drawings and Imports of Gold
        Before 1893_

                          Net Imports                      Excess
                          of Treasure.                     (+)
                        ─────────────────────              or
          Balance         Gold.     Silver.                Deficiency                Cash
          of                                  Amount       (−)                       Balances     Minimum
          Trade                               of           of           Home         in           Rate for
Years.    (Merchandise:                       Council      Bills        Charges.     the          Council
          Private                             Bills        drawn                     Home         Bills.
          Account).                           drawn.       as                        Treasury.
(1)       (2)             (3)       (4)       (5)          (6)          (7)          (8)          (9)
          £               £         £         £            £            £            £            s.   d.
                          000,000   000,000
1870–71   20,863,000      2·13      ·9        —            —            10,031,261   3,305,972    1    10¼
1871–72   31,094,000      3·43      6·3       —            —            9,703,235    2,821,091    1    10⅜
1872–73   23,376,000      2·41      ·7        13,939,095   +939,095     10,248,605   2,998,444    1    10⅜
1873–74   21,160,000      1·29      2·3       13,285,678   −214,322     9,310,926    2,013,638    1    9½
1874–75   20,137,000      1·73      4·3       10,841,615   +841,615     9,490,391    2,796,370    1    9¾
1875–76   19,204,000      1·40      1·4       12,389,613   −1,910,387   9,155,050    919,899      1    9
1876–77   23,573,000      ·18       6·1       12,695,800   −964,200     13,851,296   2,713,967    1    6½
1877–78   23,758,000      ·41       12·7      10,134,455   −2,115,545   14,048,350   1,076,657    1    8
1878–79   23,167,000      ·74       3·3       13,948,565   −3,051,435   13,851,296   1,117,925    1    6⅝
1879–80   26,046,000      1·45      6·5       15,261,810   +261,810     14,547,664   2,270,107    1    7
1880–81   21,464,000      3·03      3·2       15,239,677   −1,660,323   14,418,986   4,127,749    1    7½
1881–82   32,855,000      4·02      4·5       18,412,429   +1,212,429   14,399,083   2,620,909    1    7⅜
1882–83   31,389,000      4·01      6·1       15,120,521   −221,479     14,101,262   3,429,874    1    7
1883–84   23,611,600      4·44      5·2       17,599,805   +1,229,805   15,030,195   4,113,221    1    7¼
1884–85   20,034,100      3·76      5·8       13,758,909   −2,741,091   14,100,982   2,249,378    1    6¾
1885–86   21,344,200      2·10      8·8       10,292,692   −3,481,008   14,014,733   4,726,585    1    5⅞
1886–87   19,844,800      1·58      5·2       12,136,279   −1,195,121   14,409,949   5,280,829    1    4⅛
1887–88   18,724,400      2·10      6·5       15,358,577   −891,423     15,389,065   5,900,697    1    4⅜
1888–89   20,271,900      1·92      6·3       14,262,859   +262,859     14,983,221   3,259,933    1    4
1889–90   24,557,800      3·18      7·6       15,474,496   +784,596     14,848,923   5,402,873    1    4
1890–91   20,733,800      4·25      10·7      15,969,034   +980,034     15,568,875   3,885,050    1    4
1891–92   27,632,400      1·68      6·3       16,093,854   +93,854      15,874,699   4,122,626    1    3
1892–93   29,287,300      1·75      8·0       16,532,215   −467,785     16,334,541   12,268,388   1    2⅝

[pg 267]

                              _TABLE LII_

_Balance of Trade, Council Drawings and Imports of Gold
        After 1893_

                            Net Imports                      Excess
                            of                               (+) or
            Balance         Treasure.                        Deficiency                 Cash
            of            ───────────────────── Amount       (−) of                     Balances     Minimum
            Trade           Gold.     Silver.   of           Bills         Home         in           Rate for
Years.      (Merchandise:                       Council      drawn         Charges.     the          Council
            Private                             Bills        as                         Home         Bills.
            Account).                           drawn.       compared                   Treasury.
(1)         (2)             (3)       (4)       (5)          (6)           (7)          (8)          (9)
            £               £         £         £            £             £            £            s.   d.
                            000,000   000,000
1893–94     21,660,500      − ·39     8·3       9,530,235    −9,169,765    15,826,815   1,300,564    1    1·500
1894–95     25,765,000      −2·7      3·4       16,905,102   −94,898       15,707,367   1,503,124    1    0·000
1895–96     29,963,800      1·5       3·7       17,664,492   +664,492      15,603,370   3,393,798    1    1·000
1896–97     21,333,100      1·4       3·5       15,526,547   −973,453      15,795,836   2,832,354    1    1·781
1897–98     18,847,000      3·2       5·4       9,506,077    −3,493,923    16,198,263   2,534,244    1    2·250
1898–99     29,560,700      4·3       2·6       18,692,377   +2,692,377    16,303,197   3,145,768    1    3·094
1899–1900   25,509,600      6·3       2·4       19,067,022   +2,067,022    16,392,846   3,330,943    1    3·875
1900–01     20,727,400      ·5        6·3       13,300,277   −3,139,723    17,200,957   4,091,926    1    3·875
1901–02     28,630,600      1·3       4·8       18,539,071   +2,039,071    17,368,655   6,693,137    1    3,875
1902–03     33,352,600      5·8       4·6       18,499,966   +1,999,946    18,361,821   5,767,787    1    3·875
1903–04     45,424,100      6·6       9·1       23,859,303   +6,859,303    18,146,474   7,294,782    1    3·875
1904–05     40,548,200      6·5       8·9       24,425,558   +7,925,558    19,463,757   10,262,581   1    3·969
1905–06     39,086,700      ·3        10·5      32,166,973   +14,333,973   18,617,465   8,436,519    1    3·938
1906–07     45,506,600      9·9       16·0      33,157,196   +15,357,196   19,208,408   5,606,812    1    3·969
1907–08     31,640,000      11·6      13·0      16,232,062   −1,867,938    18,487,267   5,738,489    1    3·906
1908–09     21,173,300      2·9       8·0       13,915,426   −4,584,574    18,925,159   8,453,715    1    3·906
1909–10     47,213,000      14·5      6·3       27,096,586   +10,896,586   19,122,916   15,809,618   1    3·906
1910–11     53,685,300      16·0      5·8       26,783,303   +11,283,303   19,581,563   18,174,34?   1    3·906
1911–12     59,512,900      25·1      3·6       27,058,550   +9,900,250    19,957,657   19,463,723   1    3·937
1912–13     57,020,900      22·6      11·5      25,759,706   +10,259,706   20,279,572   9,789,634    1    3·969
1913–14     43,753,900      15·6      8·7       31,200,827   +10,000,827   20,311,673   3,157,732    1    3·937
1914–15     29,108,500      5·1       5·9       7,748,111    −12,251,889   20,208,598   7,913,226    1    3·937
1915–16     44,026,600      − ·7      3·2       20,354,517   +13,354,517   20,109,094   12,803,348   1    3·937
1916–17     60,843,200      8·82      12·5      32,998,095   +29,093,095   21,145,627   11,391,993   1    4·031
1917–18     61,420,000      16·8      12·7      34,880,682   +34,880,682   26,065,057   16,625,416   1    4·156
1918–19     56,540,000      −3·7      45·3      20,946,314   +20,946,314   23,629,495   14,715,827   1    4·906

[pg 268]

    “(2) To draw such further amounts as may be required to pay for
    purchases of silver bought for coinage purposes.

    “(3) To draw such further amounts as an unexpectedly prosperous
    season may enable the Government to spare, to be used towards
    the reduction or avoidance of debt in England.

    “(4) To sell additional bills and transfers to meet the
    convenience of trade.

    “(5) To issue telegraphic transfers on India in payment for
    sovereigns which the Secretary of State has purchased in transit
    from Australia or from Egypt to India.”

The result of such drawings is that the councils are made to play an
enormous part in the adjustment of the trade balance of India, and the
swelling of balances in the Home Treasury and the locking up of Indian
funds in London.

The second point to note in comparing the preceding tables is with
regard to the price at which the Secretary of State makes his sales.
Before the closure of the Mints the price of the council bills was
beyond the control of the Secretary of State, who had therefore to
accept the price offered by the highest bidder at the weekly sale of his
bills.  But it is objected that there is no reason why the Secretary of
State should have continued the old practice of auctioning the rupee to
the highest bidder when the closing of the Mints had given him the sole
right of manufacturing it.  Availing himself of his monopoly position,
it is insisted, the Secretary of State should not have sold his bills
below 1s. 4⅛d. or 1s. 4 3/32d. which, under the ratio of 15 rupees to
the sovereign, was for India the gold-import point.  In practice the
Secretary of State has willed away the benefit of his position, and has
accepted tenders at rates below gold-import point, as may be seen from
the minimum rates he has accepted for his bills.

It is said that if the council bills were sold in amounts required
strictly for the purposes of the Home Treasury, and sold at a price not
below gold-import point, gold would tend to be imported into India and
would thus become part of the Indian currency media.  As it is, the
combined effect of the operations of the Secretary of State is said to
be to [pg 269] lock up Indian gold in London.  With the use or misuse of
the Indian gold in London we are not here concerned.  But those who are
inclined to justify the India Office scandals in the management of
Indian funds in London, and have offered their services to place them on
a scientific footing, may be reminded that a practice on one side of
Downing Street which Bagehot said could not be carried on on the other
side of it without raising a storm of criticism, would require more
ingenuity than has been displayed in their briefs.  This much seems to
have been admitted on both sides, that the operations of the Secretary
of State do prevent the importation of gold into India, not altogether,
but to the extent covered by their magnitude.  Now, those who have held
that the ideal of the Fowler Committee has been defeated are no doubt
right in their view that the narrowing of the Secretary of State’s
operation would lead to the importation of gold into India.  But what
justification is there for assuming that the imported gold would become
a part of the currency of India?  The assumption that the abolition of
the Secretary of State’s financial dealings would automatically make
gold the currency of India is simply a gratuitous assumption.  Whether
the imported gold would become current depends on quite a different

