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Title: Indian Currency and Finance
Author: Keynes, John Maynard
Language: English
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                      INDIAN CURRENCY AND FINANCE


                      MACMILLAN AND CO., LIMITED

                      LONDON · BOMBAY · CALCUTTA

                         THE MACMILLAN COMPANY

                      NEW YORK · BOSTON · CHICAGO
                        DALLAS · SAN FRANCISCO

                   THE MACMILLAN CO. OF CANADA, LTD.


                            INDIAN CURRENCY

                              AND FINANCE


                          JOHN MAYNARD KEYNES


                      MACMILLAN AND CO., LIMITED

                      ST. MARTIN’S STREET, LONDON




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, I have decided to publish immediately what I had 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.

              _12th May 1913_.




  THE PRESENT POSITION OF THE RUPEE                                 1


  THE GOLD–EXCHANGE STANDARD                                       15


  PAPER CURRENCY                                                   37


    CURRENCY                                                       63


  COUNCIL BILLS AND REMITTANCE                                    102




  INDIAN BANKING                                                  195


  THE INDIAN RATE OF DISCOUNT                                     240

  INDEX                                                           261

  BANK OF BENGAL                                      _Face page_ 240



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 Government 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 1s. 4d., at which figure it has remained without sensible
variation ever since.

2. There can be no doubt that at first the Government of India did not
fully understand the nature of 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, 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

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 pronouncements of policy
on the part of Government, and the legislative changes have been
inconsiderable. Yet a system has been developed, which was contemplated
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 something like it was
suggested at that time. It is not possible to point to any one date at
which the currency 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
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 imperceptible process the Indian currency will be placed on a
footing which Ricardo 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 Government
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 Committee of 1898 explicitly
declared themselves to be 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

6. The main features of the Indian system as now established are as

(1) The rupee is unlimited legal tender and, so far as the law
provides, inconvertible.

(2) The sovereign is unlimited legal tender at £1 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 sometimes 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 at a rate not more unfavourable than 1s. 3–29/32d. per

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 undertaking 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 1s. 4d. by more than the cost of remitting sovereigns to
India, and the fourth provision prevents it from falling below 1s.
3–29/32d. This means in practice that the extreme limits of variation
of the sterling value of the rupee are 1s. 4⅛d. and 1s. 3–29/32d.

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

 1892. Herschell Committee on Indian Currency.

 1893. Act closing the Indian mints to the coinage of silver on private
 account. Notifications by Government fixing the rate, at which rupees
 or notes would be supplied in exchange for the tender of gold, at the
 equivalent of 1s. 4d. the rupee.

 1898. Fowler Committee on Indian Currency. Exchange value of rupee
 touched 1s. 4d.

 1899. Act declaring the British sovereign legal tender at 1s. 4d. to
 the rupee.

 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 1s. 4⅛d. 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,[2] 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 distinguished from British gold

 1907. Rupee branch of the Gold Standard Reserve instituted.

 1908. Sterling drafts sold in Calcutta on London at 1s. 3–29/32d. 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,[3] and directing the issue of notes in exchange for British
 gold coins.

 1913. Royal Commission on Indian Finance and Currency.

8. In § 6 I have 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, 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 repealing 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.

The convertibility of the sovereign into rupees at the Rs. 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 Government 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 international currency for local currency; and sufficient
liquid resources in sterling to enable them to change back the local
currency into international currency, whenever they are required to
do so. The special features of the system, although, as we shall see
later, these features are not in fact by any means 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 (London) 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 1s. 4d. by regulation, does not affect 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 1s. 4d., except in a
very indirect and unimportant way to be explained in a moment. So long
as the rupee is worth 1s. 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, somewhat 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 and
non–Indian commodities.

In the second place, although it is true that the maintenance of the
rupee at or near 1s. 4d. is due to regulation, it is not true, when
once 1s. 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 of an official.[4] This
part of the system is as perfectly automatic as in any other country.
The Government 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 magnitude 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
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 circulation 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.[5]



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 conditions; 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 currency 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 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 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 expenditure, 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

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
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 counterbalancing
claims against foreign countries.

4. The essential characteristics of the British monetary system are,
therefore, the use of cheques as the principal medium of exchange,
and the use of the bank rate for regulating the balance of immediate
foreign indebtedness (and hence the flow, by import and export, of

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 deliberations 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 introduced 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 Reichsbank will sometimes speak as if its
bank rate were efficacious by itself in the same manner as the 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
consider, 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
substantial 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,[6] and her holdings of foreign
bills are not, at normal times, important.[7] 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,[8] though covertly
and with shame. To an increasing extent the Reichsbank depends on
variations in her holding of foreign bills and credits. A few years ago
such 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 Reichsbank has been growing. The authorities of the
Reichsbank 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.


  │         │  Average for Year.  │   Maximum.    │    Minimum.    │
  │ 1895    │       £120,000      │   £152,000    │    £100,000    │
  │ 1900    │      1,270,000      │  3,540,000    │     160,000    │
  │ 1905    │      1,580,000      │  2,490,000    │     970,000    │
  │ 1906    │      2,060,000      │  2,990,000    │     830,000    │
  │ 1907    │      2,223,000      │  3,000,000    │   1,130,000    │
  │ 1908    │      3,544,000      │  6,366,000    │     977,800    │
  │ 1909    │      5,362,000      │  7,978,000    │   2,824,800    │
  │ 1910(a) │      7,032,000      │  8,855,000    │   4,893,300    │

(a): Since 1910 these figures have not been stated in the Reichsbank’s
annual reports.


  │  31st Dec.  │     Bills.    │   Credits.   │     Total.    │
  │    1906     │  £3,209,000   │   £993,000   │   £4,202,000  │
  │    1907     │   1,289,000   │    503,000   │    1,792,000  │
  │    1908     │   6,457,000   │  1,234,000   │    7,691,000  │
  │    1909     │   6,000,000   │  3,369,000   │    9,369,000  │
  │    1910     │   8,114,000   │  4,205,000   │   12,309,000  │
  │    1911     │   7,114,000   │  1,439,000   │    8,553,000  │
  │    1912     │      ...      │     ...      │       ...     │

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 ¾ per cent in France, Germany, Russia,
Austria–Hungary,[9] and Belgium. So high a premium as this is as
effective in retaining gold as a very considerable addition to the
bank rate. 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 elsewhere 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.[10]
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.[11] Account being taken of their total resources,
however, the banks of the three Scandinavian countries, Sweden, Norway,
and Denmark, hold the 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

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
international 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 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 of
¾ per cent on the latter; this may help to tide over a stringency
which is seasonal or of short duration 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 resources 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.[12] 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, dependent 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 explicitly and in name a
Gold–Exchange Standard[13] 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 are to judge from the experience of 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 arrangements 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.[14] 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 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 discovery 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 Government
or Central Bank makes arrangements for the provision of foreign
remittances in gold at a fixed 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
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.[15] 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 2·18 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 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 1s. 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
circumstances were, at first, unfavourable. Exchange fell considerably
below 1s. 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 Mints
were closed, the measures actually taken might very well have proved
immediately successful. But the demand did not expand, and the very
large issue 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 demand for new currency on an abnormally high scale
from 1903 to 1907, accompanied by high rates of discount, 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 1s. 4d. The Fowler
Committee, then appointed, recommended a gold currency as the ultimate
objective. 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.

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

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 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 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.



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.[16] For large payments, therefore, 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 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

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.[17]
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.[18] 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.[19] 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. According to these ideas, the proper principles of note issue
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 necessary for the monetary transactions of the country, and that
any further amount of notes should be issued on coin or bullion.”[20]
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 and 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 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 Government notes,
though always of growing importance, took a very minor place in the
currency system of the country. This was partly due to an arrangement,
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 ‘circles,’ as they are called, now seven[21] in
number, correspond roughly to the principal provinces of India, the
offices of issue being as follows:—

  Calcutta for Bengal, Eastern Bengal, and Assam.
  Cawnpore  ”  the United Provinces.
  Lahore    ”  the Punjab and North–West Frontier Province.
  Madras    ”  the Madras Presidency and Coorg.
  Bombay    ”  Bombay and the Central Provinces.
  Karachi   ”  Sind.
  Rangoon   ”  Burma.

