TABLE XXIX

Council Drawings

Date of Drawing.		Amount of Drawings. £, 000 omitted.	Rate at which drawn (Pence per Rupee).
1893.	June	2,478	15·039
	July	25	15·974
	August	78	15·243
	September	7	15·350
	October	5	15·334
	November	617	15·251
	December	14	15·242
1894.	January	98	14·408
	February	1,023	13·787
	March	1,915	13·870
	April	1,368	13·626

The curtailment of drawings to save the rate of exchange from being lowered was not an unmitigated good, for it imposed the necessity of a resort to the by no means inexpensive method of sterling borrowings to finance the Home Treasury.³⁰⁷ The remittances by drawings fell short of the net disbursements of the Home Treasury in 1893–94 by £6,588,000, which deficit was met by permanent sterling [pg 190] borrowings to the extent of £7,430,000, the interest on which added to the already over-heavy burden of the gold payments. Rather than incur such a penalty the Secretary of State gave up the attempt to dominate the market and preferred to follow it. But this let-go policy was not without its cost. The drop in the exchange below 1s. 4d. added to the burden of remittances to the Home Treasury, and also compelled the Government to grant exchange compensation allowance to its European officers, civil and military—an aid which it had so far withheld. The cost to the Government involved by the fall of the rupee below par was quite a considerable sum.³⁰⁸

TABLE XXX

Cost of the Fall of the Rupee

Years.	Loss on Council Bills being sold below par.	Loss by Exchange Compensation Allowance.	Loss by Increase of pay of British Troops.	Total on each Account in each Year.	Total on all Counts for three Years.
					In Rupees.	In Sterling at 1s. 4d.
					Rs.	£.
1894–95	3,74,15,000	78,02,000	37,84,000	4,90,01,000	11,91,86,000	7,945,733
1895–96	3,05,91,000	87,18,000	49,38,000	4,42,47,000
1896–97	1,66,48,000	48,95,000	44,25,000	2,59,38,000

In the midst of such a situation it is no wonder if the faith of the Government in the ultimate stability of the rupee had given way, for we find that in October, 1896, the Financial Member of the Council had personally come to the conclusion that it would be better in the interest of stability to substitute 15d. for 16d. as the par of exchange between the rupee and gold.³⁰⁹ But the suggestion was dropped as the rupee showed signs of reaching the gold par, which it did in January, 1898, after a period of full five years of depreciation from the established par.

Between January, 1898, and January, 1917, twice did the rupee fall below its gold par. The year 1907–8 records the second occasion when the parity of the rupee under [pg 191] the exchange standard broke down. The actual rates of exchange prevailing in the market were as follows:—

TABLE XXXI

Rates of Exchange, London on India (From “The Times”)

Par R. = 1s. 4d.
Date		On Calcutta.		On Bombay.
		Highest.	Lowest.	Highest.	Lowest.
1907.	September	1 4 1/32	1 3 31/32	1 4 1/32	1 3 31/32
	October	1 4 1/32	1 3 31/32	1 4 1/32	1 3 31/32
	November	1 4	1 3 23/32	1 3 31/32	1 3 23/32
	December	1 3 15/16	1 3 27/32	1 3 15/16	1 3 23/32
1908.	January	1 3 15/16	1 3 29/32	1 3 15/16	1 3⅞
	February	1 3 31/32	1 3⅞	1 3 31/32	1 3⅞
	March	1 3 29/32	1 3 27/32	1 3 29/32	1 3 27/32
	April	1 3⅞	1 3 27/32	1 3 27/32	1 3 27/32
	May	1 3⅞	1 3 27/32	1 3 15/16	1 3 27/32
	June	1 3 29/32	1 3 27/32	1 3⅞	1 3 27/32
	July	1 3⅞	1 3 27/32	1 3⅞	1 3 27/32
	August	1 3 29/32	1 3 27/32	1 3 29/32	1 3 27/32
	September	1 3 31/32	1 3 29/32	1 3 31/32	1 3⅞
	October	1 3 15/16	1 3⅞	1 3 29/32	1 3 13/16
	November	1 3 29/32	1 3⅞	1 3⅞	1 3⅞
	December	1 3 15/16	1 3 29/32	1 3 31/32	1 3⅞

After a crisis lasting over a year the rupee recovered to its old gold par and remained fixed at it, though by no means firmly, for another seven years, only to suffer another fall from its parity during the year 1914–15 (see table, p. 192).

