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   :PG.Id:       63132
   :PG.Title:    The Problem Of The Rupee
   :PG.Released: 2020-09-05
   :PG.Rights:   Public Domain
   :PG.Producer: Joseph Koshy
   :PG.Credits:  Transcribed from: https://archive.org/details/in.ernet.dli.2015.218118
   :DC.Title:    The Problem Of The Rupee
   :DC.Creator:  Bhimrao Ramji Ambedkar
   :DC.Language: en
   :DC.Created:  1923

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THE PROBLEM OF THE RUPEE
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ITS ORIGIN AND ITS SOLUTION
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      THE PROBLEM OF THE RUPEE

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      ITS ORIGINS AND ITS SOLUTION

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      BY

      \B. R. AMBEDKAR

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

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      LONDON

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	 \P. S. KING & SON, LTD.

      ORCHARD HOUSE, 2 & 4 GREAT SMITH STREET

      WESTMINSTER

      1923

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   DEDICATED

   TO THE MEMORY OF

   MY

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      FATHER AND MOTHER

   | AS A TOKEN OF MY ABIDING GRATITUDE FOR THE
   | SACRIFICES THEY MADE AND THE ENLIGHTENMENT
   | THEY SHOWED IN THE MATTER OF MY EDUCATION.

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   *Printed in Great Britain by* Butler & Tanner Ltd., *Frome and London*

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.. toc-entry:: Author's Preface

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PREFACE
=======

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]

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[pg xi]

.. toc-entry:: Foreword by Professor Edwin Cannan

FOREWORD
========

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   By Professor Edwin Cannan

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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 speaks.

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
politics.

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 arrangement.

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 community.

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   EDWIN CANNAN.

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[pg xvii]

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[pg 1]

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   THE PROBLEM OF THE RUPEE

.. toc-entry:: From a Double Standard to a Silver Standard

CHAPTER I
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   FROM A DOUBLE STANDARD TO A SILVER STANDARD

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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 standard [6]_ 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 1916.
.. [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, 340.
.. [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 Empire [10]_ did not materially
deviate from the standard.

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   +---------------------------+---------+---------------+---------+
   | Name of the Rupee         | Weight  | Name of the   | Weight  |
   |                           | in pure | Rupee         | in pure |
   |                           | Grs.    |               | Grs.    |
   +===========================+=========+===============+=========+
   | Akabari                   |   175·0 | Delhi Sonat   |  175·0  |
   | of Lahore                 |         |               |         |
   +---------------------------+---------+---------------+---------+
   | Akabari                   |   174·0 | Delhi Alamgir |  175·0  |
   | of Agra                   |         |               |         |
   +---------------------------+---------+---------------+---------+
   | Jehangiri                 |   174·6 | Old Surat     |  174·0  |
   | of Agra                   |         |               |         |
   +---------------------------+---------+---------------+---------+
   | Jehangiri                 |   173·6 | Murshedabad   |  175·9  |
   | of Allahabad              |         |               |         |
   +---------------------------+---------+---------------+---------+
   | Jehangiri                 |   173·9 | Persian Rupee |  174·5  |
   | of Kandahar               |         | of 1745       |         |
   +---------------------------+---------+---------------+---------+
   | Shehajehani               |   175·0 | Old Dacca     |  173·3  |
   | of Agra                   |         |               |         |
   +---------------------------+---------+---------------+---------+
   | Shehajehani               |   174·2 | Muhamadshai   |  170·0  |
   | of Ahamadabad             |         |               |         |
   +---------------------------+---------+---------------+---------+
   | Shehajehani               |   174·2 | Ahamadshai    |  172·8  |
   | of Delhi                  |         |               |         |
   +---------------------------+---------+---------------+---------+
   | Shehajehani               |   175·0 | Shaha Alam    |  175·8  |
   | of Delhi                  |         | (1772)        |         |
   +---------------------------+---------+---------------+---------+
   | Shehajehani               |   174·0 |                         |
   | of Lahore                 |         |                         |
   +---------------------------+---------+-------------------------+

[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
less [13]_ 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 commodities.

..

  “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
Wilson [14]_ no one would question

  “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—

   .. table::
      :width: 50%
      :hrules: none

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

[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
agreed [17]_ 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]

.. vspace:: 2
.. class:: center large

   TABLE I
.. table:: `Principal Units of Currency`:sc:
   :widths: 1 1 2 4 4
   :aligns: left left left left left

   +---------------+---------------------+--------------------+--------------------------------------------------+---------------------------------------------+
   | Issued by the | Territory in which  | Date and Authority | Silver Coins                                     | Gold Coins                                  |
   | Government of | it circulated       | of Issue.          +-------------------+--------------+---------------+-------------+---------------+---------------+
   |               |                     |                    | Name              | Gross Weight | Pure Contents | Name        | Gross Weight  | Pure Contents |
   |               |                     |                    |                   | Troy Grs.    | Troy Grs.     |             | Troy Grs.     | Troy Grs.     |
   +---------------+---------------------+--------------------+-------------------+--------------+---------------+-------------+---------------+---------------+
   | Bombay        | Presidency          |                    | Surat Rupee       | 179·0        | 164·740       | Mohur       | 179           | 164·740       |
   +---------------+---------------------+--------------------+-------------------+--------------+---------------+-------------+---------------+---------------+
   | Madras        | Presidency          |                    | Arcot Rupee       | 176·4        | 166·477       | Star Pagoda | 52·40         | 42·55         |
   +---------------+---------------------+--------------------+-------------------+--------------+---------------+-------------+---------------+---------------+
   | Bengal        | Bengal, Bihar and   | Regulations XXXV   | Sicca Rupee       | 179·66       | 175·927       | Mohur       | 190·804       | 189·40        |
   |               | Orissa              | of 1793            | (19th Sun)        |              |               |             |               |               |
   |               +---------------------+--------------------+                   |              |               |             |               |               |
   |               | Cuttock             | XII of 1805        |                   |              |               |             |               |               |
   |               +---------------------+--------------------+-------------------+--------------+---------------+-------------+---------------+---------------+
   |               | Ceded Provinces     | XLV of 1803        | Furrakabad Rupee  | 173          | 166·135       | —           | —             | —             |
   |               +---------------------+                    | (Lucknow Sicca of |              |               |             |               |               |
   |               | Conquered Provinces |                    | the 45th Sun)     |              |               |             |               |               |
   |               +---------------------+--------------------+-------------------+--------------+---------------+-------------+---------------+---------------+
   |               | Benares Provinces   | III of 1806        | Benares Rupee     | 175          | 168·875       | —           | —             | —             |
   |               |                     |                    | (Muchleedar)      |              |               |             |               |               |
   +---------------+---------------------+--------------------+-------------------+--------------+---------------+-------------+---------------+---------------+

.. [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 following:—

	.. table::
	   :width: 80%
	   :hrules: none

	   +-----------+-----------------------+-----------------------+
	   |           | *Indian.*             | *English.*            |
	   +-----------+---+-------------------+---+-------------------+
	   | 8 ruttees | = | 1 massa           | = | 15 troy grs.      |
	   +-----------+---+-------------------+---+-------------------+
	   | 12 massas | = | 1 tola (or sicca) | = | 180 troy grs.     |
	   +-----------+---+-------------------+---+-------------------+
	   | 80 tolas  | = | 1 seer            | = | 2½  troy pounds.  |
	   +-----------+---+-------------------+---+-------------------+
	   | 40 seers  | = | 1 maund (or mun)  | = | 100 troy 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 weight. [18]_

While these were the reasons in favour [19]_ 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, that [20]_ “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.

.. vspace:: 2
.. class:: center large

   TABLE II
.. table:: `Deviations of the Proposed Standard of Fineness from that
           of the Principal Recognized Rupees`:sc:
   :width: 100%
   :widths: 2 2 1 1 1 1 1

   +---------------------------+----------+-------------------+-------------------+
   | Silver Coins recognized   | Standard | More valuable     | Less valuable     |
   | as Principal Units and    | Fineness | than the          | than the proposed |
   | their Fineness.           | of the   | Proposed Rupee.   | Rupee.            |
   |                           | Proposed |                   |                   |
   +---------------+-----------+ Rupee.   +---------+---------+---------+---------+
   | Name of the   | Its Pure  |          | In Grs. | By p.c. | In Grs. | By p.c. |
   | Coin.         | Contents. |          |         |         |         |         |
   |               | 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 R. | 166·135   | 165      | 1·135   | ·683    | —       | —       |
   +---------------+-----------+----------+---------+---------+---------+---------+
   | Benares Rupee | 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 Bengal [21]_ 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 1769.

.. [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 Madras [22]_ 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 Presidency [23]_ 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}`:math: 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 Proclamation [24]_ 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 Proclamation [25]_ 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 discontinued [26]_
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 1833. [27]_

.. [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 19]

.. vspace:: 2
.. class:: center large

   TABLE III
.. table:: `Uniformity of Coinage at the end of A.D. 1833`:sc:
   :width: 80%
   :widths: 2 4 4 3
   :aligns: left center center left

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

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 standard [31]_
by reducing its pure contents [32]_ 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 alter [33]_ 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 rupee [34]_.

.. [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
        grs.
.. [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
Parliament [38]_ 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 garb [39]_ 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
rupee [40]_—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 aware [42]_
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 States [43]_ 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 tender [44]_ 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 seignorage [48]_ 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. 79–83.
.. [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
Memorandum [55]_ 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
monometallism [57]_ 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 wrote:—

.. [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
preference [60]_ 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:—

	.. table::
	   :aligns: left right
	   :width: 50%
	   :hrules: none

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

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

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:—

	.. table::
	   :aligns: left left
	   :width: 80%
	   :hrules: none

	   =========   ======================================
	   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]

.. vspace:: 2
.. class:: center large

   TABLE IV
.. table:: `Trade and Currency`:sc: [68]_
   :aligns: left center center left left left
   :widths: 1 2 2 2 2 2

   +---------+-------------------------+-------------------------+----------------------+-----------------------------+------------------------+
   | Years   | Merchandise.            | Treasure.               | Total Coinage of     | Excess (+) or Defect (―) of | Annual Production (in  |
   |         |                         | Net Imports of          |                      | Coinage on Net Imports of   | £, 00,000 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. 189.

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:—

	.. table::
	   :aligns: left right left
	   :hrules: none

	   +-------------------+----------+--------------------------------+
	   | On April 30, 1850 | £804,988 | Extracted from Table No. 2 of  |
	   +-------------------+----------+ the Return relating to East    |
	   | On April 30, 1851 | £802,036 | India Revenues, etc.,          |
	   +-------------------+----------+ Parliamentary Paper 201, VIII, |
	   | On April 30, 1852 | £770,301 | 1858.                          |
	   +-------------------+----------+                                |
	   | On April 30, 1853 | £850,432 |                                |
	   +-------------------+----------+                                |
	   | On April 30, 1854 | £850,627 |                                |
	   +-------------------+----------+                                |
	   | On April 30, 1855 | £889,875 |                                |
	   +-------------------+----------+                                |
	   | 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 consider
[75]_ 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.

.. vspace:: 2
.. class:: center large

   TABLE V
.. table:: `Banks in India`:sc: [76]_
   :widths: 4 1 1 6 4 2 2 2

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

.. [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 objected [79]_ 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*.

.. vspace:: 2
.. class:: center large

   TABLE VI
.. table:: `Extent and Economy of Paper Currency`:sc:

   +---------------+-------------+-------------+-------------+-------------+
   | Presidencies. | Bullion.    | Coin.       | Government  | Value of    |
   |               |             |             | Securities. | Notes in    |
   |               |             |             |             | Circulation.|
   |               |             |             |             |             |
   +---------------+-------------+-------------+-------------+-------------+
   | Calcutta on   | —           | 1,84,55,922 | 1,10,44,078 | 2,95,00,000 |
   | Oct. 31, 1863 |             |             |             |             |
   +---------------+-------------+-------------+-------------+-------------+
   | Madras on Oct.| —           | 73,00,000   | —           | 73,00,000   |
   | 31, 1863      |             |             |             |             |
   +---------------+-------------+-------------+-------------+-------------+
   | Bombay on Jan.| 1,17,00,000 | 1,19,00,000 | —           | 2,36,00,000 |
   | 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. Cassels [80]_ 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 Commerce [81]_ 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. 51–69.
.. [81] *Report of the Bombay Chamber of Commerce*, 1863–64,
        App. I, p. 206.

..

  “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,”

and

  “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.

.. vspace:: 2
.. class:: center large

   TABLE VII
.. table:: `Trade and Currency`:sc: [83]_

   +----------+-------------------------+------------------------+----------------------+---------------------------+---------------------+
   | Years    | Merchandise.            | Treasure.              | Total                | Excess (+) or             | Annual Production   |
   |          |                         | Net Imports of         | Coinage of           | Defect (-) of             | (in £, 00,000       |
   |          |                         |                        |                      | Coinage on Net            | omitted) of         |
   |          |                         |                        |                      | Imports 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 State [85]_ 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] reply [86]_ 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 estimated [87]_ 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 ratio [88]_ 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, 1864,
.. [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 Government.”

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 held [90]_ 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 conclusion [91]_ 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 1868.

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 India [92]_ [pg 48] and would have
been welcomed [93]_ 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 Executive.

Alas! those who then said [96]_ 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. 398.

.. toc-entry:: The Silver Standard and the Dislocation of its Parity

CHAPTER II
==========

.. container:: center large bold

   THE SILVER STANDARD AND THE DISLOCATION OF ITS PARITY

.. vspace:: 2

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.