The other explanation offered to explain the failure of the ideal of the
Fowler Committee is the want of a Mint in India open to the free coinage
of gold.  The opening of the Mints to the free coinage of gold has been
regarded as the most vital recommendation of the Fowler Committee;
indeed, so much so that the frustration of its ideal has been attributed
to the omission by the Government to carry it out. The consent given by
the Government in 1900 to drop the proposal under the rather truculent
attitude of the Treasury has ever since been resented by the advocates
of a gold currency.  A resolution was moved in 1911 by Sir V.
Thackersay, in the Supreme Legislative Council, urging upon the
Government the desirability of opening a gold Mint for the coinage of
the sovereign if the Treasury consented, and if not for the coinage of
some other gold coin.  In deference to the united voice of the Council,
the Government [pg 270] of India again asked the Secretary of State to
approach the Treasury for its sanction.⁴⁰⁹ The Treasury on this occasion
presented the Secretary of State⁴¹⁰ with two alternatives: (1) That a
branch of the Royal Mint be established at Bombay solely for the purpose
of coining gold into sovereigns, and exclusively under its control; or
(2) that the control of the Mint at Bombay should be entirely
transferred to it.  Neither of the two alternatives was acceptable to
the Government of India; and the Secretary of State, as a concession to
Indian sentiment, sanctioned the issue of a ten-rupee gold coin from the
Indian Mint. The Government of India preferred this solution to that
suggested by the Treasury, but desired that the matter be dealt with
afresh by the Chamberlain Commission then sitting.  That Commission did
not recommend a gold Mint,⁴¹¹ but saw no objection to its establishment
provided the coin issued was a sovereign, and if the coinage of it was
desired by Indian sentiment and if the Government did not mind the
expense of coinage.⁴¹² This view of the Commission carried the
proposition no further than where it was in 1900, until the war
compelled the Government to open the Bombay Mint for the coinage of gold
as a branch of the Royal Mint.  But it was again closed in 1919.  Its
reopening was recommended by the Currency Committee of 1919,⁴¹³ and so
enthusiastically was the project received that an Honourable Member of
the Supreme Council took the unique step of tempting the Government into
adopting that recommendation by an offer to increase the Budget
Estimates under “Mint” to enable the Government to bear the cost of it.
The Government, however, declined the offer with thanks.  So we have in
India the singular spectacle of a country in which there was a gold Mint
even when gold was not legal [pg 271] tender, as was the case between
1835–93, while there is no gold Mint, when gold is legal tender, as has
been the case since 1893.  Just what an open Mint can do in the matter
of promoting the ideal of the Fowler Committee it is difficult to
imagine; but the following extracts from the evidence of a witness (Mr.
Webb), than whom there was no greater advocate of an open gold Mint
before the Chamberlain Commission, help to indicate just what is
expected from a gold Mint.

  ⁴⁰⁹ _See_ Commons Paper 495, of 1913, p. 57.

  ⁴¹⁰ _Ibid._, p. 64.

  ⁴¹¹ Report, secs. 69–71.

  ⁴¹² The Commission recommended that if a gold Mint was not established
      in India Government should renew the notification withdrawn in
      1906 to receive refined gold on suitable terms.—Report, sec. 72.

  ⁴¹³ Report, par. 67.

“The principal advantage which you would expect to derive from a gold
Mint is that you would increase the amount of gold coin in
circulation?—That would be one of the tendencies.

“Is there any other advantage?—The advantage is that the country would
be fitted with what I regard as an essential part of its monetary
mechanism.  I regard it as an essential part of its currency mechanism
that it should have a Mint at which money could be coined at the
requisition of the public.

“I want to get exactly at your reason why that is essential.  Am I right
in thinking that you consider it essential to a proper currency system
that there should be a gold currency?—Yes.

“And essential to a gold currency that there should be a gold Mint?—Yes,
on the spot in India itself. … It would do away, in a measure, with the
management by the Secretary of State of the Foreign Exchanges, in that
there would be always the Mint at which the public could convert their
gold into legal-tender coins in the event of the Secretary of State
taking any action of which the public did not approve.  It is a
safeguard, so to speak, an additional safeguard, that the people of
India can on the spot obtain their own money on presentation of the

Here, again, the assumption that a gold Mint is a guarantee that there
will be a gold currency seems to be one as gratuitous as the former
assumption that if gold were allowed to be freely imported it would on
that account become part of the currency.  On the other hand, there are
cases where Mints were open, yet there was neither gold coinage nor gold
currency.  Instances may be cited from the history [pg 272] of the
coinage at the Royal Mint in London.  The magnitude of gold coinage
during the bank suspension period, 1797–1821, or the late war, 1914–18,
is instructive from this point of view.  The Mint was open in both
cases, but what was the total coinage of gold?  Throughout the
suspension period the gold coined was negligible, and during the years
1807, 1812, and 1814–16 no gold was coined at all at the Royal Mint.⁴¹⁴
Again, during the late war the coinage of gold fell off from 1915, and
from 1917 it ceased altogether.⁴¹⁵ There instances conclusively show
that although a Mint is a useful institution, yet there is no magic in a
Mint to attract gold to it.  The historical instances adduced above
leave no doubt that the circulation of gold is governed by factors quite
independent of the existence or non-existence of a Mint open to the free
coinage thereof.  Now, it is an established proposition of political
economy that when two kinds of media are employed for currency purposes
the bad one drives out the good one from circulation.  Applying this
principle to the situation in India, it should be evident that so long
as there is an unlimited issue of rupees gold cannot circulate in India.
This important principle has been so completely overlooked by those who
have insisted on the introduction of a gold currency that they have not
raised a finger against the unlimited issue of rupees.  Mr. Webb, the
fiercest opponent of the India Office malpractices, and the staunchest
supporter of the view that if only the Secretary of State could be made
to contract his drawings gold would flow and be a part of the currency
in India, recommended to the Chamberlain Commission that—

    “The sales of Council Drafts should be strictly limited to the
    sum required to meet the Home Charges, and no allotments should
    in any circumstances be made below, say, 1s. 4⅛d. to 1s.
    4 3/32d.—i.e. about the present equivalent of specie point for
    gold imports into India.  The sum required in London for Home
    Charges having been realized, _no further sales of Council
    Drafts should be made except for the express purpose—duly
    notified to the public—_ [pg 273] _of purchasing metal for the
    manufacture of further token coinage_. Such special sales of
    Council Drafts should not be made at anything below specie point
    for gold imports.”⁴¹⁶

  ⁴¹⁴ _See_ G. R. Porter, _Progress of the Nation_ (Ed. Hirst), p. 568.

  ⁴¹⁵ _See_ Report of the Deputy Master of the Royal Mint, 1921.

  ⁴¹⁶ Italics not in the original.

Again, Sir V. Thackersay, in the course of his speech on March 22, 1912,
moving a resolution in the Legislative Council, asking the Government to
open the Mint for the coinage of gold in India, observed:—

    “Let me make myself clear on one point. _I do not suggest that
    Government should give up the right to coin rupees or refuse to
    give rupees when people demand the same_.  I do not propose to
    touch the gold-standard reserve, which must remain as it is as
    the ultimate guarantee of our currency policy.  My proposal does
    not interfere with the existing arrangements in any way, but is
    merely supplementary to them. … Let the Government of India
    accumulate gold to the maximum limit of its capacity, but let
    the surplus gold which it cannot absorb be coined and circulated
    if the public chooses to do so.  With our expanding trade and
    the balance in our favour, gold will continue to be imported in
    ordinary time, and _if the facilities of minting are provided in
    India, it will go into circulation_.”⁴¹⁷

  ⁴¹⁷ _S.L.C.P._, Vol. L, pp. 637–38.  Italics not in the original.

Those are surely not the ways of promoting a gold currency.  Indeed,
they run counter to it.  So long as the coinage of rupees goes on gold
will not enter into currency.  Indeed, to cry out on the one hand
against the huge drawings of the Secretary of State and the consequent
transfer of Indian funds to London and their mismanagement by the
Secretary of State, and on the other hand to permit him to manufacture
additional token coinage of rupees, is to display not only a lamentable
ignorance of a fundamental principle of currency, but also to show a
complete failure to understand the precise source from which the whole
trouble arises.  It is true that the Government of India cannot bind the
Secretary of State to any particular course of action,⁴¹⁸ [pg 274] and
he often does override the provisions of the Annual Budget.  But the
question remains, How is it that he is able to draw so much more after
1893 than he ever did before?  It must be remembered that whatever the
Secretary of State does with the funds in London he must pay for his
drawings in India.  Before 1893 he drew less because his means of
payment were less; after 1893 he drew more because his means of payment
were greater.  And why were his means of payment greater?  Simply
because he had been able to coin rupees. Indeed, the amount of drawings
are limited by the demand for them and by his capacity to coin rupees.
It is therefore foolish to blame the Secretary of State for betraying
the interests of India and at the same time to permit him to coin
rupees, the very means by which he is able to betray.  If a gold
currency is wanted, and it is wanted because the rupee is a bad standard
of value, then what is necessary is not to put a limit on the drawings
of the Secretary of State or the opening of a gold Mint, but a short
enactment stopping the coinage of rupees.  Then only gold—made legal
tender, at a suitable ratio with the rupee—will become a part of Indian

  ⁴¹⁸ The legal position of the Secretary of State and the extent to
      which he can be bound by the provisions of any law passed by the
      Government of India were well explained by Sir James Westland in
      his speech on the Indian Paper Currency (Amendment) Bill, which
      afterwards became Act IT of 1898; compare also the peculiar
      wording of that Act.

That the stoppage of rupee coinage is a sufficient remedy is amply
corroborated by the now forgotten episode in the history of Indian
currency during the years 1898–1902.  Within the short space of a year
and a half after gold had been made legal tender the Hon. C. E. Dawkins,
notwithstanding the fact that there was no gold Mint, was able, in his
Budget speech in March, 1901, to observe:—

    “India has at length emerged from a period of transition in her
    currency, has reached the goal to which she has been struggling
    for years, has established a gold standard and a gold currency,
    and has attained that practical fixity in exchange which has
    brought a relief alike to the private individual and to the
    Government finances.”⁴¹⁹

So great was the plethora of gold that Mr. Dawkins further remarked⁴²⁰:—

    “… We have been nearly swamped … by gold …” [pg 275]

  ⁴¹⁹ _Financial Statement_, 1900–1, p. 14.

  ⁴²⁰ _Ibid._, p. 19.

The transformation in the currency position which then took place was
graphically described by Lord Curzon, the then Viceroy, in the following

    “Mr. Dawkins … has successfully inaugurated the new era under
    which the sovereign has become legal tender in India, and
    stability in exchange has assumed what we hope may be a
    stereotyped form.  This great change has been introduced in
    defiance of the vaticinations of all the prophets of evil, and
    more especially of the particular prophecy that we could not get
    gold to come to India, that we could not keep it in our hands if
    we got it here, but that it would slip so quickly through our
    fingers that we should have even to borrow to maintain the
    necessary supply.  As a matter of fact, we are almost in the
    position of the mythological king, who prayed that all he
    touched might be turned into gold, and was then rather painfully
    surprised when he found that his food had been converted into
    the same somewhat indigestible material.  So much gold, indeed,
    have we got, that we are now giving gold for rupees as well as
    rupees for gold, i.e. we are really in the enjoyment of complete
    convertibility—a state of affairs which would have been derided
    as impossible by the experts a year ago.”

