1. The Indian authorities have undertaken a double responsibility. They must be prepared to supply rupees in payment for Council Bills or in exchange for sovereigns. And on the other hand they must be prepared also to supply sterling or sterling drafts in exchange for rupees. The maintenance of the Indian system depends on their ability to fulfil this double obligation to whatever extent may be required of them.
The objects to be attained are simple, but the methods of the Government are, largely for historical reasons, exceedingly complicated. I will discuss, first, the nature of the existing methods; second, their adequacy for their purpose; third, some proposals for making them more orderly and intelligible; and lastly, the management of the cash balances.
2. From the profits of rupee coinage[59] a reserve has been built up expressly for the purpose of supporting exchange. This is known as the Gold Standard Reserve. As the reserve is used in practice, not only for holding sterling reserves but also for holding a part of the rupee reserve, this title is a misnomer.[60]
For some years after the closing of the Mints no fresh coinage was undertaken. By 1900 it had become necessary to mint additional rupees, and from that time until 1907 the profits on coinage rapidly raised the Gold Standard Reserve to a respectable total. The crisis of 1907–8 made it necessary to withdraw a great number of rupees from circulation, and no further coinage was necessary on a significant scale until the autumn of 1912. By October 1912 the aggregate profits arising from coinage amounted to about £18,600,000. Of this, however, about £1,100,000 was diverted in 1907 for capital expenditure on railways—leaving about £17,500,000 for the Gold Standard Reserve. In addition to this the receipts on account of interest on that part which was invested amounted to about £3,250,000, against which is to be set about £1,000,000 depreciation in the value of the investments in October 1912 as compared with their original cost. Thus at that date this reserve stood at about £19,750,000, allowing for depreciation. During the winter of 1912–13 profits on the heavy issues of coinage caused a further increase, and we may conveniently think of the Gold Standard Reserve as being worth about £21,000,000 net at the end of 1912.
Of this total the greater part was held in sterling securities—about £16,000,000 (market price). In recent times the policy has been followed of holding at least half of this in securities of the most liquid possible type. On March 31, 1912, £4,500,000 was held in British Treasury Bills, and £4,735,600 in Exchequer Bonds. Of the rest about £7,000,000 (face value) was in Consols and other stock guaranteed by the British Government, and about £1,500,000 (face value) in various Colonial Government Securities.
Apart from the £16,000,000 thus invested, about £1,000,000 was, at the end of 1912, lent at short notice in the London Money Market; about £3,750,000 was held in India in rupees; and £250,000 in gold was “earmarked” at the Bank of England. The holding of some part in actual gold in England was an innovation introduced in November 1912.
It has been announced that the Gold Standard Reserve is to be allowed to accumulate through coinage profits and interest receipts until it stands at £25,000,000, and that £5,000,000 of this will be held in gold.[61] It is possible that when this figure has been reached, some part of its income may be applied to capital expenditure on railways. This would be a reversion to the policy of 1907–8, since abandoned, when one–half of the profits of coinage was thus diverted.
The form in which the Gold Standard Reserve is held has been subject to much criticism. But it will not be useful to consider this until we are in a position to deal with the reserves as a whole.
3. The second reserve is the Paper Currency Reserve held against the note issue. The constitution of this has been explained in Chapter III. The invested portion may not exceed a stated maximum, of which a part only may be held in sterling securities and the rest must be placed in rupee securities. The whole of the balance must be held in gold or silver bullion, rupees, or sovereigns. But the gold may be held either in London or in India. The actual form in which the Currency Reserve was held at the end of December 1912 was approximately as follows:—
| Sterling securities | £2,500,000 |
| Rupee securities | 6,500,000 |
| Gold in London | 7,250,000 |
| Gold in India | 17,500,000 |
| Rupees in India | 8,500,000 |
| Silver bullion in India or in transit | 1,500,000 |
| —————– | |
| £43,750,000 | |
| —————– |