.. table:: TABLE VIII

   +--------------------------+-----------+--------------+-----------+-------------+---------------------------+
   | Denomination of Coins    | Gross     | Remedy       | Fineness  | Remedy      | Legal-tender              |
   | issued by the Mint.      | Wt. Troy  | in           | Troy Grs. | in          | power                     |
   |                          | Grs.      | Weight       |           | Fineness.   |                           |
   |                          |           |              |           |             |                           |
   +--------------------------+-----------+--------------+-----------+-------------+---------------------------+
   | \I. *Gold Coins* (a)     |                                                                                |
   +--------------------------+-----------+--------------+-----------+-------------+---------------------------+
   | \(i) Mohur               | 180       | 2 ⁄ 1000ths  | 165       | 2 ⁄ 1000ths | Not Legal Tender          |
   |                          |           |              |           |             | at all.                   |
   +--------------------------+-----------+--------------+-----------+-------------+                           |
   |  \(ii) Third of a Mohur  | 60        | 2 ⁄ 1000ths  | 65        | 2 ⁄ 1000ths |                           |
   +--------------------------+-----------+--------------+-----------+-------------+                           |
   | \(iii) Two-thirds of a   | 120       | 2 ⁄ 1000ths  | 110       | 2 ⁄ 1000ths |                           |
   | Mohur                    |           |              |           |             |                           |
   |                          |           |              |           |             |                           |
   +--------------------------+-----------+--------------+-----------+-------------+                           |
   | \(iv) Double Mohur       | 360       | 2 ⁄ 1000ths  | 330       | 2 ⁄ 1000ths |                           |
   |                          |           |              |           |             |                           |
   +--------------------------+-----------+--------------+-----------+-------------+---------------------------+
   | \II. *Silver Coins* (b)  |                                                                                |
   +--------------------------+-----------+--------------+-----------+-------------+---------------------------+
   | \(i) Rupee               | 180       | 5 ⁄ 1000ths  | 165       | 2 ⁄ 1000ths | Unlimited Legal           |
   |                          |           |              |           |             | Tender                    |
   +--------------------------+-----------+--------------+-----------+-------------+                           |
   | \(ii) Half-rupee         | 90        | 5 ⁄ 1000ths  | 82·5      | 2 ⁄ 1000ths |                           |
   +--------------------------+-----------+--------------+-----------+-------------+---------------------------+
   | \(iii) Quarter-rupee     | 45        | 7 ⁄ 1000ths  | 41·25     | 3 ⁄ 1000ths | Legal Tender for          |
   |                          |           |              |           |             | Fractions of a            |
   |                          |           |              |           |             | Rupee only.               |
   +--------------------------+-----------+--------------+-----------+-------------+                           |
   | \(iv) Eighth of a Rupee  | 22·5      | 10 ⁄ 1000ths | 20·625    | 3 ⁄ 1000ths |                           |
   +--------------------------+-----------+--------------+-----------+-------------+---------------------------+
   | \III. *Copper Coins* (c) |                                                                                |
   +--------------------------+-----------+--------------+-----------+-------------+---------------------------+
   | \(i) Pice                | 100       | 1 ⁄ 40th     | —         | —           | Legal Tender for          |
   |                          |           |              |           |             | `\frac{1}{64}`:math:\ th  |
   |                          |           |              |           |             | part of a Rupee.          |
   +--------------------------+-----------+--------------+-----------+-------------+---------------------------+
   | \(ii) Double Pice        | 200       | 1 ⁄ 40th     | —         | —           | Legal Tender for          |
   |                          |           |              |           |             | `\frac{1}{32}`:math:\ nd  |
   |                          |           |              |           |             | part of a Rupee.          |
   +--------------------------+-----------+--------------+-----------+-------------+---------------------------+
   | \(iii) Half-pice         | 50        | 1 ⁄ 40th     | —         | —           | Legal Tender for          |
   |                          |           |              |           |             | `\frac{1}{128}`:math:\ th |
   |                          |           |              |           |             | part of a Rupee.          |
   +--------------------------+-----------+--------------+-----------+-------------+---------------------------+
   | \(iv) Pie                | 33·3      | 1 ⁄ 40th     | —         | —           | Legal Tender for          |
   |                          |           |              |           |             | `\frac{1}{192}`:math:\ nd |
   |                          |           |              |           |             | part of a Rupee.          |
   +--------------------------+-----------+--------------+-----------+-------------+---------------------------+

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 required:—

.. [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 revenue [99]_—a privilege
for which the Presidency banks had to submit to a stringent
legislative control [pg 54] on their business [100]_ 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:—

	 .. table::
	    :hrules: none
	    :width: 80%

	    +---------------------+------------+-------------------+
	    | *Name of the Bank*  | *Accounts  | *Notes in         |
	    |                     | Current.*  | in Circulation.*  |
	    +---------------------+------------+-------------------+
	    | Bank of Bengal      | £1,254,875 | £1,283,946        |
	    +---------------------+------------+-------------------+
	    | Bank of Bombay      | £438,459   | £765,234          |
	    +---------------------+------------+-------------------+
	    | Bank of Madras      | £161,959   | £192,291          |
	    +---------------------+------------+-------------------+
	    | .. class:: right                                     |
	    |                                                      |
	    |    (*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 law [103]_ 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 great [108]_ 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:

	 .. table::

	    +-----------+--------------+---------------------------------------+-------------------------------+
	    | Period.   | Note         | Composition of the Reserve.           | Percentage of each Component  |
	    |           | Circulation. |                                       | of the Reserve to the 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 exchange [111]_ 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. 231—33.
.. [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 economical
[115]_ 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 60]

.. [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:—

	 .. table::

	     +---------+----------------------+----------------+----------------------+-----------+
	     | Months  | Eastern India        | Western India. | Northern India.      | Southern  |
	     |         +----------+-----------+ Bombay and     +-----------+----------+ India.    |
	     |         | Rangoon. | Calcutta. | Karachee.      | Cawnpore. | Lahore.  | Madras.   |
	     +=========+==========+===========+================+===========+==========+===========+
	     | Busy    | 3 months | 4 months  | 6 months       | 6 months  | 9 months | 6 months  |
	     |         |          |           |                |           |          |           |
	     +---------+----------+-----------+----------------+-----------+----------+-----------+
	     | Slack   | 9 months | 8 months  | 6 months       | 6 months  | 3 months | 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 April  | Feb. to   | April to | Feb. to   |
	     |         | March    | Nov.      |                | April     | June     | July      |
	     +---------+----------+-----------+----------------+-----------+----------+-----------+
	     | Slack   | April to | Dec. to   | May to Oct.    | May to    | July to  | April to  |
	     |         | Dec.     | July      |                | Aug.      | Sept.    | Dec.      |
	     +---------+----------+-----------+----------------+-----------+----------+-----------+
	     | Busy    | —        | —         | —              | Sept. to  | Oct. to  | —         |
	     |         |          |           |                | Nov.      | March    |           |
	     +---------+----------+-----------+----------------+-----------+----------+-----------+
	     | Slack   | —        | —         | —              | Dec. to   | —        | —         |
	     |         |          |           |                | Jan.      |          |           |
	     +---------+----------+-----------+----------------+-----------+----------+-----------+

.. [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.

	 .. class:: right

	    (*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 insisted [124]_ 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 Jevons [127]_ 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.

.. clearpage::

.. figure:: images/chart-1.png
   :alt: CHART I Discount Rates in India

   CHART I: Discount Rates in India

.. clearpage::

[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 deviated [133]_ from the
normal [134]_ 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.

.. clearpage::

.. figure:: images/chart-2.png
   :alt: CHART II Fall of the Rupee-Sterling Exchange

   CHART II: Fall of the Rupee-Sterling Exchange

.. clearpage::

[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 manœuvred [140]_ 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, p.v.
.. [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 currency [142]_ 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:—

	 .. class:: center

	    *In Millions of Francs.*

	 .. table::
	    :aligns: left right right right
	    :hrules: none

	    +-------------+--------+--------+--------+
	    |             | \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. 155.
.. [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.

.. vspace:: 2
.. class:: center large

   TABLE IX
.. table:: `Relative Production of Gold and Silver (Ounces)`:sc:

   +-----------+-----------------------------+------------------------+--------------------------+
   | Period    | Total Production.           | Annual Average         | Index Number for Average |
   |           |                             | Production             | Annual 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:—

.. vspace:: 2
.. class:: center large

   TABLE X
.. table:: `Gold and Silver`:sc: [153]_
	   `Relative Production and Relative Value`:sc:

   +-----------+-------------+----------+-------------+---------+-----------------------+
   |  Period.  | Ratio of    | Ratio of | Index       | Index   | Correlation between   |
   |           | Production  | Value of | Number      | Number  | Relative Production   |
   |           | (by Weight) | Gold to  | for the     | for the | and Relative Value.   |
   |           | of Gold to  | Silver.  | Ratio of    | Ratio   +------------+----------+
   |           | Silver. As  | As 1     | Production. | of      | Relative   | Relative |
   |           | 1 Grain to: | Grain    |             | Value.  | Production | Value of |
   |           |             | to:      |             |         | of Silver. | Silver.  |
   |           |             |          |             |         | Falls -    | Falls -  |
   |           |             |          |             |         | Rises +    | 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.

.. figure:: images/chart-3.png
   :alt: CHART III Relative Values and Relative Production of Gold and
         Silver

   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 artificial [158]_ 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 observed [160]_

  “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]

.. toc-entry:: The Silver Standard and the Evils of Its Instability

CHAPTER III
===========

.. container:: center large bold

   THE SILVER STANDARD AND THE EVILS OF ITS INSTABILITY

.. vspace:: 2

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.

.. vspace:: 2
.. class:: center large

   TABLE XI
.. table:: `The Increase in the Rupee Cost of Gold Payments`:sc: [163]_

   +-----------+-------------+------------------+-------------------------------+
   | Financial | Average     | Total Excess of  | Amount of this Excess due to  |
   | Year      | Rate of     | Rupees needed    +---------------+---------------+
   |           | Exchange    | to provide for   | (1) Fall in   | (2) Increase  |
   |           | for the     | the net Sterling | the Rate of   | in gold       |
   |           | Year.       | Payments of the  | Exchange over | Payments over |
   |           |             | Year over those  | that of       | those of the  |
   |           |             | required to meet | 1874–75.      | Year 1874–75. |
   |           |             | the Sterling     |               |               |
   |           |             | Payments of      |               |               |
   |           |             | 1874–75.         |               |               |
   |           +-----+-------+------------------+---------------+---------------+
   |           | \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 was [164]_ as
follows:—

.. [164] *Report of the Indian Currency Committee*, 1893,
         App. II, p. 263.

.. table::

   +-----------------+---------------+--------------+
   | 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 1853 [166]_ 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]

.. vspace:: 2
.. class:: center large

   TABLE XII
.. table:: `Revenue and Expenditure of the Government of India`:sc:

   +---------+-----------+-----------------------------------------+---------------------------+---------------+
   |  Year.  | Average   | In India.                               | In England.               | Final Result. |
   |         | Rate of   +--------------+-------------+------------+--------------+------------+---------------+
   |         | Exchange. | Net Revenue. | Net         | Surplus    | Net Sterling | Exchange.  | Surplus (+)   |
   |         |           |              | Expenditure | Revenue.   | Revenue.     |            | or            |
   |         |           |              | excluding   |            |              |            | 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 works.

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:—

	 .. table::
	    :hrules: none

	    +-----------------+--------------------+----------------+
	    |                 | *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 |
	    +-----------------+--------------------+----------------+
	    | .. class:: right                                      |
	    |                                                       |
	    |    *Indian Currency Committee* (1898), Appendix II,   |
	    |    p. 179.                                            |
	    +-------------------------------------------------------+

.. vspace:: 2
.. class:: center large

   TABLE XIII
.. table:: `Price Movements of the Rupee and Sterling Securities of
           the Government of India`:sc: [171]_

   +-------+-------------------------------+-----------------------------------------------------------+-------------------------------------------------------------------------+
   | Year. |      Rates of Exchange.       | Price of 4 per cent. Rupee Paper.                         | Price of Sterling India Stock.                                          |
   |	   |                               +---------------------------------+-------------------------+-------------------------------+--------------------+--------------------+
   |	   |                               | In Calcutta.                    | In London.              | 4 per cent.                   | 3½ per cent.       | 3 per 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`:f:  | 21¼           | 102⅞           | 101¾           | 94            | 91      | 106¼          | 103¼          |          |         |          |         |
   +-------+---------------+---------------+----------------+----------------+---------------+---------+---------------+---------------+----------+---------+----------+---------+
   | 1876  | 22⅜           | 18½           | 101⅞           | 98¾            | 89¾           | 78      | 105⅞          | 101⅞          |          |         |          |         |
   +-------+---------------+---------------+----------------+----------------+---------------+---------+---------------+---------------+----------+---------+----------+---------+
   | 1877  | 22¼           | 20 `9⁄16`:f:  | 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 `15⁄16`:f:  | 81⅜           | 77¾     | 105⅝          | 102⅛          |          |         |          |         |
   +-------+---------------+---------------+----------------+----------------+---------------+---------+---------------+---------------+----------+---------+----------+---------+
   | 1881  | 20 `1⁄16`:f:  | 19½           | 104⅝           | 100            | 86            | 81½     | 106⅜          | 103⅞          | 103⅞     | 100¾    |          |         |
   +-------+---------------+---------------+----------------+----------------+---------------+---------+---------------+---------------+----------+---------+----------+---------+
   | 1882  | 20 `3⁄16`:f:  | 19 `1⁄16`:f:  | 102 `1⁄16`:f:  | 95⅝            | 85            | 81      | 105⅛          | 102⅞          | 101⅞     | 99¾     |          |         |
   +-------+---------------+---------------+----------------+----------------+---------------+---------+---------------+---------------+----------+---------+----------+---------+
   | 1883  | 19 `9⁄16`:f:  | 19 `3⁄16`:f:  | 101⅛           | 97 `9⁄16`:f:   | 82            | 79¾     | 104⅝          | 102 `7⁄16`:f: | 103⅛     | 101⅜    |          |         |
   +-------+---------------+---------------+----------------+----------------+---------------+---------+---------------+---------------+----------+---------+----------+---------+
   | 1884  | 19¾           | 18 `15⁄16`:f: | 100⅝           | 95 `5⁄16`:f:   | 81¾           | 78¼     | 104⅜          | 101⅝          | 107⅛     | 101¾    | 96¼      | 91¾     |
   +-------+---------------+---------------+----------------+----------------+---------------+---------+---------------+---------------+----------+---------+----------+---------+
   | 1885  | 19 `3⁄16`:f:  | 17 `11⁄32`:f: | 98 `7⁄16`:f:   | 92¼            | 77½           | 73¼     | 103 `1⁄16`:f: | 98¾           | 102¾     | 97½     | 91½      | 85¾     |
   +-------+---------------+---------------+----------------+----------------+---------------+---------+---------------+---------------+----------+---------+----------+---------+
   | 1886  | 18            | 16⅛           | 97¾            | 97 `3⁄16`:f:   | 73            | 66¼     | 103½          | 101¼          | 102¾     | 99¾     |90⅛       | 86⅝     |
   +-------+---------------+---------------+----------------+----------------+---------------+---------+---------------+---------------+----------+---------+----------+---------+
   | 1887  | 18 `3⁄16`:f:  | 15⅝           | 99 `3⁄16`:f:   | 95 `5⁄16`:f:   | 71 `11⁄16`:f: | 67⅞     | 102¾          | 100½          | 103¼     | 100¼    | 92¾      | 95⅜     |
   +-------+---------------+---------------+----------------+----------------+---------------+---------+---------------+---------------+----------+---------+----------+---------+
   | 1888  | 17⅛           | 16            | 100 `3⁄16`:f:  | 97¾            | 69⅜           | 66¼     | 102⅞          | 100½          | 107¼     | 104⅝    | 98       | 95      |
   +-------+---------------+---------------+----------------+----------------+---------------+---------+---------------+---------------+----------+---------+----------+---------+
   | 1889  | 16 `15⁄16`:f: | 16            | 100⅜           | 97 `1⁄16`:f:   | 69⅛           | 66⅜     |               |               | 109½     | 106⅞    | 101⅛     | 99      |
   +-------+---------------+---------------+----------------+----------------+---------------+---------+---------------+---------------+----------+---------+----------+---------+
   | 1890  | 20 `29⁄32`:f: | 16⅞           | 103⅞           | 96 `13⁄16`:f:  | 87¼           | 68¾     |               |               | 108½     | 105¼    | 100¾     | 95¼     |
   +-------+---------------+---------------+----------------+----------------+---------------+---------+---------------+---------------+----------+---------+----------+---------+
   | 1891  | 18¼           | 16⅝           | 107 `13⁄16`:f: | 104 `1⁄16`:f:  | 80¾           | 74¼     |               |               | 109½     | 105     | 99       | 94½     |
   +-------+---------------+---------------+----------------+----------------+---------------+---------+---------------+---------------+----------+---------+----------+---------+
   | 1892  | 16 `11⁄16`:f: | 14⅝           | 108 `15⁄16`:f: | 103 `11⁄15`:f: | 74½           | 62      |               |               | 109½     | 106⅛    | 98½      | 94⅞     |
   +-------+---------------+---------------+----------------+----------------+---------------+---------+---------------+---------------+----------+---------+----------+---------+


.. [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 severely [172]_
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, observed [173]_:—

.. [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 cost.

..

  “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 1862–90 [176]_ 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 warned [179]_ 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:

	 .. table::
	    :hrules: none

	    +---------+----------------+-+---------+--------------+
	    | 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 100]

.. [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,

.. vspace:: 2
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   TABLE XIV
.. table:: `Imports and Exports (Both Merchandise and Treasure)`:sc: [183]_

   +---------+-------------+-------------+-+---------+--------------+--------------+
   | Year.   | Exports.    | Imports.    | | Year.   |   Exports.   |   Imports.   |
   |         +-------------+-------------+ +---------+--------------+--------------+
   |         | 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.