The currency notes[22] are in the form of promissory notes of the
Government of India payable to the bearer on demand, and are of the
denominations Rs. 5, 10, 50, 100, 500, 1000, and 10,000. Thus the
lowest note is of the face value of 6s. 8d. They are issued without
limit from any Paper Currency office in exchange for rupees or British
gold coin, or (on the requisition of the Comptroller–General) for gold

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
in payment of fares and freight, recover the value of them from the

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 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’

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 Reichsbank.

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 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 have 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
“universalising” the notes or making them legal tender in all circles.
Some authorities thought that notes of small denominations (Rs. 5 and
Rs. 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 Rs. 10 and Rs. 50 were
universalised; and 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.”[24] 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 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 circumstances, 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.[25] For some purposes the _active_ circulation
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 average
of the circulation on the last day of each month:—

  │           │ (In lakhs of rupees.) │(In £ million at 1s. 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  │    18½     │   14      │
  │ 1900─1901 │ 2888  │ 2473  │ 2205  │    19½     │   14½     │
  │ 1902─1903 │ 3374  │ 2735  │ 2349  │    22½     │   15½     │
  │ 1904─1905 │ 3920  │ 3276  │ 2811  │    26      │   18½     │
  │ 1906─1907 │ 4514  │ 3949  │ 3393  │    30      │   22½     │
  │ 1908─1909 │ 4452  │ 3902  │ 3310  │    29½     │   22      │
  │ 1909─1910 │ 4966  │ 4535  │ 3721  │    33      │   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:—

    £ million.                £ million.
  1900      19              1909      30½
  1902      21              1910      36½
  1904      25½             1911      36½
  1906      30              1912      41
  1908      31½             1913      46

The following table gives the average monthly gross circulation in £
million (at 1s. 4d. the rupee throughout):—

                                  £ million.
  Five years ending 1880–1881       8½
      ”        ”    1885–1886       9½
      ”        ”    1890–1891      11½
      ”        ”    1895–1896      19
      ”        ”    1900–1901      17½
      ”        ”    1905–1906      24
      ”        ”    1910–1911      32
           The year 1911–1912      38

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
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.


  │ March 31. │ In India. │ In London. │ Total. │
  │   1897    │    nil    │    nil     │   nil  │
  │   1898    │     ¼     │    nil     │    ¼   │
  │   1899    │    2      │    nil     │   2    │
  │   1900    │    7½     │    1½      │   9    │
  │   1901    │    6      │    nil     │   6    │
  │   1902    │    7      │    nil     │   7    │
  │   1903    │   10      │    nil     │  10    │
  │   1904    │   11      │    nil     │  11    │
  │   1905    │   10½     │    nil     │  10½   │
  │   1906    │    4      │    7       │  11    │
  │   1907    │    3½     │    7       │  10½   │
  │   1908    │    2½     │    3½      │   6    │
  │   1909    │   nil     │    1½      │   1½   │
  │   1910    │    6      │    2½      │   8½   │
  │   1911    │    6      │    5       │  11    │
  │   1912    │   15½     │    5½      │  21    │
  │   1913    │   19½     │    6       │  25½   │


  Rupees          £11,000,000
  Gold in India    19,500,000
  Gold in London    6,000,000
  Securities        9,500,000

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.[26] 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 included 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 transferences 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 in 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 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 increasing 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 Government 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 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 governing 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 destroying
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.

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.[27] That is to say, they deposit their surplus
rupees during the summer in the Currency Reserve, 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 understand 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, 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.(a) │   1908–1909.  │
  │  Minimum   ├───────┬───────┼───────┬───────┼───────┬───────┤
  │and Maximum │       │       │       │       │       │       │
  │  active    │   1.  │   2.  │   1.  │   2.  │   1.  │   2.  │
  │circulation.│       │       │       │       │       │       │
  │Min.—       │       │       │       │       │       │       │
  │ June       │ 31,15 │ 14,41 │ 35,04 │ 13,01 │ 31,13 │ 14,12 │
  │ July       │ 32,43 │ 12,87 │ 34,43 │ 15,89 │ 31,58 │ 16,52 │
  │ August     │ 32,11 │ 13,59 │ 34,30 │ 17,47 │ 31,90 │ 12,71 │
  │            │       │       │       │       │       │       │
  │Max.—       │       │       │       │       │       │       │
  │ January    │ 35,54 │  9,11 │ 33,20 │  8,62 │ 33,67 │  8,54 │
  │ Feb        │ 36,07 │  9,42 │ 33,28 │  9,38 │ 34,36 │  9,50 │
  │ March      │ 36,45 │ 10,50 │ 32,61 │ 14,28 │ 34,95 │ 10,54 │

  │ Months of  │   1909–1910.  │   1910–1911.  │   1911–1912.  │
  │  Minimum   ├───────┬───────┼───────┬───────┼───────┬───────┤
  │and Maximum │       │       │       │       │       │       │
  │  active    │   1.  │   2.  │   1.  │   2.  │   1.  │   2.  │
  │circulation.│       │       │       │       │       │       │
  │Min.—       │       │       │       │       │       │       │
  │ June       │ 34,19 │ 15,10 │ 36,58 │ 20,37 │ 38,44 │ 19,78 │
  │ July       │ 34,31 │ 17,22 │ 36,56 │ 22,60 │ 39,15 │ 21,14 │
  │ August     │ 35,49 │ 16,25 │ 36,86 │ 21,20 │ 40,99 │ 18,70 │
  │            │       │       │       │       │       │       │
  │Max.—       │       │       │       │       │       │       │
  │ January    │ 41,47 │ 10,37 │ 39,67 │ 11,45 │ 44,14 │ 10,56 │
  │ Feb        │ 41,45 │  9,12 │ 40,95 │ 12,57 │ 44,58 │ 12,61 │
  │ March      │ 39,98 │ 14,43 │ 40,17 │ 14,82 │ 44,61 │ 16,75 │

Columns(1): Active circulation. Columns(2): Holdings of Treasuries and
Presidency Banks, _i.e._, _excess_ of gross over active circulation.

  (a) 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 600 lakhs). Of course this is not a
very high proportion 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[28] in supplying
the seasonal needs of trade is well shown in the following table:—


  R. = Rupees.
  N. = Notes.

  │         │ April to  │  July to  │  Oct. to  │  Jan. to  │           │
  │         │   June.   │   Sept.   │    Dec.   │  March.   │Whole Year.│
  │  Year.  ├─────┬─────┼─────┬─────┼─────┬─────┼─────┬─────┼─────┬─────┤
  │         │  R. │  N. │  R. │  N. │  R. │  N. │  R. │  N. │  R. │  N. │
  │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│+ 444│

(a) In this table rupees (but not notes) in the Presidency Banks are
treated as being in circulation. It would be a troublesome piece of
work to exclude them, and would make, I think, 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 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.[29]

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 Government maintains an independent Treasury system. This
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 corresponding increase in its
metallic reserves. Except for a certain proportion of the business
which is transacted by cheque (chiefly in the Presidency towns), there
is nothing corresponding to this in India. 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 payment 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 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[30]) 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 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 remedy is a real one. And the method proposed
above is, I believe, the right way in which to approach the problem’s

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 endangering 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 that it could only be met from the
Mint. Additions to the currency of this kind can only be made by
importing 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.



