INDIAN CURRENCY AND FINANCE
MACMILLAN AND CO., Limited
LONDON • BOMBAY • CALCUTTA
MELBOURNE
THE MACMILLAN COMPANY
NEW YORK • BOSTON • CHICAGO
DALLAS * SAN FRANCISCO
THE MACMILLAN CO. OF CANADA, Ltd.
TORONTO
INDIAN CURRENCY
AND FINANCE
BY
JOHN MAYNARD KEYNES
FELLOW OF king’s COLLEGE, CAMBRIDGE
MACMILLAN AND CO., LIMITED
ST. MARTIN’S STREET, LONDON
* 9*3
COPYRIGHT
PREFACE
When all but the last of the following chapters were
already in type, I was offered a seat on the Royal
Commission (1913) on Indian Finance and Currency.
If my book had been less far advanced, I should, of
course, have delayed publication until the Commission
had reported, and my opinions had been more fully
formed by the discussions of the Commission and by
the evidence placed before it. In the circumstances,
however, have N decided to publish immediately
what I Md already Written, without the addition of
certain other chapters which had been projected. The
book, as it now stands, is wholly prior in date to
the labours of the Commission.
J. M. KEYNES.
King’s College, Cambridge,
12 th May 1913.
CONTENTS
CHAPTER I
PAGE
The Present Position oe the Rupee . . 1
CHAPTER II
The Gold-Exchange Standard . . . .15
CHAPTER III
Paper Currency . . . . . 37
CHAPTER IV
The Present Position oe Gold in India and Proposals
eor a Gold Currency . . . .63
CHAPTER V
Council Bills and Remittance . . . .102
CHAPTER VI
The Secretary oe State’s Reserves and the Cash
Balances . . . • • .124
vii
INDIAN CURRENCY AND FINANCE
viii
Indian Banking
CHAPTEE VII
CHAPTEE VIII
The Indian Bate of Discount
INDEX
PAGE
195
240
261
Chart showing the Bate of Discount at the Presidency
Bank of Bengal .... Face page 240
CHAPTER I
THE PRESENT POSITION OE THE RUPEE
1. On the broad historical facts relating to Indian
currency, I do not intend to spend time. It is
sufficiently well known that until 1893 the currency
of India was on the basis of silver freely minted,
the- gold value of the rupee fluctuating with the gold
value of silver bullion. By the depreciation in the
gold value of silver, extending over a long period of
years, trade was inconvenienced, and Public Finance,
by reason of the large payments which the Govern¬
ment must make in sterling, gravely disturbed; until
in 1893, after the breakdown of negotiations for
bimetallism, the Indian Mints were closed to the
free mintage of silver, and the value of the rupee
divorced from the value of the metal contained in
it. By withholding new issues of currency, the
Government had succeeded by 1899 in raising the
gold value of the rupee to Is. 4d., at which figure it
has remained without sensible variation ever since.
2. There can be no doubt that at first the Govern¬
ment of India did not fully understand the nature of
2
INDIAN CURRENCY AND FINANCE
CHAP.
the new system; and that several minor mistakes were
made at its inception. But few are now found who
dispute on broad general grounds the wisdom of the
change from a silver to a gold standard.
Time has muffled the outcries of the silver
interests, and time has also dealt satisfactorily with
what were originally the principal grounds of criticism,
namely,—
(1) that the new system was unstable,
(2) that a depreciating currency is advantageous
to a country’s foreign trade.
3. The second of these complaints was urged with
great persistency in 1893. The depreciating rupee
acted, it was said, as a bounty to exporters; and the
introduction of a gold standard, so it was argued,
would greatly injure the export trade in tea, corn, and
manufactured cotton. It was plainly pointed out by
theorists at the time (a) that the advantage to
exporters was largely at the expense of other members
of the community and could not profit the country
as a whole, and (b) that it could only be temporary.
The recent spell of rising prices in India has
shown clearly in how many ways a depreciating
currency damages large sections of the community,
although it may temporarily benefit other sections.
In fact, some recent complaints against the existing
currency policy have been occasioned by the tendency
of prices to rise; whereas it is plain that the great
change of 1893 must have tended to make them fall,
I
THE PRESENT POSITION OF THE RUPEE
3
and that rupee prices would, in all probability, be
higher than they now are, if the change had not been
effected.
With regard to the temporary nature of the effect
on exporters, experience has decisively supported
theory. The nature of this experience was admirably
summed up by Mr. J. B. Brunyate in the Legislative
Council (February 25, 1910), speaking in reply to
the similar line of argument brought forward by the
Bombay mill-owning interests in connexion with the
imposition in 1910 of a duty on silver. 1
1 Mr. Brunyate spoke as follows:—“Many here will remember the
arguments used on behalf of the tea-planting industry. At that time India
and China had been competing together for years on the same footing as
regards currency- It was argued that the disturbance of the exchange, the
appreciation of the rupee and the depieciation of silver, might not only result
in India’s ascendancy in regard to tea being wrested from her, but in the
entire and irretrievable ruin of the tea industry. I am quoting the words
actually used by the Darjeeling Planters’ Association in 1892. In the year
before the closing of the Mints India exported 115 million pounds of tea to
foreign countries, and by 1909 had a little more than doubled that amount.
Almost exactly the same arguments were used in regard to the cotton industry,
and here I must enter into more detail. What the mill-owners feared, and
had excellent reason for fearing, was an enormous depreciation in silver.
This actually took place. In 1892-93, the year before the Mints were closed,
the average value of silver per ounce was nearly 40d. The next year it fell to
33 Jd.; the year after to about 29d.; and it stayed at or below SOd. for some
years. Surely here were the conditions in which a disastrous stimulus to
production in China might have been expected. The so-called bounty in
this case was not 2 per cent but 25 per cent It was not a temporary
decline which might be counterbalanced by other causes in the course of a
single month. It continued for years, and as we all know silver has not
since returned to a price anything like 40d. an ounce. In addition, just
before the closing of the Mints occurred there had been considerable over¬
trading, and the mills had actually been working short time for some months
before to enable the Chinese markets to dispose of their accumulated stocks.
There was, as a matter of fact, a fall in exports in 1893-94 partly due to the
dislocation arising from the changes in our currency system and partly to the
existing glut of the Chinese market The exports picked up, however, in
1894-95, and it would appear that the adjustment of prices and wages in
4
INDIAN CURRENCY AND FINANCE
CHAP.
4. The criticisms of 1893, therefore, are no longer
heard, and the Currency Problems with which we are
now confronted are new. The evolution of the
Indian currency system since 1899 has been rapid,
though silent. There have been few public pro¬
nouncements of policy on the part of Government,
and the legislative changes have been inconsiderable.
Yet a system has been developed, which was con¬
templated neither by those who effected nor by those
who opposed the closing of the Mints in 1893, and
which was not favoured either by the Government or
by the Fowler Committee in 1899, although some¬
thing like it was suggested at that time. It is not
possible to point to any one date at which the cur¬
rency policy now in force was deliberately adopted.
The fact that the Government of India have drifted
into a system and have never set it forth plainly is
partly responsible for a widespread misunderstanding
of its true character. But this economy of explanation,
from which the system has suffered in the past, does
China to the extraordinary new conditions began very quickly, for I find
it stated that by the first month of 1894 the mills were again working
steadily and profitably. I may perhaps give the actual figures. In 1891-92
the exports of yarn had been 161 million pounds. In 1892-93 the inflated
year just preceding the closing of the Mints, they rose to 189 million pounds.
In 1893-94 they fell (as I have said) to 134 millions, but went up again the
following year to 159 millions. In 1902-3 and 1903-4, though by this
time the value of silver had now fallen to 24d., the exports were about
250,000,000 pounds, and in 1905-6 they reached the record figure of 298
millions. In the last two or three years there has been a falling off, owing
to various causes, but the amount exported in 1908-9 was as much as 235
millions, and in the exports to China in particular there was a marked
improvement. ”
I
THE PRESENT POSITION OF THE RUPEE
5
not make it any the worse intrinsically. The prophecy
made before the Committee of 1898 by Mr. A. M.
Lindsay, in proposing a scheme closely similar in
principle to that which was eventually adopted, has
been largely fulfilled. “ This change,” he said, “ will
pass unnoticed, except by the intelligent few, and it
is satisfactory to find that by this almost imper¬
ceptible process the Indian currency will be placed on
a footing which Eicardo and other great authorities
have advocated as the best of all currency systems,
viz., one in which the currency media used in the
internal circulation are confined to notes and cheap
token coins, which are made to act precisely as if
they were bits of gold by being made convertible
into gold for foreign payment purposes.”
5. In 1893 four possible bases of currency
seemed to hold the field: debased and depreciating
currencies usually of paper; silver; bimetallism; and
gold. It was not to be supposed that the Govern¬
ment of India intended to adopt the first; the second
they were avowedly upsetting; the third they had
attempted, and had failed, to obtain by negotiation.
It seemed to follow that their ultimate objective
must be the last—namely, a currency of gold. The
Committee of 1892 did not commit themselves; but
the system which their recommendations established
was generally supposed to be transitional and a first
step towards the introduction of gold. The Com¬
mittee of 1898 explicitly declared themselves to be
6
INDIAN CURRENCY AND FINANCE
CHAP.
in favour of the eventual establishment of a gold
currency.
This goal, if it was their goal, the Government of
India have never attained. The rupee is still the
principal medium of exchange and is of unlimited
legal tender. There is no legal enactment compelling
any authority to redeem rupees with gold. The
fact that since 1899 the gold value of the rupee has
only fluctuated within narrow limits is solely due to
administrative measures which the Government are
under no compulsion to undertake. What, then, is
the present position of the rupee ?
6. The main features of the Indian system as now
established are as follows :—
(1) The rupee is unlimited legal tender and, so
far as the law provides, inconvertible.
(2) The sovereign is unlimited legal tender at £l
to 15 rupees, and is convertible at this rate, so long
as a Notification issued in 1893 is not withdrawn,
i.e., the Government can be required to give 15 rupees
in exchange for £1.
(3) As a matter of administrative practice, the
Government is, as a rule, willing to give sovereigns
for rupees at this rate; but the practice is some¬
times suspended and large quantities of gold cannot
always be obtained in India by tendering rupees.
(4) As a matter of administrative practice, the
Government will sell in Calcutta, in return for rupees
tendered there, bills payable in London in sterling
I
THE PRESENT POSITION OF THE RUPEE
7
at a rate not more unfavourable than Is. 3f-fd. per
rupee.
The fourth of these provisions is the vital one for
supporting the sterling value of the rupee; and,
although the Government have given no binding under¬
taking to maintain it, a failure to do so might fairly
be held to involve an utter breakdown of their system.
Thus the second provision prevents the sterling
value of the rupee from rising above Is. 4d. by more
than the cost of remitting sovereigns to India, and
the fourth provision prevents it from falling below
Is. 3f-fd. This means in practice that the extreme
limits of variation of the sterling value of the rupee
are Is. 4§d. and Is. 3§fd.
7. The important characteristics of the Indian
system are so much a matter of notification and
administrative practice that it is impossible to point
to single Acts which have made the system what it
is. But the following list of dates may be useful
for purposes of reference :—
1892. Herschell Committee on Indian Currency.
1893. Act closing the Indian mints to the coinage of
silver on private account. Notifications by Govern¬
ment fixing the rate, at which rupees or notes
would be supplied in exchange for the tender of
gold, at the equivalent of Is. 4d. the rupee.
1898. Fowler Committee on Indian Currency. Exchange
value of rupee touched Is. 4d.
1899. Act declaring the British sovereign legal tender at
Is. 4d. to the rupee.
8
INDIAN CURRENCY AND FINANCE
CHAP.
1899-1903. Negotiations for coinage of sovereigns in India
(dropt indefinitely Feb. 6, 1903).
1900. Gold Standard Reserve instituted out of profits of
coinage.
1904. Secretary of State’s notification of his willingness to
sell Council Bills on India at Is. 4-^-d. the rupee
without limit.
1905. Act authorising the establishment of the Currency
Chest of “ earmarked ” gold at the Bank of England
as part of the Currency Reserve against notes, 1
and the investment of a stated part of the Currency
Reserve in sterling securities.
1906. The Notification withdrawn which had directed the
issue of rupees against the tender of gold (as dis¬
tinguished from British gold coin).
1907. Rupee branch of the Gold Standard Reserve instituted.
1908. Sterling drafts sold in Calcutta on London at
Is. 3|~|d. the rupee, and cashed out of funds from
the Gold Standard Reserve.
1910. Act rendering Currency notes of Rs. 10 and 50
universal legal tender, 2 and directing the issue of
notes in exchange for British gold coins.
1913, Royal Commission on Indian Finance and Currency.
8. In § 6 I liave stated the practical effect of
these successive measures. But the legal position is so
complicated and peculiar, that it will be worth while
to state it quite precisely. Previous to 1893 the
Government were bound by the Coinage Act of 1870
to issue rupees, weight for weight, in exchange for
silver bullion. There was also in force a Notification
of the Governor-General in Council, dating from 1868,
1 There had been temporary Acts to the same effect in 1898 and 1900.
2 Notes of Rs. 100 were tmiversalised in 1911 by Notification under this
Act.
I
THE PRESENT POSITION OF THE RUPEE
9
by which sovereigns were received at Government
Treasuries as the equivalent of ten rupees and four
annas. This Notification, which had superseded a
Notification of 1864 fixing the exchange at ten rupees,
had long been inoperative (as the gold exchange
value of ten rupees four annas had fallen much below
a sovereign). The Act of 1893 was merely a repeal¬
ing Act, necessary in order to do away with those
provisions of the Act of 1870 which provided for the
free mintage of silver into rupees. At the same time
(1893) the Notification of 1868 was superseded by a
new Notification fixing fifteen rupees as the rate at
which sovereigns would be accepted at Government
Treasuries; and a Notification was issued under the
Paper Currency Act of 1882, directing the issue of
currency notes in exchange for gold at the Rs. 15 to
£1 ratio. The direct issue of rupees against the
tender of gold also has been regulated by a series of
Notifications, of which the first was published in
1893, up to 1906 rupees being issued against either
gold coin or gold bullion; and since 1906 against
sovereigns and half-sovereigns only. Apart from
Notifications, an Act of 1899 declared British
sovereigns legal tender at the Rs. 15 to £1 ratio,
an indirect effect of which was to make it possible for
Government, so far as Acts are concerned, to redeem
notes in gold coin and refuse silver. And lastly, the
Paper Currency Act of 1910 bound the Government
to issue notes against the tender of British gold coin.
IO INDIAN CURRENCY AND FINANCE chap.
The convertibility of the sovereign into rupees at
the Es. 15 to £1 ratio is not laid down, therefore,
in any Act whatever. It depends on Notifications
withdrawable by the Executive at will. Further,
the management of the Gold Standard Reserve
is governed neither by Act nor by Notification, but
by administrative practice solely; and the sale of
Council Bills on India and of sterling drafts on
London is regulated by announcements changeable at
administrative discretion from time to time.
All this emphasises the gradual nature of the
system’s growth, and the transitional character of
existing legislation. As matters now are, there is
something to be said for a new Act, which, while
leaving administrative discretion free where there is
still good ground for this, might consolidate and
clarify the position.
9. As a result of these various measures, the rupee
remains the local currency in India, but the Govern¬
ment take precautions for ensuring its convertibility
into international currency at an approximately stable
rate. The stability of the Indian system depends
upon their keeping sufficient reserves of coined
rupees to enable them at all times to exchange inter¬
national currency for local currency; and sufficient
liquid resources in sterling to enable them to change
back the local currency into international cur¬
rency, whenever they are required to do so. The
special features of the system, although, as we shall
i THE PRESENT POSITION OF THE PUP&E\ n
see later, these features are not in fact by any\ft ^j$g,
peculiar to India, are: first, that the actual medium
of exchange is a local currency distinct from the
international currency; second, that the Government
is more ready to redeem the local currency (rupees)
in bills payable in international currency (gold) at
a foreign centre (Loudon) than to redeem it outright
locally; and third, that the Government, having taken
on itself the responsibility for providing local currency
in exchange for international currency and for changing
back local currency into international currency when
required, must keep two kinds of reserves, one for
each of these purposes.
I will deal with these characteristics in successive
chapters. It is convenient to begin with the second
of them and at the outset to discuss in a general
way the system of currency, of which the Indian
is the most salient example, known to students as
the Gold-Exchange Standard. Then we will take
the first of them in Chapters III. and IV. on Paper
Currency and on the Present Position of Gold in
India and Proposals for a Gold Currency; and the
third in Chapter VI. on the Secretary of State’s
Reserves.
10. But before we pass to these several features of
the Indian system, it will be worth while to emphasise
two respects in which this system is not peculiar.
In the first place a system, in which the rupee is
maintained at Is. 4d. by regulation, does not affect
12
INDIAN CURRENCY AND FINANCE
CHAP.
the level of prices differently from, the way in which
it would be affected by a system in which the rupee
was a gold coin worth Is. 4d., except in a very
indirect and unimportant way to be explained in
a moment. So long as the rupee is worth Is. 4d. in
gold, no merchant or manufacturer considers of what
material it is made when he fixes the price of his
product. The indirect effect on prices, due to the
rupee’s being silver, is similar to the effect of the use
of any medium of exchange, such as cheques or notes,
which economises the use of gold. If the use of gold
is economised in any country, gold throughout the
world is less valuable—gold prices, that is to say, are
higher. But as this effect is shared by the whole world,
the effect on prices in any country of economies in
•the use of gold made by that country is likely to be
relatively slight. In short, a policy which led to a
greater use of gold in India would tend, by increasing
the demand for gold in the world’s markets, some¬
what to lower the level of world prices as measured
in gold; but it would not cause any alteration worth
considering in the relative rates of exchange of Indian
1 and non-Indian commodities.
In the second place, although it is true that the
maintenance of the rupee at or near Is. 4d. is due
to regulation, it is not true, when once Is. 4d. rather
than some other gold value has been determined, that
the volume of currency in circulation depends in the
least upon the policy of the Government or the caprice
I
THE PRESENT POSITION OF THE RUPEE
13
of an official. 1 This part of the system is as perfectly
automatic as in any other country. The G-overnment
has put itself under an obligation to supply rupees
whenever sovereigns are tendered, and it often permits
or encourages the tender of sovereigns in London as
well as in India; but it has no power or opportunity
of forcing rupees into circulation otherwise. In two
matters only does the Government use a discretionary
power. First, in order that it may always be possible
to fulfil this obligation, it is necessary to keep a certain
reserve of coined rupees, just as some authority in
this country—in point of fact the Bank of England
—must keep some reserve of token silver and coined
sovereigns and not hold in its vaults too large a
proportion of uncoined or foreign gold. The magni¬
tude of this reserve is within the discretion of the
Indian Government. To a certain extent they must
anticipate probable demands on the output of the
Mint. But if they miscalculate and mint more than
they need, the new rupees must lie in the Government’s
own chests until they are wanted, and the date at
which they emerge into circulation it is beyond the
power of the Government to determine. In the second
1 The Hon. Mr. Dadabhoy, speaking in the Legislative Council in 1910,
argued that “the harmful effects of a further fall in silver {%e, in its bullion
value) can be neutralised by Government by creating a further contraction
in the volume of the currency, and thus producing a greater scarcity of the
rupee, by maintaining the Gold Standard Reserve at a higher figure, and,
further, by more frequent withdrawal of Council Bills from the market.” A
contraction of the currency would not* of course, have the effect supposed,
but the Government could not, in fact, bring about a contraction in the
manner described.
14
INDIAN CURRENCY AND FINANCE chap, i
place, the Government can postpone for a short time
a demand for rupees by refusing to supply them in
return for sovereigns tendered in London and by
insisting upon the sovereigns being sent to Calcutta.
Sometimes they do this, but very often it is worth
their while, for reasons to be explained in detail later
on, to accept the tender of sovereigns in London.
In either of these cases the permanent effect of their
action one way or the other on the volume of circu¬
lation is inconsiderable. The kind of difference it
makes is comparable to the difference which would
be made if it lay within the discretion of a government
to charge or not, as it saw fit, a small brassage not
much greater than the cost of coining. 1
1 This question of the power of Government over the volume of circulation
is discussed in much greater detail in § 8 of Chapter Y.
CHAPTER II
THE GOLD-EXCHANGE STANDARD
1. If we are to see the Indian system in its proper
perspective, it is necessary to digress for a space to a
discussion of currency evolution in general.
My purpose is, first, to show that the British
system is peculiar and is not suited to other condi¬
tions ; second, that the conventional idea of “ sound ”
currency is chiefly derived from certain superficial
aspects of the British system ; third, that a somewhat
different type of system has been developed in most
other countries; and fourth, that in essentials the
system which has been evolved in India conforms to
this foreign type. I shall be concerned throughout
this chapter with the general characteristics of cur¬
rency systems, not with the details of their working.
2. The history of currency, so far as it is relevant
to our present purpose, virtually begins with the
nineteenth century. During the second quarter of
this century England was alone in possessing an
orthodox “sound” currency on a gold basis. Gold
was the sole standard of value; it circulated freely
is
16 INDIAN CURRENCY AND FINANCE chap.
from hand to hand; and it was freely available for
export. Up to 1844 bank notes showed a tendency
to become a formidable rival to gold as the actual
medium of exchange. But the Bank Act of that year
set itself to hamper this tendency and to encourage
the use of gold as the medium of exchange as well
as the standard of value. This Act was completely
successful in stopping attempts to economise gold by
the use of notes. But the Bank Act did nothing to
hinder the use of cheques, and the very remarkable
development of this medium of exchange during the
next fifty years led in this country, without any
important development in the use of notes or tokens,
to a monetary organisation more perfectly adapted for
the economy of gold than any which exists elsewhere.
In this matter of the use of cheques Great Britain
has been followed by the rest of the English-speaking
world — Canada, Australia, South Africa, and the
United States of America. But in other countries
currency evolution has been, chiefly, along different
lines.
3. In the early days of banking of the modern
type in England, gold was not infrequently required
to meet runs on banks by their depositors, who were
always liable in difficult times to fall into a state of
panic lest they should be unable to withdraw their
deposits in case of real need. With the growth
of the stability of banking, and especially with
the growth of confidence in this stability amongst
II
THE GOLD-EXCHANGE STANDARD
17
depositors, these occasions have become more and
more infrequent, and many years have now passed
since there has been any run of dangerous proportions
on English banks. Gold reserves, therefore, in Great
Britain are no longer held primarily with a view
to emergencies of this kind. The uses of gold coin
in Great Britain are now three—as the medium of
exchange for certain kinds of out-of-pocket expendi¬
ture, such as that on railway travelling, for which
custom requires cash payment; for the payment
of wages ; and to meet a drain of specie abroad.
Fluctuations in the demand for gold in the first
two uses are of secondary importance, and can usually
be predicted with a good deal of accuracy,—at holiday
seasons, at the turn of the quarter, at the end of the
week, at harvest. Fluctuations in the demand in the
third use are of greater magnitude and, apart from
the regular autumn drain, not so easily foreseen.
Our gold reserve policy is mainly dictated, therefore,
by considerations arising out of the possible demand
for export. ,
To guard against a possible drain of gold abroad,
a complicated mechanism has been developed which
in the details of its working is peculiar to this
country. A drain of gold can only come about if
foreigners choose to turn into gold claims, which they
have against us for immediate payment, and we have
no counterbalancing claims against them for equally
immediate payment. The drain can only be stopped
i8
INDIAN CURRENCY AND FINANCE
CHAP.
if we can rapidly bring to bear our counterbalancing
claims. When we come to consider how this can best
be done, it is to be noticed that the position of a
country which is preponderantly a creditor in the
international short-loan market is quite different from
that of a country which is preponderantly a debtor.
In the former case, which is that of Great Britain, it
is a question of reducing the amount lent; in the
latter case it is a question of increasing the amount
borrowed. A machinery which is adapted for action
of the first kind may be ill suited for action of the
second. Partly as a consequence of this, partly as a
consequence of the peculiar organisation of the London
Money Market, the ‘‘bank rate” policy for regulating
the outflow of gold has been admirably successful in
this country, and yet cannot stand elsewhere unaided
by other devices. It is not necessary for the purposes
of this survey to consider precisely how changes
in the bank rate affect the balance of immediate
indebtedness. It will be sufficient to say that it tends
to hamper the brokers, who act as middlemen
between the British short-loan fund and the foreign
demand for accommodation (chiefly materialised in the
offer of bills for discount), and to cause them to enter
into a less volume of new business than that of
the short loans formerly contracted and now falling
due, thus bringing to bear the necessary counter¬
balancing claims against foreign countries.
4. The essential characteristics of the British
rx
THE GOLD-EXCHANGE STANDARD
19
monetary system are, therefore, the use of cheques as
the principal medium of exchange, and the use of the
hank rate for regulating the balance of immediate
foreign indebtedness (and hence the flow, by import
and export, of gold).
5. The development of foreign monetary systems
into their present shapes began in the last quarter of
the nineteenth century. At that time London was
at the height of her financial supremacy, and her
monetary arrangements had stood the test of time
and experience. Foreign systems, therefore, were
greatly influenced at their inception by what were
regarded as the fundamental tenets of the British
system. But foreign observers seem to have been
more impressed by the fact that the Englishman had
sovereigns in his pocket than by the fact that he had
a cheque-book in his desk ; and took more notice of
the “ efficacy ” of the bank rate and of the delibera¬
tions of the Court of Directors on Thursdays, than
of the peculiar organisation of the brokers and the
London Money Market, and of Great Britain’s position
as a creditor nation. They were thus led to imitate the
form rather than the substance. When they intro¬
duced the gold standard, they set up gold currencies
as well; and in several cases an official bank rate
was established on the British model. Germany led
the way in 1871-73. Even now apologists of the
Reiehsbank will sometimes speak as if its bank rate
were efficacious by itself in the same manner as the
20
INDIAN CURRENCY AND FINANCE
CHAP.
Bank of England’s. But, in fact, the German system,
though ostensibly modelled in part upon the British
system, has become, by force of circumstances,
essentially different.
It is not necessary for this survey to consider
individual systems in any detail. But, confining
ourselves to European countries, whether we con¬
sider, for example, France, Austria-Hungary, Russia,
Italy, Sweden, or Holland, while most of these
countries have a gold currency and an official Bank
Rate, in none of them is gold the principal medium of
exchange, and in none of them is the bank rate their
only habitual support against an outward drain of gold.
6. With the use of substitutes for gold I will deal
in Chapter IV. in treating of the proper position of
gold in the Indian system. But what props are
commonly brought to the support of an “ ineffective ”
Bank Rate in countries other than Great Britain ?
Roughly speaking, there are three. A very large
gold reserve may be maintained, so that a sub¬
stantial drain on it may be faced with equanimity;
free payments in gold may be partially suspended ;
or foreign credits and bills may be kept which can be
drawn upon when necessary. The Central Banks of
most European countries depend (in varying degrees)
upon all three.
The Bank of France uses the first two, 1 and her
1 For example, in November 1912, “no gold was handed across the
counter at the Bank of France except on the most urgent demand, and then
II
THE GOLD-EXCHANGE STANDARD
21
holdings of foreign bills are not, at normal times,
important. 1 Her bank rate is not fixed primarily with
a view to foreign conditions, and a change in it is
usually intended to affect home affairs (though these
may of course depend and react on foreign affairs).
Germany is in a state of transition, and her
present position is avowedly unsatisfactory. The
theory of her arrangements seems to be that she
depends on her bank rate after the British model;
but in practice her bank rate is not easily rendered
effective, and must usually be reinforced by much
unseen pressure by the Reichsbank on the other
elements of the money market. Her gold reserve is
not large enough for the first expedient to be used
lightly. Free payment in gold is sometimes, in
effect, partially suspended, 2 though covertly and with
the highest sum paid in gold was 300 francs per head. The other banks
followed this example, and the most generous released 200 francs in gold.
All special wishes for payment in money were charged 1 per cent premium.
At the same time, deposits in gold were credited with 1 per cent premium "
(see Bankers' Magazine , December 1912, p. 794). At the beginning of the
month cashiers were charging a premium or commission of 6 f. per 1000 f. for
payments in gold instead of silver (see Economist , November 9, 1912, p. 961).
1 Although the Bank of France only holds an important quantity of
foreign bills (generally sterling), on exceptional occasions, e.g. at the
beginning and end of 1907 and at the end of 1909, foreign paper enters very
largely, through the agency of the great Credit Banks, into the transactions
of the French Money Market. These institutions take foreign bills into
their own portfolios, and obtain the necessary funds by rediscounting
inland bills at the Bank of France. Thus the French mechanism is much
more closely analogous to the British than appears outwardly, and the
influence of the Bank of France, like that of the Bank of England, is mainly
indirect. The possibility of this is no doubt due to the fact that France,
like Great Britain, is a creditor nation in the international short-loan market.
52 For example, in November 1912 there was a premium of nearly f per
cent on gold for export.
22
INDIAN CURRENCY AND FINANCE
CHAP.
shame. To an increasing extent the Beichsbank
depends on variations in her holding of foreign bills
and credits. A few years ago snch holdings were of
small importance. The table given below shows with
what rapidity the part taken by foreign bills and
credits in the finance of the Beichsbank has been grow¬
ing. The authorities of the Beichsbank have now
learnt that their position in the international short
loan market is not one which permits them to fix the
bank rate and then idly to await the course of events.
Reichsbank’s Holdings of Foreign Bills (excluding Credits).
Average for Year.
Maximum.
Minimum.
1895
1900
1905
1906
1907
1908
1909
1910 1
£ 120,000
1 , 270,000
1 , 580,000
2 , 060,000
2 , 223,000
3 , 544,000
5 , 362,000
7 , 032,000
£ 152,000
3 , 540,000
2 , 490,000
2 , 990,000
3 , 000,000
6 , 366,000
7 , 978,000
8 , 855,000
£ 100,000
160,000
970,000
830,000
1 , 130,000
977,800
2 , 824,800
4 , 893,300
i Since 1910 these figures have not been stated in the Reichsbank’s annual reports.
Reichsbane’s Holdings of Foreign Bills and Credits with
Foreign Correspondents on last Day of each Year.
31st Dec.
Bills.
Credits.
Total.
1906
1907
1908
1909
1910
1911
1912
£ 3 , 209,000
1 , 289,000
6 , 457,000
6 , 000,000
8 , 114,000
7 , 114,000
£ 993,000
503,000
1 , 234,000
3 , 369,000
4 , 205,000
1 , 439,000
£ 4 , 202,000
1 , 792,000
7 , 691,000
9 , 369,000
12 , 309,000
8 , 553,000
II
THE GOLD-EXCHANGE STANDARD
23
7 . If we pass from France, whose position as a
creditor country is not altogether unlike Great
Britain’s, and from Germany, which is at any rate
able to do a good deal towards righting the balance
of immediate indebtedness by the sale of securities
having an international market, to other countries of
less financial strength, we find the dependence of
their Central Banks on holdings of foreign bills and
on foreign credits, their willingness to permit a
premium on gold, and the inadequacy of their bank
rates taken by themselves, to be increasingly marked.
I will first mention very briefly one or two salient
facts, and will then consider their underlying meaning,
always with an ultimate view to their bearing on the
affairs of India.
8. To illustrate how rare a thing in Europe a
perfect and automatic gold standard is, let us take
the most recent occasion of stringency—November
1912. The Balkan War was at this time at an acute
stage, but the European situation was only moderately
anxious. Compared with the crisis at the end of
1907, the financial position was one of comparative
calm. Yet in the course of that month there was
a premium on gold of about f per cent in France,
Germany, Russia, Austria-Hungary, 1 and Belgium.
So high a premium as this is as effective in retaining
gold as a very considerable addition to the bank rate.
1 This premium was made possible by the Austro-Hungarian Bank’s
exercising its right to refuse to exchange its bank notes for gold freely.
24
INDIAN CURRENCY AND FINANCE
CHAP.
If, for example, the premium did not last more
than three months, it would add to the profits
of a temporary deposit of funds for that period
as much as an addition of 3 per cent to the discount
rate; or, to put it the other way round, there would
need to be an additional profit of 3 per cent else¬
where if it were to be worth while to send funds
abroad.
9. The growing importance of foreign bills in the
portfolios of the Reichsbank has been shown above.
The importance of foreign bills and credits in the
policy of the Austro-Hungarian Bank is of longer
standing and is better known. They always form
an important part of its reserves, and the part first
utilised in times of stringency. 1 It was supposed that
in the third quarter of 1911 the Bank placed not less
than £4,000,000 worth of gold bills at the disposal
of the Austro-Hungarian market in order to support
exchange. Amongst European countries, Russia now
keeps the largest aggregate of funds in foreign bills and
in balances abroad—amounting in November 1912 to
£26,630,000. 2 Account being taken of their total re¬
sources, however, the banks of the three Scandinavian
countries, Sweden, Norway, and Denmark, hold the
1 In the abnormal conditions of recent times (1912-13), however, the
Bank has not found it possible to maintain this part of its reserves at a
high level.
2 This does not include the funds held abroad on account of the Russian
Treasury. Speaking in March 1913, in the Budget Committee of the Duma,
the Minister of Finance stated that the total amount of Russian State funds
placed abroad was £60,000,000.
II
THE GOLD-EXCHANGE STANDARD
35
highest proportion in the form of balances abroad—
amounting in November 1912, for the three countries
in the aggregate, to about £7,000,000. These are
enough examples for my purpose.
10. What is the underlying significance of this
growing tendency on the part of European State
Banks to hold a part of their reserves in foreign bills
or foreign credits? We saw above that the bank-
rate policy of the Bank of England is successful
because by indirect means it causes the Money -
Market to reduce its short-period loans to foreign
countries, and thus to turn the balance of immediate
indebtedness in our favour. This indirect policy is
less feasible in countries where the Money Market is
already a borrower rather than a lender in the inter¬
national market. In such countries a rise in the bank
rate cannot be relied on to produce the desired
effect with due rapidity. A direct policy on the part
of the Central Bank, therefore, must be employed. If
the Money Market is not a lender in the international
market, the Bank itself must be at pains to become
to some extent one. The Bank of England lends to
middlemen who, by holding bills or otherwise, lend
abroad. A rise in the bank rate is equivalent to
putting pressure on these middlemen to diminish their
commitments. In countries where the Money Market
is neither so highly developed nor, in relation to
foreign countries, so self - supporting, the Central
Bank, if it is to be secure, must take the matter
26
INDIAN CURRENCY AND FINANCE
CHAP.
in hand itself and, by itself entering the international
money market as a lender at short notice, place itself
in funds, at foreign centres, which can be rapidly
withdrawn when they are required. The only
alternative would be the holding of a much larger
reserve of gold, the expense of which would be nearly
intolerable. The new method combines safety with
economy. Just as individuals have learnt that it is
cheaper and not less safe to keep their ultimate
reserves on deposit at their bankers than to keep them
at home in cash, so the second stage of monetary
evolution is now entered on, and nations are learning
that some part of the cash reserves of their banks
(we cannot go further than this at present) may be
properly kept on deposit in the international money
market. This is not the expedient of second-rate
or impoverished countries; it is the expedient of
all those who have not attained a high degree of'
financial supremacy—of all those, in fact, who are
not themselves international bankers.
11. In the forty years, therefore, during which
the world has been coming on to a gold standard
(without, however, giving up for that reason its local
currencies of notes or token silver), two devices
—apart from the bullion reserve itself and the bank
rate—have been evolved for protecting the local
currencies. The first is to permit a small variation
in the ratio of exchange between the local currency
and gold, amounting perhaps to an occasional premium
II
THE GOLD-EXCHANGE STANDARD
27
of \ per cent on the latter; this may help to tide
over a stringency which is seasonal or of short dura¬
tion without raising to a dangerous level the rate
of discount on purely local transactions. The second
is for the Government or Central Bank to hold re¬
sources available abroad, which can be used for
maintaining the gold parity of the local currency,
when there is the need for it.
12. We are now more nearly in a position to come
back to the currency of India herself, and to see it in
its proper relation to those of other countries. At
one end of the scale we have Great Britain and
France—creditor nations in the short-loan market. 1 .
In an intermediate position comes Germany — a
creditor in relation to many of her neighbours, but
apt to be a debtor in relation to France, Great Britain,
and the United States. Next come such countries as
Russia and Austria-Hungary—rich and powerful, with
immense reserves of gold, but debtor nations, de¬
pendent in the short-loan market on their neighbours.
From the currencies of these it is an easy step to
those of the great trading nations of Asia—India,
Japan, and the Dutch East Indies.
13. I say that from the currencies of such countries
as Russia and Austria-Hungary to those which have
1 I have throughout deliberately ignored the current practice of the
United States in these matters. Her development and present position are
anomalous, and have claimed no imitators. Her arrangements would need a
discussion to themselves, and would, I think, convey few lessons of value to
students of Indian affairs. In dealing with her dependencies, she has herself
imitated, almost slavishly, India.
28
INDIAN CURRENCY AND FINANCE
CHAP.
explicitly and in name a Gold-Exchange Standard 1 it
is an easy step. The Gold-Exchange Standard is
simply a more regularised form of the same system
as theirs. In their essential characteristics and in
the monetary logic which underlies them the currencies
of India and Austria-Hungary (to take these as our
examples) are not really different. In India we know
the extreme limits of fluctuation in the exchange
value of the rupee; we know the precise volume of
reserves which the Government holds in gold and in
credits abroad; and we know at what moment the
Government will step in and utilise these resources
for the support of the rupee. In Austria-Hungary
the system is less automatic, and the Bank is allowed
a wide discretion. In detail, of course, there are a
number of differences. India keeps a somewhat
higher proportion of her reserves in foreign credits,
and keeps some part of these credits in a less liquid
form. She also keeps a portion of her gold reserve
in London—a practice made possible by the fact that
for India London is not strictly a foreign centre. On
the other hand, India is probably more willing than
the Bank of Austria-Hungary to supply gold on
demand. If we qre to judge from the experience of
1 I may seem to speak as if Japan had in name a GoM-Exch^ng; 1 Standard,
which, is not the case. There is not much publicity in regard to her monetary
arrangements. But X believe that they are, in fact, such that it is as a
Gold - Exchange Standard hers ought impartially to be classified. The
Finance Minister stated in the Diet in 1912 that the gold funds held by the
Government and the Bank of Japan in Europe and the United States were
about £37,000,000. The amount of gold circulating in Japan herself is, I
believe, inconsiderable.
II
THE GOLD-EXCHANGE STANDARD
29
recent years, India inclines to use her gold reserves,
Austria-Hungary her foreign credits, first. But in
the essentials of the Gold-Exchange Standard—the
use of a local currency mainly not of gold, some
degree of unwillingness to supply gold locally in
exchange for the local currency, but a high degree of
willingness to sell foreign exchange for payment in
local currency at a certain maximum rate, and to
use foreign credits in order to do this—the two
countries agree.
14. To say that the Gold-Exchange Standard
merely carries somewhat further the currency arrange¬
ments which several European countries have evolved
during the last quarter of a century is not, of course,
to justify it. But if we see that the Gold-Exchange
Standard is not, in the currency world of to-day,
anomalous, and that it is in the main stream of
currency evolution, we shall have a wider experience,
on which to draw, in criticising it, and may be in a
better position to judge of its details wisely. Much
nonsense is talked about a gold standard’s properly
carrying a gold currency with it. If we mean by a
gold currency a state of affairs in which gold is the
principal or even, in the aggregate, a very important
%
medium of exchange, no country in the world has
such a thing. 1 Gold is an international, but not a
local currency. The currency problem of each country
is to ensure that they shall run no risk of being
1 Unless it be Egypt.
3 °
INDIAN CURRENCY AND FINANCE
CHAP.
unable to put their hands on international currency
when they need it, and to waste as small a proportion
of their resources on holdings of actual gold as is
compatible with this. The proper solution for each
country must be governed by the nature of its position
in the international money market and of its relations
to the chief financial centres, and by those national
customs in matters of currency which it may be
unwise to disturb. It is as an attempt to solve this
problem that the Gold-Exchange Standard ought to
be judged.
15. We have been concerned so far with transitional
systems of currency. I will conclude this chapter
with a brief history in outline of the Gold-Exchange
Standard itself. It will then be time to pass from
high generalities to the actual details of the Indian
system.
The Gold-Exchange Standard arises out of the dis¬
covery that, so long as gold is available for payments
of international indebtedness at an approximately
constant rate in terms of the national currency, it
is a matter of comparative indifference whether it
actually forms the national currency.
The Gold-Exchange Standard may be said to exist
when gold does not circulate in a country to an
appreciable extent, when the local currency is not
necessarily redeemable in gold, but when the Govern¬
ment or Central Bank makes arrangements for the
provision of foreign remittances in gold at a fixed
II
THE GOLD-EXCHANGE STANDARD
3i
maximum rate in terms of the local currency, the
reserves necessary to provide these remittances being
kept to a considerable extent abroad.
A system closely resembling the Gold-Exchange
Standard was actually employed during the second
half of the eighteenth century for regulating the
exchange between London and Edinburgh. Its
theoretical advantages were first set forth by Ricardo
at the time of the Bullionist Controversy. He laid it
down that a currency is in its most perfect state when
it consists of a cheap material, but having an equal
value with the gold it professes to represent; and he
suggested that convertibility for the purposes of the
foreign exchanges should be ensured by the tendering
on demand of gold bars (not coin) in exchange for
notes,—so that gold might be available for purposes of
export only, and would be prevented from entering
into the internal circulation of the country. In an
article contributed to the Contemporary Review of
1887, Dr. Marshall again brought these advantages
to the notice of practical men.
16. The first crude attempt in recent times at
establishing a standard of this type was made by
Holland. The free coinage of silver was suspended in
1877. But the currency continued to consist mainly
of silver and paper. It has been maintained since
that date at a constant value in terms of gold by the
Bank’s regularly providing gold when it is required
for export and by its using its authority at the same
3 2
INDIAN CURRENCY AND FINANCE
CHAP.
time for restricting so far as possible the use of gold
at home. To make this policy possible, the Bank of
Holland has kept a reserve, of a moderate and
economical amount, partly in gold, partly in foreign
bills. 1 During the long period for which this policy
has been pursued, it has been severely tried more
than once, but has stood the test successfully.
