Chapter VII: A Return to the Gold Standard (2)

“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 3/32d.—i.e. about the present equivalent of specie point for
gold imports into India. The sum required in London for Home
Charges having been realized, _no further sales of Council
Drafts should be made except for the express purpose—duly
notified to the public—_ [pg 273] _of purchasing metal for the
manufacture of further token coinage_. Such special sales of
Council Drafts should not be made at anything below specie point
for gold imports.”⁴¹⁶

⁴¹⁴ _See_ G. R. Porter, _Progress of the Nation_ (Ed. Hirst), p. 568.

⁴¹⁵ _See_ Report of the Deputy Master of the Royal Mint, 1921.

⁴¹⁶ Italics not in the original.

Again, Sir V. Thackersay, in the course of his speech on March 22, 1912, moving a resolution in the Legislative Council, asking the Government to open the Mint for the coinage of gold in India, observed:—

“Let me make myself clear on one point. _I do not suggest that
Government should give up the right to coin rupees or refuse to
give rupees when people demand the same_. I do not propose to
touch the gold-standard reserve, which must remain as it is as
the ultimate guarantee of our currency policy. My proposal does
not interfere with the existing arrangements in any way, but is
merely supplementary to them. … Let the Government of India
accumulate gold to the maximum limit of its capacity, but let
the surplus gold which it cannot absorb be coined and circulated
if the public chooses to do so. With our expanding trade and
the balance in our favour, gold will continue to be imported in
ordinary time, and _if the facilities of minting are provided in
India, it will go into circulation_.”⁴¹⁷

⁴¹⁷ _S.L.C.P._, Vol. L, pp. 637–38. Italics not in the original.

Those are surely not the ways of promoting a gold currency. Indeed, they run counter to it. So long as the coinage of rupees goes on gold will not enter into currency. Indeed, to cry out on the one hand against the huge drawings of the Secretary of State and the consequent transfer of Indian funds to London and their mismanagement by the Secretary of State, and on the other hand to permit him to manufacture additional token coinage of rupees, is to display not only a lamentable ignorance of a fundamental principle of currency, but also to show a complete failure to understand the precise source from which the whole trouble arises. It is true that the Government of India cannot bind the Secretary of State to any particular course of action,⁴¹⁸ [pg 274] and he often does override the provisions of the Annual Budget. But the question remains, How is it that he is able to draw so much more after 1893 than he ever did before? It must be remembered that whatever the Secretary of State does with the funds in London he must pay for his drawings in India. Before 1893 he drew less because his means of payment were less; after 1893 he drew more because his means of payment were greater. And why were his means of payment greater? Simply because he had been able to coin rupees. Indeed, the amount of drawings are limited by the demand for them and by his capacity to coin rupees. It is therefore foolish to blame the Secretary of State for betraying the interests of India and at the same time to permit him to coin rupees, the very means by which he is able to betray. If a gold currency is wanted, and it is wanted because the rupee is a bad standard of value, then what is necessary is not to put a limit on the drawings of the Secretary of State or the opening of a gold Mint, but a short enactment stopping the coinage of rupees. Then only gold—made legal tender, at a suitable ratio with the rupee—will become a part of Indian 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 remarked⁴²⁰:—

“… We have been nearly swamped … by gold …” [pg 275]

⁴¹⁹ _Financial Statement_, 1900–1, p. 14.

⁴²⁰ _Ibid._, p. 19.

The transformation in the currency position which then took place was graphically described by Lord Curzon, the then Viceroy, in the following words⁴²¹:—

“Mr. Dawkins … has successfully inaugurated the new era under
which the sovereign has become legal tender in India, and
stability in exchange has assumed what we hope may be a
stereotyped form. This great change has been introduced in
defiance of the vaticinations of all the prophets of evil, and
more especially of the particular prophecy that we could not get
gold to come to India, that we could not keep it in our hands if
we got it here, but that it would slip so quickly through our
fingers that we should have even to borrow to maintain the
necessary supply. As a matter of fact, we are almost in the
position of the mythological king, who prayed that all he
touched might be turned into gold, and was then rather painfully
surprised when he found that his food had been converted into
the same somewhat indigestible material. So much gold, indeed,
have we got, that we are now giving gold for rupees as well as
rupees for gold, i.e. we are really in the enjoyment of complete
convertibility—a state of affairs which would have been derided
as impossible by the experts a year ago.”

⁴²¹ _Ibid._, p. 167.