.. vspace:: 2
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   TABLE XV
.. table:: `Nature of Industrial Pursuits in England and India`:sc: [184]_


   +---------+---------------------------------------------------------------+---------------------------------------------------------------+
   |         | Distribution of *Indian* Exports exclusive of Treasure.       | Distribution of *English* Exports exclusive of 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.

.. vspace:: 2
.. class:: center large

   TABLE XVI
.. table:: `Changes in Industrial Pursuits of India`:sc: [185]_

   +-------------+------------------------------+------------------------------+
   |     Years   | Imports.                     | Exports.                     |
   |             +---------------+--------------+---------------+--------------+
   |             | 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:—

.. vspace:: 2
.. class:: center large

   TABLE XVII
.. table:: `The Development of Indian Cotton Trade and Industry`:sc:

   +-----------------------------+-------------------------------------------------------+
   |                             | 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 cwts.   |           |          |          |          |          |
   +-----------------------------+-----------+----------+----------+----------+----------+
   | Exports of raw              | 5,236     | 3,988    | 5,477    | 5,330    | 4,660    |
   | cotton—thousands of cwts.   |           |          |          |          |          |
   +-----------------------------+-----------+----------+----------+----------+----------+
   | Imports of twist and yarn   | 33·55     | 33·55    | 44·34    | 49·09    | 44·79    |
   |                             |           |          |          |          |          |
   +-----------------------------+-----------+----------+----------+----------+----------+
   |                             | Growth of Industry (at end of each fifth year).       |
   +-----------------------------+-----------+----------+----------+----------+----------+
   | Number of mills             | 48        | 58       | 81       | 114      | 143      |
   +-----------------------------+-----------+----------+----------+----------+----------+
   | Number of spindles—000      | 1,000     | 1,471    | 2,037    | 2,935    | 3,712    |
   | omitted                     |           |          |          |          |          |
   +-----------------------------+-----------+----------+----------+----------+----------+
   | Number of looms—000 omitted | 10        | 13       | 16       | 22       | 34       |
   +-----------------------------+-----------+----------+----------+----------+----------+
   | Number of persons employed  | —         | 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.

.. vspace:: 2
.. class:: center large

   TABLE XVIII
.. table:: `Development of Jute Industry and Trade`:sc:

   +-----------------------+-------------------------------------------------------+
   | Growth of Trade.      | Average Annual of 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. |
   +-----------------------+-----------+----------+----------+----------+----------+
   | Exports—                                                                      |
   +-----------------------+-----------+----------+----------+----------+----------+
   | Raw, million cwt.     | 5·72      | 5·58     | 7·81     | 9·31     | 10·54    |
   +-----------------------+-----------+----------+----------+----------+----------+
   | Gunny bags, millions. | 6·44      | 35·96    | 60·32    | 79·98    | 120·74   |
   +-----------------------+-----------+----------+----------+----------+----------+
   | Cloth, million yds.   | —         | 4·71     | 6·44     | 19·79    | 54·20    |
   +-----------------------+-----------+----------+----------+----------+----------+
   | *Growth of Industry*.                                                         |
   +-------------------------------------------------------------------------------+
   | Number of —                                                                   |
   +-----------------------+-----------+----------+----------+----------+----------+
   | Mills                 | —         | 21       | 21       | 24       | 26       |
   +-----------------------+-----------+----------+----------+----------+----------+
   | Looms, 000 omitted    | —         | 5·5      | 5·5      | 7        | 8·3      |
   +-----------------------+-----------+----------+----------+----------+----------+
   | Spindles, 000 omitted | —         | 88       | 88       | 138·4    | 172·4    |
   +-----------------------+-----------+----------+----------+----------+----------+
   | Persons employed,     | —         | 38·8     | 38·8     | 52·7     | 64·3     |
   | in thousands          |           |          |          |          |          |
   +-----------------------+-----------+----------+----------+----------+----------+


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]

.. vspace:: 2
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   TABLE XIX
.. table:: `Growth of Agricultural Exports of India`:sc:

   +--------+----------+----------+----------+-----------+-----------+-----------+
   |        | 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 quarters [187]_ 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
         follows:—

	 .. class:: center

	    `Distribution of Indian Trade`:sc:

	    Annual Average for each Quinquennium in Millions of Rupees.

	 +----------------+------------------------------+------------------------------+
	 | Countries      | 1875–76 to 1879–80.          | 1880–81 to 1884–85.          |
	 |                +----------+----------+--------+----------+----------+--------+
	 |                | Imports. | Exports. | Total. | Imports. | Exports. | Total  |
	 +----------------+----------+----------+--------+----------+----------+--------+
	 | United Kingdom | 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  |
	 | Settlements    |          |          |        |          |          |        |
	 +----------------+----------+----------+--------+----------+----------+--------+

	 .. class:: center

	    Annual Average for each Quinquennium in Millions of Rupees.

	 +----------------+------------------------------+------------------------------+
	 | Countries      | 1885–86 to 1889–90.          | 1890–91 to 1894–95.          |
	 |                +----------+----------+--------+----------+----------+--------+
	 |                | Imports. | Exports. | Total. | Imports. | Exports. | Total  |
	 +----------------+----------+----------+--------+----------+----------+--------+
	 | United Kingdom | 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  |
	 | Settlements    |          |          |        |          |          |        |
	 +----------------+----------+----------+--------+----------+----------+--------+

.. vspace:: 2
.. class:: center large

   TABLE XX
.. table:: `Exports of Cotton Goods to Eastern Markets`:sc:

   +---------+-------------------------+-------------------------+
   | Years.  | Yarn, lb.,              | Piece-goods,            |
   |         | 000 omitted.            | yds., 000 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]

.. vspace:: 2
.. class:: center large

   TABLE XXI
.. table:: `Movements of Prices, Wages and Silver Between India and
           England`:sc: [190]_

   +-----------------------+-----------+--------+-------------+-----------+-------------+------------+
   | Net Imports of Silver | Index No. | Years. | Index No.   | Index No. | Index No.   | Index No.  |
   | into India.           | for Gold  |        | for Silver  | for Wages | for Gold    | for Wages  |
   +---------+-------------+ Price of  |        | Prices of   | in India. | Prices of   | in England |
   | Years.  | Amount.     | Silver.   |        | Commodities |           | Commodities |            |
   |         | Rs.         |           |        | in India.   |           | in 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.

.. figure:: images/chart-4.png
   :alt: CHART IV: Prices and Wages in India and England, 1873–93

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

.. figure:: images/chart-5.png
   :alt: CHART V: Monthly Fluctuations of The Rupee-Sterling Exchange

   CHART V: Monthly Fluctuations of The Rupee-Sterling Exchange

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]

.. vspace:: 2
.. class:: center large

   TABLE XXII
.. table:: `Fluctuations of Exchange and Fluctuations in the Rupee
           Cost of Gold Payments`:sc: [194]_

   +-----------+--------------+--------------+--------------------------+
   | Financial | Estimated    | Rate of      | Changes in the Rupee     |
   | Year.     | Rate of      | Exchange     | Cost of Sterling         |
   |           | Exchange on  | actually     | Payments consequent      |
   |           | which the    | realized on  | upon Changes between     |
   |           | Budget of    | the Average  | the Estimated and the    |
   |           | 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 all-pervading.

.. [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 affected”

.. [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 value.

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]

.. toc-entry:: Towards a Gold Standard

CHAPTER IV
==========

.. container:: center large bold

   TOWARDS A GOLD STANDARD

.. vspace:: 2

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 memorandum [197]_ 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 gold.
.. [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 uncertainty.” [205]_

.. [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 that

  “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 127]

..

  “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 profitable.”

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 Committee [211]_
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
1898 [213]_ 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 Bagehot [215]_ 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. Pierson [218]_ 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 said [219]_:—

.. [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 silver.

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 clear [221]_ 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]

.. vspace:: 2
.. class:: center large

   TABLE XXIII
.. table:: `Distribution of the Stock of Money in Different
           Countries`:sc: [222]_

   +------------+-------------------------------------------------------------------------+
   | Countries  | .. class:: center                                                       |
   |            |                                                                         |
   |            |    Monetary Circulation at the *Beginning* of 1892.                     |
   |            +---------------+---------------+-------------+-------------+-------------+
   |            | Gold.         | Silver.       | Uncovered   | Fractional  | Billon      |
   |            |               |               | Notes       | Currency.   | Money.      |
   +------------+---------------+---------------+-------------+-------------+-------------+
   | Austria fl.| 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 fr. | 3,900,000,000 | 3,200,000,000 | 572,000,000 | 280,000,000 | 280,000,000 |
   +------------+---------------+---------------+-------------+-------------+-------------+
   | Germany m. | 2,500,000,000 | 430,000,000   | 450,000,000 | 457,000,000 | 57,000,000  |
   +------------+---------------+---------------+-------------+-------------+-------------+
   | Holland fl.| 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 pes. | 160,000,000   | 646,000,000   | 548,000,000 | 190,000,000 | 157,000,000 |
   +------------+---------------+---------------+-------------+-------------+-------------+
   | U.S.A doll.| 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:—

.. vspace:: 2
.. class:: center large

   TABLE XXIV
.. table:: `Mintage of Gold and Silver in France`:sc: [224]_

   +--------------+---------+---------+-----------+
   | Period.      | Gold.   | Silver. | Ratio of  |
   |              +---------+---------+ of Value. |
   |              | Million | Million |           |
   |              | 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 that [226]_ 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. 297.
.. [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 argued [228]_:—

.. [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 despatch [232]_
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 Government [239]_
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,
	 etc.”

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 author [249]_  they proposed

.. [240] By Aston and also by R. West, I.C.C., 1893. App. III, pp. 281
         and 325.
.. [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 amount.”

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,
reported [250]_:—

.. [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 ratio.” [252]_

.. [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 repealed:—

| (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 Reserve. [257]_

.. [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. 3.

(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 tender.
    (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 observed [260]_:—

.. [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).*

  .. container:: center

     ――――――――

..

  “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 public [261]_ 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 feared [262]_ 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 proposed [265]_:—

.. [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 proposed [266]_ that
the Government should offer to sell, without limit on the one hand,
rupee drafts on India at the exchange of 16 `1⁄16`:f:\ d. 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 sterling;
(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 observed [268]_:—

.. [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
  exchange.”

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 to

  “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 Committee.”

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 principle.

.. [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]

.. toc-entry:: From A Gold Standard to a Gold Exchange Standard

CHAPTER V
=========

.. container:: center large bold

   FROM A GOLD STANDARD TO A GOLD EXCHANGE STANDARD

.. vspace:: 2

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

  “in spite of the fact the Government adopted and intended to carry
  out the recommendations of the Committee of 1898, the Indian
  currency system to-day differs considerably from that contemplated
  by the Committee, whilst the mechanism tor maintaining the exchange
  has some important features in common with the suggestions made to
  the Committee by Mr. A. M. Lindsay.” [276]_

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

It will be recalled [277]_ that in Mr. Lindsay's scheme Indian
currency was to be entirely a rupee currency; the Government was to
give rupees in every case in return for gold, and gold for rupees only
in case of foreign remittances.  The scheme was to be worked through
the instrumentality of two offices, one located in London and the
other located [pg 165] in India, the former to sell drafts on the
latter when rupees were wanted and the latter to sell drafts on the
former when gold was wanted.  Surprisingly similar is the system
prevailing in India to-day.  Corresponding to Mr. Lindsay's proposals,
which, be it noted, were rejected in 1898, the Government of India has
built up two reserves, one of gold and the other of rupees, out of the
cash balances, the paper currency, and the gold-standard reserve.
Each of these is, by the nature of the currency system, composite.
The cash balances, which are fed from revenue receipts, gather in
their net rupees as well as sovereigns, both being legal tender.
Notes being issuable against both, the paper-currency reserve always
contains sovereigns and rupees.  Up to August, 1915, the gold-standard
reserve was also held partly in gold and partly in rupees. [278]_ By a
system of sorting, technically called “transfers,” the Government
secures the command over rupees and sovereigns necessary for
discharging the obligations it has undertaken. [279]_ The location of
these funds is also very much as designed by Mr. Lindsay.  The cash
balances, being the till-money of the Government, are necessarily
distributed between the Government of India in India and the Secretary
of State in London, the portion held by the latter being entirely in
gold and that held by the former being in silver.  The gold-standard
reserve, like the cash balances, is not a statutory reserve.
Consequently its location is perfectly within the competence of the
Executive.  That being so, it has been so arranged. that the gold
portion of the fund shall be held by the Secretary of State in London,
and the rupee portion, so long as it was maintained, by the Government
of India in India.  The only reserve which did not easily lend itself
to currency manipulation was the paper-currency reserve, for the
reason that its disposition and location were governed by law.  In
that behalf, legal power has been taken to alter the location of the
gold part of that reserve by making permanent the [pg 166] provision
of the temporary Act II of 1898, which authorized the issue of notes
in India against gold tendered to the Secretary of State in London.
Thus the Secretary of State and the Government of India, under the new
system of currency, hold two reserves, one of gold, mainly in the
possession of the former and located in London, and the other of
rupees, entirely in the possession of the latter and held in India.
But the similarity of the existing system to that of Mr. Lindsay is
not confined to the maintenance of these funds and their location.  It
extends even to the modes of operating these two funds.  For, as
suggested by Mr. Lindsay, when rupees are wanted in India the
Secretary of State sells what are called “Council Bills,” encashable
into rupees at the Government Treasuries in India, thereby providing
the rupee currency in India.  When gold is wanted the Government of
India sells what are called “Reverse Councils” on the home Treasury in
London, which are encashed by the Secretary of State, thereby
providing gold for foreign remittances.  The result of the sale of
“Council Bills” and of the “Reverse Councils” on the two funds has
been to transform the Indian currency from being a gold standard with
a gold currency, as desired by the Fowler Committee, into what is
called a gold standard without a gold currency, as wished for by
Mr. Lindsay.

.. [277] *See* Chap. IV, *supra*.
.. [278] The rupee branch has been discontinued since that date, on
         the recommendation of the Chamberlain Commission.
.. [279] Besides, if the Government falls short of rupees, it has the
         legal power to convert the gold in the paper-currency reserve
         into rupees to replenish the stock.

This system which has grown up in place of the system originally
contemplated by the Government of India is called the gold-exchange
standard.  Whatever that designation may mean it was not the plan
originally contemplated by the Government of India in 1898.  How the
departure came about we shall deal with in another place.  Here it is
enough to state—one may also say necessary, for many writers seem to
have fallen into an error on this point—*that the Government did not
start to establish a gold-exchange standard*.  Rather it was
contemplating the establishing of a true gold standard, which, however
inadequately understood by the men who framed it, was in essential
agreement with the principles governing the English Bank Charter Act
of 1844,

What are we to say about the new system?  The Chamberlain [pg 167]
Commission, while reporting that there was a departure from the ideal
of a gold standard with a gold currency, observed [280]_:—

.. [280] Report, par. 46.
..

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

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

.. [281] *See supra*, Chap. IV.
.. [282] Cf., however, R. G. Hawtrey, *Currency and Credit*, 1919,
         pp. 302–3.
.. [283] Some witnesses before the Lords Committee on Cash Payments,
         appointed in 1819, raised doubts whether, having regard to
         the silver clause of the Act of 1816, resumption of cash
         payments was worth while as a means of establishing a gold
         standard in England.  Cf. particularly the evidence of
         Mr. Fletcher and also Mr. Mushet before the Committee.

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

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

..

