Chapter VII: A Return to the Gold Standard (1)

We have examined the exchange standard in the light of the claim made on behalf of it, that it is capable of maintaining the gold parity of the rupee. This was the criterion laid down by the Chamberlain Commission as a fitting one by which to judge the merits or demerits of that standard. But is the adequacy of that criterion beyond dispute? In other words, supposing the rupee has maintained its gold parity, which it has only as often as not, does it follow that all the purposes of a good monetary system are therefore subserved?

In the exchange standard, “as the system is now operated, the coinage is manipulated to keep it at par with gold”³⁷⁹ as though money is only important for the amount of gold it will procure. But what really concerns those who use money is not how much gold that money is worth, but how much of things in general (of which gold is an infinitesimal part) that money is worth. Everywhere, therefore, the attempt is to keep money stable in terms of commodities in general, and that is but proper, for what ministers to the welfare of people is not so much the precious metals as commodities and services of more direct utility. Stability of a currency in terms of gold is of importance only to the dealers in gold, but its stability in terms of commodities in general affects all, including the bullion-dealers. Even Prof. Keynes, in his testimony before the Indian Currency Committee of 1919, observed³⁸⁰:— [pg 249]

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

³⁸⁰ Q. 2,690.

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

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

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

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

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

³⁸² _See supra_, Chap. III.

³⁸³ _Purchasing Power of Money_, 1911, p. 128.

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

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

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

It is obvious that the facts do not agree with the _à priori_ assumption made in favour of the exchange standard. So noticeable must be said to be the local rise in Indian prices above the general price level in England that even Prof. Keynes, not given to exaggerate the faults of the exchange standard, was, as a result of his own independent investigation, convinced that³⁸⁵

“a comparison with Sauerbeck’s index number for the United
Kingdom shows that the change in India is much greater than can
be accounted for by changes occurring elsewhere.”

³⁸⁵ “Recent Economic Events in India,” in _The Economic Journal_,
March, 1909, p. 4. Italics not in the original.

What is then the explanation of this discrepancy between the _à priori_ assumption and the facts of the case. The explanation is that the actual exchange rates correspond to the purchasing power parities of two currencies not with regard to _all_ commodities but with regard to _some_ only. In this connection it is better to re-state the doctrine of the relation of the purchasing power parities to exchange rates with the necessary qualification. A rigorously strict formulation of the doctrine should require us to state that Englishmen and others value Indian rupees inasmuch as and in so far as those rupees will buy _such Indian goods as Englishmen want_; while Indians value English pounds inasmuch as and in so far as those pounds will buy _such English goods as the Indians want_. So stated it follows that the actual exchange rates are related to purchasing power parities of the two currencies with regard to such commodities only as are internationally traded. To assume that the actual exchange rate is an exact index of the purchasing power parity of the two currencies with regard to _all_ the commodities is to suppose that the variations in [pg 253] the purchasing power of a currency over commodities which are traded and which are not traded are the same.³⁸⁶ There is certainly a tendency for movements in the prices of these two classes of goods to influence one another _in the long run_; so that it becomes possible to say that the exchange value of a currency will be determined by its internal purchasing power. The doctrine of purchasing power parity as an explanation of exchange rates is valuable as an instrument of practical utility for controlling the foreign exchanges _and_ it is as such that the doctrine was employed in an earlier portion of this study to account for the fall in the gold value of the rupee. But to proceed, on the basis of this relationship between the purchasing power of a currency and its exchange value, to argue that at any given time the exchange is more or less an exact measure of general purchasing power of the two currencies, is to assume what cannot always be true, namely, that the prices of traded and non-traded goods move in sympathy. This assumption is too large and can only be said to be more or less true according to circumstances. Now as Prof. Kemmerer³⁸⁷ points out:

³⁸⁶ Prof. Cassel, the modern exponent of this old doctrine of the
relation of exchange rates to purchasing power parities, admits
that the correspondence between the two depends upon the
fulfilment of this assumption, for he says:

“Our calculation of the purchasing power parity rests strictly on
the proviso that the rise in prices in the countries concerned has
affected all commodities in a like degree. If that proviso is not
fulfilled, then the actual exchange rate may deviate from the
calculated purchasing power parities.”—_Money and Foreign Exchange
after_ 1914, London, 1922, p. 164.

³⁸⁷ Op. cit., p. 64.

