TABLE XLIII

Issue of Currency Notes

Acts prescribing the Fiduciary Issue of Currency Notes.
I. Limits to fiduciary issues			Act V of 1915	Act IX of 1916	Act XI of 1917	Act XIX of 1917	Act VI of 1918	Act II of 1919	Act XXVI if 1919
			In Lakhs of Rupees.
	(a) Permanent		14,00	14,00	14,00	14,00	14,00	14,00	14,00
	(b) Temporary		6,00	12,00	36,00	48,00	72,00	86,00	106,00
Total limit			20,00	26,00	50,00	62,00	86,00	100,00	120,00
II. Total issues of currency notes			61,63	67,73	86,38		99,79	153,46	179,67336
III. Reserve	Silver		32,34	23,57	19,22		10,79	37,39	47,44
	Gold		15,29	24,16	18,67		27,52	17,49	32,70
	Securities		14,00	20,00	48,49		61,48	98,58	99,53

But this facile procedure could not be carried on ad infinitum except by jeopardizing the convertibility of the notes. Consequently the very increase of paper money, added to the increased demand for currency, compelled the Government to go in for the provision of metallic money for providing current means of purchase and also give a backing to the watered paper issues. The rising price of silver naturally made the Government go in for gold. An Ordinance was issued on June 29, 1917, requiring all gold imported into India to be sold to Government at a price based on the sterling exchange, and opened a gold Mint at [pg 218] Bombay for the coinage of it into mohurs.³³⁷ Frantic efforts were made to acquire gold from various quarters. The removal of the embargo on the export of gold by the U.S.A. on June 9, 1917, and the freeing of the market for South African and Australian gold, enabled the Government to obtain some supply of that metal. From July 18, 1919, immediate telegraphic transfers on India were offered against deposit at the Ottawa Mint in Canada of gold coin or bullion at a rate corresponding to the prevailing exchange rate, and at New York at competitive tenders from August 22, 1919. Arrangements were also made for the direct purchase of gold in London and U.S.A. Finally, to encourage the private import of gold, the acquisition rate was altered from September 15, 1919, so as to make allowance for the depreciation of the sterling. But the gold thus obtained was a negligible quantity. Besides, the issue of gold did not serve the purpose the Government had in mind—namely its retention in circulation. In the nature of things it was impossible. The rupee was depreciated in terms of gold to an enormous extent, and consequently at the rate of exchange gold passed out of circulation as quickly as it was issued by the Government. What the Government could do was to make the use of gold and silver coins illegal for other than currency purposes and to prevent their exportation, which it did by the Notifications of June 29 and September 3, 1917. Realizing that it could not rely upon gold, the Government renewed its efforts to enlarge the rupee coinage. To facilitate the purchase of that metal the import of silver on private account into India was prohibited on September 3, 1917. This measure, however, removed only a few of the smaller competitors for the world's diminished supply of silver, and the world-demand remained so heavy that the Secretary of State was unable to obtain sufficient supply notwithstanding the great conservation effected in the use of silver by substituting nickel coinage for silver coins of subsidiary order,³³⁸ and by the issue of notes of denominations [pg 219] as low as that of R.1³³⁹ and of R.2–8.³⁴⁰ The Government of the United States was therefore approached on the subject of releasing a portion of the silver dollars held in their reserve. The American Government consented and passed the Pittman Act, under which the Government of India acquired a substantial volume at 101½ cents per fine ounce. The total silver purchased during this period was as follows:

TABLE XLIV

Rupee Coinage, 1915–20

Year.	Silver purchased in Open Market, Standard Ounces.	Silver purchased from U.S.A., Standard Ounces.	Total Standard Ounces.
1915–16	8,636,000	—	—
1916–17	124,535,000	—	—
1917–18	70,923,000	—	—
1918–19	106,410,000	152,518,000	—
1919–20	14,108,000	60,875,000	—
	—	—	—
Total	324,612,000	213,393,000	538,005,000

Now, recalling the fact that from 1900 to 1914 the Government had coined about 532 million standard ounces of silver,³⁴¹ it means that the coinage of silver by Government during these five years exceeded the amount coined in the fourteen preceding years by five million ounces.

Thus the fall in the gold value of the rupee is an inevitable consequence of the exercise of the power to issue inconvertible currency in unlimited quantities. This is the fate of all inconvertible currencies known to history. But it is said that an exception must be made in the case of the rupee [pg 220] currency, for if the Government has the liberty of issuing it in unlimited quantities it has also resources to counteract the effects of a fall when it does occur. We must therefore turn to an examination of these resources.