  ⁴²¹ _Ibid._, p. 167.

Compare this state of affairs in 1900–1 with that found to exist in
1910–11, for instance.  Speaking of the currency situation as it was in
that year, the Hon. Sir James (now Lord) Meston, observed⁴²²:—

    “We have passed through many changes in currency policy and made
    not a few mistakes.  But 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 Committee 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. …” [pg 276]

  ⁴²² _Financial Statement_, 1910–11, p. 346.

Leaving aside for the moment the extenuatory remarks of the speaker, the
fact remains that in 1900 India had a gold currency.  But, taking stock
of the position at the end of 1910, it had ceased to have it. What is it
that made this difference?  Nothing but the fact that between 1893–1900
no rupees were coined, but between 1900–1910 the number of rupees coined
was enormous.  During the first period the inducement to coin rupees was
very great indeed.  The exchange was not quite stable, and the
Government had still to find an increasing number of rupees to pay for
the “Home Charges.” And an Honourable Member⁴²³ of the Supreme
Legislative Council actually asked:—

    “Is there any objection to the Government working the Mints on
    their own account?  Considering the low value of silver and the
    great margin between the respective prices of bullion and the
    rupee, would not Government by manufacturing rupees for itself
    make sufficient profit to meet at least a substantial portion of
    the present deficit?  It seems to me to be a legitimate source
    of revenue and one capable of materially easing our finances.”

  ⁴²³ This was no other than the Hon. Fazulbhai Vishram, the well-known
      financier of Bombay.  Cf. his speech in the _Financial Statement_,
      1894–95, p. 96.

But Sir James Westland, who was then in charge of the finances of India,

    “I must confess to a little surprise in finding the proposal put
    forward by one of the commercial members of your Excellency’s
    Council that we should buy silver at its present low price, and
    coin it for issue at the appreciated value of the rupee. … I
    shall certainly refuse myself to fall into this temptation.”

  ⁴²⁴ _Ibid._, p. 123.

Again, in 1898, when some of the followers of Mr. Lindsay desired that
Government should coin rupees to relieve the monetary stringency, Sir
James Westland remarked⁴²⁵:—

    “… in our opinion the silver standard is now a question of the
    past. It is a case of _vestigia nulla retrorsum_. [pg 277] The
    only question before us is how best to attain the gold standard.
    We cannot go back to the position of the open Mints.  There are
    only two ways in which we can go back to that position.  We can
    either open the Mints to the public generally, or we can open
    them to coinage by ourselves.  In either case what it means is
    that the value of the rupee will go down to something
    approaching the value of silver.  If the case is that of opening
    the Mints to the public, the descent of the rupee will be rapid.
    If it is that of opening only to coinage by the Government, the
    descent of the rupee may be slow but it will be no less

  ⁴²⁵ _Financial Statement_, 1898–9, p. 169.

The Hon. C. E. Dawkins was equally emphatic in his denunciation of the
project of Government coining rupees.  When he was tempted to acquiesce
in the proposal by holding out the prospects of a profit from coinage,
he replied⁴²⁶:—

    “I think I ought … to beg my hon. friend not to dangle the
    profits on silver too conspicuously before the eyes even of a
    most virtuous Government.  Once let these profits become a
    determining factor in your action, then good-bye stability.”

  ⁴²⁶ _Financial Statement_, 1900–1, p. 163.

Another instance of the Government’s determination not to coin rupees is
furnished by inquiring into the reasons as to why it is that the
Government has never assumed the responsibility of selling council bills
in indefinite amount and at a fixed rate.  The Chamberlain Commission
argued that the Government cannot undertake such a responsibility
because it cannot hold out for a fixed rate, and may have to sell at any
rate even lower than par.  This is true so far as it is a confession of
a position weakened by the Government’s folly of indulging in excessive
rupee coinage.  But this was certainly not the explanation which the
Government gave in 1900 when it was first asked to assume that
responsibility.  The Government knew perfectly well that to keep on
selling bills indefinitely was to keep on coining rupees indefinitely.
They refused to assume that responsibility because they did not want to
coin rupees.  That this was the original reason was made quite plain by
the Hon. Mr. Dawkins,⁴²⁷ [pg 278] who reminded those who asked
Government to undertake such a responsibility that

    “the silver coin reserve of Government in consequence rapidly
    neared a point at which it was impossible to continue to meet
    unlimited transfers [i.e. council bills].  Therefore the
    Secretary of State decided to limit the demands by gradually
    raising the rate, thus meeting the most urgent demands, and
    weeding out the less urgent, while warning those whose demands
    were not so urgent to ship gold to India.  No other course was
    practicable.  The liability of the Secretary of State to keep
    the tap turned on indefinitely at 1s. 4 5/32d. has been
    asserted.  But I cannot see that any positive liability exists,
    and I wonder if those who assert its existence would have
    preferred that the stability of our currency (whose situation
    they are well able to appreciate and follow) should have been
    affected by the reserve of rupees being dangerously reduced?”
    [and which could not be augmented except by coining more

  ⁴²⁷ Cf. his Budget speech, _Financial Statement_, 1900–1, p. 27.

Just at the nick of time, when the ideal of a gold standard with a gold
currency was about to be realized, there came on the scene Sir Edward
Law as the Finance Minister of India and tore the whole structure of the
new currency to pieces with a piratical nonchalance that was as stupid
as it was wanton.  His was the Minute of June 28, 1900, which changed
the whole course of events.⁴²⁸ In that Minute occurs the following
important passage:—

    “15. As a result of these considerations it must, I think, be
    admitted that the amount of gold which can safely be held in the
    currency reserve must for the present be regulated by the same
    rules as would guide the consideration of the amount by which
    the proportion invested in Government securities could be safely
    increased.  Pending an increase in the note circulation … or
    some other change in existing conditions, I am of opinion that a
    maximum sum of approximately £7,000,000 in gold may now be
    safely held in the currency reserve.  I should not, however,
    wish to be bound absolutely to this figure, which is necessarily
    [pg 279] an arbitrary one, and particularly I should not wish
    any public announcement to be made which might seem to tie the
    hands of the Government in the event of circumstances, at
    present unforeseen, rendering its reduction hereafter

  ⁴²⁸ For a copy of the Minute and the correspondence thereon, _see_
      Appendix V to the _Interim Report of the Chamberlain Commission_,
      Cd. 7070 of 1913.

In outlining this Minute, which with modifications in the maximum gold
to be held in the currency reserve, remains the foundation of the
currency system in India, the author of it never seems to have asked for
one moment what was to happen to the ideal of a gold standard and a gold
currency?  Was he assisting the consummation of the gold standard or was
he projecting the abandonment of the gold standard in thus putting a
limit on the holding of gold?  Before the policy of this Minute was put
into execution the Indian currency system was approximating to that of
the Bank Charter Act of 1844, in which the issue of rupees was limited
and that of gold unlimited.  This Minute proposed that the issue of gold
should be limited and that of rupees unlimited—an exact reversal to the
system of the Bank Suspension period.  In this lies the great
significance of the Minute, which deliberately outlined a policy of
substituting rupees for gold in Indian currency and thereby defeating
the ideal held out since 1893 and well-nigh accomplished in 1900.

If Sir Edward Law had realized that this meant an abandonment of the
gold standard, perhaps he would not have recorded the Minute.  But what
were the considerations alluded to in the Minute which led him thus to
subvert the policy of a gold standard and a gold currency and put a
limit on the gold part of the currency rather than on the rupee part of
the currency?  They are to be found in a despatch, No. 302, dated
September 6, 1900, from the Government of India, which says:—

    “2. … the receipts of gold continued and increased after
    December last.  For more than eight months the gold in the
    currency reserve has exceeded, and the silver has been less,
    than the limits suggested in the despatch of June 18.  By the
    middle of January the stock of gold in the currency reserve in
    India reached £5,000,000. The proposal [pg 280] made in that
    despatch was at once brought into operation; later on we sent
    supplies of sovereigns to the larger District Treasuries, with
    instructions that they should be issued to anyone who desired to
    receive them in payments due or in exchange for rupees; and in
    March we directed the Post Office to make in sovereigns all
    payments of money orders in the Presidency towns and Rangoon,
    and we requested the Presidency Banks to make in the Presidency
    towns and Rangoon payments on Government account as far as
    possible in sovereigns.  These measures were taken, not so much
    in the expectation that they would in the early future relieve
    us of any large part of our surplus gold, but in the hope that
    they would accustom the people to gold, would hasten the time
    when it will pass into general circulation in considerable
    quantities, and by so doing would mitigate in future years the
    difficulties that we were experiencing from the magnitude of our
    stock of gold and the depletion of our stock of rupees.

    “3. In order to meet these difficulties and to secure, if
    possible, that we should have enough rupees for payment to
    presenters of currency notes and tenderers of gold, we began to
    coin additional rupees. …


    “14. We may mention that we have closely watched the result of
    the measures described in paragraph 2.  The issues of gold have
    been considerable; but much has come back to us through the
    Currency Department and the Presidency banks.  The
    Comptroller-General estimated the amount remaining in
    circulation at the end of June at over a million and a quarter
    out of nearly two millions issued up to that time; but there are
    many uncertain data in the calculation.  We are not yet able to
    say that gold has passed into use as money to any appreciable

    “15. It is very desirable that we should feel assured of being
    able to meet the public demand for rupees, as indicated by the
    presentation of currency notes and gold.  We therefore strongly
    press on your Lordship the expediency of sanctioning the above
    proposal for further coinage [of rupees] …


    “17. But we do not wish our proposal to be considered as
    dependent on such arguments as those just stated. [pg 281] We
    make it primarily on the practical ground that we consider it
    necessary in order to enable us to fulfil an obligation which,
    though we are not, and do not propose to be, legally committed
    thereto, we think it desirable to undertake so long as we can do
    it without excessive inconvenience; namely, to pay rupees to all
    tenderers of gold and to give rupees in encashment of currency
    notes to all who prefer rupees to sovereigns.”