“While India’s exports and imports in the absolute are large,
still, in the main, the people of India live on their own
products, and a large part of those products run their life
history from production to consumption in a very small
territory. They have only the remotest connection with foreign
trade, gold, and the gold exchanges. In time, of course, any
substantial disturbance in the equilibrium of values in the
country’s import and export trade will make itself felt in these
local prices, but, allowing for exceptions [pg 254] it may be
said that in a country like India the influences of such
disturbances travel very slowly and lose much of their momentum
in travelling.”

In consequence of the thinness of connection between the two it is obvious that the prices of such Indian goods as do enter into international trade cannot always be said to move in more or less the same proportion as those which do not. Besides this thinness of connection which permits of deviations of the general purchasing power of a currency from the level indicated by the actual exchange rate, it is to be noted that the prices of Indian commodities which largely enter into international trade are not governed by local influences. Such exports of India as wheat, hides, rice and oil seeds are international commodities, not solely amenable to influences originating from changes that may be taking place in the prices of home commodities and services. The combined effect of these two circumstances, except in abnormal events such as the war, is to militate against the prices of traded and non-traded goods moving in quick sympathy.³⁸⁸

³⁸⁸ This is merely re-stating what has previously been stated to
explain why specific depreciation of the rupee does not
immediately follow upon its general depreciation.

If this is true, then, although the maintenance of the exchange standard does imply a purchasing power parity of the rupee with gold, it is not a purchasing power parity of the two currencies with respect to _all_ the commodities. All that it implies is that the purchasing power of the rupee over such commodities as entered into international trade was on a par with gold, so that there did not often arise the necessity of exhausting the gold reserve. The preservation of the gold reserve only meant that there was equality of prices so far as internationally traded goods were concerned. Thus interpreted, the fact that the rupee maintained its gold value does not preclude the possibility of Indian prices being, on the whole, higher than gold prices, thereby vitiating the _à priori_ view that the exchange standard is as good as the gold standard. [pg 255]

It should be pointed out³⁸⁹ that all changes of prices affect more or less the welfare of the individual. However, the general flexibility of the modern economic organization, with its mobility of capital and labour, free competition, power of choice, inventive genius and intellectual resources of entrepreneurs and merchants, takes care of the normal and temporary fluctuations of prices. But when a change in the price-level is general and persistent in one direction the case is otherwise. Arrangements based on the expectation that the price movement is only temporary, and that there will be a return to the former normal position, constantly come to naught. Suffering endured in holding on for the turn in the movement cannot be offset by gains in another. In short, such a persistent price movement in one direction is bound to confound ordinary business sagacity and so vitiate all calculations for the future as to result in unlimited dislocation or loss and subject the individual to such powerful and at the same time incalculable influences that his economic welfare cannot but escape entirely from his control, and prudence, forethought, and energy become of no avail in the struggle for existence. Perfect stability of value in a monetary standard is as yet only an ideal. But the evil consequences of instability are so great that Prof. Marshall, believing as he did that the general prejudice against tampering with the monetary foundations of economic life was a healthy prejudice, yet observed that much may be done towards safeguarding the economic welfare of communities by lessening its variability.³⁹⁰ A depreciating standard of value, as gold has been since 1896, is an evil. But can a standard of value, undergoing a continuous depreciation as has been the case with the exchange standard, and that too of a greater depth than the gold standard—in other words, causing a greater rise of prices—be regarded as a good standard of value? [pg 256]

³⁸⁹ What follows is condensed from Mayo-Smith’s “Price Movements and
Individual Welfare,” in the _Political Science Quarterly_, Vol.
XV, No. 1 (March, 1900), pp. 14–17.

³⁹⁰ Cf. “Remedies for Fluctuations of General Prices,” in _The
Contemporary Review_, March, 1887, _passim_.

In the light of this it is strange that Prof. Keynes, in his treatise on _Indian Currency and Finance_, should have maintained that the exchange standard contained an essential element in the ideal standard of the future³⁹¹—a view subsequently endorsed by the Chamberlain Commission. If stability of purchasing power in terms of commodities in general is the criterion for judging a system of currency, then few students of economies will be found to agree with Prof. Keynes. Perhaps it is not too sanguine to say that even the Prof. Keynes of 1920 will prefer a gold standard to a gold-exchange standard, for under the former prices have varied much less than has been the case under the latter.

³⁹¹ Op. cit., p. 36.

In this connection attention may be drawn to the prevalent misconception that India is a gold-standard country. It will be admitted that the best practical test whether any two countries have the same standard of value is to be found in the character of the movements in their price-levels. So sure is the test that Prof. Mitchell, after a very careful and wide survey of the price-level of different countries and the American price-level during the greenback period, was led to observe³⁹² that

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

³⁹² _Gold, Prices, and Wages under the Greenback Standard_, 1908, p.
27.

