The Problem of the Rupee, Its Origin and Its Solution

CHAPTER I

Trade is an important apparatus in a society based on private property and pursuit of individual gain; without it, it would be difficult for its members to distribute the specialised products of their labour. Surely a lottery or an administrative device would be incompatible with its nature. Indeed, if it is to preserve its character, the only mode for the necessary distribution of the products of separate industry is that of private trading. But a trading society is unavoidably a pecuniary society, a society which of necessity carries on its transactions in terms of money. In fact, the distribution is not primarily an exchange of products against products, but products against money. In such a society, money therefore necessarily becomes the pivot on which everything revolves. With money as the focusing-point of all human efforts, interests, desires and ambitions, a trading society is bound to function in a régime of price where successes and failures are results of nice calculations of price-outlay as against price-product.

Economists have no doubt insisted that “there cannot … be intrinsically a more significant thing than money,” which at best is only “a great wheel by means of which every individual in society has his subsistence, conveniences and amusements regularly distributed to him [pg 2] in their proper proportions.” Whether or not money values are the definitive terms of economic endeavour may well be open to discussion.¹ But this much is certain, that without the use of money this “distribution of subsistence, conveniences and amusements,“ far from being a matter of course, will be distressingly hampered if not altogether suspended. How can this trading of products take place without money? The difficulties of barter have ever formed an unfailing theme with all economists, including those who have insisted that money is only a cloak. Money is not only necessary to facilitate trade by obviating the difficulties of barter, but is also necessary to sustain production by permitting specialisation. For who would care to specialise if he could not trade his products for those of others which he wanted? Trade is the handmaid of production, and where the former cannot flourish the latter must languish. It is therefore evident that if a trading society is not to be out of gear and is not to forego the measureless advantages of its automatic adjustments in the great give-and-take of specialised industry, it must provide itself with a sound system of money.²

At the close of the Moghul Empire, India, judged by the standards of the time, was economically an advanced country. Her trade was large, her banking institutions were well developed, and credit played an appreciable part in her transactions. But a medium of exchange and a common standard of value were among others the most supreme desiderata in the economy of the Indian people when they came, in the middle of the eighteenth century, under the sway of the British. Before the occurrence of this event, the money of India consisted of both gold and silver. Under the Hindu emperors the emphasis was laid on gold, while under the Mussalmans silver formed a large [pg 3] part of the circulating medium.³ Since the time of Akbar, the founder of the economic system of the Moghul Empire in India, the units of currency had been the gold mohur and the silver rupee. Both coins, the mohur and the rupee, were identical in weight, i.e. 175 grs. troy,⁴ and were “supposed to have been coined without any alloy, or at least intended to be so.”⁵ But whether they constituted a single standard of value or not is a matter of some doubt. It is believed that the mohur and the rupee, which at the time were the common measure of value, circulated without any fixed ratio of exchange between them. The standard, therefore, was more of the nature of what Jevons called a parallel standard⁶ than a double standard.⁷ That this want of ratio could not have worked without some detriment in practice is obvious. But it must be noted that there existed an alleviating circumstance in the curious contrivance by which the mohur and the rupee, though unrelated to each other, bore a fixed ratio to the dam, the copper coin of the Empire.⁸ So that it is permissible to hold that, as a consequence of being fixed to the same thing, the two, the mohur and the rupee, circulated at a fixed ratio.

In Southern India, to which part the influence of the [pg 4] Moghuls had not extended, silver as a part of the currency system was quite unknown. The pagoda, the gold coin of the ancient Hindu kings, was the standard of value and also the medium of exchange, and continued to be so till the time of the East India Company.

The right of coinage, which the Moghuls always held as inter jura Majestatis,⁹ be it said to their credit was exercised with due sense of responsibility. Never did the Moghul Emperors stoop to debase their coinage. Making allowance for the imperfect technology of coinage, the coins issued from the various Mints situated even in the most distant parts of their Empire¹⁰ did not materially deviate from the standard.

