Only under one or other of two conditions could loans from the Cash Balances be important: first, if the proceeds of taxation tended to accumulate in the Government Treasuries in the autumn and winter months so that the balances tended to be above their normal level at the busy season; and second, if the Government were to pursue the foolish policy of habitually keeping more ample balances than they really required. The first of these conditions is not fulfilled to any important extent. The land tax is collected, naturally, after the harvest has been sold, not during it; and at the end of the calendar year the surplus balances are small. The totals of the Indian Balances on August 1 and January 1 of recent years are shown below:—

(In Lakhs of Rupees)

August 1.January 1.
Reserve
Treasuries.		Total Balances
in India.		Reserve
Treasuries.		Total Balances
in India.
1906–19075,2617,181,6010,46
1907–19085,1817,143,2011,84
1908–19097,4119,54,769,33
1909–19102,2213,611,7410,16
1910–19119,4921,432,8213,18
1911–19129,6222,663,2115,18
1912–191310,9624,5810,6221,99

The total balances include the working balances in the innumerable District Treasuries all over India and the sums already deposited with the Presidency Banks. When, therefore, we are considering to what extent the Government could lend at the height of the busy season, we must chiefly pay attention to the sums in the Reserve Treasuries on January 1. The above figures show conclusively that, as a rule, the Indian Money Market cannot expect substantial assistance from this source at the time of year when it is most needed. Except in 1913,[82] the resources of the Reserve Treasuries on January 1 have been in recent years between £1,000,000 and £2,000,000.

After January 1, it is true, the revenue comes in rapidly.[83] But as a matter of fact, the funds which accumulate from the proceeds of revenue between January and April are quickly released and returned to the Money Market, as matters now are, through the encashment of the Council Bills which are generally sold in large quantities at this time of year. If this money were to be released by loan instead of by the encashment of Council Bills, the effect would be that less funds would be remitted to London; and unless we assume that more funds are being remitted to London than are really required, this would put the Secretary of State to inconvenience in meeting the Home Charges. Only in years when sufficient funds had been remitted to London earlier in the financial year, therefore, would surplus funds be available in the Indian Treasury to any important extent even in the latter half of the busy season.

I do not say that the Government should not lend from the Cash Balances in India whenever exceptional circumstances may lead to their being at an unnecessarily high level in the busy season. But the sums which could be lent in this way would not generally be important, and the amount of elasticity which the financial system could gain by these loans would be small compared with what it might acquire from a reform of the Paper Currency Reserve. I should prefer, therefore, that the Indian Cash Balances should be held, so far as possible, in notes, thus increasing the capacity of the Currency Reserve, and that all advances should be made in form from the Currency Reserve. The question of the use of funds in the Cash Balances would then lapse into the question of the use of funds in the Paper Currency Reserve. But if a different system of book–keeping be preferred, no substantial change is involved in what I propose. The method of loaning from the Currency Reserve is applicable mutatis mutandis to loans from the Cash Balances.

39. Of the Cash Balances in London no more than a working account is kept with the Bank of England. The manner in which the rest is dealt with is best described in the words of an official memorandum issued by the India Office in 1913 [Cd. 6619]:—

The practice followed since 1838 has been to keep a certain part of the balance at the Bank (of England) and to lend the remainder at interest. The usual method is to lend to certain banks, discount houses, and stock–brokers of high standing, whose names are included in an approved list, now containing sixty–two names. The list is revised periodically, and applications for admission are carefully considered with reference to the standing and resources of the applicants and the nature of their business. Loans to borrowers on the approved list are granted as a rule for periods from three to five weeks, occasionally for six weeks, so that the whole balance could, if needed, be called in within six weeks. The Accountant–General informs the Secretary of State’s broker daily of the amount of loans that may be renewed, the amount of new loans that may be placed, or the amount that must be called. The broker is responsible for obtaining the best possible rate of interest. The amount of a loan is not paid out from the Secretary of State’s account at the Bank of England until the security has been lodged at the Bank. In 1909 it was found that the borrowers on the approved list could not take the full amount of the balances available for loan; and, in order to obtain employment for the funds, the broker was instructed, as a temporary measure, to deposit the excess amount from time to time with leading London banks, usually for periods of between one and three months.

40. In the autumn of 1912 a determined attack was made, in the Press and by means of questions in the House of Commons, on the management of the English Balances, as described above, and on their amount. Many of the questions were framed rather with some other object than to elicit information. But they undoubtedly had the result that the authorities published to the public much ampler details than were previously available. A valuable summary of these will be found in the official memorandum [Cd. 6619] from which I have just quoted.[84] As the outcome of this very full inquisition into the whole subject, only two points have emerged in which, in my opinion, the authorities are open to criticism in detail—i.e., apart from wide questions of policy. They renewed India Bills (which were eventually paid off in December 1912) when they could have very well afforded to discharge them. If the season of 1912–13 had been a bad one, or if their expectations had been upset in any other way, it would always have been open to the India Council to issue the Bills afresh. Their action appears to the outside critic to have been one of ill–considered caution. The other point is a trifle and reflects, perhaps, on a curiosity of our economic organism rather than on the India Office. It was slightly shocking to discover that the Government broker, who is not even a whole–time officer, and has a separate business of his own besides his official duties, is the highest paid[85] official of the Government with the sole exception of the Viceroy. He has probably been paid too high even on current city standards. But it suggests once again the old question how long it will be found necessary to pay city men so entirely out of proportion to what other servants of society commonly receive for performing social services not less useful or difficult.

41. Some of the conclusions of this chapter may be summarised. All countries, since the practice has been generally adopted of employing a medium of exchange composed of some cheaper material than the standard of value, must keep a monetary reserve. Where there is a State bank, the bank is usually entrusted with this duty. Where the State regulates the currency and the note issue without the intervention of a bank, the State must itself undertake it. The proper magnitude of the reserve must depend upon the particular circumstances of each country. In India the reserve must be unusually large, first, because India is a great country specially liable to wide fluctuations in her prosperity and trade on account of climatic conditions the character of which cannot be easily foreseen; and second, because a large amount of foreign capital is employed, not only in permanent investment, but in temporary loans withdrawable at short notice, and because against these foreign liabilities India holds no appreciable amount of international Stock Exchange securities capable of easy realisation. I have argued that £40,000,000 may be, perhaps, at present a suitable amount to be held by Government in its sterling Reserves. These Reserves are most useful if they are held in London, where they must necessarily be wanted whenever there is need to make use of them. In deference to a public opinion which does not clearly understand the purpose of the Reserves or the limitations under which the Secretary of State must needs act in managing his sterling resources, it may be worth while to allay a groundless suspicion by the compromise of holding a fair proportion of the reserve of actual gold coin in India herself. When a Reserve of some such amount as the above has been firmly established, the diversion of further funds into any form of sterling or into the London Market should be deliberately avoided.