Now, we know that before the war England was a gold-standard country, and we also know that there was no close correspondence between the contemporary movements of the price-levels of India and England. In view of this, it is only a delusion to maintain that India has been a gold-standard country. On the other hand, it is better to [pg 257] recognize that India has yet to become a gold-standard country unless we are to fall into the same error that Prof. Fischer³⁹³ must be said to have committed in attributing the extraordinary rise of prices in India to the existence of a gold standard, when, as a matter of fact, it should have been attributed to the want of a gold standard.

³⁹³ _Purchasing Power_, etc., 1911, p. 340.

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

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

³⁹⁴ Op. cit., p. 29.

³⁹⁵ Op. cit., pp. 255–56; cf. also F. A. Walker, _Money in its
Relationship to Trade_, p. 27; and C. M. Walsh, _The Fundamental
Problem in Monetary Science_, p. 804.

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

³⁹⁶ _Supreme Legislative Council Proceedings_, Vol. L, p. 642.

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

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

³⁹⁷ Prof. Cannan’s Reprint, p. 17.

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

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

The Chamberlain Commission expended much ingenuity in making out a case against a gold currency in India.³⁹⁸ The arguments it urged were: (1) Indian people will hoard gold and will not make it available in a crisis; (2) that India is too poor a country to maintain such an expensive money material as gold; (3) that the transactions of the Indian people are too small to permit of a gold circulation; and (4) [pg 260] paper convertible into rupees is the best form of currency for the people of India as being the most economical, and that the introduction of a gold currency will militate against the popularity of notes as well as of rupees. The bogy of hoarding is an old one, and would really be an argument of some force if hoarding was something which knew no law. But the case is quite otherwise. Money, being the most saleable commodity and the least likely, in a well-ordered monetary system, to deteriorate in value during short periods, is hoarded continually by all people, i.e. treated as a store of value. But in treating it as a store of value the possessor of money is comparing the utilities he can get for the money, by disposing of it now, with those he believes he can get for it in the future, and if the highest present utility is not so great as the highest future utility, discounted for risk and time, he will hoard the money. On the other hand, he will not hoard the money if the present use was greater than the future use. That being so, it is difficult to understand why hoarding should be an objection to a gold currency for the Indian people. If they hoard gold that means they do not care to spend it on current purchases or that they have another form of currency which is inferior to gold and which they naturally like to part with first. On the other hand, if they do wish to make current purchases and have no other form of currency they cannot hoard gold. There are instances when precious metals have been exported from India, when occasion had called for it,³⁹⁹ showing that the hoarding habit of the Indian peoples is not such an unknown quantity as is often supposed, and if on some occasions⁴⁰⁰ they hoarded an exportable currency when they should have released it, it is not the fault of the people but of the currency system in which the component parts of the total stock of money are not equally good as a store of value. The argument from [pg 261] hoarding, if it is an argument, can be used against any people, and not particularly against the Indian people.

³⁹⁸ Report, pp. 15–19. The same arguments will be found in Chap. IV
of Mr. Keynes’s treatise.

³⁹⁹ _See_ the Memorandum by Mr. Dalal to the Chamberlain Commission
Appendices, Vol. III, No. XXXIII, pp. 673–76, for this and other
cognate topics.

⁴⁰⁰ In the crisis of 1907–8 the Indian people were accused of this.
Yet it must be noted that in that crisis some gold was exported on
private account.

The second argument against a gold currency in India has no greater force than the first. If gold were to disappear from circulation then the cause can be nothing else but the over-issue of another kind of money. In the nineties, when the question of establishing a gold standard in India was being considered, some people used to point to the vain efforts made by Italy and the Austrian Empire to promote the circulation of gold. That their gold used to disappear is a fact, but it was not due to their poverty. It was due to their paper issues. Any country can maintain a gold currency provided it docs not issue a cheaper substitute.

Again, if gold will not circulate because transactions are too small the proper conclusion is not that there should be no gold circulation but that the unit of currency should be small enough to meet the situation. The difficulties of circulation raises a problem of coinage. But the considerations in respect of coinage cannot be allowed to rule the question as to what should be the standard of value. If the sovereign does not circulate it cannot follow that India should not have a gold currency. It merely means that the sovereign is too large for circulation. The case, if at all there is one, is against the sovereign as a unit and not against the principle of a gold currency. If the sovereign is not small enough the conclusion is we must find some other coin to make the circulation of gold effective.

