CHAPTER III. *the Silver Standard and the Evils of Its Instability*

*THE SILVER STANDARD AND THE EVILS OF ITS INSTABILITY*

The economic consequences of this rupture of the par of exchange were of the most far-reaching character. It divided the commercial world into two sharply defined groups, one using gold and the other using silver as their standard money. When so much gold was always equal to so much silver, as was the case previous to 1873, it mattered very little, for the purposes of international transactions, whether a country was on a gold or on a silver standard; nor did it make any difference in which of the two currencies its obligations were stipulated and realized. But when, owing to the dislocation of the fixed par, it was not possible to define how much silver was equal to how much gold from year to year or even from month to month, this precision of value, the very soul of pecuniary exchange, gave place to the uncertainties of gambling. Of course all countries were not drawn into this vortex of perplexities in the same degree and to the same extent, yet it was impossible for any country which participated in international commerce to escape from being dragged into it. This was true of India as it was of no other country. She was a silver-standard country intimately bound to a gold standard country, so that her economic and financial life was at the mercy of blind forces operating upon the relative values of gold and silver which governed the rupee-sterling exchange.

The fall increased the burden of those who were under an obligation to make gold payments. Amongst such the most [pg 88] heavily charged was the Government of India. Owing to the exigencies of its political constitution, that Government has been under the necessity of making certain payments in England to meet: (1) Interest on debt and on the stock of the guaranteed railway companies; (2) expenses on account of the European troops maintained in India; (3) pensions and non-effective allowances payable in England; (4) cost of the home administration;¹⁶² and (5) stores purchased in England for use or consumption in India. England being a gold-standard country, these payments were necessarily gold payments. But the revenues of the Government of India out of which these payments were met were received in silver, which was the sole legal-tender money of the country. It is evident that even if the gold payments were a fixed quantity their burden must increase pari passu with the fall in the gold value of silver. But the gold payments were not a fixed quantity. They have ever been on the increase, so that the rupee cost of the gold payments grew both by reason of the growth in their magnitude, and also by reason of the contraction of the medium, i.e. the appreciation of gold, in which they were payable. How greatly this double levy diminished the revenues of India, the figures on the opposite page give a convincing testimony.

¹⁶² Since the Reform Act of 1920 that part of this cost which was “political” has been placed upon the British Estimates.

TABLE XI

The Increase in the Rupee Cost of Gold Payments¹⁶³

───────────────────────────────────────────────────────────────────── Total Excess Amount of this Excess due of Rupees to needed to ───────────────────────────── provide for (1) Fall in (2) Average the net the Rate of Increase in Rate of Sterling Exchange gold Exchange Payments of over that Payments Financial for the the Year over of 1874–75. over those Year Year. those of the Year required to 1874–75. meet the Sterling Payments of 1874–75. ─────────────────────────────────────────────────────────── s. d. R R R ───────────────────────────────────────────────────────────────────── 1875–76 1 9·626 86,97,980 41,13,723 45,84,257 ───────────────────────────────────────────────────────────────────── 1876–77 1 8·508 3,15,06,824 1,44,68,234 1,70,38,590 ───────────────────────────────────────────────────────────────────── 1877–78 1 8·791 1,30,05,481 1,14,58,670 1,15,46,811 ───────────────────────────────────────────────────────────────────── 1878–79 1 7·794 1,85,23,170 1,04,16,718 81,06,452 ───────────────────────────────────────────────────────────────────── 1879–80 1 7·961 39,23,570 1,65,37,394 −1,26,13,824 ───────────────────────────────────────────────────────────────────── 1880–81 1 7·956 3,12,11,981 1,92,82,582 1,19,29,399 ───────────────────────────────────────────────────────────────────── 1881–82 1 7·895 3,18,19,685 1,98,76,786 1,19,42,899 ───────────────────────────────────────────────────────────────────── 1882–83 1 7·525 −62,50,518 1,86,35,246 −2,48,85,764 ───────────────────────────────────────────────────────────────────── 1883–84 1 7·536 3,44,16,,685 2,33,46,040 1,10,70,645 ───────────────────────────────────────────────────────────────────── 1884–85 1 7·308 1,96,25,981 2,48,03,423 51,77,442 ───────────────────────────────────────────────────────────────────── 1885–86 1 6·254 −1,82,11,346 2,54,95,337 −4,37,06,683 ───────────────────────────────────────────────────────────────────── 1886–87 1 5·441 4,69,16,788 4,46,68,299 −33,47,376 ───────────────────────────────────────────────────────────────────── 1887–88 1 4·898 4,63,13,161 4,96,60,536 −33,47,376 ───────────────────────────────────────────────────────────────────── 1888–89 1 4·379 9,00,38,166 6,59,71,998 2,40,66,168 ───────────────────────────────────────────────────────────────────── 1889–90 1 4·566 7,75,96,889 6,06,98,370 1,68,98,519 ───────────────────────────────────────────────────────────────────── 1890–91 1 6·090 9,06,11,857 4,65,48,302 4,40,63,555 ───────────────────────────────────────────────────────────────────── 1891–92 1 4·733 10,44,44,529 6,54,52,999 3,89,91,530 ─────────────────────────────────────────────────────────────────────