After 1916 the stability of the exchange standard was threatened by a danger arising from quite unsuspected quarters. The Indian exchange standard was based upon the view that the gold value of silver was bound to fall or at least not likely to rise to a level at which the intrinsic value of the rupee became higher than its nominal value. The price of silver at which the intrinsic value of the rupee equalled its nominal value was 43d. per ounce. So long as [pg 192]

TABLE XXXII

Rates of Exchange London on Calcutta (from the National Bank of India)

Months.	1914.		1915.
	Highest.	Lowest.	Highest.	Lowest.
January	—	—	1 3 15/16	1 3 15/16
February	—	—	1 4 1/32	1 3 29/32
March	—	—	1 4	1 3 15/16
April	—	—	1 3 15/16	1 3 29/32
May	1 4¼	1 3 15/16	1 3 15/16	1 3 29/32
June	1 3 31/32	1 3 15/16	1 3⅞	1 3 27/32
July	1 3 31/32	1 3 13/16	1 3 22/32	1 3 22/32
August	1 3⅞	1 3 13/16	1 3 15/16	1 3 27/32
September	1 3 15/16	1 3 13/16	1 4	1 3 15/16
October	1 3 15/16	1 3 15/16	—	—
November	1 3 15/16	1 3 15/16	—	—
December	1 3 15/16	1 3 15/16	—	—

the intrinsic value of the rupee remained below its nominal value, i.e. the price of silver did not rise above 43d., there was no danger of the rupee circulating as currency. Once the price of silver rose above that point the danger of the rupee passing from currency to the melting-pot was imminent. Now, with the exception of a brief period from September, 1904, to December, 1907, the gold price of silver had since 1872 showed a marked tendency to fall. The decline in its price was so continuous and so steady as to create the general impression that the low price had come to stay. Indeed, so firm was the impression that the framers of the exchange standard had never taken into account the contingency of a rise in the price of silver above 43d. So little was it anticipated, that the system was not criticized on this ground by any of the witnesses who deposed before the successive Committees and Commission on Indian currency. But the unexpected may happen, and unfortunately did happen after 1916, and happened suddenly. On February 10, 1914, the cash price in London of silver [pg 193] per ounce of standard fineness was 26⅝d. It fell to 22(11)/(16)d. on February 10, 1915, and though it jumped to 27d. on the same date in 1916, yet it was below the rupee melting-point. After the last-mentioned date its rise was meteoric. On February 9, 1917, it rose to 37⅝d.; on February 8, 1918, to 43d.; and on the same date in 1919 to 48(7)/(16)d., thereby quite overshooting the rupee melting-point. But the price of silver broke all record when on February 11, 1920, it reached the colossal figure of 89½d. per standard ounce.

The rise in the intrinsic value of the rupee above the nominal value at once raised a problem as to how the rupee could be preserved in circulation. Two ways seemed open for the solution of the problem. One was to scale down the fineness of the rupee, and the other to raise its gold parity. All other countries which had been confronted by a similar problem adopted the former method of dealing with their silver coinages—a method which was successfully tried in the Philippines and the Straits Settlements and Mexico in 1904–7, when a rise in those years in the price of silver had created a similar problem in those countries.³¹⁰ The Secretary of State for India adopted the second course of action and kept on altering the rupee par with every rise in the price of silver. The alterations of the rupee par following upon the variations in the price of silver are given below:—

TABLE XXXIII

Date of Alteration of the Rupee Par.	Pitch of the Par.
	s. d.
January 3, 1917	1 4¼
August 28, 1917	1 5
April 12, 1918	1 6
May 13, 1919	1 8
August 12, 1919	1 10
September 15, 1919	2 0
November 22, 1919	2 2
December 12, 1919	2 4

[pg 194] After having played with the rupee par, for two years, in this manner, as though such alterations involved no social consequences, the Secretary of State, on May 30, 1919, appointed a new Currency Committee under the chairmanship of Babington Smith, to recommend measures “to ensure a stable gold exchange standard.” The majority of the Committee, after half a year of cogitation, reported to the effect³¹¹ that

“(i) The object should be to restore stability to the rupee, and to re-establish the automatic working of the currency system at as early a date as practicable.

“(ii) The stable relation to be established should be with gold and not with sterling.