The arguments advanced in this statement of the case for coining rupees
are a motley lot.  At the outset it is something unheard of that a
Government which was proceeding to establish a gold standard and a gold
currency should have been so very alarmed at the sight of increased gold
when it should have thanked its stars for such an early consummation of
its ideal.  Leaving aside the psychological aspect of the question, the
Government, according to its own statement, undertook to coin rupees for
two reasons: (1) because it felt itself obliged to give rupees whenever
asked for, and (2) because people did not want gold.  What force is
there in these arguments?  Respecting the first argument it is difficult
to understand why Government should feel itself obliged to give rupees.
The obligation of a debtor is to pay the legal-tender money of the
country.  Gold had been made legal tender, and the Government could have
discharged its obligations by paying out without shame or apology.
Secondly, what is the proof that people did not want gold?  It is said
that the fact that the gold paid out by Government returned to it is
evidence enough that people did not want it.  But this is a fallacy.  In
a country like India Government dues form a large part of the people’s
expenditure, and if people used that gold to meet those dues—this is
what is meant by the return of gold to Government—then it is an evidence
in support of the contention that people were prepared to use gold as
currency.  But if it is true that people do not want gold, how does it
accord with the fact that Government refuses to give gold when people
make a demand for it?  Does not the standing refusal imply that there is
a standing demand?  There is no consistency in this mode of reasoning.
The fact is, all [pg 282] this confused advocacy is employed to divert
attention from the truth that the Government was anxious to coin rupees
not because people did not want gold, but because Government was anxious
to build a gold reserve out of the profits of additional coinage of
rupees.  That this was the underlying motive is manifest from the minute
of Sir Edward Law.  That the argument about people disliking gold, and
so forth, and so forth, was only a cover for the true motive comes out
prominently from that part of the Minute in which its author had argued

    “16. If it be accepted that £7,000,000 is the maximum sum which,
    under existing conditions, can be held in gold in the currency
    reserve, in addition to the 10 crores already invested, it is
    evident that such assistance as can be obtained from
    manipulating the reserve will fail to provide the sum in gold
    which it is considered advisable to hold in connection with the
    maintenance of a steady exchange.  So far no authority has
    ventured to name a definite sum which should suffice for this
    purpose, but there is a general consensus of opinion, in which I
    fully concur, that a very considerable sum is required.  The
    most ready way of obtaining such a large sum is by gold
    borrowings, but the opinion of the Currency Commission was
    strongly hostile to such a course, and the question therefore
    remains unanswered: How is the necessary stock of gold to be

    “17. I do not presume to offer any cut-and-dried solution of
    this difficult problem, but I venture to offer certain
    suggestions which, if adopted, would, I believe, go a
    considerable way towards meeting the difficulty.  I propose to
    create a special ‘Gold Exchange Fund,’ independent of, but in
    case of _extraordinary_ requirements for exchange purposes to be
    used in conjunction with, the gold resources of the currency
    reserve.  The foundation of this fund would be the profit to be
    realized by converting into rupees the excess above £7,000,000
    now held in gold in the currency reserve.”

Can there be any doubt now as to the true cause for coining rupees?
Writers who have broadcasted that rupees were coined because people did
not want gold cannot [pg 283] be said to have read correctly the history
of the genesis of the exchange standard in India.

But was Sir Edward Law the evil genius who turned a sound system of
currency into an unsound one by his disastrous policy of coining rupees?
Opponents of the Government as well as its supporters are all agreed⁴²⁹
that this was a departure from the ideal of the Fowler Committee.  In
what precise respect the Government has departed from the
recommendations of the Fowler Committee has, however, never been made
clear anywhere in the official or non-official literature on the subject
of Indian currency.  What were the recommendations of the Fowler
Committee?  It is usually pointed out, to the shame of the Government of
India, that the Fowler Committee had said (it is as well to repeat it):—

    “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. … Looking forward as we do to the effective
    establishment of a gold standard and currency based on the
    principles of the free inflow and outflow of gold, we recommend
    these measures for adoption.”

  ⁴²⁹ Even the Chamberlain Commission said that the Government had
      departed from the ideal of the Fowler Committee.

That is true.  But those who have blamed the Government have forgotten
that the same Committee also recommended that—

    “The exclusive right to coin fresh rupees must remain vested in
    the Government of India; and though the existing stock of rupees
    may suffice for some time, regulations will ultimately be needed
    for providing such additions to the silver currency as may prove
    necessary.  The Government should continue to give rupees for
    gold, but fresh rupees should not be coined until the proportion
    of gold in the currency is found to exceed the requirements of
    the public. We also recommend that any profit on the coinage of
    rupees should not be credited to the revenue or held as a
    portion of the ordinary balance of the Government of India, but
    [pg 284] should be kept in gold as a special reserve, entirely
    apart from the paper-currency reserve and the ordinary Treasury
    balances” [and be made freely available for foreign remittances
    whenever the exchange falls below specie point].

Taking the two recommendations of the Committee together, where is the
departure?  What the Government has done is precisely what the Committee
had recommended.  That the Government of India or the Chamberlain
Commission should have admitted for a moment that there was a departure
is not a little odd, for the very despatch which conveyed the Minute of
Sir Edward Law to the Secretary of State opens with remarks which show
that Government was earnestly following the recommendations of the
Fowler Committee.  It runs:—

    “In our despatch No. 301 of August 24, 1899, we wrote with
    reference to paragraph 60 of the Report of the Indian Currency
    Committee [i.e. the Fowler Committee], that any profit made on
    rupee coinage should be held in gold as a special reserve, has
    not escaped our attention; but the need for the coinage of
    additional rupees is not likely to occur for some time, and a
    decision on this point may be conveniently deferred.”

What Sir Edward Law did was to carry that recommendation into effect
when the occasion arrived.  In view of this it is useless to belabour
the Government of India if the ideal of a gold standard with a gold
currency was defeated by the coinage of rupees.  But, even though the
Government has in ignorance taken the blame on itself, it cannot be
rightly thrown at its door.  If the project has been defeated by the
coinage of rupees, the question must be referred to the Fowler
Committee.  Why did the Committee permit the coinage of rupees?  There
is no direct answer, but it may be guessed.  It seems the Committee
first decided that there should be a gold standard and a gold currency
as desired by the Government of India.  But then they seemed to have
been worried by the question whether in the ideal they had sketched they
had made enough provision for the maintenance of the gold value of the
rupee. [pg 285]

In the view of the opponents of the Government of India the rupee ought
to have been made either convertible as a bank note or a limited legal
tender as a shilling.  The Committee rejected both these demands as
being unnecessary.  Stating their ground for refusing to reduce the
rupee to the status of a shilling, the Committee argued⁴³⁰:—

    “It is true that in the United Kingdom the silver currency has a
    fixed limit of 40s., beyond which it cannot be used to pay a
    debt. … While it cannot be denied that 40s. limitation tends to
    emphasize and maintain the subsidiary character of our silver
    coinage, yet the essential factor in maintaining those tokens at
    their representative nominal value is not the statutory limit on
    the amount for which they are a legal tender in any one payment,
    but the limitation of their total issue.  Provided the latter
    restriction is adequate, there is no essential reason why there
    need be any limit on the amount for which tokens are a tender by

  ⁴³⁰ Report, par. 56.

Regarding the necessity for convertibility the Committee observed⁴³¹:—

    “Outside the United Kingdom there are two principal instances of
    countries with a gold standard and currency, which admit silver
    coins to unlimited tender.  These countries are France and the
    United States of America.  In France the five-franc piece is an
    unlimited tender and for all internal purposes is equivalent to
    gold.  The same remark applies in the United States to the
    silver dollar. … Both in France and the United States the Mints
    are now closed to the coinage of silver coins of unlimited
    tender.  In neither country are such coins convertible by law
    into gold; in both countries alike they are equivalent to gold
    for all internal purposes.  For international payments, so far
    as specie is concerned, France and the United States depend
    ultimately on the international medium of exchange, which is
    gold.  In the last resort, it is their gold which, acting
    through the foreign exchanges, maintains the whole mass of their
    currency at its nominal value for internal purposes.

  ⁴³¹ Report, pars. 57–60.

    “The position of the currency question in India being [pg 286]
    such as we have explained in the preceding paragraph, we do not
    consider it necessary to recommend a different policy in the
    case of that country from that which is found sufficient in
    France and the United States, by imposing a legal obligation on
    the Government of India to give gold for rupees, or, in other
    words, to substitute the former for the latter on the demand of
    the holders.  This obligation would impose on the Government of
    India a liability to find gold at a moment’s notice to an amount
    which cannot be defined beforehand, and the liability is one
    which, in our opinion, ought not to be accepted.”

Although confident of its opinions, the Committee was considerably
impressed by those who, owing to the large quantity of rupees in
circulation, entertained doubts

    “whether the mere closing of the Indian Mints to silver would in
    practice be attended with such a restriction of the rupee
    currency as would make the rupee permanently exchangeable for
    gold at a fixed rate.”

So much was the Committee shaken by these doubts that it admitted

    “the forces which affect the gold value of the rupee are
    complicated and obscure in their mode of operation, and we are
    unable, therefore, to say positively that the mere closing of
    the Mints to silver will, in practice, lead to such a limitation
    of the rupee currency, relatively to the demands for it, as will
    make the rupee permanently exchangeable for gold at a fixed

  ⁴³² Report, par. 58.

As a remedy against such a contingency the Committee thought that the
Government of India should accept the obligation of convertibility of
the rupee into gold for foreign remittances whenever the rupee fell
below specie point.  Having hit upon such a simple solution the next
question was how was the Government to get its gold reserve? Borrowing
for the purposes of such a gold reserve was one way of doing it.  But
that project was somehow unpalatable to the Committee. Perhaps because
it had admonished the Government, in another part of its Report,⁴³³ to
[pg 287]

    “husband the resources at their command, exercise a resolute
    economy, and restrict the growth of their gold obligations,”

  ⁴³³ Report, par. 70.

or because it was a vicious principle to borrow

    “for the establishment or the maintenance of a gold

the Committee was averse to the proposal for gold borrowing.  But if a
gold reserve was not to be built up by borrowing, how could it be built
up otherwise?  The Committee seems to have been considerably troubled
over the problem of finding an alternative mode of raising a reserve
until some member of it, probably at a moment when his intellect was
rather weak, proposed ‘Well, why not allow the Government to coin
rupees?  If that were allowed it could easily build up a gold reserve
without having to borrow, and can then discharge the obligation of
convertibility for foreign remittances.’  So innocuous seemed the
proposal that the Committee wholeheartedly adopted and incorporated it
into its Report with a certain sigh of relief that is unmistakable from
the firm language in which it was expressed.

  ⁴³⁴ _See_ the Reservations to the Report by Campbell Helland and Muir
      Report, p. 27.