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

With these reasons, interesting in so far as they were prophetic of
the scandals connected with the recent silver purchases by the India
Office, [284]_ we are not directly concerned.  What is of importance
is whether this difference in the mode of issue makes any vital
difference to the question of an effective limit on the volume of
rupees.  Now, there is a great deal of confused thinking as to the
precise virtue of the closing of the Mints to the private coinage of
silver.  It was generally believed, the closing of the Mints having
given a monopoly to the Government in the matter of issuing rupees,
that this monopoly would somehow sustain the value of the rupees in
terms of gold by preventing their over-issue.  The closing of the
Mints, it must be admitted, has given the Government the position of a
monopolist.  But how a monopoly prevents an over-issue is not easy to
grasp.  The closing of the Mints to the free coinage of silver is the
same as depriving banks of the liberty of issuing notes and giving it
exclusively to a central bank.  But nobody has ever argued that
because a central bank has a monopoly of issue it cannot therefore
over-issue.  Similarly, because the Government of India is a
monopolist it would be absurd to argue that it cannot therefore
over-issue.  Indeed, a monopolist can issue as [pg 170] much as
private people put together, if not more.  Again, from the standpoint
of influence of profits on coinage the present plan is much inferior
to that of 1878.  It is true in both cases profits depend upon the
volume of coinage.  But in the former the amount of profit was no
incentive to coinage, either to the Government, because it had no
power to coin, or to the people who determined the volume of coinage,
because the regulation of seignorage practically controlled it by
making it unprofitable to bring additional bullion to the Mint.  In
the present case, the coinage being entirely in the hands of the
Government, a hankering after profits, generated by the silly notion
of the necessity of a “backing” to the currency, might create an
impulse to undertake additional coinage, especially if the price of
silver fell very low and produced a wide margin between the Mint and
the market price of the rupee. [285]_

.. [284] *See* P.P. 400 of 1912.
.. [285] From this point of view the proposition of Prof. Keynes, that
         the gold value of the rupee may be fixed irrespective of the
         cost price of silver, must, having regard to the existing
         system of currency, be looked upon as a somewhat unsafe
         position.  Cf. his evidence before the Indian Currency
         Committee of 1919, Q. 2,688.

If it is argued, as it well may be, that the will of the Government of
India as a monopolist, i.e. its desire to see that its currency is not
depreciated, may bring about a limitation on the issue of rupees which
could not have been possible had the Mints remained open to the public
in general, the reply is that this will to limit could be effective
only if the Government had the power to refuse to issue.  Central
banks limit their currencies so far as will is concerned, because they
are not obligated to issue to anyone and every one.  But the position
of the Government of India is lamentably weak in this respect.  It is
bound to issue currency when asked for.  It is true that every issue
does not involve a net addition to the existing volume of currency;
for a portion of the new issue is a re-issue of what is returned from
circulation.  None the less, it cannot be said that the Government by
reason of its monopoly has put an effective limit on the volume of
rupee currency.  On the other hand, having no escape from the
liability to issue currency, the exercise of this cherished privilege
has recoiled on the [pg 171] Government, so much so that this monopoly
of issue, instead of strengthening the position of the Government, has
weakened it considerably. [286]_ The view of the Chamberlain
Commission [287]_

.. [286] The danger involved in this indefinite liability to issue
         rupee currency was recognized by the Smith Currency Committee
         of 1919, which recommended that this obligation should be
         withdrawn.  *See* Report, par. 68.  Of course its motive was
         different.
.. [287] Report, par. 182.
..

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

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

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

  “the value of the rupee will be determined by the quantity in
  circulation.”

.. [288] *Currency and Credit*, 1919, p. 341.

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

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

.. [289] Report, par. 46.
..

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

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

  “the use of a local currency mainly not of gold, some degree of
  unwillingness to supply gold locally in exchange for the local
  currency, but a high degree of willingness to sell foreign exchange
  for payment in local currency at a certain maximum rate.” [290]_

.. [290] Keynes, *Indian Currency and Finance*, p. 29.

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

.. [291] Cf. his review of Keynes in the *Quarterly Journal of
         Economics*, February, 1914, p. 374.
..

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

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

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

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

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

.. [292] Cf. Andréadès, *History of the Bank of England*, p. 198.

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

.. [293] “No single word can convey the full meaning,” says
         Prof. Nicholson, *War Finance*, 2nd ed., 1918, p. 36.
.. [294] *A History of American Currency*, New York. 1874, p. 116.
..

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

That being so, it would be foolish to assume that we are immune from
the consequences of an inconvertible currency until we know what is
the grade of the convertibility that is provided.  Now, what is the
character of the convertibility of the rupee in India?  It is a
deferred, delegalized, delocalized, and therefore a devitalized kind
of convertibility.  Indeed, really speaking it is not a
convertibility, but rather it is a moratorium which is a negation of
convertibility, for what does the provision for convertibility for
foreign remittances mean in practice?  It simply means that until a
fall of exchange takes place there is a moratorium or inconvertibility
in respect of the rupee.  Not only is there a moratorium as long as
exchange does not fall, but there is no guarantee that the moratorium
will be lifted when a fall does occur.  It may not be lifted, for it
is a matter of conscience and not of law. [295]_ Is such a grade of
convertibility, if [pg 176] one has a predilection for that term, very
far removed from the inconvertibility of the bank notes during the
suspension period?  Let those who will say so.  For a person not
endowed with high and subtle imagination the distinction between such
a convertibility and absolute inconvertibility is too thin to persuade
him that the two systems are radically different; indeed, when we come
to analyse the problem of prices in India and outside India we shall
find another piece of evidence to show that they are not different,
and that the analogy between the two is perfect enough for all
practical purposes.  It may, however, be said that an inconvertible
currency may be so well managed as not to give rise to a premium on
gold, so that there may be little to choose between it and a perfectly
convertible currency.  But whether an inconvertible currency will be
so well managed is a question of practical working.  Again, whether
the absence of premium on gold suffices to place an inconvertible
currency on par with a convertible currency, so far as the price
problem is concerned, is also a matter depending on circumstances.
All these questions will be considered in their proper places. [296]_
[pg 177]

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

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

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

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

.. [297] Both Lindsay and Probyn had attacked the plan of the
         Government of India on this score, and had claimed that their
         plans were superior because they had at least provided some
         sort of convertibility.
.. [298] In his comparison of the Limping Standard with the Exchange
	 Standard, Prof. Fisher seems entirely to overlook these
	 considerations.  Cf. his *Purchasing Power*, etc., 1911, pp,
	 131–32.

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

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

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

.. toc-entry:: Stability of the Exchange Standard

CHAPTER VI
==========

.. container:: center large bold

   STABILITY OF THE EXCHANGE STANDARD

.. vspace:: 2

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]

.. vspace:: 2
.. class:: center large

   `TABLE XXV`:sc:
.. table:: `Trade of India with United Kingdom (before and after the
           Mint Closure)`:sc:

   +--------------------------+-----------------------------------------+-----------------------------------------+
   | Annual Average.          | Exports to U.K.                         | Imports from U.K.                       |
   |                          +--------------+-------------+------------+--------------+-------------+------------+
   |                          | Merchandise. | Bullion and | Total.     | Merchandise. | Bullion     | Total.     |
   |                          |              | Specie.     |            |              | and 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 comparison  | −16·598      | +87·613     | −25·055    | −9·028       | −12·261     | −9·657     |
   | with Period I            |              |             |            |              |             |            |
   +--------------------------+--------------+-------------+------------+--------------+-------------+------------+
   | Period III in comparison | +9·039       | −5·661      | +25·483    | +15·659      | +8·154      | +14·240    |
   | with Period II           |              |             |            |              |             |            |
   +--------------------------+--------------+-------------+------------+--------------+-------------+------------+
   | Period IV in comparison  | +28·126      | +6·853      | +26·682    | +41·183      | +31·304     | +39·415    |
   | with Period III          |              |             |            |              |             |            |
   +--------------------------+--------------+-------------+------------+--------------+-------------+------------+
   | Period IV in comparison  | +16·518      | +89·122     | +19·135    | +48·549      | +24·597     | +43·887    |
   | with Period I            |              |             |            |              |             |            |
   +--------------------------+--------------+-------------+------------+--------------+-------------+------------+

[pg 183]

.. vspace:: 2
.. class:: center large

   `TABLE XXVI`:sc:
.. table:: `Trade of India with China`:sc:


   +--------------------------+---------------------------------------+--------------------------------------+
   | Annual Average.          | Exports to China.                     | Imports from China.                  |
   |                          +--------------+-----------+------------+--------------+-----------+-----------+
   |                          | 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 comparison  | −9·993       | +454·333  | −9·002     | +2·801       | −74·743   | −39·425   |
   | with Period I            |              |           |            |              |           |           |
   +--------------------------+--------------+-----------+------------+--------------+-----------+-----------+
   | Period III in comparison | +13·756      | +63·817   | +14·407    | −23·551      | +58·546   | −4·910    |
   | with Period II           |              |           |            |              |           |           |
   +--------------------------+--------------+-----------+------------+--------------+-----------+-----------+
   | Period IV in comparison  | +28·737      | −12·398   | +27·971    | −4·668       | +15·206   | +2·856    |
   | with Period III          |              |           |            |              |           |           |
   +--------------------------+--------------+-----------+------------+--------------+-----------+-----------+
   | Period IV in comparison  | +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]

.. vspace:: 2
.. class:: center large

   `TABLE XXVII`:sc:
.. table:: `Finances of the Government`:sc:

   +----------+---------------+--------------+---------------+----------+---------------+----------+---------------+----------+---------------+
   | Years.   | Surplus +     | Years.       | Surplus +     | Years.   | Surplus +     | Years.   | Surplus +     | Years.   | Surplus +     |
   |          | Deficit −     |              | Deficit −     |          | Deficit −     |          | Deficit −     |          | 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 currency.

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 for.

.. [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]

.. vspace:: 2
.. class:: center large

   `TABLE XXVIII`:sc:
.. table:: `Gold Value of the Rupee`:sc:
   :class: smaller

   +----------------------------------------+--------------------------------------------------------------------------------+
   | As expressed in Terms of Foreign       | As expressed in Terms of Gold.                                                 |
   | Exchange Rates on London.              +--------+-----------------------------------+-----------------------------------+
   | Par R. = 1s. 4d.                       | Years. | \(1) Rupee Prices of Sovereigns.  | \(2) Rupee Price of Bar           |
   |                                        |        | Par Rs. 15 = 1 Sovereign.         | Gold. Par Tola = Rs. 23–14–4      |
   +-----------+--------------+-------------+        +-----------------+-----------------+-----------------+-----------------+
   | 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 and 3%         | 24  | 3   | 6   | 23  | 15  | 0   |
   +-----------+-----+--------+-----+-------+--------+-----+-----+-----+-----+-----+-----+-----+-----+-----+-----+-----+-----+
   | 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 Bills).

.. vspace:: 2
.. class:: center large

   `TABLE XXIX`:sc:
.. table:: `Council Drawings`:sc:

   +---------------------+---------------------+---------------------+
   |  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. 4,332–39.
.. [308] Evidence of Hon. A. Arthur before the Fowler
         Committee. Q. 1,806–7.

.. vspace:: 2
.. class:: center large

   `TABLE XXX`:sc:
.. table:: `Cost of the Fall of the Rupee`:sc:

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

.. vspace:: 2
.. class:: center large

   `TABLE XXXI`:sc:
.. table:: `Rates of Exchange, London on India (From “The Times”)`:sc:
   :aligns: center

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

.. vspace:: 2
.. class:: center large

   `TABLE XXXII`:sc:
.. table:: `Rates of Exchange London on Calcutta (from the National
           Bank of India)`:sc:

   +-----------+----------------------------------+---------------------------------+
   | Months.   |             \1914.               |              \1915.             |
   |           +----------------+-----------------+----------------+----------------+
   |           | Highest.       | Lowest.         |  Highest.      | Lowest.        |
   +===========+================+=================+================+================+
   | January   | —              | —               | 1 3 `15/16`:f: | 1 3 `15/16`:f: |
   +-----------+----------------+-----------------+----------------+----------------+
   | February  | —              | —               | 1 4 `1/32`:f:  | 1 3 `29/32`:f: |
   +-----------+----------------+-----------------+----------------+----------------+
   | March     | —              | —               | 1 4            | 1 3 `15/16`:f: |
   +-----------+----------------+-----------------+----------------+----------------+
   | April     | —              | —               | 1 3 `15/16`:f: | 1 3 `29/32`:f: |
   +-----------+----------------+-----------------+----------------+----------------+
   | May       | 1 4¼           | 1 3 `15/16`:f:  | 1 3 `15/16`:f: | 1 3 `29/32`:f: |
   +-----------+----------------+-----------------+----------------+----------------+
   | June      | 1 3 `31/32`:f: | 1 3 `15/16`:f:  | 1 3⅞           | 1 3 `27/32`:f: |
   +-----------+----------------+-----------------+----------------+----------------+
   | July      | 1 3 `31/32`:f: | 1 3 `13/16`:f:  | 1 3 `22/32`:f: | 1 3 `22/32`:f: |
   +-----------+----------------+-----------------+----------------+----------------+
   | August    | 1 3⅞           | 1 3 `13/16`:f:  | 1 3 `15/16`:f: | 1 3 `27/32`:f: |
   +-----------+----------------+-----------------+----------------+----------------+
   | September | 1 3 `15/16`:f: | 1 3 `13/16`:f:  | 1 4            | 1 3 `15/16`:f: |
   +-----------+----------------+-----------------+----------------+----------------+
   | October   | 1 3 `15/16`:f: | 1 3 `15/16`:f:  | —              | —              |
   +-----------+----------------+-----------------+----------------+----------------+
   | November  | 1 3 `15/16`:f: | 1 3 `15/16`:f:  | —              | —              |
   +-----------+----------------+-----------------+----------------+----------------+
   | December  | 1 3 `15/16`:f: | 1 3 `15/16`:f:  | —              | —              |
   +-----------+----------------+-----------------+----------------+----------------+

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}`:math:\ 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}`:math:\ 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.