It must be noticed, however, that although Holland
has kept gold and foreign bills as a means of obtaining
a credit abroad at any moment, she has not kept a
standing credit in any foreign financial centre. The
method of keeping a token currency at a fixed par
with gold by means of credit abroad was first adopted
by Count Witte for Russia in the transitional period
from inconvertible paper to a gold standard;—in the
autumn of 1892 the Department of Finance offered
to buy exchange on Berlin at 218 marks and to
sell at 2'20. In the same year (1892) the Austro-
Hungarian system, referred to above, was established.
As in India their exchange policy was evolved
gradually. The present arrangements, which date
1 In the course of the last twenty years, however, the Bank of Holland,
having got rid of the greater part of her redundant stock of silver coins, has
gradually come to rely more on her holding of gold and less on her holding
of foreign hills than formerly. In 1892-93 foreign bills at £1,801,409 were
about 16 per cent of her resources (excluding silver coin ); in 1911-12 they had
fallen to £1,389,139 or about 5*5 per cent of her resources (excluding silver coin).
But the media of exchange are still notes and silver, and not less than formerly
does the Bank pursue the policy of keeping her gold for purposes of export
only and of withholding it from circulation. Almost the whole of her stock
of gold is in the form of bars and foreign coin. (It should be added, however,
that at the end of 1912 there were proposals, in order to avoid fresh coinage
of silver, for the introduction of a 5 fl. gold piece.)
n
THE GOLD-EXCHANGE STANDARD
33
from 1896, were made possible by the strong
preference of the public for notes over gold and by
the provision of the law which permitted the holding
of foreign bills as cover for the note issue. This
exchange policy is the easier, because the Austro-
Hungarian Bank is by far the largest dealer in
exchange in Vienna;—just as the policy of the
Government of India is facilitated by the commanding
influence which the system of Council Bills gives it
over the exchange market.
17. But although India was not the first country
to lead the way to a Gold-Exchange Standard, she
was the first to adopt it in a complete form. When
in 1893, on the recommendation of the Herschell
Committee, following upon the agitation of the Indian
Currency Association, the Mints were closed to the
free coinage of silver, it was believed that the
cessation of coinage and the refusal of the Secretary
of State to sell his bills below Is. 4d. would suffice
to establish this ratio of exchange. The Government
had not then the experience which we have now; we
now know that such measures are not by themselves
sufficient, except under the influence of favouring
circumstances. As a matter of fact the circum¬
stances were, at first, unfavourable. Exchange fell
considerably below Is. 4d., and the Secretary of State
had to sell his bills for what he could get. If there
had been, at the existing level of prices, a rapidly
expanding demand for currency at the time when the
34
INDIAN CURRENCY AND FINANCE
CHAP.
Mints were closed, the measures actually taken might
very well have proved immediately successful. But
the demand did not expand, and the very large issues
of currency immediately before and just after the
closure of the Mints proved sufficient to satisfy the
demand for several years to come;—just as a de¬
mand for new currency on an abnormally high scale
from 1903 to 1907, accompanied by high rates of dis¬
count, was followed in 1908 by a complete cessation of
demand and a period of comparatively low rates of
discount. Favourable circumstances, however, came
at last, and by January 1898 exchange was stable at
Is. 4d. The Fowler Committee, then appointed,
recommended a gold currency as the ultimate ob¬
jective. It is since that time that the Government
of India have adopted, or drifted into, their present
system.
18. The Gold-Exchange Standard in the form in
which it has been adopted in India is justly known as
the Lindsay scheme. It was proposed and advocated
from the earliest discussions, when the Indian currency
problem first became prominent, by Mr. A. M. Lindsay,
Deputy-Secretary of the Bank of Bengal, who always
maintained that “ they must adopt my scheme despite
themselves.” His first proposals were made in 1876
and 1878. They were repeated in 1885 and again
in 1892, when he published a pamphlet entitled
Ricardo’s Exchange Remedy. Finally, he explained
his views in detail to the Committee of 1898.
II
THE GOLD-EXCHANGE STANDARD
35
Lindsay’s scheme was severely criticised both by
Government officials and leading financiers. Lord
Farrer described it as “ far too clever for the ordinary
English mind with its ineradicable prejudice for an
immediately tangible gold backing to all currencies.”
Lord Rothschild, Sir John Lubbock (Lord Avebury),
Sir Samuel Montagu (the late Lord Swaythling) all
gave evidence before the Committee that any system
without a visible gold currency would be looked on
with distrust. Mr. Alfred de Rothschild went so far
as to say that “in fact a gold standard without a
gold currency seemed to him an utter impossibility.”
Financiers of this type will not admit the feasibility
of anything until it has been demonstrated to them
by practical experience. It follows, therefore, that
they will seldom give their support to what is new.
19. Since the Indian system has been perfected
and its provisions generally known, it has been widely
imitated both in Asia and elsewhere. In 1903 the
Government of the United States introduced a system
avowedly based on it into the Philippines. Since
that time it has been established, under the influence
of the same Government, in Mexico and Panama.
The Government of Siam have adopted it. The
French have introduced it in Indo-China. Our own
Colonial Office have introduced it in the Straits
Settlements and are about to introduce it into the
West African Colonies. Something similar has existed
in Java under Dutch influences for many years. The
36 INDIAN CURRENCY AND FINANCE chap, ii
Japanese system, is virtually the same in practice. In
China, as is well known, currency reform has not yet
been carried through. The Gold-Exchange Standard
is the only possible means of bringing China on
to a gold basis, and the alternative policy (the policy
of our own Foreign Office) is to be content at first
with a standard, as well as a currency, of silver. A
powerful body of opinion, led by the United States,
favours the immediate introduction of a gold standard
on the Indian model.
It may fairly be said, therefore, that in the last
ten years the Gold-Exchange Standard has become
the prevailing monetary system of Asia. I have tried
to show that it is also closely related to the prevailing
tendencies in Europe. Speaking as a theorist, I
believe that it contains one essential element—the use
of a cheap local currency artificially maintained at par
with the international currency or standard of value
(whatever that may ultimately turn out to be)—in
the ideal currency of the future. But it is now time
to turn to details.
CHAPTER III
PAPER CURRENCY
1 . The chief characteristics of the Indian system
of currency have been roughly sketched in the first
chapter. I will now proceed to a description of the
system of note issue.
2. In existing conditions the rupee, being a token
coin, is virtually a note printed on silver. The
custom and convenience of the people justify this, so
far as concerns payment in small sums. But in
itself it is extravagant. When rupees are issued, the
Government, instead of being able to place to reserve
the whole nominal value of the coin, is able to retain
only the difference between the nominal value and
the cost of the silver. 1 For large payments, there¬
fore, it is important to encourage the use of notes
to the utmost extent possible,—from the point of view
of economy, because by these means the Government
may obtain a large part of the reserves necessary for
1 Tlie rupee contains g oz. of silver of eleven-twelfths fineness. When
standard silver is at 24d. per oz. the cost of a rupee to the Government is
about 9T81d. ; at 32d. per oz. it is about 12*241d. The average rate ot
profit on coinage of rupees from 1910 to May 1912 was about 42% of the
nominal value.
37
38 INDIAN CURRENCY AND FINANCE chap.
the support of a Gold-Exchange Standard, and also
because only thus will it be possible to introduce a
proper degree of elasticity in the seasonal supply of
currency.
3. By Acts of 1839-43 the Presidency Banks of
Bengal, Bombay, and Madras were authorised to issue
notes payable on demand; but the use of the notes
was practically limited to the three Presidency towns. 1
These Acts were repealed in 1861, when the present
Government Paper Currency was first instituted.
Since that time no banks have been allowed to issue
notes in India.
Proposals for a Government Paper Currency were
instituted in 1859 by Mr. James "Wilson on his going
out to India as the first Financial Member. 2 Mr.
Wilson died before his scheme could be carried into
effect, and the Act setting up the Paper Currency
scheme, which became law in 1861, differed in some
important respects from his original proposals. 8 The
system was eventually set up under the influence of
the very rigid ideas as to the proper regulation of
note issue prevailing, as a result of the controversies
which had culminated in the British Bank Act of 1844,
amongst English economists of that time. Accord¬
ing to these ideas, the proper principles of note issue
1 See also pp. 199, 200.
2 For this and other historical details see J. B. Brunyate, An Account of
the Presidency Banks.
3 Mr. Wilson had proposed to invest a high proportion of the reserve
(perhaps two-thirds) in Government securities.
Ill
PAPER CURRENCY
39
were two — first, that the function of note issue
should be entirely dissociated from that of banking ;
and second, that “ the amount of notes issued
on Government securities should be maintained at
a fixed sum, within the limit of the smallest
amount which experience has proved to be neces¬
sary for the monetary transactions of the country,
and that any further amount of notes should be
issued on coin or bullion.” 1 These principles
were orthodox and all others “unsound.” “The
sound principle for regulating the issue of a Paper
Circulation,” wrote the Secretary of State, “is that
which was enforced on the Bank of England by
the Act of 1844.” In England, of course, bankers
immediately set themselves to recover the economy
arid elasticity, which the Act of 1844 banished from
the English system, by other means; and with the
development of the cheque system to its present
state of perfection they have magnificently succeeded.
In foreign countries all kinds of new principles have
been tried for the regulation of note issue, and some
of them have been very successful. In India the
creed of 1861 is still repeated ; but by unforeseen
chance the words have changed their meanings, and
have permitted the old system to acquire through
inadvertence a certain degree of usefulness. The
coin, in which the greater part of the reserve had to
1 I quote this from the Secretary of State’s despatch (Sir Charles Wood,
March 26, 1860) criticising Mr. Wilson’s original scheme.
4o
INDIAN CURRENCY AND FINANCE
CHAP.
be held, was, of course, the rupee. In 1861 this was
a freely minted coin worth no more than its bullion
value. When the rupee became an artificially valued
token, rupees tacitly remained the legitimate form
of the reserve (although after a time sovereigns
were added as an optional alternative). Thus the
authorities are free, if they like, to hold the whole
of the Currency Reserve in rupee-tokens, and this
reserve has become, therefore (as we shall see below),
an important part of the mechanism by which the
supply of silver rupees to the currency is duly
regulated. While, however, the note issue has
managed to evolve an important function for itself,
I think the time has come when the usefulness of
the Currency Reserve may be much increased by a
deliberate consideration of the place it might fill in
the organism of the Indian Money Market. I return
to this later in the chapter. In the meantime I pass
to a description of the Paper Currency as it now is
—insisting, however, that when we come to consider
how it may be improved, the circumstances of its
origin be not forgotten.
4. For the first forty years of their existence the
G-overnment notes, though always of growing import¬
ance, took a very minor place in the currency system
of the country. This was partly due to an arrange¬
ment, now in gradual course of abolition, by which for
the purposes of paper currency India has been divided
up in effect into several separate countries. These
Ill
PAPER CURRENCY
4i
‘circles,’ as they are called, now seven 1 in number,
correspond roughly to the principal provinces of
India, the offices of issue being as follows:—
Calcutta
Cawnpore
Lahore
Madras
Bombay
Karachi
Rangoon
for Bengal, Eastern Bengal, and Assam.
„ the United Provinces.
„ the Punjab and North - "West Frontier
Province.
„ the Madras Presidency and Coorg.
„ Bombay and the Central Provinces.
„ Sind.
„ Burma.
The currency notes 2 are in the form of promissory
notes of the Government of India payable to the
bearer on demand, and are of the denominations Es. 5,
10, 50, 100, 500, 1000, and 10,000. Thus the lowest
note is of the face value of 6s. 8 d. They are issued with¬
out limit from any Paper Currency office in exchange
for rupees or British gold coin, or (on the requisition
of the Comptroller-General) for gold bullion. 3
5. Up to 1910 the following arrangements were
in force.
Every note was legal tender in its own circle.
Payment of dues to the Government could be made
in the currency notes of any circle ; and railway
companies could, if they accepted notes of any circle
1 A rearrangement was made in 1910 ; previous to that date there were
four circles and four sub-circles. It is no longer worth while to explain the
relations which used to exist between the circles and sub-circles.
2 Tor the legal provisions outlined in the following paragraphs see
Statistics of British India, part iv. (a).
3 For some further details see p, 9.
INDIAN CURRENCY AND FINANCE
CHAP.
2
in payment of fares and freight, recover the value
of them from the Government.
But, until recently, no notes were legal tender
outside their own circle, and were payable only at
the offices of issue of the town from which they were
originally issued.
Beyond this the law imposed no obligation to pay.
For the accommodation of the public, however, notes
of other circles could be cashed at any Paper
Currency office to such extent as the convenience of
each office might permit. In ordinary circumstances
every Government treasury, of which there are about
250, has cashed or exchanged notes if it could do so
without inconvenience; and when this could not
be done conveniently for large sums, small sums
have generally been exchanged for travellers.
6. It is easy to understand the reasons for these
restrictions. India is an enormously large country,
over which the conditions of trade lead coins to ebb
and flow within each year. At the beginning of the
busy season when the autumn crops are harvested,
rupees flow in great volume from the Presidency
towns up country; in early spring they are carried
to Burma for the rice crop; and so on—slowly
finding their way back again to the Presidency towns
during the summer. If the Government had made
its notes encashable at a great variety of centres, it
would have been taking on itself the expense and
responsibility of carrying out these movements of
Ill
PAPER CURRENCY
43
coin at different seasons of the year. When a
country is habituated to the use of notes for making
payments, they can be very usefully employed for
purposes of remittance also. But a note-issuing
authority puts itself in a difficulty if it provides
facilities for remittance before a general habit has
grown up of using notes for other purposes. If, on
the other hand, the notes had been made universal
legal tender, but only encashable at Presidency towns,
there would undoubtedly have been a premium on
coin at certain times of the year. And this would
have greatly hindered the growth of the notes’
popularity.
The Government, therefore, did what it could to
make the notes useful and popular for purposes other
than those of remittance; and it facilitated remittance
so far as the proceeds of taxation, accumulating in its
treasuries, permitted it to do this without expense.
But it shrank from taking upon itself further
responsibility. Its practice may be compared with
that of the branches of the Beichsbank.
.On the other hand, the objections to a policy,
which divided the country up for the purposes of
paper currency, are also plain. The limitation of the
areas of legal tender and of the offices where the notes
were encashable on demand greatly restricted the
popularity of the notes. It might well have seemed
worth while to popularise them, even at the expense
of temporary loss. As soon as the public had become
44
INDIAN CURRENCY AND FINANCE
CHAP.
satisfied that the notes could be turned into coin
readily and without question, their desire to cash
them would probably have been greatly diminished.
It is not certain that Government would haf e lost in
the long-run if it had undertaken the responsibility
and expense of regulating the flow of coin to the
districts where it might be wanted at the different
seasons of the year.
7 . After the establishment of the Gold-Exchange
Standard the importance of enlarging the functions
of the note issue became apparent; and since 1900
the question of increasing the availability of the
notes has been constantly to the front. In 1900
the Government issued a circular asking for opinions
on certain proposals, including one for “ universalis-
ing” the notes or making them legal tender in all
circles. Some authorities thought that notes of
small denominations (Es. 5 and Es. 10) might be
safely universalised, without risk (on account of the
trouble involved) of their being used for remittance on
a large scale. It is on these lines that the use of the
notes has been developed. In 1903 five-rupee notes
were universalised except in Burma—that is to say,
five-rupee notes of any circle were legal tender and
encashable at any office of issue outside Burma; and
in 1909 the Burmese limitation was removed.
In 1910 a great step forward was taken, and the
law on the subject was consolidated by a new Act.
Notes of Es. 10 and Es. 50 were universalised; and
Ill
PAPER CURRENCY
45
power was taken to universalise notes of higher
denominations by executive order. In pursuance of
this authority notes of Rs. 100 were universalised in
1911. “At the same time the receipt of notes of the
higher denominations in circles other than the circle
of issue, in payment of Government dues and in
payments to railways, post and telegraph offices, was
stopped by executive orders”; and “with a view
to minimise any tendency to make use of the new
universal notes for remittance purposes,’ it was
decided concurrently with the new Act to offer
facilities to bankers and merchants to make trade
remittances between the currency centres by means
of telegraphic orders granted by Government at a
reduced rate of premium.” 1 In the following year
the Comptroller of Paper Currency reported that no
difficulty whatever was experienced as the result of
universalising the Rs. 10 and Rs. 50 notes; and the
inconveniences, the fear of which had retarded the
development of the note system for many years, were
not realised.
8. The effect of these successive changes has been
to make the old system of circles virtually inoperative.
With notes of Rs. 100 universal legal tender it is
difficult to see what can prevent the public from
using them for purposes of remittance if they should
wish to do so. The “ circles ” can no longer serve
any useful purpose, and it would help to make clear
1 Report of Comptroller of Paper Currency, 1910.
46 INDIAN CURRENCY AND FINANCE chap.
in the public mind the nature of the Indian note
issue if they were to be abolished in name as well
as in effect.
9. There must have been many occasions under
the old system, on which ignorant persons suffered
inconvenience through having notes of foreign circles
passed off on them; and a long time may pass before
distrust of the notes, as things not readily convertible,
bred out of the memories of these occasions, entirely
disappears. But, in combination with other circum¬
stances, the universalising of the notes has had
already a striking effect on the volume of their
circulation, as is shown in the figures given below.
It should be explained that by gross circulation (in
the Government Statistics) is meant the value of all
notes that have been issued and not yet paid off;
that the net circulation is this sum less the value of
notes held by Government in its own treasuries; and
that the active circulation is the net reduced by the
value of notes held by the Presidency banks at their
head offices. 1 For some purposes the active circula¬
tion is the most important. But it is the reserve of
rupees held against the gross circulation which is the
best indication of the surplus volume of coined silver
available, if necessary, for the purposes of circulation.
The following table gives for various years the
1 Before 1893 these terms were used with a different significance. The
statistics are still a little ambiguous as to whether for the net circulation
the notes in Government reserve treasuries or the notes in all Government
treasuries are to he deducted. I use the term in the latter sense.
Ill
PAPER CURRENCY
47
average of the circulation on the last day of each
month:—
(In lakhs of rupees.)
(In £ million at Is. 4d.
the rupee throughout.)
Gross.
Net.
Active.
Gross.
Active.
1892-1893
2710
2333
1953
18
13
1893-1894
2829
2083
1785
19
12
1899-1900
2796
2367
2127
18*
14
1900-1901
2888
2473
2205
19|
14 l
1902-1903
3374
2735
2349
22£
15 £
1904-1905
3920
3276
2811
26
18 *
1906-1907
4514
3949 i
3393
30
22*
1908-1909
4452
3902
3310
29*
22
j1909-1910
4966
4535
3721
3-3
25
1910-1911
5435
4648
3875 !
36 |
26
1911-1912
5737
4949
4189
38
28
The following table gives in £ million the gross
circulation of currency notes on March 31 of each
year:—
1900 .
£ million.
. 19
1909 .
£ million
. 30i
1902 .
. 21
1910 .
• 36|
1904 .
. 25*
1911 .
• 36£
1906 .
. 30
1912 .
. 41**
1908 .
. 31*
1913 .
. 46
The following table
gives the average monthly
gross circulation in £ million (at Is. 4d. the rupee
throughout):—'
Five years ending 1880-1881
„ „ 1885-1886
„ „ 1890-1891
„ „ 1895-1896
„ „ 1900-1901
„ „ 1905-1906
„ „ 1910-1911
The year 1911-1912
£ million.
H
11 £
19
24
32
38
48
INDIAN CURRENCY AND FINANCE
CHAP.
10. The rules governing the reserves which must
be held against currency notes are very simple. A
certain fixed maximum, the amount of which is
determined from time to time by law, may be held
invested, chiefly in Government of India rupee
securities. Up to 1890 the invested portion of the
reserve amounted to 600 lakhs (Rs. 600,00,000).
This was increased to 700 lakhs in 1891, to 800 lakhs
in 1892, to 1000 lakhs in 1897; to 1200 lakhs, of
which 200 lakhs might be in English Government
securities, in 1905 ; and to 1400 lakhs (£9,333,000),
of which 400 lakhs (£2,666,000) might be in English
securities, in 1911. The interest thus accruing on
the invested portion of the reserve, less the expenses
of the Paper Currency Department, is credited to the
general revenues of the Government under the head
“Profits of Note Circulation.” This interest now
amounts to £300,000 annually.
Up to 1898 the whole of the rest was held in
silver coin in India. Under the Gold Note Act of
1898 the Government of India obtained authority
to hold any part of the metallic portion of the reserve
in gold coin. An Act of 1900 gave authority to hold
part of this gold in London; but this power was
only intended to be used for purposes of temporary
convenience, and, although some gold was held in
London in 1899 and 1900, this was not part of a
permanent policy. An Act of 1905, however, gave
full power to the Government to hold the metallic
Ill
PAPER CURRENCY
49
portion of the reserve, or any part of it, at its free
discretion, either in London or in India, or partly
in both places, and also in gold coin or bullion, or
in rupees or silver bullion, subject only to the
exception that all coined rupees should be kept
in India and not in London. The actual figures,
showing where the gold reserve has been held at
certain dates, are given below.
Gold in Paper Currency Reserve (£ Million).
March 31.
In India.
In London.
Total.
1897
nil
nil
nil
1898
i
nil
l
4"
1899
2
nil
2
1900
n
i|
9
1901
6
nil
6
1902
7
nil
7
1903
10
nil
10
1904
11
nil
11
1905
10*
nil
io.v
1906
4
7
11“
1907
H
7
104
1908
34
6
1909
nil
i4
X 4
1910
6
24
8 4
1911
6
5
11
1912
54
21
1913
194
6
254
Distribution op Reserve, March 31, 1913.
Rupees .
Gold in India
Gold in London .
Securities
. £11,000,000
19,500,000
6,000,000
9,500,000
£46,000,000
5 °
INDIAN CURRENCY AND FINANCE
CHAP.
11. Gold was originally accumulated in the reserve
in India through the automatic working of the rule
by which rupees could be obtained in exchange for
sovereigns. After exchange touched par in 1898,
we see from the above table that gold began to
flow in. When in 1900 the accumulations reached
£5,000,000, attempts were made, in accordance with
the recommendations of the Fowler Committee, to
force it into circulation. 1 After the comparative
failure of this attempt, and the passing of the
Act of 1905, as described above, the Paper Currency
Chest in England was instituted, and by 1906 about
two-thirds of the gold which had been accumulated
up to that time was transferred to this fund. This
stock is kept at the Bank of England, but is not in¬
cluded in the Bank of England’s own reserve. Gold
which is thus transferred is said to be “ ear-marked.”
The fund is under the absolute control of the
Secretary of State for India in Council, and trans¬
ferences to it are, so far as the accounts of the Bank
of England are concerned, reckoned as exports.
Policy as to how much of the gold should be kept
m London and how much in India has fluctuated
from time to time. I shall discuss it in Chapter VI.
12. These are the chief relevant facts of law.
Important considerations of policy do not lie so
plainly on the surface. Since 1899 the circulation
of notes has more than doubled, but the invested
1 For an account of this see p. 73.
HI
PAPER CURRENCY
5i
portion of the reserve has been increased by only
40 per cent. As the note issue has become more
firmly established and more widely used, a growing
and not a diminishing proportion of the reserves has
been kept in liquid form. This is due to a deliberate
change of policy, and to the use of the liquid part of
the reserve for a new purpose. The bullion reserve
is no longer held solely with the object of securing the
ability to meet the obligation to cash notes in legal
tender (rupees or gold) on demand. It is now utilised
for holding gold by means of which the Secretary of
State can support exchange in times of depression and
maintain at par the gold value of the rupee. For the
sake of this object the Government are content to
forego the extra profit which might be gained by in¬
creasing the investments, and have steadily increased
instead (as shown in the table on p. 49) the gold
portion of the reserve. The Paper Currency Reserve
is thus used to provide the gold which is the first line
of defence of the currency system as a whole, and
hence can hardly be distinguished from the resources
of the Gold Standard Reserve proper.
It is not profitable to discuss the reserve policy
of the Paper Currency under existing conditions in
isolation from the other reserves which the Govern¬
ment now hold. The whole problem of the reserves,
regarded as a current practical question, is dealt
with in Chapter VI. In this chapter I wish to
look at the matter from a broad standpoint, with
S3
INDIAN CURRENCY AND FINANCE
CHAP.
an eye to the proper policy in a future, possibly
remote.
13. The present policy was designed in its main
outlines at a time when notes formed an insignificant
part of the country’s currency, and when the system
of circles still greatly restricted their usefulness.
The notes were at first, and were intended to be,
little more than silver certificates. The rules govern¬
ing the Reserve were framed (see § 3) at a time
which, to the modern student of currency, is almost
prehistoric, under the influence of the Bank of
England’s system of note issue and of the British
Bank Act,—an Act which had the effect of destroy¬
ing the importance of notes as a form of currency in
England, and which it has been found impossible, in
spite of some attempts, to imitate in the note-using
countries of Europe. As has been urged in
Chapter II., England is in matters of currency the
worst possible model for India; for in no country
are the conditions so wholly different. A good deal
of experience with regard to note issues has now
been accumulated elsewhere which ought some day
to prove useful to India if her English rulers can
sufficiently free themselves from their English
traditions and preconceptions. Let me first give a
short account of the nature of the seasonal demand
for money in India; and then discuss the salient
respects in which her system of note issue differs
from those of typical note-using countries.
in
PAPER CURRENCY
53
14. In contrast to what happens in the case of
most note systems, the gross circulation in India
diminishes instead of increasing during the busy
seasons of autumn and spring. This is due to the
fact that the Government Treasuries, the Presidency
Banks, and possibly other banks and large merchants,
use the notes as a convenient method of avoiding the
custody of large quantities of silver during the slack
season when rupees are not wanted. 1 That is to say,
they deposit their surplus rupees during the summer
in the Currency Beserve, holding their own reserves
in the form of notes; and when the drain of rupees
begins up country for moving the crops these notes
have to be cashed. Thus in the dull season currency
is largely in the hands of a class of persons and
institutions which finds it most convenient to hold
it in the form of notes, and in the busy season it is
dissipated through the country and is, temporarily,
in the hands of smaller men — cultivators who have
sold their crops, small moneylenders and others, who
habitually deal in small sums for which the rupee is
the most convenient unit, or who do not yet under¬
stand the use of notes and still prefer, therefore, to
be paid in actual coin.
15. Notes themselves, however, are used also, and
to an increasing extent, for moving crops; and,
1 At all times the vast bulk of the funds held by the Presidency Banks
at their Head Offices are kept in notes, chiefly of high denominations
(Rs. 1000 and Rs. 10,000); e,g. on December 31, 1911, £4,200,000 out of
£4,800,000 was thus held.
54
INDIAN CURRENCY AND FINANCE
CHAP.
although, the gross circulation falls during the busy
season for the reasons just given, the active circulation
( i.e excluding the holdings of the Government
Treasuries and the Presidency Banks) does, as we
should expect, increase at this time of year. When,
therefore, we are considering what proportion of
liquid reserves ought to be maintained, or what part
the note issue plays in supplying the much needed
element of elasticity in the busy season, it is of the
active rather than of the gross circulation that we
must take account. The figures are given below in
lakhs of rupees :—
Months of
1906-1907.
1907-1908.1
1908-1909.
1909-1910.
1910-1911.
1911-1912.
and Maxi¬
mum active
circulation.
1 .
2.
1 .
2.
1 .
2.
1 .
2.
1 .
2.
1 .
2.
Min,—
June
July
August .
31,16
32,43
32,11
14,41
12,87
13,59
35,04
34,43
34,30
13,01
15,89
17,47
31,13
31,58
31,90
14,12
16,52
12,71
34,19
34,31
35,49
15,10
17,22
16,25
36,58
36,56
36,86
20,37
22,60
21,20
38,44
39,15
40,99
19,78
21,14
18,70
Max.—
January.
Feb.
March .
35,54
36,07
36,45
9,11
9,42
10,50
33,20
33,28
32,61
8,62
9,38
14,2S
33,67
34,36
34,95
8,54
9,50
10,54
41,47
41,45
39,98
10,37
9,12
14,43
39,67
40,95
40,17
11,45
12,57
14,82
44,14
44,58
44,61
10,56
12,61
16,75
Columns (1) : Active circulation. Columns (2): Holdings of Treasuries and Presidency
Banks, i.e., excess of gross over active circulation.
1 An abnormal year.
We see, therefore, that, while the notes held by
the Presidency Banks and the Treasury fall in the
busy season by 700 to 1000 lakhs below their highest
figure in the slack season, the active circulation
increases in the busy season over its lowest figure in
the slack season by about 400 lakhs (in the latest year
for which we have figures, 1911-1912, by more than
Ill
PAPER CURRENCY
55
600 laklis). Of course this is not a very high pro¬
portion of the total increase in the volume of currency
which is required in the busy season. But it is an
amount well worth considering, and these figures put
the note issue in a more favourable light as a source
of currency in the busy season than is usually realised.
The relative importance of notes and rupees 1 in
supplying the seasonal needs of trade is well shown in
the following table:—
Net Absorption (in Lakhs ok Rupees) of Currency into Circulation
( + ) or Return of Currency from Circulation ( — ). 1
Year.
April to June.
July to Sept.
Oct. to Dec.
Jan, to March.
Whole Year.
Rupees.
Notes.
Rupees.
Notes.
Rupees.
Notes.
Rupees.
Notes.
Rupees.
Notes.
1905-1906
-116
+ 83
+ 339
+ 58
+ 1139
+ 175
+ 88
+ 101
+ 1450
+ 417
1906-1907
- 24
-148
+ 600
+ 220
+ 1068
+ 310
+ 156
0
+ 1800
+ 382
1907-1908
+ 182
-141
+ 145
+ 29
+ 735
-126
-670
-146
+ 392
-384
1908-1909
-798
-148
-718
+ 198
+ 339
+ 112
-311
+ 72
-1488
+ 234
1909-1910
+ 47
- 76
- 58
+ 286
+ 1065
+ 130
+ 268
+ 163
+ 1322
+ 503
1910-1911
-287
-340
-100
+ 147
+ 722
+ 144
- 1
+ 68
+ 334
+ 19
1911-1912
-130
-173
+ 220
+ 262
+ 499
+ 356
+ 565
- 1
+ 1154 i
+ 444
l In this table rupees (but not notes) m the Presidency Banks are treated as being in
circulation. It would be a troublesome piece of work to exclude them, and would make,
I thinkj very little difference to the result. The main variable element in the reserves of
the Presidency Banks is the notes, and these are duly allowed for in the above table.
The above table is exceedingly instructive. It
shows that the notes supply an increasingly important
proportion of the seasonal demand for additional
currency. It shows also that the demand for notes
from one year to another has been of a steadier
character than the demand for rupees. In the period
1 The part played by gold is discussed in Chapter IT.
INDIAN CURRENCY AND FINANCE
CHAP.
S6
of depression from the winter of 1907 until the
autumn of 1908 the active rupee circulation was
much harder hit than the active note circulation ; for
in the six months January to June 1908 the rupee
circulation fell by 1468 lakhs, while the active note
circulation fell by 294 lakhs, and for the nine months
January to September 1908 the former fell by 2186
lakhs, while the latter fell by only 96 lakhs. 1
16. Let me now turn to three salient characteristics,
all closely connected with one another, and chiefly
distinguishing the Indian system of paper currency
from those of most note-using countries.
In the first place, the function of note-issue is wholly
dissociated in India from the function of banking.
To discount bills is one of the functions of banks.
Where there are Central Banks with the right of
note issue, they are usually able, subject to various
restrictions, to increase their note issue at certain
seasons of the year in order to discount more bills.
In the second place, as there is no Central Bank
in India, there is no Government Banker. It is true
that the Government keep some funds (rather more
than £2,000,000, as a rule) at the three Presidency
Banks. But the bulk of their floating resources is
held either in London or in cash in their own Treasuries
in India. Thus, as in the United States, the Govern¬
ment maintains an independent Treasury system. This
I estimate that at this date the total volume of the active rupee circula¬
tion was between five and six times the total volume of the active note
circulation.
Ill
PAPER CURRENCY
57
means, just as it does in the United States, that, at
certain seasons of the year when taxes are flowing in
fastest, funds may sometimes be withdrawn from the
money market. The difficulty and inconvenience to
which this system has given rise in the United States
are well known to those who are acquainted with the
recent financial history of that country. The ill
effects of it are to a certain extent counteracted, in
the case of India, by a transference of these funds to
London and a release of the accumulating currency
in India through the sale of Council Bills. But this
is not a perfect solution.
The third and most important point arises out of
the first two. The Indian currency is internally
(i.e., apart from the import of funds from foreign
countries) absolutely inelastic. There is no method
whatever by which the volume of currency can be
temporarily expanded by some credit device within
the country to meet the regularly recurrent seasonal
demands of trade. Cheque-using countries meet the
difficulty by increasing the volume of credit created
by the banks; most note-using countries meet it
by the Central Bank’s discounting a greater volume
of home bills than .usual, and thus increasing its
note circulation temporarily, without a correspond¬
ing increase in its metallic reserves. Except for a
certain proportion of the business which is trans¬
acted by cheque (chiefly in the Presidency towns),
there is nothing corresponding to this in India.
INDIAN CURRENCY AND FINANCE
CHAP.
58
Additional currency, whether notes or rupees, can
be obtained in two ways only—by buying Council
Bills in London or by bringing in sovereigns.
Additional notes or rupees can be obtained in pay¬
ment of Council Bills or in exchange for sovereigns,
but not otherwise. The fact that a temporary
increase in the media of exchange can only be
obtained by bringing in funds from abroad partly
explains the high rate of discount in India during
the busy season. This question will be more fully
dealt with in Chapter VIII. But the main point
can be put briefly thus :—If funds are to be attracted
from abroad for a short period (say three months),
the rate of interest must be high enough to repay the
cost of remittance both ways, which in the case of
places so remote from one another as India and
London is considerable. If there were some authority
which could create credit money in India during the
busy season, it would not be necessary for the rate of
discount to rise so high.
17. The objections to the existing arrangements
largely arise,* therefore, out of the absence of a
State Bank. This question is further discussed
in Chapters VI. and VII. I feel little doubt that
India ought to have a State Bank, associated in a
greater or less degree with the Government. The
Government is drifting year by year into doing more
business of an essentially banking character; and as
time goes on it will become increasingly objectionable
hi PAPER CURRENCY 59
to dissociate some of the functions of modern State
Banking from others. But there is a considerable
weight of opinion in favour of the view that the
time for the establishment of a Central Indian Bank
is not yet ripe. In the meantime is any partial
remedy possible for the evils dealt with above ?
18. I am inclined to think that such a remedy is
possible. The manner in which the reserve against
the note issue must be kept is needlessly restricted.
Apart from that portion which is permanently
invested, the whole must be kept in gold and silver.
This is in imitation of the rules governing the Bank
of England’s note-issue. But the note-issuing
banks of Europe afford a better model. It might be
proper to prescribe by law the holding of a certain
proportion of the reserve (say one-third 1 ) in gold
or silver coin. A further amount might be held, as
at present, permanently invested in Government
of India securities. With regard to the rest the
Government should, I think, permit itself much greater
latitude. It should be free to lend it out on suitable
security, either in India or London, for periods not
exceeding three months. In London it should be
lent out on the same conditions as the Cash Balances
and the Gold-Exchange Standard (see Chapter VI.) are
lent out at present. To lend in London would be
technically convenient (for the reasons given on
1 The proper proportion would partly depend upon the policy pursued in
regard to the Gold Standard Reserve.
6o
INDIAN CURRENCY AND FINANCE
CHAP.
p. 172), but it -would not cure the inelasticity of the
Indian system. Part of the reserve should, therefore,
be lent out in India. Suitable security for this purpose
would be Government of India securities (which would
have indirectly the effect of increasing the market for
Rupee Paper) and Bills of Exchange of the highest class.
It is not worth while to discuss here in detail the precise
methods which it would be proper for the Government
to adopt in lending out funds in India either from the
Cash Balances or from the Paper Currency Reserve.
Whether it were done through the Presidency Banks
only, or whether an approved list of borrowers of
Government funds were to be drawn up for India as
is already the case for London, the effect on the
Indian Money Market would be much the same.
The needed element of elasticity would be obtained,
and the present absolute dependence of India on
London for an expansion of currency would be
modified. I shall return to this proposal again in
Chapters VI. and VIII. Its full force cannot be shown
until we have discussed the question of the Secretary
of State’s reserves as a whole, and have studied in
detail the movements of the Indian bank rate.
A good deal of opinion has been expressed in
India lately in favour of loans being made there
from the Government’s Cash Balances. In so far as
this opinion demands some new machinery by which
on suitable occasions the Government can lend out
funds in India herself, the evil which it seeks to
m PAPER CURRENCY 61
remedy is a real one. And the method proposed
above is, I believe, the right way in which to
approach the problem’s solution.
19. The discussion of this question will be concluded
in Chapters VI., VII., and VIII. But it will be well
to say a few words at once with a view to avoiding
misunderstandings on two points. It has been
necessary in the immediate past to use the Paper
Currency Reserve as a part of the general reserves held
for ensuring the absolute stability of the rupee. I do
not advocate the lending out in India of any part of
this reserve, or of the Cash Balances, at the expense
of the stability of the Gold Standard, or until adequate
measures can be taken in other ways to ensure this.
But I think the time has practically arrived when the
whole of the liquid portion of the Paper Currency
Reserve is not required, in addition to the Gold
Standard Reserve proper, for this purpose. A busy
season will soon come when the Government might
lend some part of its reserves in India without en¬
dangering in the least the stability of its system and
to the great advantage of Indian trade. It ought, at
least, to have the power to do this.
20. The remaining point is this. A provision of
the above kind for introducing some degree of
elasticity into the Indian currency system would not
be very useful in a season such as that of the autumn
and winter of 1905-6 or of the autumn of 1912-13,
when there was a demand for rupees on so great a scale
62 INDIAN CURRENCY AND FINANCE chap, hi
that it could only be met from the Mint. Additions
to the currency of this kind can only be made by im¬
porting funds from abroad. But these are permanent
not temporary additions. Every such addition makes
a similar demand for new coinage in succeeding seasons
less likely. They are abnormal, and recent history
seems to show that these permanent additions to the
Indian currency are not made by slow and steady
accretions year by year, but in great bursts of activity
at considerable intervals. In years of normal
activity, therefore, there may be considerable stores
of rupees lying idle in the reserves beyond what
is required for the safety of the currency. Indian
bankers and merchants can only get at these rupees,
so as to obtain a net addition to the currency, by
buying sovereigns or Council Bills in London. If
the use for the additional currency is only temporary,
the cost of transport or remittance is great enough to
make it not worth their while to get this addition
until the Indian rate of discount has been forced up
to a high level. If the Government were free on
such occasions to lend out some part of the rupees,
against high-class security, at 5 or even 6 per cent,
this would be profitable to the Government, and
would prevent the discount rate from reaching a level
which is caused, not by anxiety, but merely by the
expense arising out of the distance between London
and Calcutta.
CHAPTER IV
THE PRESENT POSITION OP GOLD IN INDIA AND
PROPOSALS FOR A GOLD CURRENCY
1. The Fowler Committee of 1898 avowed them¬
selves in favour of the ultimate establishment of a
gold currency in India as well as a gold standard .
Paragraph 54 of their Report runs as follows :—
We are in favour of making the British sovereign a
legal tender and a current coin in India. We also consider
that, at the same time, the Indian mints should be thrown
open to the unrestricted coinage of gold on terms and
conditions such as govern the three Australian branches of
the Royal Mint. The result would be that, under identical
conditions, the sovereign would be coined and would circulate
both at home and in India. Looking forward as we do to
the effective establishment in India of a gold standard and
currency based on the principles of the free in-flow and
out-flow of gold, we recommend these measures for adoption.
The first part of their proposal was carried out
immediately, and, in 1899, British gold was declared
legal tender at the rate of a sovereign to 15 rupees.
It appeared at first as if their further object of a gold
currency might soon be attained also. The principle
63
64 INDIAN CURRENCY AND FINANCE chap.
of minting gold in India was accepted both by
the Secretary of State and by the Viceroy’s
Council, and in 1900 Sir Clinton Dawkins actually
announced that it had been decided to constitute
a branch of the Mint at Bombay for this purpose.
In the meantime an attempt was made, described in
§ 4, to force sovereigns into circulation. But the
attempt failed, and Sir Clinton Dawkins’s proposal
was never carried out. As Sir G. Fleetwood Wilson
explained in the Legislative Council in 1911—
A number of technical and other difficulties were raised by
the Boyal Mint, which ultimately wore out the patience of
Lord Curzon’s Government. In the interval the Kolar gold
mining companies had mostly entered into agreements for
the sale of their produce in England; and the prospect of
their bringing their gold to be refined and coined at Bombay
—which was to be the piece de resistance of our gold mint
—was thus deferred. In the circumstances it was decided
in 1902 to drop the project, and to wait until a stronger
demand for a local gold coinage should arise.
This account of the matter, however, scarcely does
justice to the part played by the British Treasury
in defeating the project. The official correspondence,
lately published, 1 shows that for two years (from
1899 to 1901) they made, as Sir G-. F. Wilson
states, a succession of technical difficulties in a spirit
of scarcely veiled hostility to the whole proposal.
But eventually (in May 1901) a scheme was arranged,
acceptable both to the Mint at home and to the
1 H. of C. 495 of 1913.
IV
GOLD IN INDIA
65
authorities in India. At this point in the negotia¬
tions the natural instincts of the Treasury officials
became uncontrollable, and respect for the independ¬
ence of the India Office had to be abandoned. Their
first line of defence in the form of technical difficulties
having been overcome, they fell back upon open
argument as to the wisdom from the Indian point
of view of the whole project:—
While expressing their satisfaction that an agreement has
now been reached, my Lords think it desirable, before
practical steps are taken to carry out the scheme, to invite
Lord George Hamilton to review the arguments originally
advanced in favour of the coinage of the sovereign in India,
and to consider whether the course of events, in the two
years which have elapsed since the proposal was made, has
not tended to diminish their force, and to render such
advantages as are likely to accrue from the establishment
of a branch mint wholly incommensurate with the expense
to be incurred. . . . The gold standard is now firmly estab¬
lished, and the public requires no proof of the intention of
the Indian Government not to go back on their policy,
which is beyond controversy. Sovereigns are readily
attracted to India when required under existing conditions.
