Indian Currency and Finance

by John Maynard Keynes

5. Up to 1910 the following arrangements were in force.

Every note was legal tender in its own circle. Payment of dues to the Government could be made in the currency notes of any circle; and railway companies could, if they accepted notes of any circle in payment of fares and freight, recover the value of them from the Government.

But, until recently, no notes were legal tender outside their own circle, and were payable only at the offices of issue of the town from which they were originally issued.

Beyond this the law imposed no obligation to pay. For the accommodation of the public, however, notes of other circles could be cashed at any Paper Currency office to such extent as the convenience of each office might permit. In ordinary circumstances every Government treasury, of which there are about 250, has cashed or exchanged notes if it could do so without inconvenience; and when this could not be done conveniently for large sums, small sums have generally been exchanged for travellers.

6. It is easy to understand the reasons for these restrictions. India is an enormously large country, over which the conditions of trade lead coins to ebb and flow within each year. At the beginning of the busy season when the autumn crops are harvested, rupees flow in great volume from the Presidency towns up country; in early spring they are carried to Burma for the rice crop; and so on—slowly finding their way back again to the Presidency towns during the summer. If the Government had made its notes encashable at a great variety of centres, it would have been taking on itself the expense and responsibility of carrying out these movements of coin at different seasons of the year. When a country is habituated to the use of notes for making payments, they can be very usefully employed for purposes of remittance also. But a note–issuing authority puts itself in a difficulty if it provides facilities for remittance before a general habit has grown up of using notes for other purposes. If, on the other hand, the notes had been made universal legal tender, but only encashable at Presidency towns, there would undoubtedly have been a premium on coin at certain times of the year. And this would have greatly hindered the growth of the notes’ popularity.

The Government, therefore, did what it could to make the notes useful and popular for purposes other than those of remittance; and it facilitated remittance so far as the proceeds of taxation, accumulating in its treasuries, permitted it to do this without expense. But it shrank from taking upon itself further responsibility. Its practice may be compared with that of the branches of the Reichsbank.

On the other hand, the objections to a policy, which divided the country up for the purposes of paper currency, are also plain. The limitation of the areas of legal tender and of the offices where the notes were encashable on demand greatly restricted the popularity of the notes. It might well have seemed worth while to popularise them, even at the expense of temporary loss. As soon as the public had become satisfied that the notes could be turned into coin readily and without question, their desire to cash them would probably have been greatly diminished. It is not certain that Government would have lost in the long–run if it had undertaken the responsibility and expense of regulating the flow of coin to the districts where it might be wanted at the different seasons of the year.

7. After the establishment of the Gold–Exchange Standard the importance of enlarging the functions of the note issue became apparent; and since 1900 the question of increasing the availability of the notes has been constantly to the front. In 1900 the Government issued a circular asking for opinions on certain proposals, including one for “universalising” the notes or making them legal tender in all circles. Some authorities thought that notes of small denominations (Rs. 5 and Rs. 10) might be safely universalised, without risk (on account of the trouble involved) of their being used for remittance on a large scale. It is on these lines that the use of the notes has been developed. In 1903 five–rupee notes were universalised except in Burma—that is to say, five–rupee notes of any circle were legal tender and encashable at any office of issue outside Burma; and in 1909 the Burmese limitation was removed.

In 1910 a great step forward was taken, and the law on the subject was consolidated by a new Act. Notes of Rs. 10 and Rs. 50 were universalised; and power was taken to universalise notes of higher denominations by executive order. In pursuance of this authority notes of Rs. 100 were universalised in 1911. “At the same time the receipt of notes of the higher denominations in circles other than the circle of issue, in payment of Government dues and in payments to railways, post and telegraph offices, was stopped by executive orders”; and “with a view to minimise any tendency to make use of the new universal notes for remittance purposes, it was decided concurrently with the new Act to offer facilities to bankers and merchants to make trade remittances between the currency centres by means of telegraphic orders granted by Government at a reduced rate of premium.”[24] In the following year the Comptroller of Paper Currency reported that no difficulty whatever was experienced as the result of universalising the Rs. 10 and Rs. 50 notes; and the inconveniences, the fear of which had retarded the development of the note system for many years, were not realised.

8. The effect of these successive changes has been to make the old system of circles virtually inoperative. With notes of Rs. 100 universal legal tender it is difficult to see what can prevent the public from using them for purposes of remittance if they should wish to do so. The “circles” can no longer serve any useful purpose, and it would help to make clear in the public mind the nature of the Indian note issue if they were to be abolished in name as well as in effect.