Indian Currency and Finance

by John Maynard Keynes

CHAPTER III

PAPER CURRENCY

1. The chief characteristics of the Indian system of currency have been roughly sketched in the first chapter. I will now proceed to a description of the system of note issue.

2. In existing conditions the rupee, being a token coin, is virtually a note printed on silver. The custom and convenience of the people justify this, so far as concerns payment in small sums. But in itself it is extravagant. When rupees are issued, the Government, instead of being able to place to reserve the whole nominal value of the coin, is able to retain only the difference between the nominal value and the cost of the silver.[16] For large payments, therefore, it is important to encourage the use of notes to the utmost extent possible,—from the point of view of economy, because by these means the Government may obtain a large part of the reserves necessary for the support of a Gold–Exchange Standard, and also because only thus will it be possible to introduce a proper degree of elasticity in the seasonal supply of currency.

3. By Acts of 1839–43 the Presidency Banks of Bengal, Bombay, and Madras were authorised to issue notes payable on demand; but the use of the notes was practically limited to the three Presidency towns.[17] These Acts were repealed in 1861, when the present Government Paper Currency was first instituted. Since that time no banks have been allowed to issue notes in India.

Proposals for a Government Paper Currency were instituted in 1859 by Mr. James Wilson on his going out to India as the first Financial Member.[18] Mr. Wilson died before his scheme could be carried into effect, and the Act setting up the Paper Currency scheme, which became law in 1861, differed in some important respects from his original proposals.[19] The system was eventually set up under the influence of the very rigid ideas as to the proper regulation of note issue prevailing, as a result of the controversies which had culminated in the British Bank Act of 1844, amongst English economists of that time. According to these ideas, the proper principles of note issue were two—first, that the function of note issue should be entirely dissociated from that of banking; and second, that “the amount of notes issued on Government securities should be maintained at a fixed sum, within the limit of the smallest amount which experience has proved to be necessary for the monetary transactions of the country, and that any further amount of notes should be issued on coin or bullion.”[20] These principles were orthodox and all others “unsound.” “The sound principle for regulating the issue of a Paper Circulation,” wrote the Secretary of State, “is that which was enforced on the Bank of England by the Act of 1844.” In England, of course, bankers immediately set themselves to recover the economy and elasticity, which the Act of 1844 banished from the English system, by other means; and with the development of the cheque system to its present state of perfection they have magnificently succeeded. In foreign countries all kinds of new principles have been tried for the regulation of note issue, and some of them have been very successful. In India the creed of 1861 is still repeated; but by unforeseen chance the words have changed their meanings, and have permitted the old system to acquire through inadvertence a certain degree of usefulness. The coin, in which the greater part of the reserve had to be held, was, of course, the rupee. In 1861 this was a freely minted coin worth no more than its bullion value. When the rupee became an artificially valued token, rupees tacitly remained the legitimate form of the reserve (although after a time sovereigns were added as an optional alternative). Thus the authorities are free, if they like, to hold the whole of the Currency Reserve in rupee–tokens, and this reserve has become, therefore (as we shall see below), an important part of the mechanism by which the supply of silver rupees to the currency is duly regulated. While, however, the note issue has managed to evolve an important function for itself, I think the time has come when the usefulness of the Currency Reserve may be much increased by a deliberate consideration of the place it might fill in the organism of the Indian Money Market. I return to this later in the chapter. In the meantime I pass to a description of the Paper Currency as it now is—insisting, however, that when we come to consider how it may be improved, the circumstances of its origin be not forgotten.

4. For the first forty years of their existence the Government notes, though always of growing importance, took a very minor place in the currency system of the country. This was partly due to an arrangement, now in gradual course of abolition, by which for the purposes of paper currency India has been divided up in effect into several separate countries. These ‘circles,’ as they are called, now seven[21] in number, correspond roughly to the principal provinces of India, the offices of issue being as follows:—

Calcutta	for	Bengal, Eastern Bengal, and Assam.
Cawnpore	”	the United Provinces.
Lahore	”	the Punjab and North–West Frontier Province.
Madras	”	the Madras Presidency and Coorg.
Bombay	”	Bombay and the Central Provinces.
Karachi	”	Sind.
Rangoon	”	Burma.

The currency notes[22] are in the form of promissory notes of the Government of India payable to the bearer on demand, and are of the denominations Rs. 5, 10, 50, 100, 500, 1000, and 10,000. Thus the lowest note is of the face value of 6s. 8d. They are issued without limit from any Paper Currency office in exchange for rupees or British gold coin, or (on the requisition of the Comptroller–General) for gold bullion.[23]