[pg 5] The table on p. 4 of the assays of the Moghul rupees shows how the coinage throughout the period of the Empire adhered to the standard weight of 175 grs. pure.¹¹

So long as the Empire retained unabated sway there was advantage rather than danger in the plurality of Mints, for they were so many branches of a single department governed by a single authority. But with the disruption of the Moghul Empire into separate kingdoms these branches of the Imperial Mint located at different centres became independent factories for purposes of coinage. In the general scramble for independence which followed the fall of the Empire, the right to coinage, as one of the most unmistakable insignia of sovereignty, became the right most cherished by the political adventurers of the time. It was the last privilege to which the falling dynasties clung, and was also the first to which the adventurers rising to power aspired. The result was that the right, which was at one time so religiously exercised, came to be most wantonly abused. Everywhere the Mints were kept in full swing, and soon the country was filled with diverse coins which, while they proclaimed the incessant rise and fall of dynasties, also presented bewildering media of exchange. If these money-mongering sovereigns had kept up their issues to the original standard of the Moghul Emperors the multiplicity of coins of the same denomination would not have been a matter of much concern. But they seemed to have held that as the money used by their subjects was made by them, they could do what they liked with their own, and proceeded to debase their coinage to the extent each chose without altering the denominations. Given the different degrees of debasement, the currency necessarily lost its primary quality of general and ready acceptability.

The evils consequent upon such a situation may well be imagined. When the contents of the coins belied the value indicated by their denomination they became mere merchandise and there was no more a currency by tale to act as a ready means of exchange. The bullion value of each coin had to be ascertained before it could be accepted as a final [pg 6] discharge of obligations.¹² The opportunity for defrauding the poor and the ignorant thus provided could not have been less¹³ than that known to have obtained in England before the great re-coinage of 1696. This constant weighing, valuing, and assaying the bullion contents of coins was, however, only one aspect in which the evils of the situation made themselves felt. They also presented another formidable aspect. With the vanishing of the Empire there ceased to be such a thing as an Imperial legal tender current all through India. In its place there grew up local tenders current only within the different principalities into which the Empire was broken up. Under such circumstances exchange was not liquidated by obtaining in return for wares the requisite bullion value from the coins tendered in payment. Traders had to be certain that the coins were also legal tender of their domicile. The Preamble to the Bengal Currency Regulation XXXV, of 1793, is illuminating on this point. It says:—

“The principal districts in Bengal, Bihar and Orissa, have each a distinct silver currency … which are the standard measure of value in all transactions in the districts in which they respectively circulate.

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“In consequence of the Ryots being required to pay their rent in a particular sort of rupee they of course demanded it from manufacturers in payment of their grain, or raw [pg 7] materials, whilst the manufacturers, actuated by similar principles with the Ryots, required the same species of rupee from the traders who came to purchase their cloth or their commodities.

“The various sorts of old rupees, accordingly, soon became the established currency of particular districts, and as a necessary consequence the value of each rupee was enhanced in the district in which it was current, for being in demand for all transactions. As a further consequence, every sort of rupee brought into the district was rejected from being a different measure of value from that by which the inhabitants had become accustomed to estimate their property, or, if it was received, a discount was exacted upon it, equal to what the receiver would have been obliged to pay upon exchanging it at the house of a shroff for the rupee current in the district, or to allow discount upon passing it in payment to any other individual.

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“From this rejection of the coin current in one district when tendered in payment in another, the merchants and traders, and the proprietors and cultivators of land in different parts of the country, are subjected in their commercial dealings with each other to the same losses by exchange, and all other inconveniences that would necessarily result were the several districts under separate and independent governments, each having a different coin.”