The fourth argument against a gold currency is one of fact, and can be neither proved nor disproved except by an appeal to evidence whether or not gold currency has the tendency ascribed to it. But we may ask, is there no danger in a system of currency composed of paper convertible into rupees? Will the paper have no effect on the value of the rupee? The Commission, if it at all considered that question, which is very doubtful, was perhaps persuaded by the view commonly held, that as the paper currency was convertible it could not affect the value or the purchasing power of the rupee. In holding this view it was wrong; for, the convertibility of paper currency to the extent it is uncovered [pg 262] does not prevent it from lowering the value of the unit of account into which it is convertible, because by competition it reduces the demand for the unit of account and thus brings about a fall in its value. Thus the paper, although economical as a currency, is a danger to the value of the rupee. This danger would have been of a limited character if the rupee had been freely convertible into gold. But the danger of a convertible paper currency to the value of a unit of account becomes as great as that of an inconvertible paper currency if that unit is not protected against being driven below the metal of ultimate redemption by free convertibility into that metal.⁴⁰¹ The rupee is not protected by such convertibility, and as the Commission did not want that it should be so protected it should have realized that it was as seriously jeopardizing the prospects of the rupee being maintained at par with commodities in general, and therefore with gold, by urging the extension of a paper currency, be it ever so perfectly convertible, as it could have done by making the paper altogether inconvertible. But so obsessed was the Commission with considerations of economy, and so reckless was it with considerations of stability of value, that it actually proposed a change in the basis of the Indian paper currency from a fixed-issue system to that of a fixed-proportion system.⁴⁰² That, at the dictates of considerations of economy, the Commission should have neglected to take account of this aspect of the question, is only one more evidence of the very perfunctory manner in which it has treated the whole question of stability of purchasing power so far as the Indian currency was concerned.

⁴⁰¹ For an illuminating discussion on this topic, cf. _Money: Its
Connection with Rising and Falling Prices_, by Prof. Cannan, 3rd
ed., pp. 47–8.

⁴⁰² Report, Sec. 112.

If there is any force in what has been urged above, then surely a gold currency is not a mere matter of “sentiment” and a “costly luxury,” but a necessity dictated by the supreme interest of steadying the Indian standard of value, and thereby to some extent, however slight, safeguarding [pg 263] the welfare of the Indian people from the untoward consequences of a rising price-level.

We now see how very wrong the Chamberlain Commission was from every point of view in upholding the departure from the plan originally outlined by the Government of India and sanctioned by the Fowler Committee. But that raises the question: How did that ideal come to be so ruthlessly defeated? If the Fowler Committee had proposed that gold should be the currency of India, how is it that gold ceased to be the currency? It cannot be said that the door is closed against the entry of gold, for it has been declared legal tender. Speaking in the language of Prof. Fisher, the movement of gold in the money reservoir of India is allowed a much greater freedom so far as law is concerned than can be said of silver. Silver, in the form of rupees, is admitted by a very narrow valve which gives it an inlet into that reservoir, but there is no outlet provided for it. On the other hand, gold is admitted into the same reservoir by a pipe-connection which gives it an inlet as well as an outlet. Why, then, does not gold flow into the currency reservoir of India? A proper understanding on this question is the first step towards a return to the sound system proposed in 1898.

On an examination of the literature which attempts to deal with this aspect of the question, it will be found that two explanations are usually advanced to account for the non-entry of gold into the currency system of India. One of them is the sale of council bills by the Secretary of State. The effect of the sale of council bills, it is said, is to prevent gold from going to India. Mr. Subhedar, said to be an authority on Indian currency, in his evidence before the Smith Committee (Q. 3,502), observed:—

“Since 1905 it has been the deliberate attempt of those who
control our currency policy to prevent gold going to India and
into circulation.”