... On the other hand, the estimates of the Government
of India of gold available for coinage in that country are
less than was anticipated, nor is any considerable increase
expected, at any rate for some time. . . . The staff would
have to be maintained in idleness for a large part of the
year at considerable cost to the Indian Exchequer. ... It
is of course for Lord George Hamilton to decide whether, in
spite of these objections, the scheme is to be proceeded
with.
The India Office answered thus :—
F
66
INDIAN CURRENCY AND FINANCE
CHAP.
The establishment of a mint for the coinage of gold in
India is the clearest outward sign that can be given of the
consummation of the new currency system; and to abandon
the proposal now must attract attention and provoke
criticism and unrest. . . . His Lordship is not inclined to
abandon the scheme at the stage which it has now reached.
The Treasury’s reply was cogent:—
My Lords cannot believe that the position of the gold
standard in India will be strengthened, or public confidence
in the intentions of the Government confirmed, by providing
machinery for obtaining gold coins which is neither demanded
nor required by the mercantile community; while, on the
other hand, the failure or only partial success of a gold mint
would undoubtedly be pointed to by the opponents of the
gold standard policy (although without justification) as
evidence of the breakdown of that policy.
The Treasury’s arguments were, as they deserved
to be, successful. After consultation with the
Government of India, who drew attention to the
agreements (referred to by Sir G. F. Wilson above)
entered into by the mining companies, the Secretary
of State agreed (Feb. 6, 1903) to the project’s in¬
definite postponement. “ No public explanation was
given in India of this sudden recession from what
has hitherto been regarded as an essential feature of
the currency policy inaugurated in 1893 and definitely
established on the recommendations of the Currency
Committee of 1898.” 1
2. From 1903 up to 1910 little was heard of pro-
1 This quotation is from a letter addressed by the Government of India to
the Secretary of State, nine years later (May 16, 1912).
IV
GOLD IN INDIA
67
posals for an active encouragement of the circulation
of gold. But the intention had never been repudiated,
and in the Budget debate of 1910 Sir James Meston,
then Financial Secretary to the Government, spoke as
follows :—
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 Commission that progress has
been real and unbroken. There is still one great step
forward before the ideal can be reached. We have linked
Tnrlia. 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, but
we cannot force it. The backwardness of our banking
arrangements, the habits and suspicions of the people, the
infancy of co-operation—all stand in the way. But the
final step will come when the country is ripe for it. I
trust that will not long be delayed; for when it comes, it
will obliterate all the mistakes, all the inconveniences, all
the artificialities, of our present position.
In March 1911 matters were carried a step further,
Sir Guy Fleetwood Wilson replying in the Legislative
Council to Sir Yithaldas Thackersey (who had argued
that a 10-rupee gold coin ought to be minted and
put into active circulation in India) that “ much has
happened since 1902 which justifies the reopening of
the question.” In a despatch to the Secretary of
State, dated May 16, 1912, the Government of India
proposed to open the Bombay Mint to the coinage of
68 INDIAN CURRENCY AND FINANCE chap-
sovereigns. This is an exceedingly confused docu¬
ment. It is mainly directed to showing that an
increased use of gold as currency in India would be
advantageous to the system. But, apart from the
validity of this argument, it is not clearly shown in
what way the establishment of a mint would effect the
desired purpose ; indeed it is explicitly admitted that
“ in proposing to open a gold mint it is not our in¬
tention to induce thereby an increased flow of gold
to India. Indeed were that our purpose we recognise
that it would certainly fail.” The despatch reads as
though it were an attempt to reconcile divergent and
contradictory views which had received expression.
The British Treasury, however, has again come to the
rescue. They have stipulated either that the branch
mint should be under Imperial management, which
would be inconvenient, or that it should be wholly
separate, which would be expensive. Accordingly, in
a despatch, dated October 18, 1912, the Secretary of
State suggested to the Government of India that
instead of sovereigns Indian gold coins of the de¬
nomination of, say, 10 rupees should be coined at
Bombay. The Government of India have replied that
they prefer this proposal to the conditions demanded
by the Treasury, and that they contemplate making
inquiries as to Indian opinion on it. This is how
the matter stands at present.
The actual policy of the Government of India since
1900 as regards gold currency has been, in my opinion,
IV
GOLD IN INDIA
69
well judged. But these negotiations show that the
authorities are still doubtful as to the advantages
of the existing system.
3. Up to 1870 the English currency system was
the envy of the rest of the world, and it was supposed
that the excellencies of the practical working of
this system were due to the fact that the actual
circulating medium of the country was gold. This,
it was thought, must be the only really safe way of
maintaining absolute stability. Germany, accord¬
ingly, when she instituted her gold standard, pro¬
hibited the issue of notes of a less denomination than
100 marks, in order that gold might actually circulate
from hand to hand to a maximum possible amount.
For similar reasons the business community showed
themselves immovably hostile to Lord Goschen’s pro¬
posals for the issue of one-pound notes in England.
While other countries, who have, with few excep¬
tions, found the expense of a gold medium of
exchange prohibitively heavy, have nevertheless
envied those who could afford it, and have adapted
their laws, even when they could not afford to adapt
their practice, to a currency of gold.
But in recent years the evolution of currency has,
for reasons which I have elaborated in Chapter II.,
embarked upon a new stage of development, and all
this is changed. In England the use of a cheque
currency has grown so universal that the com¬
position of the metallic coin has become a matter of
CHAP.
70 INDIAN CURRENCY AND FINANCE
secondary importance. In Germany the policy of
1876 has been deliberately reversed by a recent
revision of the Bank Act, and 20-mark notes are now
issued with the deliberate object of keeping as much
gold as possible in the bank and wasting as little as
possible in circulation. This new policy is likely to
be extended in the future. The President of the
Reiehsbank, addressing the Budget Committee of the
Reichstag in January 1913, argued that the rule laid
down in 1906, forbidding the free issue of 20- and 50-
mark notes to an amount exceeding XI5,000,000,
would have to be repealed, the issue of these notes
in 1912 having exceeded the limit by XI 1,500,000;
and he went on to say that they must, in the
interests of sound policy, increase the issue of .notes
and thus hold a larger quantity of gold in their
reserves.
In other countries, where actual currency is the
principal medium of exchange, the attempt to
introduce gold as the medium passing from hand to
hand has been for the most part abandoned. A
great part of the new gold has flowed, during the
last ten years, into the reserves of the State Banks,
and a comparatively small amount only can have
found its way into circulation. In Austria-Hungary,
for example, after the currency reform of 1892,
attempts were made to force gold into circulation
just as they were in India. They luckily failed. The
authorities of the Austro-Hungarian Bank now keep
IV
GOLD IN INDIA
7 i
all the gold they can in their central reserves, and they
are not likely to make another attempt to dissipate
it. The same kind of thing occurred in Russia. After
establishing with difficulty a gold standard, they
began with the theory, and have since abandoned
it, that a gold currency was the natural corollary.
Other examples could be given. A gold standard is
the rule now in all parts of the world; but a gold
currency is the exception. The “ sound currency ”
maxims of twenty or thirty years ago are still often
repeated, but they have not been successful, nor
ought they to have been, in actually influencing
affairs. I think I am right in saying that Egypt
is now the only country in the world in which
actual gold coins are the principal medium of
exchange. 1
The reasons for this change are easily seen. It
has been found that the expense of a gold circulation
is insupportable, and that large economies can be
safely effected by the use of some cheaper substitute;
and it has been found further that gold in the
pockets of the people is not in the least available at
a time of crisis or to meet a foreign drain. For
these purposes the gold resources of a country must
be centralised.
1 The value of the token coins (silver, nickel, and bronze) circulating in
Egypt and the Sudan is estimated at no more than £E3,600,000, and the
notes of the National Bank of Egypt (chiefly current in the large towns) at
£E2,400,000. The whole of the rest of the currency consists of gold coins
(chiefly British sovereigns). The existing position in Egypt is, therefore, the
ideal at which many Indian currency reformers seem to aim.
72 INDIAN CURRENCY AND FINANCE chap.
This view has long been maintained by economists. 1
Ricardo’s proposals for a sound and economical cur¬
rency were based on the principle of keeping gold
out of actual circulation. Mill (. Political Economy,
Bk. III. chap. xxii. § 2) argued that “ gold wanted for
exportation is almost invariably drawn from the
reserves of banks, and is never likely to be taken
from the outside circulation while the banks remain
solvent.” While Goschen spoke as follows in 1891
before the London Chamber of Commerce :—
We only have as an effective circulation that which is
required for the daily wants of the people. You cannot
tap that to any extent so as to increase your central stock
of gold. You may raise your rate of interest to 6 per cent
or 8 per cent, but the bulk of the people will not carry less
gold in their pockets than they did before, and I doubt
whether, from other quarters, you would be able to get
much addition to your central store.
But while it is no new theory that gold in the
pockets of the people is absolutely useless for the
purposes for which a currency reserve is held, all
but the highest authorities have believed until fairly
recently that no gold standard can be really stable,
unless gold actually circulates in the country. The
contrary view was distrusted by practical financiers,
and only of late years has it become powerful enough
to dictate policies. At last, however, Governments
have been converted to it, and it is now as much
1 See Lindsay’s evidence before Indian Currency Committee (1898)
IV
GOLD IN INDIA
73
their anxiety to keep gold out of circulation and in
their reserves as it was formerly the opposite.
A preference for a tangible gold currency is no
longer more than a relic of a time when Governments
were less trustworthy in these matters than they are
now, and when it was the fashion to imitate un¬
critically the system which had been established in
England and had seemed to work so well during the
second quarter of the nineteenth century.
4. Let us now apply these general considerations
to the case of India. In 1900 an attempt was
seriously made to get sovereigns into active circu¬
lation, in accordance with the recommendations
of the Committee of 1898. It was decided to pay
out gold to the public as soon as the stock should
exceed five millions sterling, and such payments
commenced on January 12, 1900, at the currency
offices in Calcutta, Madras, and Bombay. The instruc¬
tions issued were to tender gold to all presenters of
notes, but to give rupees if they were preferred.
Later on the Comptroller-General was authorised to
send sovereigns to the larger district treasuries. And
in March the Post Offices in the Presidency towns
began to give gold in payment of money orders, and
the Presidency Banks were requested to issue sove¬
reigns in making payments on Government account.
These arrangements continued in force throughout
the financial year 1900-1901, and by March 31,
1901, the amount put into the hands of the public
74
INDIAN CURRENCY AND FINANCE
CHAP.
reached the considerable total of £6,750,000. But
of this amount part was exported, not far short of
half was returned to Government, and it was supposed
that the greater part of the remainder went into the
hands of bullion dealers. 1 Further attempts to force
gold into circulation were, therefore, abandoned, and
a large part of the gold which had accumulated in
the currency reserve in India was, a little later on,
shipped to England in order to be held “ ear-marked ”
at the Bank of England.
Since that time the provisions of the Indian system
regarding gold (as already given in Chapter I.) have
been as follows:—(l) The sovereign is legal tender
in India at 15 rupees to £1; (2) the Government
has bound itself by Notification to give rupees for
sovereigns at this rate ; (3) it is willing, as a rule,
to give sovereigns for rupees at this rate, but is
under no legal obligation to do so, and will not
always exchange large quantities.
5. The defeat of the experiment of 1900-1901 was
due to a variety of causes, but mainly, I should sup¬
pose, to the long habituation of the Indian public to
the use of silver, and to the unsuitability of the
sovereign, by reason of its high value, for so poor
a country as India.
But it is not by any means so certain that an
attempt at the present time to put a 10-rupee gold
1 The above account is summarised from the Reports of the Comptroller
of Paper Currency for 1900 and 1901.
IV
GOLD IN INDIA
' 75
coin into circulation would not meet with more
success. Its value would be somewhat less. But,
more important than this, the taste of India for gold,
as against silver, has been very considerably developed
during the last ten years. It will be worth while to
summarise the available evidence as to the present
position of gold in India.
6. We know, of course, what the annual net addi¬
tion to the total stock of gold in India ( i.e ., the
imports and the production less the exports) approxi¬
mately is—although the amount of the steady leakage
across the land frontiers is usually neglected, 1 We
know also how much of this addition is in the form
of sovereigns, and how much in the form of gold bars.
By making allowance, therefore, for the increase or
decrease of sovereigns in the Paper Currency Reserve
and the Government Treasuries, we can calculate how
many sovereigns have found their way each year into
the hands of the public. But as to the uses to which
the public put the sovereigns our information is ex¬
ceedingly vague and unprecise. By far the most
careful and valuable discussions of the question are to
be found in the Reports of the Comptroller-General of
1 This is probably very considerable. India must be the main source of
supply of gold for the whole of Central Asia. The following extract from a
report sent in to the Comptroller of Currency (1911-12) is instructive:—
“From Peshawar a considerable absorption of gold in connection with the
trans-border trade is reported ; this trade is said to have amounted during
1911-12 to the value of Rs. 30 lakhs. Gold so taken seldom or never returns.
The Amir’s subsidy is also largely paid in gold.” It is also reported that
gold is preferred by those who go on pilgrimage to Mecca.
76 INDIAN CURRENCY AND FINANCE chap.
Paper Currency for 1910-11 (written by Mr. P. W.
Gillan) and for 1911-12 (written by Mr. M. F.
Gauntlett); and I have made free use of these in
what follows. First, it will be useful to have
before us the statistical information referred to
above:—
(I)=(2)+(S)
Net Addition
to Stock of
Gold:—
Imports - Ex¬
ports +
Production.
(2)
Net Addition to
Gold in Paper
Currency Re¬
serve and
Treasuries. 1
(3)=(4)+(5)
Net Addition
to Stock of
Gold m Hands
of Public.
(4)
Net Addition
to Bullion in
Hands of
Public.
(5)
Net Addition
to Sovereigns
m Hands of
Public.
1901- 02
1902- 03
1903- 04
1904- 05
1905- 06
1906- 07
1907- 08
1908- 09
1909- 10
1910- 11
1911- 12
1912- 13 2
£
3,223,000
7,882,000
8,963,000
8,841,000
2,698,000
12,061,000
13,677,000
5,022,000
16,620,000
18,153,000
27,345,000
24,551,000
£
-5,000
2,870,000
944,000
38,000
-6,840,000
-193,000
-993,000
-2,843,000
6,347,000
71,000
9,347,000
4,231,000
£
3,228,000
5,012,000
8,019,000
8,803,000
9,538,000
12,254,000
14,670,000
7,865,000
10,273,000
18,082,000
17,998,000
20,320,000
£
2,261,000
2,814,000
4,741,000
5,866,000
5,806,000
7,098,000
| 7,243,000
4,422,000
! 7,407,000
9,991,000
9,117,000
9,320,000
£
967,000
2,198,000
3,278,000
2,937,000
3,732,000
5,156,000
7,427,000
3,443,000
2 ,866,000
8,091,000
8,881,000
11 ,000,000
i Since 1908 the whole of this has been held in sovereigns.
2 Estimate.
7. The enormous amount of wealth which the
Indian people are now devoting to the barren accum¬
ulation of gold is brought out very strikingly by the
figures in the third column. We know that it is
hoarded, used as jewellery, as gilding, even (according
to Messrs. Samuel Montagu) as medicine. But these
figures are not relevant to our present purpose, and
we must turn to the figures in the last column, giving
the flow of sovereigns into the hands of the public.
What part of this total is employed for ornament,
IV
GOLD IN INDIA
77
what part for hoarding, what part is melted down,
and what part is left truly to serve as currency ?
In the first place it is estimated that about
£1,000,000 “shield” sovereigns are now imported
annually. These are sought after for purposes of
ornament and stand at a premium. 1 It may be safely
assumed, therefore, that they are not used as currency.
Further, it is certain that a large number are melted
every year and used as bullion. There are two causes
of this. “As regards melting,” writes Mr. Gillan, 2
“it is to be noted that for certain purposes the
sovereign has at all times an advantage. Gold being
sold in 5- and 10-ounce bars, if a jeweller wants only
a small quantity, a full-weight sovereign meets his
purpose very well, as he knows its exact weight,
fineness, and value, and has no trouble in obtaining it.
And the sovereign is presumably cheaper than the
same quantity of gold in out-of-the-way parts.”
There is also another cause, connected with the
exchanges; 8 at some times of year the cheapest way
of getting gold is to buy sovereigns for rupees from
the Government. This explanation is borne out by
the fact that there is a steady demand for sovereigns
from the Government’s reserves during the summer
months. This is the time when the exchanges make
it most advantageous to get gold in this way, and when
there is least likely to be a demand for sovereigns as a
1 Throughout 1911-12 the Bank of Bengal quoted them at a premium
of 4d.
2 Report on Paper Currency, 1911-12. 3 See pp. 97*99.
0
78 INDIAN CURRENCY AND FINANCE chap.
medium of exchange. Many sovereigns, therefore, are
melted. But we should be making rather a random
guess if we were to attempt to say how many.
There must still remain, as the result of recent
importations, a large number of sovereigns retained
in the hands of the public in that form. But we
cannot assume that even this reduced total is truly
employed as a medium of exchange. There is a good
deal of evidence for supposing that in some parts of
the country sovereigns are displacing rupees for the
purpose of hoards. This may be the case even when
in the first instance the gold is used for currency.
The crops may be sold for gold, because the cultivator
wants gold for his hoard. “ It is quite conceivable,”
Mr. Gillan points out, “ that the acceptance by the
cultivator of gold in payment of his crops is in the
nature of barter ; that is to say, he takes the gold not
as coin merely but for some other purpose, and the
return of gold in payment of revenue may be no more
than the return of so much as he finds himself
unable to retain.”
8. It is clear, then, that we must not fly from a
glance at column (1) of the table on p. 76, or even from
a glance at column (5), to extravagant conclusions as
to the present position of the sovereign in the Indian
currency system. Many heavy deductions must be
made from the first totals. What direct evidence is
there as to the use of gold as currency ?
“ The best indication” (to quote Mr. Gillan again)
V
GOLD IN INDIA
79
“of the extent to which sovereigns have established
themselves as a regular part of the currency, is to he
found in the figures of receipts at Post Offices and
Railways.” These have been as follows :—
Post Offices.
Railways.
1906 - 07
1907 - 08
1908 - 09
1909 - 10
1910 - 11
1911 - 12
£ 553 , 000 *
1 , 358,000
1 , 001,000
265,000
638,000
1 , 363,000
£ 468 , 000 *
1 , 045,000
710,000
134,000
597,000
1 , 222,000
i Second half-year only.
It has been estimated by the Paper Currency De¬
partment 1 that in 1907, as a result of the absorption
of earlier years, not less than two millions were in
circulation. But it is supposed that by the end of
1908 nearly the whole of that amount had disappeared.
Owing to the depression of that year and the low
level of the exchanges, the most profitable employ¬
ment of the sovereigns was as bullion. This is
strikingly borne out by the almost negligible receipts
of gold (given below) by Post Offices and Railways in
1909-10. Until 1910 the absorption of sovereigns
was not sufficient to restore them to a position of any
importance as currency. We have chiefly to consider,
therefore, the imports of sovereigns since 1910. It
is from this source that the sovereigns now circulat¬
ing as currency are likely to have come.
1 See Report for 1909.
8 o
INDIAN CURRENCY AND FINANCE
CHAT.
9. When we proceed to detail, it appears that
there are several important parts of India in which
the use of the sovereign is still negligible—in Bengal,
Eastern Bengal, Assam, the Central Provinces, and
Burma. In these provinces it has not begun to make
any serious headway. In the United Provinces (for
the purchase of wheat) and in certain districts of
Madras, on the other hand, sovereigns seem to
circulate to some extent, to be received freely by the
general public, and to be increasing, though at no
sensational rate. In Bombay and the Punjab, par¬
ticularly in the latter, their use is, however, much
more important. Most of the detailed evidence, which
is available, refers to the Punjab; and care must be
taken not to apply to the whole of India opinions
from witnesses in that province as to the present
position of gold. The following extract from a re¬
solution passed by the Punjab Chamber of Commerce
on June 4, 1912, is interesting. The Chamber “are
able to state authoritatively that sovereigns are
becoming popular and that their circulation is in¬
creasing. They are accepted as legal tender in the
bazaars, and this may be attributed to the intelligence
of the people and to the fact that all over the East (in
China and the Straits Settlements), where the Punjab
Sepoys serve in the army and the police, the sovereign
is popular. These men remit their earnings in gold,
and as there is hardly a village in the Punjab that
has not sent a man to these services, it is not sur-
IV
GOLD IN INDIA
81
prising that the value of the sovereign is understood
It is difficult to say to what extent sovereigns are
being hoarded, but that they are held up by the
well-to-do to a very considerable amount is un¬
doubtedly the case; and hoarding will continue
among the rural population for years to come.
With regard to the probable effect this importation of
sovereigns may have on exchange, they are of opinion
that Government should not rely on the sovereigns
that are being absorbed by the districts in exchange
for produce and in the shape of savings coming out at
any time in any appreciable quantity to support the
stability of the rupee.” In 1911-12 the Comptroller
of Currency collected a number of district reports as
to the growing popularity of gold in the Punjab.
They completely corroborate the above summary.
10. Before we pass on to other aspects of the
question, a word may be added with special reference
to the very large gold imports of quite recent date
(i.e., in 1912). Popular attention has been attracted
by the figures for that year, which are indeed truly
remarkable. 1 The gold imports of 1911-12 and
1912-13 (see table on p. 76) were noteworthy as
compared with those of former years by reason of
their huge aggregate amount; but they were even
more noteworthy if regard be had to the very high
proportion of sovereigns.
1 In the calendar year 1912 India increased her stock of gold by
£29,500,000, of which about £21,500,000 was in sovereigns.
G
82
INDIAN CURRENCY AND FINANCE
CHAP.
I do not believe, however, that a conclusion can
fairly be drawn from these figures as to any startling
change in the position of the sovereign in India.
India has experienced two very good seasons and has
been able, therefore, to accumulate savings to an
unusually large extent for investment in gold orna¬
ments and hoards. Is this altogether inadequate as
a partial explanation of the recorded figures? I do
not, for the following reasons, think it is.
In the first place the gold imports for 1911-12
fall short of, and those for 1912-13 do not much
exceed, those for 1910-11 if we exclude the addi¬
tions to the Paper Currency Reserve. Imports of
gold for this purpose are, for reasons to be explained
in Chapter V., quite independent of the effective
desire of India for gold, and occur merely because
gold happens in some circumstances to be a cheaper
means of remittance to India than Council Bills
or any other method. In the second place the
conditions of 1912 were somewhat abnormal on
account of the unusually large supplies of gold
which were available from Australia and Egypt. If
it is a matter of importing gold from England, those
who want it for bullion purposes will generally find
it cheaper to buy gold bars than to buy gold coin.
But if there are sovereigns on their way from Australia
and ready to be diverted to India, or if there are
surplus sovereigns available for export at Alexandria,
it may be a good deal cheaper to buy these sovereigns
IV
GOLD IN INDIA
83
than to get gold bars from London. The explanation
of this, depending on the foreign exchanges, is fully
discussed in Chapter V. I suspect, therefore, that
a higher proportion than usual of the sovereigns
imported in 1912 were put to non-currency uses for
which gold bars would have served just as well. If
sovereigns rather than bars are imported from London
it is reasonable to draw the conclusion that the
importer (since he must pay a higher price) definitely
prefers them. But if sovereigns are imported from
Egypt or Australia rather than bars from London, no
such conclusion can be drawn. Of the £21,500,000
sovereigns imported into India in 1912 only about
£5,000,000 came from London—the rest from Egypt
and Australia. 1 From the gross figures of gold
imports into India in 1912 even heavier deductions
than usual must be made, therefore, before we have
an indication of the extent to which additional
sovereigns have really found their way into the
currency. 2
1 The fluctuations in the proportions for different years of the figures in
columns (4) and (5) of the table on p. 76 must certainly be explained in
part by the state of the exchanges, and not wholly by the degree of deliberate
preference for sovereigns.
2 The Accountant-General, Bombay, has suggested (see Paper Currency
Report, 1911-1912) that “the principal cause” of the heavy importation of
sovereigns has been a reduction in the rate of charge (fiom -fa per cent to
per cent) for Telegraphic Transfers issued upon Madras and Calcutta
against gold imported into Bombay. No doubt, this favours gold to a
slightly greater extent than before, as against Council Transfeis, as a means
of remittance from London to Madras and Calcutta, but the difference seems
too small in relation to the other factors which determine the cheapest form
of remittance, for the change to have exerted any appreciable influence.
8 4
INDIAN CURRENCY AND FINANCE
CHAP.
11. Perhaps we may fairly sum this evidence up
by saying that it goes to show the existence in India
at the present time of an enormous demand for gold
bullion, a very considerable demand for sovereigns for
purposes of hoarding, and a relatively smaller demand
for them, chiefly confined to the United Provinces,
the Punjab, Madras, and Bombay, for purposes of
currency.
Those who think that this tendency to use gold
coins should be further encouraged have advocated
three methods of doing so : by making arrangements
for the coinage of sovereigns at Bombay; by the
mintage there of some distinctively Indian coin of the
denomination of 10 rupees; by a deliberate attempt
on the part of Government, as in 1900-1901, to force
sovereigns into circulation and to familiarise parts of
the country with them where they are at present
unfamiliar, even to the extent of refusing to issue
more rupees on demand.
12. I have placed these proposals in the order of
their probable efficacy to effect their purpose, I see
no reason why the first—the coinage of sovereigns at
Bombay—should have any effect at all towards
increasing the use of sovereigns as currency. Four
types of occasion can be distinguished on which gold
bars might be presented at Bombay for coinage :—
(a) Gold might be deliberately imported from
England for the purpose; or it might occasionally
happen that importers of gold bars, having tempor-
IV
GOLD IN INDIA
85
arily miscalculated the demand for bars, would wish
to sell these bars to the Government.
(6) Owners of Indian gold mines might conceivably
find it worth their while to suspend the arrangements
they have made in recent years with English refiners
and might sell their gold (about £2,000,000 annually)
to the Bombay Mint. Whether or not they would
find it worth while to do this would presumably
depend on the facilities for refining in India and the
terms offered by the Bombay Mint.
(c) The habits of the people might be changing,
the importation of new bars from England ceasing,
and the people wishing to get rid of the bars and
ornaments they already had.
(d) In times of famine or depression the people
might sell their bars and ornaments to the Mint
when they were driven to turn their ultimate resources
into money.
Provided the Bombay Mint did not offer to coin
on more favourable terms than the British Mint, which
presumably it would not do, it seems exceedingly
unlikely that bar gold would be imported from
England on purpose to be coined in India rather
than in England. But if this were to happen, it
would have no consequences worth thinking about.
The place of mintage is a matter of indifference. In
all the other eventualities, suggested above, the gold
is brought to the Mint, not to satisfy a demand for
new gold currency, but because the owners of the
86
INDIAN CURRENCY AND FINANCE
CHAP.
gold wish to sell it. The sellers would take payment
in sovereigns, notes, or rupees (since the former can
always be exchanged for the latter), as might suit
their convenience. In cases (c) and (d) the Govern¬
ment would probably be forced in the end to export
the sovereigns it had itself minted, and to bear the
cost of export as well as the cost of minting.
The chief result of mintage at Bombay, therefore
(assuming that the terms for coining were sub¬
stantially the same as in England), would be a small
saving of expense to sellers of gold in India. Im¬
porters of gold bars would be saved occasionally a
small loss of interest due to miscalculation; owners
of Indian gold mines might conceivably pay, at the
expense of Government, infinitesimally higher divi¬
dends; the people turning their hoards into money
would be able to save the expense of sending the
gold to England. A corresponding cost would fall
on the Government, for mintage in the first instance
and sometimes for export afterwards. These conse¬
quences, whether desirable or not, have very little to
do with currency questions. The last of them—the
making it easier to turn hoards into money—is very
likely desirable. But all of them could be brought
about more cheaply without the establishment of a
Bombay Mint. It would be sufficient if the Govern¬
ment were to publish terms on which it was ready to
buy gold bars. It might be a real convenience if
Government notified its readiness to purchase bars
IV
GOLD IN INDIA
87
tendered in India at Es. 58 annas 5 per ounce 1
(payable in silver or notes or sterling drafts on London
or in sovereigns, on the present system, if they were
available). 2 The Government would be involved, from
time to time, in the cost of export; but this cost it
would have to bear, I believe, just as often if there
were a mint, while the cost of the mint itself would
be saved. Such a notification, as is suggested above,
would be much more in the true spirit of the Indian
currency system than the establishment of a gold
mint would be; and it would serve the convenience
of the public just as efficiently, at less expense to
Government. The establishment of a Mint, however,
would flatter at small expense an ignorant vanity.
The Government by granting it in response to popular-
appeal (though I doubt whether, in fact, there is any
such appeal) would have a pleasant feeling of being
democratic on an occasion when to yield involves
no more evil than any other expenditure on a piece
of fairly cheap ostentation.
13. To the second proposal for the mintage of
a distinctively Indian gold coin many of the above
comments apply equally. But the existence of a
1 This corresponds to the Bank of England’s normal price for gold
bullion,
2 At present notes can be issued by currency offices, but only to treasuries
on the requisition of the Comptroller-General, in exchange for gold bullion
at the rate of 1 rupee for 7*53344 grains troy of fine gold* Since April 1,
1907, the receipt at the Indian Mints of gold bullion and gold coins other
than sovereigns and half-sovereigns has, in fact, been stopped by Government
of India Notification.
88
INDIAN CURRENCY AND FINANCE
CHAP.
10-rupee gold piece (13s. 4d.) might very possibly do
something to popularise the use of gold as currency,
largely because it would be of a smaller and therefore
more convenient denomination. 1 It is very difficult
to prophesy with regard to the local popularity of
a new coin. On the other hand—apart from the
general objections, to be dealt with later, against
popularising gold—it is generally a bad thing to
introduce a new coin and add to the confusion of
currencies. For purposes of export, at times of de¬
pression, the 10-rupee piece would be worth less than
two-thirds of a sovereign. The sovereign, moreover,
is fast becoming the international gold coin par ex¬
cellence far beyond the bounds of the British Empire.
In 1911, 43,305,722 British sovereigns were minted,
or a good deal more than the whole gold coinage in
that year of the rest of the world, viz. £33,375,455.
A rival coin ought not to be set up in India
unless some evident advantage is to be obtained
from it.
14. The third policy—that of active measures on
the part of Government to get more gold into
circulation—is not likely to be adopted. If it were,
it is difficult to say if it would be successful or not.
To force a coin on people is not always the best way
to popularise it; and if rupees were to be refused,
there would probably be a small premium on them
1 I have, however, seen no evidence which suggests that AaZ/-sovereigns
are specially popular on account of their lower denomination.
IV GOLD IN INDIA 89
or a small discount on gold—a position which would
not help gold.
15. It is probably the case, however, that if it
were desirable to popularise the use of gold, a means
could be found of effecting this in some degree. The
main question is whether this is, in fact, the right
policy. Lord Crewe looks forward (see his speech in
the House of Lords, November 14, 1912) “with some
confidence to the increased use of gold currency in
India among the people, although it may be a long
and indefinite time before it becomes the habitual
and favourite coin in the country at large.” Ought
he to expect this result with satisfaction as well as
confidence ?
My own answer to this question is unhesitatingly
in the negative. The principal arguments against
such a policy are two,—first, the general argument
that it is extravagant and wasteful to have gold coins
as the actual media of circulation, and second, the
argument, more especially applicable to India, that
it would diminish, and not, as its advocates claim for
it, increase the stability of the currency system as a
whole.
16. Let us consider first how heavy a loss and ex¬
pense the popularity of a gold currency might involve.
During the last twelve years the Government have
been able to accumulate a sum of about £21,000,000
sterling from the profits of rupee coinage; and the
interest on the invested portion of the Paper Currency
90
INDIAN CURRENCY AND FINANCE
CHAP.
Reserve is now about £300,000 annually. Thus the
annual income, derivable from the interest on the
sums set free by the use of cheap forms of currency,
amounts already to about £1,000,000. With the
rapidly increasing use of notes, this income should
show a steady growth in the future. Both these
sources of profit would be gravely jeopardised if the
introduction of an Indian gold coin were to meet
with any considerable measure of success. It would
be specially unfortunate if a competitor to the paper
currency were to be introduced, before the virtual
abolition of the system of circles has had time to
have its full effect in the direction of popularising
the use of notes.
\7. Advocates of a gold currency, however, would
not, I think, deny that it might involve the country
in some extra expense. They support their policy
on the ground that it would do a great deal to ensure
the stability of the currency system, and that it is
worth while to incur some expense for this object.
I think it is possible to show that such a policy is
likely on the whole to have an exactly opposite effect*
It is suggested that the currency should be com¬
posed of rupees, gold, and paper, with rupees still
predominating, but consisting of gold in a considerably
higher proportion than at present. This greater
infusion of gold would necessarily be at the expense
either of the Currency Reserve or of the Gold Standard
Reserve. If the gold replaced notes, the former
IV
GOLD IN INDIA
9i
would be diminished, and, if it replaced rupees, the
latter.
It is tacitly assumed that the greater part of what
has to be withdrawn from the circulation at a time
of crisis would come from the gold portion of the
circulation.
This assumption seems to me to be unwarranted
and contrary to general experience. At a time of
crisis it is the fiduciary coins with which the public
are most eager to part. Bankers and others would
keep as much of their surplus currency as they
possibly could in the form of gold, and it would be
rupees (in great part) and not gold that would be
paid into the Government Treasuries.
Thus the infusion of more gold into the circulation
would necessarily weaken the existing reserves and
would not correspondingly reduce the amount of such
reserves which Government ought in prudence to keep.
When it became necessary to contract the volume of
currency, Government would be in a worse, position
than at present, unless the greater part of what was
withdrawn came from the gold portion of the
circulation and not from the rupee or paper portion.
This is not an expectation upon which it would be
prudent to act.
I have already quoted the late Lord Goschen’s
authority in support of the centralisation of gold
reserves. A further passage from the address he
delivered on the same occasion (in proposing a
92
INDIAN CURRENCY AND FINANCE
CHAI’.
scheme of one-pound notes for England) is relevant
here :—“ I would much prefer for national and
monetary purposes to have £20,000,000 of gold
under our command at the Bank of England than
30,000,000 sovereigns in the hands of the public.
... If the issue (of one-pound notes) took place,
and were taken up, we should have £20,000,000 more
central gold—an immeasurably stronger reserve than
30,000,000 sovereigns on which we could not place
our hands.”
18. There are, in fact, two ways of maintaining
stability in a country whose demand for currency
varies widely from year to year — either it must
consist almost wholly of gold, or a sufficient reserve
must be concentrated in the hands of Government.
If only one-quarter or one-fifth of the circulation
consists of gold, I do not think that a Government
can rely on getting more than a fraction of this,
when it becomes necessary to contract the circulation
by one-sixth or one-seventh; whereas if the.gold is
in the Government’s reserves, the whole of it is
available.
For obvious reasons of convenience and of
economy the greater part of the Indian circulation
must continue in any case to consist of rupees. It is
vain to suppose that the advantages of a true gold
currency can be obtained by the compromise of some¬
what increasing the gold element. If the Govern¬
ment dissipates some part of its sterling resources
IV
GOLD IN INDIA
93
over the country—and any proposal for a greater in¬
fusion of gold into the currency amounts to this-- it
must plainly stand in a weaker position to meet a
crisis than if they are concentrated in its own chests.
19. The encouragement of gold, therefor*', would
involve expense, and, at the same time, diminish
safety. There is a further argument against it,
connected nevertheless with the above, which is of
great importance.
If gold were to supplant rupees only and not
notes, and were to supplant them to so great an
extent that sovereigns would tend to flow out of
the'currency at times of depression, there might be
something to be said for it. It is certainly the case
that it is a disadvantageous thing for India to have
so large a part of her currency in the form of
expensive tokens,—the issue of rupees strengthens
the reserves by less than a half of their nominal
value. The degree of damage to the Government’s
reserves, therefore, would be much less if the gold
were to supplant rupees than if it were to supplant
notes. But this is most unlikely to be the case.
It is for comparatively large payments that the
sovereign may gradually come into use, and for
these it is essentially a rival to the note. For small
payments, which in India make in the aggregate an
enormous total, the sovereign can no more supplant the
rupee than it can supplant the shilling in England.
Reports collected by the Comptroller of Currency
94
INDIAN CURRENCY AND FINANCE
CHAP.
in 1911-12 already show in a striking way the
tendency of gold to take the place which is, or might
be, occupied by notes. The rapidity with which
gold is becoming popularised in the Punjab is prob¬
ably due in very great part to the fact that notes
have never become acclimatised there . 1 The incon¬
venience of making large payments in silver is
obvious ; 2 and facilities for obtaining gold are natur¬
ally welcomed. The events of the last two or three
years may have done very great harm in the direction
of postponing the development of the use of notes in
Northern India. In Bengal and Eastern Bengal, on
the other hand, the slow progress made by gold is to
be explained by the fact that the people of these
provinces are much more accustomed to the use of
notes, which are even used in some cases for the
purpose of hoarding (cf. p. 165). If the Government
were to attempt to further in any way the circulation
of gold in the Bengals, they would be aiming a
dangerous blow at their own note issue; whereas if
notes could be encouraged in place of rupees in the
jute trade, there would be a huge increase in their
circulation. It is also reported that the use of gold
in the rice trade in Burma would displace notes
1 The Manager of the National Bank in the Punjab reported in 1911-
1912 :— u The fact of currency notes having always been unpopular throughout
the Punjab and, excepting in Lahore, being cashed only at a considerable
discount, has no doubt conduced to the popularity of the sovereign. A
portable medium commanding its full face value was urgently required and
the sovereign has for the present met the want.”
2 £6000 in rupees weighs more than a ton.
IV
GOLD IN INDIA
95
mainly. The following quotations from the reports
(collected in 1911-12 by the Comptroller of Currency
from districts in the Punjab), referred to above,
illustrate the point that gold is preferred to silver
because it is more convenient to carry, and that
notes are distrusted because there is no universally
spread assurance of their ready convertibility . 1
Gujranwala .—The zamindar prefers to have his price
for the grain in gold, as he can easily carry it and easily
exchange it and, if necessary, easily put it away. He
shies at currency notes of any value, as they cannot be
easily exchanged, and to receive payment in silver means
cost of carriage and a greater risk of being robbed. Con¬
tractors of the Canal Department are very glad to receive
payment of their cheques in gold Some have remarked
that sovereigns can be exchanged even in the village most
remote from civilisation, but notes, even of the value of
Rs. 5, are looked upon with distrust by the village yokel
and even by the village sahukar. With a sovereign there
is no trouble, no awkward questions are asked and no
discount taken.
Jhang .—The people prefer gold because it is less trouble¬
some than silver money.
Gurdaspur .—The facility of transit is the reason why
corn merchants prefer sovereigns to silver.
Ambalct .—Both in cities and villages, sovereigns are
replacing notes more than rupees.
Bamm .—Gold is slowly but steadily replacing currency
notes.
Rohtak .—(With the increase of gold) a corresponding
decrease in the use of currency notes has been observed
during 1911—12.
1 The Government should probably instruct its officers to receive and
change notes with freedom on every possible occasion, in order to dissipate
this idea.
96
INDIAN CURRENCY AND FINANCE
CHAP.
Ludhiana. —(With the increase of gold) the issues of
notes have correspondingly decreased.
These particular statements are corroborated by
general statistics. The most recent statistics of the
use of 10-rupee notes in the Punjab and in Bombay,
as compared with Bengal, strongly suggest that the
recent development of gold circulation in these
provinces has been at the expense of these notes.
“In the Punjab it is reported (in 1911-12) that
large payments for agricultural produce are never
made in notes, and that gold is replacing notes to
some extent even in ordinary payments among
merchants and traders.” In the light of these facts,
it is a wonderful tribute to the enduring power of
the “ sound ” currency maxims of the middle of last
century that responsible officials should have wel¬
comed the. outflow of gold as the salvation of their
system.
Before leaving this topic I wish to emphasise, in
close connexion with it, a special reason why it is
so important to develop the use of notes in India
at the present time. It is desirable to encourage
the popularity of the note issue, and to avoid
encouraging its rivals, not only for reasons of
i mm ediate economy or because, by the centralisation
of the reserves, the stability of the currency is
increased, but also because, in a country where
cheques are not likely for many years to come to be
used to a dominating extent, it is only thus that a
IV
GOLD IN INDIA
97
proper degree of seasonal elasticity in the currency can
possibly be secured. This question has been already
raised in Chapter III., and I shall return to it again
in Chapters VI. and VII.
20. One minor indirect consequence of the exist¬
ing system is worth reference. Gold flows into the
Currency Reserve when this is a cheaper way of get¬
ting notes or rupees than by buying Council Bills or
Transfers (see Chapter V.). It flows out of the
Currency Reserve when sovereigns are wanted for
circulation or for hoarding, or when this is the
cheapest way in which bullion dealers can get gold.
There is reason for thinking that a good deal flows out
for the last reason, and it is the occasion of this out¬
flow which I wish to examine in a little more detail.
The Currency Department publishes figures which
show the number of sovereigns withdrawn from the
Treasuries each month. It appears from these that,
while some are withdrawn in the winter months
during the busy season, when the demand for currency
and for hoarding (since it is then that the cultivators
sell their crops and realise their savings in coin) is
at its height, there is in the summer also, when it
is most improbable that an extra supply is required
for these purposes, a steady and, in the aggregate,
a heavy drain. A brief arithmetical calculation
provides what must, I think, be the explanation of
this. Since the price of bullion in London is
(normally) £3:17:9 per oz., while the price of
H
9 S INDIAN CURRENCY AND FINANCE chap.
sovereigns is £3 :17:1C% the bullion import point
of Indian exchange will be a little below the sovereign
import point. Thus when exchange is fairly high, an
Indian purchaser of gold finds it more profitable
to buy drafts on London, purchase gold in the
bullion market and ship it to India, than to purchase
sovereigns from the Treasury at Is. 4d.; but when
exchange is low, the reverse is the case and it is
cheaper to get as much gold as the Treasury will let
you have at Is. 4d. I do not know exactly where the
dividing line comes; 1 but when telegraphic trans¬
fers are at Is. 4-|d. it is certainly more profitable to
get gold bullion in London, and when they are at
Is. 4-^2-d. it may pay to get it in India.