Here was a situation where trade was reduced to barter, whether one looks upon barter as characterised by the absence of a common medium of exchange or by the presence of a plurality of the media of exchange; for in any case, it is obvious that the want of a “double coincidence” must have been felt by people engaged in trade. One is likely to think that such could not have been the case as the medium was composed of metallic counters. But it is to be remembered that the circulating coins on India, by reason of the circumstance attendant upon the diversity in their fineness and legal tender, formed so many different species that an exchange against a particular species did not necessarily close the transaction; the coin must, in certain circumstances, have been only an intermediate to be further bartered against another, and so on till the one of the requisite species was [pg 8] obtained. This is sufficient indication that society had sunk into a state of barter. If this alone was the flaw in the situation, it would have been only as bad as that of international trade under diversity of coinages. But it was further complicated by the fact that although the denomination of the coins was the same, their metallic contents differed considerably. Owing to this, one coin bore a discount or a premium in relation to another of the same name. In the absence of knowledge as to the amount of premium or discount, every one cared to receive a coin of the species known to him and current in his territory. On the whole the obstacles to commerce arising from such a situation could not have been less than those emanating from the mandate of Lycurgus, who compelled the Lacedæmonians to use iron money in order that its weight might prevent them from overmuch trading. The situation, besides being irritating, was aggravated by the presence of an element of gall in it. Capital invested in providing a currency is a tax upon the productive resources of the community. Nevertheless, wrote James Wilson¹⁴ no one would question

“that the time and labour which are saved by the interposition of coin, as compared with a system of barter, form an ample remuneration for the portion of capital withdrawn from productive sources, to act as a single circulator of commodities, by rendering the remainder of the capital of the country so much the more productive.”

What is, then, to be said of a monetary system which did not obviate the evil consequences of barter, although enormous capital was withdrawn from productive sources, to act as a single circulator of commodities? Diseased money is worse than want of money. The latter at least saves the cost. But society must have money, and it must be good money, too. The task, therefore, of evolving good money out of bad money fell upon the shoulders of the English East India Company, who had in the meanwhile succeeded to the Empire of the Moghuls in India.

The lines of reform were first laid down by the Directors [pg 9] of the Company in their famous Despatch, dated April 25, 1806,¹⁵ to the authorities administering their territories in India. In this historic document they observed:—

“17. It is an opinion supported by the best authorities, and proved by experience, that coins of gold and silver cannot circulate as legal tenders of payment at fixed relative values … without loss; this loss is occasioned by the fluctuating value of the metals of which the coins are formed. A proportion between the gold and silver coin is fixed by law, according to the value of the metals, and it may be on the justest principles, but owing to the change of circumstances gold may become of greater value in relation to silver than at the time the proportion was fixed, it therefore becomes profitable to exchange silver or gold, so the coin of that metal is withdrawn from circulation; and if silver should increase in its value in relation to gold, the same circumstances would tend to reduce the quantity of silver coin in circulation. As it is impossible to prevent the fluctuation in the value of the metals, so it is also equally impracticable to prevent the consequences thereof on the coins made from these metals … To adjust the relative values of gold and silver coin according to the fluctuations in the values of the metals would create continual difficulties, and the establishment of such a principle would of itself tend to perpetuate inconvenience and loss.”

They therefore declared themselves in favour of monometallism as the ideal for the Indian currency of the future, and prescribed:—

“21. … that silver should be the universal money of account [in India], and that all … accounts should be kept in the same denominations of rupees, annas and pice …”

The rupee was not, however, to be the same as that of the Moghul Emperors in weight and fineness. They proposed that

“9. … the new rupee … be of the gross weight of—

Troy grains	180
Deduct one-twelfth alloy	15
	——
An contain of fine silver troy grs.	165

[pg 10] Such were the proposals put forth by the Court of Directors for the reform of Indian currency.

The choice of a rupee weighing 180 grs. troy and containing 165 grs. pure silver as the unit for the future currency system of India was a well-reasoned choice.

The primary reason for selecting this particular weight for the rupee seems to have been the desire to make it as little of a departure as possible from the existing practice. In their attempts to reduce to some kind of order the disorderly currencies bequeathed to them by the Moghuls by placing them on a bimetallic basis, the Governments of the three Presidencies had already made a great advance by selecting out of the innumerable coins then circulating in the country a species of gold and silver coin as the exclusive media of exchange for their respective territories. The weights and fineness of the coins selected as the principal units of currency, with other particulars, may be noted from the summary table opposite.