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,[31] 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.”[32]

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

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.[33]

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

This view has long been maintained by economists.[34] 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.[35] 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.[36] 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:—

  │          │ (1)=(2)+(3)│     (2)    │(3)=(4)+(5)│   (4)   │   (5)    │
  │          │            │Net Addition│           │         │          │
  │          │            │  to Gold   │    Net    │   Net   │   Net    │
  │          │Net Addition│  in Paper  │  Addition │Addition │ Addition │
  │          │to Stock of │  Currency  │  to Stock │   to    │    to    │
  │          │   Gold:—   │   Reserve  │     of    │ Bullion │Sovereigns│
  │          │  Imports – │     and    │    Gold   │ in Hands│    in    │
  │          │  Exports + │ Treasuries.│  in Hands │    of   │ Hands of │
  │          │ Production.│    (a)     │ of Public.│ Public. │  Public. │
  │          │      £     │     £      │      £    │    £    │     £    │
  │1901–02   │  3,223,000 │    –5,000  │  3,228,000│2,261,000│   967,000│
  │1902–03   │  7,882,000 │ 2,870,000  │  5,012,000│2,814,000│ 2,198,000│
  │1903–04   │  8,963,000 │   944,000  │  8,019,000│4,741,000│ 3,278,000│
  │1904–05   │  8,841,000 │    38,000  │  8,803,000│5,866,000│ 2,937,000│
  │1905–06   │  2,698,000 │–6,840,000  │  9,538,000│5,806,000│ 3,732,000│
  │1906–07   │ 12,061,000 │  –193,000  │ 12,254,000│7,098,000│ 5,156,000│
  │1907–08   │ 13,677,000 │  –993,000  │ 14,670,000│7,243,000│ 7,427,000│
  │1908–09   │  5,022,000 │–2,843,000  │  7,865,000│4,422,000│ 3,443,000│
  │1909–10   │ 16,620,000 │ 6,347,000  │ 10,273,000│7,407,000│ 2,866,000│
  │1910–11   │ 18,153,000 │    71,000  │ 18,082,000│9,991,000│ 8,091,000│
  │1911–12   │ 27,345,000 │ 9,347,000  │ 17,998,000│9,117,000│ 8,881,000│
  │1912–13(b)│ 24,551,000 │ 4,231,000  │ 20,320,000│9,320,000│11,000,000│

  (a) Since 1908 the whole of this has been held in sovereigns.

  (b) Estimate.

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 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.[37] 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,[38] “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;[39]
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

“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:—

  │         │ Post Offices. │   Railways.   │
  │ 1906–07 │   £553,000(a) │   £468,000(a) │
  │ 1907–08 │  1,358,000    │  1,045,000    │
  │ 1908–09 │  1,001,000    │    710,000    │
  │ 1909–10 │    265,000    │    134,000    │
  │ 1910–11 │    638,000    │    597,000    │
  │ 1911–12 │  1,363,000    │  1,222,000    │

  (a) Second half–year only.

It has been estimated by the Paper Currency Department[40] 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

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.[41]
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.[42] 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.[43]

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[44] (payable in
silver or notes or sterling drafts on London or in sovereigns, on the
present system, if they were available).[45] 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.[46] 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.[47] The
inconvenience of making large payments in silver is obvious;[48] 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.[49]

 _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

 _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;[50] 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.



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 remittances 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 £15,000,000 to £18,000,000. Rupees to this amount, being
part of the revenue from taxation, etc., accumulate 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 remittance cheaper than the alternative one of sending
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.[51]
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 1s.
4–3/32d.), 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 1/32d. higher than the
highest rate of allotment on the preceding Wednesday.

4. It should be added that cash must be paid for the bills in London
as soon as they are allotted; but, on account of the time taken by
the mail, they cannot 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 1/32d. per rupee higher than the rate
for bills.[52] 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 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 1/32d. 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
opportunities (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 explained. On account
of the provision by which rupees can always be obtained in India in
exchange for sovereigns at the rate of 1s. 4d. per rupee, it can never
be worth while for the banks to buy Council Bills at a price which
exceeds 1s. 4d. by more than the cost of sending gold to India. This
cost varies considerably from time to time, but it seldom exceeds
⅛d. If, therefore, the Secretary of State refuses to sell bills
at less than 1s. 4⅛d., when the banks are requiring 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 1s. 4⅛d. per rupee
if he had sold transfers, whereas if gold flows he gets only 1s. 4d.)
and the cost of bringing it back again, say, 3/32d.; thus a refusal to
sell bills would mean an eventual loss of nearly ¼d. per rupee or
about 1½ 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, 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 remittance 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

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 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 these reserves which are held in London, “earmarked” at
the Bank of England,[53] 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
circulation 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 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 additional 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. 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 bills, 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

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 1s. 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

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 1s. 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 Reserve. But, however all this might be, at present
the Government of India do _not_, in fact, exert such discretionary
powers as they possess for affecting, even temporarily, the volume of

9. I have said that the cost of sending gold to India does not
generally exceed ⅛d. per rupee. The Secretary of State has,
therefore, a standing notification (since January 1904) that he will
sell bills at 1s. 4⅛d. Up to January 1900 he undertook to sell
telegraphic transfers at 1s. 4–5/32d. without limit of quantity, and
since that time he has usually been willing to do so.[54] The cost of
sending gold to India depends, however, on complex causes, varying
considerably from time to time, and is often a good deal less than
⅛d. 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.[55]

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, consigned by the route (Bremen and Trieste) by which
the stolen gold had been sent, was doubled, rising from 1s. 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 underwriters requiring a higher premium than usual if
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 1s. 3–31/32d. in London
for 1s. 4d. delivered in India (1/32d. being the interest on 1s. 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 1/32d. per rupee more than Council Bills. If,
therefore, Council Bills are at a price in excess of 1s. 3–15/16d.,
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 1s. 3–15/16d. 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 circumstances, 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, selling for it telegraphic transfers at a
suitable rate.[56] This was done on a large scale in 1905–6 and 1906–7.

Surplus gold from Egypt is not capable of undercutting Council Bills
so seriously as surplus gold from Australia; for in this case it
is Egypt which lies between. If we assume, for the sake of precise
illustration,[57] 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 case, will take any price in
excess of 1s. 4d.[58] paid in London for the delivery in India of the
value in gold of a rupee. This is the extreme case. If Council Bills
are at a higher rate than 1s. 4d., say at 1s. 4–1/16d., the Alexandrian
exchanges may be at a level which makes it profitable to ship gold from
Egypt to India for payment 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 1s.
4–1/16d. 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 remittance 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 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 interest—has been dealt
with already, 1/32d. represents the interest on 1s. 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 depreciation of the
rupee, and have not undertaken to give sovereigns for rupees in the
way that they have undertaken 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 1s. 1d. The Government
has, however, practically 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 1s. 3–29/32d. 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
disadvantages 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
restricting his offers; and if he cannot get at least 1s. 3–29/32d.
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 in India, as the revenue flows in and no Council
Bills are presented for payment. If the cash balances in 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 1s. 3–29/32d., 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 1s. 3–29/32d., these bills being cashed in London out of the
Gold Standard Reserve.

These measures were sufficient during the severe crisis of 1908. Their
sufficiency for the future will be discussed in 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:—


  Home Charges                                                       _x_
  Gold “earmarked,” or securities bought for
    Currency Reserve in London                                       _y_
  Cost of silver + profit on coinage credited
    to Gold Standard Reserve in London                               _z_
  Expenditure on stores in London for capital
    purposes in India                                                _v_
  Transfer of cash balances from India to London                   ± _w_
                                             _x_ + _y_ + _z_ + _v_ ± _w_


  Council Bills cashed from balances in India      _x_ – _u_ + _v_ ± _w_
  Council Bills cashed from rupees in Currency
    Reserve  in India                              _y_
  Council Bills cashed from new coinage            _z_
  Total Council Bills drawn            _x_ + _y_ + _z_ – _u_ + _v_ ± _w_
  Net capital borrowings in London                                   _u_
  Total receipts in London                   _x_ + _y_ + _z_ + _v_ ± _w_