These considerations are modified in practice by
the fact that many Indian purchasers of bullion
have a preference for small gold bars which are
manufactured in England. Thus these bars are
worth more than an equivalent weight of sovereigns,
and consequently importation of bullion in this
form takes place throughout the year. But for
many non-currency purposes sovereigns are as good
or nearly as good as other forms of bullion, and for
these purposes the Indian Treasury is the bullion
dealer’s cheapest source of supply when exchange
is relatively low. Thus in the summer months the
bullion dealers will always draw their supplies from
the Treasury, so long as the Treasury is willing to
1 See pp. US-118 for an aocount of the cost of transporting bullion to India.
TV
GOLD IN INDIA
99
supply them. Whenever, therefore, gold in India is
available to the public throughout the year, the
G-overnment will lose during the summer months
whatever amount the bullion dealers require. On
every sovereign thus drawn out, the G-overnment loses
about l^d. For the gold could have been kept in
England by selling bills at a rate more advantageous
than the par of exchange by about this amount. The
annual amount which is drawn out by bullion dealers
when gold is available all the year round is probably not
less than £2,000,000. Thus an important indirect
effect of the present practice is to allow bullion
dealers in the summer months to get their gold at
the Government’s cost slightly cheaper than they
otherwise could.
21. India, as we all know, already wastes far too
high a proportion of her resources in the needless
accumulation of the precious metals. The Govern¬
ment ought not to encourage in the slightest degree
this ingrained fondness for handling hard gold. By
the elimination of both precious metals, to the utmost
extent that public opinion will permit, from amongst
the hoards and the circulation of the country, they
ought to counteract an uncivilised and wasteful habit.
It is interesting to reflect that India’s love of
the precious metals, ruinous though it has been to
her own economic development, has flourished in
the past to the great advantage of Western nations.
Every one knows Jevons’s description of India as
IOO
INDIAN CURRENCY AND FINANCE
CHAP.
the sick of the precious metals, always ready to
absorb the redundant bullion of the West and to
save Europe from the more violent disturbances to
her price level. In very recent years, while the
South African mines have been reaching the zenith
of their production, she has been fulfilling to
perfection her r6le of sink. Prices have been rising,
as it is, much faster than is healthy and in a way
very disadvantageous to such a creditor nation
as Great Britain, to whom large sums fixed in
terms of gold are annually due. It is reasonable
to think that without the assistance of the Indian
demand, they would have risen still faster. From its
very short period point of view the City is sometimes
cross when this Indian demand shows itself in an
inconvenient week; but if we take a longer view the
Indian demand is, at a time of plentiful gold supply
like the present, a true friend to the City and an
enemy of inflation.
On the other hand, if a time comes when Indians
learn to leave off their unfertile habits and to divert
their hoards into the channels of productive industry
and to the enrichment of their fields, they will have
the money markets of the world at their mercy. A
surfeit of gold can do at least as much damage
as a shortage. During the past sixty years India
is supposed to have absorbed, in addition to her
previous accumulations, more than £300,000,000 of
gold (apart from enormous quantities of silver). We
IV
GOLD IN INDIA
ioi
may presume that, if India ceases to demand fresh
gold and begins to disgorge some part of her huge
stock, she will do so gradually. Yet if the change
comes at a time of big new production, she may
involve the world, nevertheless, in a very great
inflation of gold prices.
If, however, India is thus to turn the tables on
the West, she must not delay too long. The time
may not be far distant when Europe, having per¬
fected her mechanism of exchange on the basis of a
gold standard, will find it possible to regulate her
standard of value on a more rational and stable basis.
It is not likely that we shall leave permanently the
most intimate adjustments of our economic organism
at the mercy of a lucky prospector, a new chemical
process, or a change of ideas in Asia.
CHAPTEK Y
COUNCIL BILLS AND REMITTANCE
1. Remittance by means of what are termed Council
Bills is a feature peculiar to the Indian system, and
is not, so far as I know, to be paralleled elsewhere.
It arises partly from the historical circumstance that
the Government of India is the successor of a trading
company, partly from the necessity under which the
Government lies of making very large annual remit¬
tances to England.
2. The Home Charges, that is, the payments which
the Government of India must make in England, for
interest on debt, pensions, payments to the War
Office, Government stores (not chargeable to capital),
etc., amount to £19,000,000 or £20,000,000 annually.
But the amount which it is necessary to remit, apart
from extraordinary remittances to be dealt with later,
is usually less than this; for the amount of new capital
raised by Government in England usually exceeds their
capital expenditure in this country on repayments and
on railway materials, etc. Thus the amount which it
is necessary to remit to England annually is from
102
chap, v COUNCIL BILLS AND REMITTANCE
103
£15,000,000 to £18,000,000. Rupees to this amount,
being part of the revenue from taxation, etc., ac¬
cumulate in the Indian Treasuries. This value is
remitted to England by selling for sterling in London
bills which can be cashed in rupees in Calcutta.
Thus the Government of India pays out rupees in
Calcutta when the bills are presented, and the
Secretary of State’s balances at the Bank of England
are swelled by a corresponding amount.
The Government is, therefore, one of the largest
dealers in foreign exchange, and does for itself
business, which Colonial Governments, for example,
who have a certain amount of similar transactions to
carry through (though on a far smaller scale), would
do through a bank. But while the Government saves
for itself the commission which it would otherwise
have to pay to a bank, it is not, in any real sense,
a competitor with the banks for business. In the
first place, it sells .exchange, save in exceptional
circumstances, in one direction only. And in the
second place, the Secretary of State’s method of selling
exchange results in his dealing exclusively with the
Exchange Banks and financial houses, and not directly
with the trading public. The Secretary of State is
in effect the ultimate source of supply for bills on
India, and the banks, after securing what private bills
are available, even up their demands for remittance
to India by buying bills from him,—provided he is
selling them at a rate which makes this form of
104
CHAP.
INDIAN CURRENCY AND FINANCE
remittance cheaper than the alternative one of send¬
ing sovereigns. The method by which these bills are
sold is as follows.
3. The bills are offered in London for tender at
the Bank of England every Wednesday morning, the
Secretary of State for India in Council (or, for short,
the India Council, whence the name Council Bills)
having previously announced the amount (70 lakhs,
say) for which tenders are invited. There is a reserve
price (not published) below which he will not sell,
but this reserve price is seldom operative. 1 The
tenders name the amount tendered for and the
number of pence per rupee which is offered. The
total amount of 70 lakhs is then allotted to the highest
bidders, the allotment at the minimum rate accepted
being proportionate to the amount applied for at that
rate.
If the demand is large and the minimum rate of
allotment high (say Is. 4-^-d.), the amount offered for
tender the following week (which is announced at the
same time as the result of the previous allotment) is „
likely to be increased. In the interval between the
allotments on successive Wednesdays, the Secretary of
State is usually willing to sell what are known as
specials at a rate ^Ld. higher than the highest
rate of allotment on the preceding Wednesday.
4. It should be added that cash must be paid for
1 It was operative, however, in the middle of March 1913, when the
whole amount offered was not allotted, tenders below Is. 4d. being rejected ;
later in the month tenders below Is. 4d. were accepted.
V COUNCIL BILLS AND REMITTANCES^ 105
the bills in London as soon as they are allotte
on account of the time taken by the mail, they carmoE
be changed into rupees at Calcutta for about a
fortnight. A fortnight’s interest is therefore lost,
and it is worth paying extra to obtain what are
called “ telegraphic transfers,” by means of which
rupees can be obtained at Calcutta almost as soon as
the sovereigns are paid into the Secretary of State’s
account at the Bank of England.
The Secretary of State, therefore, is usually willing
to sell telegraphic transfers at a rate -^d. per rupee
higher than the rate for bills. 1 If the purchaser
chooses transfers, the effect to him is that he gets
his rupees a fortnight earlier in India and pays for
this privilege a sum equal to 5 per cent on the money
for a fortnight. The question, whether it is worth
the purchaser’s while to pay this extra sum, chiefly
depends upon the Indian bank rate, because this
governs the amount of interest which can be gained
by having the money immediately available in India.
It may happen, of course, that a particular bank may
have a special urgency for funds in India, or that the
rate for fortnightly loans does not closely agree with
the bank rate. Generally speaking, however, if the
purchaser can lend money out at no higher rate than
1 The rule is supposed to be that the extra charge for transfers is
per rupee when the Indian bank rate is below 9 per cent, and ^d. when it is
9 per cent or above. The last occasions, on which the difference of j^d. was
in force, occurred between December 1906 and March 1907. In 1904 and
formerly the ^d. difference came into force when the Indian bank rate ex¬
ceeded 6 per cent.
106 INDIAN CURRENCY AND FINANCE chap.
3 per cent in India, he will certainly prefer bills; but
if he can lend at 7 per cent in India, it will be more
profitable for him to buy transfers.
Experience accords with these expectations. When
the Indian bank rate is high and the difference of .^d.
between the two prices is in force, the demand is
almost entirely for transfers. This is convenient to
bankers, and, if he has the rupees waiting in India,
profitable to the Secretary of State.
5. The bills and transfers are made payable at
the option of the purchaser at Calcutta, Bombay, or
Madras. The amount drawn on Madras is relatively
small, and Calcutta comes first, with about 45 per cent
of the whole.
6. Up to 1900 the volume of sales of Council
Bills in any year was mainly governed by the
amount required to defray the Home Charges, this
amount partly depending on the volume of capital
borrowings in the year. But the sales also fluctuated,
though within comparatively narrow limits in most
years, according to the Secretary of State’s oppor¬
tunities (depending on the activity of business and
the balance of trade) of selling his bills at a
satisfactory rate. Since 1900, however, the functions
of the Council Bill system have been enlarged, and
it has now become a very important part of the
general mechanism for the maintenance of the Gold
Exchange Standard.
7. The way in which this has arisen is easily
V
COUNCIL BILLS AND REMITTANCE
ioj
explained. On account of the provision by which
rupees can always be obtained in India in exchange for
sovereigns at the rate of Is. 4d. per rupee, it can never
be worth while for the banks to buy Council Bills at
a price which exceeds Is. 4d. by more than the cost
of sending gold to India. This cost varies consider¬
ably from time to time, but it seldom exceeds -g-d.
If, therefore, the Secretary of State refuses to sell
bills at less than Is. 4|-d., when the banks are requir¬
ing to remit to India, gold will flow. This gold will
be presented at the Treasuries in India to be
exchanged for rupees or notes. Thus the only effect
of the Secretary of State’s refusing to sell remittances
at a price which suits the banks is that sterling-
resources accumulate in his Treasuries in India instead
of in England. This may not be convenient to him.
For example, if the banks are sending gold to India
on a large scale and are exchanging it for rupees, a
time may come when this demand can only be met
by minting more rupees ; the silver for this must be
purchased in London and the profit on the coinage
must be credited to the Gold Standard Reserve which,
for reasons to be discussed in the next chapter, is
kept for the most part in London; thus the gold has
eventually to be shipped back again to England to
pay for the silver and to be credited to the Gold
Standard Reserve. In this case a double loss is
involved—the cost of sending the gold to India (for
the Secretary of State could probably have got
io8
INDIAN CURRENCY AND FINANCE
CHAP-
Is. 4£d. per rupee if he had sold transfers, whereas if
gold flows he gets only Is. 4d.) and the cost of bring¬
ing it back again, say, -^d.; thus a refusal to sell
bills would mean an eventual loss of nearly £d. per
rupee or about 1-J per cent. Or, again, the policy of
holding some part of the gold in the Currency
Reserve in London for possible use in emergency,
may lead to the Secretary of State’s preferring gold
to accumulate in London rather than in India;
otherwise it will have to be sent back again, in
pursuance of this policy, and a double loss incurred,
as in the former case. Lastly, if the Secretary of
State has considerable cash balances in India, it may
be worth his while for a time to cash additional
Council Bills out of these, thus in effect transferring
his balances to London. The reasons that may make
him inclined to do this are, first, that to increase the
proportion of his cash balances held in sterling puts
him in a stronger position in a case of emergency ;
second, that selling Council Bills at a good price now
will enable him to meet the Home Charges later on
when he might not be able to sell his Bills at so good a
price (in this case the transference of cash balances
from India to London is only temporary); third, that
it may put him in a stronger position for carrying out
impending loan transactions at the most favourable
moment; and fourth, that cash balances held in
London can be made to earn a small rate of interest.
All these considerations being taken into account.
V
COUNCIL BILLS AND REMITTANCE
log
it can only be worth the Secretary of State’s while to
refuse to sell bills within the gold export price, when
he deliberately wishes either to increase his cash
balances in India at the expense of his balances in
London, or to replenish that part of the gold portion
of the Currency Reserve which is kept in India.
Thus he will endeavour to make as certain as
possible of selling within the year the amount
budgeted for ( i.e ., the Home Charges adjusted with
reference to the probable capital transactions of the
year and the state of the cash balances); but he will
sell more than this if the demand for remittance is
so great that, on his refusal to sell, the price of re¬
mittance will rise to the gold export point. In the
words of the annual budget, “ the estimate of Council
drawings is for the amount necessary to provide for
the Secretary of State’s requirements, but additional
bills will be sold if needed to meet the demands of
trade.”
8. Let us sum up the argument so far, and enforce
at the same time the contention, brought up at the
end of Chapter I., that the volume of currency
circulating in India does not depend, as some critics
have maintained, on the caprice of the India Office
in the amount of Council Bills that it offers for sale.
So far as Council Bills are sold for the ordinary
purposes of remittance of Government funds from
India to London, they are cashed in India out of ^
the general balances of Government. But when they
no
INDIAN CURRENCY AND FINANCE
CHAP.
are sold in larger quantities, to obviate the necessity
■of sovereigns being sent, sufficient rupees are not
forthcoming from this source. One expedient is to pay
out some of the rupees in the Paper Currency Reserve
or in the silver branch of the Gold Standard Reserve,
and to pay an equivalent sum into the branches of
I these reserves which are held in London, “ earmarked ”
at the Bank of England, 1 or in other sterling forms.
If, on the other hand, the India Council had refused
to sell bills freely, gold would have been exported to
India, taken to the Paper Currency Department,
and exchanged for rupees in notes or silver. In either
case there is a 'similar increase in the volume of
currency in India not held by the Government. The
volume of currency which finds its way into circula¬
tion in India is, therefore, quite independent of the
Secretary of State’s action. Exceptional amounts of
Council Bills are only sold when exchange has reached
a point at which it is nearly as profitable to remit
gold ■ and if Council Bills were not sold sovereigns
would go instead (the expense of sending them being
lost), for which the Government of India would have
' to give rupees in exchange. This point is important,
for it is often assumed in controversy regarding
Thus a probable effect of exceptionally large sales of Council Bills is an
earmarking of gold on Indian account at the Bank of England. The extent
to which the Indian system can he misunderstood is well illustrated by the
fact that in a money article recently published in an important newspaper
in this country, an increased offering of bills by the India Council was given
as a reason for expecting a postponement of the need for earmarking gold
at the Bank on Indian account. 6 6
V
COUNCIL BILLS AND REMITTANCE
hi
the currency and its relation to prices that the issue of
rupees into circulation depends in some way upon the
amount of Council Bills sold by the Government, and
can, therefore, be expanded or contracted by them at
will, according to the policy of the moment. Broadly
speaking, this is false. Even if the Government were
to hasten the flow of rupees into circulation by selling
an exceptional quantity of bills at a relatively low rate
(which would be equivalent to lowering by a fraction
of a penny the normal value of the rupee as measured
in sterling), and were to pursue this policy over a
long period, the permanent effect could be no more
than in proportion to the amount by which they
had thus lowered the par value of the rupee in terms
of sterling. This is the amount of their conceivable
executive power, if the Government were to exercise
it. In fact, it has not been exercised.
If, however, the stock of rupees in the reserves is
running low (for a considerable quantity of rupees
must always be kept there in order to ensure the
ready convertibility of the notes in terms of rupees),
and more Council Bills are sold in London than can
be conveniently cashed in Calcutta in the above
ways, more rupees must be issued from the Mint.
The silver out of which they are minted is purchased
in England out of the proceeds of selling the addi¬
tional Council Bills, and the surplus due to the fact
that rupees are worth more than the silver they
contain, is credited to the Gold Standard Reserve.
112
INDIAN CURRENCY AND FINANCE
CHAP.
According to the present practice the process in these
circumstances also is, therefore, automatic, and the
amount of new rupees put into circulation does not
depend on the arbitrary action of the Secretary of
State in selling or withholding Council Bills. If
he did not sell hills, sovereigns would be sent to
India, new rupees would have to be coined to meet
the obligation under which the Government of India
has placed itself of giving rupees in exchange for
sovereigns on demand, and a great part of the
sovereigns would have to be credited in some form or
other to the Gold Standard Reserve or shipped back
to England again to pay for the silver.
It is true that, if a different practice were
adopted (a practice which was adopted in part in
1907), and if the profits on the coinage of rupees,
instead of being credited to the Gold Standard Reserve,
were turned into rupees and spent by the Government
in India on goods and services (whether for capital
or any other purpose), more rupees would be in
circulation for the time being than would have been
the case otherwise. But even in this case the effect
on the volume of circulation must be temporary, so
long as the provisions for the maintenance of the
rupee at Is. 4d. are in operation. For this additional
issue of rupees would, eventually, have the effect of
delaying additional demands for coinage in the future
or of precipitating an occasion for the withdrawal of
rupees from circulation.
V
COUNCIL BILLS AND REMITTANCE
**3
While, therefore, it is to a certain extent within
the power of Government (though not at present
according to their usual practice) to urge a certain
number of rupees into circulation more rapidly than
is necessary, they cannot permanently increase the
circulation without depreciating its gold value, that
is, they cannot permanently increase the circulation
beyond what it would otherwise be and at the same
time maintain the rupee at Is. 4d. It. may be added
that a release of rupees from any other reserve, or
even a temporary increase in the amount of capital
funds annually raised by Government abroad for use
in India, would have a similar effect to the release
of rupees from the Gold Standard Eeserve. But,
however all this might be, at present the Govern¬
ment of India do not, in fact, exert such dis¬
cretionary powers as they possess for affecting, even
temporarily, the volume of circulation.
9. I have said that the cost of sending gold to
India does not generally exceed gd. per rupee. The
Secretary of State has, therefore, a standing notifica¬
tion (since January 1904) that he will sell bills at
Is. 4-Jd. Up to January 1900 he undertook to sell
telegraphic transfers at Is. 4gWd. without limit of
quantity, and since that time he has usually been
willing to do so. 1 The cost of sending gold to India
1 On two occasions this practice has been suspended—in January 1900,
when the price rose to Is. 4fd., and in December 1906-March 1907, when
it rose to Is. 4-&d. The reason for the suspension in the second case was
the operation of the rule by which the premium charged for telegraphic
I
INDIAN CURRENCY AND FINANCE
CHAP.
114
depends, however, on complex causes, varying con¬
siderably from time to time, and is often a good deal
less than -§d. It is not easy, therefore, for the
Secretary of State to know at exactly what price gold
will become a serious competitor of bills as a means
of remittance; and not infrequently Council Bills are,
unintentionally, at a price which makes it cheaper to
send gold. It will be interesting to consider briefly the
kinds of causes which influence the gold import point. 1
10. The expense of remitting gold from one
country to another is made up of insurance, freight,
and loss of interest. Even the first item is sometimes
capable of variation. For example, after the recent
robbery of sovereigns in transit from London to
Alexandria, the ordinary rate quoted on gold, con¬
signed by the route (Bremen and Trieste) by which
the stolen gold had been sent, was doubled, rising
from Is. 3d. to 2s. 6d. per cent. Again, on one
recent occasion, it was stated that more gold would
have been shipped if it had not been for the fact
that the mail-boat was already carrying a million
and a half sterling in gold and silver, the under¬
writers requiring a higher premium than usual if
transfers over the rate for hills depends on the Indian hank rate (see p. 105).
The statement made in answer to a question on this subject in the House of
Commons (April 30, 1912) hy the Parliamentary Under-Secretary was not
quite correct.
. " 01d * fasMoned treatises on the foreign exchanges often leave the student
with the impression that the gold import point is a known and stable thing
given for good in books of reference. How far this is from the truth, the
example of India well illustrates.
V
COUNCIL BILLS AND REMITTANCE
115
they • were to insure a larger sum than this on
a single voyage. But if it is a matter of shipping
sovereigns from England the variations in the cost
of insurance and freight are relatively small. The
main part of variation in the gold point arises either
out of the possibility of getting sovereigns from other
sources, or from variations in the rate of interest.
These other sources are either sovereigns in transit
from Australia or sovereigns ready for export from
Egypt. As India lies between Australia and England,
it is naturally cheaper (mainly on account of the
smaller loss of interest) to send sovereigns from
Australia to India than from Australia to England.
Let us suppose that the state of the Australian
exchanges is such that it pays to remit sovereigns
from Australia to London anyhow, and assume, for
the sake of simplicity (and without, in fact, any
substantial sacrifice of truth), that the cost of freight
and insurance from Australia to London is the same
as from Australia to India. Now if, when the
Australian sovereigns are off India, the bank which
is remitting them can receive cash in London against
their delivery in India, it will get its money at least
a fortnight sooner, and will probably accept, therefore,
about Is. 3-fijrd. in London for Is. 4d. delivered in India
(g^d. being the interest on Is. 4d. for a fortnight at
5 per cent per annum). Gold bought in this way
for immediate delivery in India is as good as a
telegraphic transfer, i.e., is worth -^d. per rupee more
ii6 INDIAN CURRENCY AND FINANCE chai-.
than Council Bills. If, therefore, Council Bills are
at a price in excess of Is. 3^|d., gold about to be
shipped from Australia competes with them as a
means of remittance to India. Normally, of course,
an Australian bank is able to get more than Is. 3-pjjd.
for gold delivered in India. I mean only that the
Secretary of State cannot hope to undercut Australian
gold, when it is available for export in large quantities,
unless he is prepared to put down his price for
Council Bills to this level. If, in these circum¬
stances, he wants the gold in England rather than in
India, his cheapest course, therefore, is to buy the
gold in transit himself for delivery in England, by
selling for it telegraphic transfers at a suitable rate. 1
This was done on a large scale in 1905-6 and 1906-7.
Surplus gold from Egypt is not capable of under¬
cutting Council Bills so seriously as surplus gold from
Australia; for in this ease it is Egypt which lies in
between. If we assume, for the sake of precise
illustration, 2 that the cost of sending gold from
Egypt to London is nearly the same as that of sending
it from Egypt to India, an Egyptian bank, about to
ship sovereigns in any ease, will take any price in
excess of Is. 4d. s paid in London for the delivery
1 It is worth his while to do this, because the cost of sending gold from
Australia to London in one transaction is less than the cost of sending it
first from Australia to India and then from India to London in two separate
transactions.
2 I make this assumption, which is not exactly accurate, for purposes of
illustration only.
3 Or less, if paid at the time of shipment and in advance of the time of
delivery.
V
COUNCIL BILLS AND REMITTANCE
117
in India of the value in gold of a rupee. This is
the extreme case. If Council Bills are at a higher
rate than Is. 4d., say at Is. 4-j^d., the Alexandrian
exchanges may he at a level which makes it profit¬
able to ship gold from Egypt to India for pay¬
ment in London, when it is not profitable to ship
gold from Egypt to London. If we still make
the above illustrative (but not exactly accurate)
assumption, when Council Bills are at about Is. 4 X V1.
and the Alexandrian exchange on London below par,
Egyptian gold competes with Councils as a means of
remittance to India. Of course the supply of remit¬
tance from this source is usually somewhat limited;
when some Egyptian gold has flowed away to India
under the influence of the above conditions, this is likely
to have the effect of strengthening the Alexandrian
exchange, and therefore, by modifying the conditions,
of making the continuance of a flow less likely. The
Egyptian gold is of great practical importance,
because the busy season in Egypt comes rather earlier
than the busy season in India, so that in the winter
months the gold which has served the purpose of
moving the crops in Egypt can be sent on to be
changed into rupees which are to serve the same
purpose in India. Of the gold, therefore, which
flows from London to Egypt every autumn, very
little finds its way back again to London; what is
not kept by the cultivators in Egypt travels on in
due course to India. The precise moment at which
n8 INDIAN CURRENCY AND FINANCE chap.
this movement takes place and its extent depend, as
we have seen above, on the rate at which Council
Bills are being sold in London, and also upon
whether the Egyptian cotton crop is dealt with late
or early. But when towards the end of their busy
season the Egyptian banks find themselves with more
gold than they need, Council Bills must be sold at a
relatively low rate if the flow of this gold to India is to
be prevented. The dealings between the Egyptian and
the Indian banks must thus present very delicate
problems of arbitrage.
It is probably within the power of the Secretary
of State, if he wishes, to regulate the flow of gold
direct from London to Bombay by means of the sales
of Council Bills. But when gold is available in
Australia or Egypt, the matter is not susceptible of
such easy control.
The remaining element which determines the cost
of remittance—variation in the market rate of in¬
terest—has been dealt with already, -g^d. represents
the interest on Is. 4d. for a fortnight at 5 per cent
per annum. It is easy to calculate how the gold
export point is affected by fluctuations in the market
rate of discount in India on either side of 5 per cent.
11. So far we have been dealing with the upper
limit of exchange and with the results of a heavy
demand for Council Bills. The effects at the lower limit
differ in this important respect, that the Government
are under no legal obligation to prevent the deprecia-
V
COUNCIL BILLS AND REMITTANCE
119
tion of the rupee, and have not undertaken to give
sovereigns for rupees in the way that they have under¬
taken to give rupees for sovereigns. There is nothing
in law, therefore, to prevent exchange from falling
indefinitely. There has been no change in law in this
respect since 1895, when exchange actually did fall
below Is. Id. The Government has, however, practic¬
ally pledged its word to do all in its power to prevent
the depreciation of the gold value of the rupee and to
prevent exchange from falling below the lower limit
of Is. 3-§-fd. The business community would rightly
regard it as a breach of faith if the Government were
to permit exchange to fall below this rate, unless all
reasonable resources had been exhausted.
12. We now see how intimately the management of
Council Bills and of Government remittance is bound
up with the Gold-Exchange Standard. The disad¬
vantages from the point of view of regulating a Gold-
Exchange Standard, which arise out of there being
no • Government bank, are partly compensated by
the Secretary of State’s being the largest dealer in
foreign exchange. By regulating the amount of bills
he offers for tender, he is able to regulate to a great
extent the level of exchange. When exchange is
falling below par he can support it by greatly restrict¬
ing his offers; and if he cannot get at least Is. 3|-|d. -
for his bills, he withdraws from the market. In the
meantime, of course, he has payments to make in
England, while on the other hand rupees accumulate
120
INDIAN CURRENCY AND FINANCE
CHAP.
in India, as the revenue flows in and no Council
Bills are presented for payment. If the cash balances
m London are not sufficient to stand the drain on
them, gold at the Bank of England may be “un¬
earmarked” and placed to the Secretary of State’s
current account, rupees in India being transferred
at the same time from the Government balances
to the silver portion of the Paper Currency Reserve—
the reverse process from that which has been described
already as the result of exceptionally large sales of
Council Bills.
If the Secretary of State’s withdrawal from the
market and the consequent scarcity of bills on India
is insufficient to support exchange at Is. 3.^2d., more
drastic measures are necessary. The method adopted
on the last occasion of this kind was the offer by the
Government of India in Calcutta of sterling bills on
London at the rate of Is. 3-^d, these bills being
cashed in London out of the Gold Standard Reserve.**
> Tiiese measures were sufficient during the severe
crisis of 1908. Their sufficiency for the future will
be discussed m Chapter VI. in dealing with the
Secretary of State’s Reserves.
13. If we turn from the mechanism of remittance
to the question of Government remittance as a whole,
this can be explained most clearly by reference to a
hypothetical India Office balance-sheet. The whole
account for the year balances out in some such manner
as this:—
V
COUNCIL BILLS AND REMITTANCE
121
Payments
Home Charges.
Gold “ earmarked,” or securities bought for Currency Reserve
in London.
Cost of silver + profit on coinage credited to Gold Standard
Reserve in London.
Expenditure on stores in London for capital purposes in lndia
Transfer of cash balances from India to London
Receipts
Council Bills cashed from balances in India .
Council Bills cashed from rupees in Currency Reserve
in India.
Council Bills cashed from new coinage '
Total Council Bills drawn.
Net capital borrowings in London
Total receipts in London.
u. + y + z + w + w
x—u+v±w
y
X- 3 ry J rZ-U + '0±VO
%
Li receipts m London. x + y+z+v±w
14. I will conclude this chapter with some statistics.
moo-io.
1010-11.
1911-12.
Home Charges (net) 1
Capital expenditure in Eng¬
land on material for rail-
£
£
£
18,763,000
IS,003,000
18,333,000
ways and irrigation works
Credited to Gold Standard
5,748,000
5,188,000
5,083,000
Reserve in England 2 ,
S, 090,000
600,000
Credited to Paper Currency
Reserve in England
1,000,000
2,545,000
1,988,000
Purchase of silver
Addition to Cash Balances
in England 3 .
4,815,000
3,898,000
1,693,000
38,416,000
30,234,000
27,097,000
1012-13
\ IJL'll iMtllll ltl‘
1,200,000
400,000
7,059,000
i
Council Bills and Transfers 27,096,000'* 26,783,000 27,058,000 25,760 000
Gold from India .... i ooa nnn
Net debt incurred in "* 1,9-8,000
England 0 . , . 11,320,000 3,451,000 39,000 -2,983,000
Reduction of Cash Balances
in England . . . - __ ■■■ 10,017,000
38,416,000 30,234,000 27,097,000 34,722,000
1 Aft0r deduction of certain small sources of revenue In England and various minor
adjustments. 2 Apart from dividends earned and reinvested in England
3 Excluding balances in Gold Standard Reserve.
4 Deducting bills on London sold in India.
5 Excl uling reduction of debt by annuities and sinking funds included in Home Charges.
122
INDIAN CURRENCY AND FINANCE
CHAP.
The table given above analyses the Home Accounts
in a way which brings out the essential facts more
clearly than the Government's own published accounts.
These actual figures may be compared with the hypo¬
thetical balance-sheet given in § 13.
The principal items of the Home Charges are
* analysed below. As these do not vary much from
year to year it has been thought sufficient to give the
figures of one recent year, namely, 1911-12. It will
be seen that in that year about £5,000,000 was spent
on pensions and leave allowances, £11,000,000 on
debt services, and £2,250,000 on military services
(excluding pensions). Other expenses were of a very
small amount.
Analysis of Home Charges in 1911-12
Superannuation and pensions (Civil) . . . £2,063,100
>> ,, (Military) (net) . . 2,471,400
urlougn allowances. 426,500
Interest on ordinary debt. 2,284,VoO
Interest on railway debt and on capital deposited by
companies. .. 5,268,600
.Railway annuities and sinking funds . . . 3,623,600
Military services (apart from pensions) . . . 2,277,400
Miscellaneous. 1,130,200
„ . • , , £19,545,500
Revenue from interest .... £448,000
Miscellaneous revenue .... 141,600
--- 589,600
£18,955,900
The total drawings of Council Bills, the average,
maximum and minimum rates of allotment, and the
fluctuation between the maximum and minimum in
recent years were as follows :—
V
COUNCIL BILLS AND REMITTANCE
123
Total Drawings
of Council Bills
Average
Bate.
Maximum
Rate.
Minimum
Rate.
Fluctuation
£
d.
d.
d.
d.
1001-02
18,500,000
15-987
16*125
15-875
•250
11>02-03
IS, 500,000
16-002
16*156
15*875
*281
1903-04
23,900,000
16*049
16*156
15-875
*281
1001-05
24,400,000
16*045
16-156
15-970
*186
loor.-no
31,600,000
16*042
16-156
15-937
*219
1906-07
33,400,000
16*084
16-1875
15-937
*250
1907-08
15,300,000
16-029
16-1875
15-875
*312
1908-09
13,900,000
15*964
16
15-875
*125
1909-10
27,400,000
16*041
16-156
15-875
-281
1910-11
26,500,000
16*061
16-156
15-875
*281
1911-12
27,100,000
16*082
16-156
15-937
*219
1912-13
25,700,000
16*058
16-156
15-970
*186
CHAPTER VI
THE SECRETARY OF STATE’S RESERVES AND THE
CASH BALANCES
1. The Indian authorities have undertaken a double
responsibility. They must be prepared to supply
rupees in payment for Council Bills or in exchange
for sovereigns. And on the other hand they must
be prepared also to supply sterling or sterling drafts
in exchange for rupees. The maintenance of the
Indian system depends on their ability to fulfil this
double obligation to whatever extent may be required
of them.
The objects to be attained are simple, but the
methods of the Government are, largely for historical
reasons, exceedingly complicated. I will discuss, first,
the nature of the existing methods; second, their
adequacy for their purpose; third, some proposals
for making them more orderly and intelligihle; and
lastly, the management of the cash balances.
2. From the profits of rupee coinage 1 a reserve
has been built up expressly for the purpose of sup-
1 See p. 37 (footnote).
124
chap, vi RESERVES AND CASH BALANCES 125
porting exchange. This is known as the Gold Stand¬
ard Reserve. As the reserve is used in practice, not
only for holding sterling reserves but also for holding
a part of the rupee reserve, this title is a misnomer. 1
For some years after the closing of the Mints no
fresh .coinage was undertaken. By 1900 it had
become necessary to mint additional rupees, and
from that time until 1907 the profits on coinage
rapidly raised the Gold Standard Reserve to a
respectable total. The crisis of 1907-8 made it
necessary to withdraw a great number of rupees from
circulation, and no further coinage was necessary on
a significant scale until the autumn of 1912. By
October 1912 the aggregate profits arising from
coinage amounted to about £18,600,000. Of this,
however, about £1,100,000 was diverted in 1907
for capital expenditure on railways—leaving about
£17,500,000 for the Gold Standard Reserve. In
addition to this the receipts on account of interest on
that part which was invested amounted to about
£3,250,000, against which is to be set about
£1,000,000 depreciation in the value of the invest¬
ments in October 1912 as compared with their
original cost. Thus at that date this reserve stood
at about £19,750,000, allowing for depreciation.
During the winter of 1912-13 profits on the heavy
issues of coinage caused a further increase, and we
1 The designation of the reserve was changed from “Gold Reserve” to
“Gold Standard Reserve” in 1906, when it was decided to hold a part in
silver ; hut the change of title has not really made the position much clearer.
126
INDIAN CURRENCY AND FINANCE
CHAP.
may conveniently think of the Gold Standard Reserve
as being worth about £21,000,000 net at the end of
1912.
Of this total the greater part was held in sterling
securities — about .£16,000,000 (market price). In
recent times the policy has been followed of hold¬
ing at least half of this in securities of the most
liquid possible type. On March 31,1912, £4,500,000
was held in British Treasury Bills, and £4,735,600 in
Exchequer Bonds. Of the rest about £7,000,000
(face value) was in Consols and other stock guaranteed
by the British Government, and about £1,500,000
(face value) in various Colonial Government Securities.
Apart from the £16,000,000 thus invested, about
£1,000,000 was, at the end of 1912, lent at short
notice in the London Money Market; about £3,750,000
was held in India in rupees; and £250,000 in gold
was “earmarked” at the Bank of England. The
holding of some part in actual gold in England
was an innovation introduced in November 1912.
It has been announced that the Gold Standard
Reserve is to be allowed to accumulate through coin¬
age profits and interest receipts until it stands at
£25,000,000, and that £5,000,000 of this will be
held in gold. 1 It is possible that when this figure has
been reached, some part of its income may be applied
to capital expenditure on railways. This would be a
1 At the end of March 1913, £1,620,000 in gold stood to the credit of
the Gold Standard Reserve in London. •
VI
RESERVES AND CASH BALANCES
127
reversion to the policy of 1907-8, since abandoned,
when one-half of the profits of coinage was thus
diverted.
The form in which the Gold Standard Reserve is
held has been subject to much criticism. But it will
not be useful to consider this until we are in a posi¬
tion to deal with the reserves as a whole.
3. The second reserve is the Paper Currency
Reserve held against the note issue. The constitu¬
tion of this has been explained in Chapter III. The
invested portion may not exceed a stated maximum,
of which a part only may be held in sterling securities
and the rest must be placed in rupee securities. The
whole of the balance must be held in gold or silver
bullion, rupees, or sovereigns. But the gold may be
held either in London or in India. The actual form
in which the Currency Reserve was held at the end of
December 1912 was approximately as follows :—
Sterling securities ....
. £2,500,000
Bupee securities ....
6,500,000
Gold in London ....
7,250,000
Gold in India .....
. 17,500,000
Rupees in India ....
8,500,000
Silver bullion in India or in transit
1,500,000
£43,750,000
4. The Government’s remaining reserve source of
supply of cash in the form of rupees or sterling is the
Cash Balances. Both the total of these and the pro¬
portions held in rupees and sterling respectively vary
within wide limits from time to time. Their total
128
INDIAN CURRENCY AND FINANCE
CHAP.
amount fluctuates according to the volume of taxes
coming in at different seasons of the year, the recency
with which loans have been contracted for capital
expenditure, the proximity of extraordinary expendi¬
ture impending, the receipts of windfalls of income
(as, recently, from the opium revenue), the general
prosperity of the country, and the degree of caution
or optimism which, in the opinion of those responsible
for the finances, the general situation warrants. The
proportions held in rupees and sterling respectively
depend even more on considerations of temporary
convenience,—recent or impending capital transac¬
tions in London, the likelihood of sterling funds being
wanted for the purchase of silver, and trade demands
for Council Bills as a means of remittance. The
totals of the cash balances at various dates are given
below.
Cash Balances 1
In India.
In London.
Total.
March
31, 1901
£8,767,687
£4,091,926
£12,859,613
J5
1903
12,081,388
5,767,786
17,849,174
V>
1905
10,597,770
10,262,581
20,860,351
JJ
1907
10,026,932
5,606,812
15,633,744
)>
1908
12,851,413
4,607,266
17,458,679
J>
1909
10,235,483
7,983,898
18,219,381
>?
1910
12,295,428
12,799,094
25,094,522
>>
1911
13,566,922
16,696,990
30,263,912
1912
12,279,689
18,390,013
30,669,702
»
1913
19,543,900
8,372,900
27,916,800
1 Excluding balances held in the Gold Standard Reserve.
It may be added that the Indian cash balances
VI
RESERVES AND CASH BALANCES
129
are kept partly in District Treasuries all over the
country, partly in Reserve Treasuries, and partly
on deposit at the Presidency Banks. The District
Treasuries do not usually contain more resources than
they require for ordinary transactions, and the
balances in excess of immediate requirements, which
are transferred to the Reserve Treasuries, are mainly
held in the form of notes. Thus the Government
has no large surplus stock of rupees outside the
Currency Reserve. The London Balances are held
partly at the Bank of England and partly on loan
for short periods with certain financial houses on an
approved list. 1 No more than a working balance
(about £500,000) is ordinarily held at the Bank
of England, and this has been reckoned for many
years now (though not formerly) amongst the
“ other ” deposits, not amongst the “ public ” deposits.
It will be seen from the table given above that the
London Balances fell to a low level in 1908, the
Secretary of State making free use of them to aid him
in supporting exchange during the critical months of
that year. On October 30, 1908, these balances had
sunk to £1,196,691. In 1911 and 1912, on the
other hand, they reached a very high figure, and in
June of both these years exceeded £19,000,000. By
the end of 1912 they had sunk again to a more
normal level. This abnormally high level in the first
half of 1912 gave rise to much criticism in regard
1 See also pp. 190, 191, below.
K
130
INDIAN CURRENCY AND FINANCE
CHAP.
both to the amount of the balances and also to the
method adopted of lending them out in the London
Money Market. Something will be said about this
in the concluding paragraphs of this chapter.
5. We are now in a position to see exactly what
resources in sterling and rupees respectively the
Indian authorities have, on which to draw for the
fulfilment of their currency obligations. Since the
surplus balances in India, beyond those required by
the District Treasuries and those deposited with the
Presidency Banks, are mainly held in notes, we may
neglect them for the present purpose.
Rupee Reserves are held partly in the Currency
Reserve, partly in the Gold Standard Reserve. In
December 1912 the amounts were approximately as
follows:—
Currency Reserve 1 . . . . £10,000,000
Gold Standard Reserve . . . 3,750,000
£13,750,000
Sterling Reserves are held partly in the Currency
Reserve, partly in the Gold Standard Reserve, and
partly in the London Cash Balances. The forms in
which they are held are gold (in the Currency Reserve,
both in India and London, and to a small extent in
the Gold Standard Reserve), money lent at short notice
(in the Gold Standard Reserve and in the Cash
Balances), and sterling securities (in the Currency
1 Including silver bullion in India or in transit.
VI RESERVES AND CASH BALANCES 131
Reserve and in the Gold Standard Reserve). In
December 1912 the amounts were approximately as
follows:—
Gold —
Currency Reserve in India . . £17,500,000
Currency Reserve in London . . 7,250,000
Gold Standard Reserve in London . 250,000
£25,000,000
Money at Short Notice —
Gold Standard Reserve in London . £1,000,000
Cash Balances in London . . 7,500,000
£8, 500,000
Sterling Securities —
Currency Reserve .... £2,500,000
Gold Standard Reserve . . . 16,000,000
£18,500,000
Aggregate Sterling Resources —
Gold.£25,000,000
Money at Short Notice . . . 8,500,000
Securities ..... 18,500,000
£52,000,000
6. Before we consider the adequacy of these
reserves for their purposes, it will be useful to recall
the circumstances of the two recent occasions on which
their resources were severely taxed. The Govern¬
ment were hard pressed to supply sufficient rupees in
1906, and hard pressed to supply sufficient sterling in
1908. We can deal with both these occasions in a
continuous narrative.