The council bill has a history which goes back to the days of the East India Company.⁴⁰³ The peculiar position [pg 264] of the Government of India, arising from the fact that it receives its revenues in India and is obliged to make payments in England, imposes upon it the necessity of making remittances from India to England. Ever since the days of the East India Company the policy has been to arrange for the remittance in such a way as to avoid the transmission of bullion. Three modes of making the remittance were open to the Directors of the East India Company: (1) Sending bullion from India to England; (2) receiving money in England in return for bills on the Government of India; and (3) making advances to merchants in India for the purchase of goods consigned to the United Kingdom and repayable in England to the Court of Directors of the Company to whom the goods were hypothecated. Out of these it was on the last two that greater reliance was placed by them. In time the mode of remittance through hypothecation of goods was dropped “as introducing a vicious system of credit, and interfering with the ordinary course of trade.” The selling of bills on India survived as the fittest of all the three alternatives,⁴⁰⁴ and was continued by the Secretary of State in Council—hence the name, council bill—when the Government of India was taken over by the Crown from the Company. In the hands of the Secretary of State the council bill has undergone some modifications. The sales as now effected are weekly sales,⁴⁰⁵ and are managed through the Bank of England, which issues an advertisement on every Wednesday on behalf of the Secretary of State for India, inviting tenders to be submitted on the following Wednesday for bills payable on [pg 265] demand by the Government of India either at Bombay, Madras, or Calcutta. The minimum fraction of a penny in the price at which tenders of bills are received has now⁴⁰⁶ been fixed at \frac{1}{32}nd of a penny. The council bill is no longer of one species as it used to be. On the other hand there are four classes of bills: (1) Ordinary bills of exchange, sold every Wednesday, known as “_Councils_”; (2) telegraphic transfers, sold on Wednesdays, called shortly “_Transfers_”;⁴⁰⁷ (3) ordinary bills of exchange, sold on any day in the week excepting Wednesday, called “Intermediates”; and (4) telegraphic transfers, sold on any day excepting Wednesday, named “_Specials_.” Now, in what way does the Secretary of State use his machinery of council bills to prevent gold from going to India? It is said that the price and the magnitude of the sale are so arranged that gold does not go to India. Before we examine to what extent this has defeated the policy of the Fowler Committee, the following figures (Tables LI and LII, pp. 266–7) are presented for purposes of elucidation.

⁴⁰³ Cf. the Memorandum by Sir Henry Waterfield relating to the system
of effecting remittances from India, Appendix to the Fowler
Committee’s Report, p. 24; also Memorandum by F. W. Newmarch on
the Sale of Council Bills and Telegraphic Transfers, Appendices to
the Interim Report of the Royal Commission on Indian Finance and
Currency, Vol. I, No. VIII. p. 217.

⁴⁰⁴ There was a fourth one, viz., the Government of India purchasing
sterling bills in India on London and sending them to the
Secretary of State for collection. It was employed for a short
period of time in 1877, but was afterwards dropped.

⁴⁰⁵ From January 22, 1862, when the Sale of Council Bills under the
authority of the Secretary of State first took place, up to
November, 1862, the sales were effected monthly. From November,
1862, the sales were effected fortnightly; and in August, 1876,
they were made weekly.

⁴⁰⁶ From January to March, 1862, the minimum fraction was a farthing;
it was reduced to ⅛th of a penny in March 1862, to 1/16th in
January 1875, and to 1/32nd in 1882, at which fraction it has
continued since then.

⁴⁰⁷ First introduced in 1876.

From an examination of these tables two facts at once become clear. One is the enormous amount of council bills the Secretary of State sells. Before the closing of the Mints the sales of council bills moved closely with the magnitude of the home charges, and the actual drawings did not materially deviate from the amount estimated in the Budget. Since the closure of the Mints the drawings of the Secretary of State have not been governed purely by the needs of the Home Treasury. Since the closure, the Secretary of State has endeavoured⁴⁰⁸:—

“(1) To draw from the Treasuries of the Government of India
during the financial year the amount that is laid down in the
Budget as necessary to carry out the Ways and Means programme of
the year. [pg 266]

⁴⁰⁸ Cf. Memorandum on the Sale of Council Bills, by F. W. Newmarch, to
the Chamberlain Commission, App. Vol. I, No. VII, p. 222,

