Chapter VI: Section I: of Act XVII of 1835. This Act had also authorized (1)

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

TABLE VIII

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

¹⁰³ Sect. IV of Act XIX of 1861.

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

¹⁰⁵ Act XIX, Sec. X.

¹⁰⁶ Act III, Sec. 16.

¹⁰⁷ Act XV, Sec. I.

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

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

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

¹⁰⁹ For a clear and concise sketch of the organization of the paper
currency in India, _see_ the Note of the Government of India in
the Report of the U.S. Director of the Mint, Washington, 1894, pp.
231—33.

¹¹⁰ Sec. 3 of Act III.

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

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

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

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

It must, however, be borne in mind that it was not the intention of the Indian Legislature to make the Indian currency as economical¹¹⁵ as was desired by the Executive Government. The Legislature was no doubt appealed to by the original author of the paper currency to turn India into a new Peru, where as much currency could be had with as little cost,¹¹⁶ but the Legislature showed a rather prudent reserve on the matter of aiding the consummation of such a [pg 59] policy. As the centres of encashment were so few, and the area included within each so large as to separate the furthest point in a circle by a distance of about 700 miles from the centre of encashment of the circle, it viewed with dread the authorizing of notes of smaller denomination which the poor could not refuse and yet could not cash.¹¹⁷ Besides the hardship involved in the want of encashability in the notes, the Legislature feared they would prove a “fugitive treasure” in the hands of the Indian peasant. Not being able to preserve them from rain and ants, he might have had to pay a heavy discount to be rid of the notes he could have been forced to accept.¹¹⁸ So opposed was the Legislature to the economizing clauses of the Paper Currency Bill as contrived to drive out metallic currency that it gave the Government an option to choose between legal-tender notes but of higher denomination and lower-denomination notes but of no legal-tender power.¹¹⁹ And as the Government chose to have legal-tender notes, the Legislature in its turn insisted on their being of higher denomination. At first it adhered to notes of Rs. 20 as the lowest denomination, though it later on yielded to bring it down to 10, which was the lowest limit it could tolerate in 1861. Not till ten years after that did the Legislature consent to the issue of Rs. 5 notes, and that, too, only when the Government had promised to give extra legal facilities for their encashment.¹²⁰ On the whole, the desire of the Indian Legislature was to make the Indian currency safer, rather than economical, and such it undoubtedly was. [pg 60]

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

(_Van Den Berg, loc. cit._)

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

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

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

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

¹²⁵ Op. cit., p. 7.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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