March 31.In India.In London.Total.
1897nil–nil–nil–
1898 ¼nil ¼
18992 nil 2
19007½1½9
19016 nil 6
19027 nil 7
190310 nil 10
190411 nil 11
190510½nil 10½
19064 7 11
19073½7 10½
19082½3½6
1909nil 1½1½
19106 2½8½
19116 5 11
191215½5½21
191319½6 25½

Distribution of Reserve, March 31, 1913.

Rupees£11,000,000
Gold in India19,500,000
Gold in London6,000,000
Securities9,500,000
—————
£46,000,000
═══════

11. Gold was originally accumulated in the reserve in India through the automatic working of the rule by which rupees could be obtained in exchange for sovereigns. After exchange touched par in 1898, we see from the above table that gold began to flow in. When in 1900 the accumulations reached £5,000,000, attempts were made, in accordance with the recommendations of the Fowler Committee, to force it into circulation.[26] After the comparative failure of this attempt, and the passing of the Act of 1905, as described above, the Paper Currency Chest in England was instituted, and by 1906 about two–thirds of the gold which had been accumulated up to that time was transferred to this fund. This stock is kept at the Bank of England, but is not included in the Bank of England’s own reserve. Gold which is thus transferred is said to be “ear–marked.” The fund is under the absolute control of the Secretary of State for India in Council, and transferences to it are, so far as the accounts of the Bank of England are concerned, reckoned as exports. Policy as to how much of the gold should be kept in London and how much in India has fluctuated from time to time. I shall discuss it in Chapter VI.

12. These are the chief relevant facts of law. Important considerations of policy do not lie so plainly on the surface. Since 1899 the circulation of notes has more than doubled, but the invested portion of the reserve has been increased by only 40 per cent. As the note issue has become more firmly established and more widely used, a growing and not a diminishing proportion of the reserves has been kept in liquid form. This is due to a deliberate change of policy, and to the use of the liquid part of the reserve for a new purpose. The bullion reserve is no longer held solely with the object of securing the ability to meet the obligation to cash notes in legal tender (rupees or gold) on demand. It is now utilised for holding gold by means of which the Secretary of State can support exchange in times of depression and maintain at par the gold value of the rupee. For the sake of this object the Government are content to forego the extra profit which might be gained by increasing the investments, and have steadily increased instead (as shown in the table on p. 49) the gold portion of the reserve. The Paper Currency Reserve is thus used to provide the gold which is the first line of defence of the currency system as a whole, and hence can hardly be distinguished from the resources of the Gold Standard Reserve proper.

It is not profitable to discuss the reserve policy of the Paper Currency under existing conditions in isolation from the other reserves which the Government now hold. The whole problem of the reserves, regarded as a current practical question, is dealt with in Chapter VI. In this chapter I wish to look at the matter from a broad standpoint, with an eye to the proper policy in a future, possibly remote.

13. The present policy was designed in its main outlines at a time when notes formed an insignificant part of the country’s currency, and when the system of circles still greatly restricted their usefulness. The notes were at first, and were intended to be, little more than silver certificates. The rules governing the Reserve were framed (see § 3) at a time which, to the modern student of currency, is almost prehistoric, under the influence of the Bank of England’s system of note issue and of the British Bank Act,—an Act which had the effect of destroying the importance of notes as a form of currency in England, and which it has been found impossible, in spite of some attempts, to imitate in the note–using countries of Europe. As has been urged in Chapter II., England is in matters of currency the worst possible model for India; for in no country are the conditions so wholly different. A good deal of experience with regard to note issues has now been accumulated elsewhere which ought some day to prove useful to India if her English rulers can sufficiently free themselves from their English traditions and preconceptions. Let me first give a short account of the nature of the seasonal demand for money in India; and then discuss the salient respects in which her system of note issue differs from those of typical note–using countries.

14. In contrast to what happens in the case of most note systems, the gross circulation in India diminishes instead of increasing during the busy seasons of autumn and spring. This is due to the fact that the Government Treasuries, the Presidency Banks, and possibly other banks and large merchants, use the notes as a convenient method of avoiding the custody of large quantities of silver during the slack season when rupees are not wanted.[27] That is to say, they deposit their surplus rupees during the summer in the Currency Reserve, holding their own reserves in the form of notes; and when the drain of rupees begins up country for moving the crops these notes have to be cashed. Thus in the dull season currency is largely in the hands of a class of persons and institutions which finds it most convenient to hold it in the form of notes, and in the busy season it is dissipated through the country and is, temporarily, in the hands of smaller men—cultivators who have sold their crops, small moneylenders and others, who habitually deal in small sums for which the rupee is the most convenient unit, or who do not yet understand the use of notes and still prefer, therefore, to be paid in actual coin.