| Gold— | |
| Currency Reserve in India | £17,500,000 |
| Currency Reserve in London | 7,250,000 |
| Gold Standard Reserve in London | 250,000 |
| —————– | |
| £25,000,000 | |
| ════════ | |
| Money at Short Notice— | |
| Gold Standard Reserve in London | £1,000,000 |
| Cash Balances in London | 7,500,000 |
| —————– | |
| £8,500,000 | |
| ════════ | |
| Sterling Securities— | |
| Currency Reserve | £2,500,000 |
| Gold Standard Reserve | 16,000,000 |
| —————– | |
| £18,500,000 | |
| ════════ | |
| Aggregate Sterling Resources— | |
| Gold | £25,000,000 |
| Money at Short Notice | 8,500,000 |
| Securities | 18,500,000 |
| —————– | |
| £52,000,000 | |
| ════════ |
6. Before we consider the adequacy of these reserves for their purposes, it will be useful to recall the circumstances of the two recent occasions on which their resources were severely taxed. The Government were hard pressed to supply sufficient rupees in 1906, and hard pressed to supply sufficient sterling in 1908. We can deal with both these occasions in a continuous narrative.
The coinage of rupees recommenced on a significant scale in 1900. For the five years following there was a steady annual demand for fresh coinage (low in 1901–2, high in 1903–4, but at no time abnormal) and the Mints were able to meet it with time to spare, though there was some slight difficulty in 1903–4. In 1905–6 the demand quickened, and from July 1905, when the Government’s silver reserves stood at what was then considered the comfortable figure of 1837 lakhs[63] (£12,250,000), it quite outstript the new supplies arising from the mintage of the uncoined silver reserve. The Government were very slow to buy more silver and, in fact, do not seem to have taken steps to do so until, in December 1905, their bullion reserve was quite exhausted. They had then to buy silver in London hurriedly and at rather a high price. In the meantime the rupee reserves had sunk to the very low figure of 761 lakhs (i.e., about 40% of the holdings six months earlier), and the demand for Council Bills in London, which would have to be cashed in rupees in India, showed no signs of abating. In order to give themselves breathing space, and to allow time for the silver recently bought in London to reach India and be coined, the Government had to raise the price of telegraphic transfers to what was then the unusually high figure of 1/45/32. This was the worst that happened. The new coinage very quickly overtook and passed the demand, and by the end of March 1906 the available silver reserves were double what they had been in January.
This slight scare, however, was more than sufficient to make the Government lose their heads. Having once started on a career of furious coinage, they continued to do so with little regard to considerations of ordinary prudence—though their sins did not overtake them immediately. Without waiting to see how the busy season of 1906–7 would turn out, they coined heavily throughout the summer months, and, there being more silver in hand than could be conveniently held in the Currency Reserve, it was maintained, at the expense of the sterling resources, in the Gold Standard Reserve. In July 1906 the silver reserve stood at about 3200 lakhs. As a matter of fact the season of 1906–7 turned out well, and the demand for rupees was on a large scale. Yet the available silver in India hardly fell below 2000 lakhs—nearly three times the minimum at the most critical moment of the preceding year. The more than adequacy of their reserve at the busiest moment of the very busy season 1906–7 did not check, however, the impetuous activity of the Mints. During the summer of 1907, as in the summer of 1906, they continued to coin without waiting until the prosperity of the season 1907–8 was assured. In September 1907 their silver holdings in one form or another stood at the excessive figure of 3148 lakhs. This time they got what they deserved. The season of 1907–8 was a failure, and at the end of 1907 came the crisis in America. In place of there being a demand for new rupees, it was necessary to withdraw from circulation an immense volume of the old ones; and the sterling reserves, not the rupee reserves, were in danger of insufficiency. This leads us to the next chapter of the history.
7. The coinage policy of the Government of India from 1905 to 1907 suggests one obvious reflection. A succession of years, in which there is a heavy demand for currency, makes it less likely that the heavy demand will persist in the year following. The effects of heavy coinage are cumulative. The Indian authorities do not seem to have understood this. They were, to all appearances, influenced by the crude inductive argument that, because there was a heavy demand in 1905–6, it was likely that there would be an equally heavy demand in 1906–7; and, when there actually was a heavy demand in 1906–7, that this made it yet more likely that there would be a heavy demand in 1907–8. They framed their policy, that is to say, as though a community consumed currency with the same steady appetite with which some communities consume beer. In so far as the new currency is to satisfy the demands, not of hoarding, but of trade, it is hardly necessary to point out the fallacy. Moreover, even a superficial acquaintance with the currency history of India brings experience to the support of reason. Even when the rupee was worth no more than its bullion value, so that it was hoarded and melted much more than it is now, years of unusually heavy coinage were nearly always followed by a reaction. India has taken her coinage in great gulps, and it need not have been difficult to see that the demand of 1905–7 was one of these.
8. The Government of India’s silver policy during the early part of 1907 left them, therefore, in a somewhat worse position to meet the crisis which came at the end of the year, than need have been the case. But their sterling reserves were nevertheless fairly high. On September 1, 1907, they seem to have been, approximately, as follows:—
| Gold— | ||
| Currency Reserve in India | £4,100,000 | |
| Currency Reserve in London | 6,200,000 | |
| —————– | ||
| £10,300,000 | ||
| ════════ | ||
| Money at Short Notice— | ||
| Gold Standard Reserve in London | £50,000 | |
| Cash Balances in London | 5,150,000 | |
| —————– | ||
| £5,200,000 | ||
| ════════ | ||
| Sterling Securities— | ||
| In Currency Reserve | £1,300,000 | (a) |
| In Gold Standard Reserve | 14,100,000 | (a) |
| —————– | ||
| £15,400,000 | ||
| ════════ | ||
| Aggregate Sterling Reserves— | ||
| Gold | £10,300,000 | |
| Money at Short Notice | 5,200,000 | |
| Securities | 15,400,000 | |
| —————– | ||
| £30,900,000 | ||
| ════════ |
(a) Book value.
Thus, to take a round figure, the crisis found the Secretary of State with about £31,000,000 in hand. The storm was soon on him. By the end of October 1907 it had become plain that the Indian harvest would be a bad one, and the financial crisis in the United States was fast developing. On November 4 the Bank of England raised its rate to 6 per cent, and on November 7 (for the first time since 1873) to 7 per cent. On November 6 the Secretary of State could only manage to sell even 30 lakhs of rupees by allowing the rate to drop to the minimum figure of 1s. 329/32d. For several weeks following, at a time of year when the demand for Council Bills is usually strong, he sold none at all. But beyond withdrawing from the market he took no further steps for the support of exchange. This measure was inadequate to effect its purpose, and there is a good deal to be said for the view that he ought to have taken at once the more drastic steps for maintaining the gold value of the rupee which he had to take a few months later. However, it was a perplexing and unprecedented time for every one, and that it was some weeks before his advisers found their bearings is not to be wondered at.