“(iii) The gold equivalent of the rupee should be sufficiently high to give assurance, so far as is practicable, that the rupee, while retaining its present weight and fineness, will remain a token coin, or in other words, that the bullion value of the silver it contains will not exceed its exchange value.

“After most careful consideration” (the Committee said) “we are unanimous (with the exception of one of our members who signs a separate report) in recommending that the stable relation to be established between the rupee and gold should be at the rate of one rupee to 11·30016 grs. of fine gold both for foreign exchange and internal circulation.”

i.e. the rupee to be equal to 2s. (gold).

The minority report, which harped on the old cry of a stimulus of low exchange and penalty of high exchange, stood out for the maintenance of the old rate of 15 rupees to the gold sovereign or 113·0016 grs. troy of pure gold, and recommended the issue of a two-rupee silver coin of reduced fineness compared with the old rupee, so long as the price of silver in New York was over 92 cents.³¹² By the announcements of February 2, 1920, the recommendations of the majority of the Committee were accepted [pg 195] by the Secretary of State and also by the Government of India, which abandoned the old parity of 7·53344 grs. per rupee for the new parity of 11·30016 grs. troy. Now, has the rupee maintained its new parity with gold?

In the matter of ascertaining this fact the exchange quotation on London is no guide, for the value of the rupee was 2s. gold and not 2s. sterling. Had gold and sterling been identical the case would have been otherwise. But during the war, owing to the issue of virtually inconvertible money, the pound sterling had depreciated in terms of gold. We must therefore take as our standard a currency which had kept its par with gold. Such a currency was the American dollar, and the exchange quotation on New York is therefore more directly helpful in measuring the gold value of the rupee than is the sterling quotation on London. We can also employ the actual rupee-sterling quotation as a measure by comparing it with the amount of sterling the rupee should have purchased, as an equivalent of 11·30016 grs. of fine gold, when corrected by the prevailing cross-rate between New York and London.³¹³

Compared with the par of exchange, the actual exchange, either on New York or on London, indicates a fall of the rupee which is simply staggering (see table, p. 196).

Consider, along with the external gold value of the rupee, its internal value in terms of sovereigns and bar gold (see table, p. 197). [pg 196]

TABLE XXXIV

Actual Gold Value of the Rupee and the new Parity in Terms of Foreign Exchanges

As in the Middle of the Month of—	New York on Bombay in cents.						Bombay on London in s. d.
	1920.		1921.		1922.		1920.		1921.		1922.
	Par Rate.	Actual Rate.	Par Rate.	Actual Rate.	Par Rate.	Actual Rate.	Par Rate.	Actual Rate.	Par Rate.	Actual Rate.	Par Rate.	Actual Rate.
January	0·4866	0·4400	0·4866	0·2925	0·4866	0·2800	2 7½	2 3⅝	2 7 5/16	1 5⅝	2 3⅝	1 3 13/16
February	0·4866	0·4850	0·4866	0·2800	0·4866	0·2845	2 10 11/32	2 9⅛	2 5 13/16	1 4⅛	2 2 7/32	1 3 9/16
March	0·4866	0·4850	0·4866	0·2625	0·4866	0·2787	2 7 29/32	2 5¾	2 5 31/32	1 3¼	2 2 29/32	1 3 5/16
April	0·4866	0·4775	0·4866	0·2625	0·4866	0·2785	2 5 7/16	2 3¾	2 5 13/16	1 3⅝	2 2½	1 3⅛
May	0·4866	0·4325	0·4866	0·2675	0·4866	0·2930	2 6 19/32	2 2⅛	2 5 7/32	1 3½	2 2¼	1 3 9/16
June	0·4866	0·4125	0·4866	0·2525	0·4866	0·2900	2 5 31/32	1 10 13/16	2 6 29/32	1 3⅜	2 2⅛	1 3 19/32
July	0·4866	0·3900	0·4866	0·2400	0·4866	0·2900	2 5 31/32	1 8 1/16	2 8 9/32	1 3¼	2 2⅝	1 3⅝
August	0·4866	0·3650	0·4866	0·2475	0·4866	0·2916	2 8 9/32	1 10 1/16	2 7 29/32	1 4¾	2 2 3/16	1 3 19/32
September	0·4866	0·3325	0·4866	0·2675	0·4866	0·2875	2 9 9/16	1 10 1/16	2 7 15/32	1 5 1/16	2 2 6/16	1 3 9/16
October	0·4866	0·3025	0·4866	0·2825	0·4866	—	2 9 21/32	1 7¾	2 6 1/32	1 5 7/16	—	—
November	0·4866	0·3025	0·4866	0·2695	0·4866	—	2 10 9/16	1 7⅛	2 5 16/32	1 4⅛	—	—
December	0·4866	0·2650	0·4866	0·2775	0·4866	—	2 9 9/16	1 5¼	2 4	1 3⅞	—	—