Compare this state of affairs in 1900–1 with that found to exist in 1910–11, for instance. Speaking of the currency situation as it was in that year, the Hon. Sir James (now Lord) Meston, observed⁴²²:—

“We have passed through many changes in currency policy and made
not a few mistakes. But the broad lines of our action and our
objects are clear and unmistakable, and there has been no great
or fundamental sacrifice of consistency in progress towards our
ideal. Since the Fowler Committee that progress has been real
and unbroken. There is still one great step forward before the
ideal can be reached. We have linked India with the gold
countries of the world, we have reached a gold-exchange
standard, which we are steadily developing and improving. The
next and final step is a true gold currency. That, I have every
hope, will come in time. …” [pg 276]

⁴²² _Financial Statement_, 1910–11, p. 346.

Leaving aside for the moment the extenuatory remarks of the speaker, the fact remains that in 1900 India had a gold currency. But, taking stock of the position at the end of 1910, it had ceased to have it. What is it that made this difference? Nothing but the fact that between 1893–1900 no rupees were coined, but between 1900–1910 the number of rupees coined was enormous. During the first period the inducement to coin rupees was very great indeed. The exchange was not quite stable, and the Government had still to find an increasing number of rupees to pay for the “Home Charges.” And an Honourable Member⁴²³ of the Supreme Legislative Council actually asked:—

“Is there any objection to the Government working the Mints on
their own account? Considering the low value of silver and the
great margin between the respective prices of bullion and the
rupee, would not Government by manufacturing rupees for itself
make sufficient profit to meet at least a substantial portion of
the present deficit? It seems to me to be a legitimate source
of revenue and one capable of materially easing our finances.”

⁴²³ This was no other than the Hon. Fazulbhai Vishram, the well-known
financier of Bombay. Cf. his speech in the _Financial Statement_,
1894–95, p. 96.

But Sir James Westland, who was then in charge of the finances of India, replied⁴²⁴:—

“I must confess to a little surprise in finding the proposal put
forward by one of the commercial members of your Excellency’s
Council that we should buy silver at its present low price, and
coin it for issue at the appreciated value of the rupee. … I
shall certainly refuse myself to fall into this temptation.”

⁴²⁴ _Ibid._, p. 123.

Again, in 1898, when some of the followers of Mr. Lindsay desired that Government should coin rupees to relieve the monetary stringency, Sir James Westland remarked⁴²⁵:—

“… in our opinion the silver standard is now a question of the
past. It is a case of _vestigia nulla retrorsum_. [pg 277] The
only question before us is how best to attain the gold standard.
We cannot go back to the position of the open Mints. There are
only two ways in which we can go back to that position. We can
either open the Mints to the public generally, or we can open
them to coinage by ourselves. In either case what it means is
that the value of the rupee will go down to something
approaching the value of silver. If the case is that of opening
the Mints to the public, the descent of the rupee will be rapid.
If it is that of opening only to coinage by the Government, the
descent of the rupee may be slow but it will be no less
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 replied⁴²⁶:—

“I think I ought … to beg my hon. friend not to dangle the
profits on silver too conspicuously before the eyes even of a
most virtuous Government. Once let these profits become a
determining factor in your action, then good-bye stability.”

⁴²⁶ _Financial Statement_, 1900–1, p. 163.

Another instance of the Government’s determination not to coin rupees is furnished by inquiring into the reasons as to why it is that the Government has never assumed the responsibility of selling council bills in indefinite amount and at a fixed rate. The Chamberlain Commission argued that the Government cannot undertake such a responsibility because it cannot hold out for a fixed rate, and may have to sell at any rate even lower than par. This is true so far as it is a confession of a position weakened by the Government’s folly of indulging in excessive rupee coinage. But this was certainly not the explanation which the Government gave in 1900 when it was first asked to assume that responsibility. The Government knew perfectly well that to keep on selling bills indefinitely was to keep on coining rupees indefinitely. They refused to assume that responsibility because they did not want to coin rupees. That this was the original reason was made quite plain by the Hon. Mr. Dawkins,⁴²⁷ [pg 278] who reminded those who asked Government to undertake such a responsibility that

“the silver coin reserve of Government in consequence rapidly
neared a point at which it was impossible to continue to meet
unlimited transfers [i.e. council bills]. Therefore the
Secretary of State decided to limit the demands by gradually
raising the rate, thus meeting the most urgent demands, and
weeding out the less urgent, while warning those whose demands
were not so urgent to ship gold to India. No other course was
practicable. The liability of the Secretary of State to keep
the tap turned on indefinitely at 1s. 4 5/32d. has been
asserted. But I cannot see that any positive liability exists,
and I wonder if those who assert its existence would have
preferred that the stability of our currency (whose situation
they are well able to appreciate and follow) should have been
affected by the reserve of rupees being dangerously reduced?”
[and which could not be augmented except by coining more
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 agreed⁴²⁹ that this was a departure from the ideal of the Fowler Committee. In what precise respect the Government has departed from the recommendations of the Fowler Committee has, however, never been made clear anywhere in the official or non-official literature on the subject of Indian currency. What were the recommendations of the Fowler Committee? It is usually pointed out, to the shame of the Government of India, that the Fowler Committee had said (it is as well to repeat it):—