_TABLE LI_

_Balance of Trade, Council Drawings and Imports of Gold
Before 1893_

───────────────────────────────────────────────────────────────────────────────────────────────────────────── Net Imports Excess of Treasure. (+) ───────────────────── or Balance Gold. Silver. Deficiency Cash of Amount (−) Balances Minimum Trade of of Home in Rate for Years. (Merchandise: Council Bills Charges. the Council Private Bills drawn Home Bills. Account). drawn. as Treasury. compared with Budget Estimate. ───────────────────────────────────────────────────────────────────────────────────────────────────────────── (1) (2) (3) (4) (5) (6) (7) (8) (9) ───────────────────────────────────────────────────────────────────────────────────────────────────────────── £ £ £ £ £ £ £ s. d. 000,000 000,000 ───────────────────────────────────────────────────────────────────────────────────────────────────────────── 1870–71 20,863,000 2·13 ·9 — — 10,031,261 3,305,972 1 10¼ ───────────────────────────────────────────────────────────────────────────────────────────────────────────── 1871–72 31,094,000 3·43 6·3 — — 9,703,235 2,821,091 1 10⅜ ───────────────────────────────────────────────────────────────────────────────────────────────────────────── 1872–73 23,376,000 2·41 ·7 13,939,095 +939,095 10,248,605 2,998,444 1 10⅜ ───────────────────────────────────────────────────────────────────────────────────────────────────────────── 1873–74 21,160,000 1·29 2·3 13,285,678 −214,322 9,310,926 2,013,638 1 9½ ───────────────────────────────────────────────────────────────────────────────────────────────────────────── 1874–75 20,137,000 1·73 4·3 10,841,615 +841,615 9,490,391 2,796,370 1 9¾ ───────────────────────────────────────────────────────────────────────────────────────────────────────────── 1875–76 19,204,000 1·40 1·4 12,389,613 −1,910,387 9,155,050 919,899 1 9 ───────────────────────────────────────────────────────────────────────────────────────────────────────────── 1876–77 23,573,000 ·18 6·1 12,695,800 −964,200 13,851,296 2,713,967 1 6½ ───────────────────────────────────────────────────────────────────────────────────────────────────────────── 1877–78 23,758,000 ·41 12·7 10,134,455 −2,115,545 14,048,350 1,076,657 1 8 3/16 ───────────────────────────────────────────────────────────────────────────────────────────────────────────── 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 ───────────────────────────────────────────────────────────────────────────────────────────────────────────── 1891–92 27,632,400 1·68 6·3 16,093,854 +93,854 15,874,699 4,122,626 1 3 1/16 ───────────────────────────────────────────────────────────────────────────────────────────────────────────── 1892–93 29,287,300 1·75 8·0 16,532,215 −467,785 16,334,541 12,268,388 1 2⅝ ─────────────────────────────────────────────────────────────────────────────────────────────────────────────

[pg 267]

