Indian Currency and Finance

CHAPTER I. The Present Position of the Rupee

THE PRESENT POSITION OF THE RUPEE

1. On the broad historical facts relating to Indian currency, I do not intend to spend time. It is sufficiently well known that until 1893 the currency of India was on the basis of silver freely minted, the gold value of the rupee fluctuating with the gold value of silver bullion. By the depreciation in the gold value of silver, extending over a long period of years, trade was inconvenienced, and Public Finance, by reason of the large payments which the 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 silver.

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 rupee?

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

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

(2) The sovereign is unlimited legal tender at £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 rupee.

The fourth of these provisions is the vital one for supporting the sterling value of the rupee; and, although the Government have given no binding 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 reference:—

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, 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 coin).

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