Indian Currency and Finance: Chapter IV

Indian Currency and Finance by John Maynard Keynes is part of HackerNoon’s Book Blog Post series. You can jump to any chapter in this book here. CHAPTER IV: The present position of gold in India and Proposals for a gold currency

CHAPTER IV. THE PRESENT POSITION OF GOLD IN INDIA AND PROPOSALS FOR A GOLD CURRENCY

1. The Fowler Committee of 1898 avowed themselves 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 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 Royal 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 pièce de résistance 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, 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 authorities in India. At this point in the negotiations the natural instincts of the Treasury officials became uncontrollable, and respect for the independence 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 established, and the public requires no proof of the intention of the Indian Government not to go back on their policy, which is beyond controversy. Sovereigns are readily attracted to India when required under existing conditions.... On the other hand, the estimates of the Government 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:—

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 indefinite 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.”

2. From 1903 up to 1910 little was heard of proposals 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 India with the gold countries of the world, we have reached a gold–exchange standard, which we are steadily developing and improving. The next and final step is a true gold currency. That, I have every hope, will come in time, 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 Vithaldas 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 sovereigns. This is an exceedingly confused document. 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 intention 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 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, 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, accordingly, when she instituted her gold standard, prohibited 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 proposals for the issue of one–pound notes in England. While other countries, who have, with few exceptions, 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 composition of the metallic coin has become a matter of 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 Reichsbank, 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 £15,000,000, would have to be repealed, the issue of these notes in 1912 having exceeded the limit by £11,500,000; 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 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.

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.

This view has long been maintained by economists.Ricardo’s proposals for a sound and economical currency 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.

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 India with the gold countries of the world, we have reached a gold–exchange standard, which we are steadily developing and improving. The next and final step is a true gold currency. That, I have every hope, will come in time, 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 Vithaldas 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 sovereigns. This is an exceedingly confused document. 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 intention 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 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, 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, accordingly, when she instituted her gold standard, prohibited 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 proposals for the issue of one–pound notes in England. While other countries, who have, with few exceptions, 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 composition of the metallic coin has become a matter of 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 Reichsbank, 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 £15,000,000, would have to be repealed, the issue of these notes in 1912 having exceeded the limit by £11,500,000; 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 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.

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.

This view has long been maintained by economists. Ricardo’s proposals for a sound and economical currency 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 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 uncritically 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 circulation, 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 instructions 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 sovereigns 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 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. 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:—(1) 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 suppose, 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 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 addition to the total stock of gold in India (i.e., the imports and the production less the exports) approximately is—although the amount of the steady leakage across the land frontiers is usually neglected. 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 exceedingly 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 Paper Currency for 1910–11 (written by Mr. R. 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:—

7. The enormous amount of wealth which the Indian people are now devoting to the barren accumulation 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, what part for hoarding, what part is melted down, and what part is left trulserve as currency?

In the first place it y to 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. 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 “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; 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 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) “of the extent to which sovereigns have established themselves as a regular part of the currency, is to be found in the figures of receipts at Post Offices and Railways.” These have been as follows:—

It has been estimated by the Paper Currency Department 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 employment 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 circulating as currency are likely to have come.

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, particularly 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 resolution 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 increasing. 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 surprising 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 undoubtedly 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.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.

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 has experienced two very good seasons and has been able, therefore, to accumulate savings unusually large extent for investment in gold ornaments and hoards. Is this altogether inadequate 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 additions 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, 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 sovereign 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. 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.

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 temporarily miscalculated the demand for bars, would wish to sell these bars to the Government.

(b) 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 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 Government 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 coming were substantially the same as in England), would be a small saving of expense to sellers of gold in India. Importers 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 dividends; 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 consequences, 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 Government 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 tendered in India at Rs. 58 annas 5 per ounce (payable in silver or notes or sterling drafts on London or in sovereigns, on the present system, if they were available). 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 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. 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 depression, 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 excellence 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 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 expense 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 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.

17. 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 composed 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 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 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 somewhat increasing the gold element. If the Government dissipates some part of its sterling resources over the country—and any proposal for a greater infusion 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, therefore, 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 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 probably due in very great part to the fact that notes have never become acclimatised there. The inconvenience of making large payments in silver is obvious; and facilities for obtaining gold are naturally 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 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.

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. Contractors 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 troublesome than silver money.

Gurdaspur.—The facility of transit is the reason why corn merchants prefer sovereigns to silver.

Ambala.—Both in cities and villages, sovereigns are replacing notes more than rupees.

Bannu.—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.

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 welcomed 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 immediate 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 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 existing system is worth reference. Gold flows into the Currency Reserve when this is a cheaper way of getting 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 outflow 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 sovereigns is £3:17:10½, 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 1s. 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 1s. 4d. I do not know exactly where the dividing line comes; but when telegraphic transfers are at 1s. 4⅛d. it is certainly more profitable to get gold bullion in London, and when they are at 1s. 4–1/32d. 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 supply them. Whenever, therefore, gold in India is available to the public throughout the year, the Government will lose during the summer months whatever amount the bullion dealers require. On every sovereign thus drawn out, the Government loses about 1½d. 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 Government 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 the sink 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 rôle 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 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 perfected 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.

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Keynes, John Maynard, 2015. Indian Currency and Finance. Urbana, Illinois: Project Gutenberg. Retrieved May 2022 from https://www.gutenberg.org/files/49166/49166-h/49166-h.htm

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