_TABLE LII_

_Balance of Trade, Council Drawings and Imports of Gold
After 1893_

──────────────────────────────────────────────────────────────────────────────────────────────────────────────── Net Imports Excess of (+) or Balance Treasure. Deficiency Cash of ───────────────────── Amount (−) of Balances Minimum Trade Gold. Silver. of Bills Home in Rate for Years. (Merchandise: Council drawn Charges. the Council Private Bills as Home Bills. Account). drawn. compared Treasury. with Budget Estimate. ──────────────────────────────────────────────────────────────────────────────────────────────────────────────── (1) (2) (3) (4) (5) (6) (7) (8) (9) ──────────────────────────────────────────────────────────────────────────────────────────────────────────────── £ £ £ £ £ £ £ s. d. 000,000 000,000 ──────────────────────────────────────────────────────────────────────────────────────────────────────────────── 1893–94 21,660,500 − ·39 8·3 9,530,235 −9,169,765 15,826,815 1,300,564 1 1·500 ──────────────────────────────────────────────────────────────────────────────────────────────────────────────── 1894–95 25,765,000 −2·7 3·4 16,905,102 −94,898 15,707,367 1,503,124 1 0·000 ──────────────────────────────────────────────────────────────────────────────────────────────────────────────── 1895–96 29,963,800 1·5 3·7 17,664,492 +664,492 15,603,370 3,393,798 1 1·000 ──────────────────────────────────────────────────────────────────────────────────────────────────────────────── 1896–97 21,333,100 1·4 3·5 15,526,547 −973,453 15,795,836 2,832,354 1 1·781 ──────────────────────────────────────────────────────────────────────────────────────────────────────────────── 1897–98 18,847,000 3·2 5·4 9,506,077 −3,493,923 16,198,263 2,534,244 1 2·250 ──────────────────────────────────────────────────────────────────────────────────────────────────────────────── 1898–99 29,560,700 4·3 2·6 18,692,377 +2,692,377 16,303,197 3,145,768 1 3·094 ──────────────────────────────────────────────────────────────────────────────────────────────────────────────── 1899–1900 25,509,600 6·3 2·4 19,067,022 +2,067,022 16,392,846 3,330,943 1 3·875 ──────────────────────────────────────────────────────────────────────────────────────────────────────────────── 1900–01 20,727,400 ·5 6·3 13,300,277 −3,139,723 17,200,957 4,091,926 1 3·875 ──────────────────────────────────────────────────────────────────────────────────────────────────────────────── 1901–02 28,630,600 1·3 4·8 18,539,071 +2,039,071 17,368,655 6,693,137 1 3,875 ──────────────────────────────────────────────────────────────────────────────────────────────────────────────── 1902–03 33,352,600 5·8 4·6 18,499,966 +1,999,946 18,361,821 5,767,787 1 3·875 ──────────────────────────────────────────────────────────────────────────────────────────────────────────────── 1903–04 45,424,100 6·6 9·1 23,859,303 +6,859,303 18,146,474 7,294,782 1 3·875 ──────────────────────────────────────────────────────────────────────────────────────────────────────────────── 1904–05 40,548,200 6·5 8·9 24,425,558 +7,925,558 19,463,757 10,262,581 1 3·969 ──────────────────────────────────────────────────────────────────────────────────────────────────────────────── 1905–06 39,086,700 ·3 10·5 32,166,973 +14,333,973 18,617,465 8,436,519 1 3·938 ──────────────────────────────────────────────────────────────────────────────────────────────────────────────── 1906–07 45,506,600 9·9 16·0 33,157,196 +15,357,196 19,208,408 5,606,812 1 3·969 ──────────────────────────────────────────────────────────────────────────────────────────────────────────────── 1907–08 31,640,000 11·6 13·0 16,232,062 −1,867,938 18,487,267 5,738,489 1 3·906 ──────────────────────────────────────────────────────────────────────────────────────────────────────────────── 1908–09 21,173,300 2·9 8·0 13,915,426 −4,584,574 18,925,159 8,453,715 1 3·906 ──────────────────────────────────────────────────────────────────────────────────────────────────────────────── 1909–10 47,213,000 14·5 6·3 27,096,586 +10,896,586 19,122,916 15,809,618 1 3·906 ──────────────────────────────────────────────────────────────────────────────────────────────────────────────── 1910–11 53,685,300 16·0 5·8 26,783,303 +11,283,303 19,581,563 18,174,34? 1 3·906 ──────────────────────────────────────────────────────────────────────────────────────────────────────────────── 1911–12 59,512,900 25·1 3·6 27,058,550 +9,900,250 19,957,657 19,463,723 1 3·937 ──────────────────────────────────────────────────────────────────────────────────────────────────────────────── 1912–13 57,020,900 22·6 11·5 25,759,706 +10,259,706 20,279,572 9,789,634 1 3·969 ──────────────────────────────────────────────────────────────────────────────────────────────────────────────── 1913–14 43,753,900 15·6 8·7 31,200,827 +10,000,827 20,311,673 3,157,732 1 3·937 ──────────────────────────────────────────────────────────────────────────────────────────────────────────────── 1914–15 29,108,500 5·1 5·9 7,748,111 −12,251,889 20,208,598 7,913,226 1 3·937 ──────────────────────────────────────────────────────────────────────────────────────────────────────────────── 1915–16 44,026,600 − ·7 3·2 20,354,517 +13,354,517 20,109,094 12,803,348 1 3·937 ──────────────────────────────────────────────────────────────────────────────────────────────────────────────── 1916–17 60,843,200 8·82 12·5 32,998,095 +29,093,095 21,145,627 11,391,993 1 4·031 ──────────────────────────────────────────────────────────────────────────────────────────────────────────────── 1917–18 61,420,000 16·8 12·7 34,880,682 +34,880,682 26,065,057 16,625,416 1 4·156 ──────────────────────────────────────────────────────────────────────────────────────────────────────────────── 1918–19 56,540,000 −3·7 45·3 20,946,314 +20,946,314 23,629,495 14,715,827 1 4·906 ────────────────────────────────────────────────────────────────────────────────────────────────────────────────

[pg 268]

“(2) To draw such further amounts as may be required to pay for
purchases of silver bought for coinage purposes.

“(3) To draw such further amounts as an unexpectedly prosperous
season may enable the Government to spare, to be used towards
the reduction or avoidance of debt in England.

“(4) To sell additional bills and transfers to meet the
convenience of trade.

“(5) To issue telegraphic transfers on India in payment for
sovereigns which the Secretary of State has purchased in transit
from Australia or from Egypt to India.”

The result of such drawings is that the councils are made to play an enormous part in the adjustment of the trade balance of India, and the swelling of balances in the Home Treasury and the locking up of Indian funds in London.