The basis of the reasoning is that the rupee is a token currency, and that if the value of a token currency is maintained at par with gold by applying to it the principle of redemption into gold³⁴² it should be possible to maintain the value of the rupee at par with gold by adopting a similar mechanism. What is wanted is an adequate gold fund, and so long as the Government has it, we are assured that we need have no anxiety on the score of a possible fall in the value of the rupee. Such a fund the Government of India has, and on all the three occasions when the gold value of the rupee fell below par that fund was operated upon, The process of redemption is carried on chiefly in three ways: (1) The sale of what are called reverse councils, by which the Government receives rupees in India in return for gold in London; (2) the release of gold internally in receipt for rupees in India; and (3) the stoppage of the Secretary of State's council bills to prevent further rupees from going into circulation. The cumulative effect of these, it is said, is to contract the currency and raise its value to par. Although all the three may be employed, the first is by far the most important means adopted by the Government in carrying through this process of redemption. The extent of the redemption effected on the three occasions when it was employed may be seen from the three following tables:— [pg 221]

I. Redemption of Currency, 1907–8.

TABLE XLV

Date.	By the Sale of Reverse Councils.		By Release of Gold. Diminution of Govt. Stock of Gold during the Month.	Private Exports of Gold Coin during the Month.	Drawings of the Secretary of State.
	Amount offered.	Amount sold.
	£	£	£	£	£
1907—
Sept.	—	—	152,000	14	858,896
Oct.	—	—	254,000	9,109	921,678
Nov.	—	—	532,000	3	427,344
Dec.	—	—	338,000	2,501	571,905
1908—
March 26	500,000	70,000	226,000	—	172,699 (for the whole month)
April 2	500,000	449,000	461,000	—	66,834
April 9	500,00	340,000
April 16	500,000	441,000
April 23	500,000	329,000
April 30	500,000	205,000
May 7	500,000	81,000	645,000	—	62,764
May 14	500,000	145,000
May 21	820,000	793,000
May 28	500,000	500,000
June 4	1,000,000	755,000	334,000	—	169,810
June 11	1,000,000	70,000
June 18	500,000	Nil
June 25	500,000	50,000
July 2	500,000	470,000	16,000	—	186,847
July 9	500,000	304,000
July 16	500,000	500,000
July 23	1,000,000	968,000
July 30	1,000,000	860,000
Aug. 6	1,000,000	418,000	354,000	—	262,217
Aug. 13	500,000	310,000
Aug. 20	500,000	Nil
Aug. 27	500,000	Nil
Sept. 3	500,000	Nil	502,000	—	1,431,012
Sept. 10	500,000	Nil
Total	15,320,000	8,058,000	4,394,000	249,912

[pg 222]

II. Redemption in 1914–16

TABLE XLVI

Date.		Reverse Councils (in £, 000).	Drawings of the S. of S. (in Lakhs of Rs.).
1914.	April	Nil	270
	May	Nil	61
	June	Nil	68
	July	Nil	66
	August	2,778	72
	September	1,515	25
	October	1,895	41
	November	1,044	32
	December	1,250	30
1915.	January	225	29
	February	Nil	181
	March	Nil	287
Total		8,707	1,162
1915.	April	Nil	1,53
	May	Nil	1,03
	June	651	17
	July	3,377	8
	August	815	23
	September	50	2,17
	October	Nil	2,25
	November	Nil	2,02
	December	Nil	3,28
	January	Nil	5,26
	February	Nil	6,02
	March	Nil	6,33
Total		4,893	30,37

[pg 223]

III. Redemption in 1920

TABLE XLVII

Sale of Reverse Councils (Figures in Thousands of Pounds)

