(2) Power should be taken to invest a larger amount of the Currency Reserve than at present (say £7,500,000 sterling securities in addition to the rupee securities instead of £2,500,000 as at present), and to hold a prescribed maximum proportion (say one–third) of it in bills of exchange or on loan at short notice either in India or London.
All this, after the necessary change of law, could be effected by a change in book–keeping; and in December 1912 the account would have stood as follows (compare the actual state of affairs as given on p. 131):—
| Gold— | |
| Gold Standard Reserve in London | £7,500,000 |
| Gold Standard Reserve in India | 2,500,000 |
| Currency Reserve in India | 15,000,000 |
| —————– | |
| £25,000,000 | |
| ════════ | |
| Money at Short Notice— | |
| Currency Reserve in London | £1,000,000 |
| Cash Balances in London | 7,500,000 |
| —————– | |
| £8,500,000 | |
| ════════ | |
| Sterling Securities— | |
| Currency Reserve | £7,500,000 |
| Gold Standard Reserve | 11,000,000 |
| —————– | |
| £18,500,000 | |
| ════════ | |
| Rupees— | |
| Currency Reserve | £13,750,000 |
| ════════ |
33. Some changes of substance might be added to these changes in book–keeping and are naturally suggested by them. There is, first, the question whether the gold portion of the reserves ought to be held in India or in London. Readers of Chapter IV. will know that there are, in my opinion, no advantages in keeping gold in India, and that such a policy involves a direct money loss through the cost of originally carrying the gold to India and the cost of bringing it back again to London when, at a later date, it is required to support exchange. But Indian opinion views with suspicion the holding in London of the greater part of India’s gold reserve, and this opinion, though ill–founded, is likely to persist for some time to come. The amount of expense involved in keeping gold in the Indian reserves is, in relation to the issues involved, not great; and it might be well worth while to incur it in order to avoid the currency system’s falling under a suspicion, however ill–founded. It might be a satisfactory compromise, therefore, if, as a normal practice (but not as a legal requirement), the gold in the Gold Standard Reserve were held “ear–marked” at the Bank of England, but the gold in the Currency Reserve retained in India. It may be added that the authorities seem, in fact, to be moving somewhat in this direction; for it is understood to be their intention to accumulate £5,000,000 in gold “earmarked” for the Gold Standard Reserve.
If, however, a large part of the gold be held in India, it is of the utmost importance, in the event of a crisis, that the gold should be shipped by the Government to London and sterling drafts on London sold against it, or, if it were released in India, that the banks only should be allowed to get it, and on an undertaking to export it. Otherwise, if it were made freely available in India, a part might be lost and wasted (so far as the support of exchange is concerned) in hoards.
34. The suspicion which is felt with regard to the holding of Indian gold in London is exceedingly natural, and can be completely dissipated only by a fuller knowledge of the currency system and of the mechanism of the foreign exchanges, than the generality is likely to possess. It is natural to think that this gold is more at the disposal of the London Money Market than it would be if it were in India, and that the Secretary of State, under corrupt or interested pressure, can easily place it at the disposal of London financiers. Apart from the question how far the Secretary of State is really open to such pressure, it may be doubted whether he is likely to be exposed to it, because at a time of real stringency it will prove easy, I believe, for the London Market to get hold of some part of the Indian gold, whether held in London or in India, by perfectly legitimate means. India is normally in the position of owing London money; this debt is discharged partly by the consignment of goods, partly by the renewal at frequent intervals of short loans or credits made by the London Market to the Indian Market on bills of exchange or through the Exchange Banks, and partly by new permanent loans. If there is great stringency in the London Market and London is in urgent need of funds, the use of the last two methods can be so much restricted that India can be practically forced to pay what is owing in gold. It is, in fact, precisely because she is open to this pressure that it is necessary for a considerable gold reserve to be kept. So long, therefore, as the gold is freely available either in India or in London for the support of exchange, it is unlikely that it can be withheld from the London Money Market if this Market really wants it. If it is in London, India will be able, by the sale of telegraphic sterling transfers in Calcutta, to discharge her due obligations cheaply and without delay; if it is in Calcutta, additional charges and a loss of time must be incurred.
A feeling of jealousy on a country’s part, lest some other country should have a lien on its gold reserve, is frequently liable to arise at the present time, but is essentially opposed in spirit to the whole purpose and meaning of keeping gold reserves at all. Gold reserves are meant to be used in times of difficulty, and for the discharge of pressing obligations. It is absurd for a man with a large balance at his bank to default to his creditors, because a feeling of jealousy, in regard to any one in whose favour he draws a cheque, prevents him from ever drawing one. Mr. Bagehot certainly did England a great service in dissipating from the minds of her financiers this primitive prejudice;—for wonderfully few other countries have yet learnt that gold reserves, although no doubt they serve some purpose when they are held for show only, exist to much better purpose if they are held for use also.
Vague stirrings of the original sin of mercantilism always inherent in the mind of the natural man and urging him to regard gold as beyond everything essential wealth; jealousy of the too powerful magnates of the London Money Market obtaining what should belong to India’s Market for their own purposes; jealousy of the Secretary of State seeming, like a man who invests abroad, to seek in this way an independence of India in case of trouble; jealousy of Great Britain, who might use or regard India’s “ear–marked” gold as her own war–chest;—all combine to make a powerful, natural, and yet unfounded prejudice which it is exceedingly difficult to combat. Nothing is commoner than to read incitements against malevolent financiers who would seek to deprive India of her “fair share” of the world’s new gold. India must be allowed, I suppose, to hug her sterile favourite. In spite of the notorious fact that the Bank of England holds less gold than the Central Bank of any other first–class Power,—far less even than the Caja of the Argentine,—the belief will continue that the amount of gold a country holds at home, rather than the degree of promptness and certainty with which at all times it can meet its international engagements, is the measure of its financial strength.
35. What other changes of substance might be made usefully? By far the most important is connected with the proposed power to make advances from the Currency Reserve on bills of exchange and other approved security, as briefly described in Chapter III.