The coinage of rupees recommenced on a significant
scale in 1900. For the five years following there was
132
INDIAN CURRENCY AND FINANCE
CHAP.
a steady annual demand for fresh coinage (low in
1901-2, high in 1903-4, but at no time abnormal) and
the Mints were able to meet it with time to spare,
though there was some slight difficulty in 1903-4.
In 1905-6 the demand quickened, and from July
1905, when the Government's silver reserves stood at
what was then considered the comfortable figure of
1837 lakhs 1 (£12,250,000), it quite outstript the new
supplies arising from the mintage of the uncoined
silver reserve. The Government were very slow to
buy more silver and, in fact, do not seem to have
taken steps to do so until, in December 1905,
their bullion reserve was quite exhausted. They
had then to buy silver in London hurriedly and at
rather a high price. In the meantime the rupee
reserves had sunk to the very low figure of 761 lakhs
( i-e ., about 40% of the holdings six months earlier), and
the demand for Council Bills in London, which would
have to be cashed in rupees in India, showed no signs
of abating. In order to give themselves breathing
space, and to allow time for the silver recently bought
in London to reach India and be coined, the Govern¬
ment had to raise the price of telegraphic transfers to
what was then the unusually high figure of 1/4^-.
This was the worst that happened. The new coinage
very quickly overtook and passed the demand, and by
the end of March 1906 the available silver reserves
were double what they had been in January.
1 Reckoning uncoined silver at its coined value.
VI
RESERVES AND CASH BALANCES
133
This slight scare, however, was more than
sufficient to make the Government lose their heads.
Having once started on a career of furious coinage,
they continued to do so with little regard to con¬
siderations of ordinary prudence—though their sins
did not overtake them immediately. Without waiting
to see how the busy season of 1906-7 would turn
out, they coined heavily throughout the summer
months, and, there being more silver in hand than
could be conveniently held in the Currency Reserve,
it was maintained, at the expense of the sterling
resources, in the Gold Standard Reserve. In July
1906 the silver reserve stood at about 3200 lakhs.
As a matter of fact the season of 1906-7 turned out
well, and the demand for rupees was on a large scale.
Yet the available silver in India hardly fell below
2000 lakhs—nearly three times the minimum at the
most critical moment of the preceding year. The
more than adequacy of their reserve at the busiest
moment of the very busy season 1906-7 did not
check, however, the impetuous activity of the Mints.
During the summer of 1907, as in the summer of
1906, they continued to coin without waiting until
the prosperity of the season 1907—8 was assured.
In September 1907 their silver holdings in one form
or another stood at the excessive figure of 3148
lakhs. This time they got what they deserved.
The season of 1907-8 was a failure, and at the end
of 1907 came the crisis in America. In place of
134
CHAP.
INDIAN CURRENCY AND FINANCE
there being a demand for new rupees, it was
necessary to withdraw from circulation an immense
volume of the old ones; and the sterling reserves, not
the rupee reserves, were in danger of insufficiency.
This leads us to the next chapter of the history.
7. The coinage policy of the Government of India
from 1905 to 1907 suggests one obvious reflection. A
succession of years, in which there is a heavy demand
for currency, makes it less likely that the heavy
demand will persist in the year following. The effects
of heavy coinage are cumulative. The Indian
authorities do not seem to have understood this.
They were, to all appearances, influenced by the crude
inductive argument that, because there was a heavy
demand in 1905-6, it was likely that there would be
an equally heavy demand in 1906-7 ; and, when
there actually was a heavy demand in 1906-7, that
this made it yet more likely that there would be a
heavy demand in 1907-8. They framed their policy,
that is to say, as though a community consumed
currency with the same steady appetite with which
some communities consume beer. In so far as the new
currency is to satisfy the demands, not of hoarding,
but of trade, it is hardly necessary to point out the
fallacy. Moreover, even a superficial acquaintance
with the currency history of India brings experience
to the support of reason. Even when the rupee was
worth no more than its bullion value, so that it was
hoarded and melted much more than it is now, years
VI
RESERVES AND CASH BALANCES
135
of unusually heavy coinage were nearly always
followed by a reaction. India has taken her coinage
in great gulps, and it need not have been difficult to
see that the demand of 1905-7 was one of these.
8. The Government of India’s silver policy during
the early part of 1907 left them, therefore, in a some¬
what worse position to meet the crisis which came at
the end of the year, than need have been the ease.
But their sterling reserves were nevertheless fairly
high. On September 1, 1907, they seem to have
been, approximately, as follows :—
Gold—
Currency Eeserve in India . . £4,100,000
Currency Eeserve in London . . 6,200,000
£10,300,000
Money at Short Notice —
Gold Standard Eeserve in London . £50,000
Cash Balances in London . . . 5,150,000
£5,200,000
£1,300,000 1
14,100,000 1
£15,400,000
£10,300,000
5,200,000
15,400,000
£30,900,000
Thus, to take a round figure, the crisis found the
Secretary of State with about £31,000,000 in hand.
1 Book value.
Aggregate Sterling Reserves —
Gold .
Money at Short Notice .
Securities
Sterling Securities —
In Currency Eeserve
In Gold Standard Eeserve
136
INDIAN CURRENCY AND FINANCE
CHAP.
The storm was soon on him. By the end of October
1907 it had become plain that the Indian harvest
would be a bad one, and the financial crisis in the
United States was fast developing. On November 4
the Bank of England raised its rate to 6 per cent,
and on November 7 (for the first time since 1873) to
7 per cent. On November 6 the Secretary of State
could only manage to sell even 30 lakhs of rupees by
allowing the rate to drop to the minimum figure of
Is. 3§f-d. For several weeks following, at a time of year
when the demand for Council Bills is usually strong,
he sold none at all. But beyond withdrawing from
the market he took no further steps for the support of
exchange. This measure was inadequate to effect its
purpose, and there is a good deal to be said for the
view that he ought to have taken at once the more
drastic steps for maintaining the gold value of the
rupee which he had to take a few months later.
However, it was a perplexing and unprecedented time
for every one, and that it was some weeks before his
advisers found their bearings is not to be wondered at.
So inadequate was his action that at first the fall
in exchange was scarcely stayed at all. Tumbling
day by day, it reached on November 25 the rate of
This is below the gold export point (from
India), and it could not have fallen so low if the
Government had made gold freely available in India.
But, as can be seen from the preceding table, their
Indian gold reserve was not large. Individuals were
VI
RESERVES AND CASH BALANCES
137
not permitted, therefore, to take out more than
£10,000 at a time; and in this manner the gold
dribbled slowly away over a period of a few months.
It would probably have been of more use if it had
been allowed to disappear in a week at the moment
when it was most badly wanted.
In the meantime the Secretary of State, deprived
of his usual source of income from the sale of Council
Bills, was meeting his normal expenses from the gold
portion of the Currency Reserve in London. But the
G-old Standard Reserve, although about £1,000,000
worth of Consols was sold out in order to be ready
for use in a more liquid form, was kept so far intact.
Thus matters went on until the end of December
1907, when the authorities nerved themselves,
although the immediate necessity had temporarily
disappeared through a slight strengthening of
exchange, to take whatever drastic steps might be
necessary to maintain the gold value of the rupee.
It was announced that they would sell in India
telegraphic transfers on London at a fixed rate.
Before the need arose for acting on this announce¬
ment, it was changed into an offer to sell sterling
bills on London at the fixed minimum rate of l/3|f.
By March 1908 the reserves of actual gold were
nearly exhausted, but the securities and cash at short
notice had not yet been trenched on. Early in April
exchange was again weak, and the offer referred to
above came into active operation. At first £500,000
INDIAN CURRENCY AND FINANCE
CHAP.
138
a week, and later £1,000,000 a week of sterling bills
on London were sold in India at l/3-f-f. These were
cashed in London from the proceeds of selling securities
from the Gold Standard Reserve. By August 1908
about £8,000,000 of bills had been cashed in this way.
At the beginning of September 1908 the sterling
reserves, which I give for comparison with the
amounts in September 1907 quoted above, were,
approximately, as follows :—
Gold—
Currency Reserve in India .
Currency Reserve in London
. £150,000
. 1,850,000
£2,000,000
Money at Short Notice —
Gold Standard Reserve in London
Cash. Balances in London .
. nil.
. £1,850,000
£1,850,000
Sterling Securities —
In Currency Reserve .
In Gold Standard Reserve .
. £1,300,000
. 6,000,000
£7,300,000
Aggregate Sterling Resources —
Gold.
Money at Short Notice
Securities .....
. £2,000,000
. 1,850,000
. 7,300,000
£11,150,000
9. Thus the Secretary of State’s sterling resources
sank in the course of a year from about £31,000,000
to about £11,000,000. But these figures do not
supply by themselves a complete explanation of the
manner in which he had financed himself in London
VI
RESERVES AND CASH BALANCES
i 39
during this period. Between September 1907 and
September 1908 railway loans to the aggregate amount
of about £12,500,000 and a loan of £2,000,000 for
“general purposes” 1 were raised in sterling. 2 A
large part of the former was required for the dis¬
charge of some previously existing railway debentures,
and for the purchase in England of railway materials
chargeable to capital account. In so far as the
loan was used for these purposes it did not help
the general position. But in so far as it was used
for railway construction which could be paid for
by rupees in India, it had the effect of increasing the
Secretary of State’s sterling resources by a correspond¬
ing amount. Altogether, during the period under
review, the net assistance obtained by loans amounted,
I think, to about £4,500,000; so that the total de¬
terioration in the Secretary of State’s position during
the first year of the depression was not far short of
£25,000,000.
After October 1908 the market still showed some
hesitation. If the season had turned out poorly, it
is clear that the Secretary of State must have had
recourse to borrowing on a fairly heavy scale. In fact
the harvest was satisfactory, and by December 1908
the demand for Council Bills was strong. It may
1 A further loan of £2,500,000 for “general purposes” was incurred in
December 1908.
a An unfunded debt of £6,000,000, which has been wiped offlately out of
the proceeds of the opium windfall, was incurred by the issue of India
Bills during this period.
140
INDIAN CURRENCY AND FINANCE
CHAP.
be added to complete the story, that in August and
September 1909 there was a short period of weak¬
ness when it was again necessary to offer sterling
bills in Calcutta. Since that time India has enjoyed
a period of very great prosperity, and, so far from the
reserves being tested, it has been possible to build up
the very strong position analysed above.
10. I have looked at the crisis so far from the
point of view of its effect in depleting the sterling
resources of the Secretary of State. To the authorities
in India it presented its other face. There it was a
question of how many rupees they would be able to
withdraw from circulation. Unless there is a de¬
ficiency in the revenue from taxation, and apart from
loans, the extent to which the Secretary of State can
draw on sterling resources must exactly equal the
extent to which the Government of India can with¬
draw rupees from circulation. For every transfer
from the sterling branch of any of the reserves must
be balanced by a corresponding transfer into the
rupee branch. The amount of the sterling reserves
is a measure of the ability of the authorities to with¬
draw rupees; and conversely, the volume of rupees
which can be spared from the circulation (or from
hoards) in bad times sets an upper limit to the
extent to which they can be compelled to draw on
their sterling reserves for the support of the currency.
Regarded from this standpoint, the facts were as
follows:—By March 1908 nearly 115 million rupees
VI
RESERVES AND CASH BALANCES
141
had been withdrawn into the currency reserve by the
release of gold, and by December 1908 the figure had
risen to 154 million. Up to March 1908 it had not
been necessary to take rupees into the Gold Standard
Reserve; but by the end of November 1908 about
130 million rupees had been withdrawn in this way.
There was also a small increase of rupees in that part
of the Indian Cash Balances which is held in rupees
and not in currency notes. Thus the active circula¬
tion was reduced altogether by about 285 million
rupees (£19,000,000). This figure agrees closely
enough with the figures we reached by studying the
state of the sterling resources.
11. This completes the narrative of events up to
the end of the crisis of 1908. I have given only
such details as are relevant to my main topic—the
adequacy of the reserves to fulfil their purpose.
12. Let us consider, first, the adequacy of the
reserve of coined rupees. The governing facts of the
situation are that every addition to the rupee reserve
diminishes to an equivalent extent the amount avail¬
able for the sterling reserve; that if the rupee reserve
is insufficient, nothing worse can happen than some
delay and inconvenience to merchants at a time of
boom, whereas, if the sterling reserve is insufficient, a
dangerous crisis may be aggravated to the pitch of
panic; that at the last moment the rupee reserve can
always be replenished with no very great delay from
the resources of the sterling reserve, whereas the
142
INDIAN CURRENCY AND FINANCE
CHAP,
reverse is not the case (the silver being not so
saleable at a crisis as the gold is in a boom); and
that, therefore, it is desirable to keep the rupee
reserve at the lowest possible point consistent with
probability and ordinary prudence. The practical
information chiefly required for settling the proper
policy is in regard to the ease with which new rupees
can be supplied as they are wanted—as to how far,
. that is to say, the Government can safely pursue the
policy of living from hand to mouth. This depends
upon how fast silver can be bought by the Govern¬
ment without its submitting to extravagant charges,
and how fast, in relation to the maximum rates of
new demand so far experienced, the Indian Mints
can turn the silver into rupees.
13. The Government of India’s recent attempt
to solve the first part of the problem unhappily
involved its officers in a good deal of obloquy. The
silver market is a very narrow one and can only be
dealt in through the agency of one or other of a very
small number of brokers. A ring of speculators lay
waiting to force prices up as soon as the Government
should appear as a buyer. Apart from the brokers
who acted for the ring, there was only one firm in a
position to buy large quantities of silver with the
secrecy which was necessary if the speculators were
to be defeated. Unfortunately the head of this firm
was closely related by blood to the Parliamentary
Under-Secretary of State. Two courses were open:
VI
RESERVES AND CASH BALANCES
H3
to buy openly and pay such extra price as the
speculators might find themselves in a position to
demand, or to risk charges of venality from any
one who might have an interest in discrediting
the Government—disappointed speculators, currency r
malcontents, or members of the political party in
opposition. The officials, thinking (bureaucratically)
more of the Indian Exchequer and the Indian tax¬
payer than of the House of Commons, chose, in fact,
the second of the two alternatives—in a spirit, per¬
haps, of too great innocence, bred of long immunity
from charges of personal corruption. It turned out
that they had made insufficient allowance for the
deep interest which the House of Commons takes in
suggestions of personal scandal. The question of
Indian currency became almost interesting. Members
asked one another what the Gold Standard Reserve
might be, and, when writers in the Press told them,
were duly horrified to learn that it contained no
gold. Closer inquiry elicited further facts unsuspected y
hitherto. It was discovered that a number of the most
prominent members of the London Money Market
were Jews, and that the Government of India’s hold¬
ings of Consols had depreciated in market value since
they were bought. But attention was specially con¬
centrated on the fact that the cash balances held in
London, after fluctuating considerably from time to
time, had risen for a year past to an unusually high
level, and had been lent out at low rates of interest
144
INDIAN CURRENCY AND FINANCE
CHAP.
to persons many of whom bore foreign names. How
was the ordinary member of Parliament to be sure
that some cosmopolitan syndicate of Jews was not
fattening at the expense of the ryots of India,
whose trustee he had often declared himself to be ?
Indian currency is too complicated a subject to be
mastered at a moment’s notice; and many persons,
without paying much attention to random charges
of corruption, felt, quite legitimately, that there was
a great deal going on of which they had no concep¬
tion, and that they would like to be fully satisfied
for themselves, and not merely on the word of the
officials, that everything was really in order. The
situation in its fundamentals has arisen before, and
will arise from time to time in the future so long
as the relations of the House of Commons to India
combine in a high degree responsibility and ignorance.
14. The circumstances themselves are of very
transient importance, but they are likely to have
some permanent effect on the particular question
which we are now discussing. It will be too much
to expect the officials to expose their personal re¬
putations again to a suspicion, however ill-founded,
even in the interests of the Indian Exchequer. Next
time that the Government of India have to buy
silver on a large scale, it is likely that they will do
so publicly and pay such extra price as this policy
involves. It is not worth a Government’s while
to risk its transactions falling into suspicion in
VI
RESERVES AND CASH BALANCES
145
order to save half a million pounds. Assu min g,
therefore, that in future the Government will have
to buy publicly, we have to consider whether it
is likely to be cheaper for them to buy when the
price of silver seems low, and hold stocks in hand,
or to wait until the last moment and buy at what¬
ever price is then ruling. I am inclined to think
that the second of these two policies is the better
—though it is plainly a matter on which it is not
possible at present to see one’s way clearly. It
is outside the ordinary run of Government officials’ *
duties to judge whether or not a given time is a good
one at which to buy silver. The speculative business
of estimating the future of silver is best left to »
experts in the matter, even though the price ulti¬
mately paid has to include some commission to them
for their services or their foresight. In the second
place the history of the recent speculative ring in
silver, so far as it can be known to an outsider, does
not suggest that such a transaction is a very easy
or profitable thing to carry through, or that the
speculators have had a sufficiently striking success
to encourage similar attempts on a large scale in the
future. I do not know with what profit the ring
have emerged from the transaction; but the expense
of carrying silver for a long period is great, and the
rise in its price in the last two years, though sub¬
stantial, has not been enough—so far as one can judge y
—to leave a surplus of profits at all commensurate
L
146
INDIAN CURRENCY AND FINANCE
CHAP.
with the great risks run. In the third place, it does
not seem certain that the urgent demands for fresh
coinage of rupees, to which India is subject from time
to time, will be as frequent in the future as they have
been in the immediate past. On the one hand the heavy
coinages since 1900 are cumulative in their effect and
render further coinages in the future less probable;
and on the other hand an increased use (it is to be
hoped) of other media of exchange will allow an urgent
demand for currency to be met in other ways.
15. I do not think, therefore, that the Government
need show a very long foresight lest they should have
to buy silver dear. But when their stocks are falling
low and there are apparently signs of demand in the
immediate future, how long can coinage be delayed
safely ? To answer this we need to know the maximum
rate of output of the Mints, and the maximum rate
of absorption of new currency so far experienced.
16. The rates of absorption of rupees in various
years have been given in the Table on p. 55. The
maximum absorption in the October to December
quarter was 11*39 lakhs in 1905-6, and the maximum
in the January to March quarter was 2*68 lakhs in
1909-10. It has been estimated that the Indian
Mints can turn out 2*25 lakhs of rupees per month
without overtime, and 4*50 lakhs per month with
overtime. There seems little reason, therefore, for
over-anxiety lest the Government be caught short
of rupees. If they were to start the busy season
VI
RESERVES AND CASH BALANCES
147
with a surplus of 500 or 600 lakhs oyer what
was considered a safe minimum, the reasonable y
demands of prudence would have been fully satisfied.
The safe minimum in question must necessarily depend
on circumstances, especially on the volume of the note
issue and on the amount of gold held in India; it is
impossible to suggest any figure which would be
permanently suitable. I am dealing merely with the
surplus over this minimum which, on the basis of
experience, the Government might reasonably take
pains to have in stock at the beginning of a busy
season. The calculation refers throughout to their
aggregate rupee resources in the Currency Reserve
and Gold Standard Reserve combined.
17. ~We now come to the much more important
question of the adequacy of the sterling reserves.
I do not think it has ever been thought out quite
clearly for what precise purposes these reserves are
held. The difficulty can be put shortly in this question,
—Are they held purely as a currency reserve, or are
they to fulfil also the purpose of a banking reserve ? Is
their only purpose, that is to say, to make certain that
the Government will always be able to exchange for
sterling such rupees and notes as may be presented to
them, or are they also intended to ensure India’s being
able to meet her international obligations at a time of
dangerous crisis ? The two purposes are plainly not
identical. If all bankers and merchants keep adequate
reserves in rupees and notes, then it will be sufficient
148
INDIAN CURRENCY AND FINANCE
CHAP.
if the Government are always able to turn these rupees
and notes into sterling. But if in a financial crisis
the Indian Money Market as a whole is in fact
unable to meet its international obligations without
Government assistance, is it the Government’s in¬
tention to stand calmly aside and permit (for
example) a suspension of cash payments by the
three Presidency Banks, or will they, if necessary,
use their sterling reserves to give some support to
the Indian Money Market in extremis ?
If the Government’s Reserve is held purely to
support the currency, then the maximum volume of
rupees and notes, which could, so far as one can
anticipate, be spared from the circulation and
tendered to the Government for exchange, sets an
upper limit to the necessary amount of this Reserve.
If, on the other hand, it is intended to act as a
banking reserve and to ensure India’s ability to meet
her international obligations at all times, then its
upper limit is set by the probable maximum amount
of the adverse balance which could arise against
India for immediate payment.
18. I will begin by discussing this question on
the first hypothesis—that what the Government has
been accumulating is intended to serve as a currency
reserve only—and will return later to the problem
of a reserve held for wider purposes, and of the
possible magnitude of the balance of international
indebtedness against India.
VI
RESERVES AND CASH BALANCES
149
19. To estimate the demand that the reserves
might have to meet merely in order to support the
currency, the existing volume of currency is what we
chiefly require to know. For this sets, or suggests, a
limit to the maximum amount which can possibly be
spared from the active circulation.
Attempts to estimate the rupee circulation of India
have been the occasion of some very interesting calcu¬
lations. For many years past (since 1875) an annual
census of rupees has been taken by examining in each
Government Treasury a bag containing 2000. This
enabled Mr. F. C. Harrison, when he was Comptroller
of Currency, to apply the Jevonian method very fully;
and he was also able to corroborate his estimates by
reference to the numbers of the older issues, 1835 and
1840 (e.g.), actually withdrawn from circulation on
the occasions when the Mint recalled them. Mr.
Harrison’s results were checked by the labours of a
later Comptroller of Currency, Mr. Adie, who applied to
the same material two alternative methods of much
greater technical complexity than Mr. Harrison’s. 1
Jevons’s method is based on the assumptions that
the proportions of coins issued at different dates
found in the given samples roughly correspond to
their proportions in the circulation at large, and that
the numbers in circulation of the latest issues do not
1 For details of the method applied in these various investigations see
Appendices to Reports of Head Commissioner of Paper Currency, 1894, 1895,
1896,1897, and 1900. See also Mr. Harrison’s article on the “Rupee Census ”
in the Economic Journal for 1891.
INDIAN CURRENCY AND FINANCE
CHAP.
ISO
much, differ from the numbers issued from the Mint.
In short, if we know the relative proportions of coins
of 1860 and of 1912 in the circulation, and if we
know, approximately, the absolute number of coins
of 1912, we can calculate the absolute number still
circulating of the coins of 1860. In applying this
method to the Indian data, we are assuming that the
proportions of rupees of each date found in the bags
examined in a great number of scattered Government
Treasuries are a fair sample of the proportions still in
circulation throughout the country. In a country
such as India, however, there may be great stagnancy
in a part of the circulation, and the coins finding
their way to the Government Treasuries may be a
sample rather of the floating surplus of coinage,
which has a relatively high velocity of circulation,
than of the total stock, which includes semi-hoards
passing from hand to hand comparatively seldom.
Since these samples are likely, therefore, to contain
an undue proportion of recent issues, estimates of the
total circulation, which are based on them, may be
expected to fall short of the truth rather than to
exceed it. There is reason, also, for supposing that
in some cases the officials charged with the duty of
examining the samples did not always deal with them
conscientiously. A tendency was noticed for the
returns of one year to resemble those of the previous
year more closely than they should, and not infre¬
quently a batch of coins would be attributed to a
VI RESERVES AND CASH BALANCES 151
year in which it is known that none were minted.
Nevertheless the calculations of Mr. Harrison and
Mr. Adie, and the data on which they are based,
seem on the whole coherent, and bear, so far as one
can judge, the marks of substantial accuracy.
A quite different method of estimating the circula¬
tion has been adopted by Mr. F. J. Atkinson. 1 His
method is direct; and consists in a calculation or
estimate of the additions to the currency and the
losses from export, melting, etc., year by year, from
1831 when the modern coinage first began. Some
of the items in the calculation are definitely known,
but others, the amount annually melted, for example,
are almost entirely a matter of guesswork. The fact
that his calculations contain altogether a great
number of separate guesses does not prevent his
final result from being a guess too. For the period
previous to the closing of the Mints some of his
estimates for the amount melted seem very low, and
this may possibly explain why his final results yield
a much higher total for the circulation than those of
Mr. Harrison and Mr. Adie. In recent times, i.e.
since the closing of the Mints, and specially since the
new equilibrium which was reached in 1900, Mr.
Atkinson’s method is much more satisfactory than for
earlier years and, since the doubtful items are in
these later years a far smaller proportion of the whole,
much less likely to lead us wrong. For the earlier
1 Stat. Journ. March 1897 and March 1903.
152
INDIAN CURRENCY AND FINANCE
CHAP.
years, therefore, I am inclined to prefer Mr. Harrison’s
conclusions; but I think they can be brought up
to date by a year-to-year method resembling Mr.
Atkinson’s. The increase in Mr. Atkinson’s estimate
during the ’nineties is due to the fact that, as his
figures purport to exclude rupees in hoards, he must
make large allowance for the coins from this source
then entering into circulation.
The actual figures are as follows :—
Estimate op the Rupee Currency in Crores (10,000,000)
op Rupees
Harrison.
Adie,
1st method
Adie,
2nd method.
Atkinson, i
1881
r
108
135
1882
111
108
133
1883
about
113
110
136
1884
115
106
107
136
1885
104
105
139
1886
106
110
145
1887
109
108
148
1888
120
106
106
152
1889
112
112
154
1890
121
115
159
1891
121
116
166
1892
125
129
121
167
1893
128
132
130
173
1894
129
126
176
1895
128
127
169
1896
121
120
172
1897
116
116
178
1898
120
118
113
183
1899
118
112
178
1900
177
1901
189
th ! £JL?L r - ^inson’s two sepa , rat f, “Icnlationa, made in 1897 and 1903, I have taken
the latter. His calculation explicitly excludes rupees in hoards, currency reserves anri
Government balances; and is not, therefore, entirely comparable 'with the others, ’if it
were, the excess would be considerably greater than it actually appears above.
VI
RESERVES AND CASH BALANCES
153
20. These are the data. It is very difficult to
estimate the extent to which rupees may have
emerged from hoards during the period which suc¬
ceeded the closing of the Mints. Mr. Atkinson’s
figures suggest that rupees from this source not only
made good the natural wastage in the active cir¬
culation but actually brought about a large increase
in it. Judging from the course of prices, I think he
must have made an excessive allowance under this
head. The figures of Mr. Harrison and Mr. Adie, on
the other hand (which refer to the total circulation),
point to a more moderate influx out of hoards into
current use. I propose to take a middle course,
nearer, however, to Mr. Harrison than to Mr. Atkin¬
son, and to assume a public circulation in 1900 (i.e.,
excluding rupees in the Currency Eeserve and
Government Balances) of 120 crores of rupees.
This estimate is probably near enough to the truth
for our purpose. If it is incorrect, I think it is more
likely to be an underestimate than an overestimate.
Starting from this assumption, I have worked out
the details given in the following table as a guide to
the probable circulation at the present time. By
public circulation, whether of rupees or notes, I mean
the whole circulation not in the hands of the Govern¬
ment— i.e., including that in the hands of the banks.
I am primarily concerned with the circulation of
rupees; but the public circulation of notes has been
added in the last column but one, as it is useful to
154
INDIAN CURRENCY AND FINANCE
CHAP.
It
know at the same time the total public circulation of
currency.
Currency in Lakhs op Rupees
Financial
Year,
April 1-
March 31.
Public Cir¬
culation of
Rupees on
April 1.
New Coin¬
age less
Recoin¬
age, 1 etc. 2
Rupees
released
from
iCurrency,
Gold Ex¬
change
Standard,
and
Treasury
Reserves.
Net 3
Export.
Public
Circulation
of Rupees on
March 31+
Public Cir¬
culation of
Notes on
March 31.
Total
Currency
in the hands
of the
Public on
March 31+
1900- 1901
1901- 1902
1902- 1903
1903- 1904
1904- 1905
1905- 1906
1906- 1907
1907- 1908
1908- 1909
1909- 1910
1910- 1911
1911- 1912
1912- 1913
120,00
128,59
126,49
124,28
135,65
142,47
155,69
172.41
175,92
160,75
172.42
174,04
184,41
+ 13,60
+ 2,04
+ 60
+ 11,42
+ 6,88
+ 16,11
+ 22,88
+ 15,48
+ 2
+ 8
- 42
7
1
- 4,66
- 2,72
- 58
- 45
+ 55
- 2,11
- 4,88
-11,56
-14,90
+ 13,14
+ 3,76
+ 11,61
- 35
- 1,42
- 2,23
+ 40
- 61
- 78
- 1,28
- 41
- 29
- 1,39
- 1,72
- 1,13
= 128,59
= 126,49
= 124,28
= 135,65
= 142,47
= 155,69
= 172,41
= 175,92
= 160,75
= 172,42
= 174,04
= 184,41
+ 23,79
+ 24,24
+ 28,87
+ 31,54
+ 33,73
+ 37,90
+ 41,20
+ 38,65
+ 39,23
+ 46,51
+ 45,68
+ 53,24
= 152,38
= 150,73
= 153,15
= 167,19
=176,20
= 193,59
= 213,61
=214,57
= 199,98
= 218,93
= 219,72
= 237,65
1 This column is derived from the figures given by the Currency Department, and the
total of net coinage issued m individual years differs somewhat from the total amount
minted as stated in the Mint Statistics.
2 i n one or two of the earlier years deduction is made on account of an appreciable sum
in rupees paid out to native states. This deduction is in accordance with the practice of
the reports of the Currency Department.
3 For Bahrein Islands, Ceylon, Arabia, Mauritius, and East African Coast.
4 Not allowing for natural wastage of rupees (see below).
This calculation makes no allowance for the general
wastage through loss and. various causes, or for the
steady drain of rupees across the land frontiers.
This last item is probably considerable and is not
adequately accounted for in the trade returns. The
recorded statistics of trade overland show a large
annual balance against India, which is probably met
by an unrecorded export of gold, silver bullion, and
rupees. In the case of Nepal, for example, the
VI
RESERVES AND CASH BALANCES
155
recorded statistics show a considerable net balance of
imports of treasure into India; and in the case of
Tibet, Afghanistan and, in fact, all the land frontiers,
the official statistics of the export of treasure do not
tally with what we know of the circulation of the
rupee beyond the frontiers. Taking all these causes
of loss together, I do not think we should overestimate
the wastage of rupees from the circulation in placing
it between half a crore and a crore annually. For the
twelve years 1900 to 1912, therefore, I propose to
make an aggregate deduction of 941 lakhs.
This leaves us with a public circulation of 175 crores
of rupees (£116,500,000) on March 31, 1912, and a
total public circulation, including notes, of 228 crores 1
(£152,000,000), being an increase since 1900 of 46
per cent in the rupee circulation and of 58 per cent
in the total circulation. If Mr. Atkinson’s estimate
of the circulation in 1900 is nearer the truth than Mr.
Harrison’s, then the public rupee circulation in 1912
may have been as much as 200 crores. In the course
of 1912 there was a good deal of fresh coinage, of
which, at the time of writing, accurate statistics are
not yet available. For our present purpose it will
be quite sufficiently cautious to think of the public
rupee and note circulation together as amounting to
not more than 250 crores.
21. How much of this could possibly be spared
from circulation at a time of crisis? In 1908 the
1 This represents a per capita circulation of between Es. 7 and Es. 8.
156 INDIAN CURRENCY AND FINANCE chap.
rupee circulation fell (at its lowest point) by some¬
what less than 30 crores, or less than 20 per cent of
the estimated rupee circulation at that time. The
note circulation (see p. 55) fell much less seriously.
It does not seem to me likely that the Government
could be called on at the present time to redeem
more than 25 per cent of the total circulation (notes
and rupees together), or, on the basis of the foregoing
calculations, 60 crores (say) of rupees (£40,000,000).
If the Government were to keep in one way or another
a reserve of this amount for purely currency purposes,
I think they would have done as much as reasonable
prudence could require. I do not say that it is im¬
possible that they should be called on to redeem a
greater amount than this. But it would be ex¬
travagant to maintain a reserve adequate for all
conceivable emergencies, since there is a further resort
of which use might fairly be made without great
reluctance. Unless the London Money Market has
collapsed as well as the Indian, it is always open to
the Secretary of State to borrow by means of India
Bills. There would be nothing shameful in this—
though possibly some expense. But the expense,
even if the Secretary of State had to pay a rate of
interest appropriate to Turkey or China, would be
much less than the expense of maintaining a very
great reserve against unlikely emergencies. 1
1 In 1899, the Government of India contemplated the possibility of a loan.
See their despatch of August 24, 1899 (H. of C. 495 of 1913, p. 13)“ If
India were afflicted with famine or other adverse circumstances in the earlier
VI
RESERVES AND CASH BALANCES
157
22. So muck for the proper magnitude of the Re¬
serve, regarded as a Currency Reserve. The question
of its use as a Banking Reserve raises two problems
—a problem of policy and a problem of statistics.
Ought the Government to allow its Reserve to be
used as a Banking Reserve ? If so, how large ought
this Reserve to be ? Let us consider policy first.
23. There are three kinds of crises by which the
Indian Money Market might be assailed—a purely
internal crisis, in which the banks have difficulty in
meeting a run on them by their Indian depositors ;
a purely external crisis, in which India owes, and is
called on to pay, large sums in the London Market,
but is free from serious banking trouble at home;
and a general crisis, in which the features of an
internal and an external crisis are combined.
A purely internal crisis of the first kind might
require assistance from the resources of Government,
but would involve no claims on their sterling re¬
sources specifically, as distinguished from their rupee
resources. The trouble would probably begin with
a boom of the usual type, heavy commitments on
the part of the banks, large importations of foreign
goods, and (in the future) a good deal of internal
years of our new currency, and before an adequate reserve bad accumulated,
circumstances might arise in which borrowing to maintain the standard
would become an absolute necessity. We should hare preferred to have been
armed against such a contingency ... not by actual borrowing but by
obtaining power to borrow. . . . We have learnt with satisfaction . . . that
your lordship has stated in the House of Commons that borrowing would be
resorted to if it should prove to be necessary.”
INDIAN CURRENCY AND FINANCE
CHAP.
*58
company promoting. If, early in the autumn, a
serious failure of the monsoon became apparent, a
widespread suspension on the part of the numerous
bubble banks, which have been springing up lately
all over India, 1 would be a probable consequence.
Indian depositors generally might take alarm and
hoard money in their own houses on a large scale.
Exchange Banks have such large deposits in India
and so little cash there 2 that they would probably
require to import funds from London as fast as
possible. The Indian Joint Stock Banks, however,
are now so important that the part played by the
Exchange Banks might not be adequate to save the
situation. The Government would then be called on
to make advances to the Presidency Banks. This
has happened from time to time in the past, the last
occasion being in April 1898, when the Bank of
Bombay, whose bank rate was then at 13 per cent,
asked the Government for an advance of 25 lakhs. 3
This raises the first question of policy—whether
the Government should help the bankers’ reserves
on an occasion of internal crisis by making rupee
advances to them. But it is hardly relevant to the
question of the Government’s sterling resources;
and, unless the Government Savings Banks were to
be in trouble at the same time, it is not likely that
1 See Chap. VII. 2 See p. 215,
3 The Government was on the point of sanctioning this advance when the
urgent necessity for it came to an end, and the advance was not actually
made.
VI
RESERVES'AND CASH BALANCES
159
there would be any difficulty in helping the bankers,
if it were thought right to do so.
A crisis of the second kind, due to general de¬
pression or bad harvests, in which India has to meet
a heavy adverse balance in London, provided that,
as in 1907, it is not accompanied by internal banking ,
difficulties of the kind just described, causes, it is
true, a drain on the Government’s sterling resources
through the necessity of providing remittance on
London, but only in proportion to the volume of notes
and rupees which are brought to the Government for
encashment or in payment of sterling drafts.
At first, therefore, in such a case, there is no
question of the Government’s using its reserves
otherwise than as currency reserves; and the banks
will have plenty of notes and rupees with which to
buy the Government’s sterling drafts. Only if the
depression is very prolonged, and one bad harvest
follows another, is the need likely to arise for •
sterling advances from Government, otherwise than
against a corresponding face value of notes and
rupees.
It is not very improbable, however, that in the
future there might be a general crisis of the third
kind—a heavy adverse balance against India, and an
internal banking crisis at the same time. It is in
these circumstances that the most difficult question
of policy arises. The Indian Money Market would
need to remit funds to London, but, on account
i6o
INDIAN CURRENCY AND FINANCE
chap.
of the internal banking crisis and an outbreak of
hoarding amongst depositors, would not have even
rupee resources with which to do it. Consequently
the Government’s offer to sell sterling drafts in
Calcutta, or to release gold from the Currency
Reserve would not meet the ease. If general distrust
of banking was widely spread, and notes, gold, and
rupees were being hoarded in the old-fashioned way
on a large scale, the banks would not be able to
put their hands on sufficient cash resources of any
kind to enable them to pay for the Government’s
drafts on a scale adequate to their necessities.
The position would be that the Indian Money
Market was on the verge of general insolvency with
the Presidency Bank Rates at (say) 12 per cent, and
that the Indian Government had (say) £40,000,000
sterling resources in hand with demands on only a
modest scale for the encashment of notes and rupees.
The Government would be vehemently urged to save
the situation by making sterling advances, not simply
in exchange for notes or rupees, but on some other
non-monetary security.
24. We now have the possibilities before us. If
in any of these sets of circumstances the Govern¬
ment were faced with demands for advances either in
rupees or sterling, what line would it be proper to
take %
On the one hand the policy of advances may
introduce into the Indian Money Market a serious
VI
RESERVES AND CASH BALANCES
161
element of weakness,—an element, perhaps, insepar¬
able from a system where there is no central banking
authority and where the currency authority stands,
normally, outside the money market. It is not the
business of the Government to hold any of the reserves
which the bankers ought to hold. But if the Govern¬
ment does, in fact, for another purpose hold large
reserves in its hands, and if it is believed that it will
in case of extreme necessity come to the market’s
rescue, the bankers may tend to keep somewhat
lower reserves than they ought, and than they other¬
wise would. We have over again the situation which
has long existed, to its detriment, in the United
States. There, as in India, the Government, with
immense currency reserves of gold, is normally aloof
from the money market. There also they have no
central banking authority. The expectation that
the Government will bring some of its gold to the
rescue in extreme circumstances, has always been
said to exert an enervating influence on the banks
themselves in the matter of the precautions they
take for times of crisis. The ultimate solution prob¬
ably lies in the establishment of a Central Bank for
India which shall be the Government Bank and shall
hold the banking and currency reserves at the same
time. 1
In the meantime, in spite of this consideration,
the Government will not, I think, be able to resist
1 I will recur to this proposal in Chapter VII.
M
162 INDIAN CURRENCY AND FINANCE chap.
the pressure on them in a crisis to come to the
assistance of the market. Indeed, I do not know
that they ought to resist it. It would be absurd to
have large reserves in hand, and not to use them to
avert a general calamity. The awkwardness of the
situation is intrinsic, and cannot be avoided so long
as the present divorce is maintained between the
banking and the currency authorities. The plans
of the Government ought, therefore, to be laid
accordingly.
25. If there is force in this contention, and unless
the Government of India have definitely made up their
minds that their sterling reserves are to be used in
no circumstances except for the support of exchange
and of the sterling value of their currency, it is
important to understand that immediate action is
essential, and that to delay action for a few weeks
may be fatal. I would emphatically apply to India
the well-known doctrine which the powerful advocacy
of Mr. Bagehot raised in England, many years ago,
to an impregnable position in the unwritten constitu¬
tion of this country—the doctrine, namely, that in
a time of panic the reserves of the Bank of England
must, at a suitably high rate, be placed at the
disposal of the public without stint and without
delay. There is a danger that the matter may not be
thought out until, quite suddenly, the financial crisis
comes, and that then, while the decision is being
taken and the best advice sought, an inadvertent
VI
RESERVES AND CASH BALANCES
163
delay will intervene. If there were signs of a general
banking crisis in India, and particularly if the position
of the Exchange Banks were weakening in England,
I am inclined to think that it would be a wise policy
on the part of Government to make an immediate
announcement that they would place up to (say)
£10,000,000 at the disposal of the Presidency Banks
(or other approved borrowers) at a rate of (say)
10 per cent. If this action stayed, as it well might,
the run on the banks in India, and the difficulties of
the Exchange Banks in raising temporary loans in
London, the Government might with a very moderate
loss of funds (the mere announcement that they were
available being sufficient) find itself in a far more
favourable position for dealing with the subsequent
depression; whereas after a delay a similar announce¬
ment might eventually be forced upon them, and if
the panic had then gained impetus, the £10,000,000
quickly lapt up.
26. Two points connected with the above may be
emphasised before we pass on to the statistical problem.
In the first place, in the event of a Jinancictl crisis,
accompanied by numerous bank failures, I do not
think it likely that the Government would be over¬
whelmed with demands for the encashment in sterling
of notes and rupees. It would be much more in
accordance with what we know of similar crises else¬
where to expect hoarding on a large scale, rather than
a diminished demand for currency and an ability to
i6 4 INDIAN CURRENCY AND FINANCE chap.
export it. In this matter the experience of 1907-8,
when the monetary position in India was easy through¬
out, may prove, I think, misleading. During the
eventful weeks in November 1907, when the Bank of
England rate stood at 7 per cent, the Bank of Bengal
rate did not rise above 6 per cent. 1 No tendency
whatever was apparent for there to be withdrawals of
money from the banks in India, or for hoarding to
reassert itself amongst the class which is learning to
bank. On the other hand, the comparative failure of
the crops left financiers with considerable rupee funds
in their hands which they could not use. The banks
had, therefore, no special difficulty in putting their
hands on rupees and notes, and the only problem was
for the Government to turn these into sterling. The
easiness of the internal money market at that time
and the total absence of banking trouble have pro¬
duced the impression that there will be plenty of
rupee funds available at a crisis, and that the only
question will be as to whether the Government can
turn these into sterling. The great development of
Indian Joint Stock Banking since that time on not
perfectly sound lines makes it doubtful whether bank
troubles will be absent in an equal degree on the next
occasion of difficulty.
