Indian Currency and Finance

by John Maynard Keynes

15. Notes themselves, however, are used also, and to an increasing extent, for moving crops; and, although the gross circulation falls during the busy season for the reasons just given, the active circulation (i.e., excluding the holdings of the Government Treasuries and the Presidency Banks) does, as we should expect, increase at this time of year. When, therefore, we are considering what proportion of liquid reserves ought to be maintained, or what part the note issue plays in supplying the much needed element of elasticity in the busy season, it is of the active rather than of the gross circulation that we must take account. The figures are given below in lakhs of rupees:—

Months of Minimum and Maximum active circulation.	1906–1907.		1907–1908.(a)		1908–1909.		1909–1910.		1910–1911.		1911–1912.
	1.	2.	1.	2.	1.	2.	1.	2.	1.	2.	1.	2.
Min.—
June	31,15	14,41	35,04	13,01	31,13	14,12	34,19	15,10	36,58	20,37	38,44	19,78
July	32,43	12,87	34,34	15,89	31,58	16,52	34,31	17,22	36,56	22,60	39,15	21,14
August	32,11	13,59	34,30	17,47	31,90	12,71	35,49	16,25	36,86	21,20	40,99	18,70
Max.—
January	35,54	9,11	33,20	8,62	33,67	8,54	41,47	10,37	39,67	11,45	44,14	10,56
Feb	36,07	9,42	33,28	9,38	34,36	9,50	41,42	9,12	40,95	12,57	44,58	12,61
March	36,45	10,50	32,61	14,28	34,95	10,54	39,98	14,43	40,17	14,82	44,61	16,75

Columns(1): Active circulation. Columns(2): Holdings of Treasuries and Presidency
Banks, i.e., excess of gross over active circulation.

(a) An abnormal year.

We see, therefore, that, while the notes held by the Presidency Banks and the Treasury fall in the busy season by 700 to 1000 lakhs below their highest figure in the slack season, the active circulation increases in the busy season over its lowest figure in the slack season by about 400 lakhs (in the latest year for which we have figures, 1911–1912, by more than 600 lakhs). Of course this is not a very high proportion of the total increase in the volume of currency which is required in the busy season. But it is an amount well worth considering, and these figures put the note issue in a more favourable light as a source of currency in the busy season than is usually realised. The relative importance of notes and rupees[28] in supplying the seasonal needs of trade is well shown in the following table:—

Net Absorption (in Lakhs of Rupees) of Currency into Circulation (+) or Return of Currency from Circulation (–).^(a)

Year.	April to June.				July to Sept.				Oct. to Dec.				Jan. to March.				Whole Year.
	Rupees.		Notes.		Rupees.		Notes.		Rupees.		Notes.		Rupees.		Notes.		Rupees.		Notes.
1905–1906	–	116	+	83	+	339	+	58	+	1139	+	175	+	88	+	101	+	1450	+	417
1906–1907	–	24	–	148	+	600	+	220	+	1068	+	310	+	156		0	+	1800	+	382
1907–1908	+	182	–	141	+	145	+	29	+	735	–	126	–	670	–	146	+	392	–	384
1908–1909	–	798	–	148	–	718	+	198	+	339	+	112	–	311	+	72	–	1488	+	234
1909–1910	+	47	–	76	–	58	+	286	+	1065	+	130	+	268	+	163	+	1322	+	503
1910–1911	–	287	–	340	–	100	+	147	+	722	+	144	–	1	+	68	+	334	+	19
1911–1912	–	130	–	173	+	220	+	262	+	499	+	356	+	565	–	1	+	1154	+	444

(a) In this table rupees (but not notes) in the Presidency Banks are treated as being in circulation. It would be a troublesome piece of work to exclude them, and would make, I think, very little difference to the result. The main variable element in the reserves of the Presidency Banks is the notes, and these are duly allowed for in the above table.

The above table is exceedingly instructive. It shows that the notes supply an increasingly important proportion of the seasonal demand for additional currency. It shows also that the demand for notes from one year to another has been of a steadier character than the demand for rupees. In the period of depression from the winter of 1907 until the autumn of 1908 the active rupee circulation was much harder hit than the active note circulation; for in the six months January to June 1908 the rupee circulation fell by 1468 lakhs, while the active note circulation fell by 294 lakhs, and for the nine months January to September 1908 the former fell by 2186 lakhs, while the latter fell by only 96 lakhs.[29]

16. Let me now turn to three salient characteristics, all closely connected with one another, and chiefly distinguishing the Indian system of paper currency from those of most note–using countries.