Indian Currency and Finance

CHAPTER VI

THE SECRETARY OF STATE’S RESERVES AND THE CASH BALANCES

1. The Indian authorities have undertaken a double responsibility. They must be prepared to supply rupees in payment for Council Bills or in exchange for sovereigns. And on the other hand they must be prepared also to supply sterling or sterling drafts in exchange for rupees. The maintenance of the Indian system depends on their ability to fulfil this double obligation to whatever extent may be required of them.

The objects to be attained are simple, but the methods of the Government are, largely for historical reasons, exceedingly complicated. I will discuss, first, the nature of the existing methods; second, their adequacy for their purpose; third, some proposals for making them more orderly and 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 1912.

Of this total the greater part was held in sterling securities—about £16,000,000 (market price). In recent times the policy has been followed of 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:—

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.

Cash Balances^(a)

(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:—

(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:—

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 ¹/4_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:—

(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. 3²⁹/₃₂d. 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 ¹/_3¹¹/16. 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 intact.

Thus matters went on until the end of December 1907, when the authorities nerved themselves, although the immediate necessity had temporarily disappeared through a slight strengthening of exchange, to take whatever drastic steps might be necessary to maintain the gold value of the rupee. It was announced that they would sell in India telegraphic transfers on London at a fixed rate. Before the need arose for acting on this announcement, it was changed into an offer to sell sterling bills on London at the fixed minimum rate of ¹/3_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 ¹/3_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 follows:—

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 circulation.

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:—

Estimate of the Rupee Currency in Crores (10,000,000) Of Rupees

(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.

Currency in Lakhs of Rupees