.. table:: `TABLE XXXIII`:sc:
   :aligns: left left
   :hrules: none

   +-----------------------+-----------+
   | Date of Alteration of | Pitch of  |
   | the Rupee Par.        | 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 effect [311]_ 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]_

.. |F0| replace:: :math:`x \frac{11·30016 \times 240}{23·22 \times \textrm{D}}`
.. |F1| replace:: :math:`\frac{11·680}{\textrm{D}}`

.. [313] The formula for this computation is as follows:—

   .. table::
      :hrules: none

      +----------------------+---+--------------------------+
      | If :math:`x` pence   | = | 1 rupee                  |
      +----------------------+---+--------------------------+
      |                      | = | 11·30016 grs. fine gold, |
      +----------------------+---+--------------------------+
      | 23·22 grs. fine gold | = | 1 dollar,                |
      +----------------------+---+--------------------------+
      | D dollars            | = | 1 pound sterling         |
      +----------------------+---+--------------------------+
      |                      | = | 240 pence.               |
      +----------------------+---+--------------------------+
      | Then |F0|            | = | |F1| 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 196]

.. |_| unicode:: 0x00A0 .. non-breaking space
   :trim:

.. vspace:: 2
.. class:: center large

   `TABLE XXXIV`:sc:
.. table:: `Actual Gold Value of the Rupee and the new Parity in Terms
           of Foreign Exchanges`:sc:

   +-----------+-----------------------------------------------------+-------------------------------------------------------------------------------------------------------------------------------+
   | As in the | New York on Bombay in cents.                        | Bombay on London in s. d.                                                                                                     |
   | Middle of +-----------------+-----------------+-----------------+-------------------------------------------+-----------------------------------------+-----------------------------------------+
   | the Month | \1920.          | \1921.          | \1922.          | \1920.                                    | \1921.                                  | \1922.                                  |
   | of—       +--------+--------+--------+--------+--------+--------+---------------------+---------------------+--------------------+--------------------+--------------------+--------------------+
   |           | Par    | Actual | Par    | Actual | Par    | Actual | Par Rate.           | Actual Rate.        | Par Rate.          |    Actual Rate.    |     Par Rate.      | Actual 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`:f:  | 1 5⅝               | 2 3⅝               | 1 3 |_| `13/16`:f: |
   +-----------+--------+--------+--------+--------+--------+--------+---------------------+---------------------+--------------------+--------------------+--------------------+--------------------+
   | February  | 0·4866 | 0·4850 | 0·4866 | 0·2800 | 0·4866 | 0·2845 | 2 10 |_| `11/32`:f: | 2 9⅛                | 2 5 |_| `13/16`:f: | 1 4⅛               | 2 2 |_| `7/32`:f:  | 1 3 |_| `9/16`:f:  |
   +-----------+--------+--------+--------+--------+--------+--------+---------------------+---------------------+--------------------+--------------------+--------------------+--------------------+
   | March     | 0·4866 | 0·4850 | 0·4866 | 0·2625 | 0·4866 | 0·2787 | 2 7 |_| `29/32`:f:  | 2 5¾                | 2 5 |_| `31/32`:f: | 1 3¼               | 2 2 |_| `29/32`:f: | 1 3 |_| `5/16`:f:  |
   +-----------+--------+--------+--------+--------+--------+--------+---------------------+---------------------+--------------------+--------------------+--------------------+--------------------+
   | April     | 0·4866 | 0·4775 | 0·4866 | 0·2625 | 0·4866 | 0·2785 | 2 5 |_| `7/16`:f:   | 2 3¾                | 2 5 |_| `13/16`:f: | 1 3⅝               | 2 2½               | 1 3⅛               |
   +-----------+--------+--------+--------+--------+--------+--------+---------------------+---------------------+--------------------+--------------------+--------------------+--------------------+
   | May       | 0·4866 | 0·4325 | 0·4866 | 0·2675 | 0·4866 | 0·2930 | 2 6 |_| `19/32`:f:  | 2 2⅛                | 2 5 |_| `7/32`:f:  | 1 3½               | 2 2¼               | 1 3 |_| `9/16`:f:  |
   +-----------+--------+--------+--------+--------+--------+--------+---------------------+---------------------+--------------------+--------------------+--------------------+--------------------+
   | June      | 0·4866 | 0·4125 | 0·4866 | 0·2525 | 0·4866 | 0·2900 | 2 5 |_| `31/32`:f:  | 1 10 |_| `13/16`:f: | 2 6 |_| `29/32`:f: | 1 3⅜               | 2 2⅛               | 1 3 |_| `19/32`:f: |
   +-----------+--------+--------+--------+--------+--------+--------+---------------------+---------------------+--------------------+--------------------+--------------------+--------------------+
   | July      | 0·4866 | 0·3900 | 0·4866 | 0·2400 | 0·4866 | 0·2900 | 2 5 |_| `31/32`:f:  | 1 8 |_| `1/16`:f:   | 2 8 |_| `9/32`:f:  | 1 3¼               | 2 2⅝               | 1 3⅝               |
   +-----------+--------+--------+--------+--------+--------+--------+---------------------+---------------------+--------------------+--------------------+--------------------+--------------------+
   | August    | 0·4866 | 0·3650 | 0·4866 | 0·2475 | 0·4866 | 0·2916 | 2 8 |_| `9/32`:f:   | 1 10 |_| `1/16`:f:  | 2 7 |_| `29/32`:f: | 1 4¾               | 2 2 |_| `3/16`:f:  | 1 3 |_| `19/32`:f: |
   +-----------+--------+--------+--------+--------+--------+--------+---------------------+---------------------+--------------------+--------------------+--------------------+--------------------+
   | September | 0·4866 | 0·3325 | 0·4866 | 0·2675 | 0·4866 | 0·2875 | 2 9 |_| `9/16`:f:   | 1 10 |_| `1/16`:f:  | 2 7 |_| `15/32`:f: | 1 5 |_| `1/16`:f:  | 2 2 |_| `6/16`:f:  | 1 3 |_| `9/16`:f:  |
   +-----------+--------+--------+--------+--------+--------+--------+---------------------+---------------------+--------------------+--------------------+--------------------+--------------------+
   | October   | 0·4866 | 0·3025 | 0·4866 | 0·2825 | 0·4866 | —      | 2 9 |_| `21/32`:f:  | 1 7¾                | 2 6 |_| `1/32`:f:  | 1 5 |_| `7/16`:f:  | —                  | —                  |
   +-----------+--------+--------+--------+--------+--------+--------+---------------------+---------------------+--------------------+--------------------+--------------------+--------------------+
   | November  | 0·4866 | 0·3025 | 0·4866 | 0·2695 | 0·4866 | —      | 2 10 |_| `9/16`:f:  | 1 7⅛                | 2 5 |_| `16/32`:f: | 1 4⅛               | —                  | —                  |
   +-----------+--------+--------+--------+--------+--------+--------+---------------------+---------------------+--------------------+--------------------+--------------------+--------------------+
   | December  | 0·4866 | 0·2650 | 0·4866 | 0·2775 | 0·4866 | —      | 2 9 |_| `9/16`:f:   | 1 5¼                | 2 4                | 1 3⅞               | —                  | —                  |
   +-----------+--------+--------+--------+--------+--------+--------+---------------------+---------------------+--------------------+--------------------+--------------------+--------------------+

[pg 197]

.. vspace:: 2
.. class:: center large

   `TABLE XXXV`:sc:
.. table:: `Gold Value of the Rupee and the new Parity in Terms of the
           Price of Sovereigns and Gold`:sc:


   +-----------+----------------------------------------+------------------------------------------+---------------------------------------+
   |           | \1920.                                 | \1921.                                   | \1922.                                |
   |           +------------------+---------------------+---------------------+--------------------+------------------+--------------------+
   | Months.   | Price of British | Price of Bar Gold   | Price of British    | Price of Bar Gold  | Price of British | Price of Bar Gold  |
   |           | Sovereigns       | per Tola 100 touch. | Sovereigns.         | per Tola 100 touch | Sovereigns.      | per Tola 100 touch |
   |           +------------------+---------------------+---------------------+--------------------+------------------+--------------------+
   |           | Par 10 Rs =      | Par Rs 15–14–10 =   | Par 10 Rs = 1 Sov.  | Par Rs 15–14–10 =  | Par 10 Rs =      | Par Rs 15–14–10    |
   |           | 1 Sov.           | 1 Tola              |                     | 1 Tola             | 1 Sov.           | = 1 Tola           |
   +===========+==================+=====+=====+=========+=========+=====+=====+====================+=====+=====+======+====================+
   |           | Rs.  A.  P.      | Rs. | \A. | \P.     | Rs.     | \A. | \P. | Rs.   A.   P.      | Rs. | \A. |  \P. |                    |
   +-----------+------------------+-----+-----+---------+---------+-----+-----+--------------------+-----+-----+------+--------------------+
   | January   | Nominal          | 28  | 0   | 0       | Nominal             | Official figures   | 17  | 14  | 0    | Official figures   |
   +-----------+------------------+-----+-----+---------+---------------------+ not yet            +-----+-----+------+ not yet            |
   | February  | Nominal          | 22  | 0   | 0       | Nominal             | published.         | 17  | 14  | 0    | published.         |
   +-----------+------------------+-----+-----+---------+---------------------+                    +-----+-----+------+                    |
   | 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   |                    | —                |                    |
   +-----------+------------------+-----+-----+---------+---------+-----+-----+                    +------------------+                    |
   | June      | Nominal          | 22  | 4   | 0       | 19      | 12  | 0   |                    | —                |                    |
   +-----------+------------------+-----+-----+---------+---------+-----+-----+                    +------------------+                    |
   | July      | Nominal          | 23  | 0   | 0       | 20      | 9   | 0   |                    | —                |                    |
   +-----------+------------------+-----+-----+---------+---------+-----+-----+                    +------------------+                    |
   | 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, 1914.

.. vspace:: 2
.. class:: center large

   `TABLE XXXVI`:sc:
.. table:: `Period I, 1893–98`:sc:

   +--------+---------------------------+----------------+----------------+
   | Years. | Currency in Circulation,  | Index          | Index          |
   |        | Rupees + Notes.           | Number of      | Number of      |
   |        +-----------+---------------+ Prices in      | Prices in      |
   |        | Amount in | Index Number  | India          | England        |
   |        | Crores of |               |                |                |
   |        | Rs.       | 1890–94 = 100 | 1890–94 = 100. | 1890–94 = 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             |
   +--------+-----------+---------------+----------------+----------------+

.. vspace:: 2
.. class:: center large

   `TABLE XXXVII`:sc:
.. table:: `Period II, 1900–1908`:sc:

   +--------+---------------------------+----------------+----------------+
   | Years. | Currency in Circulation,  | Index          | Index          |
   |        | Rupees + Notes.           | Number of      | Number of      |
   |        +-----------+---------------+ Prices in      | Prices in      |
   |        | Amount in | Index Number  | India          | England        |
   |        | Crores of |               |                |                |
   |        | Rs.       | 1890–94 = 100 | 1890–94 = 100. | 1890–94 = 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]

.. vspace:: 2
.. class:: center large

   `TABLE XXXVIII`:sc:
.. table:: `Period III, 1909–14`:sc: [315]_

   +--------+---------------------------+----------------+----------------+
   | Years. | Currency in Circulation,  | Index          | Index          |
   |        | Rupees + Notes.           | Number of      | Number of      |
   |        +-----------+---------------+ Prices in      | Prices in      |
   |        | Amount in | Index Number  | India          | England        |
   |        | Crores of |               |                |                |
   |        | Rs.       | 1890–94 = 100 | 1890–94 = 100. | 1890–94 = 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.

.. vspace:: 2
.. class:: center large

   `TABLE XXXIX`:sc:
.. table:: `Period IV, 1915–21`:sc: [316]_

   +--------+--------------------------+----------------+----------------+
   | Years. | Currency in Circulation, | Index          | Index          |
   |        | Rupees + Notes.          | Number of      | Number of      |
   |        +-----------+--------------+ Prices in      | Prices in      |
   |        | Amount in | Index Number | India          | England        |
   |        | Crores    |              |                |                |
   |        | of Rs.    | 1913 = 100.  | 1913 = 100.    | 1913 = 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. Keynes [317]_ 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 Currency [319]_ and the Government of India [320]_ 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.

.. |F2| replace:: :math:`\textrm{16d.} \times \frac{\textrm{Col. 3}}{\textrm{Col. 2}}`

.. table:: `TABLE XL`:sc:

   +--------------------+-------------+--------------+-----------+----------------+
   | Date.              | Rupee       | Sterling     | Average   | Rupee-sterling |
   |                    | Prices      | Prices in    | Rate of   | Purchasing     |
   |                    | in India.   | England      | Exchange  | Power Parity.  |
   |                    |             | (*Statist*). | London on | |F2|           |
   |                    | 1913 = 100. | 1913 = 100.  | Calcutta. |                |
   +====================+=============+==============+===========+================+
   |      \(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.

.. vspace:: 2
.. class:: center large

   `TABLE XLI`:sc:
.. table:: `Price of Silver in Sterling (Pence)`:sc: [321]_

   +--------+----------+---------------+---------------+---------------+
   | Year   | Highest. | Lowest.       |  Average.     | Range of      |
   |        |          |               |               | Variation.    |
   +========+==========+===============+===============+===============+
   | 1913   | 29⅜      | 25 `15/16`:f: | 27 `9/16`:f:  | 3 `7/16`:f:   |
   +--------+----------+---------------+---------------+---------------+
   | 1914   | 27¾      | 22⅛           | 25 `5/16`:f:  | 5 `5/8`:f:    |
   +--------+----------+---------------+---------------+---------------+
   | 1915   | 27¼      | 22 `5/16`:f:  | 23 `11/16`:f: | 4 `15/16`:f:  |
   +--------+----------+---------------+---------------+---------------+
   | 1916   | 37⅛      | 26 `11/16`:f: | 31 `5/16`:f:  | 10 `7/16`:f:  |
   +--------+----------+---------------+---------------+---------------+
   | 1917   | 55       | 35 `11/16`:f: | 40 `7/8`:f:   | 19 `11/16`:f: |
   +--------+----------+---------------+---------------+---------------+
   | 1918   | 49½      | 42½           | 47 `9/16`:f:  | 7             |
   +--------+----------+---------------+---------------+---------------+
   | 1919   | 79⅛      | 47¾           | 57 `1/16`:f:  | 31⅜           |
   +--------+----------+---------------+---------------+---------------+
   | 1920   | 89½      | 38⅞           | 61 `7/16`:f:  | 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:—

.. vspace:: 2
.. class:: center large

   `TABLE XLII`:sc:
.. table:: `Depreciation of the Rupee`:sc:


   +-------------+-------------+--------+-----------+-----------+---------------+
   | Date.       | Price of Bar Gold    | Price of Silver in    | Index Number  |
   |             | in India (Bombay)    | India (Bombay) per    | for Prices in |
   |             | per Tola of 180 grs. | 100 Tolas.            | India         |
   |             +--------+-----+-------+-----------+-----+-----+---------------+
   |             |        | Rs. | \A.   |           | Rs. | \A. | 1913 = 100.   |
   +=============+========+=====+=======+===========+=====+=====+===============+
   | 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 16)  | 117 |  2  | 178           |
   +-------------+--------+-----+-------+-----------+-----+-----+---------------+
   | 1918        |        |             | (Nov. 28) | 82  | 10  | —             |
   +-------------+--------+-----+-------+-----------+-----+-----+---------------+
   | 1918 August |        | 30  | 0     |           | —         | —             |
   +-------------+--------+-----+-------+-----------+-----------+---------------+
   | 1918 Sept.  |        | 32  | 4     |           | —         | —             |
   +-------------+--------+-----+-------+-----------+-----+-----+---------------+
   | 1919, March |        | 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. 2,665–68.
.. [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. 16–17.
.. [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, observed [334]_:—

.. [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:—

.. vspace:: 2
.. class:: center large

   `TABLE XLIII`:sc:
.. table:: `Issue of Currency Notes`:sc:
   :align: center

   +--------------------------------------------------------------------------------------------------+
   | Acts prescribing the Fiduciary Issue of Currency Notes.                                          |
   +---------------------------+---------+---------+---------+---------+---------+---------+----------+
   | I. Limits to              | Act V   | Act IX  | Act XI  | Act XIX | Act VI  | Act II  | Act XXVI |
   | fiduciary issues          | of 1915 | of 1916 | of 1917 | of 1917 | of 1918 | of 1919 | if 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  | 179,67   |
   | currency notes            |         |         |                   |         |         | [336]_   |
   +---------+-----------------+---------+---------+-------------------+---------+---------+----------+
   | III.    | Silver          | 32,34   | 23,57   | 19,22             | 10,79   | 37,39   | 47,44    |
   | 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.1 [339]_ 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.

.. vspace:: 2
.. class:: center large

   `TABLE XLIV`:sc:
.. table:: `Rupee Coinage, 1915–20`:sc:

   +----------+------------------+------------------+-------------+
   | 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 gold [342]_ 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.