To reduce these principal units of the different Presidencies to a single principal unit, the nearest and the least inconvenient magnitude of weight which would at the same time be an integral number was obviously 180 grs., for in no case did it differ from the weights of any of the prevailing units in any marked degree. Besides, it was believed that 180, or rather 179·5511, grs. was the standard weight of the rupee coin originally issued from the Moghul Mints, so that the adoption of it was really a restoration of the old unit and not the introduction of a new one.¹⁶ Another advantage claimed in favour of a unit of 180 grs. was that such a unit of currency would again become what it had ceased to be, the unit of weight also. It was agreed¹⁷ that the unit of weight in India had at all times previously been linked up with that of the principal coin, so that the seer and the manual weights were simply multiples of the rupee, which originally weighed 179·6 grs. troy. Now, if the weight of the [pg 11]

TABLE I

[pg 12] principal coin to be established was to be different from 180 grs. troy, it was believed there would be an unhappy deviation from the ancient practice which made the weight of the coin the basis of other weights and measures. Besides, a unit of 180 grs. weight was not only suitable from this point of view, but had also in its favour the added convenience of assimilating the Indian with the English units of weight.¹⁸

While these were the reasons in favour¹⁹ of fixing the weight of the principal unit of currency at 180 grs. troy, the project of making it 165 grs. fine was not without its justification. The ruling consideration in selecting 165 grs. as the standard of fineness was, as in the matter of selecting the standard weight, to cause the least possible disturbance in existing arrangements. That this standard of fineness was not very different from those of the silver coins recognised by the different Governments in India as the principal units of their currency, may be seen from the following comparative statement on p. 13.

It will thus be seen that, with the exception of the Sicca and the Benares rupees, the proposed standard of fineness agreed so closely with those of the other rupees that the interest of obtaining a complete uniformity without considerable dislocation overruled all possible objections to its adoption. Another consideration that seemed to have prevailed upon the Court of Directors in selecting 165 grs. [pg 13] as the standard of fineness was that, in conjunction with 180 grs. as the standard weight, the arrangement was calculated to make the rupee eleven-twelfths fine. To determine upon a particular fineness was too technical a matter for the Court of Directors. It was, however, the opinion of the British Committee on Mint and Coinage, appointed in 1803, that²⁰ “one–twelfth alloy and eleven–twelfths fine is by a variety of extensive experiments proved to be the best proportion, or at least as good as any which could have been chosen.” This standard, so authoritatively upheld, the Court desired to incorporate in their new scheme of Indian currency. They therefore desired to make the rupee eleven–twelfths fine. But to do so was also to make the rupee 165 grs. pure—a content which they desired, from the point of view stated above, the rupee to possess.

TABLE II

Reviewing the preference of the Court of Directors for monometallism from the vantage-ground of latter-day events, one might be inclined to look upon it as a little too short-sighted. At the time, however, the preference was well founded. One of the first measures the three Presidencies, into which the country was divided for [pg 14] purposes of administration, had adopted on their assuming the government of the country, was to change the parallel standard of the Moghuls into a double standard by establishing a legal ratio of exchange between the mohur, the pagoda, and the rupee. But in none of the Presidencies was the experiment a complete success.