14. I will conclude this chapter with some statistics.

  │                        │ 1909–10.    │ 1910–11. │ 1911–12. │ 1912–13  │
  │                        │             │          │          │(revised  │
  │                        │             │          │          │ estimate)│
  │                        │    £        │     £    │     £    │    £     │
  │Home Charges (net)(a)   │18,763,000   │18,003,000│18,333,000│18,986,000│
  │Capital expenditure     │             │          │          │          │
  │  in England on material│             │          │          │          │
  │  for railways and      │             │          │          │          │
  │  irrigation works      │ 5,748,000   │ 5,188,000│ 5,083,000│ 7,077,000│
  │Credited to Gold        │             │          │          │          │
  │  Standard Reserve      │             │          │          │          │
  │  in England(b)         │ 8,090,000   │   600,000│    ...   │ 1,200,000│
  │Credited to Paper       │             │          │          │          │
  │  Currency Reserve      │             │          │          │          │
  │  in England            │ 1,000,000   │ 2,545,000│ 1,988,000│   400,000│
  │Purchase of silver      │    ...      │    ...   │    ...   │ 7,059,000│
  │Addition to Cash        │             │          │          │          │
  │  Balances in England(c)│ 4,815,000   │ 3,898,000│ 1,693,000│    ...   │
  │                        │38,416,000   │30,234,000│27,097,000│34,722,000│
  │                        ╞═════════════╪══════════╪══════════╪══════════╡
  │                        │             │          │          │          │
  │Council Bills and       │             │          │          │          │
  │  Transfers             │27,096,000(d)│26,783,000│27,058,000│25,760,000│
  │Gold from India         │    ...      │   ...    │    ...   │ 1,928,000│
  │Net debt incurred in    │             │          │          │          │
  │  England(e)            │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│

(a) After deduction of certain small sources of revenue in England and
various minor adjustments.

(b) Apart from dividends earned and reinvested in England.

(c) Excluding balances in Gold Standard Reserve.

(d) Deducting bills on London sold in India.

(e) Excluding reduction of debt by annuities and sinking funds included
      in Home Charges.

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
hypothetical 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


  Superannuation and pensions (Civil)                     £2,063,100
        ”         ”           (Military)(net)              2,471,400
  Furlough allowances                                        426,500
  Interest on ordinary debt                                2,284,700
  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
  Revenue from interest                        £448,000
  Miscellaneous revenue                         141,600

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:—

  │        │ Total Drawings  │ Average│ Maximum│ Minimum│Fluctuation.│
  │        │of Council Bills.│  Rate. │  Rate. │  Rate. │            │
  │        │         £       │   d.   │   d.   │   d.   │     d.     │
  │1901–02 │    18,500,000   │ 15·987 │ 16·125 │ 15·875 │    ·250    │
  │1902–03 │    18,500,000   │ 16·002 │ 16·156 │ 15·875 │    ·281    │
  │1903–04 │    23,900,000   │ 16·049 │ 16·156 │ 15·875 │    ·281    │
  │1904–05 │    24,400,000   │ 16·045 │ 16·156 │ 15·970 │    ·186    │
  │1905–06 │    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    │



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 intelligible; and lastly, the management
of the cash balances.

2. From the profits of rupee coinage[59] a reserve has been built up
expressly for the purpose of supporting exchange. This is known as the
Gold Standard 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.[60]

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 investments 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 may conveniently think of the Gold
Standard Reserve as being worth about £21,000,000 net at the end of

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 holding 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 coinage profits and interest receipts until it
stands at £25,000,000, and that £5,000,000 of this will be held in
gold.[61] 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 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 position to deal with the reserves as a whole.

3. The second reserve is the Paper Currency Reserve held against the
note issue. The constitution 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
  Rupee 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

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 proportions held in rupees and sterling respectively vary
within wide limits from time to time. Their total 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 expenditure 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 transactions 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.


  │                │ In India.  │ In London. │    Total.   │
  │ March 31, 1901 │ £8,767,687 │ £4,091,926 │ £12,859,613 │
  │      ”    1903 │ 12,081,388 │  5,767,786 │  17,849,174 │
  │      ”    1905 │ 10,597,770 │ 10,262,581 │  20,860,351 │
  │      ”    1907 │ 10,026,932 │  5,606,812 │  15,633,744 │
  │      ”    1908 │ 12,851,413 │  4,607,266 │  17,458,679 │
  │      ”    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 │

  (a) Excluding balances held in the Gold Standard Reserve.

It may be added that the Indian cash balances 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.[62] 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 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(a)       £10,000,000
  Gold Standard Reserve       3,750,000

(a) Including silver bullion in India or in transit.

_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 Reserve
and in the Gold Standard Reserve). In December 1912 the amounts were
approximately as follows:—

      Currency Reserve in India        £17,500,000
      Currency Reserve in London         7,250,000
      Gold Standard Reserve in London      250,000

  _Money at Short Notice_—
      Gold Standard Reserve in London   £1,000,000
      Cash Balances in London            7,500,000

  _Sterling Securities_—
      Currency Reserve                  £2,500,000
      Gold Standard Reserve             16,000,000

  _Aggregate Sterling Resources_—
      Gold                             £25,000,000
      Money at Short Notice              8,500,000
      Securities                        18,500,000

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
Government 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 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[63] (£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 Government had to
raise the price of telegraphic transfers to what was then the unusually
high figure of ¼–5/32. 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.

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 considerations
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 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 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 somewhat worse position to meet the
crisis which came at the end of the year, than need have been the case.
But their sterling reserves were nevertheless fairly high. On September
1, 1907, they seem to have been, approximately, as follows:—

      Currency Reserve in India             £4,100,000
      Currency Reserve in London             6,200,000

  _Money at Short Notice_—
      Gold Standard Reserve in London          £50,000
      Cash Balances in London                5,150,000

  _Sterling Securities_—
      In Currency Reserve                   £1,300,000(a)
      In Gold Standard Reserve              14,100,000(a)

  _Aggregate Sterling Reserves_—
      Gold                                 £10,300,000
      Money at Short Notice                  5,200,000
      Securities                            15,400,000

  (a) Book value.

Thus, to take a round figure, the crisis found the Secretary of State
with about £31,000,000 in hand. 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
1s. 3–29/32d. 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 ⅓–11/16. 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 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 Gold
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

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 announcement, it was changed into an offer to sell
sterling bills on London at the fixed minimum rate of ⅓–29/32.

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 a week, and
later £1,000,000 a week of sterling bills on London were sold in
India at ⅓–29/32. 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

      Currency Reserve in India                 £150,000
      Currency Reserve in London               1,850,000

  _Money at Short Notice_—
      Gold Standard Reserve in London            _nil._
      Cash Balances in London                 £1,850,000

  _Sterling Securities_—
      In Currency Reserve                     £1,300,000
      In Gold Standard Reserve                 6,000,000

  _Aggregate Sterling Resources_—
      Gold                                    £2,000,000
      Money at Short Notice                    1,850,000
      Securities                               7,300,000

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 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”[64] were raised in sterling.[65] A large part
of the former was required for the discharge 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 corresponding 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 deterioration
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 be added to complete the story, that
in August and September 1909 there was a short period of weakness 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 deficiency 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 withdraw 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 withdraw 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 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 circulation 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
available 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 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 Government 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: 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 malcontents, or
members of the political party in opposition. The officials, thinking
(bureaucratically) more of the Indian Exchequer and the Indian taxpayer
than of the House of Commons, chose, in fact, the second of the two
alternatives—in a spirit, perhaps, 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 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 holdings of
Consols had depreciated in market value since they were bought. But
attention was specially concentrated 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 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 conception, 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 reputations 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 order to save half a
million pounds. Assuming, 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 whatever
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 ultimately 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 substantial, has not been
enough—so far as one can judge—to leave a surplus of profits at all
commensurate 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 with
a surplus of 500 or 600 lakhs over what was considered a safe minimum,
the reasonable 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 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
intention 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.

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

Attempts to estimate the rupee circulation of India have been the
occasion of some very interesting calculations. 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.[66]

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 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 infrequently a
batch of coins would be attributed to a 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 circulation has been
adopted by Mr. F. J. Atkinson.[67] 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 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:—


  │        │ Harrison. │    Adie,   │    Adie,   │ Atkinson.(a) │
  │        │           │ 1st method │2nd method. │              │
  │  1881  │ {         │     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      │

(a) Of Mr. Atkinson’s two separate calculations, made in 1897 and 1903,
I have taken the latter. His calculation explicitly excludes rupees
in hoards, currency reserves, and 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.