This may or may not be a correct interpretation of the reasoning
employed by the Committee in permitting the Government to coin rupees.
But the fact remains that the Committee did not realize what was
involved in that recommendation.  First of all, what was to happen to
the gold standard and currency if the coinage of rupees was to go on? In
this regard is it possible to have more respect for a Committee which
lays down on the one hand the ideal of a gold standard and currency, and
permits on the other hand the coinage of rupees, than Bagehot felt for
the Directors of the Bank of England, who, on March 25, 1819, passed
that notorious resolution:—

    “That the Court cannot refrain from adverting to an opinion,
    strongly insisted upon by some, that the Bank has only to reduce
    its issues to obtain a favourable turn in the Exchanges, and a
    consequent influx of the precious metals; [pg 288] the Court
    conceives it to be its duty to declare that it is unable to
    discover any solid foundation for such a sentiment”?

If the opinions of the Directors were classical for their nonsense, are
those of the Fowler Committee less so?  Is there any difference between
them?  Bagehot, in commenting upon the sentiments embodied in the
resolution, not dissimilar to the recommendations of the Fowler
Committee, urged some extenuating circumstances which compel us to
forgive the Bank Directors their nonsense.  The Directors lived in an
age when economic reasoning was in a confused state; nor were they
anxious for the “influx of gold,” being perfectly satisfied with paper.
None of these circumstances can excuse the nonsense of the Fowler
Committee.  They framed their recommendations at a time when the
contrary of what the Bank Directors had held was an established axiom.
Besides, it cannot be said that they were not anxious for the influx of
gold into the Indian currency.  On the other hand, that was just the
thing they were looking forward to.  Consequently, they should have
carefully weighed their words and allowed nothing that was inconsistent
with their main object.  In not paying sufficient heed to that
elementary principle known as Gresham’s Law, the Committee not only made
a fool of itself but defeated the principal object it had set forth in
the earlier part of its Report.

Secondly, was it necessary to endow the Government with a power to coin
rupees?  What was the nature of the problem the Committee was called
upon to decide?  Let us re-state it.  The Herschell Committee⁴³⁵ by way
of modifying the proposals of the Government of India, submitted to it
in 1892, had introduced a proviso by which the Mints, although closed to
the public, were to remain open to the Government for the coinage of
rupees—a proviso which, by the way, reveals that after all that imposing
survey the Committee remained supremely ignorant of the secret why in
the monetary systems it investigated the currency maintained its parity
with gold with little or no gold.  If it had understood [pg 289] that it
was limitation of issue which maintained this parity it would not have
introduced the proviso which it did.  However pernicious the proviso,
the Committee must be excused for that indiscretion, for it was afraid
that owing to the Mint closure there might be a sudden contraction of
currency, and as it had not made gold general legal tender it had to
provide for the necessary addition to the currency, and this it thought
could best be done by Government having the power to coin rupees.
Fortunately for the Government the occasion for an addition did not
arise for some time, till 1898, and there was therefore no necessity to
exercise that power.  But when such an occasion did arise the
Government, as was pointed out before, refused to exercise that
power—and held to the view that the additions to Indian currency,
instead of being made by further coinage of rupees, should be made by an
influx of gold.  The Government was the strongest opponent of Mr.
Lindsay, who was then agitating that it was safe and economical to
compel it to make the necessary additions by undertaking to coin rupees.
It was to adjudicate in the dispute between the Government of India on
the one hand and Mr. Lindsay on the other, the former desiring additions
by gold coinage and the latter by rupee coinage, that the Fowler
Committee was called into being.  If the Government was anxious to add
to the currency by coining more rupees rather than by the influx of
gold, there was no necessity to appoint the Fowler Committee.  Such a
power had already been given to it by the Herschell Committee.  It was
because the Government did not want to exercise that ill-charged power
that an appeal to a new Committee became necessary.  Faced with this
immediate problem of how best to expand the currency in relief of
monetary stringency, the Committee had solved it in one part of its
Report by prescribing that gold should be made legal tender, so that any
debtor who was unable to find rupees could have the option of paying his
creditors in gold.  If gold was allowed to be the general medium of
exchange, was not the proposal to coin rupees a superfluous one, quite
uncalled for?

  ⁴³⁵ _See_ Chap. IV, _supra_, p. 147.

Thirdly, could the proposal to coin rupees as a means of [pg 290]
building up a gold reserve be justified as calculated to maintain the
value of the rupee?  The one thing essential to the maintenance of the
value of the rupee was a limitation on its issue.  The Committee talked
in a very learned manner about the shilling as being maintained in value
in consequence of a limitation in its issue.  But did it understand how
the shilling was maintained limited in quantity?  If it is true that it
is not the limit on legal tender, but the limit on the total volume,
that maintains the value of the shilling, why is not the shilling issued
in unlimited quantities?  The manufacture of the shilling is profitable
in the same way as is the manufacture of the rupee.  Why does not the
British Government coin it in unlimited quantities?  Only because
shillings cannot be paid out in unlimited quantities?  If the Government
could pay its Chancellors of Exchequer, Cabinet Ministers, and the hosts
of officials and clerks, and if they in turn could pay their grocers,
milkmen, brewers, and butchers in shillings, there could be nothing to
prevent the over-issue of shillings.  But it is because nobody can pay
out shillings in unlimited quantities that nobody will have them in
unlimited quantities.  It is the absence of a wholesale market, so to
say, due to a limit on legal tender, that stops the Government from
indulging in the over-issue of shillings.  The Committee was therefore
wrong in arguing that the limit on legal tender had nothing to do with
the maintenance of the value of the shilling.  On the other hand, if
limitation of issue is the prime condition which maintains the value of
a token coin, one means of making such a limit effective is to put a
limit on its legal tender.

With regard to its views on convertibility, its reasoning was equally
confused.  To say what was sufficient for France and America should be
sufficient for India, was like the blind leading the blind.  It was
entirely erroneous to argue that it was not convertibility but their

    “which, acting through the foreign exchanges, maintains the
    whole mass of their currency at its nominal value for internal
    purposes.” [pg 291]

Quite the contrary. France and America did not need convertibility to
protect their currency because the silver franc and the silver dollar
were absolutely limited in quantity.  Indeed, far from being protected
by the influx of gold, the limitation of issue not only maintained their
value, but permitted the retention of whatever gold there was in those
countries.  Now, the Committee, instead of venturing into long-winded
and pointless disquisitions, should have insisted that there was no
necessity either to prescribe a limit of tender or convertibility with
regard to the rupee, so long as there were other ways of restricting its
over-issue.  Limitation of legal tender or convertibility can be said to
be essential only because they are the means of bringing about a
limitation of issue, and if the requisite limitation of issue was
provided for in other ways, the purpose for which convertibility or
limitation of legal tender were asked for was accomplished.  Now, was
not the closing of the Mints a sufficient limitation on the volume of
rupees?  Indeed, if the closing of the Mints was not an effective
limitation on the issue of rupees, what else could have been?  Was not
the closing of the Mints the same thing as regulating the currency on
the principle of a fixed-issue system so well known in the matter of
regulating paper currencies?  That it was, could hardly be denied.  That
being so, the only question was whether the volume of rupees already in
circulation was distinctly less than the minimum amount of legal-tender
money ever necessary for the internal circulation of the country.  The
Government of India had foreseen the volume of rupees in circulation
becoming in excess of such a minimum and had accordingly provided
against it.  In their despatch of March 3, 1898, outlining their plans,
the Government observed:—

    “9. … We know now that one of the main reasons of this failure
    [to maintain the exchange value of the rupee] is that our rupee
    circulation had before the closing of the Mints been increased
    to such an extent that it fully, and more than fully, supplied
    all the demands of trade, and allowed no room for any further
    addition in the form of gold. … The necessary condition of a
    fixed rate of [pg 292] exchange between two countries is that,
    when the currency of one of them becomes redundant as compared
    with that of the other, the redundancy may be relieved by the
    withdrawal, for a time, of the excess coin, and we wish,
    therefore, to reach the condition in which our circulating
    medium … is not composed wholly of silver coin which has no
    equal value outside the country, but contains also a margin of
    gold which is capable of being used elsewhere as coin, and will
    therefore in natural course flow to where it is most wanted.
    Our total rupee currency is estimated to be at present somewhere
    about 120 crores, to which we have to add 10 crores of fiduciary
    circulation of currency notes.

    “10.  It is impossible with any exactness to say, and it can
    only be ascertained by actual experience, by how much this rupee
    circulation has to be decreased in order to remove its
    redundancy. … But some considerations point to the amount being
    within quite manageable limits.  For example, there are
    twenty-four crores, more or less, of currency notes in
    circulation, including the amounts held in our Treasuries.  If
    we could imagine that amount of circulation at present existing
    in the form of currency notes suddenly converted into
    £16,000,000 in gold, it seems impossible that Indian trade
    should be able to get on without having part at least of that
    amount held in actual circulation, in other words, it would not
    be possible for that amount of gold coin to be remitted out of
    the country without the value of the rupee being forced up to a
    point which would arrest the stream of export.  If this is the
    case, twenty-four crores of rupees is the outside limit of the
    amount it might be necessary to convert into gold coin in order
    to introduce a stable exchange of 16d., accompanied by an actual
    (active or inactive) circulation of gold at that comparative
    value; and it is more than probable that the amount required may
    really fall far short of this.

    “11. The mere reduction of circulation might be carried out in
    the same way in which it was effected in 1893, namely, by
    abstaining from withdrawing council bills, until we have an
    accumulation of, say, twenty crores in excess of our ordinary
    balances.  But this procedure would be both costly and, as we
    believe, ineffective; in the first place the permanent locking
    up of twenty crores would cost us the interest on that amount,
    or on the amount of gold borrowed in England during the
    suspension of drawings, and in the [pg 293] second place the
    existence of this accumulation of silver coin would be a
    perpetual menace to the exchange market, and would entirely
    prevent any confidence in the future of the rupee.  We must not
    only withdraw the amount from circulation, but we must show by
    the method we adopt that our intention is that it should cease
    to exist in the form of coin, and that its place, as coin, is to
    be taken by gold. Our proposal is therefore to melt down
    existing rupees, having first provided a reserve of gold [by
    borrowing] both for the practical purpose of taking the place of
    the silver, and in order to establish confidence in the issue of
    our measures.”

At the time the Committee reported the volume of rupees in circulation
was not redundant, as was proved by the fact that exchange was rising
and gold was flowing in.  That the closing of the Mints had therefore
brought about an effective limit is beyond dispute, and was even
admitted by the Committee.⁴³⁶ But supposing that the closing of the
Mints did not constitute an effective limitation on the volume of rupees
in circulation, what was the remedy?  Was the plan of a gold reserve to
assure convertibility for foreign remittances calculated to promote that
object if the gold reserve was to be got by coining more rupees?  If the
limitation of rupees was going to maintain their value, as it did the
value of the shilling, was the permission to add to the volume of
rupees, which the Committee feared was over-abundant if not redundant,
for the sake of a gold reserve, designed to limit their volume?

  ⁴³⁶ Report, p. 17.