Date of Sale.		Amount offered at each Sale.	Amount applied for at each Sale.	Amount sold at each Sale.	Progressive Total of Amount sold.
1920.	January 2	1,000	770	770	770
	January 8	1,000	8,499	990	1,760
	January 15	2,000	300	300	2,060
	January 22	2,000	4,890	2,000	4,060
	January 29	2,000	1,334	5,000	5,394
	February 5	2,000	32,390	2,000	7,394
	February 12	2,000	41,312	2,000	12,394
	February 19	2,000	122,335	2,000	14,394
	February 26	2,000	78,417	2,00	16,394
	March 3	2,000	64,931	2,000	18,394
	March 11	2,000	117,185	2,000	20,394
	March 18	2,000	153,559	2,000	22,394
	March 25	2,000	56,295	2,000	24,394
	March 31	2,000	35,050	1,988	26,382
	April 1
	April 8	2,000	16,721	1,000	28,382
	April 15	2,000	48,270	2,000	30,382
	April 22	2,000	59,020	2,000	32,382
	April 29	1,000	53,210	1,000	33,382
	May 6	1,000	89,514	1,000	34,382
	May 13	1,000	101,625	1,000	35,382
	May 20	1,000	122,279	1,000	36,382
	May 26	1,000	85,620	1,000	37,382
	June 3	1,000	101,821	1,000	38,382
	June 10	1,000	109,245	1,000	39,382
	June 15	1,000	122,991	1,000	40,382
	June 24	1,000	73,391	1,000	41,382
	July 1	1,000	106,751	1,00	42,382
	July 8	1,000	63,690	1,000	43,382
	July 15	1,000	101,830	1,000	44,382
	July 22	1,000	103,960	1,000	45,382
	July 29	1,000	75,486	1,000	46,382
	August 5	1,000	101,260	1,000	47,382
	August 12	1,00	112,230	1,000	48,382
	August 19	1,000	114,767	1,000	49,382
	August 26	1,000	117,390	1,000	50,382
	Sept. 2	1,000	126,425	1,000	51,382
	Sept. 7	1,000	117,200	1,000	52,382
	Sept. 13	1,000	115,095	1,000	53,382
	Sept. 21	1,000	112,590	1,000	54,382
	Sept. 28	1,000	120,050	1,000	55,382

[pg 224] Not only did the Government sell reverse councils on a large scale, but it also sold gold for rupees for internal circulation, a thing which it seldom did before.

III. Redemption in 1920

TABLE XLVIII

Sale of Gold

No. of Sale.	Date of Sale.		Minimum Rate of accepted Tenders.			Average Rate of accepted Tenders.			Quantity sold (in Tolas).	Price of Country Bar Gold in the Bombay Bazaar.
			Rs.	A.	P.	Rs.	A.	P.		Rs.	A.	P.
1	1919,	September 3	25	8	0	26	12	1	3,29,130	28	10	0
2		September 17	24	8	0	24	10	0	3,96,640	26	1	0
3		October 6	25	8	0	25	9	8	3,26,000	27	0	0
4		October 20	26	15	3	27	0	2	3,34,000	28	0	0
5		November 3	27	14	6	27	15	6	3,25,000	28	5	0
6		November 17	26	15	0	27	0	11	5,18,500	28	2	0
7		December 8	26	0	6	26	4	6	10,00,650	27	10	0
8	1920.	January 5	26	4	3	26	7	9	7,63,300	27	3	0
9		January 19	26	13	3	26	14	7	8,00,000	27	5	0
10		February 5	25	2	3	25	9	7	7,56,450	25	6	0
11		February 19	16	2	3	21	9	1	9,60,590	23	4	0
12		March 3	18	8	0	18	12	4	12,96,125	21	7	0
13		March 17	21	6	0	21	7	7	12,53,325	22	13	0
14		April 7	22	7	3	22	9	4	12,46,200	24	0	0
15		April 21	23	7	4	23	8	6	10,68,175	24	4	0
16		May 5	20	13	3	21	3	2	11,96,750	21	8	0
17		May 19	21	0	3	21	1	7	12,46,050	21	12	0
18		June 9	21	8	9	21	9	8	11,32,350	22	2	6
19		June 23	20	14	10	21	0	5	12,25,250	21	8	0
20		July 7	21	1	4	22	2	2	12,81,500	21	6	0
21		July 21	22	0	1	22	0	11	12,42,000	22	5	0
22		August 4	22	5	6	23	6	3	12,78,950	22	7	0
23		August 19	23	9	4	23	10	2	5,54,500	23	7	0
24		September 1	22	8	3	22	10	8	8,27,700	23	1	6
25		September 14	23	9	4	23	12	11	2,30,500	23	8	0
							Total		2,15,89,635

During 1920 no council bills were drawn by the Secretary of State on the Government of India.

