In the first place there would be an elimination of risk. If the average loss from exchange on funds sent out to India for the busy season works out at (say) 2 per cent per annum, the Banks, in order to recompense themselves for the risk of fluctuations beyond the average, would be able to make a difference of more than 2 per cent between the current Indian and English rates. In the case of funds borrowed in terms of rupees and repayable in terms of rupees, this element of risk is absent; and the elimination of it provides a source of net gain. If the effect of Government lending in India were to mitigate the seasonal stringency there, some lowering of the normal upper limit of fluctuation of exchange might result. In so far as this was the case, in normal years the consequences would be outwardly similar to those of the first alternative, discussed and rejected above, whilst the Government would not have bound themselves by any undertaking capable of turning out burdensome.
Secondly, the rate of interest which the Secretary of State can earn on loans in London is appreciably lower, on account of the short period for which he lends and the nature of the security he requires, than the normal rate at which the Exchange Banks would raise their funds there, and a good deal lower than what would be obtained by direct lending in India. (It should be admitted, on the other hand, that the practice of lending funds in India would probably involve some sacrifice of perfect safety as compared with the present arrangements.)
And, thirdly, it is not clear that it might not sometimes be feasible to lend out in India sums additional to those which would in fact be released under the present system, so that there would be some net addition to the resources available in India.
10. In addition, therefore, to the grounds for making loans in India from the Paper Currency Reserve which I have given in earlier chapters, I believe that it is in this direction that the best hope lies of a remedy for the high level which the Indian Bank Rate commonly reaches in the course of each busy season. I do not feel in a position to say anything very decided as to the manner in which such loans could be best made. But there is a presumption, I think, that, in the absence of a State Bank, they must be made, mainly if not entirely, through the Presidency Banks. And I believe that the Government would act advisedly if, as a general rule, 5 or 5½ per cent were the highest rate they ever chose to exact from the Banks. In financial matters of this kind there is a danger lest Governments prove too jealous of the profits of private persons. In a case where the co–operation of private persons is necessary, they must be allowed a reasonable share of the profits of the transaction. In their past relations with the Presidency Banks in the matter of temporary loans, the Government of India have sometimes seemed to attach more importance to preventing the Banks from making any profit out of the loans than to any other aspect of the transaction. I may repeat that the loans I contemplate are to be for the busy season only, and that they should not be made until the expectation of a normal or successful harvest is reasonably assured.
11. In the nature of a postscript to the above proposals, it may be instructive to consider them in the light of the actual circumstances of the season 1912–13. The peculiarity of this season from the point of view of the Indian Money Market was the combination of a high Bank Rate in India for a comparatively long period[126] with a relatively low rate of exchange and only a moderate demand for Council Bills and gold. At the end of 1912 the situation could have been described as normal. The Bank Rate was at the somewhat high level usual at that time of year; exchange was high (the minimum rate for the allotment of Council Bills being 1s. 43/32d.); and the demand for Council Bills was on a large scale. But from January to March, although the Bank Rate remained at a high level and trade was active, the demand for Council Bills fell away, slowly at first and rapidly during March, exchange dropping pari passu until, during the latter half of March, the minimum rate at which Council Bills were allotted fell so low as 1s. 331/32d. The combination of so low a rate of exchange with an 8 per cent Bank Rate at Bombay was very abnormal.
It is dangerous for a writer who is not in touch with the practical side of the Money Market to venture on an explanation of current events. But I will give my explanation for what it is worth. The poor demand for Council Bills in March 1913 is not to be explained by the competition of gold as a means of remittance; for the low level of exchange did not favour the importation of sovereigns (even from Egypt, except earlier in the season), and as a matter of fact the import of them was on a very much smaller scale than in the previous year. It must have been due, therefore, to an unwillingness on the part of the Exchange Banks and others to lay out money in London for the purchase of remittance to India. This unwillingness was due to a variety of causes. The lock–up of funds in silver and opium, and the freedom with which India was purchasing foreign goods, probably had something to do with it; and an important contributory influence was the dearness[127] of money in London combined with a sufficient expectation of cheaper money soon, to provide an incentive to delay, wherever delay was possible. A precise diagnosis of the causes of the unwillingness on the part of the Banks to buy Council Bills is not necessary, however, to the lesson I seek to enforce. For whatever reason, Indian Bank Rates of 7 and 8 per cent, even in combination with a very low level of exchange, did not in fact tempt the Banks to buy Council Bills on any considerable scale. What was the effect on the Government Balances in India? The ordinary method, by which the rupees accumulating in the Reserve Treasuries from the proceeds of taxation are quickly released and given back to the Money Market, the encashment, namely, of large volumes of Council Bills, had failed. The position was aggravated by the large realised surplus, much of which was to be devoted to expenditure only in the next financial year, and which in the meantime was swelling the Government Balances in any case beyond their usual dimensions. So far, therefore, from assisting the market, the Government were busy increasing the stringency by taking off the market, week by week, rupees which for the moment they did not in the least want. Already at the end of 1912 (see table on p. 188) the sums lying idle in the Reserve Treasuries were unusually high. By the end of February 1913, the total Government Balances in India had risen to £17,400,000, and the end of March to £19,300,000, of which £8,000,000 lay in the Reserve Treasuries. What Money Market in the world could have seen such sums taken out of its use and control at one of the busiest moments of the year without suffering a loss of ease?
The situation was not due, in my judgment, to any ignorance or incompetence on the part of the executive officers of Government, but to a system which provided them with no sort of appropriate machinery for dealing with the position. The “Independent Treasury System” and the traditional aloofness of Government from the Money Market were seen at their worst. Millions of rupees were lying idle in the Government Treasuries at the time of year when there was most work for them to do outside. The sort of arrangements I have outlined in earlier paragraphs might have done something, I feel sure, to ease the situation. One can point, therefore, to the first quarter of 1913 as a specific occasion on which Government could have lent sums in India with profit to itself, with advantage to the Money Market, and without incurring any risk of which it need have been afraid.
12. I have now completed my discussion of these questions. Two points I would end by emphasising. The first affects my general treatment of the subject matter. I have tried to bring out the fact that the Indian system is an exceedingly coherent one. Every part of the system fits into some other part. It is impossible to say everything at once, and an author must needs sacrifice from time to time the complexity and interdependence of fact in the interests of the clearness of his exposition. But the complexity and the coherence of the system require the constant attention of anyone who would criticise the parts. This is not a peculiarity of Indian Finance. It is the characteristic of all monetary problems. The difficulty of the subject is due to it.
My second point affects the kinship of Indian arrangements to those lately developed in other parts of the world. Indian affairs are so exclusively studied by those whose knowledge and experience is preponderantly Indian or English, that the true perspective of India’s development is sometimes lost; and the value of foreign experiences neglected. I urge that, in her Gold–Exchange Standard, and in the mechanism by which this is supported, India, so far from being anomalous, is in the forefront of monetary progress. But in her banking arrangements, in the management of her note issue, and in the relations of her Government to the Money Market, her position is anomalous; and she has much to learn from what is done elsewhere.