It is difficult to read the report of the Fowler Committee without
exasperation.  The permission to coin rupees was mischievous in every
way.  It was destructive of a true gold standard; it was not wanted as a
relief against monetary stringency, and was calculated to lower the
value of the rupee.  If it was anxious for a gold standard and currency,
as it undoubtedly was, it should have absolutely stopped the coinage of
rupees and suppressed the notification holding the Government ready to
give rupees for gold.  In failing to do that it not only deprived the
country of a [pg 294] sound system, but actually, albeit unwittingly,
helped to place the entire Indian currency, including paper currency, on
the basis of an inconvertible rupee.  Few people seem to be alive to the
precise significance of that pernicious proviso introduced by the
Herschell Committee, and remorselessly upheld by the Fowler Committee,
that the Government shall always be ready to give rupees for gold, but
there can be no doubt that in the absence of a counter-proviso,
requiring Government to give gold for rupees, the proviso is simply a
cover for an authority to the Indian Government to issue inconvertible
rupee currency of unlimited legal tender in the same way as the bank
restriction was for an authority to the Bank of England to issue
inconvertible notes in unlimited quantities.  The first step in the
right direction would be to scrap that Report and make a speedy return
to the safe and sound proposals of the Government of India as outlined
in the despatch referred to above.  The primary condition is to stop the
coinage of rupees and not merely close the Mints to the public. Whether
it would be necessary to melt a portion of the rupees depends upon what
gold value it is desired the rupee should have.  Once the total
contraction of the rupee is settled upon and all further coinage is
stopped, India will be in a position to have an effective gold standard
based on a free inflow and outflow of gold.  There will be no necessity
to reduce the rupee in legal tender and provide for its convertibility.
Its value would be maintained intact by sheer force of its quantity
being limited, provided the quantity in circulation has been reduced so
far as to be always below the minimum demand.

Supporters of the existing system of rupee currency have ever since its
inauguration held out that the currency is economical and secure. Its
claim for security, both in terms of gold and commodities, has been
tested, and the grounds of it have been analysed in the course of this
and previous chapters, wherein is demonstrated how very much wanting it
is in the essentials that go to make up a secure currency. We must now
endeavour to assess whether it is economical, for if it were really so,
then that might be a point of some [pg 295] value against its opponents
We must therefore scrutinize the economy effected by the rupee currency.
Kemmerer says⁴³⁷:—

    “A convertible money finds its _raison d’être_ largely in the
    fact that it economizes the precious metals, and makes possible
    a saving to the community.  If paper money or token money are
    substituted for primary money, their substitution reduces the
    demand for the precious metals by the difference between the
    amount of metal used in the token money introduced plus that
    contained in the primary money required for the redemption fund.
    This economy of the precious metals results in an increased
    supply being thrown upon the market” [which supply goes abroad
    and into the arts and increases the non-monetary wealth of the
    country by an equivalent amount: the gold obtained for the metal
    economized represents a net gain to the community].

  ⁴³⁷ _Money and Credit Instruments in Relation to Prices_, p. 63.

The same kind of gain, says Kemmerer, attaches to the use of
inconvertible money, and even on a larger scale, because there is no
necessity to use primary money even for a redemption fund, as there is
when the money is convertible.  Such views as these have led Mr. Keynes
to opine that the Indian currency system is a marvel of economy, and
that other more advanced countries might usefully follow the lead.  We
will not draw from this the uncharitable conclusion that either Prof.
Kemmerer or Prof. Keynes would recommend that because an inconvertible
paper currency is the most economical currency a country should adopt it
without remorse.  What we are concerned with is to find out whether the
rupee currency is really economical.  When the process by which the
rupee comes into being is carefully analysed it becomes impossible to
take seriously the plea that the Indian currency is economical.  First
of all, gold is tendered to the Secretary of State in London for his
council bills, or gold is tendered to the Government of India in India
in payment of taxes or otherwise.  Out of this gold the Secretary of
State buys silver and coins rupees.  As the price of silver is below the
[pg 296] ratio, there arises a difference between the cost price of the
rupee and its selling price in gold. To the extent of this difference
there is, of course, a gain.  But this gain or profit on coinage, as it
is called, is no benefit to society.  It is a hoard, and to that extent
represents a useless abstraction of wealth.  If the profit is not to be
used for any current purposes of society it is as well not to coin
rupees.  It is therefore obvious that so long as the profits are merely
held apart from the revenue resources of India there is no economy in
the rupee currency worth naming.  From another standpoint the currency
of India is a wasteful asset to society.  Metallic currency is primarily
a capital good representing a form of social investment.  Consequently
it is necessary to see that the capital value of the currency is
maintained.  It is a happy circumstance to note that the Government of
India is not dead to this aspect of the question with regard to its
paper-currency reserve, and has very recently instituted a depreciation
fund for the preservation of its capital value.⁴³⁸ Now, the
considerations that apply to the paper currency should apply also to the
rupee currency.  Has the rupee currency maintained its capital value?
The gold part of it, called the gold-standard reserve, is invested in
interest-bearing securities.  Interest is no doubt an additional source
of gain, but have the securities maintained their capital value?  Far
from it.  Turn to the rupee half of the currency. Has the bullion in the
rupee maintained its capital value?  There have been endless charts and
diagrams drawn by playful economists in which the black line, showing
the nominal value of the rupee, has remained up while the red line,
showing the bullion value of the rupee, has gone down with the falling
gold value of silver.

  ⁴³⁸ Cf. the Speech of the Finance Minister, Mr. Hailey, on the Indian
      Paper Currency (Amendment) Bill, dated September 16, 1920,
      _S.L.C.P._, Vol. LIX, pp. 308–9,

But what does that mean?  Simply that the rupee is a wasting asset and
is not worth at a later date what it cost to society when it was
manufactured.  Surely there was more economy in the project of the mad
Chinaman who burnt his house to roast his pig [pg 297] than there is in
the Indian rupee currency.  The Chinaman’s house must have been very old
and uninhabitable.  The same cannot, however, be said of this converting
of gold money into silver money, because we know that silver is an
inferior kind of investment to gold.  Thus viewed, the currency is not
in the least economical.  It appears to be so because people look only
to the rupee.  But, adding the cost of the rupee currency to that of the
gold-standard reserve, can it be said that India would have required
more gold if she had a gold currency in place of a rupee currency?
Bearing in mind that with a fixed limit on the issue of rupees there can
be no reason for a gold reserve, the only result of a stoppage of rupee
coinage would be that gold, instead of being, as now, part reserved as a
sinking fund and part transmuted into a rupee currency, would enter into
circulation without being subjected to this baneful and wasteful
process.  No more gold would be required in the one case than in the
other.  We can therefore conclude without fear of challenge that with a
complete stoppage of rupee coinage Indian currency would be truly
economical, prices would be more stable, and exchange secure, in the
only way in which it can really be said to be secure, and the rupee,
although inconvertible, will cease to be a problem, which it has been
ever since 1873.

But will that be all the advantage to the country?  By no means.  In
drawing a moral from his comparison of the paper pound of 1797 with the
paper pound of 1914, Prof. Cannan⁴³⁹ points out that

    “there can in these days be no doubt that the experiment of
    entrusting what no community should entrust to any institution,
    the power of creating money without limit, to the Bank of
    England, compares very favourably with the modern plan of
    entrusting it to the Government itself or to a State bank
    completely under the control of the Government.  In the
    comparatively short war of 1914–18 currencies ‘not convertible
    at will into a coin which is exportable’ were issued by
    Governments and Government banks in amounts compared with which
    the 100 per cent. increase in [pg 298] thirteen years, which
    made the Bullion Committee complain so vigorously in 1810, look
    absolutely trifling.”

  ⁴³⁹ _The Paper Pound of_ 1797–1821, Introduction, p. xxxix.

There was a time when it could have been said that this indictment did
not apply to the Government of India.  Few Governments could be said to
have been so very anxious to wash their hands of the responsibilities
involved in, the management of a currency as the Government of India
once was.  In 1861, when the Government first undertook the issue of
paper money in India, the anxiety it displayed was laudable.  An
impecunious Government, made prostrate by the heavy burdens of the
Mutiny should have welcomed the project of a paper currency as a source
of profit.  But so great was its sense of responsibility that the
Government refused to be content with convertibility as a check on
over-issue.  One of the principal reasons why the desperate
paper-currency scheme, which that straitened financier Mr. Wilson had
devised in 1860 to find ways and means for improving the finances of
India, was rejected was so well stated by his successor, Mr. Laing, that
in these days of frenzied finance his remarks may as well be reproduced
in full.  He said⁴⁴⁰:—

    “There was another important reason why he (Mr. Laing) thought
    that Sir Charles Wood’s principle was the soundest.  All parties
    were agreed that a paper currency ought to be identical with the
    metallic currency which it displaced.  But the system of issuing
    against two-thirds of securities and one-third of specie, as was
    proposed by Mr. Wilson, would not always ensure this identity,
    and there was considerable risk that in times of buoyancy and
    speculation the circulation would be unduly extended.  He
    thought that that was a point of considerable importance,
    because if we looked at what had taken place in India during the
    last three years, we should find a great increase in the wages
    of labour and the prices of commodities, which should warn us as
    to what the consequences might be if we were to accelerate the
    process already going on so rapidly by any artificial inflation
    of the currency.  If you unnaturally [pg 299] stimulated the
    rise of prices by an over-issue of paper circulation you ran
    considerable risk of changing the healthy action of commerce
    into a feverish excitement which was sure to bring about a
    reaction. If we continued to go on as we had done for the last
    two or three years, the result would be that many articles of
    Indian produce might be driven out of the market by the
    competition of other countries and he therefore thought that the
    Government ought to be exceedingly cautious how it took any step
    that might unduly accelerate the tendency to a general advance,
    as might be the case under the system of paper currency which to
    any considerable extent represented securities and not bullion.
    Such an advance might even reach a point seriously embarrassing
    to the Government if the general rise in the rate of wages and
    cost of living made the present scale of salaries and the pay of
    troops no longer adequate.⁴⁴¹ For these reasons he thought it by
    far the wisest course to adhere to the principle of paper
    currency adopted in England as laid down in Sir Charles Wood’s

  ⁴⁴⁰ His speech on the Paper Currency Bill, dated February 16, 1861,
      _S.L.C.P._, Vol. VII, pp. 66–7.