The success of this mechanism on the two previous occasions had strengthened the belief that it had the virtue of restoring the value of the rupee. But the failure of this mechanism in the crisis of 1920 compels one to adopt an attitude of reserve towards its general efficacy. It cannot be said that exchange gave way because this mechanism [pg 225] was not brought into operation. On the other hand, the view of the Government regarding the sale of reverse councils in 1920 had undergone a profound modification as compared with the view it held during the crisis of 1907–8. In that crisis the Government behaved like a miser, sitting tight on its gold reserve and refusing to use it for the very purpose which it was designed to serve. An Accountant-General had “to go on his knees” to persuade the Government of India, to release its gold.³⁴³ It was probably because it was rebuked by the Chamberlain Commission for failing to make use of its gold reserve in 1907 that in the crisis of 1920 the policy of selling reverse councils was so boldly conceived. There was a great deal of ignorant criticism of that policy from the general public that it was an “organized loot.” But the Finance Minister was undaunted, and argued³⁴⁴:—

“It is an essential feature of our exchange policy … that we should not only provide for remittances from London to India through council bills at approximately gold point, but from India to London in time of exchange weakness also at gold point, through the sale of sterling remittance known as reverse councils. It is simply an alternative to the export of gold. This is no new matter—we have been selling reverse councils for years … and unless we do so the exchange policy does not become effective. … This is the reason, and the only reason, why we have sold reverse councils. … It is an effort in fact to maintain exchange as near as possible to the gold point. … What would be the consequence if we yielded to the pressure placed on us and ceased to sell reverse councils at all? I can understand a demand that reverse councils should be sold by some different method, or at rates different from those at present in force, but I must confess that I cannot understand the demand that the facilities for the exchange of rupees into external currency should be entirely withdrawn. I see that in Bombay it is urged that we should let exchange find its ‘natural level.’ That is a catchword which does not impress me. Used in the sense in which that phrase has been recently [pg 226] used, there is no such thing as a ‘natural level’ in exchange, for, when one translates the internal currency into another currency, there must be some sort of common denominator to which both currencies can be brought; it may be gold, it may be silver, it may be sterling or it may be Spanish pesetas, which we take as our basis. The rupee must be linked on to something,³⁴⁵ and if it is so linked, then it must be at some definite rate, and this necessarily involves that we must sometimes be prepared to sell reverse councils in order to maintain that rate. If reverse councils be withdrawn entirely, then we should have neither a gold standard, nor a gold-exchange standard, nor any kind of standard at all.”

But that only raises the question: If the sale of reverse councils is efficacious in righting the exchange, why was its effect such a disastrous failure? The Finance Minister answered the point tersely and cogently when he said:—

“If we have failed in narrowing the gap between the market price and the theoretical gold par of the rupee … it is not because we have sold too many reverse councils; it is because we have sold too few. I put it to any member of the commercial community here, and I put it without fear of contradiction, that if our resources had enabled us … to sell straight away 20, 30, or 40 millions of reverse councils, we should probably have had no gap between the market price of the rupee and the theoretical gold price of the rupee at all. One of our difficulties has been, not that we have sold too many reverse councils, but that we have been obliged to sell too few.”³⁴⁶

There would have been some force in this argument if the amount of reverse bills sold were “too few.” Not 20, 30, or 40 millions, but 554 millions of reverse councils were sold, besides the large issue of gold internally, and the complete [pg 227] stoppage of council bills, and yet the rupee did not rise above 1s. 4d. sterling, let alone reaching 2s. gold. Why did not the sale of reverse councils suffice to rectify the exchange? This leads us to examine the whole question of the efficacy of this redemption. It is necessary to premise at the outset that redemption may result in mere substitution of one form of currency by another, or it may result in the retirement of currency. In so far as it results in substitution it is of no consequence at all, for substitution of currency is not a shrinkage of currency.³⁴⁷ To the restoration of the value of a currency what is essential is its shrinkage, i.e. its retirement, cancellation. The important question with regard to this mechanism is not to what extent the currency can be redeemed, but to what extent it can be retired. In the prevalent view of this question it seems to be accepted without question that this extent is determined by the magnitude of the gold resources of the Government of India and the Secretary of State. Let us first make it clear how these gold resources are located and distributed. It will be recalled that these gold resources are distributed between (1) the paper-currency reserve, (2) the gold-standard reserve, and (3) the cash balances of the Secretary of State. It has been the habit to speak of these resources as being three “lines of defence” on which the Government can safely rely when an exchange crisis takes place. But are they? They can be, for the purposes of retirement, only if they were all “free” resources; in other words, if they were not appropriated resources. To what extent are they unappropriated? Can the Secretary of State take gold from the paper-currency reserve? He can, but then he must replace it by something else, or must cancel notes to that extent. Can the Secretary of State take gold out of his cash balances? He can, but then he must either borrow to fill his Treasury or draw upon the Government of India [pg 228] if there is anyone to buy his bills, which is tantamount to issuing rupee currency. The gold in the paper-currency reserve and that in the cash balances is of no use at all, for it does not permit of the cancellation of the rupee currency, which is what is wanted in restoring its value when it suffers a fall. It is therefore sheer nonsense to speak of the effectiveness of redemption as being commensurate with the gold resources of the Secretary of State. The matter is important, and an illustration may not be out of place. Suppose A, a holder of rupees, wants to get gold for them. He can go to three counters: (1) that of the controller in charge of cash balances; (2) that of the controller of currency in charge of the paper-currency reserve; or (3) that of the custodian of the gold-standard reserve. If A goes to the first, what is the result? The cash balance is pro tanto reduced. On the assumption that the cash balance is at its minimum, as it should be, the controller must reimburse himself immediately to maintain his solvency by drawing a bill on India and thereby releasing rupees received for gold again in circulation, so that in this case there is no shrinkage of currency. If A goes to the controller of currency, what happens? The controller gives him gold, but on the assumption that the paper-currency account is a separate statutory account he must put the rupees received from A in place of the gold issued from his reserve, so that here again what happens is that the composition of the reserve undergoes a change, but the total paper currency remains the same. It must therefore be borne in mind that to the extent the gold in the paper-currency reserve and the cash balances are operated upon the result is not a retirement of currency. To speak of them as “lines of defences,” as is so often done, is to overlook the fact that these two are not free resources but are appropriated resources.

