Ludhiana.—(With the increase of gold) the issues of notes have correspondingly decreased.
These particular statements are corroborated by general statistics. The most recent statistics of the use of 10–rupee notes in the Punjab and in Bombay, as compared with Bengal, strongly suggest that the recent development of gold circulation in these provinces has been at the expense of these notes. “In the Punjab it is reported (in 1911–12) that large payments for agricultural produce are never made in notes, and that gold is replacing notes to some extent even in ordinary payments among merchants and traders.” In the light of these facts, it is a wonderful tribute to the enduring power of the “sound” currency maxims of the middle of last century that responsible officials should have welcomed the outflow of gold as the salvation of their system.
Before leaving this topic I wish to emphasise, in close connexion with it, a special reason why it is so important to develop the use of notes in India at the present time. It is desirable to encourage the popularity of the note issue, and to avoid encouraging its rivals, not only for reasons of immediate economy or because, by the centralisation of the reserves, the stability of the currency is increased, but also because, in a country where cheques are not likely for many years to come to be used to a dominating extent, it is only thus that a proper degree of seasonal elasticity in the currency can possibly be secured. This question has been already raised in Chapter III., and I shall return to it again in Chapters VI. and VII.
20. One minor indirect consequence of the existing system is worth reference. Gold flows into the Currency Reserve when this is a cheaper way of getting notes or rupees than by buying Council Bills or Transfers (see Chapter V.). It flows out of the Currency Reserve when sovereigns are wanted for circulation or for hoarding, or when this is the cheapest way in which bullion dealers can get gold. There is reason for thinking that a good deal flows out for the last reason, and it is the occasion of this outflow which I wish to examine in a little more detail. The Currency Department publishes figures which show the number of sovereigns withdrawn from the Treasuries each month. It appears from these that, while some are withdrawn in the winter months during the busy season, when the demand for currency and for hoarding (since it is then that the cultivators sell their crops and realise their savings in coin) is at its height, there is in the summer also, when it is most improbable that an extra supply is required for these purposes, a steady and, in the aggregate, a heavy drain. A brief arithmetical calculation provides what must, I think, be the explanation of this. Since the price of bullion in London is (normally) £3:17:9. per oz., while the price of sovereigns is £3:17:10½, the bullion import point of Indian exchange will be a little below the sovereign import point. Thus when exchange is fairly high, an Indian purchaser of gold finds it more profitable to buy drafts on London, purchase gold in the bullion market and ship it to India, than to purchase sovereigns from the Treasury at 1s. 4d.; but when exchange is low, the reverse is the case and it is cheaper to get as much gold as the Treasury will let you have at 1s. 4d. I do not know exactly where the dividing line comes;[50] but when telegraphic transfers are at 1s. 4⅛d. it is certainly more profitable to get gold bullion in London, and when they are at 1s. 4–1/32d. it may pay to get it in India.
These considerations are modified in practice by the fact that many Indian purchasers of bullion have a preference for small gold bars which are manufactured in England. Thus these bars are worth more than an equivalent weight of sovereigns, and consequently importation of bullion in this form takes place throughout the year. But for many non–currency purposes sovereigns are as good or nearly as good as other forms of bullion, and for these purposes the Indian Treasury is the bullion dealer’s cheapest source of supply when exchange is relatively low. Thus in the summer months the bullion dealers will always draw their supplies from the Treasury, so long as the Treasury is willing to supply them. Whenever, therefore, gold in India is available to the public throughout the year, the Government will lose during the summer months whatever amount the bullion dealers require. On every sovereign thus drawn out, the Government loses about 1½d. For the gold could have been kept in England by selling bills at a rate more advantageous than the par of exchange by about this amount. The annual amount which is drawn out by bullion dealers when gold is available all the year round is probably not less than £2,000,000. Thus an important indirect effect of the present practice is to allow bullion dealers in the summer months to get their gold at the Government’s cost slightly cheaper than they otherwise could.
21. India, as we all know, already wastes far too high a proportion of her resources in the needless accumulation of the precious metals. The Government ought not to encourage in the slightest degree this ingrained fondness for handling hard gold. By the elimination of both precious metals, to the utmost extent that public opinion will permit, from amongst the hoards and the circulation of the country, they ought to counteract an uncivilised and wasteful habit.
It is interesting to reflect that India’s love of the precious metals, ruinous though it has been to her own economic development, has flourished in the past to the great advantage of Western nations. Every one knows Jevons’s description of India as the sink of the precious metals, always ready to absorb the redundant bullion of the West and to save Europe from the more violent disturbances to her price level. In very recent years, while the South African mines have been reaching the zenith of their production, she has been fulfilling to perfection her rôle of sink. Prices have been rising, as it is, much faster than is healthy and in a way very disadvantageous to such a creditor nation as Great Britain, to whom large sums fixed in terms of gold are annually due. It is reasonable to think that without the assistance of the Indian demand, they would have risen still faster. From its very short period point of view the City is sometimes cross when this Indian demand shows itself in an inconvenient week; but if we take a longer view the Indian demand is, at a time of plentiful gold supply like the present, a true friend to the City and an enemy of inflation.
On the other hand, if a time comes when Indians learn to leave off their unfertile habits and to divert their hoards into the channels of productive industry and to the enrichment of their fields, they will have the money markets of the world at their mercy. A surfeit of gold can do at least as much damage as a shortage. During the past sixty years India is supposed to have absorbed, in addition to her previous accumulations, more than £300,000,000 of gold (apart from enormous quantities of silver). We may presume that, if India ceases to demand fresh gold and begins to disgorge some part of her huge stock, she will do so gradually. Yet if the change comes at a time of big new production, she may involve the world, nevertheless, in a very great inflation of gold prices.
If, however, India is thus to turn the tables on the West, she must not delay too long. The time may not be far distant when Europe, having perfected her mechanism of exchange on the basis of a gold standard, will find it possible to regulate her standard of value on a more rational and stable basis. It is not likely that we shall leave permanently the most intimate adjustments of our economic organism at the mercy of a lucky prospector, a new chemical process, or a change of ideas in Asia.