Indian Currency and Finance

by John Maynard Keynes

28. These are the relevant considerations. But any conclusion as to the possible magnitude of the adverse balance at which one can arrive on the basis of them is little better than a guess. I will give my guess for what it is worth. I think the £40,000,000, which I have fixed as the maximum figure of what is required for the redemption in sterling of such notes and rupees as may be presented, is more than sufficient to meet the adverse balance that is at all likely to emerge in any single year. But I do not think it certain that this sum would be adequate to the necessities of two successive bad years. On the other hand, it is necessary to bear in mind that by the second bad year there would have been time for a very great reduction in the volume of imports, on account of the greatly reduced purchasing power of the people, and that this might go a long way towards righting the balance; also that, if there was a considerable liquidation of short–period loans in the first year, it would not be necessary to repeat this to anything like the same extent in the second year. In short, the natural forces tending towards equilibrium would begin in the second year to show themselves more strongly. Nor is it necessary to accumulate reserves in advance for every eventuality. Two bad years in succession are not very likely; and, if they do come, the Secretary of State will have ample time to make his arrangements for borrowing.

I think it a sufficient concession, therefore, if the £40,000,000 be given as the proper limit, not as before of the aggregate sterling resources of all kinds, but of the Gold Standard Reserve and the sterling branch of the Paper Currency Reserve (i.e. excluding the Cash Balances).

In a country such as India, where all available resources are required for capital expansion, and where it is not sound or humane policy to burden the present overmuch for the sake of the future, it is nearly as important to avoid extravagance in the reserve policy as to avoid undue parsimony. As the rupee and note circulation is increased, the proportion of reserves ought to grow, of course, pari passu. But in existing circumstances to hold much more than £40,000,000 in sterling in the Gold Standard Reserve and the Paper Currency Reserve together would border on extravagance. If the reserves were somewhat lower than this, I do not think it would necessarily be blameworthy to leave them so, provided it would prove a very burdensome thing to raise them. For the expedient of a loan is always available.[77] My conclusion, rather, is that the reserves should be allowed to reach some such figure as this by the natural processes of growth, before sums are diverted from them to other purposes.

A very few years ago hopes of reaching so secure a position as this would have seemed chimerical. But the details given on p. 131 show that in December 1912 the sterling reserves already amounted to somewhat more than this. It is not yet clear, however, that their present amount is normal. If it turns out to be so, then a position of adequate strength has been attained already. But the form in which these reserves are held is open to much criticism, and this must be my next topic.

29. The criticisms which have had most popular vogue have been mainly directed against the absolute amount of the Gold Standard Reserve, against the investment of a large part of this reserve in securities, and against the maintenance in London of some part of the gold in the Currency Reserve.

In regard to the amount of the Gold Standard Reserve, Lord Curzon, in 1904, was inclined to think that £10,000,000 would be a proper figure. In 1905 Sir E. Law, the Financial Member of the Viceroy’s Council, suggested £20,000,000. In 1906 Sir E. Baker thought £20,000,000 a suitable minimum. More recently, in 1912, £25,000,000 is the amount which responsible officials have announced that they are aiming at. Sir E. Law and Sir E. Baker both based their estimates on the amount which the Secretary of State would require for his Home Charges if he had to curtail his drawings of Council Bills by one–third or one–half for a considerable period. I do not think that this is the most useful point of view from which to approach the question, or that the proper magnitude of the Gold Standard Reserve can be discussed without reference to the magnitude of the other reserves.

30. The other two criticisms quoted above lead on to the general question of how the sterling resources should be held and how they should be divided between the several Reserves. The second of these questions is mainly a matter of book–keeping, but has nevertheless some importance. The Government of India’s present system has no logical basis, is exceedingly difficult to understand, and has often led, in consequence, to a good deal of misunderstanding. The ideal system should be as simple and logical as is compatible with leaving the authorities a free hand to shift and adjust as the necessities of the moment may require. The present system is the outcome partly of historical origins, partly of the authorities not having allowed themselves by law a perfectly free hand. The much criticised practice, for example, of holding six crores of coined rupees in the Gold Standard Reserve is probably due to the provision by which that portion of the Currency Reserve, which is held in London, can be held only in gold. If rupees have to be released hurriedly from the silver portion of the Gold Standard Reserve in India, the authorities have a completely free hand as to the form in which they make the corresponding addition to their sterling reserves in London; whereas, if they are released from the Currency Reserve, the corresponding transference in London must be made wholly in gold coin—a course which may sometimes be exceedingly inconvenient at the moment.

31. If the authorities allowed themselves more latitude as to the manner in which the Currency Reserve might be held, it would be a mere book–keeping transaction to transfer to this reserve the rupees now held in silver in the Gold Standard Reserve and to replace them by a corresponding transfer of gold; but such an arrangement would be more logical and easier to understand.

32. I think, therefore, that there might be considerable advantages in the adoption of some general scheme for the reserves such as the following:—

(1) While it would be legal to hold the Gold Standard Reserve in any form—gold, securities, bills of exchange, loans, or rupees—it should be normal in good times to hold, say, £11,000,000 in sterling securities and the rest in gold either in London or India, but preferably in London.