Indian Currency and Finance

by John Maynard Keynes

The reasons for this change are easily seen. It has been found that the expense of a gold circulation is insupportable, and that large economies can be safely effected by the use of some cheaper substitute; and it has been found further that gold in the pockets of the people is not in the least available at a time of crisis or to meet a foreign drain. For these purposes the gold resources of a country must be centralised.

This view has long been maintained by economists.[34] Ricardo’s proposals for a sound and economical currency were based on the principle of keeping gold out of actual circulation. Mill (Political Economy, Bk. III. chap. xxii. § 2) argued that “gold wanted for exportation is almost invariably drawn from the reserves of banks, and is never likely to be taken from the outside circulation while the banks remain solvent.” While Goschen spoke as follows in 1891 before the London Chamber of Commerce:—

We only have as an effective circulation that which is required for the daily wants of the people. You cannot tap that to any extent so as to increase your central stock of gold. You may raise your rate of interest to 6 per cent or 8 per cent, but the bulk of the people will not carry less gold in their pockets than they did before, and I doubt whether, from other quarters, you would be able to get much addition to your central store.

But while it is no new theory that gold in the pockets of the people is absolutely useless for the purposes for which a currency reserve is held, all but the highest authorities have believed until fairly recently that no gold standard can be really stable, unless gold actually circulates in the country. The contrary view was distrusted by practical financiers, and only of late years has it become powerful enough to dictate policies. At last, however, Governments have been converted to it, and it is now as much their anxiety to keep gold out of circulation and in their reserves as it was formerly the opposite.

A preference for a tangible gold currency is no longer more than a relic of a time when Governments were less trustworthy in these matters than they are now, and when it was the fashion to imitate uncritically the system which had been established in England and had seemed to work so well during the second quarter of the nineteenth century.

4. Let us now apply these general considerations to the case of India. In 1900 an attempt was seriously made to get sovereigns into active circulation, in accordance with the recommendations of the Committee of 1898. It was decided to pay out gold to the public as soon as the stock should exceed five millions sterling, and such payments commenced on January 12, 1900, at the currency offices in Calcutta, Madras, and Bombay. The instructions issued were to tender gold to all presenters of notes, but to give rupees if they were preferred. Later on the Comptroller–General was authorised to send sovereigns to the larger district treasuries. And in March the Post Offices in the Presidency towns began to give gold in payment of money orders, and the Presidency Banks were requested to issue sovereigns in making payments on Government account. These arrangements continued in force throughout the financial year 1900–1901, and by March 31, 1901, the amount put into the hands of the public reached the considerable total of £6,750,000. But of this amount part was exported, not far short of half was returned to Government, and it was supposed that the greater part of the remainder went into the hands of bullion dealers.[35] Further attempts to force gold into circulation were, therefore, abandoned, and a large part of the gold which had accumulated in the currency reserve in India was, a little later on, shipped to England in order to be held “ear–marked” at the Bank of England.

Since that time the provisions of the Indian system regarding gold (as already given in Chapter I.) have been as follows:—(1) The sovereign is legal tender in India at 15 rupees to £1; (2) the Government has bound itself by Notification to give rupees for sovereigns at this rate; (3) it is willing, as a rule, to give sovereigns for rupees at this rate, but is under no legal obligation to do so, and will not always exchange large quantities.

5. The defeat of the experiment of 1900–1901 was due to a variety of causes, but mainly, I should suppose, to the long habituation of the Indian public to the use of silver, and to the unsuitability of the sovereign, by reason of its high value, for so poor a country as India.

But it is not by any means so certain that an attempt at the present time to put a 10–rupee gold coin into circulation would not meet with more success. Its value would be somewhat less. But, more important than this, the taste of India for gold, as against silver, has been very considerably developed during the last ten years. It will be worth while to summarise the available evidence as to the present position of gold in India.