1 For the movements of the Indian bank-rate in the autumn and spring of
1907-8, see the chart appended to Chap. VIII. Eventually, on January 16,
1908, the Bengal rate did rise to 9 per cent (the Bombay rate did not rise to
this level until February 7); but this is not very abnormal in the winter,
and the average rate for money in 1907-8 was lower than in the correspond¬
ing season of the two busy years 1905-6 and 1906-7.
VI RESERVES AND CASH BALANCES 165
There is no one now living in England within
whose memory hoarding has been a normal thing. But
in countries where the tradition is but lately dead or
still lingers, it is apt to revive with astonishing
vitality at the least sign of danger. The extent to
which the people resorted to hoarding in France,
Germany, and Austria (especially in the latter country)
during the Balkan War was very remarkable, and has
exhibited a danger to which the banking systems of
those countries are still subject, although some had
begun to forget it. If this is the case in European
countries, there cannot be much doubt as to what
would happen in India. Some banking failures, a
hint of political trouble, — and the old habits will
come back, whatever progress banking may seem to
have made in a time of prosperity.
But, secondly, assuming a sharp financial crisis to
be accompanied by increased hoarding, it would plainly
be better if it were a hoarding of rupees and notes
rather than of gold. It is not impossible that this
might be the case. A trust in the Government’s
capacity to meet its obligations will persist some time
after all confidence in private institutions has been
dissolved. In Austria, for example, the hoarding was
not so much of gold or silver as of notes. I believe
that in some parts of India, especially in those where
gold has made relatively little progress, hoards are
sometimes held already to a fair extent in notes. I
know, for example, a very conservative Brahmin family,
166 INDIAN CURRENCY AND FINANCE chap.
small landowners in Eastern Bengal, where this is the
case. Once a week the head of the family will retire
privately to a corner of the roof of the house, take
out the little hoard of notes with ritual care, count and
check them, dust each with a feather brush, and lay
them out in the sun to air and to recover from any
trace of damp. If a note shows signs of age or wear,
it is taken to^ the nearest currency office and changed
for a new one. In troubled times such a family would
hoard more notes or silver, not gold. This, however,
is no more than an illustration of the point I have
already dwelt on and emphasised—the manner in
which any increase in the popularity of gold diminishes
the stability of the currency.
27. Returning from these digressions, I conclude
that the Government will not be able in practice to
restrict its responsibility to the currency, and may
have to take a part in moderating the consequences
of rash or unfortunate banking, and in meeting
an adverse balance of indebtedness. This con¬
clusion brings us to the statistical problem. Is the
£40,000,000, which I put forward as a safe maximum
for the reserves, so far as the convertibility of the
currency is concerned, still adequate when the
possible magnitude of India’s adverse balance of
indebtedness is our test of sufficiency ?
This problem is even less capable than the former
of exact solution. The variable elements in India’s
international balance-sheet are chiefly (i.) the excess
VI
RESERVES AND CASH BALANCES
167
of exports over imports, including treasure, i.e., the
trade balance; (ii.) the amount of new fixed capital
lent to India by European capitalists; and (iii.) the
amount of short-period loans afforded to India by
the European Money Market.
We require to know the magnitude of possible
variation in these items, rather than the absolute
amount of the various annual payments which India
has to make, in order to gauge the possible balance
of indebtedness against her. The greatest stress is
commonly placed on the first of them—the trade
balance. But in the normal state of affairs receipts
and payments only balance after account has been
taken of capital transactions; and if a certain amount
of new capital has been flowing in every year, a
slackening of this flow affects the balance as adversely
as a reduction in the volume of exports affects it.
In 1907-8 the adverse balance of indebtedness was
largely due to a change in the trade balance;—on the
one hand, goods ordered during the boom continued
to pour into Bombay for some weeks after they had
become unsaleable, thus continuing for a time a large
supply of bills on India, while, on the other hand,
the failure of the monsoon and consequent anticipa¬
tions of a scanty harvest cut off a considerable part
of the normal supply of trade bills on London. But
even on this occasion the adverse balance arose to a
considerable extent out of changes in capital trans¬
actions under items (ii.) and (iii.). The acute
i68
INDIAN CURRENCY AND FINANCE
CHAP.
stringency in the international money markets,
occasioned by the position in America, made it
necessary for Exchange Banks and others to reduce
below their normal level their short-period borrow¬
ings (direct or indirect) in London for use in India;
and this stringency also caused the flow of new in¬
vestment to India to fall short of its usual volume.
Thus, of the adverse balance of some £25,000,000
which had to be met between September 1907 and
September 1908, perhaps £18,000,000 was due to
a change in the trade balance and £7,000,000 to a
diminution of new capital transactions and to the
non-renewal of some short-period loans. 1 It is
not easy, however, to argue from the experience
of 1907—8 as to what will happen in the future.
The volume of trade has expanded very greatly
since that time, 2 and the absolute variation in
the favourable balance between good years and
bad is likely to be correspondingly greater. In
addition, the growth of banking in the intervening
period has been on a very great scale; and there is,
therefore, greater room for disturbance in the short-
period loan market. If, moreover, the internal
banking position in India is as weak as in Chapter
VII. I make it out to be, a serious breakdown there
1 For a fuller discussion of tliis question in relation to the events of
1907-8, see my article on “ Recent Economic Events in India ” in the Economic,
Journal , March 1909.
2 Aggregate exports of Indian produce and manufactures: 1906-7,
£115,625,136 ; 1911-12, £147,813,000.
VI
RESERVES AND CASE BALANCES
169
may embarrass the Exchange Banks in London,
however intrinsically sound the position of these
Banks may really be, in their efforts -to assist the
Indian market.
28. These are the relevant considerations. But
any conclusion as to the possible magnitude of the
adverse balance at which one can arrive on the basis
of them is little better than a guess. I will give my
guess for what it is worth. I think the £40,000,000,
which I have fixed as the maximum figure of what is
required for the redemption in sterling of such notes
and rupees as may be presented, is more than suffi¬
cient to meet the adverse balance that is at all likely
to emerge in any single year. But I do not think
it certain that this sum would be adequate to the
necessities of two successive bad years. On the other
hand, it is necessary to bear in mind that by the
second bad year there would have been time for a very
great reduction in the volume of imports, on account
of the greatly reduced purchasing power of the people,
and that this might go a long way towards righting
the balance; also that, if there was a considerable
liquidation of short-period loans in the first year,
it would not be necessary to repeat this to anything
like the same extent in the second year. In short,
the natural forces tending towards equilibrium would
begin in the second year to show themselves more
strongly. Nor is it necessary to accumulate reserves
in advance for every eventuality. Two bad years in
170
INDIAN CURRENCY AND FINANCE
CHAP.
succession are not very likely; and, if they do come,
the Secretary of State will have ample time to make
his arrangements for borrowing.
I think it a sufficient concession, therefore, if the
£40,000,000 be given as the proper limit, not as
before of the aggregate sterling resources of all kinds,
but of the Gold Standard Eeserve and the sterling
branch of the Paper Currency Reserve (i.e. excluding
the Cash Balances).
In a country such as India, where all available
resources are required for capital expansion, and
where it is not sound or humane policy to burden the
present overmuch for the sake of the future, it is
nearly as important to avoid extravagance in the
reserve policy as to avoid undue parsimony. As the
rupee and note circulation is increased, the propor¬
tion of reserves ought to grow, of course, pari passu.
But in existing circumstances to hold much more
than £40,000,000 in sterling in the Gold Standard
Reserve and the Paper Currency Reserve together
would border on extravagance. If the reserves were
somewhat lower than this, I do not think it would
necessarily be blameworthy to leave them so, pro¬
vided it would prove a very burdensome thing to
raise them. For the expedient of a loan is always
available. 1 My conclusion, rather, is that the reserves
should be allowed to reach some such figure as this
1 The Government of India stands in a particularly strong position in this
respect, because few countries have so good a market for their loans at a
foreign centre as India has.
VI
RESERVES AND CASH BALANCES
171
by the natural processes of growth, before sums are
diverted from them to other purposes.
A very few years ago hopes of reaching so secure
a position as this would have seemed chimerical. But
the details given on p. 131 show that in December 1912
the sterling reserves already amounted to somewhat
more than this. It is not yet clear, however, that
their present amount is normal. If it turns out to
be so, then a position of adequate strength has been
attained already. But the form in which these
reserves are held is open to much criticism, and this
must be my next topic.
29. The criticisms which have had most popular
•vogue have been mainly directed against the absolute
amount of the Gold Standard Reserve, against the
investment of a large part of this reserve in securities,
and against the maintenance in London of some part
of the gold in the Currency Reserve.
In regard to the amount of the Gold Standard
Reserve, Lord Curzon, in 1904, was inclined to think
that £10,000,000 would be a proper figure. In 1905
Sir E. Law, the Einancial Member of the Viceroy’s
Council, suggested £20,000,000. In 1906 Sir E.
Baker thought £20,000,000 a suitable minimum.
More recently, in 1912, £25,000,000 is the amount
•which responsible officials have announced that they
are aiming at. Sir E. Law and Sir E. Baker both
based their estimates on the amount which the
Secretary of State would require for his Home
172 INDIAN CURRENCY AND FINANCE chap.
Charges if he had to curtail his drawings of Council
Bills by one-third or one-half for a considerable
period. I do not think that this is the most useful
point of view from which to approach the question,
or that the proper magnitude of the Gold Standard
Reserve can be discussed without reference to the
magnitude of the other reserves.
30. The other two criticisms quoted above lead on
to the general question of how the sterling resources
should be held and how they should be divided
between the several Reserves. The second of these
questions is mainly a matter of book-keeping, but has
nevertheless some importance. The Government of
India’s present system has no logical basis, is exceed¬
ingly difficult to understand, and has often led, in
consequence, to a good deal of misunderstanding.
The ideal system should be as simple and logical as is
compatible with leaving the authorities a free hand to
shift and adjust as the necessities of the moment may
require. The present system is the outcome partly
of historical origins, partly of the authorities’ not
having allowed themselves by law a perfectly free
hand. The much criticised practice, for example, of
holding six crores of coined rupees in the Gold
Standard Reserve is probably due to the provision by
which that portion of the Currency Reserve, which is
held in London, can be held only in gold. If rupees
have to be released hurriedly from the silver portion
of the Gold Standard Reserve in India, the authorities
VI
RESERVES AND CASH BALANCES
173
have a completely free hand as to the form in which
they make the corresponding addition to their sterling
reserves in London; whereas, if they are released from
the Currency Eeserve, the corresponding transference
in London must he made wholly in gold coin—a course
which may sometimes he exceedingly inconvenient at
the moment.
31. If the authorities allowed themselves more
latitude as to the manner in which the Currency
Eeserve might he held, it would he a mere hook¬
keeping transaction to transfer to this reserve the
rupees now held in silver in the Gold Standard
Eeserve and to replace them by a corresponding
transfer of gold; but such an arrangement would be
more logical and easier to understand.
32. I think, therefore, that there might he con¬
siderable advantages in the adoption of some general
scheme for the reserves such as the following :—
(1) While it would be legal to hold the Gold ■
Standard Eeserve in any form—gold, securities, bills
of exchange, loans, or rupees—it should be normal in
good times to hold, say, £11,000,000 in sterling
securities and the rest in gold either in London or
India, but preferably in London.
(2) Power should be taken to invest a larger
amount of the Currency Eeserve than at present (say
£7,500,000 sterling securities in addition to the rupee
securities instead of £2,500,000 as at present), and
to hold a prescribed maximum proportion (say one-
174 INDIAN CURRENCY AND FINANCE chap.
third) of it in bills of exchange or on loan at short
notice either in India or London.
All this, after the necessary change of law, could
be effected by a change in book-keeping; and in
December 1912 the account would have stood as
follows (compare the actual state of affairs as given
on p. 131):—
Gold —
Gold Standard Eeserve in London
Gold Standard Reserve in India
Currency Reserve in India
Money at Short Notice —
Currency Reserve in London .
Cash Balances in London
Sterling Securities —
Currency Reserve
Gold Standard Reserve .
Currency Reserve
£ 7 , 500,000
2 , 500,000
15 , 000,000
£ 25 , 000,000
£1,000,000
7 , 500,000
£ 8 , 500,000
£ 7 , 500,000
11,000,000
£ 18 , 500,000
£ 13 , 750,000
33. Some changes of substance might be added to
these changes in book-keeping and are naturally sug¬
gested by them. There is, first, the question whether
the gold portion of the reserves ought to be held in
India or in London. Readers of Chapter IV. will
know that there are, in my opinion, no advantages in
keeping gold in India, and that such a policy involves
a direct money loss through the cost of originally
VI
RESERVES AND CASE BALANCES
*75
carrying the gold to India and the cost of bringing
it back again to London when, at a later date, it is
required to support exchange. But Indian opinion
views with suspicion the holding in London of the
greater part of India’s gold reserve, and this opinion,
though ill-founded, is likely to persist for some time
to come. The amount of expense involved in keep¬
ing gold in the Indian reserves is, in relation to the
issues involved, not great; and it might be well
worth while to incur it in order to avoid the
currency system’s falling under a suspicion, however
ill-founded. It might be a satisfactory compromise,
therefore, if, as a normal practice (but not as a legal
requirement), the gold in the Gold Standard Reserve
were held “ear-marked” at the Bank of England, but
the gold in the Currency Reserve retained in India.
It may be added that the authorities seem, in fact,
to be moving somewhat in this direction; for it is
understood to be their intention to accumulate
£5,000,000 in gold “earmarked” for the Gold
Standard Reserve.
If, however, a large part of the gold be held in
India, it is of the utmost importance, in the event
of a crisis, that the gold should be shipped by the
Government to London and sterling drafts on London
sold against it, or, if it were released in India, that
the banks only should be allowed to get it, and on an
undertaking to export it. Otherwise, if it were made
freely available in India, a part might be lost and
176
INDIAN CURRENCY AND FINANCE
CHAP.
wasted (so far as the support of exchange is con¬
cerned) in hoards.
34. The suspicion which is felt with regard to the
holding of Indian gold in London is exceedingly
natural, and can be completely dissipated only by a
fuller knowledge of the currency system and of the
mechanism of the foreign exchanges, than the gener¬
ality is likely to possess. It is natural to think that
this gold is more at the disposal of the London
Money Market than it would be if it were in India,
and that the Secretary of State, under corrupt or
interested pressure, can easily place it at the disposal
of London financiers. Apart from the question how
far the Secretary of State is really open to such
pressure, it may be doubted whether he is likely to
be exposed to it, because at a time of real stringency
it will prove easy, I believe, for the London Market
to get hold of some part of the Indian gold, whether
held in London or in India, by perfectly legitimate
means. India is normally in the position of owing
London money; this debt is discharged partly by
the consignment of goods, partly by the renewal at
frequent intervals of short loans or credits made by
the London Market to the Indian Market on bills of
exchange or through the Exchange Banks, and partly
by new permanent loans. If there is great stringency
in the London Market and London is in urgent need
of funds, the use of the last two methods can be so
much restricted that India can be practically forced
VI
RESERVES AND CASH BALANCES
177
to pay what is owing in gold. It is, in fact, pre¬
cisely because she is open to this pressure that it is
necessary for a considerable gold reserve to be kept.
So long, therefore, as the gold is freely available
either in India or in London for the support of
exchange, it is unlikely that it can be withheld from
the London Money Market if this Market really
wants it. If it is in London, India will be able, by
the sale of telegraphic sterling transfers in Calcutta,
to discharge her due obligations cheaply and without
delay; if it is in Calcutta, additional charges and a
loss of time must be incurred.
A feeling of jealousy on a country’s part, lest
some other country should have a lien on its gold
reserve, is frequently liable to arise at the present
time, but is essentially opposed in spirit to the whole
purpose and meaning of keeping gold reserves at all.
Gold reserves are meant to be used in times of diffi¬
culty, and for the discharge of pressing obligations.
It is absurd for a man with a large balance at his
bank to default to his creditors, because a feeling of
jealousy, in regard to any one in whose favour he draws
a cheque, prevents him from ever drawing one. Mr.
Bagehot certainly did England a great service in dissi¬
pating from the minds of her financiers this primitive
prejudice ;—for wonderfully few other countries have
yet learnt that gold reserves, although no doubt they
serve some purpose when they are held for show only,
exist to much better purpose if they are held for use also.
i 7 8
INDIAN CURRENCY AND FINANCE
CHAP.
Vague stirrings of the original sin of mercantilism
always inherent in the mind of the natural man and
urging him to regard gold as beyond everything
essential wealth; jealousy of the too powerful magnates
of the London Money Market obtaining what should
belong to India’s Market for their own purposes;
jealousy of the Secretary of State seeming, like a
man who invests abroad, to seek in this way an
independence of India in case of trouble; jealousy of
Great Britain, who might use or regard India’s “ ear¬
marked” gold as her own war-chest;—all combine
to make a powerful, natural, and yet unfounded
prejudice which it is exceedingly difficult to combat.
Nothing is commoner than to read incitements against
malevolent financiers who would seek to deprive
India of her “fair share” of the world’s new gold.
India must be allowed, I suppose, to hug her sterile
favourite. In spite of the notorious fact that the
Bank of England holds less gold than the Central
Bank of any other first-class Power,—far less even
than the Caja of the Argentine,—the belief will con¬
tinue that the amount of gold a country holds at home,
rather than the degree of promptness and certainty
with which at all times it can meet its international
engagements, is the measure of its financial strength.
35. What other changes of substance might be
made usefully ? By far the most important is con¬
nected with the proposed power to make advances
from the Currency Beserve on bills of exchange and
VI
RESERVES AND CASH BALANCES
179
other approved security, as briefly described in
Chapter III.
The policy pursued during 1912 of holding large
cash balances in London and of lending them out in
the London Market provoked widespread criticism
both in India and at home. The line of thought
underlying this criticism appears to me to be entirely
reasonable. If the Government of India hold in
London a penny more than is required to establish
the stability of their financial system, they are
certainly diverting resources from India, where they
are greatly required, to the detriment of India’s
own trade. I do not think, however, that the
authorities are in fact open to any serious blame
up to the present time. The holding of such large
balances in London has not been part of a permanent
policy, and was due in 1912 to a combination of
circumstances which could not easily have been fore¬
seen. And further, the Government have not until
quite lately held more sterling resources altogether
than have been required for the stability of the
system. Public feeling points, nevertheless, in the
direction of what, in the future, will be the right
policy. If I am right in thinking that about
£40,000,000 in the sterling Reserves is in present
circumstances adequate, further accumulations in
the hands of Government ought to be put at
the disposal of the Indian Money Market and not
converted into sterling. At present there is no
180 INDIAN CURRENCY AND FINANCE chap.
machinery for doing this; and the absence of the
appropriate arrangements constitutes a serious gap
in the country’s financial system. What would be
thought in France or Germany, or in any other
European country, if an expansion of the note issue
could not be made against the discount of home hills,
but only against a corresponding deposit in cash cent
per cent? Yet this is the position in India. The
Government (apart from their deposits in the
Presidency Banks, which will be dealt with later on)
have no choice between allowing the funds which
accumulate in their hands to lie absolutely idle in
India and transferring them to London to earn a low
rate of interest there.
If the use of notes continues to increase, and if
£40,000,000 is an adequate figure for the sterling
Reserves, a considerable sum may soon be available
in India from the funds of the Paper Currency
Reserve. Every addition, moreover, to the Gold
Standard Reserve reduces to some extent the need
for holding large amounts of sterling in the Paper
Currency Reserve. Great advantages may be obtained
if the surplus funds in the Paper Currency Reserve
be used, not as a permanent or quasi-permanent loan
to Indian traders, but to provide elasticity in the
seasonal supply of currency and to make possible the
increase in the stock of purchasing power in the form
of money which is temporarily required in the busy
season, without having to raise it in London. Per-
VI RESERVES AND CASH BALANCES 181
manent additions to the currency must be obtained
in the future as they are at present. But temporary
additions, due to seasonal demand, ought to be pro¬
vided by a suitable organisation of credit money in
India herself.
The advances from the Currency Reserve, therefore,
must be made at a fairly high rate of interest and for
periods not exceeding three months; and they should
be so arranged that the Government would regain
possession of its funds and the advances be reduced to
nil in each slack season. Thus the Government would
begin each busy season with their funds intact; and
they would not lend until the success of the season
was assured, and it was plain that the general position
warranted it. The advances would be made in notes
or rupees, according to the demand. These prosperity
advances, therefore, are to be sharply distinguished
from the adversity advances, discussed on pp. 160-163,
which would be made in sterling drafts, and which
would be governed by wholly different considerations.
36. There remains for discussion the question of
the Government’s Cash Balances. 1 I will begin with
the method of managing that part of them which is
held in India. It will be useful to know in what way
this method has grown up. 2
When, in 1862, the right of note issue was taken
away from the Presidency Banks, they were given as
1 In continuation of what has been said in § 4 .
2 See Brunyate, loc. cit. chap, vii., from which the greater part of what
follows is summarised.
182
INDIAN CURRENCY AND FINANCE
CHAP.
part recompense the use of the whole of that part
of the Government balances which would otherwise
have been received at the General Treasury, or at
places where the Banks had branches, provided that
sums in excess of a prescribed amount (70 lakhs in
the case of the Bank of Bengal), if not held in cash,
should be invested in Government paper and other
authorised securities. Difficulties very soon arose
(in 1863) through the Government’s requiring the
use of its funds at a time when the Bank of Bengal
could only sell out the securities in which it had
invested them at a considerable loss. The system
of virtually compelling the Banks to lock up the
Government funds in securities, not easily saleable
at all times, was plainly vicious, and in 1866 a new
, arrangement was made by which the Banks were
' permitted to use the whole of the balances, placed
with them for the time being, for banking purposes.
This seems to have worked satisfactorily up to 1874.
In that year there was a famine in Bengal, and the
Government had to buy rice in Burma and send it
to Bengal for relief purposes. The rice had to be
paid for in cash; but when the Government intimated
to the Bank of Bombay that they would have to
draw out about 30 lakhs (£300,000), their balance at
the Bank then being about a crore (£1,000,000), the
Bank was unable to let them have the money. In
the correspondence which the Viceroy (Lord North¬
brook) raised in regard to this, the Secretary of State
VI RESERVES AND CASH BALANCES 183
(Lord Salisbury) suggested that the Government
should release themselves from their engagement to
leave their whole balances with the Banks and that
they should retain the surplus in their own Treasury,
or “lend it for short terms under suitable conditions
as to interest and security.’' This interesting sugges¬
tion, closely anticipating more recent proposals, was
not acted on, the Indian authorities thinking it
improper that the Government should appear to enter
into competition with the Banks. But in 1876 the
Reserve Treasury system was set up, the Government
undertaking to leave, ordinarily, certain minimum
amounts at the Banks and diverting the bulk of the
rest of their funds into their own Reserve Treasury.
In 1878 it proved inconvenient to divert from the
Banks immediately the whole of the proceeds of a
newly raised loan, and the Comptroller-General was
told that he “ would be at liberty, to the extent to
which he could conveniently do so, to accommodate
the Banks with temporary advances from the Reserve
Treasury, provided they were willing to pay interest
on such advances at the current rates.” No special
security was taken from the Banks for the sums thus
lent to them. For some time loans were freely given
in this way. In 1889 the Government declared
“ that any assistance in relief of the Money Market
which may be afforded by means of the Treasury
Reserve can only be made (l) through the Bank, (2)
at its published rate of discount, (3) in relief of
184 INDIAN CURRENCY AND FINANCE chap .
temporary stringency.” Up to 1892, however, loans
were made as before. From 1892 to 1899 loans
-were made very rarely. In 1899 the Secretary of
State wrote to the authorities in India :—“ I see no
objection to your lending to the Presidency Banks, on
the security of Government paper, at such rates of
interest from time to time and for such periods as
you think best. I am inclined to think that the rate
should, as a rule, be not below the Bank rate.” Be¬
tween 1899 and 1906 such loans were made on four
or five occasions; but since 1906 there have been
none. The balances left with the Banks without
interest normally exceed, however, the prescribed
minima. 1
The question of the proper employment of the
Indian Cash Balances is, therefore, a very old one,
and one in regard to which the Government have
pursued no consistent policy. The effect of recent
practice, however, has been on the whole to divert
more funds than formerly from banking purposes.
On the one hand the Government have been less
willing to allow the Banks loans in addition to the
normal balances kept with them, and on the other
hand the general level of the cash balances has been
getting higher.
While the Government’s practice has become
1 AH this refers to the "balances at the Head Offices. “ There is no limit
to the Government deposits at branch offices. But the latter are held
absolutely at call, and in actual practice are removed with the utmost free¬
dom.”—Brunyate, loc. cit. p. 98 .
VI RESERVES AND CASH BALANCES 185
stricter, it is arguable, I think, that there is less need
for it. Originally, we have seen, the Government
banked with the Presidency Banks, and difficulties
arose because, the Government’s deposits bearing a
high proportion to the Bank’s total resources, it was
not easy to release a large part of these deposits
suddenly. This would no longer be the ease to
nearly the same extent, even if the Government were
to place much larger sums with the Banks. In 1870 1
the public deposits at £3,600,000 fell not far short of
the total private deposits and exceeded by 50 per
cent the capital and reserve of the Banks; in 1880
they were £1,900,000, and were about one-third of
the private deposits; in 1890 the figures were
£2,400,000, equal to about a quarter of the private
deposits; in 1900, £1,900,000, equal to less than
a quarter; in 1912 the Government deposits at
£2,500,000 were not much more than a tenth of the
private deposits. Moreover, the capital and reserves
of the Banks have doubled since 1870.
37. The portion of the Cash Balances deposited,
under the above arrangements, with the three Presi¬
dency Banks varies, of course, from week to week.
The amount normally placed with the Head Offices
of the Banks has fluctuated for some time in the
neighbourhood of £1,000,000. In addition to this,
further sums, fluctuating about £1,500,000, are held
at branch offices of the Banks. These are deposited
1 See table given on p. 204.
i86
INDIAN CURRENCY AND FINANCE
CHAP.
on a different understanding (see p. 184, footnote) from
that governing the sums at the Head Offices, and
are held literally at call, the amounts at particular
branches being subject to wide variations. The total
sums placed with the Banks, head and branch offices
together, are usually about £2,000,000, and the
maximum deposits in recent years have been about
£3,000,000. On these deposits, as in the case of
the Bank of England and the British Government
deposits, the Banks pay no interest. The whole of
the rest of the Government Balances is maintained in
cash (rupees, notes, or sovereigns) in the various
Government Treasuries. This is the present position.
The Government are free in exceptional circumstances,
as we have seen above, to place additional sums with
the Presidency Banks on which interest is payable.
But advantage has not been taken of these powers
recently.
38. In view of the facts mentioned at the end of
§ 36, I am of opinion that the Beserve Treasury
system needs reconsideration and that at present
rather more funds, perhaps, than is necessary are
withdrawn from the use of the Money Market into
the Treasuries.
But the critics referred to in § 35 are following
a false track when they argue that much offence lies
in the present use of the Cash Balances, and that the
main remedy for the seasonal stringency of the Indian
Money Market is to be found in lending out these
VI RESERVES AND CASH BALANCES 187
balances in India during the busy season. In thinking
that any substantial remedy is to be obtained by
loans from this source, they are paying too much
attention to the transient circumstances of a single
year. I believe, for the reasons given below, that
the Indian Money Market cannot expect very much
assistance from the Cash Balances, and that they have
much more to hope for in the future from the growing
resources of the Paper Currency Reserve.
Only under one or other of two conditions could
loans from the Cash Balances be important: first, if
the proceeds of taxation tended to accumulate in the
Government Treasuries in the autumn and winter
months so that the balances tended to be above their
normal level at the busy season; and second, if the
Government were to pursue the foolish policy of
habitually keeping more ample balances than they
really required. The first of these conditions is not
fulfilled to any important extent. The land tax is
collected, naturally, after the harvest has been sold,
not during it; and at the end of the calendar year
the surplus balances are small. The totals of the
Indian Balances on August 1 and January 1 of recent
years are shown below :—
[Table
INDIAN CURRENCY AND FINANCE
CHAP.
188
(In Lakhs of Rupees)
August 1.
January I.
Reserve
Treasuries.
Total Balances
in India.
Reserve
Treasuries.
Total Balances
in India.
1906- 1907
1907- 1908
1908- 1909
1909- 1910
1910- 1911
1911- 1912
1912- 1913
5,26
5,18
7,41
2,22
9,49
9,62
10,96
17,18
17,14
19,54
13,61
21,43
22,66
24,58
1,60
3.20
76
1,74
2,82
3.21
10,62
10,46
11,84
9,33
10,16
13.18
15.18
21,99
The total balances include the working balances
in the innumerable District Treasuries all over India
and the sums already deposited with the Presidency
Banks, When, therefore, we are considering to what
extent the Government could lend at the height of
the busy season, we must chiefly pay attention to the
sums in the Reserve Treasuries on January 1. The
above figures show conclusively that, as a rule, the
Indian Money Market cannot expect substantial
assistance from this source at the time of year when
it is most needed. Except in 191 3 , 1 the resources of
the Beserve Treasuries on January 1 have been in
recent years between £1,000,000 and £2,000,000.
After January 1, it is true, the revenue comes in
rapidly. 2 But as a matter of fact, the funds which
1 The exceptional circumstances of 1913 are dealt with in Chap. VIII.
2 See Report of Comptroller of Currency, 1911-12: “In July the
balance generally reaches its highest level. Prom July onwards until
December the revenue collections are comparatively small and the balances
steadily go down till they reaoh their minimum level in November or
December. After December the surplus revenue receipts far exceed the
demands for expenditure.”
VI RESERVES AND CASH BALANCES 189
accumulate from the proceeds of revenue between
January and April are quickly released and returned
to the Money Market, as matters now are, through
the encashment of the Council Bills which are
generally sold in large quantities at this time of year.
If this money were to be released by loan instead of
by the encashment of Council Bills, the effect would
be that less funds would be remitted to London; and
unless we assume that more funds are being remitted
to London than are really required, this would put
the Secretary of State to inconvenience in meeting
the Home Charges. Only in years when sufficient
funds had been remitted to London earlier in the
financial year, therefore, would surplus funds be
available in the Indian Treasury to any important
extent even in the latter half of the busy season.
I do not say that the Government should not
lend from the Cash Balances in India whenever
exceptional circumstances may lead to their being at
an unnecessarily high level in the busy season. But
the sums which could be lent in this way would not
generally be important, and the amount of elasticity
which the financial system could gain by these loans
would be small compared with what it might acquire
from a reform of the Paper Currency Reserve. I
should prefer, therefore, that the Indian Cash Balances
should be held, so far as possible, in notes, thus
increasing the capacity of the Currency Reserve, and
that all advances should be made in form from the
INDIAN CURRENCY AND FINANCE
CHAP.
I90
Currency Reserve. The question of the use of funds
in the Cash Balances would then lapse into the
question of the use of funds in the Paper Currency
Reserve. But if a different system of book-keeping
be preferred, no substantial change is involved in
what I propose. The method of loaning from the
Currency Reserve is applicable mutatis mutandis to
loans from the Cash Balances.
39. Of the Cash Balances in London no more than
a working account is kept with the Bank of England.
The manner in which the rest is dealt with is best
described in the words of an official memorandum
issued by the India Office in 1913 [Cd. 6619] :—
The practice followed since 1838 has been to keep a
certain part of the balance at the Bank (of England) and to
lend the remainder at interest. The usual method is to lend
to certain banks, discount houses, and stock-brokers of high
standing, whose names are included in an approved list, now
containing sixty-two names. The list is revised periodic¬
ally, and applications for admission are carefully considered
with reference to the standing and resources of the applicants
and the nature of their business. Loans to borrowers on
the approved list are granted as a rule for periods from three
to five weeks, occasionally for six weeks, so that the whole
balance could, if needed, be called in within six weeks.
The Accountant-General informs the Secretary of State’s
broker daily of the amount of loans that may be renewed,
the amount of new loans that may be placed, or the amount
that must be called. The broker is responsible for obtain¬
ing the best possible rate of interest. The amount of a
loan is not paid out from the Secretary of State’s account
at the Bank of England until the security has been lodged
VI RESERVES AND CASH BALANCES 19 I
at the Bank. In 1909 it was found that the borrowers
on the approved list could not take the full amount of
the balances available for loan; and, in order to obtain
employment for the funds, the broker was instructed, as
a temporary measure, to deposit the excess amount from
time to time with leading London banks, usually for
periods of between one and three months.
40. In the autumn of 1912 a determined attack was
made, in the Press and by means of questions in the
House of Commons, on the management of the English
Balances, as described above, and on their amount.
Many of the questions were framed rather with some
other object than to elicit information. But they un¬
doubtedly had the result that the authorities published
to the public much ampler details than were previously
available. A valuable summary of these will be found
in the official memorandum [Cd. 6619] from which
I have just quoted. 1 As the outcome of this very full
inquisition into the whole subject, only two points have
emerged in which, in my opinion, the authorities are
open to criticism in detail— i.e., apart from wide
questions of policy. They renewed India Bills (which
were eventually paid off in December 1912) when
they could have very well afforded to discharge them.
If the season of 1912-13 had been a bad one, or if
their expectations had been upset in any other way,
it would always have been open to the India Council
to issue the Bills afresh. Their action appears to the
1 See also Lord Inchcape’s letter to the Times of November 12, 1912. I
forbear to enter in detail into what is not, in reality, one of the truly vital
aspects of Indian Government Finance.
192
INDIAN CURRENCY AND FINANCE
CHAP.
outside critic to have been one of ill-considered
caution. The other point is a trifle and reflects, per¬
haps, on a curiosity of our economic organism rather
than on the India Office. It was- slightly shocking
to discover that the Government broker, who is not
even a whole-time officer, and has a separate business
of his own besides his official duties, is the highest
paid 1 official of the Government with the sole excep¬
tion of the Viceroy. He has probably been paid too
high even on current city standards. But it suggests
once again the old question how long it will be found
necessary to pay city men so entirely out of pro¬
portion to what other servants of society commonly
receive for performing social services not less useful
or difficult.
41. Some of the conclusions of this chapter may
be summarised. All countries, since the practice has
been generally adopted of employing a medium of
exchange composed of some cheaper material than the
standard of value, must keep a monetary reserve.
Where there is a State bank, the bank is usually
entrusted with this duty. Where the State regulates
the currency and the note issue without the inter¬
vention of a bank, the State must itself undertake it.
1 The payments to the Government broker, from which, no doubt, some
deduction has to be made for expenses, have been as follows :—
1908 .... £2,642 1911 .... £10,544
1909 .... 6,396 1912 (up to Dec. 14) . 7,958
1910 .... 12,728
The principles governing the amount of these payments were explained in
the House of Commons on December 17, 1912, in answer to a question.
VI
RESERVES AND CASH BALANCES
193
The proper magnitude of the reserve must depend upon
the particular circumstances of each country. In
India the reserve must be unusually large, first,
because India is a great country specially liable to wide
fluctuations in her prosperity and trade on account of v'
climatic conditions the character of which cannot be
easily foreseen; and second, because a large amount
of foreign capital is employed, not only in permanent
investment, but in temporary loans withdrawable at
short notice, and because against these foreign
liabilities India holds no appreciable amount of inter¬
national Stock Exchange securities capable of easy
realisation. I have argued that £40,000,000 may be,
perhaps, at present a suitable amount to be held by
Government in its sterling Reserves. These Reserves
are most useful if they are held in London, where they
must necessarily be wanted whenever there is need to
make use of them. In deference to a public opinion
which does not clearly understand the purpose of the
Reserves or the limitations under which the Secretary
of State must needs act in managing his sterling re¬
sources, it may be worth while to allay a groundless
suspicion by the compromise of holding a fair propor¬
tion of the reserve of actual gold coin in India herself.
When a Reserve of some such amount as the above
has been firmly established, the diversion of further
funds into any form of sterling or into the London
Marker should be deliberately avoided.
Stability has been attained already, or is about to
0
194
INDIAN CURRENCY AND FINANCE ciiai-. vi
be. So, on the whole, has economy, though some
current opinion in regard to the use of gold puts it
in jeopardy. The system still wants elasticity. A
machinery ought to be set up, therefore, by which
further funds, accumulating in the hands of Govern¬
ment through the increased use of notes, may be
used in India to afford the needed elasticity in the
seasonal supply of currency.
Let the Indian public learn that it is extravagant
to use gold as a medium of exchange, foolish to
lessen the utility of their reserves through suspicion
of the London Money Market, and highly advan¬
tageous to their own trade and to the resources of
their own money market to develop the use of notes;
and their financial system may soon become wonder¬
fully well adapted to the particular circumstances of
their situation. The history of the last twelve years
has been transitional. The authorities have been—
wisely—building up the reserves they ought to have.
This process has necessarily diverted funds from the
Indian Money Market, and has naturally excited some
measure of opposition. But the fruits of cautious
growth may soon be reaped.
CHAPTER VII
INDIAN BANKING
1. In passing from Currency and the Finance of
Government to the kindred topic of Banking, we
come to a part of the subject where statistics and
other information are much less freely available to
the outside critic. The published figures are not
adequate to tell us much of what we require to
know, and the literature of Indian Banking is almost
non-existent. I must run the risk, therefore, of
sometimes falling into errors of fact, and hope that,
if these errors provoke criticism, they will bring to
light the true facts at the same time.
2. The Money Market and Banking System of
India comprises the following as its four main
constituents:—
(i.) The Presidency Banks; (ii.) the European
Exchange Banks; (iii.) the Indian Joint Stock Banks;
and (iv.) the Shroffs, Marwaris, and other private
bankers and money-lenders.
The first two of these constitute what we may
term the European Money Market, and the rest,
' *95
196
INDIAN CURRENCY AND FINANCE
CHAI>.
under the leadership of Marwaris and Parsecs, the
Indian or Native Money Market,—up-country Banks
such as the Allahabad Bank and the Alliance Bank
of Simla, which are Indian Joint Stock Banks under
European management, occupying, perhaps, an inter¬
mediate position. The local money markets, outside
the main towns in which European business men
have offices and where the bulk of the foreign trade
is handled, are entirely in the hands of Indians.
3. How close a connexion exists between the two
money markets—native and European—how nearly
the rates ruling in one agree with those in the other,
and how readily capital flows from one to the other,
I am not clear. Some evidence bearing on these
points was laid before the Fowler Committee of 1898,
but such facts are now fifteen years old. In the
pre-1899 period it was not uncommon in times of
stringency for the bazaar rate to be appreciably
lower than the Presidency Bank rate, and the con¬
nexion between the two money markets seems to
have been very incomplete. The following quota¬
tion from a letter by Mr. J. H. Sleigh, Secretary
and Treasurer of the Bank of Bombay, written in
1898 (reprinted in the Appendix to the Fowler
Committee’s Report), is interesting:—
During the last export season, Shroffs’ 60 days’ sight bills
were not obtainable over 8 per cent discount. . . . This
was the rate then ruling in the native bazaar both in
Bombay and Calcutta, and that, too, while the Exchange
INDIAN BANKING
19 7
vn
Banks were greedy to receive fixed deposits for short periods
at 9, 10, and even 11 per cent per annum, and while the
Presidency Banks were straining to meet the demands for
loans at 12 and 13 per cent per annum. But there is no
singularity in these facts. The same peculiarity has shown
itself over and over again during periods of financial
pressure ; and even at the present moment (November 1898),
while money is not by any means tight, there exists a
difference of about 2 per cent between the bazaar and the
Presidency Bank rates. I have ever found that when the
official rate rose abnormally high, the rate in the native
market did not respond to the full extent, but generally
stopped at 7 or 8 per cent, though the Presidency Banks’
rate might rise to 10 or 12 per cent. The explanation is
simple. The Shroffs, who finance nearly the whole of the
internal trade of India, rarely, if ever, discount European
Paper and never purchase foreign or sterling bills. Neither
do they lend money on Government Paper or similar
securities, but confine their advances to the discount of
hoondees , to loans to cultivators, and against gold and silver
bullion. The hoondees they purchase are for the most part
those of traders, small and large, at rates of discount
ranging from 9 to 25 per cent per annum, but the hoondees
they buy and sell to each other, which are chiefly the
traders’ hoondees bearing the Shroffs’ own endorsements,
rule the rates in the native bazaar, and are generally
negotiated, during the busy season, at from 5 to 8 per
cent discount. They also discount their endorsements
pretty largely with the Presidency Banks when rates are
low, and discontinue doing so when they rise above 6 per
cent. They also speculate largely at times in Government
Paper, especially during the off season, but rarely or ever
hold it or lend on it.
I have seen no evidence for supposing that the
general conditions outlined in this quotation do not
198
INDIAN CURRENCY AND FINANCE
CHAP.
still hold; but in recent years the Presidency Bank
rates have not risen above 9 per cent, and occasions
for the operation of the tendencies described above
have been rarer. The conditions prevailing in the
Indian Money Market in the period immediately pre¬
ceding 1898 were in many respects very abnormal.
I suspect that the rates in the two markets may
appear to be more different than they really are,
and are explicable by the difference of the con¬
ditions and of security, subject to which business
is transacted. It is, however, plain that the main
movements of the interest rate up and down,
which result from the central facts of the Indian
seasons and harvests, must be the same in both
markets, and that the Native Money Market must
ultimately depend on the European for additional
supplies of cash.
4. As I am chiefly interested in the Indian Banking
System, so far as this book is concerned, from the
point of view of its effect on the remittance of funds
to and from India, I shall be concerned for the most
part with what I have called the European Money
Market—the Presidency and Exchange Banks. But
an Indian writer, in a position to know the facts,
could throw much useful light on a question where I
must necessarily be content with somewhat doubtful
conjecture.
5. The Presidency Bank of Bengal was opened in
1806 and received its charter of incorporation from
VII
INDIAN BANKING
199
the East India Company in 1809. 1 The first Bank of
Bombay 2 was established under a similar charter
in 1840, and the Bank of Madras in 1843. The
establishment of these Banks in the other Presidencies
put an end to the possibility that the Bank of Bengal
might become a Bank for all India. The Presi¬
dency Banks had, at first, a semi-official character.