What is, then, the resource left to the Government to retire the rupee currency? Only the gold-standard reserve. That is the only reserve the amount of which is unappropriated for any particular use. It is free cash, and only to that extent is it possible for the Government to restore the rupee currency when a fall in its gold value eventuates, Of course [pg 229] it is important to bear in mind that this is the extent to which it can retire the currency. Not that it will, for it may not, and there is no want of cases in which it has not. Two instances will suffice. During the first period of the Mint closure, 1893–98, it will be recalled how a large number of rupees had accumulated in the hands of the Government, and in the interest of raising the value of the rupee they should have been locked away. Instead the Government of India released that money in circulation in extending railways and other public works, as though the spending of rupees by itself produced an effect different to what would have been produced had they been spent by the public. Similarly irresponsible conduct marked the sale of reverse councils in 1920. To meet these reverse councils the Secretary of State took the gold from the paper-currency reserve. But instead of cancelling notes to the extent of the gold that was taken out of the reserve, the Government took powers under an Act XXI of 1920 to fill the gap by manufacturing securities ad hoc, so that though there was redemption there was no retirement, and so much gold was merely wasted, for it produced no effect on prices or the exchange. This Act, passed in March, 1920, was of temporary duration, and would have obliged the Government to retire the currency by October, 1920, when it was to expire. Rather than do this the Government altered the paper-currency law, not temporarily but permanently (Act XLV of 1920), changing the provisions in such a manner as to require the Government to cancel the currency to the smallest degree possible by retiring their “created securities.” Even this was not done, owing to deficits in the Government Budget.

But even if such indiscretions were not repeated the fact remains that Government cannot effect a greater retirement than is permitted by the gold-standard reserve. If that reserve fails Government has only two resources left: (1) to melt down the rupees and sell them as bullion or gold and to go on further contracting the currency, and so on till its value is restored; or (2) to borrow gold. Both these are evidently costly methods. To sell rupees as [pg 230] bullion is bound to result in loss unless the bullion in the rupee fetched more at the time of sale than what it cost when it was purchased for manufacturing it into bullion. The second process, that of borrowing, cannot be lightly resorted to for the purpose of creating a reserve fund to retire the currency. Indeed, so costly are such methods, and so complete would be the proof they would afford of the instability of the exchange standard if they were resorted to, that Government has never contemplated them as possible lines of defence in an exchange crisis. It seems certain, however, that Government does recognize that the gold-standard reserve by itself cannot suffice for the maintenance of exchange. For we find that from the year 1907–8 dates a complete change in the distribution of Government balances between London and India. Up to that period it was the policy of the Secretary of State to draw only as much as necessary to finance his Home Treasury. After that date the practice was originated of drawing as much as the Government of India could provide, and as the Government of India has been supreme in financial matters it provided large sums for council drawings by increased taxation and budgeting for surpluses. The effect of this was to swell the cash balances of the Secretary of State.³⁴⁸ No official explanation of a satisfactory character has ever been given for this novel way of financing the Home Treasury,³⁴⁹ but we shall not be very far wrong if we say that the object in accumulating these balances is to provide a second gold reserve to supplement the true gold-standard reserve. Whatever strength the Government may derive for the time being from this adventitious resource, it is obvious that it cannot be permanent. Under a more popular control of Government finances the cash balances will have to be kept down to a minimum necessary to work the Treasury, and the gold-standard reserve will be the only reserve on which the Government will have to depend.