¹⁶³ Compiled from figures in Appendix II, p. 270, of the Indian Currency Committee of 1893.

The effect of such a growing burden on the finance of the Government may well be imagined; the condition of the Government, embarrassing at first, later became quite desperate under this continuously increasing burden. It enforced a policy of high taxation and rigid economy in the finances of the Government. Analysing the resource side of the Indian Budgets from the year 1872–73, we find that there was hardly any year which did not expire without making an addition to the existing imposts of the country. In 1872–73 there commenced the levy of what were called Provincial Rates. The fiscal year 1875–76 witnessed the addition of R.1 per gallon in the excise duty on spirits. In 1877–78 the Pass Duty on Malwa opium was raised from [pg 89] Rs. 600 to Rs. 650 per chest. An addition of a Licence Tax and Local Rates was made in the year 1878–79, and an increase of Rs. 50 per chest took place in the Malwa Opium Duty in the following year. With the help of these imposts the Government expected to place its finances on an adequate basis. By the end of 1882 it felt quite secure and even went so far as to remit some of the taxes, which it did by lowering the customs duties and the Patwari Cess in the North-Western Provinces. But the rapid pace in the fall of the exchange soon showed that a resort to further taxation was [pg 90] necessary to make up for the increased cost of the sterling payments. To the existing burdens, therefore, was added in 1886 an Income Tax, a duty of 5 per cent. on imported and also on non-illuminating petroleum. The Salt Duty was raised in 1888 in India from Rs. 2 to Rs. 2½, and in Burma from 3 annas to R. 1 per maund. The Patwari Cess of the North-Western Provinces, repealed in 1882, was re-imposed in 1888. The rates of duty on imported spirit and the excise duties on spirits were not only raised in 1890, but were afterwards added to in every province. An excise duty on malt liquor was levied in 1893, and another on salted fish at the rate of 6 annas per maund. The yield of the taxes and duties levied from 1882–83 was¹⁶⁴ as follows:—

¹⁶⁴ Report of the Indian Currency Committee, 1893, App. II, p. 263.

────────────────────────────────────────────────────────────────── Sources 1882–83. 1892–93. ────────────────────────────────────────────────────────────────── Rs. Rs. ────────────────────────────────────────────────────────────────── Salt 5,67,50,000 8,14,90,000 ────────────────────────────────────────────────────────────────── Excise 3,47,50,000 4,97,90,000 ────────────────────────────────────────────────────────────────── Customs 1,08,90,000 1,41,80,000 ────────────────────────────────────────────────────────────────── Assessed Taxes 48,40,000 1,63,60,000 ──────────────────────────────────────────────────────────────────

All this additional burden was due to the enhanced cost of meeting the gold payments, and “would not have been necessary but for the fall in the exchange.”¹⁶⁵

¹⁶⁵ J. E. O’Conor, Report of the Indian Currency Committee, 1898, App. II, p. 182.