.. vspace:: 1
.. class:: large center

   `I. Redemption of Currency, 1907–8.`:sc:

.. table:: `TABLE XLV`:sc:

   +----------+------------------------+-------------+---------+--------------+
   | Date.    | By the Sale of         | By Release  | Private | Drawings     |
   |          | Reverse Councils.      | of Gold.    | Exports | of the       |
   |          +------------+-----------+ Diminution  | of Gold | Secretary    |
   |          | Amount     | Amount    | of Govt.    | Coin    | of State.    |
   |          | offered.   | sold.     | Stock of    | during  |              |
   |          |            |           | Gold during | the     |              |
   |          |            |           | the Month.  | Month.  |              |
   +----------+------------+-----------+-------------+---------+--------------+
   |          |  £         | £         | £           | £       | £            |
   +==========+============+===========+=============+=========+==============+
   | 1907—    |                                                               |
   +----------+------------+-----------+-------------+---------+--------------+
   | 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      |
   +----------+------------+-----------+-------------+---------+--------------+
   | 1908—    |                                                               |
   +----------+------------+-----------+-------------+---------+--------------+
   | March 26 | 500,000    | 70,000    | 226,000     | —       | 172,699      |
   |          |            |           |             |         | (for the     |
   |          |            |           |             |         | whole month) |
   +----------+------------+-----------+-------------+---------+--------------+
   | April 2  | 500,000    | 449,000   | 461,000     | —       | 66,834       |
   +----------+------------+-----------+             |         |              |
   | April 9  | 500,00     | 340,000   |             |         |              |
   +----------+------------+-----------+             |         |              |
   | April 16 | 500,000    | 441,000   |             |         |              |
   +----------+------------+-----------+             |         |              |
   | April 23 | 500,000    | 329,000   |             |         |              |
   +----------+------------+-----------+             |         |              |
   | April 30 | 500,000    | 205,000   |             |         |              |
   +----------+------------+-----------+-------------+---------+--------------+
   | May 7    | 500,000    | 81,000    | 645,000     | —       | 62,764       |
   +----------+------------+-----------+             |         |              |
   | May 14   | 500,000    | 145,000   |             |         |              |
   +----------+------------+-----------+             |         |              |
   | May 21   | 820,000    | 793,000   |             |         |              |
   +----------+------------+-----------+             |         |              |
   | May 28   | 500,000    | 500,000   |             |         |              |
   +----------+------------+-----------+-------------+---------+--------------+
   | June 4   | 1,000,000  | 755,000   | 334,000     | —       | 169,810      |
   +----------+------------+-----------+             |         |              |
   | June 11  | 1,000,000  | 70,000    |             |         |              |
   +----------+------------+-----------+             |         |              |
   | June 18  | 500,000    | Nil       |             |         |              |
   +----------+------------+-----------+             |         |              |
   | June 25  | 500,000    | 50,000    |             |         |              |
   +----------+------------+-----------+-------------+---------+--------------+
   | July 2   | 500,000    | 470,000   | 16,000      | —       | 186,847      |
   +----------+------------+-----------+             |         |              |
   | July 9   | 500,000    | 304,000   |             |         |              |
   +----------+------------+-----------+             |         |              |
   | July 16  | 500,000    | 500,000   |             |         |              |
   +----------+------------+-----------+             |         |              |
   | July 23  | 1,000,000  | 968,000   |             |         |              |
   +----------+------------+-----------+             |         |              |
   | July 30  | 1,000,000  | 860,000   |             |         |              |
   +----------+------------+-----------+-------------+---------+--------------+
   | Aug. 6   | 1,000,000  | 418,000   | 354,000     | —       | 262,217      |
   +----------+------------+-----------+             |         |              |
   | Aug. 13  | 500,000    | 310,000   |             |         |              |
   +----------+------------+-----------+             |         |              |
   | Aug. 20  | 500,000    | Nil       |             |         |              |
   +----------+------------+-----------+             |         |              |
   | Aug. 27  | 500,000    | Nil       |             |         |              |
   +----------+------------+-----------+-------------+---------+--------------+
   | Sept. 3  | 500,000    | Nil       | 502,000     | —       | 1,431,012    |
   +----------+------------+-----------+             |         |              |
   | Sept. 10 | 500,000    | Nil       |             |         |              |
   +----------+------------+-----------+-------------+---------+--------------+
   |          |            |           |             |         |              |
   +----------+------------+-----------+-------------+---------+--------------+
   | Total    | 15,320,000 | 8,058,000 | 4,394,000   | 249,912 |              |
   +----------+------------+-----------+-------------+---------+--------------+

[pg 222]

.. class:: large center

   `II. Redemption in 1914–16`:sc:

.. table:: `TABLE XLVI`:sc:

   +--------------------+--------------+--------------------+
   | Date.              | Reverse      | Drawings of        |
   |                    | Councils     | the S. of S.       |
   |                    | (in £, 000). | (in Lakhs of Rs.). |
   +========+===========+==============+====================+
   | \1914. | April     | Nil          | 270                |
   |        +-----------+--------------+--------------------+
   |        | May       | Nil          | 61                 |
   |        +-----------+--------------+--------------------+
   |        | June      | Nil          | 68                 |
   |        +-----------+--------------+--------------------+
   |        | July      | Nil          | 66                 |
   |        +-----------+--------------+--------------------+
   |        | August    | 2,778        | 72                 |
   |        +-----------+--------------+--------------------+
   |        | September | 1,515        | 25                 |
   |        +-----------+--------------+--------------------+
   |        | October   | 1,895        | 41                 |
   |        +-----------+--------------+--------------------+
   |        | November  | 1,044        | 32                 |
   |        +-----------+--------------+--------------------+
   |        | December  | 1,250        | 30                 |
   +--------+-----------+--------------+--------------------+
   | \1915. | January   | 225          | 29                 |
   |        +-----------+--------------+--------------------+
   |        | February  | Nil          | 181                |
   |        +-----------+--------------+--------------------+
   |        | March     | Nil          | 287                |
   +--------+-----------+--------------+--------------------+
   | Total              | 8,707        | 1,162              |
   +--------+-----------+--------------+--------------------+
   | \1915. | April     | Nil          | 1,53               |
   |        +-----------+--------------+--------------------+
   |        | May       | Nil          | 1,03               |
   |        +-----------+--------------+--------------------+
   |        | June      | 651          | 17                 |
   |        +-----------+--------------+--------------------+
   |        | July      | 3,377        | 8                  |
   |        +-----------+--------------+--------------------+
   |        | August    | 815          | 23                 |
   |        +-----------+--------------+--------------------+
   |        | September | 50           | 2,17               |
   |        +-----------+--------------+--------------------+
   |        | October   | Nil          | 2,25               |
   |        +-----------+--------------+--------------------+
   |        | November  | Nil          | 2,02               |
   |        +-----------+--------------+--------------------+
   |        | December  | Nil          | 3,28               |
   +--------+-----------+--------------+--------------------+
   |1916.   | January   | Nil          | 5,26               |
   |        +-----------+--------------+--------------------+
   |        | February  | Nil          | 6,02               |
   |        +-----------+--------------+--------------------+
   |        | March     | Nil          | 6,33               |
   +--------+-----------+--------------+--------------------+
   | Total              | 4,893        | 30,37              |
   +--------------------+--------------+--------------------+

[pg 223]

.. class:: center large

   `III. Redemption in 1920`:sc:

.. vspace:: 2
.. class:: center large

   `TABLE XLVII`:sc:
.. table:: `Sale of Reverse Councils (Figures in Thousands of
           Pounds)`:sc:

   +----------------------+---------+------------+---------+-------------+
   | Date of Sale.        | Amount  | Amount     | Amount  | Progressive |
   |                      | offered | applied    | sold at | Total of    |
   |                      | at each | for at     | each    | Amount      |
   |                      | Sale.   | each Sale. | Sale.   | sold.       |
   +========+=============+=========+============+=========+=============+
   | \1920. | 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      |
   |        +-------------+---------+------------+---------+-------------+
   |        | 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.

.. vspace:: 1
.. class:: center large

   `III. Redemption in 1920`:sc:

.. vspace:: 2
.. class:: center large

   `TABLE XLVIII`:sc:
.. table:: `Sale of Gold`:sc:

   +-------+-----------------------+------------------+------------------+-------------+--------------------+
   | No.   | Date of Sale.         | Minimum Rate     | Average Rate     | Quantity    | Price of Country   |
   | of    |                       | of accepted      | of accepted      | sold        | Bar Gold in the    |
   | Sale. |                       | Tenders.         | Tenders.         | (in Tolas). | Bombay Bazaar.     |
   +=======+=======================+======+=====+=====+======+=====+=====+=============+=======+======+=====+
   |       |                       | Rs.  | \A. | \P. | Rs.  | \A. | \P. |             | Rs.   | \A.  | \P. |
   +-------+--------+--------------+------+-----+-----+------+-----+-----+-------------+-------+------+-----+
   | 1     | \1919, | September 3  | 25   | 8   | 0   |  26  | 12  | 1   | 3,29,130    | 28    | 10   | 0   |
   +-------+--------+--------------+------+-----+-----+------+-----+-----+-------------+-------+------+-----+
   | 2     |        | September 17 | 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 20   | 26   | 15  | 3   | 27   | 0   | 2   | 3,34,000    | 28    | 0    | 0   |
   +-------+--------+--------------+------+-----+-----+------+-----+-----+-------------+-------+------+-----+
   | 5     |        | November 3   | 27   | 14  | 6   | 27   | 15  | 6   | 3,25,000    | 28    | 5    | 0   |
   +-------+--------+--------------+------+-----+-----+------+-----+-----+-------------+-------+------+-----+
   | 6     |        | November 17  | 26   | 15  | 0   | 27   | 0   | 11  | 5,18,500    | 28    | 2    | 0   |
   +-------+--------+--------------+------+-----+-----+------+-----+-----+-------------+-------+------+-----+
   | 7     |        | December 8   | 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 19   | 26   | 13  | 3   | 26   | 14  | 7   | 8,00,000    | 27    | 5    | 0   |
   +-------+--------+--------------+------+-----+-----+------+-----+-----+-------------+-------+------+-----+
   | 10    |        | February 5   | 25   | 2   | 3   | 25   | 9   | 7   | 7,56,450    | 25    | 6    | 0   |
   +-------+--------+--------------+------+-----+-----+------+-----+-----+-------------+-------+------+-----+
   | 11    |        | February 19  | 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 1  | 22   | 8   | 3   | 22   | 10  | 8   | 8,27,700    | 23    | 1    | 6   |
   +-------+--------+--------------+------+-----+-----+------+-----+-----+-------------+-------+------+-----+
   | 25    |        | September 14 | 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
argued [344]_:—

.. [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 finds [353]_ 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.

.. vspace:: 2
.. class:: center large

   `TABLE XLIX`:sc:
.. table:: `Distribution of the Gold-standard Reserve and its
           Proportion to Rupee Circulation (in Thousands of Pounds
           Sterling)`:sc:

   +----------+-------------------------------------------------------+--------------------------------------------------------+----------+-------------+-------------+
   | March 31 | In England.                                           | In India.                                              | Total    | Volume of   | Percentage  |
   | in each  +------------+---------+-----------+-----------+--------+-----------+-------------+-----------+---------+--------+ Reserve, | Rs. in      | of Reserve  |
   | Year.    | Purchase   | Cash at | Temporary | Gold      | Total. | Coined    | Outstanding | Temporary | Gold.   | Total. | England  | Circulation | to Rs. in   |
   |          | value of   | Short   | Loan to   | deposited |        | Rupees    | Debt from   | Loan to   |         |        | and      | in Crores.  | Circulation |
   |          | Sterling   | Notice. | the Home  | at the    |        | in India. | Treasury    | Treasury  |         |        | India.   |             | (£ = Rs 15) |
   |          | Securities.|         | Treasury. | Bank of   |        |           | Balances.   | Balances. |         |        |          |             | [354]_      |
   |          |            |         |           | England.  |        |           |             |           |         |        |          |             |             |
   +----------+------------+---------+-----------+-----------+--------+-----------+-------------+-----------+---------+--------+----------+-------------+-------------+
   | \(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 footnote [357]_, 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:—

	 .. table:: Statement showing the average cost of silver
                    purchased by the— [359]_
	    :hrules: none

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

	 In the absence of information whether the price is F.O.B. or
	 C.I.F. it is difficult to say that the Secretary of State has
	 had to pay higher prices for silver than were paid by the
	 Master of the Royal Mint.
.. [358] From 1900–1 to 1920–21 the profits on coinage credited to the
         gold-standard reserve amounted to £28,573,606 only: while
         during the same period Interest and Discount gave £13,306,847
         or nearly one-half the profits on coinage. Cf. *East India:
         Accounts and Estimates*, 1921–22, *Cmd*, 1517 of 1921, p. 20.
.. [359] *Legislative Assembly Debates*, Vol. II, No. 3, September, 10
         1921, p. 181.

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

.. [360] *Money,* p. 227.
..

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

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

.. [361] Report, par. 63.

Having regard to its origin, the gold-standard reserve, instead of
acting as a brake upon reckless issue of rupee currency, is the direct
cause of it and tends to aggravate the effects of an inconvertible
currency rather than counteract them.  Perversity cannot go further.
If the fact that a mechanism like that of the gold-standard reserve,
set up for the purpose of limiting the currency, cannot be made to
function without adding to the currency, does not render the system an
unsound currency, one begins to wonder what would.  Great names have
been invoked in support of the exchange standard.  After trying hard
to find authoritative precedents for his plan, [362]_ Mr. Lindsay
[pg 239] claimed before the Fowler Committee that it was founded upon
the Report of the Parliamentary Committee on Irish Exchange. [363]_
There he was on firm ground.  Among other things, the Committee did
recommend that for stabilizing the exchange between England and
Ireland the Bank of Ireland should open credit at the Bank of England
and sell drafts on London at a fixed price.  In so far as the exchange
standard rests on gold reserve in London, Lindsay must be said to have
faithfully copied the plan of the Irish Committee on exchange.  But he
totally neglected to give prominence to another and the most vital
recommendation of the Committee, in which it is observed: [364]_ “*But
all the benefits proposed by this Mode of Remedies would be of little
Avail and very limited Duration if it* [i.e.  Bank of Ireland] *did
not promise at the same time to cure the Depreciation of Paper in
Ireland by diminishing its over issue*.”  Indeed, so great, was the
stress laid on the limitation of issue that when Parnell, in his
resolution in the House of Commons on the reform of the Irish
currency, regretted the non-adoption of the recommendations of the
Committee, [365]_ Thornton in his reply pointed out that nothing would
help to stabilize Irish exchange so long as the vital condition laid
down by the Committee was disregarded.  The recent experience in
pegging the exchanges well illustrates the importance of that vital
condition.  Pegging the exchange is primarily a device to prevent the
external value of the currency falling along with its internal value.
The way in which pegging effects this divorce is important to
note. [366]_ The primary effect of the peg is to permit the purchases
of foreign goods by procuring foreign currency for home currency at a
fixed price, which is higher than would be the case if it were
determined by the general purchasing-power parity of the two
currencies.  By enabling people to buy [pg 240] foreign goods with
foreign currency obtained at a cheaper price the peg virtually raises
foreign prices more to the level of the home prices, so that if the
exchange is stable it is not because there is a peg, but because the
price-levels in the two countries have reached a new equilibrium.
Essentially the exchange is stable because it is an artificial
purchasing-power parity.  Whether it will continue to be so depends
upon the movements in the home prices.  If the home prices rise more
than the rise brought about by the peg in the foreign prices the
mechanism must break.  It is from this point of view that the
condition laid down by the Irish Committee on exchange regarding the
limitation on issue must be held as one of vital character.  In
omitting to advert to that condition the Indian currency contradicts
what is best in that Report of the Irish Committee.

