So inadequate was his action that at first the fall in exchange was scarcely stayed at all. Tumbling day by day, it reached on November 25 the rate of 1/311/16. This is below the gold export point (from India), and it could not have fallen so low if the Government had made gold freely available in India. But, as can be seen from the preceding table, their Indian gold reserve was not large. Individuals were not permitted, therefore, to take out more than £10,000 at a time; and in this manner the gold dribbled slowly away over a period of a few months. It would probably have been of more use if it had been allowed to disappear in a week at the moment when it was most badly wanted.
In the meantime the Secretary of State, deprived of his usual source of income from the sale of Council Bills, was meeting his normal expenses from the gold portion of the Currency Reserve in London. But the Gold Standard Reserve, although about £1,000,000 worth of Consols was sold out in order to be ready for use in a more liquid form, was kept so far intact.
Thus matters went on until the end of December 1907, when the authorities nerved themselves, although the immediate necessity had temporarily disappeared through a slight strengthening of exchange, to take whatever drastic steps might be necessary to maintain the gold value of the rupee. It was announced that they would sell in India telegraphic transfers on London at a fixed rate. Before the need arose for acting on this announcement, it was changed into an offer to sell sterling bills on London at the fixed minimum rate of 1/329/32.
By March 1908 the reserves of actual gold were nearly exhausted, but the securities and cash at short notice had not yet been trenched on. Early in April exchange was again weak, and the offer referred to above came into active operation. At first £500,000 a week, and later £1,000,000 a week of sterling bills on London were sold in India at 1/329/32. These were cashed in London from the proceeds of selling securities from the Gold Standard Reserve. By August 1908 about £8,000,000 of bills had been cashed in this way. At the beginning of September 1908 the sterling reserves, which I give for comparison with the amounts in September 1907 quoted above, were, approximately, as follows:—
| Gold— | |
| Currency Reserve in India | £150,000 |
| Currency Reserve in London | 1,850,000 |
| —————– | |
| £2,000,000 | |
| ════════ | |
| Money at Short Notice— | |
| Gold Standard Reserve in London | nil. |
| Cash Balances in London | £1,850,000 |
| —————– | |
| £1,850,000 | |
| ════════ | |
| Sterling Securities— | |
| In Currency Reserve | £1,300,000 |
| In Gold Standard Reserve | 6,000,000 |
| —————– | |
| £7,300,000 | |
| ════════ | |
| Aggregate Sterling Resources— | |
| Gold | £2,000,000 |
| Money at Short Notice | 1,850,000 |
| Securities | 7,300,000 |
| —————– | |
| £11,150,000 | |
| ════════ |
9. Thus the Secretary of State’s sterling resources sank in the course of a year from about £31,000,000 to about £11,000,000. But these figures do not supply by themselves a complete explanation of the manner in which he had financed himself in London during this period. Between September 1907 and September 1908 railway loans to the aggregate amount of about £12,500,000 and a loan of £2,000,000 for “general purposes”[64] were raised in sterling.[65] A large part of the former was required for the discharge of some previously existing railway debentures, and for the purchase in England of railway materials chargeable to capital account. In so far as the loan was used for these purposes it did not help the general position. But in so far as it was used for railway construction which could be paid for by rupees in India, it had the effect of increasing the Secretary of State’s sterling resources by a corresponding amount. Altogether, during the period under review, the net assistance obtained by loans amounted, I think, to about £4,500,000; so that the total deterioration in the Secretary of State’s position during the first year of the depression was not far short of £25,000,000.
After October 1908 the market still showed some hesitation. If the season had turned out poorly, it is clear that the Secretary of State must have had recourse to borrowing on a fairly heavy scale. In fact the harvest was satisfactory, and by December 1908 the demand for Council Bills was strong. It may be added to complete the story, that in August and September 1909 there was a short period of weakness when it was again necessary to offer sterling bills in Calcutta. Since that time India has enjoyed a period of very great prosperity, and, so far from the reserves being tested, it has been possible to build up the very strong position analysed above.
10. I have looked at the crisis so far from the point of view of its effect in depleting the sterling resources of the Secretary of State. To the authorities in India it presented its other face. There it was a question of how many rupees they would be able to withdraw from circulation. Unless there is a deficiency in the revenue from taxation, and apart from loans, the extent to which the Secretary of State can draw on sterling resources must exactly equal the extent to which the Government of India can withdraw rupees from circulation. For every transfer from the sterling branch of any of the reserves must be balanced by a corresponding transfer into the rupee branch. The amount of the sterling reserves is a measure of the ability of the authorities to withdraw rupees; and conversely, the volume of rupees which can be spared from the circulation (or from hoards) in bad times sets an upper limit to the extent to which they can be compelled to draw on their sterling reserves for the support of the currency.
Regarded from this standpoint, the facts were as follows:—By March 1908 nearly 115 million rupees had been withdrawn into the currency reserve by the release of gold, and by December 1908 the figure had risen to 154 million. Up to March 1908 it had not been necessary to take rupees into the Gold Standard Reserve; but by the end of November 1908 about 130 million rupees had been withdrawn in this way. There was also a small increase of rupees in that part of the Indian Cash Balances which is held in rupees and not in currency notes. Thus the active circulation was reduced altogether by about 285 million rupees (£19,000,000). This figure agrees closely enough with the figures we reached by studying the state of the sterling resources.
11. This completes the narrative of events up to the end of the crisis of 1908. I have given only such details as are relevant to my main topic—the adequacy of the reserves to fulfil their purpose.