Along with this increase of resources the Government of India also exercised the virtue of economy in the cost of administration. For the first time in its history the Government turned to the alternative of employing the comparatively cheaper agency of the natives of the country in place of the imported Englishmen. Prior to 1870 the scope of effecting economy along this line was very limited. By the Civil Service Reforms of 1853¹⁶⁶ the way was cleared for the appointment of Indians to the posts reserved for the members of the covenanted Civil Service by the statute of [pg 91] 1793.¹⁶⁷ But this reform did not conduce to any economy in the cost of the administration, because the Indian members carried the same high scale of salaries as did the English members of the Civil Service. It was when the statute of 1870 (33 Vic. c. 3) was passed permitting the appointment by nomination of non-covenanted Indians to places reserved for the covenanted Civil Service on a lower scale of salary, that a real scope for economy presented itself to the Government of India. Hard pressed, the Government of India availed itself of the possibilities for economy held out by this statute. So great was the need for economy and so powerful was the interest of the Government in reducing its expenditure that it proceeded, notwithstanding increased demands for efficient administration, to substitute the less expensive agency of non-covenanted civilians in place of the more expensive agency of the covenanted civilians. The scale on which this substitution was effected was by no means small, for we find that between 1874 and 1889 the strength of the covenanted service recruited in England was reduced by more than 22 per cent., and was further expected to be reduced by about 12 per cent., by the employment of uncovenanted Indians to the posts usually reserved for covenanted civilians.¹⁶⁸ Besides substituting a cheap for a dear agency in the administration, the Government also sought to obtain relief by applying the pruning knife to the rank growth in departmental extravagances.¹⁶⁹ Even with such heroic efforts to increase the revenue and reduce the expenditure the finances of the Government throughout the period of the falling exchange were never in a flourishing state.

¹⁶⁶ Cf. Report of the Public Service Commission, C. 5327 of 1887.

¹⁶⁷ This clause of the statutes has been re-enacted into the statute of 1861.

¹⁶⁸ Cf. evidence of Mr. Jenkins, Q. 12. Mit. of Evid. of the Select Committee on East India (Civil Servants), H. of C. 327 of 1890.

¹⁶⁹ Cf. Calcutta Civil Finance Committee’s Report, 1886; also The Report of the Civil Finance Commissioner (1887), who completed the work of the Committee after it was dissolved.

Much more regrettable was the inability of the Government, owing to its financial difficulties, to find money for useful public works. The welfare of the Indian people [pg 92]

