Indian Currency and Finance

by John Maynard Keynes

12. Let us consider, first, the adequacy of the reserve of coined rupees. The governing facts of the situation are that every addition to the rupee reserve diminishes to an equivalent extent the amount available for the sterling reserve; that if the rupee reserve is insufficient, nothing worse can happen than some delay and inconvenience to merchants at a time of boom, whereas, if the sterling reserve is insufficient, a dangerous crisis may be aggravated to the pitch of panic; that at the last moment the rupee reserve can always be replenished with no very great delay from the resources of the sterling reserve, whereas the reverse is not the case (the silver being not so saleable at a crisis as the gold is in a boom); and that, therefore, it is desirable to keep the rupee reserve at the lowest possible point consistent with probability and ordinary prudence. The practical information chiefly required for settling the proper policy is in regard to the ease with which new rupees can be supplied as they are wanted—as to how far, that is to say, the Government can safely pursue the policy of living from hand to mouth. This depends upon how fast silver can be bought by the Government without its submitting to extravagant charges, and how fast, in relation to the maximum rates of new demand so far experienced, the Indian Mints can turn the silver into rupees.

13. The Government of India’s recent attempt to solve the first part of the problem unhappily involved its officers in a good deal of obloquy. The silver market is a very narrow one and can only be dealt in through the agency of one or other of a very small number of brokers. A ring of speculators lay waiting to force prices up as soon as the Government should appear as a buyer. Apart from the brokers who acted for the ring, there was only one firm in a position to buy large quantities of silver with the secrecy which was necessary if the speculators were to be defeated. Unfortunately the head of this firm was closely related by blood to the Parliamentary Under–Secretary of State. Two courses were open: to buy openly and pay such extra price as the speculators might find themselves in a position to demand, or to risk charges of venality from any one who might have an interest in discrediting the Government—disappointed speculators, currency malcontents, or members of the political party in opposition. The officials, thinking (bureaucratically) more of the Indian Exchequer and the Indian taxpayer than of the House of Commons, chose, in fact, the second of the two alternatives—in a spirit, perhaps, of too great innocence, bred of long immunity from charges of personal corruption. It turned out that they had made insufficient allowance for the deep interest which the House of Commons takes in suggestions of personal scandal. The question of Indian currency became almost interesting. Members asked one another what the Gold Standard Reserve might be, and, when writers in the Press told them, were duly horrified to learn that it contained no gold. Closer inquiry elicited further facts unsuspected hitherto. It was discovered that a number of the most prominent members of the London Money Market were Jews, and that the Government of India’s holdings of Consols had depreciated in market value since they were bought. But attention was specially concentrated on the fact that the cash balances held in London, after fluctuating considerably from time to time, had risen for a year past to an unusually high level, and had been lent out at low rates of interest to persons many of whom bore foreign names. How was the ordinary member of Parliament to be sure that some cosmopolitan syndicate of Jews was not fattening at the expense of the ryots of India, whose trustee he had often declared himself to be? Indian currency is too complicated a subject to be mastered at a moment’s notice; and many persons, without paying much attention to random charges of corruption, felt, quite legitimately, that there was a great deal going on of which they had no conception, and that they would like to be fully satisfied for themselves, and not merely on the word of the officials, that everything was really in order. The situation in its fundamentals has arisen before, and will arise from time to time in the future so long as the relations of the House of Commons to India combine in a high degree responsibility and ignorance.