At the foundation of the Bank of Bengal, the East
India Company contributed one-fifth (the proportion
became smaller subsequently) of the capital and
appointed three of the directors. Up to the time of
the Mutiny the office of Secretary and Treasurer was
held by a Covenanted Civilian.
Up to 1862 the Banks had the right of note
issue; but this right was so hedged about by a
restriction of the total liabilities payable on demand
to a certain multiple (at first three times, later four
times) of the cash reserve, and of the total liabilities
of all kinds to the amount of the Bank’s capital (up
to 1839), or of the total note issue to a fixed amount
(from 1839 to 1862), that the note issue of the Presi¬
dency Banks never became important. In 1862 the
management of the note issue was taken over by the
Government in the manner described in Chapter III.
At the same time the right of note issue by private
1 See Mr. J. B. Brunyate’s Account of the Presidency Banks (1900), whence
the historical details which follow have been chiefly derived. Mr. Brunyate’s
Account is of the highest value to students of hanking history.
2 The first Bank of Bombay went into liquidation in 1868, although its
liabilities were eventually paid up in full. A new Bank of Bombay was
formed in the same year.
200
INDIAN CURRENCY AND FINANCE
CHAP.
Banks was finally abolished. 1 In 1876 the Govern¬
ment relinquished their share of the capital of the
Banks and their right of appointing directors. 2 Since
then the Presidency Banks have lost their official
character, but remain distinct from other Banks in
that they are governed by a special Charter Act (the
Presidency Banks Act of 1876).
6. The Presidency Banks have worked from the
beginning under very rigorous restrictions as to the
character of the business which they might undertake.
These restrictions were originally due partly, perhaps,
to a feeling of jealousy on the part of the Court of
Directors of the East India Company lest the Banks
should compete in business (such as foreign exchange)
which the Company regarded as its own ; but chiefly
from a proper wish that semi-official institutions, in
a country so dangerous for banking as India, should
1 By 1862 such issues were of negligible account, but in earlier times they
had been important. “Probably the first banking institution in India, on
European lines, was the Bank of Hindustan, which was established in Calcutta
about 1770 by a private trading firm. The notes of this Bank, though not
recognised by the Government, obtained a local circulation which occasionally
reached forty or fifty lakhs and generally averaged about half that amount.”
It is said that they were “ received for many years at all the public offices in
Calcutta scarcely excepting the Treasury itself.” On two occasions, once in
1819 and again in 1829, the occurrence of a panic led to the presentation for
payment of about twenty lakhs’ worth of the notes, and the demand was
promptly met. (Brunyate, loc. ait. p. 55.) This Bank and others ui-apj vr.u <3
in the commercial disasters of 1829-1832. “Out of their ruin rose the
Union Bank, a Joint Stock Bank created by co-operation among all the leading
Calcutta houses.” (Brunyate, loc. ait. p. 59.) In 1834 the Bank of Bengal
refused to accept the notes of its formidable rival, and in 3848 the Union
Bank disappeared.
2 This was in some degree consequent on the failure of the Bank of Bombay
in 1868, the Government having found itself in the awkward position of
being a shareholder in a Bank, its liability for which was not clearly defined.
VII
INDIAN BANKING
201
be conducted on the safest possible principles. 1 An
exceedingly interesting history of the restrictions is
to be found in Mr. Brunyate’s Account. In 1862
they were greatly relaxed, but the most important
limitations were reimposed in 1876. 2 Since that
time only minor charges have been effected.
7. The principal restrictions on the Presidency
Banks are now the following :—
(i.) The Banks may not draw, discount, buy, or
sell bills of exchange or other negotiable securities
unless they are payable in India 3 or in Ceylon;
this restriction has cut off the Presidency Banks
completely from dealing in sterling drafts or any
kind of foreign exchange ; (ii.) they may not borrow,
or receive deposits payable, outside India, or maintain
a foreign branch or agency for this or similar purposes,
and they are thus prevented from raising funds in
London for use in India 4 ; (iii.) they may not lend
1 The way in which Indian institutions have been moulded on and
influenced by English is interestingly illustrated by the fact that several of
the provisions in the Charters of the Presidency Banks were copied from the
1695 constitution of the Bank of England.
2 This also was partly consequent on the failure of the Bank of Bombay
in 1868.
3 Except for the use of principals for the purpose of certain specified kinds
of remittance.
4 In 1877 the Banks pressed strongly for a relaxation of this provision.
But the Secretary of State held that “the concession of a power of creating
a foreign agency in England, such as would be the result of entering into
loan transactions of the nature of those contemplated, would admit of the
Banks locking up a large portion of their capital at so great a distance as to
render it practically unavailable in the case of any emergency arising in
India.” This argument is not one which would be likely to be used at the
present time. The fear would rather be lest they should lock up funds in
India.
202
INDIAN CURRENCY AND FINANCE
CHAP.
for a longer period than six months 1 ; (iv.) or upon
mortgage, or in any other manner upon the security
of immovable property; (v.) or upon promissory notes
bearing less than two independent names; (vi.) or
upon personal security; (vii.) or upon goods, unless
the goods, or the title to them, are deposited with
the Bank as security.
The fifth of these provisions allows a loophole by
means of which the rules can be made to work in
practice less rigorously than appears on paper. Any
two names will satisfy the letter of the Presidency
Banks Act; but any two names are not necessarily
very good security. After getting two names to
satisfy the Act, the authorities of the Banks can then
proceed to satisfy the dictates of cautious banking
by taking, as well, some of the other kinds of
security upon which, technically, they are forbidden to
lend. It is an excellent instance of the consequences
of an attempt to control banking by an elaborate Act
forty years old. The last provision has led, I believe,
to the Banks establishing a kind of bonded warehouse
for the reception of merchandise. In other cases the
borrower’s own mill or warehouse is made to serve
the purpose by the expedient of the Bank’s paying
the wages of his watchman. Where the personal
security of the borrower is obviously good, there must
be a temptation to allow him to value the goods
generously, rather than to put the Bank to the in-
1 Up to 1907 the maximum period was three mouths.
VII
INDIAN BANKING
203
convenience of housing or watching a greater bulk of
merchandise.
As some recompense for these restrictions, the
Presidency Banks have been allowed to hold a
portion of the Government balances without payment
of interest. The use of these balances was first
granted them in 1862 as compensation for their
being deprived of the right of note issue. Up to
1876 the Presidency Banks held, subject to certain
conditions, the whole of the Government balances
which would have been “ paid in ordinary course into
Government Treasuries at the places where the head
offices and branch offices of the Banks are established.”
But on more than one occasion the Banks made diffi¬
culties when the Government desired to withdraw large
sums at short notice. In 1876, therefore, the Reserve
Treasuries were established, and since that time only a
8. The present constitution of the Presidency
Banks is to be explained, therefore, by their long
and complicated history. The restrictions under
which they work have in the past contributed,
beyond doubt, to their stability. The Bank of
Bengal has seen the rise and fall of numerous
powerful rivals. Only by virtue of its being
absolutely precluded by law from the more specu¬
lative forms of business, has this Bank survived the
half-dozen or more violent crises by which the Indian
1 See §§ 36-38 of Chapter VI.
204
INDIAN CURRENCY AND FINANCE
CHAP.
^financial system has been assailed in the last hundred
years. And, in spite of the restrictions, the Presidency
Banks have shown great vitality and a power of ex¬
pansion hardly less than that of the Exchange Banks
in the happier circumstances of the last decade. But
their constitutions are exceedingly out of date at the
present time. The considerations which originally
gave rise to them are no longer operative;—since the
introduction of the Gold Standard, for example,
dealing in foreign exchange has ceased to be a
highly speculative business. And they do not play
as useful a part in the Indian Financial System, as
with a different history behind them they might do.
9. The principal statistics of the three Presidency
Banks are as follows 1 :—
Dec. 31.
Capital, Reserve,
and Rest.
Public Deposits.
Private Deposits.
Gash.
1870
£ 2 , 412,000
£ 3 , 620,000
£ 4 , 264,000
£ 6 , 646,000
1880
2 , 702,000
1 , 941,000
5 , 662,000
4 , 943,000
1890
2 , 984,000
2 , 395,000
9 , 842 , 000 1
8 , 645,000 1
1895
3 , 267,000
2 , 218,000
8 , 747,000
5 , 131,000
1900
3 , 731,000
1 , 870,000
8 , 588,000
3 , 363,000
1905
4 , 156,000
2 , 078,000
14 , 842,000
5 , 487,000
1906
4 , 266,000
2 , 052,000
18 , 301,000
7 , 300,000
1907
4 , 366,000
2 , 239,000
18 , 742,000
6 , 350,000
1908
4 , 461,000
2 , 172,000
19 , 077,000
6 , 925,000
1909
4 , 521,000
2 , 132,000
21 , 767,000
7 , 770,000
1910
4 , 607,000
2 , 824,000
21 , 563,000
7 , 567,000
1911 2
4 , 650,000
2 , 640,000
23 , 250,000
9 , 430,000
19122
4 , 900,000
2 , 530,000
24 , 000,000
8 , 070,000
1 An exceptional year, due to the excessive abundance of money.
2 The figures for 1911 and 1912 are not taken from the same returns as the rest, and arc
not quite strictly comparable 'with them m one or two details.
1 The rupee has been converted, at the uniform rate of Is. 4d. throughout.
VII
INDIAN BANNING
205
These figures do not require much commerN^V Th^^
growth of private deposits since 1900 (rising'fr i SHf sSi
£8,500,000 in 1900 to £15,000,000 in 1905 and
£24,000,000 in 1912) is very noticeable. This has
been accompanied by a fair increase of Capital and
Beserve and of Cash. The Presidency Banks publish
weekly statements of their affairs, and it is scarcely
possible, therefore, that they should “ window-dress ”
their balance sheets. The figures given above refer
to December 31, which falls in the busy season ; and
the proportion of cash held affords no ground of
complaint. It should be said, however, that, while
the public deposits at the head offices are stable and
not liable to sudden reduction, the public deposits
at the branch offices stand in a different position and
are held literally at call. It is necessary for the
Banks to hold a considerable proportion of these in
cash at the branches in question, and this arrange¬
ment makes the cash held against the private
deposits appear in a somewhat more favourable light
than it should. It must also be remembered that the
Presidency Banks are to a certain extent Bankers’
Banks, and that the other Indian Banks reckon their
balances with the Presidency Banks (included in the
private deposits) as part of their cash.
10. The two provisions of the Presidency Banks
Act which have proved fundamental in their effect on
the development of the Indian Banking System are
those which prohibit the P^Sjlleney Banks from
206
INDIAN CURRENCY AND FINANCE
CHAP.
dealing in foreign exchange and from raising funds
in London. To transact these two classes of business
—though once established they have not limited
their transactions to them—a class of Banks has
arisen known as the Exchange Banks. Officially a
Bank is an Exchange Bank if its head office is located
elsewhere than in India; but Banks in this category
coincide very nearly with Banks doing the class of
business described above. The Indian Specie Bank
is the only Indian Joint Stock Bank having a branch
office in London; but this is probably in connexion
with its business in silver and pearls, and this Bank
does not transact any considerable volume of business
of the kind undertaken by Exchange Banks.
11. The Exchange Banks proper fall into two
groups—those doing a considerable proportion of
their total business in India, and those which are no
more than agencies of large banking corporations
doing business all over Asia. This second group
includes the Comptoir National d’Escompte de Paris,
the Yokohama Specie Bank, the Deutsch-Asiatische
Bank, the International Banking Corporation, and
the Pusso-Asiatic Bank. These Banks represent in
India French, Japanese, German, American, and
Russian interests respectively. No figures are
published of the proportion of their total business
which these Banks transact in India. But I should
be surprised if, even in the case of the Yokohama
Specie Bank, it would amount to more than five to
VII
INDIAN BANNING
207
ten per cent; and in the case of some of them it must
be much less than this. In what follows, therefore,
I shall leave these five Ban k s out of account.
In the first group there are six Banks—the Delhi
and London Bank (1844), the Chartered Bank of
India, Australia, and China (1853), the National Bank
of India (1863), the Hong Kong and Shanghai Bank¬
ing Corporation (1864), the Mercantile Bank of India
(1893 1 ), and the Eastern Bank (1910). The dates
after these Banks give the years when they were
established. Of these, two, the Chartered and
the Hong Kong Banks, do a very large business
in other parts of the East, especially China 2 ; but this
does not prevent their Indian connexion from being
important. The other four are primarily Indian. 3
It is noticeable that no entirely new Exchange
Bank now surviving 4 was founded between 1864
and 1910. This is in spite of the fact that most of
the above, especially in the last decade, have proved
enormously successful from the point of view of
their shareholders. The Delhi and London Bank, 6
1 This is the date of the foundation of this Bank under its present style,
but it was formed out of the old Chartered Mercantile Bank of India, London
and China, which dates much further back.
2 The Chartered Bank, in spite of its name, has never done business in
Australia.
8 But not exclusively. The National Bank, for example, has a large
interest in East Africa; this coast has considerable trade connexions with
India, and the rupee has a fairly wide circulation there (see figures of rupees
exported given on p, 154).
4 The New Oriental Bank, established in 1885 (the great Oriental Bank
Corporation had failed in 1884), went into liquidation in 1893.
5 I fancy that it has more the character of an Indian Joint Stock Bank
and less of the character of an Exchange Bank than the others.
208
INDIAN CURRENCY AND FINANCE
CHAP.
the oldest established of all, has not shown the
vitality or power of expansion of the others; and the
Eastern Bank, though it seems to have made a good
start, is still too young to pass judgment on. But
the shares of the rest, if the issue of bonus shares be
allowed for, stand at a premium of about 200 per cent
or more. It is probable, however, that it would be
exceedingly difficult to start a new Exchange Bank
at the present time, except under the aegis of some
important financial house already established in a
strong position in India. 1 Indian Exchange Banking
is no business for speculative or enterprising out¬
siders, and the large profits which it earns are pro¬
tected by established and not easily assailable
advantages.
X
12. This summary leads us, therefore, to the
important conclusion that the business of financing
Indian trade, so far as it is carried out by Banks
with their seat in London, 2 is in the hands of a very
small number of Banks. They stand, broadly speaking,
in an exceedingly strong financial position supported
by large reserve funds. In this matter India is now
enjoying the fruit of past disasters and of conditions
in which the struggle for existence was too keen to
1 The Eastern Bank was established under the auspices of Messrs. E. D.
Sassoon, while two important French Banks and Messrs. Brown, Shipley,
and Co. are represented on the board of directors.
3 There is of course much business of a semi-banking character
transacted by financial and mercantile houses, some of them of the first
magnitude, with establishments both in India and London. But they
are private firms and publish no information about their business of which
it is possible to take account.
VII
INDIAN BANKING
209
allow any but the fittest to survive. If the present
spell of prosperity lasts too long, she will no doubt
lose it.
IS. I shall not attempt any complete account of
the activities of a typical Exchange Bank. Much of
their business is .very like that of any other Bank.
But it will be worth while to describe in rather more
detail the most characteristic part of their transactions
and the part which is most relevant to the topics of
this book.
14. In addition to its capital and the reserves
accumulated from profits, an Exchange Bank
obtains its funds by receiving deposits either for
fixed periods or on current account. These
deposits are received both in India and in London ;
but it is a principal object of Exchange Banks to
obtain as much as they can in London, and they
seek to attract such deposits by offering better
terms than an English Bank will allow. On fixed
deposits, received for a year or more, 4 or 3^ per
cent will be paid; for shorter periods a more
variable rate; and on current accounts 2 per cent
will be allowed on the minimum monthly balance or
on the amount by which the balance exceeds a
certain fixed minimum. Apart from the cash,
money at call, and investments, which every Bank
must hold, a certain part of these funds are employed
in making loans either in India or elsewhere. But a
large part is employed in the purchase (or discount)
p
210
INDIAN CURRENCY AND FINANCE
CHAP.
of bills of exchange. Some of these bills will be
negotiated in London and drawn on India, but the
bulk of them will be negotiated in India and drawn on
London. A busy Exchange Bank discounts far more
of these trade bills in India than it can afford to
hold until maturity. But as they are drawn on
London houses there is no difficulty in rediscount¬
ing them in London. As the majority of the bills
are bought by the Banks in India, while cash is
received for them, either at maturity or through
rediscount, in London, the Banks are constantly in
the position of finding themselves in funds in London
and of wishing to have funds (for the purchase of
more bills) in India. They proceed, therefore, to
even up their accounts as between London and India
by buying, in London, Council Bills (or transfers) or
sovereigns (from the Bank of England or from the
agents of Egyptian or Australian Banks) for delivery
in India, or, perhaps, silver (though their dealings
in silver bullion are probably much less important
than formerly) 1 for remittance to India. The
question of what determines the relative advantages
of these methods has been discussed in Chapter V.
The demand for Council Bills, therefore, chiefly
depends on how much new business the Exchange
Banks are entering into in India. The method of
telegraphic transfers enables them to act with great
1 Another method occasionally worth while employing is the purchase of
Government Rupee Paper in London and its sale in India.
VII
INDIAN BANKING
211
despatch on receiving advices from their Indian agents.
The Indian branches obtain immediately the funds
enabling them to take the trade bills, the offer of
which had seemed to them to be at sufficiently
satisfactory rates to make the transaction taken as a
whole worth while. A few weeks later the bills reach
England, are duly accepted, and are capable of being
rediscounted if the Bank needs additional free funds
to buy more Council Bills and turn its money over
again in another transaction of the same kind.
We are now in a position to understand what the
Secretary of State means when he says that he has
sold bills to meet the needs of trade. If he withdraws
the convenience of telegraphic transfers or forces the
Banks to put themselves in funds in India by sending
sovereigns, he causes delay or additional expense in
the discounting of bills in India. In other words,
Indian traders are less easily able to turn the goods
they are exporting into money. On the other hand,
if the Indian season is a poor one and the exports
fall off, the offer of bills for discount is reduced and
the need of the Exchange Banks in London to buy
Council Bills correspondingly less.
It is worth noticing that, from the point of view
of the London Money Market as a whole, it is a mere
difference of machinery whether the Exchange Banks
finance the Indian trade by attracting deposits in
London and hold the bills themselves, or whether
the Discount Houses and London Banks attract the
212
INDIAN CURRENCY AND FINANCE
CHAP.
deposits and use them to rediscount bills for the
Exchange Banks. In so far as the Exchange Banks
can attract deposits themselves without paying too
high a rate for them, this alternative is usually the
more profitable for them,—especially since, if they are
able to hold in this way a considerable proportion of
the bills they discount, they can afford to wait for
a favourable moment before rediscounting such bills
as they have eventually to dispose of. But, apart
from private profits, the important point is the extent
to which Indian trade is financed by the purchase of
Council Bills in London with borrowed money, whether
this money is supplied by the depositors in Exchange
Banks or by those who rediscount the bills.
15. There is, prima facie, some danger to the
stability of the Indian financial system in the fact
that its money market is largely financed by funds
raised, not permanently but for short periods, in a
far-distant foreign centre. 1 In order to judge accurately
whether this danger is in any way a real one, it
would be necessary to have before us certain facts
which are not ordinarily published. We do not know
what proportion of the Exchange Banks’ total deposits
are held in England; or to what extent those which
1 Tlie volume of bills, drawn in India on London and outstanding, is not,
of course, a correct measure of the extent to wbicb India is being financed
abroad. A bill may be used to finance tbe foreign purchaser just as much as
the Indian seller. Tor example, a dealer in cotton in India might be paid by
a 3 m/s Bank credit supplied by the buyer, a Continental spinner; this
spinner might get the cotton within a fortnight of the acceptance of the bill,
which would, therefore, be really financing his cotton factory.
VII
INDIAN BANKING
213
are so held are fixed for a year or more and how far
they are at call or short notice. As is often the case
when banking is under discussion in other countries,
those who are in a position to know are not in a.
position to speak, while those who are in a position
to speak are not in a position to know. I will make
my guess for what it is worth in § 18. In the mean¬
time let us discuss the principle which should guide
us, had we knowledge.
It is plain that if Banks were to borrow money at
short notice in England and use it in India—certainly
if they were to do this on a large scale,—the situation
might be dangerous. They might be called on to
return what they had borrowed in England, and
unable at short notice to bring back what they had
lent in India. The principle of which we are in search
is, therefore, that the sums borrowed on relatively
short notice in either country should not exceed the
assets located there. Where, however, bills of exchange
between England and India are in question, it is not
immediately plain what part of the Banks’ funds may
properly be regarded as located in England and what
part in India. The answer is, I think, that a bill
which has been accepted in England, and is payable
there at maturity, is an English asset, wherever it
may have been originally negotiated. Thus in the
case of Indian Exchange Banks, their deposits in
London (other than those fixed for long periods)
should be at least balanced by their short-term loans
214
INDIAN CURRENCY AND FINANCE
CHAP.
in London, their cash in London, their portfolio of
trade bills having a London domicile, and such of
their securities as may be readily marketable in
London. Similarly their liquid assets in India should
at least balance their short-period liabilities there.
16. How far these conditions are as a matter of
fact satisfied, it is, as I have said above, impossible
to know for certain. The Exchange Banks do not
distinguish in their published accounts between their
Indian and London deposits. They do, however,
give private information to the Indian authorities of
their deposits in India and elsewhere respectively in
each year. These aggregates for all the Exchange
Banks together are published in the Statistics of
British India, Part II., and are, therefore, available
to the public two or three years after the period to
which they refer. 1
So far as the Indian deposits are concerned, these
returns are very valuable. But the aggregate of
deposits outside India is as nearly as possible useless.
For Exchange Banks of both groups — the Banks
primarily Indian and the agencies of huge European
institutions doing business in many parts of the world
—are lumped together, so that the total includes the
whole of the French deposits of the Comptoir National
d’Eseompte and of the deposits, in whatever country,
of the other Banks with Indian agencies enumerated
1 The figures for 1910, for example, are in the issue which was obtainable in
England early in 1913.
VII
INDIAN BANKING
215
on p. 206. The figures are, therefore, hardly relevant
to questions peculiarly Indian ; and I will content
myself with quoting, from the table given in the
official statistics, the total deposits of Exchange
Banks made in India, and the cash balances held in
India against them.
Exchange Banks
Deposits in India.
Cash Balances m India.
1890
£ 5 , 000,000
£ 2 , 300,000
1895
6 , 900,000
1 , 800,000
1900
7 , 000,000
1 , 600,000
1901
7 , 900,000
2 , 200,000
1902
9 , 100,000
2 , 300,000
1903
10 , 800,000
2 , 100,000
1904
10 , 900,000
3 , 300,000
1905
11 , 400,000
2 , 500,000
1906
12 , 100,000
3 , 400,000
190*7
12 , 800,000
3 , 700,000
1908 !
13 , 000,000
2 , 500,000
1909
13 , 500,000
2 , 800,000
1910
16 , 200,000
2 , 900,000
17. Two facts emerge from this table with great
plainness—the rapid rate at which in recent years
Exchange Banks have been able to increase the funds
raised by deposit in India herself, and the slow rate at
which they have thought fit to increase their Indian
balances. 1 The position has evidently changed a
good deal in quite recent times. It is tantalising to
think that two years must elapse before we can
1 On tlie one hand, these balances are even weaker than they look, because
they include the Exchange Banks' balances at the Presidency Banks. On
the other hand, the Exchange Banks often have sovereigns or Council Bills in
transit which they may fairly consider, perhaps, as equivalent to cash.
2 l6
INDIAN CURRENCY AND FINANCE
CHAP.
know how the Banks stood in these respects last
December (1912). The Statistics of British India
do not lend their aid to ruder hands than those of
the historian.
In the event of an internal financial crisis in India
the Exchange Banks are probably depending on the
anticipation that they will be able to remit funds
from London by telegraphic transfer. In this case
they rely on not being hard pressed in India and in
London at the same time. An Indian reserve, such
as they appear to keep, of from 18 to 20 per cent
would be respectable, for example, in England. But
in such a country as India, where banking is ill-estab¬
lished and hoarding more than a memory, the pro¬
portion held in reserve seems somewhat lower than
perhaps it ought to be. Possibly Exchange Banks
have already been in smooth waters longer than is for
their good. There are famous dates in the history of
Indian banking which should serve as a memento mori.
18. When we turn to the assets and liabilities of
the Exchange Banks in England we find reason for
supposing a much stronger position; for the bulk
of the bills of exchange held are probably domiciled
in London and may be regarded, therefore, as liquid
London assets. 1 The following table sets out the
1 A certain proportion of their bills, no doubt, are drawn on the London
branches of Banks with a foreign domicile. These bills are not always so
readily discountable as London acceptances, the Bank of England taking
them unwillingly and charging £ per cent extra discount. But for the
present purpose they can, I think, be regarded none the less as liquid
London assets.
vir
INDIAN BANKING
217
figures relating to deposits, leaving out the Hong
Kong and Shanghai Banking Corporation, because,
although its Indian business is important, this can only
be a small proportion of its total business. I include
all the other Banks given in my first group (see
p. 207) although the non - Indian business of the
Chartered and National Banks cannot be accurately
allowed for.
Fixed and Cdkbent Deposits (in £1,000,000)
Bank.
1900.
1905.
1906.
1907.
190S.
1909.
1910.
1911.
1912.
Chartered
National
Mercantile .
Delhi and London
Eastern
£m.
6
ii
14
£m.
114
9
2|
14
£m.
134
9S
3|
14
£m.
124
104
34
14
£m.
124
104
34
14
£m.
13f
114
44
14
£m.
154
12|
54
14
14
£m.
16i
13
54
14
14
1 £m.
18
14
£4
14
2
Total .
'
18
244
28
274
274
314 .
364
38
_i
41
The total cash in hand and at bankers held by these
five Banks at the end of 1912 was about £m7f. I
estimate that in 1910 these Banks may have held
outside India about £m23 in deposits and about
£m5 cash in hand and at bankers.
As to the proportion of these deposits which were
held for long periods there is no accurate information.
The Chartered and Eastern Banks are alone in dis¬
tinguishing in their balance sheets between fixed
deposits and current accounts. In 1912 the Chartered
Bank held £mlO|- on current account, etc., and £m7|-
on fixed deposit; the Eastern Bank £m-|- on current
2 l8
INDIAN CURRENCY AND FINANCE
CHAP.
account and £mlf- on fixed deposit. 1 More than half
of the deposits of the Banks as a whole are probably
held on current account or at short notice. If we
are to make a guess, the Banks may have held
in 1910 about £13,000,000 on current account out¬
side India; but by no means all of this (in the ease
of the Chartered and National Banks especially) would
be held in London. The question of the amount of
the London assets of the Banks does not lend itself
to statistical summary. But I do not think that
there is the least reason for supposing that the
position is not a strong one.
19. The principles which underlie the preceding
analysis may be illustrated by reference to a
hypothetical balance sheet, simplified, but less
simplified than those commonly published.
(i.) Capital and Reserve
Fund
(ii.) Fixed Deposits in
London .
(iii.) Current Accounts in
London .
(iv.) Fixed Deposits in India
(v.) Current Accounts in
India
(vi.) Trade Bills on London
negotiated in India
and rediscounted in
London
£m.
ii
H
H
2
21
5 ir
17 |
(vii.) Loans and Advances
in London . . 3
(viii.) Loans and AcUance-
in India. . .3
(ix.) Trade Bills on London
negotiated in India .
(x.) Trade Bills on India
negotiated in London 1^
(xi.) Cash, etc., in London
(xii.) Cash, eta, in India . |
(xiii.) Securities. . .1
(xiv.) Miscellaneous assets in¬
cluding silver bullion J
V3
1 I believe that the Eastern Bank offers rather better terms than the other
Banks for fixed deposits.
VII
INDIAN BANNING
219
This would probably be published as follows :—
£m.
Capital and Reserve Fund 1J
Deposits, etc. . . 10 J
Loans, Advances, etc.
Bills of Exchange
Cash, etc..
Securities
Miscellaneous assets
12 I
[Bills rediscounted and outstanding,
£m.
6
H
2
1
i
12
Acceptances have been omitted in the above, the
amount of bills payable is supposed to be deducted
from cash, and various minor items are omitted.
The “ capital employed in India ” seems to be
(viii.) + (x.) + (xii.) = £m5. The “ capital employed
in London ” is (vii.) + (ix.) — (vi.) + (xi.) = .fm.5^. 1
The securities and miscellaneous assets (xiii.) + (xiv.)
= £ml|-, may be regarded perhaps as equally avail¬
able in either centre. If there is a run in India,
assets must be available there in a liquid form equal
to (v.). If there is a run in London, liquid assets
must be available there equal to (iii.). The second
condition, but not the first, is, in this hypothetical
example, fulfilled. If the Bank had to remit funds
back from India to London, this would be most
simply effected by not entering into new business
under (ix.). It would not then be necessary to buy
1 The confusing point here is this : that (ix.) is the amount advanced to
Indian merchants, and (x.) the amount advanced to English merchants ; yet
(ix.) must be reckoned an English asset and (x.) an Indian asset. For
(ix.) when it falls due is paid in England, although, of course, the Bank has
advanced money, through the purchase of it. in India.
220
INDIAN CURRENCY AND FINANCE
CHAP.
Council Bills, and the trade bills already bought
under (ix.), being rediscounted or allowed to mature
in London, would swell the available funds there
automatically. If it were possible to call in loans in
India and reduce (viii.), then it would be possible to
buy more trade bills under (ix.) in India (or Govern¬
ment sterling drafts if trade were depressed), without
having to buy Council Bills in London, and these
trade bills could then be rediscounted in London.
If the Exchange Banks are remitting funds back
to London, this shows itself, therefore, in a poor
demand for Council Bills; and conversely when
they are remitting funds to India, there is a strong
demand for Council Bills. Thus the weakness of the
demand for Council Bills in times of depression (and
the strength of the demand for Government sterling
drafts) partly depends on the action of the Exchange
Banks. What their action would be in a situation of
acute stringency bordering on financial panic, it is
not easy to predict.
20. So far the only apparent element of danger
in the banking position seems to lie in the growth of
deposits attracted by the Exchange Banks in India
without a corresponding growth in their Indian cash
reserves. It would be a good thing if the Exchange
Banks were compelled to distinguish in their balance
sheets between their Indian and extra-Indian business,
much in the manner set out in the hypothetical
balance sheet on p. 218, except that for “London”
VII
INDIAN BANNING
221
“outside India” would have to be substituted. 1
They should also distinguish, as two already do
distinguish, between fixed deposits and accounts at
call or for short periods. When, as in the case of
the Exchange Banks, we have to deal with a small
number of Banks of established position, an insistence
on due publicity, rather than compulsion or regula¬
tion in matters of policy, is likely to be the proper
remedy for any weaknesses which may possibly exist.
21. The next section of the Indian banking world
comprises the Indian Joint Stock Banks, i.e. those
Banks, other than the three Presidency Banks,
registered in India and having their head offices
there. This is a confusing group, because a great
number of small money-lending establishments are
registered as Banks under the Indian Companies Act
—in 1910-11 492 businesses were classified as Banks. 2
The official statistics separate off, however, those of
the Banks proper which are of any considerable size,
—those, namely, which have a paid-up capital and
reserve of at least 5 lakhs (£33,000).
The earlier Banks, coming under this description,
were usually under European management. Out of
seven existing in 1870, only two now survive,—the
Bank of Upper India (1863) and the Allahabad Bank
1 It would be most useful to have a triple classification—India, London,
and elsewhere. But I do not see how the Indian authorities could reasonably
enforce this. „ x ... , ,
2 The great majority (363) of these small money-lending establishments
were registered in Madras. Most of them are mutual societies, and it would
not be difficult to exclude them from the official statistics.
222
INDIAN CURRENCY AND FINANCE
CHAP.
(1865). 1 Between 1870 and 1894 seven more Banks,
conforming on the whole to this same type, were
founded, of which four now survive,—the Alliance
Bank of Simla (1874), the Oudh Commercial Bank
(1881), the Punjab Banking Company (1889), and the
Punjab National Bank (1894). 2 All these Banks are
on a very small scale compared with the Presidency
and Exchange Banks; but they are distinguished in
type from most of the more recent creations.
Between 1894 and 1904 s no new Banks were
founded with as much as 5 lakhs of paid-up capital.
But since 1904 there has been a great outburst of
fresh activity, and a type of Bank new to India has
become important. The way was led in 1904 by the
foundation of the Bank of Burma. This Bank failed
in 1911, two directors and the general manager being
found guilty of cheating and sentenced to imprison¬
ment in 1913. In 1906 three Banks were founded,
all of some importance,—the Bank of India (under
important Parsee auspices), the Bank of Rangoon,
and the Indian Specie Bank. Until 1910 these three
Banks remained alone amongst the new creations
in having a paid-up capital in excess of 15 lakhs
(£100,000). 4 Since 1906 numerous Banks have been
1 There is also, on a smaller scale, the Bangalore Bank (1868).
2 There are a few others on a very small scale, such as the Kashmir Bank
(1882), and the Poona Mercantile Bank (1893).
3 In 1901 the People’s Bank of India was founded, "but it did not reach
the 5 lakhs’ limit until 1908.
4 The Bank of India has a paid-up capital of 50 lakhs and a reserve and
rest of 5J lakhs ; the corresponding figures for the Indian Specie Bank are 75
VII
INDIAN BANKING
223
started, amongst the most important of which in
respect of paid-up capital may be mentioned the
Bengal National Bank (1907), the Bombay Merchants’
Bank (1909), the Credit Bank of India (1909), the
Kathiawar and Ahmedabad Banking Corporation
(1910), and the Central Bank of India (1911).
The main object of most of these Banks is, of
course, to attract deposits (though some of them are
almost as much concerned at present with placing a
further part of their unissued capital). For deposits
fixed for a year the rate offered varies, as a rule,
from 4|- to 5 per cent, the newer creations generally
favouring the higher rate. Some Banks offer 6 per
cent. About the rates for shorter periods there is
more vagueness. On current accounts 2 per cent is
generally allowed, though the eagerness of some of
the newest Banks has led them to offer 2-|-. I have
the advertisement before me of a Bank which offers
3 per cent on the daily balance, and up to 6 per cent
on sums deposited for longer periods; at the head of
the advertisement appears in large letters—Capital,
Us. 50,000,000; but it appears below that applica¬
tions for shares are invited, and the paid-up capital
is probably negligible. Some Banks advertise such
advantages as “ Special Marriage Deposits, 50 per cent
added to Principal in five years’ time.” 1
lakhs and 19 lakhs. The Bank of Rangoon is on a smaller scale and has been
less successful.
1 This represents compound interest at the rate of about 8 per cent per
annum.
224
INDIAN CURRENCY AND FINANCE
CHAP.
per cent on deposits fixed for a year and 2 per
cent on current accounts in excess of a certain mini¬
mum are very likely reasonable rates to offer in
Indian conditions, provided that the funds thus
attracted are not used for speculation and that
adequate reserves are maintained in a liquid form.
It is in this respect that the more substantial of these
Banks are chiefly open to criticism. The official
statistics are, unfortunately, very much out of date.
But for the Banks which had a paid-up capital and
reserve of at least 5 lakhs the available figures up to
1910 are as follows :—
Indian Joint Stock Banks
No. of
Banks.
Capital, Reserve,
and Rest.
Deposits.
Cash Balances.
1890
5
£340,000
£1,810,000
£370,000
1895
9
630,000
3,780,000
640,000
1900
9
850,000
5,380,000
790,000
1905
9
1,080,000
7,990,000
1,160,000
1906
10
1,270,000
7,700,000
1,000,000
1907
11
1,950,000
9,340,000
1,300,000
1908
14
2,060,000
10,840,000
1,630,000
1909
15
2,360,000
13,660,000
1,860,000
1910
16
2,510,000
17,110,000
1,870,000
22. These figures reveal, in my opinion, an ex¬
ceedingly serious state of affairs. If they could be
brought up to date, they would probably appear even
worse. As late as 1900 these Banks were compara¬
tively insignificant. Since that time they have suc¬
ceeded in attracting so large a volume of deposits
vn
INDIAN BANNING
225
as to make them an important part of the hanking
system of the country. Only six of them date back
long enough to remember any real financial crisis in
India (for the depression of 1907—8 was not accom¬
panied by the symptoms of financial crisis). Grow¬
ing up in smooth times, they have thought more of
attracting deposits than of retaining cash reserves;
and in 1910 we find sixteen Banks with deposits of
£17,000,000 and cash reserves of not quite 11 per
cent. 1 Even of these reserves the greater part is
probably held by the older and more established of
the Banks belonging to this class. In the case of the
smaller Banks, dealing, as they are, with clients to
whom banking is a new thing and in a country where
hoarding is still dominant, the cash balances seem,
from the available indications, to be hopelessly in¬
adequate; and it is hard to doubt that in the next
bad times they will go down like ninepins. If such
a catastrophe occurs, the damage inflicted on India
will be far greater than the direct loss falling on the
depositors. The growth of banking habits in India
is, of course, of the utmost importance to the
country’s economic development. A startling series
of failures will do much to retard it.
In this connexion the history of the Bank of
Burma, the first Bank of the new order to be founded,
is instructive. This Bank was started in 1904 under
European management by a firm engaged in floating
1 Here again it is tantalising that no later figures should be available*
326
INDIAN CURRENCY AND FINANCE
CHAP.
oil companies and other highly speculative enter¬
prises. The Bank’s capital was £117,500, and by
1911, when it failed, deposits had been attracted to
the extent of £792,701, a large part of which is said
to have come from Bombay and Calcutta. To obtain
these deposits the Bank had offered interest at the
rate of 6 per cent for deposits placed with it for a
year; and many persons, it seems, were deceived by
its title into believing that it was in some sense a
Presidency Bank. In the autumn of 1911, after a
year in which the Burma rice crop had been good
and had sold at very high prices, and when the
province generally was prosperous, the Bank failed.
The balance sheet turned out to be false, and one-
third of the assets had been advanced against worth¬
less security to a firm in which the directors were
interested.
23. Both in the case of the Exchange Banks and
in that of the Indian Joint Stock Banks, the “ Cash
Balances” include, I think, balances held at other
Banks. 1 It is impossible, therefore, to summarise
accurately the figures for the Indian Banking System
as a whole—Presidency Banks, Exchange Banks, and
Joint Stock Banks together. The figures given below
state accurately the total of private deposits; but in
the total of cash balances some items must be counted
twice over.
1 In the official statistics no definition is given of what precisely is meant
by “cash.”
VII
INDIAN BANNING
227
Total Deposits m
India, excluding
Public Deposits.
Total Cash.
Balances.
Cash Per Cent
of Deposits.
1890
£16,650,000
£11,310,000
68 1
1895
19,430,000
7,570,000
39
1900
20,970,000
5,750,000
23
1905
34,230,000
9,150,000
27
1906
38,100,000
11,700,000
31
1907
40,880,000
11,350,000
28
1908
42,920,000
11,050,000
26
1909
48,930,000
12,430,000
25
1910
54,870,000
12,340,000
22
1 An exceptional year.
The steady deterioration of the position, as
shown in the above figures, is exceedingly marked.
These figures flatter the Banks, rather than the
reverse. For I have excluded the Public Deposits
(amounting in 1910 to £2,820,000), and' have
included the whole of the cash balances (at the
branches as well as the head offices) held by the
Presidency Banks against them. If the figures could
be worked out accurately, the present proportion of
cash available against the private deposits would
come out, I suspect, lower by far than appears super¬
ficially from the above table.
24. To complete the figures of Indian deposits, 1 it
will be useful to give at this point the deposits in
the Post Office Savings Banks, which have increased
at a great rate, though not so fast as deposits in
Banks, since 1900 :—
1 The Co-operative Credit Societies are not important in this connexion,
capital, reserves, loans, and deposits altogether being less than £1,000,000.
228
INDIAN CURRENCY AND FINANCE
CHAP.
Harch 31.
Number of Depositors.
Deposits.
1900
1905
1906
1907
1908
1909
1910
1911
1912 1
1913 2
785,729
1,058,813
1,115,758
1,190,220
1,262,763
1,318,632
1,378,916
1,430,451
1,500,834
£6,431,000
8,938,000
9,328,000
9,845,000
10,121,000
10,156,000
10,578,000
11,279,000
12,599,000
13,860,000
* Limit of animal cask deposits raised from Bs. 200 to Bs. 500. 2 Estimate.
As in England, the Government do not maintain
any specific reserve against these deposits. They are
treated as unfunded debt and used for capital
expenditure. It is important, therefore, to remember
that the Government now hold in India nearly
£14,000,000 of unfunded debt repayable at short
notice to 1,500,000 depositors. This constitutes a
not negligible claim on their general reserves.
25. The figures of the preceding paragraphs, in
their cumulative effect, suggest the following reflection.
Apart from any deterioration in the proportion of
reserves held, the question of Indian deposits is now
important. They stand for the first time at a figure
which is large in relation to the total trade of the
country and to the resources of the Government.
If the Banks get into trouble, there will be much
more far-reaching effects than could have been the
case formerly. This is quite apart from the question
whether they are more likely to get into trouble than
VII
INDIAN BANKING
329
formerly. The question of the reserves they hold
matters, therefore, more than it used. The informa¬
tion which I have been able to convey in this chapter
is exceedingly incomplete. But, such as it is, it
provides strong prima facie grounds for doubt and
dissatisfaction.
26. The last group of Banks for discussion—since
I have no precise data relating to the private and
unincorporated bankers or money-lenders—consists of
those numerous institutions registered as Banks under
the Indian Companies Act, but with a capital
insufficient or with activities too mixed for inclusion
in the list of Indian Joint Stock Banks proper, dealt
with above.
The available statistics (approximate) are as
follows:—
March 31.
Number of Banks.
Paid-up Capital.
1900
398
£2,000,000
1905
510
2,200,000
1906
505
2,000,000
1907
504
1,900,000
1908
478
2,800,000
1909
492
3,100,000
1910
476
3,400,000
There are no statistics of their deposits. While
the capital of these Banks has increased rather rapidly
since 1907, the above figures show that it is not
yet large.
Our interest in these Banks, however, arises not
230
INDIAN CURRENCY AND FINANCE
CHAP.
so much out of the banking business which they may
possibly transact, as out of certain, almost Gilbertian,
characteristics calculated to bring the name and
profession of banking into derision or disrepute.