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
succeeded 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 circulation 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. Atkinson, and to assume a _public_ circulation in 1900 (_i.e._,
excluding rupees in the Currency Reserve 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 Government—_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 know at the same
time the _total_ public circulation of currency.


  Total Currency
  in the hands────────────────────────────────────────────–┐
  of the Public                                            │
  on March 31.(d)                                          │
  Public circolation                                       │
  of Notes on──────────────────────────────────────–┐      │
  March 31.                                         │      │
                                                    │      │
  Public circolation                                │      │
  of Rupees on──────────────────────────────┐       │      │
  March 31.(d)                              │       │      │
                                            │       │      │
  Net(c) Export.────────────────────–┐      │       │      │
                                     │      │       │      │
  Rupees released                    │      │       │      │
  from Currency,                     │      │       │      │
  Gold Exchange────────────────┐     │      │       │      │
  Standard,                    │     │      │       │      │
  and Treasur                  │     │      │       │      │
  Reserves.                    │     │      │       │      │
                               │     │      │       │      │
  New Coinage less             │     │      │       │      │
  Recoinage,(a)────────–┐      │     │      │       │      │
  etc.(b)               │      │     │      │       │      │
                        │      │     │      │       │      │
  Public                │      │     │      │       │      │
  Circolation────┐      │      │     │      │       │      │
  of Rupees      │      │      │     │      │       │      │
  on April 1.    │      │      │     │      │       │      │
                 │      │      │     │      │       │      │
  Financial      │      │      │     │      │       │      │
  Year,          │      │      │     │      │       │      │
  April 1–       │      │      │     │      │       │      │
  March 31.      │      │      │     │      │       │      │
        │        │      │      │     │      │       │      │
   │1900–1901│120,00│+13,60│– 4,66│–  35│=128,59│+23,79│=152,38│
   │1901–1902│128,59│+ 2,04│– 2.72│–1.42│=126,49│+24,24│=150,73│
   │1902–1903│126,49│+   60│–   58│–2,23│=124,28│+28,87│=153,15│
   │1903–1904│124,28│+11,42│–   45│+  40│=135,65│+31,54│=167,19│
   │1904–1905│135,65│+ 6,88│+   55│–  61│=142,47│+33,73│=176,20│
   │1905–1906│142,47│+16,11│– 2,11│–  78│=155,69│+37,90│=193,59│
   │1906–1907│155,69│+22,88│– 4,88│–1,28│=172,41│+41,20│=213,61│
   │1907–1908│172,41│+15,48│–11,56│–  41│=175,92│+38,65│=214,57│
   │1908–1909│175,92│+    2│–14,90│–  29│=160,75│+39,23│=199,98│
   │1909–1910│160,75│+    8│+13,14│–1,39│=172,42│+46,51│=218,93│
   │1910–1911│172,42│–   42│+ 3,76│–1,72│=174,04│+45,68│=219,72│
   │1911–1912│174,04│–    7│+11,61│–1,13│=184,41│+53,24│=237,65│
   │1912–1913│184,41│      │      │     │       │      │       │

(a) This column is derived from the figures given by the Currency
Department, and the total of net coinage issued in individual years
differs somewhat from the total amount minted as stated in the Mint

(b) In 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

(c) For Bahrain Islands, Ceylon, Arabia, Mauritius, and East African

(d) 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 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[68] (£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

21. How much of this could possibly be spared from circulation at a
time of crisis? In 1908 the rupee circulation fell (at its lowest
point) by somewhat 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 impossible that they should be called on to redeem a greater
amount than this. But it would be extravagant 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

22. So much for the proper magnitude of the Reserve, 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 resources 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 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,[70]
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[71]
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.[72]

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 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 depression 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 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 case. 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 Government 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 element of weakness,—an element, perhaps,
inseparable 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 Government 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 otherwise 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 probably 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

In the meantime, in spite of this consideration, the Government will
not, I think, be able to resist 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 constitution 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 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
announcement 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 _financial_ crisis, accompanied by numerous bank failures, I do not
think it likely that the Government would be overwhelmed 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 elsewhere to
expect hoarding on a large scale, rather than a diminished demand for
currency and an ability to export it. In this matter the experience
of 1907–8, when the monetary position in India was easy throughout,
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.[74] 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 produced 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.

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, 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

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 conclusion 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 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 anticipations 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 transactions under items (ii.) and (iii.). The
acute 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 borrowings (direct
or indirect) in London for use in India; and this stringency also
caused the flow of new investment to India to fall short of its usual

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.[75] 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,[76] 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 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 sufficient 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 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 Reserve 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
proportion 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, provided it would prove a very burdensome thing to raise them. For
the expedient of a loan is always available.[77] My conclusion, rather,
is that the reserves should be allowed to reach some such figure as
this 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

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 Financial 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 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 exceedingly 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
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 Reserve, the corresponding
transference in London must be made wholly in gold coin—a course which
may sometimes be exceedingly inconvenient at the moment.

31. If the authorities allowed themselves more latitude as to the
manner in which the Currency Reserve might be held, it would be a mere
book–keeping transaction to transfer to this reserve the rupees now
held in silver in the Gold Standard Reserve 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 be considerable advantages
in the adoption of some general scheme for the reserves such as the

(1) While it would be legal to hold the Gold Standard Reserve 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
Reserve 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–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.

      Gold Standard Reserve in London    £7,500,000
      Gold Standard Reserve in India      2,500,000
      Currency Reserve in India          15,000,000

  _Money at Short Notice_—
      Currency Reserve in London         £1,000,000
      Cash Balances in London             7,500,000

  _Sterling Securities_—
      Currency Reserve                   £7,500,000
      Gold Standard Reserve              11,000,000

      Currency Reserve                  £13,750,000

33. Some changes of substance might be added to these changes in
book–keeping and are naturally suggested 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
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 keeping 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

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 wasted (so far as the support of exchange is concerned) in

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 generality 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 to pay
what is owing in gold. It is, in fact, precisely 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 difficulty, 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 dissipating 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.

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 continue 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 connected with the proposed power to make advances
from the Currency Reserve on bills of exchange and 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 foreseen. 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 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 bills, 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. _Permanent_ 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 provided 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.[78] 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.[79]

When, in 1862, the right of note issue was taken away from the
Presidency Banks, they were given as 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
Northbrook) raised in regard to this, the Secretary of State (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 suggestion, 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 (1) through the Bank, (2) at its published rate of discount, (3)
in relief of 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.” Between 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.[80]

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 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 case to nearly
the same extent, even if the Government were to place much larger sums
with the Banks. In 1870[81] 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 Presidency 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 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 Reserve 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 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:—


  │         │       August 1.          │      January 1.          │
  │         ├──────────–┬──────────────┼──────────–┬──────────────┤
  │         │  Reserve  │Total Balances│  Reserve  │Total Balances│
  │         │Treasuries.│  in India.   │Treasuries.│   in India.  │
  │1906–1907│   5,26    │    17,18     │   1,60    │    10,46     │
  │1907–1908│   5,18    │    17,14     │   3,20    │    11,84     │
  │1908–1909│   7,41    │    19,54     │    ,76    │     9,33     │
  │1909–1910│   2,22    │    13,61     │   1,74    │    10,16     │
  │1910–1911│   9,49    │    21,43     │   2,82    │    13,18     │
  │1911–1912│   9,62    │    22,66     │   3,21    │    15,18     │
  │1912–1913│  10,96    │    24,58     │  10,62    │    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 1913,[82]
the resources of the Reserve 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.[83] But as
a matter of fact, the funds which 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 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 periodically, 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 obtaining
 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 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 undoubtedly 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.[84] 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 outside
critic to have been one of ill–considered caution. The other point is a
trifle and reflects, perhaps, 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[85] official of the Government with the sole exception 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 proportion 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 intervention of a bank, the
State must itself undertake it. 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 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 international 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 resources, it may be worth while to allay a
groundless suspicion by the compromise of holding a fair proportion
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
Market should be deliberately avoided.