TABLE XII

Revenue and Expenditure of the Government of India

────────────────────────────────────────────────────────────────────────────────────────────────── In India. In England. Final Average Result. Rate ────────────────────────────────────────────────────────────────────────────── of Net Net Surplus Net Exchange. Surplus Year. Exchange. Revenue. Expenditure Revenue. Sterling (+) or excluding Revenue. Deficit Exchange. (−) ────────────────────────────────────────────────────────────────────────────────────────── d. R. R. R. £ R. R. ────────────────────────────────────────────────────────────────────────────────────────────────── 1874–75 22·156 39,564,216 25,897,098 13,667,118 12,562,101 1,045,239 59,778 ────────────────────────────────────────────────────────────────────────────────────────────────── 1875–76 21·626 40,053,419 24,541,923 15,511,496 12,544,813 1,377,428 1,589,255 ────────────────────────────────────────────────────────────────────────────────────────────────── 1876–77 20·508 38,253,366 25,355,285 12,898,081 13,229,646 2,252,611 −2,584,176 ────────────────────────────────────────────────────────────────────────────────────────────────── 1877–78 20·791 39,275,489 27,658,021 11,617,468 13,756,478 2,123,030 −4,262,040 ────────────────────────────────────────────────────────────────────────────────────────────────── 1878–79 19·794 44,415,139 25,778,928 18,636,211 13,610,211 2,891,902 2,134,098 ────────────────────────────────────────────────────────────────────────────────────────────────── 1879–80 19·961 45,258,197 29,384,030 15,874,167 14,223,891 2,878,169 −1,227,893 ────────────────────────────────────────────────────────────────────────────────────────────────── 1880–81 19·956 44,691,119 34,880,434 9,810,085 11,177,231 2,264,848 −3,031,394 ────────────────────────────────────────────────────────────────────────────────────────────────── 1881–82 19·895 45,471,887 27,717,249 17,754,638 11,737,688 2,421,499 3,595,451 ────────────────────────────────────────────────────────────────────────────────────────────────── 1882–83 19·525 42,526,173 25,500,437 17,025,736 13,299,976 3,050,923 674,837 ────────────────────────────────────────────────────────────────────────────────────────────────── 1883–84 19·536 43,591,273 23,566,381 20,024,892 14,770,257 3,375,158 1,879,477 ────────────────────────────────────────────────────────────────────────────────────────────────── 1884–85 19·308 41,585,347 24,763,779 16,821,568 13,844,028 3,363,986 −386,446 ────────────────────────────────────────────────────────────────────────────────────────────────── 1885–86 18·254 42,635,953 27,352,132 15,283,821 13,755,659 4,329,888 −2,801,726 ────────────────────────────────────────────────────────────────────────────────────────────────── 1886–87 17·441 44,804,774 25,124,335 19,680,439 14,172,298 5,329,714 178,427 ────────────────────────────────────────────────────────────────────────────────────────────────── 1887–88 16·898 45,424,150 25,968,025 19,456,125 15,128,018 6,356,939 −2,028,832 ────────────────────────────────────────────────────────────────────────────────────────────────── 1888–89 16·379 46,558,354 25,051,147 21,507,207 14,652,590 6,817,599 37,018 ────────────────────────────────────────────────────────────────────────────────────────────────── 1889–90 16·566 50,005,810 26,367,855 23,637,955 14,513,155 6,512,767 2,612,033 ────────────────────────────────────────────────────────────────────────────────────────────────── 1890–91 18·090 49,403,819 25,579,727 23,824,092 15,176,866 4,959,055 3,688,171 ────────────────────────────────────────────────────────────────────────────────────────────────── 1891–92 16·733 50,023,142 27,013,618 23,009,524 15,716,780 6,825,909 467,535 ──────────────────────────────────────────────────────────────────────────────────────────────────

The English investor would not invest in the rupee securities. An important customer for the Indian rupee securities was thus lost. The response of the Indian money market was inadequate. To issue sterling securities was the only alternative to enable the Government to tap a bigger and a more constant reservoir for the drawing of capital to India; but as it was bound to increase the burden of the gold payments, which it was the strongest interest of the Government to reduce, the resort to the London money market, unavoidable as it became, was somewhat restrained,¹⁷⁰ [pg 94]

¹⁷⁰ During the period of falling exchange the distribution of the debt of India was as follows:—

────────────────────────────────────────────────────────────────── Sterling Debt. Rupee Debt. End of 1873–74 41,117,617 66,41,72,900 End of 1898–99 124,268,605 1,12,65,04,340 Indian Currency Committee (1898), Appendix II, p. 179. ──────────────────────────────────────────────────────────────────

TABLE XIII

Price Movements of the Rupee and Sterling Securities of the Government of India¹⁷¹