“We are in favour of making the British sovereign a legal tender
and a current coin in India. We also consider that, at the same
time, the Indian Mints should be thrown open to the unrestricted
coinage of gold. … Looking forward as we do to the effective
establishment of a gold standard and currency based on the
principles of the free inflow and outflow of gold, we recommend
these measures for adoption.”

⁴²⁹ Even the Chamberlain Commission said that the Government had
departed from the ideal of the Fowler Committee.

That is true. But those who have blamed the Government have forgotten that the same Committee also recommended that—

“The exclusive right to coin fresh rupees must remain vested in
the Government of India; and though the existing stock of rupees
may suffice for some time, regulations will ultimately be needed
for providing such additions to the silver currency as may prove
necessary. The Government should continue to give rupees for
gold, but fresh rupees should not be coined until the proportion
of gold in the currency is found to exceed the requirements of
the public. We also recommend that any profit on the coinage of
rupees should not be credited to the revenue or held as a
portion of the ordinary balance of the Government of India, but
[pg 284] should be kept in gold as a special reserve, entirely
apart from the paper-currency reserve and the ordinary Treasury
balances” [and be made freely available for foreign remittances
whenever the exchange falls below specie point].

Taking the two recommendations of the Committee together, where is the departure? What the Government has done is precisely what the Committee had recommended. That the Government of India or the Chamberlain Commission should have admitted for a moment that there was a departure is not a little odd, for the very despatch which conveyed the Minute of Sir Edward Law to the Secretary of State opens with remarks which show that Government was earnestly following the recommendations of the Fowler Committee. It runs:—

“In our despatch No. 301 of August 24, 1899, we wrote with
reference to paragraph 60 of the Report of the Indian Currency
Committee [i.e. the Fowler Committee], that any profit made on
rupee coinage should be held in gold as a special reserve, has
not escaped our attention; but the need for the coinage of
additional rupees is not likely to occur for some time, and a
decision on this point may be conveniently deferred.”

What Sir Edward Law did was to carry that recommendation into effect when the occasion arrived. In view of this it is useless to belabour the Government of India if the ideal of a gold standard with a gold currency was defeated by the coinage of rupees. But, even though the Government has in ignorance taken the blame on itself, it cannot be rightly thrown at its door. If the project has been defeated by the coinage of rupees, the question must be referred to the Fowler Committee. Why did the Committee permit the coinage of rupees? There is no direct answer, but it may be guessed. It seems the Committee first decided that there should be a gold standard and a gold currency as desired by the Government of India. But then they seemed to have been worried by the question whether in the ideal they had sketched they had made enough provision for the maintenance of the gold value of the rupee. [pg 285]

In the view of the opponents of the Government of India the rupee ought to have been made either convertible as a bank note or a limited legal tender as a shilling. The Committee rejected both these demands as being unnecessary. Stating their ground for refusing to reduce the rupee to the status of a shilling, the Committee argued⁴³⁰:—

“It is true that in the United Kingdom the silver currency has a
fixed limit of 40s., beyond which it cannot be used to pay a
debt. … While it cannot be denied that 40s. limitation tends to
emphasize and maintain the subsidiary character of our silver
coinage, yet the essential factor in maintaining those tokens at
their representative nominal value is not the statutory limit on
the amount for which they are a legal tender in any one payment,
but the limitation of their total issue. Provided the latter
restriction is adequate, there is no essential reason why there
need be any limit on the amount for which tokens are a tender by
law.”

⁴³⁰ Report, par. 56.

Regarding the necessity for convertibility the Committee observed⁴³¹:—

“Outside the United Kingdom there are two principal instances of
countries with a gold standard and currency, which admit silver
coins to unlimited tender. These countries are France and the
United States of America. In France the five-franc piece is an
unlimited tender and for all internal purposes is equivalent to
gold. The same remark applies in the United States to the
silver dollar. … Both in France and the United States the Mints
are now closed to the coinage of silver coins of unlimited
tender. In neither country are such coins convertible by law
into gold; in both countries alike they are equivalent to gold
for all internal purposes. For international payments, so far
as specie is concerned, France and the United States depend
ultimately on the international medium of exchange, which is
gold. In the last resort, it is their gold which, acting
through the foreign exchanges, maintains the whole mass of their
currency at its nominal value for internal purposes.