[pg 197]

TABLE XXXV

Gold Value of the Rupee and the new Parity in Terms of the Price of Sovereigns and Gold

Months.	1920.				1921.				1922.
	Price of British Sovereigns	Price of Bar Gold per Tola 100 touch.			Price of British Sovereigns.			Price of Bar Gold per Tola 100 touch	Price of British Sovereigns.			Price of Bar Gold per Tola 100 touch
	Par 10 Rs = 1 Sov.	Par Rs 15–14–10 = 1 Tola			Par 10 Rs = 1 Sov.			Par Rs 15–14–10 = 1 Tola	Par 10 Rs = 1 Sov.			Par Rs 15–14–10 = 1 Tola
	Rs. A. P.	Rs.	A.	P.	Rs.	A.	P.	Rs. A. P.	Rs.	A.	P.
January	Nominal	28	0	0	Nominal			Official figures not yet published.	17	14	0	Official figures not yet published.
February	Nominal	22	0	0	Nominal				17	14	0
March	Nominal	24	0	0	Nominal				17	14	0
April	Nominal	24	8	0	18	12	0		—
May	Nominal	22	12	0	19	0	0		—
June	Nominal	22	4	0	19	12	0		—
July	Nominal	23	0	0	20	9	0		—
August	Nominal	21	8	0	20	9	0		—
September	Nominal	25	4	0	19	2	0		—
October	Nominal	27	6	0	18	14	0		—
November	Nominal	28	10	0	18	8	0		—
December	Nominal	27	12	0	18	6	0		—

The tables need no comment. The rupee is not only far away from 2s. (gold), but is not even 1s. 4d. (sterling).

Do not the facts furnish an incontrovertible proof of the futility of the exchange standard? How can a system which fails to maintain its value in terms of gold, which it is supposed to do, be regarded as a sound system of currency? There must be somewhere some weakness in the mechanism of a system which is liable to such occasional breakdowns. The rupee fell or rather was below par in 1893, and did not reach its parity to any real degree of firmness until 1900. After an interval of seven years the rupee again falls below par in 1907. The year 1914 witnesses another fall of the rupee. A meteoric rise since 1917, and again a fall after 1920. This curious phenomenon naturally raises the question: Why did the rupee fail to maintain its gold parity on these occasions? A proper reply to this question will reveal wherein lies the weakness of the exchange standard. [pg 198]

The only scientific explanation sufficient to account for the fall of the rupee would be to say that the rupee had lost its general purchasing power. It is an established proposition that a currency or unit of account will be valued in terms of another currency or unit of account for what it is worth, i.e. for the goods which it will buy. To take a concrete example, Englishmen and others value Indian rupees inasmuch and in so far as those rupees will buy Indian goods. On the other hand, Indians value English pounds (and other units of account, for that matter) inasmuch and in so far as those pounds will buy English goods. If rupees in India rise in purchasing power (i.e. if the Indian price-level falls) while pounds fall in purchasing power or remain stationary or rise less rapidly (i.e. if the English price-level rises relative to the Indian price-level), fewer rupees would be worth as much as a pound, i.e. the exchange value of the rupee in terms of the pound will rise. On the other hand, if rupees in India fall in purchasing power (i.e. if the Indian price-level rises) while pounds rise in purchasing power or remain stationary or fall less rapidly (i.e. if the English price-level falls relative to the Indian price-level), it will take more rupees to be worth as much as a pound, i.e. the exchange value of the rupee in terms of the pound will fall.

On the basis of this theory the real explanation for a fall in the Indian exchange should be sought for in the movement of the Indian price-level. Lest there be any doubt regarding the validity of the proposition let us take each of the occasions of the fall and find out whether or not the fall was coincident with the fall in the purchasing power of the rupee.³¹⁴ [pg 199]