Stability has been attained already, or is about to 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 Government 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 advantageous
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
wonderfully 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.



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, under the leadership of Marwaris and
Parsees, 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
intermediate 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 connexion between the two money markets seems to have
been very incomplete. The following quotation 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

 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 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 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 preceding 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 conditions 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 the East India Company in 1809.[86] The
first Bank of Bombay[87] 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 Presidency 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
Presidency 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
Banks was finally abolished.[88] In 1876 the Government relinquished
their share of the capital of the Banks and their right of appointing
directors.[89] 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 be conducted on the
safest possible principles.[90] 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.[91] Since that time only minor charges have been

7. The principal restrictions on the Presidency Banks are now the

(i.) The Banks may not draw, discount, buy, or sell bills of exchange
or other negotiable securities _unless they are payable in India_[92]
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[93]; (iii.) they may not lend for a longer
period than six months[94]; (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 inconvenience 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 difficulties
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 portion of the balances has been placed with the

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 speculative forms of business, has
this Bank survived the half–dozen or more violent crises by which the
Indian 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 expansion 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

  │         │  Capital,  │            │                │               │
  │Dec. 31. │  Reserve,  │   Public   │   Private      │    Cash.      │
  │         │  and Rest. │  Deposits. │   Deposits.    │               │
  │         │            │            │                │               │
  │ 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(a) │  8,645,000(a) │
  │ 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(b) │  4,650,000 │  2,640,000 │  23,250,000    │  9,430,000    │
  │ 1912(b) │  4,900,000 │  2,530,000 │  24,000,000    │  8,070,000    │

(a) An exceptional year, due to the excessive abundance of money.

(b) The figures for 1911 and 1912 are not taken from the same returns
as the rest, and are not quite strictly comparable with them in one or
two details.

These figures do not require much comment. The growth of private
deposits since 1900 (rising from £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 Reserve 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 arrangement 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 Presidency Banks from 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

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
Russo–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 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 Banks out of

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 Banking
Corporation (1864), the Mercantile Bank of India (1893[97]), 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[98]; but this does not prevent their Indian connexion from being
important. The other four are primarily Indian.[99] It is noticeable
that no entirely new Exchange Bank now surviving[100] 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,[101] 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.[102]
Indian Exchange Banking is no business for speculative or enterprising
outsiders, and the large profits which it earns are protected by
established and not easily assailable advantages.

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,[103] 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 allow any but the
fittest to survive. If the present spell of prosperity lasts too long,
she will no doubt lose it.

13. 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 3½
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) 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 rediscounting 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)[104] for remittance to India. The question of what determines
the relative advantages of these methods has been discussed in Chapter

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 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 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.[105] 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 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 meantime 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 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.[106]

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’Escompte and of the deposits, in whatever country, of the
other Banks with Indian agencies enumerated 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.


  │      │ Deposits in India. │ Cash Balances in 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        │
  │ 1907 │    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.[107] 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 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–established and hoarding more
than a memory, the proportion 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.[108] The following
table sets out the 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.


  │     Bank.      │1900.│1905.│1906.│1907.│1908.│1909.│1910.│1911.│1912.│
  │                │  £m.│ £m. │ £m. │ £m. │ £m. │ £m. │ £m. │ £m. │ £m. │
  │Chartered       │  9¼ │ 11½ │ 13¼ │ 12¼ │ 12½ │ 13¾ │ 15½ │ 16¼ │ 18  │
  │National        │  6  │  9  │  9¾ │ 10¼ │ 10¼ │ 11¾ │ 12¾ │ 13  │ 14  │
  │Mercantile      │  1½ │  2¾ │  3¾ │  3½ │  3½ │  4½ │  5¼ │  5½ │  5½ │
  │Delhi and London│  1¼ │  1¼ │  1¼ │  1½ │  1¼ │  1¼ │  1½ │  1½ │  1½ │
  │Eastern         │ ... │ ... │ ... │ ... │ ... │ ... │  1¼ │  1¾ │  2  │
  │    Total       │ 18  │ 24½ │ 28  │ 27½ │ 27½ │ 31¼ │ 36¼ │ 38  │ 41  │

The total cash in hand and at bankers held by these five Banks at the
end of 1912 was about £m7¾. 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 distinguishing in their balance sheets between fixed
deposits and current accounts. In 1912 the Chartered Bank held £m10½
on current account, etc., and £m7½ on fixed deposit; the Eastern
Bank £m½ on current account and £m1½ on fixed deposit.[109]
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 outside India; but by no means all of this (in the case 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.

                             £m.   │                                £m.
    (i.) Capital and               │  (vii.) Loans and Advances
           Reserve Fund      1½    │           in London             3
   (ii.) Fixed Deposits            │ (viii.) Loans and Advances
           in London         3½    │           in India              3
  (iii.) Current Accounts          │   (ix.) Trade Bills on London
           in London         2½    │           negotiated in India   6½
   (iv.) Fixed Deposits            │    (x.) Trade Bills on India
           in India          2     │           negotiated in London  1½
    (v.) Current Accounts          │   (xi.) Cash, etc., in London   1½
           in India          2½    │
                                   │  (xii.) Cash, etc., in India      ½
   (vi.) Trade Bills on            │
           London negotiated       │ (xiii.) Securities              1
           in India                │
           and rediscounted        │  (xiv.) Miscellaneous assets
           in London         5½    │           including silver
                                   │           bullion                 ½
                            —————— │                                ————
                            17½    │                                17½
                            ══════ │                                ════

This would probably be published as follows:—

                             £m.   │                          £m.
  Capital and Reserve Fund   1½    │ Loans, Advances, etc.    6
  Deposits, etc.            10½    │ Bills of Exchange        2½
                                   │ Cash, etc.               2
                                   │ Securities               1
                                   │ Miscellaneous assets       ½
                            —————— │                         ——————
                            12     │                         12
                            ══════ │                         ══════
               [Bills rediscounted and outstanding, £m5½.]

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.) = £m5½.[110] The securities and miscellaneous
assets (xiii.) + (xiv.) = £m1½, may be regarded perhaps as equally
available 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 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 Government 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” “outside India”
would have to be substituted.[111] 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 regulation 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.[112] 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
(1865).[113] 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).[114] 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[115] 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 imprisonment 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).[116] Since 1906 numerous Banks have been 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 4½ 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 2½. 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, Rs. 50,000,000; but it appears below
that applications 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’

4½ per cent on deposits fixed for a year and 2 per cent on current
accounts in excess of a certain minimum 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:—


  │      │ No. of │ Capital, Reserve, │ Deposits.  │   Cash    │
  │      │ Banks. │   and Rest.       │            │ 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 exceedingly 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 comparatively
insignificant. Since that time they have succeeded in attracting so
large a volume of deposits as to make them an important part of the
banking 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 accompanied by the symptoms of financial crisis).
Growing 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.[118] 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 inadequate; 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
oil companies and other highly speculative enterprises. 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 worthless
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.[119] 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.

  │      │ Total Deposits in │             │ Cash Per  │
  │      │ India, excluding  │ Total Cash  │ Cent of   │
  │      │ Public Deposits.  │  Balances.  │ Deposits. │
  │ 1890 │   £16,650,000     │ £11,310,000 │    68(a)  │
  │ 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     │

  (a) 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 superficially from the
above table.

24. To complete the figures of Indian deposits,[120] 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:—

  │ March 31. │ Number of Depositors. │ Deposits.  │
  │  1900     │          785,729      │ £6,431,000 │
  │  1905     │        1,058,813      │  8,938,000 │
  │  1906     │        1,115,758      │  9,328,000 │
  │  1907     │        1,190,220      │  9,845,000 │
  │  1908     │        1,262,763      │ 10,121,000 │
  │  1909     │        1,318,632      │ 10,156,000 │
  │  1910     │        1,378,916      │ 10,578,000 │
  │  1911     │        1,430,451      │ 11,279,000 │
  │  1912(a)  │        1,500,834      │ 12,599,000 │
  │  1913(b)  │                       │ 13,860,000 │

(a) Limit of annual cash deposits raised from Rs. 200 to Rs. 500.