⁴³¹ Report, pars. 57–60.

“The position of the currency question in India being [pg 286]
such as we have explained in the preceding paragraph, we do not
consider it necessary to recommend a different policy in the
case of that country from that which is found sufficient in
France and the United States, by imposing a legal obligation on
the Government of India to give gold for rupees, or, in other
words, to substitute the former for the latter on the demand of
the holders. This obligation would impose on the Government of
India a liability to find gold at a moment’s notice to an amount
which cannot be defined beforehand, and the liability is one
which, in our opinion, ought not to be accepted.”

Although confident of its opinions, the Committee was considerably impressed by those who, owing to the large quantity of rupees in circulation, entertained doubts

“whether the mere closing of the Indian Mints to silver would in
practice be attended with such a restriction of the rupee
currency as would make the rupee permanently exchangeable for
gold at a fixed rate.”

So much was the Committee shaken by these doubts that it admitted that⁴³²

“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 Committee⁴³⁵ by way of modifying the proposals of the Government of India, submitted to it in 1892, had introduced a proviso by which the Mints, although closed to the public, were to remain open to the Government for the coinage of rupees—a proviso which, by the way, reveals that after all that imposing survey the Committee remained supremely ignorant of the secret why in the monetary systems it investigated the currency maintained its parity with gold with little or no gold. If it had understood [pg 289] that it was limitation of issue which maintained this parity it would not have introduced the proviso which it did. However pernicious the proviso, the Committee must be excused for that indiscretion, for it was afraid that owing to the Mint closure there might be a sudden contraction of currency, and as it had not made gold general legal tender it had to provide for the necessary addition to the currency, and this it thought could best be done by Government having the power to coin rupees. Fortunately for the Government the occasion for an addition did not arise for some time, till 1898, and there was therefore no necessity to exercise that power. But when such an occasion did arise the Government, as was pointed out before, refused to exercise that power—and held to the view that the additions to Indian currency, instead of being made by further coinage of rupees, should be made by an influx of gold. The Government was the strongest opponent of Mr. Lindsay, who was then agitating that it was safe and economical to compel it to make the necessary additions by undertaking to coin rupees. It was to adjudicate in the dispute between the Government of India on the one hand and Mr. Lindsay on the other, the former desiring additions by gold coinage and the latter by rupee coinage, that the Fowler Committee was called into being. If the Government was anxious to add to the currency by coining more rupees rather than by the influx of gold, there was no necessity to appoint the Fowler Committee. Such a power had already been given to it by the Herschell Committee. It was because the Government did not want to exercise that ill-charged power that an appeal to a new Committee became necessary. Faced with this immediate problem of how best to expand the currency in relief of monetary stringency, the Committee had solved it in one part of its Report by prescribing that gold should be made legal tender, so that any debtor who was unable to find rupees could have the option of paying his creditors in gold. If gold was allowed to be the general medium of exchange, was not the proposal to coin rupees a superfluous one, quite uncalled for?

⁴³⁵ _See_ Chap. IV, _supra_, p. 147.

Thirdly, could the proposal to coin rupees as a means of [pg 290] building up a gold reserve be justified as calculated to maintain the value of the rupee? The one thing essential to the maintenance of the value of the rupee was a limitation on its issue. The Committee talked in a very learned manner about the shilling as being maintained in value in consequence of a limitation in its issue. But did it understand how the shilling was maintained limited in quantity? If it is true that it is not the limit on legal tender, but the limit on the total volume, that maintains the value of the shilling, why is not the shilling issued in unlimited quantities? The manufacture of the shilling is profitable in the same way as is the manufacture of the rupee. Why does not the British Government coin it in unlimited quantities? Only because shillings cannot be paid out in unlimited quantities? If the Government could pay its Chancellors of Exchequer, Cabinet Ministers, and the hosts of officials and clerks, and if they in turn could pay their grocers, milkmen, brewers, and butchers in shillings, there could be nothing to prevent the over-issue of shillings. But it is because nobody can pay out shillings in unlimited quantities that nobody will have them in unlimited quantities. It is the absence of a wholesale market, so to say, due to a limit on legal tender, that stops the Government from indulging in the over-issue of shillings. The Committee was therefore wrong in arguing that the limit on legal tender had nothing to do with the maintenance of the value of the shilling. On the other hand, if limitation of issue is the prime condition which maintains the value of a token coin, one means of making such a limit effective is to put a limit on its legal tender.

With regard to its views on convertibility, its reasoning was equally confused. To say what was sufficient for France and America should be sufficient for India, was like the blind leading the blind. It was entirely erroneous to argue that it was not convertibility but their 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 says⁴³⁷:—