These Banks have discovered that there is, or may
be, a useful ambiguity in the public mind between
nominal capital and paid-up capital, and that nothing
is cheaper than to increase the former. "When,
therefore, a Bank is registered, its promoters may just
as well put down as its nominal capital sums ranging
from £100,000 to £1,000,000 as anything else. One
comic opera Bank registered in Calcutta in 1910 put
down £20,000,000, without having at the time of
the last return any paid-up capital at all. Apart
from this exceptional venture, the 38 Banks registered
in 1910-11 had between them a nominal capital of
£1,306,000 and a paid-up capital of £19,500. With
enormous nominal capitals they combine high-
sounding titles—the Bank of Asia, the East India
Bank, the Hindustan Bank, the United Bank of
Commerce, and so forth. Once established, their
activities are not limited. One of these Banks has
included in its operations coach-building and medical
attendance.
27. Plainly these ventures are not to be taken too
seriously. But the recent activity of their promoters
has raised some discussion in India as to whether it
would not be for the public good to restrain them by
legislation. In this matter, as is the case in so many
VII
INDIAN BANKING
231
(her governors knowing no other model), the legislation
of India has followed the lines of Great Britain’s. Just
as in this country there is no special law relating to
the incorporation of Banks, so in India Banks are
registered under the ordinary Joint Stock Companies
Act. As a Bill to amend this Act has been to the
front for some time, discussion has naturally centred
round the question whether this opportunity should
not be taken of introducing some suitable restrictions
relating specifically to Banks. 1 While I am inclined
to think that it would be more convenient to deal
with this matter in a separate Bill, the important
point is that decided action of some kind should
be taken with the least possible delay. The Upper
Indian Chamber of Commerce, in reply to an inquiry
from Government in 1910, answered, very wisely, as
follows:—
The Committee feel very strongly that something more
is needed ( i.e ., than in other Companies) in the case of Banks
where the capital and confidence, not only of the shareholders
but of the depositors, are involved. Hew Banks are spring¬
ing up with alarming rapidity, with little share capital
subscribed; these Banks are trading on the confidence of
the depositor who is little versed in money matters but
is attracted by the name “Bank” and wishes to earn
interest on his savings. . . . The fear is that if one of
these mushroom growths fails, others will follow, and the
timid depositor, unable to discriminate between the sound
and the unsound concerns, will make haste to get his
money back from whatever Bank it is in, and his confidence
1 At the time of writing, this Bill has not yet passed through its final stages.
232
INDIAN CURRENCY AND FINANCE
CHAP.
in banking institutions thus rudely checked will take years
to win back.
Various suggestions have been made as to what
restrictions would be proper. It has been proposed
that it should not be permitted to combine banking
operations with other businesses; that the accounts
of Banks should be regularly audited and the results
published; that fairly detailed accounts 1 should be
published in the local official Gazette; that all
institutions calling themselves Banks should be
required to publish certain specified particulars at
the head of every advertisement; and that capital
and reserves should bear a certain proportion to
liabilities before dividends may be paid. The abuse
of a great disproportion between nominal and paid-up
capital could be cured by a stamp duty on registration
proportioned to the nominal capital. Provisions for
due publicity will probably lead in the long-run to
the best results—though care must be taken that the
form for publication of accounts is well suited to bring
to the light what is most relevant. Regulations of
other kinds are apt to have hampering results which
cannot be easily foreseen. During the infancy of
Indian banking, nevertheless, it will very likely be
wise to have some precise rule as to the kind and
amount of the reserves.
28. In conclusion, something must be said about
1 In the published balance sheet, which I have before me, of one of the
largest of these little Banks, the cash is lumped together with the “ invest¬
ments,” i.e., with the Bank’s speculations.
VII
INDIAN BANKING
233
proposals for a State Bank. This is a proper subject
for inquiry by a Royal Commission. I am not
prepared to discuss it here in detail.
The question is an old one. In 1836 “a large
body of merchants interested in the East Indies ”
submitted to the Court of Directors of the East
India Company a project for a “great Banking
Establishment for British India.” Such a Bank,
“ confining its transactions strictly to Banking
principles and business,” and “ established by Act
of Parliament and possessed of adequate capital,
would, under judicious management and control,
become an instrument of general good by facili¬
tating the employment of a portion of the re¬
dundant capital of this country (England) for the
general improvement of Indian commerce, giving
stability to the monetary system of India, and pre¬
venting those occasional fluctuations to which it is at
present subject, and also by affording the Company
facilities and advantages in their future financial
arrangements.” It was also to “ facilitate the receipt
of the revenue and its subsequent diffusion through
the various channels of the public expenditure, furnish
the remittance to Great Britain of the sums required
there for the Home Charges, and enable the East India
Company to act up to the instruction of the legislature
by keeping their Government entirely aloof from that
interference with the commerce of India which the
present system of remittance involves. ... At present
234
INDIAN CURRENCY AND FINANCE
CHAP.
the basis of the Bank of Bengal is too narrow for such
a customer as the Government.” I quote this from the
Account of the Presidency Banks by Mr. J. B.
Brunyate, who remarks on its appropriateness to
present conditions. From 1860 to 1876 the possibility
of the Bank of Bengal’s developing into a “ Bank of
India ” was constantly in the air, successive financial
Members of Council being not unfriendly to the idea.
In 1867 a specific proposal for the amalgamation of
the three Presidency Banks was laid before the Govern¬
ment of India in a memorandum of complete grasp
and mastery by Mr. Dickson, celebrated (in his own
time) for pre-eminent ability as Secretary and Treasurer
of the Bank of Bengal. The Viceroy’s minute was un¬
favourable. “ I submit,” he wrote, “ that it is not
for the interest of a State that a great institution of
the kind should grow up for all India, the interests of
which may in time be opposed to those of the public,
and whose influence at'any rate may overshadow
that of the Government itself. A Bank of such a
character would be very difficult to manage. Few
men in India would be found equal to the task. And
as regards the interests and convenience of the
merchants of Bombay and Madras, surely it is only
natural that they should prefer separate Banks for
those important centres of commerce.” The Secretary
of State’s sole contribution to the discussion—no need
to name him, it is the eternal Secretary of State
speaking, not a transient individual—was as follows :—
VII
INDIAN BANNING
235
Any proposition for changes of a fundamental character,
such as the establishment of a Central State Bank, or a
return to the system of Government Treasuries, which
may hereafter be taken into consideration, must be viewed
in its general bearings, and not with special reference to
the circumstances. of a particular Presidency, or of a
particular crisis.
The project was smothered in the magnificent and
empty maxims of political wisdom. 1
Before the Fowler Committee of 1898, there was
some desultory discussion of proposals for a Central
Bank of India, which were supported by a few of the
witnesses; but, apart from Mr. Hambro’s memor¬
andum, no attempt was made to deal with the
question in detail. 2
29. At the present time the arguments in favour
of a State Bank for India are very strong,—far
stronger than they were in 1867 or even in 1898.
The Government have taken over so many of the
functions of a Central Bank, that they cannot wisely
neglect the rest. A note issue of growing import¬
ance, the management of the Government’s cash bal¬
ances, the regulation of the foreign exchanges,—all
these are controlled together and treated as a whole
1 These quotations are derived from Mr. Brunyate’s Account, loc. tit.
2 In tlieir Despatch dealing with the Report of the Fowler Committee
(August 24, 1899) the Government of India went so far as to declare that the
constitution of a State Bank, by the amalgamation and absorption of the
three Presidency Banks, was desirable. For the circumstances and discus¬
sions which led up to the ultimate abandonment of these ideas, see “ Papers
relating to the Proposed Establishment of a Central Bank in India (reprinted
from the Gazette of India and Supplement, dated the 12th Oct. 1901).”
236 INDIAN CURRENCY AND FINANCE chap.
in a compact and admirably conceived scheme. But
other benefits cannot be obtained easily, so long as
these functions are utterly divorced from those of
banking proper. I summarise the arguments thus :—
(i.) The existing divorce between responsibility for
the note issue and that for banking generally is
contrary to modern banking practice, and is, in
several respects, a source of weakness.
(ii.) In particular it leads to the keeping of two
distinct reserves—the Government’s reserves and the
bankers’ reserves—with no clearly defined relation
between them, so that the reserves of the latter may
be insufficient, without the assumption by the former
of the fact or the machinery of responsibility.
(iii.) It leads also to a want of elasticity in the
system, since in modern conditions this elasticity is
most commonly provided by exactly that co-operation
between banking and note issue which is lacking in
India.
(iv.) The absence of a State Bank makes it diffi¬
cult for the Government to use its cash balances
or any other part of its liquid funds to the best
advantage,—since it cannot prudently place the whole
of its free resources in the hands of a private
institution.
(v.) The absence of a central banking authority
leads to a general lack of direction in the banking
policy of the country: it is no one’s business to look
at the matter as a whole, to know the position of the
VII
INDIAN BANKING
2 37
market s component units, or to enforce prudence
when it is needed. There is a multiple reserve
system in theory, but hardly an adequate one in
fact i and a danger exists that every one is reckoning,
in a crisis, upon every one else.
(vi.) The absence of the advice and experience,
which the officers of a State Bank would possess, is a
source of weakness to Government itself. There are
no high officials whose business it is to make finance
the chief study of their life. The Financial Secretary¬
ship is an incident in the career of a successful
civilian. A Financial Member of Council is apt to
come to the peculiar problems of Ifis office with a
fresh mind. Thus the financial officers of Government
spend five years or so in mastering a difficult subject
and have then reached a seniority which warrants
promotion to duties of some other kind. So far as
the Government of India is concerned, questions of
finance and currency are in the hands of intelligent
amateurs who begin with the timidity of ignorance
and leave off just when they are becoming properly
secure of their ground. It is not astonishing that
the centre of power in these matters has tended to
gravitate to the India Office and the India Council in
London. For the officials and advisers of the Secretary
of State have grown up in familiarity with the problems
of Indian currency. Control from the India Office is
always looked on, from an instinct often founded on
wisdom, with jealousy and with suspicion; but in
238
INDIAN CURRENCY AND FINANCE
CHAP.
questions of currency they are likely, as things now
are, to have the wider knowledge and experience.
Yet the element of continuity supplied by the India
Office—though, as I read the history of the last
decade, it has been invaluable in guiding the
evolution of the currency—is no proper solution
of the difficulty. With Indian banking this
authority cannot be adequately in touch, and it
would be much better if trained experience were
to be found in India herself. It is a remarkable thing
that the two classical pronouncements on the funda¬
mental problems of Indian Finance, which have stood
the test of time—Mr. Dickson’s, in 1867, on the
question of a Central Bank, and Mr. A. M. Lindsay’s,
in 1878 and subsequently, on the regulation of a Gold
Standard—should both have come from Secretaries of
the Bank of Bengal, not from high officials of State.
{Yet this last argument for a State Bank, though I
have amplified it in my summary at greatest length,
is not at all the most important. The arguments
given first are those which govern the question.)
30. On the other hand, a fairly good case can be
made out against a State Bank. Several of the
defects, outlined above, could be remedied, in part at
least, by less drastic proposals. The reasons on this
side are mainly, nevertheless, those of conservatism
and of caution (or timidity). The question, as soon as
one attempts to frame practical suggestions, bristles
with difficulties. The Government are naturally
VII
INDIAN BANKING
239
afraid of so troublesome a proposal—and one so far
removed from what they are used to; while there is
no important body which is sufficiently interested in
forcing it on their attention. The Banks fear a
possible rival; merchants are content with present
prosperity ; and no one else knows anything about
it. I shall be astonished, therefore, if action is
taken while times are good. Perhaps we may have
to wait for the lessons of a severe crisis. Only
under some such strong influence as this is it likely
that the responsible Government will nerve itself to
the task, or the business community acquiesce in it.
31. If some day sufficient constructive energy is
stirred into activity to undertake the task, let the
framers of the new Bank’s constitution put far from
their minds all thoughts of the Bank of England.
It is in the State Banks of Europe, especially in that
of Germany, or in those, perhaps, of Holland or
Russia, that the proper model is to be found.
CHAPTER VIII
THE INDIAN RATE OF DISCOUNT
1. The Presidency Banks publish an official mini¬
mum rate of discount, in the same manner as the
Bank of England. As an effective influence on the
Money Market the Presidency Bank Rates do not
stand, and do not pretend, to stand, in a situation com¬
parable in any respect with the Bank of England's.
They do not attempt to control the market and to
dictate what the rate ought to be. They, rather,
follow the market and supply an index of the general
position.
It is, therefore, as the best available index to
variations in the value of money in India that the
Presidency Bank Rates are chiefly interesting; and
it is in this capacity that I shall make use of them in
this chapter.
If we are to use these rates, however, as an index,
a few warnings are first necessary. There is, of
course, in India, just as there is in England, not one
single rate for money, but several rates according to
the period of the loan required (or the maturity of
240
Hate of Discount at the - zsidency -Bank of -Bengal y
ch. viii THE INDIAN RATE OF DISCOUNT 241
the bill negotiated) and the character of the security
offered. The published Bank Rate in India represents,
1 believe, the rate charged day by day for a loan
advanced on such security as Government Paper. The
interest on a loan of this kind, that is to say, is
calculated day by day at the published Bank Rate
prevailing on each day. It may be said to correspond,
therefore, to the London rate for some comparatively
short period—say for fortnightly loans. Because the
Bank Rate is at 7 per cent, it does not follow, there¬
fore, that money can be used, of obtained, at this
rate for two or three months. The rate ordinarily
charged for fine bills of two or three months’ currency
may be either higher or lower than the published
minimum Bank Rate. Further, the rates published
by the Presidency Banks may be from time to time
more or less “ effective.” The Banks may not always
be able, that is to say, to do any considerable volume
of business at their published minima. This would
not be the case, I believe, in the busy season, so much
as in the slack season, when the Banks do not let
their published rates fall below 3 per cent, although
money may be practically unusable and they would
probably be glad enough to lend a large sum at
2 per cent. But these various qualifications do not
prevent the Presidency Bank Rates from affording
the best available index for measuring the relative
ease or stringency of the Indian Money Market. I
append a chart giving the movements of the Rate of
R
242
INDIAN CURRENCY AND FINANCE
CHAP.
Discount at the Presidency Bank of Bengal since
1893. 1
2. The rates, announced by the three Presidency
Banks, are not always identical, but seldom, if ever,
differ by more than 1 per cent. Such differences
as there are chiefly reflect the differences in date
at which occur the various crop movements with
which each Presidency is mainly concerned. A wider
difference of rate tends to be prevented, not only by
the possibility of moving funds from one part of
India to another, but also by the fact that the
Secretary of State is willing to make his Bills and
Transfers payable at any of the Presidency towns at
the option of the purchaser. If there is relatively
greater stringency at one of them, the bulk of the
Council Bills and Transfers sold in London tend to
be drawn on that one. The general appearance of
the chart would not, therefore, have been appreciably
different if I had chosen Bombay in place of Bengal.
The official rates move by 1 per cent at a time.
There have been occasions of movements by 2 per cent,
but not recently. "When the rate is rising or falling,
however, at the beginning or end of the busy season,
changes often follow one another in quick succession.
3. An examination of the chart shows that the
Indian Money Market enjoys years of high and low
average rates respectively, just as other markets do.
But these annual variations, while perfectly notice-
1 I am indebted for the preparation of this chart to Mr. II. Bellingham of
the India Office.
VIII
THE INDIAN FA TE OF DISCOUNT
243
able, are relatively small in comparison with the
seasonal changes, which are very great and very
regular, and which afford the most clear ground of
differentiation between the Indian Market and those
with which we are familiar in Europe.
Let us examine the annual fluctuations of the rate
in recent years in more detail:—
Bengal Bate per Cent.
Bengal Rate per Cent.
Max, rate in
February.
Min. rate in
August.
Max. rate in
February.
Min. rate in
August.
1900
8
3
1907
9
3
1901
8
3
1908
9
3
1902
8
3
1909
8
3
1903
8
3
1910
6
3
1904
7
3
1911
8
3
1905
7
3
1912
8
3
1906
9
3
1913
8
From this table and the chart it is safe to make
the generalisation that the Indian Bate may be
expected to reach 8 per cent in the winter or early
spring, and to fall to 3 per cent in summer. Tears
differ from one another chiefly in the length of time
for which the high and low rates prevail respectively.
From 8 to 3 per cent is an enonnous range for the
normal seasonal fluctuation. What is the explana¬
tion of it? The Bank of England rate seldom
exceeds 5 per cent, and in many years falls short of
this, even in the winter. If there is so regular an
expectation of obtaining 7 or 8 per cent in India on
excellent security, why is it not worth some one’s
244
INDIAN CURRENCY AND FINANCE
CHAP.
while to transfer funds to India in the busy season
on an ampler scale than is the ease at present, and
thus secure the advantage of so wide a discrepancy
between the English and the Indian rates ?
4. The facts are to be explained, I think, as
follows. High rates of 7 or 8 per cent are not
obtainable in India all the year round. In normal
years they cannot be relied on to prevail for more
than about three months. The banker who raises
funds in London in order to lend them for short
periods in India has to choose between leaving them
in India all the year round, waiting after one busy
season for the next, and bringing them back again
to London after a comparatively short period. He
must either accept, that is to say, the rate obtainable
in India on the average of the whole year, or he
must earn a high enough rate in the brief busy
season to compensate him for bearing the expense of
remittance both ways.
In considering the difference between two European
Bank Bates as the cause of a transfer of funds between
the two centres, the cost of remittance, as measured
by the difference between the telegraphic rate of
exchange outwards at the beginning of the trans¬
action and the telegraphic rate of exchange back at
the end of it, is not, of course, to be neglected. But
where the two centres are near together and there
is no reason to anticipate the suspension of a free
market in gold, this cost is, relatively, a minor
VIII
THE INDIAN RATE OF DISCOUNT
245
consideration. The great distance, however, between
London and India makes it in their case a very
significant quantity, and a brief calculation shows
that, measured in terms of Bank Rate, the cost of
remittance works out higher, perhaps, than unin¬
structed common sense would anticipate. For, under
present conditions, the cost of remittance both ways
can hardly be less than ^d. per rupee, rising in most
years as between certain dates as high as -/jd., and
reaching occasionally as much as -^d. It would not
be prudent to act on the expectation of a less cost
than ^ s ¥ d. Now ^d. on a rupee is about '6 per cent.
If this loss on exchange ( i.e . on remittance) is to be
recouped in three months (i.e. in a quarter of a year),
an additional rate of nearly 2^ per cent per annum
must be earned in India as compared with the rate
in London. If a different degree of loss in exchange is
anticipated, and if the length of time for which money
can be used in India at a high rate is expected to be
more or less than three months, the calculation must
be adjusted accordingly. In any case the reason why
the Indian and London Bank Rates can differ from
one another for short periods by large amounts is
adequately explained. If, for example, money can be
employed in India at the high rate for one month only,
even if the double cost of remittance for that period
is so low as -j^d., the difference between the London
and Indian rates must amount to 5 per cent per annum
to make a transfer of funds prima facie profitable.
246
INDIAN CURRENCY AND FINANCE
CHAP.
These illustrations show that what seems a very
small fluctuation in exchange can account for a very
wide difference in the rate of discount; and, apart
from questions of unequal knowledge and unequal
security, it is this possibility of fluctuation that makes
distinct markets of the two centres. The underlying
explanation is essentially the same as that of the
circumstance to which I called attention in § 9 of
Chapter II., namely, that a temporary premium of
f per cent on gold in those European countries where
gold is not always freely obtainable, is as effective
as a very great increase in the Bank Rate in pre¬
venting the remittance of funds abroad and even in
attracting an inward flow of funds.
5. This discussion will have served to make
clear a distinction highly important to the problem
of the Indian Bank Rate. When we say that the
Indian Bank Rate is apt to be high, we mean, not
that the average effective rate over the whole year is
high, but that the maximum rate in each year,
effective for periods of shorter or longer duration, is
generally high. A high average rate and a high
maximum rate are likely to call for different explana¬
tions and, if a remedy is sought, for different kinds of
remedies. The available evidence does not suggest
that the average rate in India is at all unduly high
for a country in India’s stage of economic and
financial development. Some of the Exchange Banks,
for example, do not fipd it worth their while to offer
VIII
THE INDIAN RATE OF DISCOUNT
247
more than per cent on Indian deposits fixed for a
year. It is the high maximum rate almost invariably
reached which calls for enquiry.
The phenomenon under discussion is in no way
peculiar to India and does not arise out of those
features of the Indian system which are characteristic
of a Gold-Exchange Standard. We find the same
thing in any country where the demand for funds for
financing trade is to a high degree seasonal and
variable in amount throughout the year, and where,
at the same time, these funds have to be remitted from
some far distant foreign centre—in the countries of
South America, for example. In fact, by the establish¬
ment of a par of exchange between the rupee and
sterling, the severity of seasonal stringency has been
greatly moderated. The exceptionally high Bank Bates
of 1897 and 1898 were partly occasioned by a natural
timidity on the part of the Banks in importing funds
at a rate of exchange which at that time was excep¬
tionally high. The Banks had no guarantee that
exchange would be maintained at or near the existing
level, and if they imported funds they ran the risk of
having to bring them home again at a heavy loss.
Under present arrangements the maximum fluctua¬
tion in exchange between the busy season and the slack
is known and limited. But .while the stabilisation of
the gold value of the rupee has done much for the
Indian Money Market, and has rendered a 12 per cent
Bank Rate most improbable except at a time of wide-
248 INDIAN CURRENCY AND FINANCE chap.
spread crisis and panic, it does not prevent an 8 per
cent or even a 9 per cent Bank Rate from being a
comparatively common occurrence. Is it possible to
conceive of any remedy or moderating influence
for the somewhat severe seasonal stringency still
experienced ?
6. It is clear that a remedy can be sought in one
or other of two ways only. Either the cost of remit¬
tance and the maximum range of fluctuation in ex¬
change must be reduced, or a new source for the
seasonal supply of funds must be found in India
herself. I will discuss these alternatives in turn.
It will help to make the points at issue plain if I
begin by taking an extreme case. Let us suppose
that exchange between London and Calcutta were
fixed at Is. 4d., in the sense that the Government were
always prepared to provide telegraphic remittance in
either direction at this rate. Under such circum¬
stances, the London and Indian Money Markets would
become practically one market, and the large differ¬
ences which can now exist between rates current in
the two centres for loans on similar security would
become impossible. The effect of this on the volume
of remittance would be very great. Every year
immense sums would be remitted from London to
India in the busy season and brought back again at
the end of it, since the fact which now diminishes the
profitableness of such transactions would have ceased
to exist. The following illustration shows on how
VIII
THE INDIAN RATE OF DISCOUNT
249
large a scale these seasonal movements to and fro
would probably be. In July the cash reserves of the
Bank of Bengal might stand, as things now are, at,
let us suppose, about 1000 lakhs and its discount rate
at 3 per cent. This reserve might be 400 or 500
lakhs at least in excess of what prudence required.
But it would be useless to lower the Bank Bate; for
the additional funds were probably not loanable in
India for the month of July at any rate at all. Yet
for the reasons already given it would not be worth
while in existing circumstances for any one to borrow
this sum and remit it to London, until such time as
it may be again wanted in Calcutta;—it is better to
let it lie idle and wait for busier times. But fix
exchange at Is. 4d. and all this would be changed. The
Bank’s customers would immediately remit the 400
or 500 lakhs to London, knowing that they could be
brought back without loss as soon as they were wanted.
Every one in India having loanable funds to spare
would act likewise.
What would be the effect on the Secretary of State
if he were to lay himself under such an obligation ?
In order to be in a position to act as universal money¬
changer, and to be able to provide large quantities of
sterling in London in the slack season, and large
quantities of rupee funds in India in the busy season,
it would be necessary for him to keep very much
larger reserves than he does at present in both
countries. It might even be necessary for him to
250
INDIAN CURRENCY AND FINANCE
cii \r.
remit gold backwards and forwards himself, thus bear¬
ing the whole expense of which the Exchange Banks
were being relieved. At present the possible fluctua¬
tion of exchange between what may fairly be termed
the “gold points” on either side of Is. 4d., acts in some
measure as a protection to the currency and lessens
the reserves which it is necessary for the authorities
to maintain; a falling exchange acts as a drag on re¬
mittance from India and a rising exchange as a drag
on remittance from London, thus bringing the private
interests of individuals and the natural forces acting
on the market into greater harmony with the interests
of the market as a whole, and with the efforts of the
Secretary of State to maintain the stability of the
system. If telegraphic exchange were fixed at Is. 4d.,
the Indian Bank Rate would closely follow London’s,
but it would be at the expense of forcing the Secretary
of State enormously to increase his reserves.
7. I have taken this extreme case in order to
make emphatic the principles involved in all such
proposals. But no one is likely to propose the above
as’ a practical policy. More moderate proposals of
the same kind, however, deserve consideration. Some
critics, for example, have suggested that the Secretary
of State should never sell Council Bills in London
below Is. 4d. This would lessen to a certain extent
the probable range of fluctuation in exchange and
might, therefore, diminish the risk of loss involved
in remitting to India when exchange is high; but
VIII
THE INDIAN RATE OF DISCOUNT
251
the Secretary of State’s withdrawal from the market
would not necessarily prevent exchange from falling
below Is. 4d. Moreover, in normal times the policy
actually followed already approximates closely to
this proposal; in the last three years the occasions on
which Council Bills have been sold below Is. 4d. have
been very rare. And in exceptional times it may be
some protection to the sterling reserves if Council
Bills can be sold at a lower rate if necessary. I con¬
clude, therefore, that the advantage of such a policy
would not be great, probably not great enough to
outweigh the cost.
Thus it is not easy to find a remedy for high Bank
Rate by any method of diminishing the maximum
range of fluctuation in exchange. Indeed so long as
the currency arrangements are at all like those now
in force, this maximum range may fairly be said to be
determined by forces outside Government control,
namely, by the forces governing the cost of remittance
of gold. Though the burden of this cost may be
shifted, it cannot be easily avoided altogether.
8. We must fall back, therefore, on the second
alternative, the discovery of a new source for the
seasonal supply of funds in India herself. A pro¬
posal, having this object in view, has already been
put forward in more than one passage in the pre¬
ceding pages. I believe that, in future, the Govern¬
ment of India may have in the busy season a
considerable stock of rupee funds available in the
252
INDIAN CURRENCY AND FINANCE
CUAV.
Paper Currency Reserve and, occasionally, a surplus
stock in the Indian Cash Balances. If a proper
machinery is set up for lending these out in India,
I anticipate some appreciable relief to the Bank Rate
at the season of greatest stringency. Assuming that
such a policy is practicable on other grounds, let us
try to compare its precise effect as compared with
the existing state of affairs.
9. Broadly speaking, surplus Government funds
in India can at present be released only by the sale
of Council Bills in London. When these bills are
sold at a fairly high rate, the Government gain the
premium over and above Is. 4d. and are in a position
to put out at interest funds in London. If the
funds in India, instead of being released through the
encashment of Council Bills, are lent out there direct,
the interest obtained in India takes the place of the
two sources of gain distinguished above. In the
first case money is first borrowed from the London
Money Market (by the Exchange Banks or otherwise)
for the purchase of Council Bills, and is then lent
back again to that Market by the Secretary of State.
In the second case, instead of a double transaction in
London there is a single transaction in India. It
might be argued that the two methods come in the
end to much the same thing; that there can be no
relief to the Money Market unless the Government
of India accept a lower rate of interest for sums lent
out in India than is the equivalent of what they
VIII
THE INDIAN RATE OF DISCOUNT
253
would make if they were to sell Council Bills at a
premium and lend out the funds in England; and
that the second method involves no net addition to
the resources available in India. For the following
reasons, however, I do not think that this way of
looking at the matter would be correct.
In the first place there would be an elimination
of risk. If the average loss from exchange on funds
sent out to India for the busy season works out at
(say) 2 per cent per annum, the Banks, in order to
recompense themselves for the risk of fluctuations
beyond the average, would be able to make a difference
of more than 2 per cent between the current Indian
and English rates. In the case of funds borrowed
in terms of rupees and repayable in terms of rupees,
this element of risk is absent; and the elimination
of it provides a source of net gain. If the effect of
Government lending in India were to mitigate the
seasonal stringency there, some lowering of the
normal upper limit of fluctuation of exchange might
result. In so far as this was the case, in normal
years the consequences would be outwardly similar to
those of the first alternative, discussed and rejected
above, whilst the Government would not have bound
themselves by any undertaking capable of turning
out burdensome.
Secondly, the rate of interest which the Secretary
of State can earn on loans in London is appreciably
lower, on account of the short period for which he
254
INDIAN CURRENCY AND FINANCE
CHAP.
lends and the nature of the security he requires, than
the normal rate at which the Exchange Banks would
raise their funds there, and a good deal lower than
what would he obtained by direct lending in India.
(It should be admitted, on the other hand, that the
practice of lending funds in India would probably
involve some sacrifice of perfect safety as compared
with the present arrangements.)
And, thirdly, it is not clear that it might not
sometimes be feasible to lend out in India sums
additional to those which would in fact be released
under the present system, so that there would be
some net addition to the resources available in India.
10. In addition, therefore, to the grounds for
making loans in India from the Paper Currency
Reserve which I have given in earlier chapters, I
believe that it is in this direction that the best hope
lies of a remedy for the high level which the Indian
Bank Rate commonly reaches in the course of each
busy season. I do not feel in a position to say
anything very decided as to the manner in which
such loans could be best made. But there is a
presumption, I think, that, in the absence of a State
Bank, they must be made, mainly if not entirely,
through the Presidency Banks. And I believe that
the Government would act advisedly if, as a general
rule, 5 or 5-£ per cent were the highest rate they ever
chose to exact from the Banks. In financial matters
of this kind there is a danger lest Governments prove
VIII
THE INDIAN RATE OF DISCOUNT
255
too jealous of the profits of private persons. In a
ease where the co-operation of private persons is
necessary, they must be allowed a reasonable share of
the profits of the transaction. In their past relations
with the Presidency Banks in the matter of temporary
loans, the Government of India have sometimes
seemed to attach more importance to preventing the
Banks from making any profit out of the loans than
to any other aspect of the transaction. I may repeat
that the loans I contemplate are to be for the
busy season only, and that they should not be made
until the expectation of a normal or successful harvest
is reasonably assured.
11. In the nature of a postscript to the above
proposals, it may be instructive to consider them
in the light of the actual circumstances of the season
1912-13. The peculiarity of this season from the
point of view of the Indian Money Market was the
combination of a high Bank Bate in India for a
comparatively long period 1 with a relatively low rate
of exchange and only a moderate demand for Council
Bills and gold. At the end of 1912 the situation
could have been described as normal. The Bank
Bate was at the somewhat high level usual at that
time of year; exchange was high (the minimum rate
for the allotment of Council Bills being Is. 4^d.);
and the demand for Council Bills was on a large scale.
1 The Bengal Bank Rate was at 7 or 8 per cent from November 28, 1912,
to April 17,1913, and the Bombay Bank Rate at no less than 8 per cent from
December 27, 1912, to April 3, 1913.
256 INDIAN CURRENCY AND FINANCE chap.
But from January to March, although the Bank Rate
remained at a high level and trade was active, the
demand for Council Bills fell away, slowly at first
and rapidly during March, exchange dropping pari
passu until, during the latter half of March, the
minimum rate at which Council Bills were allotted
fell so low as Is. 3fjd. The combination of so low
a rate of exchange with an 8 per cent Bank Rate at
Bombay was very abnormal.
It is dangerous for a writer who is not in touch
with the practical side of the Money Market to venture
on an explanation of current events. But I will give
my explanation for what it is worth. The poor de¬
mand for Council Bills in March 1913 is not to be
explained by the competition of gold as a means of
remittance; for the low level of exchange did not
favour the importation of sovereigns (even from Egypt,
except earlier in the season), and as a matter of fact
the import of them was on a very much smaller scale
than in the previous year. It must have been due,
therefore, to an unwillingness on the part of the Ex¬
change Banks and others to lay out money in London
for the purchase of remittance to India. This un¬
willingness was due to a variety of causes. The lock¬
up of funds in silver and opium, and the freedom with
which India was purchasing foreign goods, probably
had something to do with it; and an important con¬
tributory influence was the dearness 1 of money in
1 The Bank of England’s rate was 5 per cent, with the market rate well
VIII
THE INDIAN RATE OF DISCOUNT
257
London combined with a sufficient expectation of
cheaper money soon, to provide an incentive to delay,
wherever delay was possible. A precise diagnosis of
the causes of the unwillingness on the part of the
Banks to buy Council Bills is not necessary, however,
to the lesson I seek to enforce. For whatever reason,
Indian Bank Bates of 7 and 8 per cent, even in com¬
bination with a very low level of exchange, did not
in fact tempt the Banks to buy Council Bills on
any considerable scale. What was the effect on
the Government Balances in India? The ordinary
method, by which the rupees accumulating in the
Beserve Treasuries from the proceeds of taxation are
quickly released and given back to the Money Market,
the encashment, namely, of large volumes of Council
Bills, had failed. The position was aggravated by the
large realised surplus, much of which was to be de¬
voted to expenditure only in the next financial year,
and which in the meantime was swelling the Govern¬
ment Balances in any case beyond their usual dimen¬
sions. So far, therefore, from assisting the market, the
Government were busy increasing the stringency by
taking off the market, week by week, rupees which for
the moment they did not in the least want. Already
at the end of 1912 (see table on p. 188) the sums lying
idle in the Beserve Treasuries were unusually high.
up to the Bank Bate ; and the difference between the current rates for money
in London and India was probably, for the time of year, not much greater
than usual.
S
2 5 8
INDIAN CURRENCY AND FINANCE
CHAP.
By the end of February 1913, the total Government
Balances in India had risen to £17,400,000, and by
the end of March to £19,300,000, of which £8,000,000
lay in the Reserve Treasuries. What Money Market
in the world could have seen such sums taken out of
its use and control at one of the busiest moments of
the year without suffering a loss of ease %
The situation was not due, in my judgment, to
any ignorance or incompetence on the part of the
executive officers of Government, but to a system which
provided them with no sort of appropriate machinery
for dealing with the position. The “Independent
Treasury System” and the traditional aloofness of
Government from the Money Market were seen at
their worst. Millions of rupees were lying idle in the
Government Treasuries at the time of year when there
was most work for them to do outside. The sort of
arrangements I have outlined in earlier paragraphs
might have done something, I feel sure, to ease the
situation. One can point, therefore, to the first quarter
of 1913 as a specific occasion on which Government
could have lent sums in India with profit to itself, with
advantage to the Money Market, and without incur¬
ring any risk of which it need have been afraid.
12. I have now completed my discussion of these
questions. Two points I would end by emphasising.
The first affects my general treatment of the subject
matter. I have trie<jl to bring out the fact that the
Indian system is an exceedingly coherent one. Every
VIII
THE INDIAN RATE OF DISCOUNT
259
part of the system fits into some other part. It is
impossible to say everything at once, and an author
must needs sacrifice from time to time the complexity
and interdependence of fact in the interests of the
clearness of his exposition. But the complexity and
the coherence of the system require the constant
attention of anyone who would criticise the parts.
This is not a peculiarity of Indian Finance. It is the
characteristic of all monetary problems. The difficulty
of the subject is due to it.
My second point affects the kinship of Indian
arrangements to those lately developed in other parts
of the world. Indian affairs are so exclusively studied
by those whose knowledge and experience is preponder¬
antly Indian or English, that the true perspective
of India’s development is sometimes lost; and the
value of foreign experiences neglected. I urge that,
in her Gold-Exchange Standard, and in the mechanism
by which this is supported, India, so far from being
anomalous, is in the forefront of monetary progress.
But in her banking arrangements, in the management
of her note issue, and in the relations of her Govern¬
ment to the Money Market, her position is anomalous;
and she has much to learn from what is done elsewhere.
INDEX
Adie, Mr., 149 ff.
Atkinson, F. J., 151 ff.
Australian sovereigns, remittance of,
to India, 115-116
Austro-Hungarian Bank, 24, 32, 33,
70
Bagehot, W., 162, 177
Balances. See Cash Balances
Balkan War, effect of, on gold
markets, 23, 165
Bank Rate in India, 105, 163, 164,
196-198, 240 ff.
Banking in India, 195 ff.
Banking Reserves in India, 147, 160,
161, 204-205, 215-218, 224-
227, 232
Banks with small paid-up capital,
230-232
Bengal, Bank of, 182, 198 ff., 234
Bombay, Bank of, 182, 199 ff.
Bombay, proposed mintage of gold
at, 64, 67-68, 84-87
British monetary system, 15-19, 69
Brunyate, J. B., 3, 38 %., 181%.,
199 %., 201, 234
Burma, Bank of, 222, 225-226
Cash Balances in India, 60-61, 127-
129, 131, 181-190
Cash Balances in London, 128-129,
143-144, 190-192
Central Bank for India, 58-59, 161,
233-239
Cheque system, 16, 39
China, Currency for, 36
Circles of issue for Paper Currency,
40-46
Co-operative Credit Societies, 227 n.
Council Bills, 102 ff., 132, 210 ff.,
255-257
Crewe, Lord, 89
Crisis of 1907-8, 135-141, 159, 164,
167-168
Currency Reserve. See Paper Cur¬
rency Reserve
Currency notes of India. See Paper
Currency
Dadabhoy, Hon. Mr., 13 %.
Dawkins, Sir Clinton, 64
Depreciating rupee, effects of, 2-3
Dickson, Mr., 234, 238
Egyptian gold shipped to India, 116-
118
Egyptian system of currency, 29 %.,
71%.
Elasticity of Indian currency system,
57-58, 60-62, 180-181, 251-
254
English and Indian Bank Rates,
their differences accounted for,
243-246
English institutions, influence of, on
Indian, 38-39, 52, 59, 201 %.,
231, 239, 259
Exchange Banks, 103, 158, 163,
206-221
Fowler Committee, 4, 7, 34, 50, 63,
196, 235
France, Bank of, 20-21
Gauntlett, M. F., 76
261
262
INDIAN CURRENCY AND FINANCE
German Reichsbank, 19-22, 70, 239
Gillan, R. W., 76, 77, 78
Gold, amount of, circulating in
India, 75-84
Gold Currency in India, 63-101
Gold, methods of checking a foreign
drain of, 17 ff.
Gold, premium on, 23, 26-27, 246
Gold, 10-rupee coin, 68, 84, 87-88
Gold-Exchange Standard, 10-11, 30-
36, 106 ff., 119-120
Gold-Exchange Standard, transition
to, 27-30
Gold import point, 114 ff.
Gold not the principal circulating
medium in countries having a
gold standard, 69-71
Gold Note Act of 1898, 48
Gold Reserves, division of, between
India and London, 28, 48-5*0,
126-127, 131, 174-178
Gold Standard Reserve, 8, 90, 107,
110 ff., 125-127, 130-131, 137,
143, 170 ff.'
Goschen, Lord, 69, 72, 91
Hambro, E., 235
Harrison, E. C., 149 ff.
Herschell Committee, 7, 33
Hoarding, 77-78, 81, 85-86, 99-101,
153, 158-160, 165-166, 225
Holland, Bank of, 32, 239
Home Charges, 1 102, 120-122, 171-
172
Indian. Bank Rate. See B§nk Rate
inlndja\ \
Indian Banking, 195 ff.
Indian currency system, 1893-1899,
1-3; since 18,99,' 4-6, 8-10;
main features as how estab¬
lished, 6-7, 10-11 ; reference,
dates, 7-8 ;-future development,
194, 258-259
Indian Joint Stock Banks, 221-226
Indian Money Market, 195-198,
240 ff
Indian Treasury. See Reserve
Treasury System
Japanese system of currency, 27,
28 n.
Java, currency of, 27, 35
Jevons, W. S., 99, 149
Lindsay, A. M., 5, 34, 72 ?i., 238
Madras, Bank of, 199 ff.
Marshall, A., 31
Meston, Sir James, 67
Mill, J. S., 72
Northbrook, Lord, 182
Note circulation in India. See
Paper Currency, volume of
Note currency of India. See Paper
Currency
Note issue by Banks, 38, 199-200
Paper Currency, 37 ff.
Paper Currency, volume of, 46-47,
53 ff.
Paper Currency Reserve, 40, 48 ff,
- 89, 97, 127, 130-131, 170 ff,
189, 254
Post Office Savings Banks, 158, 227-
228
Presidency Bank Rates. See Bank
Rate in India
Presidency Banks, 38, 53 56, 60,
158, 163, 181-186, 198-206,
234, 240-243
Reserves of Government. See Rupee
Reserves, and Sterling Reserves
Reserves of Indian Banks. See Bank¬
ing Reserves in India
Reserve Treasury System, 56-57,
129, 181-189, 257-258
Ricardo, 31, 72
Rothschild, Lord, 35
Rupee, legal position of, 6-10
Rupee circulation of India, 149-155
Rupee Reserves of Government, 132-
133, 141-147
Rupees, coinage of, 131-135
Rupees, profit on coinage of, 36, 124-
126
Russian Finance and Currency, 24,
27, 32
Salisbury, Lord, 183
Savings Banks. See Post Office
Savings Banks
INDEX
Seasonal demand for money in India,
53-56, 57-58,146-147,180-181,
242-244
Shroffs, 195-198
Silver purchases by Government,
132-135, 142-146
Sleigh, J. H., 196
Sovereigns, circulation of, in India,
6-10, 73-74, 76-84, 94-96, 115-
118
State Bank for India, 233-239. See
also Central Bank
263
Sterling Reserves, 137-140, 147-
171, 193
Telegraphic transfers, 105, 137, 210-
211
Thackersey, Sir Yithaldas, 67
United States Independent Treasury
System, 56-57
Wilson, James, 38
Wilson, Sir G. Fleetwood, 64, 67
Wood, Sir Charles, 39 n.
Printed by R. & R. Clark, Limited, Edinburgh .
Live Music Archive
Librivox Free Audio
Metropolitan Museum
Cleveland Museum of Art
Internet Arcade
Console Living Room
Books to Borrow
Open Library
TV News
Understanding 9/11