In Bengal²¹ the Government, on June 2, 1766, determined upon the issue of a gold mohur weighing 179·66 grs. troy, and containing 149·92 grs. troy of pure metal, as legal tender at 14 Sicca rupees, to relieve the currency stringency caused largely by its own act of locking up the revenue collections in its treasuries, to the disadvantage of commerce. This was a legal ratio of 16·45 to 1, and as it widely deviated from the market ratio of 14·81 to 1, this attempt to secure a concurrent circulation of the two coins was foredoomed to failure. Owing to the drain of silver on Bengal from China, Madras, and Bombay, the currency stringency grew worse, so much so that another gold mohur was issued by the Government on March 20, 1769, weighing 190·773 grs. troy and containing 190·086 grs. pure gold with a value fixed at 16 Sicca rupees. This was a legal ratio of 14·81 to 1. But, as it was higher than the market ratio of the time both in India (14 to 1) and in Europe (14·61 to 1), this second effort to bring about a concurrent circulation fared no better than the first. So perplexing seemed to be the task of accurate rating that the Government reverted to monometallism by stopping the coinage of gold on December 3, 1788, and when the monetary stringency again compelled it to resume in 1790 the coinage of gold, it preferred to let the mohur and the rupee circulate at their market value without making any attempt to link them by a fixed ratio. It was not until 1793 that a third attempt was made to forge a double standard in Bengal. A new mohur was issued in that year, weighing 190·895 grs. troy and containing 189·4037 grs. of pure gold, and made legal tender at 16 Sicca rupees. This [pg 15] was a ratio of 14·86 to 1, but, as it did not conform to the ratio then prevalent in the market, this third attempt to establish bimetallism in Bengal failed as did those made in 1766 and 1769.

The like endeavours of the Government of Madras²² proved more futile than those of Bengal. The first attempt at bimetallism under the British in that Presidency was made in the year 1749, when 350 Arcot rupees were legally rated at 100 Star pagodas. As compared with the then market ratio this rating involved an under-valuation of the pagoda, the gold coin of the Presidency. The disappearance of the pagoda caused a monetary stringency, and the Government in December, 1750, was obliged to restore it to currency. This it did by adopting the twofold plan of causing an import of gold on Government account, so as to equalise the mint ratio to the market ratio, and of compelling the receipts and payments of Government treasuries to be exclusively in pagodas. The latter device proved of small value; but the former by its magnitude was efficacious enough to ease the situation. Unluckily the ease was only temporary. Between 1756 and 1771 the market ratio of the rupee and the pagoda again underwent a considerable change. In 1756 it was 364 to 100, and in 1768 it was 370 to 100. It was not till after 1768 that the market ratio became equal to the legal ratio fixed in 1749 and remained steady for about twelve years. But the increased imports of silver rendered necessary for the prosecution of the second Mysore war once more disturbed the ratio, which at the close of the war stood at 400 Arcot rupees to 100 Star pagodas. After the end of the war the Government of Madras made another attempt to bring about a concurrent circulation between the rupee and the pagoda. But instead of making the market ratio of 400 to 100 the legal ratio it was led by the then increasing imports of gold into the Presidency to hope that the market ratio would in time rise to that legally established in 1749. In an expectant mood so induced it decided, in 1790, to anticipate the event by fixing the ratio first at 365 to 100. [pg 16] The result was bound to be different from that desired, for it was an under-valuation of the pagoda. But instead of rectifying the error, the Government proceeded to aggravate it by raising the ratio still further to 350 to 100 in 1797, with the effect that the pagoda entirely went out of circulation, and the final attempt at bimetallism thus ended in a miserable failure.