14. The circumstances themselves are of very transient importance, but they are likely to have some permanent effect on the particular question which we are now discussing. It will be too much to expect the officials to expose their personal reputations again to a suspicion, however ill–founded, even in the interests of the Indian Exchequer. Next time that the Government of India have to buy silver on a large scale, it is likely that they will do so publicly and pay such extra price as this policy involves. It is not worth a Government’s while to risk its transactions falling into suspicion in order to save half a million pounds. Assuming, therefore, that in future the Government will have to buy publicly, we have to consider whether it is likely to be cheaper for them to buy when the price of silver seems low, and hold stocks in hand, or to wait until the last moment and buy at whatever price is then ruling. I am inclined to think that the second of these two policies is the better—though it is plainly a matter on which it is not possible at present to see one’s way clearly. It is outside the ordinary run of Government officials’ duties to judge whether or not a given time is a good one at which to buy silver. The speculative business of estimating the future of silver is best left to experts in the matter, even though the price ultimately paid has to include some commission to them for their services or their foresight. In the second place the history of the recent speculative ring in silver, so far as it can be known to an outsider, does not suggest that such a transaction is a very easy or profitable thing to carry through, or that the speculators have had a sufficiently striking success to encourage similar attempts on a large scale in the future. I do not know with what profit the ring have emerged from the transaction; but the expense of carrying silver for a long period is great, and the rise in its price in the last two years, though substantial, has not been enough—so far as one can judge—to leave a surplus of profits at all commensurate with the great risks run. In the third place, it does not seem certain that the urgent demands for fresh coinage of rupees, to which India is subject from time to time, will be as frequent in the future as they have been in the immediate past. On the one hand the heavy coinages since 1900 are cumulative in their effect and render further coinages in the future less probable; and on the other hand an increased use (it is to be hoped) of other media of exchange will allow an urgent demand for currency to be met in other ways.

15. I do not think, therefore, that the Government need show a very long foresight lest they should have to buy silver dear. But when their stocks are falling low and there are apparently signs of demand in the immediate future, how long can coinage be delayed safely? To answer this we need to know the maximum rate of output of the Mints, and the maximum rate of absorption of new currency so far experienced.

16. The rates of absorption of rupees in various years have been given in the Table on p. 55. The maximum absorption in the October to December quarter was 11·39 lakhs in 1905–6, and the maximum in the January to March quarter was 2·68 lakhs in 1909–10. It has been estimated that the Indian Mints can turn out 2·25 lakhs of rupees per month without overtime, and 4·50 lakhs per month with overtime. There seems little reason, therefore, for over–anxiety lest the Government be caught short of rupees. If they were to start the busy season with a surplus of 500 or 600 lakhs over what was considered a safe minimum, the reasonable demands of prudence would have been fully satisfied. The safe minimum in question must necessarily depend on circumstances, especially on the volume of the note issue and on the amount of gold held in India; it is impossible to suggest any figure which would be permanently suitable. I am dealing merely with the surplus over this minimum which, on the basis of experience, the Government might reasonably take pains to have in stock at the beginning of a busy season. The calculation refers throughout to their aggregate rupee resources in the Currency Reserve and Gold Standard Reserve combined.

17. We now come to the much more important question of the adequacy of the sterling reserves.

I do not think it has ever been thought out quite clearly for what precise purposes these reserves are held. The difficulty can be put shortly in this question,—Are they held purely as a currency reserve, or are they to fulfil also the purpose of a banking reserve? Is their only purpose, that is to say, to make certain that the Government will always be able to exchange for sterling such rupees and notes as may be presented to them, or are they also intended to ensure India’s being able to meet her international obligations at a time of dangerous crisis? The two purposes are plainly not identical. If all bankers and merchants keep adequate reserves in rupees and notes, then it will be sufficient if the Government are always able to turn these rupees and notes into sterling. But if in a financial crisis the Indian Money Market as a whole is in fact unable to meet its international obligations without Government assistance, is it the Government’s intention to stand calmly aside and permit (for example) a suspension of cash payments by the three Presidency Banks, or will they, if necessary, use their sterling reserves to give some support to the Indian Money Market in extremis?

If the Government’s Reserve is held purely to support the currency, then the maximum volume of rupees and notes, which could, so far as one can anticipate, be spared from the circulation and tendered to the Government for exchange, sets an upper limit to the necessary amount of this Reserve. If, on the other hand, it is intended to act as a banking reserve and to ensure India’s ability to meet her international obligations at all times, then its upper limit is set by the probable maximum amount of the adverse balance which could arise against India for immediate payment.

18. I will begin by discussing this question on the first hypothesis—that what the Government has been accumulating is intended to serve as a currency reserve only—and will return later to the problem of a reserve held for wider purposes, and of the possible magnitude of the balance of international indebtedness against India.