(b) 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 formerly. The question
of the reserves they hold matters, therefore, more than it used.
The information 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 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 (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.[121] 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

 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. New Banks are springing 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 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[122] 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 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
facilitating the employment of a portion of the redundant capital
of this country (England) for the general improvement of Indian
commerce, giving stability to the monetary system of India, and
preventing 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 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
Government 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
unfavourable. “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:—

 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.[123]

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
memorandum, no attempt was made to deal with the question in

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 importance, the management of the Government’s cash balances,
the regulation of the foreign exchanges,—all these are controlled
together and treated as a whole 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

(iv.) The absence of a State Bank makes it difficult 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
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; 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 Secretaryship is
an incident in the career of a successful civilian. A Financial Member
of Council is apt to come to the peculiar problems of his 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 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
fundamental 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
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.



1. The Presidency Banks publish an official minimum 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 comparable in any respect with
the Bank of England’s. They do not attempt to control the market and
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.


  _H. Bellingham_,
  _India Office_.

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 the
period of the loan required (or the maturity the bill negotiated) and
the character of the security offered. The published Bank Rate in India
represents, I 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, therefore, that money can be used, or 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 Discount at the Presidency Bank of Bengal since 1893.[125]

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 noticeable,
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 Rate per Cent. │    │   Bengal Rate per Cent. │
  │    ├────────────┬────────────┤    ├────────────┬────────────┤
  │    │Max. rate in│Min. rate in│    │Max. rate in│Min. rate in│
  │    │  February. │  August.   │    │  February. │   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 Rate may be expected to reach 8 per cent in the winter
or early spring, and to fall to 3 per cent in summer. Years 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 enormous
range for the normal seasonal fluctuation. What is the explanation 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 while to transfer funds
to India in the busy season on an ampler scale than is the case 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 Rates 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 transaction 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 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 uninstructed common sense would anticipate. For, under present
conditions, the cost of remittance both ways can hardly be less than
1/16d. per rupee, rising in most years as between certain dates as high
as 5/32d., and reaching occasionally as much as 3/16d. It would not be
prudent to act on the expectation of a less cost than 3/32d. Now 3/32d.
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 2½ 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 1/16d., 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.

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 ¾ 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 preventing 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 explanations 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 find it worth their while to offer
more than 3½ 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 establishment of a par of exchange between
the rupee and sterling; the severity of seasonal stringency has been
greatly moderated. The exceptionally high Bank Rates 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
exceptionally 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 fluctuation 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–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 remittance and the maximum range of
fluctuation in exchange 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 1s. 4d., in the sense that the Government were always
prepared to provide telegraphic remittance _in either direction_ at
this rate. Under such circumstances, the London and Indian Money
Markets would become practically one market, and the large differences
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 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 Rate; 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 1s. 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 remit gold
backwards and forwards himself, thus bearing the whole expense of
which the Exchange Banks were being relieved. At present the possible
fluctuation of exchange between what may fairly be termed the “gold
points” on either side of 1s. 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
remittance 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 1s. 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 1s. 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 the Secretary of State’s withdrawal from the market would
not necessarily prevent exchange from falling below 1s. 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 1s. 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
conclude, 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 proposal, having this object in view, has already been put
forward in more than one passage in the preceding pages. I believe
that, in future, the Government of India may have in the busy season
a considerable stock of rupee funds available in the 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 1s. 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 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 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 be 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 5½ 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 too jealous of the
profits of private persons. In a case 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
Rate in India for a comparatively long period[126] 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 Rate 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 1s. 4–3/32d.); and the demand for Council Bills was
on a large scale. 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 1s.
3–31/32d. 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
demand 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
Exchange Banks and others to lay out money in London for the purchase
of remittance to India. This unwillingness 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 contributory influence was the dearness[127]
of money in 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
Rates of 7 and 8 per cent, even in combination 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 Reserve 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
devoted to expenditure only in the _next_ financial year, and which in
the meantime was swelling the Government Balances in any case beyond
their usual dimensions. 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 Reserve Treasuries were unusually high. By the end
of February 1913, the total Government Balances in India had risen to
£17,400,000, and 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 incurring 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 tried to bring out the fact that the Indian
system is an exceedingly _coherent_ one. Every 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
preponderantly 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 Government to the Money Market, her position _is_ anomalous; and
she has much to learn from what is done elsewhere.


  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 _n._, 181 _n._, 199 _n._, 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 Currency Reserve

  Currency notes of India. _See_ Paper Currency

  Dadabhoy, Hon. Mr., 13 _n._

  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 _n._, 71 _n._

  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 _n._,
    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

  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, 48–50,
    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, F. 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, 102, 120–122, 171–172

  Indian Bank Rate. _See_ Bank Rate in India

  Indian Banking, 195 ff.

  Indian currency system, 1893–1899, 1–3;
    since 1899, 4–6, 8–10;
    main features as now established, 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 _n._, 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 _n._, 56, 60, 158, 163, 181–186, 198–206, 234,

  Reserves of Government. _See_ Rupee Reserves, and Sterling Reserves

  Reserves of Indian Banks. _See_ Banking 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

  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

  Sterling Reserves, 137–140, 147–171, 193

  Telegraphic transfers, 105, 137, 210–211

  Thackersey, Sir Vithaldas, 67

  United States Independent Treasury System, 56–57

  Wilson, James, 38

  Wilson, Sir G. Fleetwood, 64, 67

  Wood, Sir Charles, 39 _n._

                                THE END

_Printed by_ R. & R. CLARK, LIMITED, _Edinburgh_.


[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 depreciation 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 33⅓d.; the year after to about 29d.; and it stayed at
or below 30d. 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 overtrading, 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 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.”

[2] There had been temporary Acts to the same effect in 1898 and 1900.

[3] Notes of Rs. 100 were universalised in 1911 by Notification under
this Act.

[4] The Hon. Mr. Dadabhoy, speaking in the Legislative Council in 1910,
argued that “the harmful effects of a further fall in silver (_i.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.

[5] This question of the power of Government over the volume of
circulation is discussed in much greater detail in § 8 of Chapter V.

[6] 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 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).

[7] 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 Crédit 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.

[8] For example, in November 1912 there was a premium of nearly ¾ per
cent on gold for export.

[9] This premium was made possible by the Austro–Hungarian Bank’s
exercising its right to refuse to exchange its bank notes for gold

[10] 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.

[11] 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.

[12] 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.

[13] I may seem to speak as if Japan had in name a Gold–Exchange
Standard, which is not the case. There is not much publicity in regard
to her monetary arrangements. But I 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.

[14] Unless it be Egypt.

[15] 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 bills 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.)

[16] The rupee contains ⅜ 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 9·181d.; at 32d. per oz. it is about 12·241d. The
average rate of profit on coinage of rupees from 1910 to May 1912 was
about 42% of the nominal value.

[17] See also pp. 199, 200.

[18] For this and other historical details see J. B. Brunyate, _An
Account of the Presidency Banks_.

[19] Mr. Wilson had proposed to invest a high proportion of the reserve
(perhaps two–thirds) in Government securities.

[20] I quote this from the Secretary of State’s despatch (Sir Charles
Wood, March 26, 1860) criticising Mr. Wilson’s original scheme.

[21] 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

[22] For the legal provisions outlined in the following paragraphs see
_Statistics of British India_, part iv. (a).

[23] For some further details see p. 9.

[24] Report of Comptroller of Paper Currency, 1910.

[25] 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 be deducted. I use the term in the
latter sense.

[26] For an account of this see p. 73.

[27] 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.

[28] The part played by gold is discussed in Chapter IV.

[29] I estimate that at this date the total volume of the active rupee
circulation was between five and six times the total volume of the
active note circulation.