  ⁴⁴¹ During the bank suspension period in England it is to be noted
      that the Army and the Navy were paid in gold, for fear of causing

Not only was the Government anxious to put a limit on the issue over and
above making it convertible, but it did not want to be vested with the
legal authority to issue notes.  In a despatch dated April 27, 1859,⁴⁴²
to the Secretary of State, the Government of the day observed:—

    “We believe that the convertibility of the notes on demand would
    not be a sufficient guarantee against over-issue.  When once the
    paper currency is established in public confidence, the
    temptation to take dangerous advantage of this confidence will
    be very great in a time of difficulty, if the power of doing so
    is left in the hands of the Government of India alone.
    Restriction by law, either to a certain amount of issue
    absolutely, or to an amount relative to the balances in India,
    will, in our opinion, be necessary.  We think that such a law
    ought to be passed by Parliament, and not by the Legislative
    Council of India.”

  ⁴⁴² For a copy of it, _see_ Commons Paper 183, of 1860, p. 1.

Equally sane was the view of the Government in 1876 with regard to the
rupee currency.  The Bengal Chamber of [pg 300] Commerce, it will be
recalled, had urged upon the Government of India to close the Mints to
the free coinage of silver, without opening them to the free coinage of
gold—a project which practically meant that the Government should
undertake the management of the rupee currency.  The reply of the
Government of India was a sharp rebuke.  It declared⁴⁴³:—

    “8. … the Chamber invite the Government to take a measure
    calculated to enhance indefinitely the value of the rupee by
    suspending the long-established legal right of all comers to
    have silver bullion manufactured upon uniform conditions under
    State supervision into legal-tender coin, and temporarily
    substituting a system of coinage, at the discretion of the State


    “11. It is essential to a sound system of currency that it be
    automatic.  No man or body of men can ascertain whether at any
    particular moment the interests of the community as a whole
    require an increase or diminution of the currency; still less,
    how much increase or how much decrease is, at any moment,
    exactly needed.  No Government which aspires to keep its
    currency in a sound condition would be justified in attempting
    that impossible task, or in leaving the community, even for a
    short interval, without a fixed metallic standard of value.
    Under an ‘open coinage system’ these things regulate themselves
    without official interference.”

  ⁴⁴³ Resolution of the Government of India, relating to the
      Depreciation in the Value of Silver, dated September 22, 1870,
      Commons Paper 449 of 1893.

Now, compare with this the later pronouncements of the Government with
regard to the principles governing the paper and rupee currency
respectively.  During the war, when the Government of India resorted to
the enlargement of paper issues, Honourable Members of the Supreme
Legislative Council pointed out the effects it would produce on prices
in India.  But the late Hon. Sir Wm. Meyer, who as a Finance Minister
piloted the Indian finances during the last war, in the course of a
speech on the Indian Paper Currency (Amendment) Bill, dated September 5,
1917, replied⁴⁴⁴:— [pg 301]

  ⁴⁴⁴ _S.L.C.P._, Vol. LVI, p. 35.

    “The note circulation was sixty crores before the war and is now
    about a hundred crores.  But the Hon. Mr. Sarma shivered at the
    idea of inflation.  I may remind him that one of the accepted
    (!) doctrines of economists is that artificial inflation of
    paper currency only exists when the note circulation is not
    fully covered. Now we have covered every rupee of our note
    circulation … in securities …” [How could there be an

The change in the Government’s view with regard to the rupee currency is
equally noteworthy.  In 1908, when the exchange value of the rupee fell
below par, the Government was reminded that it was the result of the
excessive coinage of rupees.  But although in 1876 the Government did
not think it was possible for it to so increase and decrease the
currency to suit the needs of commerce, yet in 1908 the Government
advanced the opposite view.  The Finance Minister, the Hon. Mr. Baker,
in his reply, went on to argue⁴⁴⁵:—

    “In the first place the whole of the new coinage that we have
    undertaken during this period has been undertaken solely to meet
    the demands of trade.  Not one single rupee has been added to
    the circulation except to enable us to meet these demands. …”

  ⁴⁴⁵ Cf. Financial Statement for 1908–9, p. 229.

Now, if it is dangerous to entrust a Government with the power to manage
currency, how very dangerous is it to entrust it to the Government of
India, which professes to carry out its trust on the basis of doctrines
such as these!  No one is so ill-instructed in these days as to suppose
that these are sound maxims.  If security is enough, what need is there
for convertibility?  If currency is issued only in response to trade
demand, what fear is there of over-issue?  A Government acting on such a
principle may well go on indefinitely increasing the currency without
remorse.  History abounds with instances of ruin caused by the
management of currencies on such naive principles as these.⁴⁴⁶ Happily
for the country, the paper [pg 302] currency profoundly altered in its
basis—one might almost say, tampered with—in 1920 by the Government is
yet far away from currencies regulated on the theory enunciated by the
Finance Minister. It is the rupee currency which has been, ever since
the Mint closure, the chief source of danger to the welfare of the
Indian people, particularly because of the principle governing its
issue.  Because that principle has the support, in itself a surprising
thing, of such eminent authorities as Prof. Keynes,⁴⁴⁷ Mr. Shirras,⁴⁴⁸
and the Chamberlain Commission,⁴⁴⁹ it cannot alter the case for
depriving the Government of this power of managing the rupee currency,
for the principle is essentially unsound.  The reason why the fallacy in
the reasoning, that there could be no excess of rupees because of their
being issued in response to trade demand, does not appear on the surface
is due to the peculiar nature of money.  Money is said to be wanted only
because money has a purchasing power.  That is no doubt true, but that
does not quite explain why people so incessantly want money, even when
they know that the value of money is so unstable. Indeed, if purchasing
power was the only consideration we should not find such a desire for
the current means of purchase.  That desire can only be accounted for by
the fact that money has a differential advantage over other goods, in
that it has in the highest degree what Menger called the quality of
saleability.  That one can more often buy at a bargain than sell at a
bargain is simply another way of stating that every one desires to hold
his resources in the most saleable form of money.  In this sense it is
absolutely true that no more money can be issued than there is demand
for.  But from that it does not follow that there can be no over-issue
of money purely for the currency needs at any given time.  All money is
acquired in response to trade or services, but all money is not retained
in currency.  Indeed, all commodities are exchanged for money, because
money is supposed to bear the option of being used for non-monetary
purposes.  In the case of the rupee the option-of-use quality is
nonexistent.  Consequently, although issued in response to [pg 303]
trade demand, it remains in currency whether it is wanted or not, and
thus tends to bring about its depreciation.  That such a depreciation is
possible cannot be denied even by those who maintain that rupees are
issued only in response to trade demand, otherwise why should they be so
very anxious for an increase of the gold reserves of the country.  But
the danger to the rupee currency does not merely arise from the
possibility of indiscretion on the part of the Government.  Besides the
Government there have been statesmen in India so interested in the
welfare of their fellow-subjects that they have rebuked the Government
on several occasions for not making the profits on rupee coinage
available for the advancement of the moral and material progress of the
country,⁴⁵⁰ and in 1907 the profits on rupees were actually employed in
the extension of railways.  It must fill every one with horror and
despair to contemplate the consequences sure to emanate from the
manipulation of currency for such ends.  Is it not time this source of
danger and temptation be removed by depriving the Government of this
power to manage the rupee currency?  But what is the means of bringing
this about?  If it is desirable to do away with the management then
convertibility is an insufficient measure: for with convertibility the
rupee will still remain a managed rupee.  Only the complete stoppage of
rupee coinage will remove the governmental interference in the
management of Indian currency; and it is this that we must therefore ask

  ⁴⁴⁶ Cf. E. R. A. Seligman, _Currency Inflation and Public Debts_, New
      York, 1022, _passim_.

  ⁴⁴⁷ Op. cit., p. 111.

  ⁴⁴⁸ Op. cit., p. 39.

  ⁴⁴⁹ Report, par. 66.

  ⁴⁵⁰ Such a sober politician as the late Mr. Gokhale took the lead in
      this matter. Cf. his speech in the _Financial Statement_ for
      1907–8, pp. 203–4; and the same indiscretion is repeated by Prof.
      V. G. Kale in his _Currency Reform in India_, 1919, p. 65.

  Changes in 1833, 21
  Civil Service reforms, 1853, 90, 91, 97
  Table of costs, 92
  Agricultural exports, 104
  Althorpe, Lord, 161 _note_

Babington Smith, Sir Henry. _See_ Smith Committee on Currency
Bagehot, Walter, 130, 131
Baker, Hon. Mr., 301
Bank Charter Act, 1884, 279
Bank of England Notes, depreciation, 1797–1818, 243, 247
Banks in India, table, 37
Barbour, D., 184 _note_
Belgium, Bimetallic system in, 23
  Double standard experiments, 1766–93, 14
  Reform of currency, 18
  Abrogation in India, 22 _et seq._
  Drawbacks of, 138
  Gold to silver ratio, 83
  Indian Government’s position, 140, 141
  Market and Mint ratio divergences, 84, 85
  Monetary conferences, discussions at, 135, 136
Bombay, currency reforms, 16, 18
Brown, Hon. Claud, 45 _note_

Cairnes, Prof. J. E., 47 _note_, 82
Cannan, Prof. Edwin, 246 _note_, 262 _note_, 297
Cassel, Prof. G., 253 _note_
Cassels, Mr., 34, 35, 41
Castlereagh, Lord, 211, 241 _note_
Chamberlain Currency Commission, 1913, 164, 167, 171, 187, 225, 231
        _note_, 234, 237, 249, 259, 272, 277, 278 _note_, 302
Cheque system, failure of, 64
China, trade with India, 1889–1908, table, 183
Civil Service, economies in, 90, 91, 97
Coinage and Mint Act, 1870, 49 _et seq._, 147
Coinage under the Moghul Empire, 4
Cotton trade, development in India, 102, 106
Council Bills:
  Drawings, 1803–94, 189
  History of, 263
  Reverse Councils, 166, 220 _et seq_.
  Sales of, 130, 131, 166, 187, 213, 264 _et seq_.
Cromer, Lord, 113
Currency. _See_ Indian Currency Currency Act, 1835, 22, 23, 36
Curzon, Lord, 275

Dalal, Mr., 260 _note_
Datta, Mr., 210 _note_
Davenport, Prof., 257
Dawkins, Hon. C. E., 274, 277
Demonetization of gold, 1833, 19
Demonetization of silver, 71 _et seq._
Discount rates, chart, 66
Dislocation of silver standard parity, 49 _et seq._

East India Company:
  Double standard experiments, 1766–93, 14 _et seq._
  Silver standard prescribed, 9
English currency, early history, 2, 6, 27
European countries, money stocks distribution, table, 134
  Fall of, economic effects, 87 _et seq._
  High exchange policy, 1920, 208
  “Natural level” fallacy, 225, 226
  Stabilization of, 203
Exchange rate:
  Gold value of rupee in terms of, 196
  London on Calcutta, 1914, 1915, table, 192
  London on India, 1907–8, table, 191
  Purchasing power parity, 252 _et seq._
Exchange standard, stability of, 181 _et seq._