The second point to note in comparing the preceding tables is with regard to the price at which the Secretary of State makes his sales. Before the closure of the Mints the price of the council bills was beyond the control of the Secretary of State, who had therefore to accept the price offered by the highest bidder at the weekly sale of his bills. But it is objected that there is no reason why the Secretary of State should have continued the old practice of auctioning the rupee to the highest bidder when the closing of the Mints had given him the sole right of manufacturing it. Availing himself of his monopoly position, it is insisted, the Secretary of State should not have sold his bills below 1s. 4⅛d. or 1s. 4 3/32d. which, under the ratio of 15 rupees to the sovereign, was for India the gold-import point. In practice the Secretary of State has willed away the benefit of his position, and has accepted tenders at rates below gold-import point, as may be seen from the minimum rates he has accepted for his bills.

It is said that if the council bills were sold in amounts required strictly for the purposes of the Home Treasury, and sold at a price not below gold-import point, gold would tend to be imported into India and would thus become part of the Indian currency media. As it is, the combined effect of the operations of the Secretary of State is said to be to [pg 269] lock up Indian gold in London. With the use or misuse of the Indian gold in London we are not here concerned. But those who are inclined to justify the India Office scandals in the management of Indian funds in London, and have offered their services to place them on a scientific footing, may be reminded that a practice on one side of Downing Street which Bagehot said could not be carried on on the other side of it without raising a storm of criticism, would require more ingenuity than has been displayed in their briefs. This much seems to have been admitted on both sides, that the operations of the Secretary of State do prevent the importation of gold into India, not altogether, but to the extent covered by their magnitude. Now, those who have held that the ideal of the Fowler Committee has been defeated are no doubt right in their view that the narrowing of the Secretary of State’s operation would lead to the importation of gold into India. But what justification is there for assuming that the imported gold would become a part of the currency of India? The assumption that the abolition of the Secretary of State’s financial dealings would automatically make gold the currency of India is simply a gratuitous assumption. Whether the imported gold would become current depends on quite a different 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 State⁴¹⁰ with two alternatives: (1) That a branch of the Royal Mint be established at Bombay solely for the purpose of coining gold into sovereigns, and exclusively under its control; or (2) that the control of the Mint at Bombay should be entirely transferred to it. Neither of the two alternatives was acceptable to the Government of India; and the Secretary of State, as a concession to Indian sentiment, sanctioned the issue of a ten-rupee gold coin from the Indian Mint. The Government of India preferred this solution to that suggested by the Treasury, but desired that the matter be dealt with afresh by the Chamberlain Commission then sitting. That Commission did not recommend a gold Mint,⁴¹¹ but saw no objection to its establishment provided the coin issued was a sovereign, and if the coinage of it was desired by Indian sentiment and if the Government did not mind the expense of coinage.⁴¹² This view of the Commission carried the proposition no further than where it was in 1900, until the war compelled the Government to open the Bombay Mint for the coinage of gold as a branch of the Royal Mint. But it was again closed in 1919. Its reopening was recommended by the Currency Committee of 1919,⁴¹³ and so enthusiastically was the project received that an Honourable Member of the Supreme Council took the unique step of tempting the Government into adopting that recommendation by an offer to increase the Budget Estimates under “Mint” to enable the Government to bear the cost of it. The Government, however, declined the offer with thanks. So we have in India the singular spectacle of a country in which there was a gold Mint even when gold was not legal [pg 271] tender, as was the case between 1835–93, while there is no gold Mint, when gold is legal tender, as has been the case since 1893. Just what an open Mint can do in the matter of promoting the ideal of the Fowler Committee it is difficult to imagine; but the following extracts from the evidence of a witness (Mr. Webb), than whom there was no greater advocate of an open gold Mint before the Chamberlain Commission, help to indicate just what is expected from a gold Mint.

⁴⁰⁹ _See_ Commons Paper 495, of 1913, p. 57.

⁴¹⁰ _Ibid._, p. 64.

⁴¹¹ Report, secs. 69–71.

⁴¹² The Commission recommended that if a gold Mint was not established
in India Government should renew the notification withdrawn in
1906 to receive refined gold on suitable terms.—Report, sec. 72.

⁴¹³ Report, par. 67.

“The principal advantage which you would expect to derive from a gold Mint is that you would increase the amount of gold coin in circulation?—That would be one of the tendencies.

“Is there any other advantage?—The advantage is that the country would be fitted with what I regard as an essential part of its monetary mechanism. I regard it as an essential part of its currency mechanism that it should have a Mint at which money could be coined at the requisition of the public.

“I want to get exactly at your reason why that is essential. Am I right in thinking that you consider it essential to a proper currency system that there should be a gold currency?—Yes.