──────────────────────────────────────────────────────────────────────────────────────────────────────────────────────────────────── Price of 4 per cent. Price of Sterling India Rates of Rupee Paper. Stock. Exchange. ───────────────────────────────────────────────────────────────────────────────────────────────────────── Year. In In 4 per 3½ per 3 per Calcutta. London. cent. cent. cent. ────────────────────────────────────────────────────────────────────────────────────────────────────────────────────────────── Highest. Lowest. Highest. Lowest. Highest. Lowest. Highest. Lowest. Highest. Lowest. Highest. Lowest. ──────────────────────────────────────────────────────────────────────────────────────────────────────────────────────────────────── d. d. ──────────────────────────────────────────────────────────────────────────────────────────────────────────────────────────────────── 1873 22⅞ 21⅝ 105 101⅞ 97 94½ 106½ 101¼ ──────────────────────────────────────────────────────────────────────────────────────────────────────────────────────────────────── 1874 23⅛ 21¾ 104½ 99½ 98 94½ 103¾ 101 ──────────────────────────────────────────────────────────────────────────────────────────────────────────────────────────────────── 1875 22 3⁄16 21¼ 102⅞ 101¾ 94 91 106¼ 103¼ ──────────────────────────────────────────────────────────────────────────────────────────────────────────────────────────────────── 1876 22⅜ 18½ 101⅞ 98¾ 89¾ 78 105⅞ 101⅞ ──────────────────────────────────────────────────────────────────────────────────────────────────────────────────────────────────── 1877 22¼ 20 9⁄16 98⅞ 93¼ 88½ 81 104⅝ 102¼ ──────────────────────────────────────────────────────────────────────────────────────────────────────────────────────────────────── 1878 21 18¾ 96⅞ 93½ 82½ 75⅜ 104⅝ 99 ──────────────────────────────────────────────────────────────────────────────────────────────────────────────────────────────────── 1879 20⅝ 18⅝ 94⅞ 91¼ 80 77¼ 105⅜ 100⅞ ──────────────────────────────────────────────────────────────────────────────────────────────────────────────────────────────────── 1880 20⅜ 19¾ 100 92 81⅜ 77¾ 105⅝ 102⅛ 15⁄16 ──────────────────────────────────────────────────────────────────────────────────────────────────────────────────────────────────── 1881 20 1⁄16 19½ 104⅝ 100 86 81½ 106⅜ 103⅞ 103⅞ 100¾ ──────────────────────────────────────────────────────────────────────────────────────────────────────────────────────────────────── 1882 20 3⁄16 19 1⁄16 102 1⁄16 95⅝ 85 81 105⅛ 102⅞ 101⅞ 99¾ ──────────────────────────────────────────────────────────────────────────────────────────────────────────────────────────────────── 1883 19 9⁄16 19 3⁄16 101⅛ 97 9⁄16 82 79¾ 104⅝ 102 103⅛ 101⅜ 7⁄16 ──────────────────────────────────────────────────────────────────────────────────────────────────────────────────────────────────── 1884 19¾ 18 100⅝ 95 5⁄16 81¾ 78¼ 104⅜ 101⅝ 107⅛ 101¾ 96¼ 91¾ 15⁄16 ──────────────────────────────────────────────────────────────────────────────────────────────────────────────────────────────────── 1885 19 3⁄16 17 98 7⁄16 92¼ 77½ 73¼ 103 1⁄16 98¾ 102¾ 97½ 91½ 85¾ 11⁄32 ──────────────────────────────────────────────────────────────────────────────────────────────────────────────────────────────────── 1886 18 16⅛ 97¾ 97 3⁄16 73 66¼ 103½ 101¼ 102¾ 99¾ 90⅛ 86⅝ ──────────────────────────────────────────────────────────────────────────────────────────────────────────────────────────────────── 1887 18 3⁄16 15⅝ 99 3⁄16 95 5⁄16 71 11⁄16 67⅞ 102¾ 100½ 103¼ 100¼ 92¾ 95⅜ ──────────────────────────────────────────────────────────────────────────────────────────────────────────────────────────────────── 1888 17⅛ 16 100 3⁄16 97¾ 69⅜ 66¼ 102⅞ 100½ 107¼ 104⅝ 98 95 ──────────────────────────────────────────────────────────────────────────────────────────────────────────────────────────────────── 1889 16 15⁄16 16 100⅜ 97 1⁄16 69⅛ 66⅜ 109½ 106⅞ 101⅛ 99 ──────────────────────────────────────────────────────────────────────────────────────────────────────────────────────────────────── 1890 20 29⁄32 16⅞ 103⅞ 96 87¼ 68¾ 108½ 105¼ 100¾ 95¼ 13⁄16 ──────────────────────────────────────────────────────────────────────────────────────────────────────────────────────────────────── 1891 18¼ 16⅝ 107 104 80¾ 74¼ 109½ 105 99 94½ 13⁄16 1⁄16 ──────────────────────────────────────────────────────────────────────────────────────────────────────────────────────────────────── 1892 16 11⁄16 14⅝ 108 103 74½ 62 109½ 106⅛ 98½ 94⅞ 15⁄16 11⁄15 ────────────────────────────────────────────────────────────────────────────────────────────────────────────────────────────────────

¹⁷¹ Appendix II to the Report of the Indian Currency Committee of 1893, p. 272. These prices differ slightly from those given in