The Government of Bombay seemed better instructed in the mechanics of bimetallism, although that did not help it to overcome the practical difficulties of the system. On the first occasion when bimetallism was introduced in the Presidency²³ the mohur and the rupee were rated at the ratio of 15·70 to 1. But at this ratio the mohur was found to be over-rated, and accordingly, in August, 1774, the Mint Master was directed to coin gold mohur of the fineness of a Venetian and of the weight of the silver rupee. This change brought down the legal ratio to 14·83 to 1, very nearly, though not exactly, to the then prevailing market ratio of 15 to 1, and had nothing untoward happened, bimetallism would have had a greater success in Bombay than it actually had in the other two Presidencies. But this was not to be, for the situation was completely altered by the dishonesty of the Nawab of Surat, who allowed his rupees, which were of the same weight and fineness as the Bombay rupees, to be debased to the extent of 10, 12, and even 15 per cent. This act of debasement could not have had any disturbing effect on the bimetallic system prevalent in the Bombay Presidency had it not been for the fact that the Nawab's (or Surat) rupees were by agreement admitted to circulation in the Company's territories at par with the Bombay rupees. As a result of their being legal tender the Surat rupees, once they were debased, not only drove out the Bombay rupees from circulation, but also the mohur, for as rated to the debased Surat rupees the ratio became unfavourable to gold, and the one chance for a successful bimetallic system vanished away. The question of fixing up a bimetallic [pg 17] ratio between the mohur and the rupee again cropped up when the Government of Bombay permitted the coinage of Surat rupees at its Mint. To have continued the coinage of the gold mohur according to the Regulation of 1774 was out of the question. One Bombay mohur contained 177·38 grs. of pure gold, and 15 Surat rupees of the standard of 1800 contained 247,110 grs. of silver. By this Regulation the proportion of silver to gold would have been (247, 110)/(177·38) i.e. 13·9 to 1. Here the mohur would have under-valued. It was therefore resolved to alter the standard of the mohur to that of the Surat rupee, so as to give a ratio of 14·9 to 1. But as the market ratio was inclined towards 15·5 to 1, the experiment was not altogether a success.

In the light of this experience before them the Court of Directors of the East India Company did well in fixing upon a monometallic standard as the basis of the future currency system of India. The principal object of all currency regulations is that the different units of money should bear a fixed relation of value to one another. Without this fixity of value the currency would be in a state of confusion, and no precaution would be too great against even a temporary disturbance of that fixity. Fixity of value between the various components of the currency is so essential a requisite in a well-regulated monetary system that we need hardly be surprised if the Court of Directors attached special importance to it, as they may well have done, particularly when they were engaged in the task of placing the currency on a sound and permanent footing. Nor can it be said that their choice of monometallism was ill-advised, for it must be admitted that a single standard better guarantees this fixity than does the double standard. Under the former it is spontaneous; under the latter it is forced.

These recommendations of the Court of Directors were left to the different Governments in India to be carried into effect at their discretion as to the time and manner of doing it. But it was some time before steps were taken in consonance with these orders, and even then it was on the realisation of those parts of the program of the Court which pertained [pg 18] to the establishment of a uniform currency that the efforts of the different Governments were first concentrated.

The task of reducing the existing units of currency to that proposed by the Court was first accomplished in Madras. On January 7, 1818, the Government issued a Proclamation²⁴ by which its old units of currency—the Arcot rupee and the Star pagoda—were superseded by new units, a gold rupee and a silver rupee, each weighing 180 grs. troy and containing 165 grs. of fine metal. Madras was followed by Bombay six years later by a Proclamation²⁵ of October 6, 1824, which declared a gold rupee and a silver rupee of the new Madras standard to be the only units of currency in that Presidency. The Government of Bengal had a much bigger problem to handle. It had three different principal units of silver currency to be reduced to the standard proposed by the Court. It commenced its work of reorganisation by a system of elimination and alteration. In 1819, it discontinued²⁶ the coinage of the Benares rupee and substituted in its place the Furrukabad rupee, the weight and fineness of which were altered to 180·234 and 135·215 grs. troy respectively. Apparently this was a step away from the right direction. But even here the purpose of uniformity, so far as fineness was concerned, was discernible, for it made the Furrukabad rupee like the new Madras and Bombay rupees, eleven-twelfths fine. Having got rid of the Benares rupee, the next step was to assimilate the standard of the Furrukabad rupee to that of Madras and Bombay, and this was done in 1833.²⁷

Thus, without abrogating the bimetallic system, substantial steps were taken in realising the ideal unit proposed by the Court, as may be seen from the table on opposite page.

Taking stock of the position as it was at the end of 1833, we find that with the exception of the Sicca rupee and the gold mohur of Bengal, that part of the scheme of the Directors which pertained to the uniformity of coinage was an accomplished fact. Nothing more remained to carry it [pg 19]