[30] The proper proportion would partly depend upon the policy pursued
in regard to the Gold Standard Reserve.

[31] H. of C. 495 of 1913.

[32] This quotation is from a letter addressed by the Government of
India to the Secretary of State, nine years later (May 16, 1912).

[33] 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.

[34] See Lindsay’s evidence before Indian Currency Committee (1898), Q.

[35] The above account is summarised from the Reports of the
Comptroller of Paper Currency for 1900 and 1901.

[36] 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.

[37] Throughout 1911–12 the Bank of Bengal quoted them at a premium of

[38] Report on Paper Currency, 1911–12.

[39] See pp. 97–99.

[40] See Report for 1909.

[41] In the _calendar_ year 1912 India increased her stock of gold by
£29,500,000, of which about £21,500,000 was in sovereigns.

[42] 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.

[43] 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
(from 1/16 per cent to 1/32 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 Transfers, 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.

[44] This corresponds to the Bank of England’s normal price for gold

[45] 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.

[46] I have, however, seen no evidence which suggests that
_half_–sovereigns are specially popular on account of their lower

[47] The Manager of the National Bank in the Punjab reported in
1911–1912:—“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.”

[48] £6000 in rupees weighs more than a ton.

[49] The Government should probably instruct its officers to receive
and change notes with freedom on every possible occasion, in order to
dissipate this idea.

[50] See pp. 113–118 for an account of the cost of transporting bullion
to India.

[51] It was operative, however, in the middle of March 1913, when the
whole amount offered was not allotted, tenders below 1s. 4d. being
rejected; later in the month tenders below 1s. 4d. were accepted.

[52] The rule is supposed to be that the extra charge for transfers is
1–32d. per rupee when the Indian bank rate is below 9 per cent, and
1/16d. when it is 9 per cent or above. The last occasions, on which the
difference of 1/16d. was in force, occurred between December 1906 and
March 1907. In 1904 and formerly the 1/16d. difference came into force
when the Indian bank rate exceeded 6 per cent.

[53] 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 be 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

[54] On two occasions this practice has been suspended—in January
1900, when the price rose to 1s. 4⅜d., and in December 1906–March
1907, when it rose to 1s. 4–3/16d. The reason for the suspension in
the second case was the operation of the rule by which the premium
charged for telegraphic transfers over the rate for bills depends on
the Indian bank rate (see p. 105). The statement made in answer to a
question on this subject in the House of Commons (April 30, 1912) by
the Parliamentary Under–Secretary was not quite correct.

[55] Old–fashioned 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.

[56] 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.

[57] I make this assumption, which is not exactly accurate, for
purposes of illustration only.

[58] Or less, if paid at the time of shipment and in advance of the
time of delivery.

[59] See p. 37 (footnote).

[60] 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; but the change of title has not really made the position much

[61] At the end of March 1913, £1,620,000 in gold stood to the credit
of the Gold Standard Reserve in London.

[62] See also pp. 190, 191, below.

[63] Reckoning uncoined silver at its coined value.

[64] A further loan of £2,500,000 for “general purposes” was incurred
in December 1908.

[65] An unfunded debt of £6,000,000, which has been wiped off lately
out of the proceeds of the opium windfall, was incurred by the issue of
India Bills during this period.

[66] 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.

[67] _Stat. Journ._ March 1897 and March 1903.

[68] This represents a _per capita_ circulation of between Rs. 7 and
Rs. 8.

[69] 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 years of our new currency, and before an
adequate reserve had accumulated, circumstances might arise in which
borrowing to maintain the standard would become an absolute necessity.
We should have 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.”

[70] See Chap. VII.

[71] See p. 215.

[72] 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.

[73] I will recur to this proposal in Chapter VII.

[74] 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 corresponding season of the two busy years 1905–6 and 1906–7.

[75] For a fuller discussion of this question in relation to the events
of 1907–8, see my article on “Recent Economic Events in India” in the
_Economic Journal_, March 1909.

[76] Aggregate exports of Indian produce and manufactures: 1906–7,
£115,625,135; 1911–12, £147,813,000.

[77] 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.

[78] In continuation of what has been said in § 4.

[79] See Brunyate, _loc. cit._ chap. vii., from which the greater part
of what follows is summarised.

[80] All 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 freedom.”—Brunyate, _loc. cit._ p. 98.

[81] See table given on p. 204.

[82] The exceptional circumstances of 1913 are dealt with in Chap. VIII.

[83] See Report of Comptroller of Currency, 1911–12: “In July the
balance generally reaches its highest level. From July onwards until
December the revenue collections are comparatively small and the
balances steadily go down till they reach their minimum level in
November or December. After December the surplus revenue receipts far
exceed the demands for expenditure.”

[84] 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.

[85] 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
       1909                    6,396
       1910                   12,728
       1911                   10,544
       1912 (up to Dec. 14)    7,958

The principles governing the amount of these payments were explained in
the House of Commons on December 17, 1912, in answer to a question.

[86] 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 banking

[87] 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.

[88] 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. cit._ p. 55.) This Bank and others
disappeared 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. cit._ p.
59.) In 1834 the Bank of Bengal refused to accept the notes of its
formidable rival, and in 1848 the Union Bank disappeared.

[89] 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.

[90] 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.

[91] This also was partly consequent on the failure of the Bank of
Bombay in 1868.

[92] Except for the use of principals for the purpose of certain
specified kinds of remittance.

[93] 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.

[94] Up to 1907 the maximum period was three months.

[95] See §§ 36–38 of Chapter VI.

[96] The rupee has been converted at the uniform rate of 1s. 4d.

[97] 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.

[98] The Chartered Bank, in spite of its name, has never done business
in Australia.

[99] 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).

[100] The New Oriental Bank, established in 1885 (the great Oriental
Bank Corporation had failed in 1884), went into liquidation in 1893.

[101] 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.

[102] 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.

[103] 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.

[104] Another method occasionally worth while employing is the purchase
of Government Rupee Paper in London and its sale in India.

[105] The volume of bills, drawn in India on London and outstanding,
is not, of course, a correct measure of the extent to which India
is being financed abroad. A bill may be used to finance the foreign
purchaser just as much as the Indian seller. For 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.

[106] The figures for 1910, for example, are in the issue which was
obtainable in England early in 1913.

[107] On the 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.

[108] 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 ¼ per cent extra discount.
But for the present purpose they can, I think, be regarded none the
less as liquid London assets.

[109] I believe that the Eastern Bank offers rather better terms than
the other Banks for fixed deposits.

[110] 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

[111] 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.

[112] 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.

[113] There is also, on a smaller scale, the Bangalore Bank (1868).

[114] There are a few others on a very small scale, such as the Kashmir
Bank (1882), and the Poona Mercantile Bank (1893).

[115] In 1901 the People’s Bank of India was founded, but it did not
reach the 5 lakhs’ limit until 1908.

[116] The Bank of India has a paid–up capital of 50 lakhs and a reserve
and rest of 5½ lakhs; the corresponding figures for the Indian Specie
Bank are 75 lakhs and 19 lakhs. The Bank of Rangoon is on a smaller
scale and has been less successful.

[117] This represents compound interest at the rate of about 8 per cent
per annum.

[118] Here again it is tantalising that no later figures should be

[119] In the official statistics no definition is given of what
precisely is meant by “cash.”

[120] The Co–operative Credit Societies are not important in this
connexion, capital, reserves, loans, and deposits altogether being less
than £1,000,000.

[121] At the time of writing, this Bill has not yet passed through its
final stages.

[122] 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
“investments,” _i.e._, with the Bank’s speculations.

[123] These quotations are derived from Mr. Brunyate’s _Account_, _loc.

[124] In their 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 discussions 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).”

[125] I am indebted for the preparation of this chart to Mr. H.
Bellingham of the India Office.

[126] 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 8, 1913.

[127] The Bank of England’s rate was 5 per cent, with the market rate
well up to the Bank Rate; 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.

                         TRANSCRIBER’S NOTE:

—Obvious print and punctuation errors were corrected.

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