Indian Currency and Finance

by John Maynard Keynes

The Treasury’s reply was cogent:—

My Lords cannot believe that the position of the gold standard in India will be strengthened, or public confidence in the intentions of the Government confirmed, by providing machinery for obtaining gold coins which is neither demanded nor required by the mercantile community; while, on the other hand, the failure or only partial success of a gold mint would undoubtedly be pointed to by the opponents of the gold standard policy (although without justification) as evidence of the breakdown of that policy.

The Treasury’s arguments were, as they deserved to be, successful. After consultation with the Government of India, who drew attention to the agreements (referred to by Sir G. F. Wilson above) entered into by the mining companies, the Secretary of State agreed (Feb. 6, 1903) to the project’s indefinite postponement. “No public explanation was given in India of this sudden recession from what has hitherto been regarded as an essential feature of the currency policy inaugurated in 1893 and definitely established on the recommendations of the Currency Committee of 1898.”[32]

2. From 1903 up to 1910 little was heard of proposals for an active encouragement of the circulation of gold. But the intention had never been repudiated, and in the Budget debate of 1910 Sir James Meston, then Financial Secretary to the Government, spoke as follows:—

The broad lines of our action and our objects are clear and unmistakable, and there has been no great or fundamental sacrifice of consistency in progress towards our ideal. Since the Fowler Commission that progress has been real and unbroken. There is still one great step forward before the ideal can be reached. We have linked India with the gold countries of the world, we have reached a gold–exchange standard, which we are steadily developing and improving. The next and final step is a true gold currency. That, I have every hope, will come in time, but we cannot force it. The backwardness of our banking arrangements, the habits and suspicions of the people, the infancy of co–operation—all stand in the way. But the final step will come when the country is ripe for it. I trust that will not long be delayed; for when it comes, it will obliterate all the mistakes, all the inconveniences, all the artificialities, of our present position.

In March 1911 matters were carried a step further, Sir Guy Fleetwood Wilson replying in the Legislative Council to Sir Vithaldas Thackersey (who had argued that a 10–rupee gold coin ought to be minted and put into active circulation in India) that “much has happened since 1902 which justifies the reopening of the question.” In a despatch to the Secretary of State, dated May 16, 1912, the Government of India proposed to open the Bombay Mint to the coinage of sovereigns. This is an exceedingly confused document. It is mainly directed to showing that an increased use of gold as currency in India would be advantageous to the system. But, apart from the validity of this argument, it is not clearly shown in what way the establishment of a mint would effect the desired purpose; indeed it is explicitly admitted that “in proposing to open a gold mint it is not our intention to induce thereby an increased flow of gold to India. Indeed were that our purpose we recognise that it would certainly fail.” The despatch reads as though it were an attempt to reconcile divergent and contradictory views which had received expression. The British Treasury, however, has again come to the rescue. They have stipulated either that the branch mint should be under Imperial management, which would be inconvenient, or that it should be wholly separate, which would be expensive. Accordingly, in a despatch, dated October 18, 1912, the Secretary of State suggested to the Government of India that instead of sovereigns Indian gold coins of the nomination of, say, 10 rupees should be coined at Bombay. The Government of India have replied that they prefer this proposal to the conditions demanded by the Treasury, and that they contemplate making inquiries as to Indian opinion on it. This is how the matter stands at present.

The actual policy of the Government of India since 1900 as regards gold currency has been, in my opinion, well judged. But these negotiations show that the authorities are still doubtful as to the advantages of the existing system.

3. Up to 1870 the English currency system was the envy of the rest of the world, and it was supposed that the excellencies of the practical working of this system were due to the fact that the actual circulating medium of the country was gold. This, it was thought, must be the only really safe way of maintaining absolute stability. Germany, accordingly, when she instituted her gold standard, prohibited the issue of notes of a less denomination than 100 marks, in order that gold might actually circulate from hand to hand to a maximum possible amount. For similar reasons the business community showed themselves immovably hostile to Lord Goschen’s proposals for the issue of one–pound notes in England. While other countries, who have, with few exceptions, found the expense of a gold medium of exchange prohibitively heavy, have nevertheless envied those who could afford it, and have adapted their laws, even when they could not afford to adapt their practice, to a currency of gold.

But in recent years the evolution of currency has, for reasons which I have elaborated in Chapter II., embarked upon a new stage of development, and all this is changed. In England the use of a cheque currency has grown so universal that the composition of the metallic coin has become a matter of secondary importance. In Germany the policy of 1876 has been deliberately reversed by a recent revision of the Bank Act, and 20–mark notes are now issued with the deliberate object of keeping as much gold as possible in the bank and wasting as little as possible in circulation. This new policy is likely to be extended in the future. The President of the Reichsbank, addressing the Budget Committee of the Reichstag in January 1913, argued that the rule laid down in 1906, forbidding the free issue of 20–and 50–mark notes to an amount exceeding £15,000,000, would have to be repealed, the issue of these notes in 1912 having exceeded the limit by £11,500,000; and he went on to say that they must, in the interests of sound policy, increase the issue of notes and thus hold a larger quantity of gold in their reserves.

In other countries, where actual currency is the principal medium of exchange, the attempt to introduce gold as the medium passing from hand to hand has been for the most part abandoned. A great part of the new gold has flowed, during the last ten years, into the reserves of the State Banks, and a comparatively small amount only can have found its way into circulation. In Austria–Hungary, for example, after the currency reform of 1892, attempts were made to force gold into circulation just as they were in India. They luckily failed. The authorities of the Austro–Hungarian Bank now keep all the gold they can in their central reserves, and they are not likely to make another attempt to dissipate it. The same kind of thing occurred in Russia. After establishing with difficulty a gold standard, they began with the theory, and have since abandoned it, that a gold currency was the natural corollary. Other examples could be given. A gold standard is the rule now in all parts of the world; but a gold currency is the exception. The “sound currency” maxims of twenty or thirty years ago are still often repeated, but they have not been successful, nor ought they to have been, in actually influencing affairs. I think I am right in saying that Egypt is now the only country in the world in which actual gold coins are the principal medium of exchange.[33]