Falkner, Prof. R. P., 62 _note_
Fetter, F. A., 234 _note_
Finances, Imperial and Provincial, separation between, 207
Fisher, Prof., 83, 84, 250, 257
Fowler, Sir Henry, Indian Currency Committee, 1898–99, 156, 239, 263,
        269, 283, 288
Foxwell, Prof. H. 8., 72 _note_, 79 _note_
  Bimetallic system, 23
  English and French currency systems compared, 161
  Gold and silver mintage, 1803–73, table, 137

Germany, currency difficulties in, 132
Giffen, Sir Robert, 129
Gokhale, Hon. Mr., 258, 303 _note_
  Consumption in various countries, table, 245
  Discoveries, effect of, 23, 25
  Issue, 1917, 218
  Notes, value in terms of, table, 243
  Price-levels compared with other commodities, 242
  Silver and gold, value and production, 76 _et seq._, 79
Gold currency for India:
  Arguments in favour, 257 _et seq_.
  Commission of 1868, 47
  Imports of gold, 1863–64, 42
  Legal tender notification, 1864, 46
  Proposals, 1864–66, 42 _et seq_.
Gold exchange standard:
  Chamberlain Commission, 1913, 164, 167, 171
  Mints, closing for silver, 168, 169
  Objections to, 167
Gold payments:
  Army remittances, 97
  Burden of, 186
  Civil Service remittances, 97
  Rupee, cost of, 87, 88, 89
Gold standard for India:
  Bengal Chamber of Commerce support, 1876, 122
  Currency Committee, 1886, 129
  Currency Committee, 1898, 129
  English fiscal difficulties, 26, 27
  Government scheme, 1878, 125
  Monetary Conferences, 135 _et seq._
  Movement towards, 118 _et seq._
  Proposals, 1859, 38, 39
  Smith, Col. J. T., plan of, 121
  Temple, Sir R., plan of, 118
Gold standard reserve:
  Danger of, 238 _et seq._
  Maintenance and distribution, 230 et seq.
Gregory, Dr. T. E., 239 _note_
Gresham’s Law, 138
Gupta, Mr., 210 _note_

Halifax, Lord, 119
Hamilton, Lord George, 158
Herschel Committee on Indian currency, 1893–94, 146 _et seq._, 288
Huskisson, 27

Inchcape, Lord, 213
Indian currency:
  Additions to coinage, 1893–1920, 218 _et seq._
  Army establishment, effect on, 30
  Banks, table of, 37
  Barter, trade reduced to, 7
  Chamberlain Commission, 1913, 164, 167, 171, 187, 225, 231 _note_,
          234, 237, 249, 259, 272, 277, 278 _note_, 302
  Coinage and Mint Act, 1870, provisions of, 49 _et seq._
  Convertibility of, 174
  Credit currency, lack of, 1859, 36
  Currency circulation, tables, 199, 200
  Dislocation of parity of exchange, 69, 70
  East India Company Units, table, 11
  Expansion measures, 1898, 152, 153, 154
  Fowler Committee, 1898–99, 156, 239, 263, 269, 283, 288
  Gold currency. _See that title_
  Gold exchange standard. _See that title_
  Gold standard for India. _See that title_
  Herschell Committee, 1893–94, 146 _et seq._, 288
  Imperial and Provincial finances, separation, 207
  Mint for gold coinage, 157, 158
  Mints, opening to silver, 149, 150
  Moghul Empire, 1 _et seq._
  Money market fluctuations, causes of, 60 _et seq._
  Monopoly of issue by Government, 169 _et seq._
  Paper currency. _See that title_
  Precious metals imports, 31, 32, 33
  Redemption, 220, 224 _et seq._
  Reforms, 1833, 18, 19
  Rupee. _See that title_
  Silver standard. _See that title_
  Smith Committee, 1919, 194, 201, 248, 249, 263
  Trade currency, 1860–70, table, 43
  Trade expansion, 1842, effect of, 30, 32, 33
Industrial pursuits, England and India, tables, 100, 101
International coinage, uniformity in, 71 _et seq._
International Coinage Commission, 119
International Exchange, American Commission, 1898, 133, 135
International Monetary Conferences. _See_ Monetary Conferences
Investments, Indian, Price-movements of, 94
Italy, Bimetallic system of, 24 _note_

Jevons, 63, 82, 132
Jute industry in India, development, 103

Kemmerer, Prof., 172, 249, 251 _note_, 253, 295
Keynes, J. M., 170 _note_, 172, 173, 184 _note_, 201, 214, 232, 248,
        249, 251 _note_, 252, 256, 257, 295, 302
Kitchin, Joseph, 245 _note_

Laing, Mr., 39, 40, 298
Latin Currency Union, 1865, 24, 72
Laughlin, Prof. J. L., 73 _note_, 74 _note_, 76 _note_
Law, Sir Edward, 278, 279, 282, 283, 284
Legal tender:
  Limitation of, 285, 290, 201
  Rupee as legal tender in U K., 145
Lewis, Prof. W., 79 _note_
Lindsay, A. M., 154, 164, 165, 166, 177 _note_, 238, 240, 289
Liverpool, Lord, 28
London, A. C. B., 35 _note_

McCulloch, J. R., 48 _note_
Madras, currency reforms, 15, 18
Mansfield, Sir William, 46 _note_
Marshall, Professor, 108, 130 _note_, 17, 186 _note_, 203
Meston, Sir James, 275
Meyer, Hon. Sir Wm., 300
Mint and Coinage Committee, 1803, 13
Mint regulations under Coinage Act, 1870, 51
Mints, opening to silver, 149, 150, 269
Mitchell, Professor, 242, 256
Moghul Empire, economic system under, 2, 3
  Currency unit, 119
  Issues of, 14, 217
Monetary Conferences, 1878, 1881 and 1892, 135, 149
Money and stocks distribution, table, 134
Money market, Indian, causes of fluctuation, 60 _et seq_.
Monometallism. _See_ Silver standard
Muir, Sir William, 123

Newmarch, F. W., 264 _note_, 265 _note_
Nicholson, Professor, 175 _note_
Nickel coinage, 218

Overstone, Lord, 162, 163

Paper currency in India:
  Banks of issue, 53, 54, 57
  Department for, 55
  Encashment regulations, 58
  Establishment of, 49
  Fiduciary issue, extending, 215 _et seq._
  Independent Treasury system, 66, 67
  Notes, issue of, 1915–19, table 217
  Paper pound, 1797 and 1914, compared, 297
  Reserve distribution, 1862–91, table, 56 _note_
  Values, table, 41
Paper Currency Acts, 42, 63, 147, 215
Parnell, C. S., 239
Peel, Sir Robert, 27, 30
Pierson, Professor, 160
Pittman Act, U.S.A., 219
  Committee of Enquiry, 1910, 210
  Gold exchange standard in relation to, 250 _et seq_.
  Indian and foreign price-levels, Chart, 250
  Inflation during War, 250, 251
  Movements of prices as standard of value, 256
  Rupee and sterling securities, 1873–92, 94
  Wages and Prices in England and India, 112
  Wages, silver and prices, table, 110
Probyn, Mr., 154, 177 _note_, 238 _note_
Public works in India, development, 91, 93

Reddi Garu, M. L., 236
Revenue and expenditure in India, 88 _et seq._, 92
“Reverse Councils,” sale of, 166, 220 _et seq._
Ricardo, David, 28, 238 _note_, 241 _note_
Ripon, Lord, 95
Ross, H. M., 213 _note_
  Alteration of par, 1917–1919, table, 193
  Coinage additions, 214, 215, 219
  Convertibility, 174
  Cost of fall of, 1894–97, 190
  Depreciation, 1914–19, 205
  East India Company’s rupee, 9
  Economy of rupee currency, 294, 205
  Gold payments, cost of, table, 89
  Gold standard reserve and rupee circulation, 233
  Gold value, 1802–1922, tables, 188, 194, 195, 196, 197
  Imperial bimetallic, 145
  Legal tender in United Kingdom, 145
  Moghul Empire, 4, 5
  Monthly fluctuations, chart, 113
  Purchasing power, 198 _et seq._
  Rupee-sterling exchange, fall of, 71
  Stability, general survey, 187
  Standard of value, 257
  Uniform, coinage, 1833, table, 19
  Weight, increasing, 144
Russell, H. B., 48 _note_, 72 _note_, 73 _note_

Sconce, Hon. Mr., 58 _note_, 59 _note_
Seignorage, levy of, 25, 167
Shirras, Mr., 201, 210 _note_, 249, 302
  Bounties and the fall of, 108 _et seq._
  Cost of purchases, 1893–1920, 236
  Depreciation, attempts to prevent, 130, 131, 132
  Gold and silver, relative production and value, 76 _et seq._, 79
  Indian Government purchases, 1915–20, 219
  Limited legal tender, 285
  Price movements of, 191, 192, 204
Silver standard for India:
  East India Company’s decree, 9
  Evolution of, 22 _et seq._
  Demonetization of silver, effect of, 71 _et seq._
  Dislocation of parity of exchange, 1873, 70 _et seq._
  General nature of, 49 _et seq._
  Instability, 87 _et seq._
Smith, Colonel J. T., 121, 143
Smith Committee on Indian Currency, 1919, 194, 201, 248, 249, 263
Subedhar, Mr., 263
Switzerland, bimetallic system, 24 _note_

Taussig, F. W., 161 _note_
Taxation, increases in, 88 _et seq._

Temple, Sir Richard, 55 _note_, 59 _note_, 67 _note_, 118, 119
Thackersay, Sir V., 269, 273
  Adverse balance and fall of exchange, 209, 246
  Agricultural exports, 104
  Bounties and the fall of silver, 108 _et seq._
  China and India, 1889–1908, table, 183
  Cotton trade development, 102, 106
  Distribution of, tables, 105
  Falling exchange, general effect of, 99 _et seq._
  Imports and exports, tables, 99, 100
  India and U.K. before and after Mint closure, 182
  Jute industry development, 103
  Speculation caused by exchange fluctuations, 114
Treasury Notes, Indian, interest-bearing, 35
Trevelyan, Sir Charles, 42, 45 _note_

United States, currency difficulties, 133, 143
Units of currency, tables, 11

Van Don Berg, Mr., 60, 62
Vishram, Hon. Fazulbhai, 276

Walker, Prof. F. A., 143 _note_
Waterfield, Sir Henry, 189 _note_, 263 _note_
Westland, Sir James, 276
Whitaker, A. C., 161 _note_
Wood, Sir Charles, 63 _note_, 67 _note_, 298

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