A system closely resembling the Gold–Exchange Standard was actually employed during the second half of the eighteenth century for regulating the exchange between London and Edinburgh. Its theoretical advantages were first set forth by Ricardo at the time of the Bullionist Controversy. He laid it down that a currency is in its most perfect state when it consists of a cheap material, but having an equal value with the gold it professes to represent; and he suggested that convertibility for the purposes of the foreign exchanges should be ensured by the tendering on demand of gold bars (not coin) in exchange for notes,—so that gold might be available for purposes of export only, and would be prevented from entering into the internal circulation of the country. In an article contributed to the Contemporary Review of 1887, Dr. Marshall again brought these advantages to the notice of practical men.
16. The first crude attempt in recent times at establishing a standard of this type was made by Holland. The free coinage of silver was suspended in 1877. But the currency continued to consist mainly of silver and paper. It has been maintained since that date at a constant value in terms of gold by the Bank’s regularly providing gold when it is required for export and by its using its authority at the same time for restricting so far as possible the use of gold at home. To make this policy possible, the Bank of Holland has kept a reserve, of a moderate and economical amount, partly in gold, partly in foreign bills.[15] During the long period for which this policy has been pursued, it has been severely tried more than once, but has stood the test successfully.
It must be noticed, however, that although Holland has kept gold and foreign bills as a means of obtaining a credit abroad at any moment, she has not kept a standing credit in any foreign financial centre. The method of keeping a token currency at a fixed par with gold by means of credit abroad was first adopted by Count Witte for Russia in the transitional period from inconvertible paper to a gold standard;—in the autumn of 1892 the Department of Finance offered to buy exchange on Berlin at 2·18 marks and to sell at 2·20. In the same year (1892) the Austro–Hungarian system, referred to above, was established. As in India their exchange policy was evolved gradually. The present arrangements, which date from 1896, were made possible by the strong preference of the public for notes over gold and by the provision of the law which permitted the holding of foreign bills as cover for the note issue. This exchange policy is the easier, because the Austro–Hungarian Bank is by far the largest dealer in exchange in Vienna;—just as the policy of the Government of India is facilitated by the commanding influence which the system of Council Bills gives it over the exchange market.
17. But although India was not the first country to lead the way to a Gold–Exchange Standard, she was the first to adopt it in a complete form. When in 1893, on the recommendation of the Herschell Committee, following upon the agitation of the Indian Currency Association, the Mints were closed to the free coinage of silver, it was believed that the cessation of coinage and the refusal of the Secretary of State to sell his bills below 1s. 4d. would suffice to establish this ratio of exchange. The Government had not then the experience which we have now; we now know that such measures are not by themselves sufficient, except under the influence of favouring circumstances. As a matter of fact the circumstances were, at first, unfavourable. Exchange fell considerably below 1s. 4d., and the Secretary of State had to sell his bills for what he could get. If there had been, at the existing level of prices, a rapidly expanding demand for currency at the time when the Mints were closed, the measures actually taken might very well have proved immediately successful. But the demand did not expand, and the very large issue of currency immediately before and just after the closure of the Mints proved sufficient to satisfy the demand for several years to come;—just as a demand for new currency on an abnormally high scale from 1903 to 1907, accompanied by high rates of discount, was followed in 1908 by a complete cessation of demand and a period of comparatively low rates of discount. Favourable circumstances, however, came at last, and by January 1898 exchange was stable at 1s. 4d. The Fowler Committee, then appointed, recommended a gold currency as the ultimate objective. It is since that time that the Government of India have adopted, or drifted into, their present system.
18. The Gold–Exchange Standard in the form in which it has been adopted in India is justly known as the Lindsay scheme. It was proposed and advocated from the earliest discussions, when the Indian currency problem first became prominent, by Mr. A. M. Lindsay, Deputy–Secretary of the Bank of Bengal, who always maintained that “they must adopt my scheme despite themselves.” His first proposals were made in 1876 and 1878. They were repeated in 1885 and again in 1892, when he published a pamphlet entitled Ricardo’s Exchange Remedy. Finally, he explained his views in detail to the Committee of 1898.
Lindsay’s scheme was severely criticised both by Government officials and leading financiers. Lord Farrer described it as “far too clever for the ordinary English mind with its ineradicable prejudice for an immediately tangible gold backing to all currencies.” Lord Rothschild, Sir John Lubbock (Lord Avebury), Sir Samuel Montagu (the late Lord Swaythling) all gave evidence before the Committee that any system without a visible gold currency would be looked on with distrust. Mr. Alfred de Rothschild went so far as to say that “in fact a gold standard without a gold currency seemed to him an utter impossibility.” Financiers of this type will not admit the feasibility of anything until it has been demonstrated to them by practical experience. It follows, therefore, that they will seldom give their support to what is new.
19. Since the Indian system has been perfected and its provisions generally known, it has been widely imitated both in Asia and elsewhere. In 1903 the Government of the United States introduced a system avowedly based on it into the Philippines. Since that time it has been established, under the influence of the same Government, in Mexico and Panama. The Government of Siam have adopted it. The French have introduced it in Indo–China. Our own Colonial Office have introduced it in the Straits Settlements and are about to introduce it into the West African Colonies. Something similar has existed in Java under Dutch influences for many years. The Japanese system is virtually the same in practice. In China, as is well known, currency reform has not yet been carried through. The Gold–Exchange Standard is the only possible means of bringing China on to a gold basis, and the alternative policy (the policy of our own Foreign Office) is to be content at first with a standard, as well as a currency, of silver. A powerful body of opinion, led by the United States, favours the immediate introduction of a gold standard on the Indian model.
It may fairly be said, therefore, that in the ten years the Gold–Exchange Standard has become the prevailing monetary system of Asia. I have tried to show that it is also closely related to the prevailing tendencies in Europe. Speaking as a theorist, I believe that it contains one essential element—the use of a cheap local currency artificially maintained at par with the international currency or standard of value (whatever that may ultimately turn out to be)—in the ideal currency of the future. But it is now time to turn to details.