.. [362] In 1876, when Mr. Lindsay first set out his scheme in the
         pages of his *Calcutta Review*, he mentions no parallel at
         all.  In 1892, in his *Ricardo's Exchange Remedy*, he uttered
         the name of Ricardo as an authority for his plan, but in 1898
         he shifted his ground, so much so that he blamed (*Economic
         Journal*, *supra*) Probyn for taking Ricardo's gold-bar plan
         as a basis.  The reason why he disavowed Ricardo as his
         authority most probably lies in the fact that Ricardo's
         general views of currency were rather damaging to his
         position.  In view of the fact that there are so many people
         who assert, no doubt, from the title of his *Proposals for an
         Economical and Secure Currency*, that Ricardo wrote against a
         metallic standard, it is worth while recording the following
         passage from his *Proposals*, in which he says: “During the
         late discussion on the bullion questions, it was almost
         justly contended that a currency, to be perfect, should be
         absolutely invariable in value.  But it was said, too, that
         ours had become such a currency, by the Bank Restriction
         Bill; for by that bill we had wisely discarded gold and
         silver as the standard of our money … Those who supported
         this opinion did not see that such a currency, instead of
         being variable, was subject to the greatest variations—that
         the only use of a standard is to regulate the quantity, and
         by the quantity the value of the currency—and that without a
         standard it would be exposed to all the fluctuations to which
         the ignorance or the interests of the issuers might subject
         it.”
.. [363] The Report, which is a masterly document, was eclipsed by the
         Bullion Report, though both contain the same doctrine, by
         reason of its not being printed till 1826.  *See* Lords Paper
         48 of 1826.
.. [364] Report, p. 16.  Italics not in the original.
.. [365] See *Hansard Parliamentary Debates*, Vol. XIV, pp. 75–91.
.. [366] Cf. the succinct statement by T. E. Gregory, *Foreign
         Exchanges*, p. 86.

The reason why Mr. Lindsay paid no attention to the question of
limitation in setting up his exchange standard is largely that,
notwithstanding the great reputation he has achieved as an author of a
new system, he was profoundly ignorant of the true doctrine regarding
the value of a currency.  Neither he nor the hosts of currency-mongers
who during the nineties exercised their ingenuity to devise plans for
remedying Indian exchange troubles, [367]_ understood that to
stabilize the exchange was essentially a problem of stabilizing the
purchasing power of currency by controlling its volume. [368]_ The
gold-exchange standard ignores the fact that in the long run it is the
general purchasing power of a currency that will ultimately govern its
exchange value.  Its aim is to stabilize exchange and allow the
problem of purchasing power to go hang.  The true policy should be to
stabilize the purchasing power of the currency and let exchange take
care of itself.  Had the Chamberlain Commission considered the
exchange standard from this point of view it could not have called it
a sound standard when in its fundamentals it was the very reverse of
it. [pg 241]

.. [367] *See* Chap. IV.
.. [368] Cf. evidence of Mr. Lindsay before the Fowler
         Committee, Q. 4,190–95, where he asserted that exchange had
         nothing to do with the quantity of money in circulation.

Now some one who remains unconvinced of the weakness of the exchange
standard may say that in examining its stability we have taken only
those occasions on which the standard has broken down.  Thinking such
a treatment to be unfair, he might say: How about the years during
which stability was maintained?  Is there nothing to be said in favour
of a system that maintained the gold value of the rupee from 1901 to
1907, or from 1909 to 1914?  The question is a pertinent one, and the
position that underlies it is supposed to be so strong that those who
hold it have asked the opponents of the exchange standard either to
admit that it is a stable standard or to show that under that standard
the rupee has *invariably* failed to maintain its gold value. [369]_

.. [369] Dodwell, “A Gold Currency for India,” *Economic Journal*,
         1911; *Report on the Enquiry into the Rise of Prices in
         India*, 1914, p. 94.

The validity of this position depends upon assumptions so plausible
and so widespread that the argument urged so far against the exchange
standard will not be of full effect until their futility is fully
demonstrated.  The first assumption is that there cannot be a
depreciation of a currency unless it has depreciated in terms of gold.
In other words, if the excess has not produced a fall in the value of
a currency in terms of a particular commodity such as gold, then there
has been no excess at all in terms of commodities in general.  Now
there was a time, particularly during the discussion on the Bullion
Report, when the conception of a change in the value of the currency
in relation to things in general was not quite clear even to the most
informed minds, [370]_ and was even pronounced invalid by high
authorities. [371]_ In view of the absence of the system of index
numbers, this simple [pg 242] faith in the summary method of
ascertaining depreciation by some one typical article, gold for
instance, as a measure of value, was excusable.  But the same view is
without any foundation to-day.  No one now requires to be shown that
the price of each commodity has varied to the same extent and in the
same direction as prices of commodities in general before admitting
that there has been a change in the value of a currency.  Why assume a
single commodity like gold as a measure of depreciation?  It would be
allowable, although it is short-sighted to do so, if the depreciation
of gold was an accurate measure of the depreciation of a currency in
terms of all other commodities.  But such is not the case.  Commenting
upon the experience of the United States with the greenbacks during
the Civil War, Prof. W. C. Mitchell observes [372]_:—

.. [370] Canning's castigation of Lord Castlereagh's definition of
         standard as “a sense of value” during the Bullion debates
         must be attributed to his ignorance on this matter.
.. [371] Ricardo, in his *Proposals for an Economical and Secure
         Currency*, says: “It has indeed been said that we might judge
         of the value of a currency by its relation not to one but to
         the mass of the commodities. … Such a test would be of no use
         whatever. … To determine the value of a currency by the test
         proposed … is evidently impossible.”
.. [372] *Gold, Prices and Wages under the Greenback Standard*, 1908,
         pp. 39–41.
..

  “The fluctuations in the price of gold which attracted so much
  attention were much more moderate than the extreme fluctuations in
  the prices of commodities.  The gold quotations lay all the time
  well within the outer limits of the field covered by the variations
  of commodity prices.  … During the war gold moved up or down in
  price more quickly than the mass of commodities. …  When gold was
  rising in price the majority of the commodities followed, but more
  slowly. … When gold was falling in price the majority of commodities
  stood still or followed more slowly. … This more sluggish movement
  of commodity prices appears still more clearly after the war.  Rapid
  as was the fall of prices it was not so rapid as the falling gold.
  A more curious fact is that the price-level for commodities
  continued for ten years to be higher than the price-level for gold.”

This shows that the test sought to be applied by the adherents of the
exchange standard is a false one and gives an inaccurate reading of
the value of a currency.  There can be no doubt that people who have
urged its application to that standard would not have pressed for it
so much as they have done if they had taken proper care to distinguish
between *specific* depreciation of a currency and its *general*
[pg 243] depreciation. [373]_ The experience of the Bank of England
during the suspension period is a capital instance of the phenomenon
where a currency is generally depreciated, although it showed no sign
of specific depreciation:—

.. [373] Cf. Prof. Nicholson's *Principles of Political Economy*
         (1897), Vol. II, Chap. XV, § 4; and Walker, F. A., *Money*,
         1878, pp. 387–91.

.. vspace:: 2
.. class:: center large

   `TABLE L`:sc:
.. table:: `Depreciation of the Notes of the Bank of England`:sc: [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 accept [377]_ 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:—

	 .. class:: center small

	    `Consumption of Gold (millions of pounds sterling at
	    85s. per fine ounce)`:sc: [376]_

	 .. table::
	    :hrules: none
	    :aligns: left right right right right right right

	    +----------------------+--------+--------+--------+--------+--------+--------+
	    |                      | \1915. | \1916. | \1917. | \1918. | \1919. | \1920. |
	    +======================+========+========+========+========+========+========+
	    | Industrial Arts      | 17·0   | 18·0   | 16·0   | 17·0   | 22·0   | 22·0   |
	    | (Europe and America) |        |        |        |        |        |        |
	    +----------------------+--------+--------+--------+--------+--------+--------+
	    | India (Year to March | 1·4    | 5·1    | 19·6   | −3·3   | 27·7   | 5·1    |
	    | 31 following)        |        |        |        |        |        |        |
	    +----------------------+--------+--------+--------+--------+--------+--------+
	    | China                | −1·7   | 2·6    | 2·6    | 0·4    | 11·5   | −3·7   |
	    +----------------------+--------+--------+--------+--------+--------+--------+
	    | Egypt                | −0·8   | −0·2   | −0·1   | −0·0   | −0·0   | ?      |
	    +----------------------+--------+--------+--------+--------+--------+--------+
	    | Balance available as | 80·5   | 68·0   | 48·2   | 64·9   | 13·8   | 46·6   |
	    | money (difference)   |        |        |        |        |        |        |
	    +----------------------+--------+--------+--------+--------+--------+--------+
	    | World                | 96·4   | 93·5   | 86·3   | 79·0   | 75·0   | 70·0   |
	    +----------------------+--------+--------+--------+--------+--------+--------+

.. [376] The figures are those of Mr. Joseph Kitchin in *The Review of
         Economic Statistics*, Preliminary volume 3, No. 8 for August,
         1921, p.257.  If figures previous to 1914 are desired, *see*
         table *ibid.*, p. 268.)

	 Omitting the abnormal years of 1917 and 1919 and reducing the
         figures to *per capita* basis the consumption of gold by
         India must be said to be remarkably small.  Besides, it is to
         be noted that figures for India include industrial as well as
         monetary consumption.  Further, in making comparison account
         must be taken of the difference in the period taken as unit
         in the case of India and other countries.  Of course in these
         days when gold is so very greatly depreciated in terms of
         commodities in general, neither is there any necessity to
         shed tears if its production were to fall off, nor can it be
         anything but a welcome event if its use were to be extended.
         It would therefore be unwise to resent an increase, if it
         were to take place, in the importation and use of gold by
         India.  The greater the use of gold and the less the
         production of it, the better for the world as it is
         circumstanced to-day.  Cf. in this connection the remarks of
         Prof. Cannan on Mr. Shirras's Paper in the *J.R.S.S* for
         July, 1920, pp. 623–24,
.. [377] Evidence of Prof. Marshall, I.C.C., 1898, Q. 11,793.
..

  “in a modern community the prices of different goods constitute a
  completely organized system, in which the various parts are
  continually being adjusted to each other by intricate business
  process.  Any marked change in the price of important goods disturbs
  the equilibrium of this system, and business processes at once set
  going a series of readjustments in the prices of other goods to
  restore it.” [378]_

.. [378] Mitchell, *ibid.*, p. 258.

It is true that in the case of India the interconnection between
production for internal trade and production for external trade is not
so closely knit as in the case of other countries.  The only
difference that this can make in the situation is to moderate the pace
of general depreciation [pg 247] so that it does not affect foreign
trade commodities too soon.  But it cannot prevent its effect from
ultimately raising their price.  And once their price is risen the
foreigner will not accept them, however essential.  A demand for gold
must arise, resulting in the specific depreciation of the currency.

This statement of the case agrees closely with the experience of the
Bank of England and that of India as well.  In the case of the Bank of
England the “great evil,” i.e. the specific depreciation of the bank
notes, of which Horner complained so much, made its appearance in
1809, some thirteen years after the suspension was declared.
Similarly, we find in the case of India specific depreciation tends to
appear at different intervals, thereby completely demonstrating that,
even for the purpose of avoiding specific depreciation, it is
necessary to pay attention to the general depreciation of a currency.

Having regard to these facts, supported as they are by theory as well
as history, the incident that the rupee has maintained its gold value
over periods of some duration need not frighten anyone into an
admission that the exchange standard is therefore a stable standard.
Indeed, a recognition of that fact cannot in the least discredit what
has been said above.  For our position is that in the *long run*
general depreciation of a currency will bring about its specific
depreciation in terms of gold.  That being our position, even if we
are confronted with the absence of specific depreciation of the rupee,
we are not driven to retract from the opinion that the best currency
system is one which provides a brake on the general depreciation of
the unit of account.  The exchange standard provides no such
controlling influence; indeed, its gold reserve, the instrument which
controls the depreciation, is the direct cause of such depreciation.
The absence of specific depreciation for the time being is not more
than a noteworthy and an interesting incident.  To read into it an
evidence of the security of the exchange standard is to expose
oneself, sooner or later, to the consequences that befall all those
who choose to live in a fool's paradise. [pg 248]

.. toc-entry:: A Return to the Gold Standard

CHAPTER VII
===========

.. container:: center large bold

   A RETURN TO THE GOLD STANDARD

.. vspace:: 2

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, observed [380]_:— [pg 249]

.. [379] Fischer, *Purchasing Power of Money*, 1911, p. 340.
.. [380] \Q. 2,690.
..

  “I should aim always … at keeping Indian prices stable in relation
  to commodities rather than in relation to any particular metallic or
  particular foreign currency.  That seems to me of far greater
  importance to India.”

It is, of course, a little difficult to understand how the remedy of
high exchange which he supported was calculated to achieve that
object.  Raising the exchange was a futile project, in so far as it
was not in keeping with the purchasing power of the rupee.  As an
influence governing prices it could hardly be said to possess the
virtue he attributed to it.  The existing price-level it could affect
in no way; nor could a high exchange prevent a future rise of prices.
It could only change the base from which to measure prices.  Future
prices could vary as easily from the new high base-line as prices did
in the past from the old base-line.  In other words, Mr. Keynes seems
to have overlooked the fact that exchange was only an index of the
price-level, and to control it, it was necessary to control the
price-level and not merely give it another name which it cannot bear
and will not endure, as was proved in 1920 when the rupee was given in
law the value of 2s. (gold) when in practice it could not fetch even
1s. 4d. sterling, with the result that the rupee exchange sank to the
level determined by its purchasing power.  But, apart from this
question, we have the admission of the ablest supporter of the
exchange standard that the real merit of a currency system lies in
maintaining the standard of value stable in terms of commodities in
general.

Given that this is the proper criterion by which to judge a currency
system, we must ask what has been the course of prices in India since
the Mint closure in 1893?  This is a fundamental question, and yet not
one among the many who have praised the virtues of the exchange
standard has paid any attention to it.  In vain may one search the
pages of Prof. Keynes, Prof. Kemmerer, or Mr. Shirras for what they
have to say of the exchange standard from this point of view.  The
Chamberlain Commission or the Smith Committee on Indian currency never
troubled about [pg 250] the problem of prices in India, [381]_ and yet
without being satisfied on that score it is really difficult to
understand how anyone can give an opinion of any value as to the
soundness or otherwise of that standard.

.. [381] Perhaps an exception may be made in the case of the latter
         Committee; but its object was only to make it a ground for
         high exchange.

In proceeding to consider the exchange standard from the standpoint of
prices, it is as well to premise that one of the important reasons why
the Indian Mints were closed to the free coinage of silver was that
the rupee was a depreciating currency resulting in high prices. [382]_
The closing of the Mints, therefore, should have been followed by a
fall of prices in India; for, to adopt the phraseology of Prof.
Fisher, [383]_ the pipe-connection between the money reservoir and the
silver-bullion reservoir was owing to the Mint closure cut off or
stopped, thereby preventing the passage of silver from the bullion
reservoir to the money reservoir.  In other words, the newly-mined
silver could not become money after the Mint closure and lower the
purchasing power of the rupees in circulation.  If this is so, then
how very disappointing has been the effect of the Mint closure! From
the standpoint of prices the rupee has become a problem as it had
never been before.  The rise of prices in India since the Mint closure
(*see* Chart VI) has been quite unprecedented in the history of the
country.  Indeed, the rise of prices in India before the Mint closure,
when the pipe-connection between the silver-bullion reservoir and the
rupee-currency reservoir was intact, must be regarded as very trifling
compared with the rise of prices after the Mint closure when the
pipe-connection was cut off.  From the standpoint of prices the Mint
closure has therefore turned out to be a curse rather than a blessing,
and literally so, for, under an ever-rising price-level, life in India
is rendered quite unbearable.  No people have undergone so much misery
owing to high prices as the Indian people have done.  During the war
period the price-level reached such a giddy height that the reports of
suicide by men and women [pg 251] who were unable to buy food and
clothing were in no way few and far between.  It may, however, be
argued that the rise of prices in India would have been greater if the
Mints had not been closed and India had remained a purely
silver-standard country.  A good deal, no doubt, can be said in favour
of this view.  It is absolutely true that silver, being universally
discarded, has become unfit for functioning as a standard of value.
To that extent an exchange standard is better than a pure-silver
standard.  But is it as good as a gold standard?

.. [382] *See supra*, Chap. III.
.. [383] *Purchasing Power of Money*, 1911, p. 128.

.. figure:: images/chart-6.jpg
   :alt: CHART VI: Comparative Price Levels, Indian and Foreign, 1893–1922

   CHART VI: Comparative Price Levels, Indian and Foreign, 1893–1922

On the basis of the doctrine of purchasing power parities as an
explanation of actual exchange rates, one may be led to answer the
question in the affirmative.  For it may be argued that if the gold
value of the rupee was maintained it is because gold prices and rupee
prices were equal. [384]_ This, it may be said, is all that the
exchange standard aims at doing and can be claimed to have done, for
the fact that the gold-standard reserve was seldom depleted is a proof
that the general prices inside India were on the same level as those
ruling outside India.  On *à priori* considerations such as these, the
exchange standard may be deemed to be as good as a gold standard.

.. [384] It is, however, to be noted that neither Prof. Kemmerer nor
         Prof. Keynes has set up this claim in favour of the exchange
         standard.  If anything, both have argued against the
         assumption of there being equality of *all* prices.

One may ask as to why Indian prices should have been kept as high, if
they were no higher than gold prices, and whether it would not have
been better to have kept Indian prices on a lower level.  But we shall
not raise that question.  We shall be satisfied if Indian prices were
only as high as gold prices.  Now did Indian prices rise only as much
as gold prices?  A glance at the chart reveals the surprising
phenomenon that prices in India not only rose as much as gold prices,
but rose more than gold prices.  Of course in comparing Indian prices
with gold prices to test the efficacy of the exchange standard we must
necessarily eliminate the war period, for the reason that gold had
been abandoned as a standard of value by most of the countries.  And,
even [pg 252] if we do take that period into account, it does not
materially affect the conclusion, for although India was not a
belligerent country, yet prices in India were not very much lower than
prices in countries with most inflated currencies during the war, and,
barring a short period, were certainly higher than gold prices in
U.S.A.

It is obvious that the facts do not agree with the *à priori*
assumption made in favour of the exchange standard.  So noticeable
must be said to be the local rise in Indian prices above the general
price level in England that even Prof. Keynes, not given to exaggerate
the faults of the exchange standard, was, as a result of his own
independent investigation, convinced that [385]_

  “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. Kemmerer [387]_ 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 out [389]_ 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 future [391]_—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 observe [392]_ that

  “when two countries have a similar monetary system and important
  business relations with each other, the movements of their
  price-levels as represented by index-numbers are found to agree
  rather closely.  This agreement is so strong that similarity of
  movement is usually found even when comparisons are made with
  materials so crude as index-numbers compiled from unlike lists of
  commodities and computed on the basis of actual prices in different
  years.”

.. [392] *Gold, Prices, and Wages under the Greenback Standard*,
         1908, p. 27.

Now, we know that before the war England was a gold-standard country,
and we also know that there was no close correspondence between the
contemporary movements of the price-levels of India and England.  In
view of this, it is only a delusion to maintain that India has been a
gold-standard country.  On the other hand, it is better to [pg 257]
recognize that India has yet to become a gold-standard country unless
we are to fall into the same error that Prof. Fischer [393]_ must be
said to have committed in attributing the extraordinary rise of prices
in India to the existence of a gold standard, when, as a matter of
fact, it should have been attributed to the want of a gold standard.

.. [393] *Purchasing Power*, etc., 1911, p. 340.

How can she become a gold-standard country?  The obvious answer is, by
introducing a gold currency.  Prof. Keynes scoffs at the view that
there cannot be a gold standard without a gold currency as pure
nonsense. [394]_ He seems to hold that a currency and a standard of
value are two different things.  Surely there he is wrong.  Because a
society needs a medium of exchange, a standard of value, and a store
of value to sustain its economic life, it is positively erroneous to
argue that these three functions can be performed by different
instrumentalities.  On the other hand, as Professor Davenport
insists, [395]_

  “all the different uses of money are merely different aspects or
  emphasis of the intermediate function.  Deferred payments … are
  merely deferred payments of the intermediate.  So again of the
  standard aspect; whatever is the general intermediate is by that
  fact the standard.  The functions are not two, but one. … Clearly,
  also, the intermediate may be a storehouse of purchasing power.  The
  second half of the barter may be deferred.  The intermediate is
  generalized purchasing power.  Delay is one of the privileges which
  especially the intermediate function carries with it.”

.. [394] Op. cit., p. 29.
.. [395] Op. cit., pp. 255–56; cf. also F. A. Walker, *Money in its
         Relationship to Trade*, p. 27; and C. M. Walsh, *The
         Fundamental Problem in Monetary Science*, p. 804.

Thus the rupee by reason of being the currency is also the standard of
value.  If we wish to make gold the standard of value in India we must
introduce it into the currency of India.  But it may be asked what
difference could it make to the price level in India if gold were made
a part of the Indian currency?  To answer this question it is
necessary to lay bare the nature of the rupee currency.  Now it will
be [pg 258] granted that a standard of value which is capable of
expansion as well as contraction is likely to be more stable than one
which is incapable of such a manipulation.  The rupee currency is
capable of easy expansion, but is not capable of easy contraction by
reason of the fact that it is neither exportable nor meltable, nor is
it convertible at will.  The effects of such a currency as compared
with those of an exportable currency were well brought out by the late
Hon. Mr. Gokhale in a speech in which he observed: [396]_

.. [396] *Supreme Legislative Council Proceedings*, Vol. L, p. 642.
..

  “Now, what is the difference if you have an automatic self-adjusting
  currency, such as we may have with gold or we had with silver before
  the year 1893, and the kind of artificial currency that we have at
  present?  Situated as India is you will always require, to meet the
  demands of trade, the coinage of a certain number of gold or silver
  pieces, as the case may be, during the export season, that is for
  six months in the year.  When the export season is brisk money has
  to be sent into the interior to purchase commodities.  That is a
  factor common to both situations, whether you have an artificial
  currency, as now, or a silver currency, as before 1893.  But the
  difference is this.  During the remaining six months of the slack
  season there is undoubtedly experienced a redundancy of currency,
  and under a self-adjusting automatic system there are three outlets
  for this redundancy to work itself off.  The coins that are
  superfluous may either come back to the banks and to the coffers of
  Government, or they may be exported, or they may be melted by people
  for purposes of consumption for other wants.  But where you have no
  self-adjusting and automatic currency, where the coin is an
  artificial token currency, such as our rupee is at the present
  moment, two out of three of these outlets are stopped.  You cannot
  export the rupee without heavy loss, you cannot melt the rupee
  without heavy loss, and consequently the extra coins must return to
  the banks and coffers of the Government or they must be absorbed by
  the people.  In the latter case the situation is like that of a soil
  which is water-logged, which has no efficient drainage, and the
  moisture from which cannot be removed.  In this country the
  facilities for banking are very inadequate, and therefore our money
  does not swiftly return back to the banks or [pg 259] Government
  Treasuries.  Consequently, the extra money that is sent into the
  interior often gathers here and there like pools of water turning
  the whole soil into a marsh.  I believe the fact cannot be gainsaid
  that the stopping of two outlets out of the three tends to raise
  prices by making the volume of currency redundant.”

Had gold formed a part of the Indian currency it would have not only
met the needs for expansion but would have permitted contraction of
currency in a degree unknown to the rupee.  Gold would be superior to
the rupee as a standard of value for the reason that the former is
expansible as well as contractible, while the latter is only
expansible but not contractible.  This is merely to state in different
language what has already been said previously, that the Indian
monetary standard, instead of being a gold or a gold-exchange
standard, is in all essentials an inconvertible rupee standard like
the paper pound of the Bank Suspension period, and the extra local
rise of prices which, in itself an incontrovertible proof of the
identity of the two systems, is characteristic of both, is, to use the
language of the Bullion Report, [397]_

.. [397] Prof. Cannan's Reprint, p. 17.
..

  “the effect of an excessive quantity of a circulating medium in a
  country which has adopted a currency not exportable to other
  countries, or not convertible at will into a coin which is
  exportable.”

Therefore, if some mitigation of the rise in the Indian price-level is
desirable, then the most essential thing to do is to permit some form
of “exportable” currency such as gold to be a counterpart of the
Indian monetary system.

The Chamberlain Commission expended much ingenuity in making out a
case against a gold currency in India. [398]_ The arguments it urged
were: (1) Indian people will hoard gold and will not make it available
in a crisis; (2) that India is too poor a country to maintain such an
expensive money material as gold; (3) that the transactions of the
Indian people are too small to permit of a gold circulation; and (4)
[pg 260] paper convertible into rupees is the best form of currency
for the people of India as being the most economical, and that the
introduction of a gold currency will militate against the popularity
of notes as well as of rupees.  The bogy of hoarding is an old one,
and would really be an argument of some force if hoarding was
something which knew no law.  But the case is quite otherwise.  Money,
being the most saleable commodity and the least likely, in a
well-ordered monetary system, to deteriorate in value during short
periods, is hoarded continually by all people, i.e. treated as a store
of value.  But in treating it as a store of value the possessor of
money is comparing the utilities he can get for the money, by
disposing of it now, with those he believes he can get for it in the
future, and if the highest present utility is not so great as the
highest future utility, discounted for risk and time, he will hoard
the money.  On the other hand, he will not hoard the money if the
present use was greater than the future use.  That being so, it is
difficult to understand why hoarding should be an objection to a gold
currency for the Indian people.  If they hoard gold that means they do
not care to spend it on current purchases or that they have another
form of currency which is inferior to gold and which they naturally
like to part with first.  On the other hand, if they do wish to make
current purchases and have no other form of currency they cannot hoard
gold.  There are instances when precious metals have been exported
from India, when occasion had called for it, [399]_ showing that the
hoarding habit of the Indian peoples is not such an unknown quantity
as is often supposed, and if on some occasions [400]_ 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 now [406]_ been fixed at
:math:`\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
         `1/16`:f:\ th in January 1875, and to `1/32`:f:\ nd 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 endeavoured [408]_:—

  “(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,

.. vspace:: 2
.. class:: center large

   `TABLE LI`:sc:
.. table:: `Balance of Trade, Council Drawings and Imports of Gold
           Before 1893`:sc:

   +---------+---------------+-------------------------+------------+---------------+------------+------------+--------------------+
   | Years.  | Balance of    | Net Imports of          | Amount of  | Excess (+) or | Home       | Cash       | Minimum            |
   |         | Trade         | Treasure.               | Council    | Deficiency    | Charges.   | Balances   | Rate for           |
   |         | (Merchandise: +-------------+-----------+ Bills      | (−) of Bills  |            | in the     | Council            |
   |         | Private       | Gold.       | Silver.   | drawn.     | drawn as      |            | Home       | Bills.             |
   |         | Account).     |             |           |            | compared with |            | Treasury.  |                    |
   |         |               |             |           |            | Budget        |            |            |                    |
   |         |               |             |           |            | Estimate.     |            |            |                    |
   +---------+---------------+-------------+-----------+------------+---------------+------------+------------+--------------------+
   | \(1)    | \(2)          | \(3)        | \(4)      | \(5)       | \(6)          | \(7)       | \(8)       | \(9)               |
   +---------+---------------+-------------+-----------+------------+---------------+------------+------------+-----+--------------+
   |         | £             | £ 000,000   | £ 000,000 |  £         | £             | £          | £          | \s. | \d.          |
   +=========+===============+=============+===========+============+===============+============+============+=====+==============+
   | 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 `3/16`:f:  |
   +---------+---------------+-------------+-----------+------------+---------------+------------+------------+-----+--------------+
   | 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 `15/16`:f: |
   +---------+---------------+-------------+-----------+------------+---------------+------------+------------+-----+--------------+
   | 1891–92 | 27,632,400    | 1·68        | 6·3       | 16,093,854 | +93,854       | 15,874,699 | 4,122,626  | 1   | 3 `1/16`:f:  |
   +---------+---------------+-------------+-----------+------------+---------------+------------+------------+-----+--------------+
   | 1892–93 | 29,287,300    | 1·75        | 8·0       | 16,532,215 | −467,785      | 16,334,541 | 12,268,388 | 1   | 2⅝           |
   +---------+---------------+-------------+-----------+------------+---------------+------------+------------+-----+--------------+

[pg 267]

.. vspace:: 2
.. class:: center large

   `TABLE LII`:sc:
.. table:: `Balance of Trade, Council Drawings and Imports of Gold
           After 1893`:sc:

   +-----------+---------------+-----------------------+------------+---------------+------------+------------+--------------+
   | Years.    | Balance of    | Net Imports of        | Amount of  | Excess (+) or | Home       | Cash       | Minimum      |
   |           | Trade         | Treasure.             | Council    | Deficiency    | Charges.   | Balances   | Rate for     |
   |           | (Merchandise: +-----------+-----------+ Bills      | (−) of Bills  |            | in the     | Council      |
   |           | Private       | Gold.     | Silver.   | drawn.     | drawn as      |            | Home       | Bills.       |
   |           | Account).     |           |           |            | compared with |            | Treasury.  |              |
   |           |               |           |           |            | Budget        |            |            |              |
   |           |               |           |           |            | Estimate.     |            |            |              |
   +-----------+---------------+-----------+-----------+------------+---------------+------------+------------+--------------+
   | \(1)      | \(2)          | \(3)      | \(4)      | \(5)       | \(6)          | \(7)       | \(8)       | \(9)         |
   +-----------+---------------+-----------+-----------+------------+---------------+------------+------------+-----+--------+
   |           | £             | £ 000,000 | £ 000,000 |  £         | £             | £          | £          | \s. | \d.    |
   +===========+===============+===========+===========+============+===============+============+============+=====+========+
   | 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 `3/32`:f:\ d. 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 circumstance.

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 State [410]_
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 metal.”

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 `3/32`:f:\ d.—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 currency.

.. [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 remarked
[420]_:—

  “… 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 words [421]_:—

  “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, observed [422]_:—

  “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
Member [423]_ 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, replied [424]_:—

  “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 remarked [425]_:—

  “… 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 inevitable.”

.. [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 replied [426]_:—

  “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 `5/32`:f:\ d. 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 rupees].

.. [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 desirable.”

.. [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 extent.

..

  “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 that:—

  “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 obtained?

..

  “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
agreed [429]_ 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 argued [430]_:—

  “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 law.”

.. [430] Report, par. 56.

Regarding the necessity for convertibility the Committee observed
[431]_:—

  “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 that
[432]_

  “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 rate.”

.. [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 standard,”
  [434]_

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 Committee
[435]_ 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
gold

  “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 says [437]_:—

  “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. Cannan [439]_ 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 said [440]_:—

  “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 despatch.”

.. [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 discontent.

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 declared [443]_:—

  “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, replied [444]_:— [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 inflation?]

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 argue [445]_:—

  “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 for.  Queer as it may seem, SAFETY LIES IN AN INCONVERTIBLE RUPEE
WITH A FIXED LIMIT OF ISSUE.

.. [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.

.. backmatter

.. toc-entry::

INDEX
=====

| Administration:
|   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
| Bengal:
|   Double standard experiments, 1766–93, 14
|   Reform of currency, 18
| Bimetallism:
|   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
| Exchange:
|   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*
| France:
|   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*
| Gold:
|   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
| Mohur:
|   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
| Prices:
|   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*
| Rupee:
|   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
| Silver:
|   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
| Trade:
|   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

.. clearpage::

.. footnotes::
   :class: smaller

.. pgfooter::
