For India as a whole the war years were fat years, though the wealth poured into the country was, as usual, very unevenly distributed, and some sections of the population were very hard hit by the tremendous rise in the cost of living. Lean years were bound to come in India as elsewhere when the war was over. But the reaction would hardly have led to such a serious crisis had it not been for complications which have arisen out of the peculiarities of a unique exchange and currency system. This system presumes a gold standard, but it is in reality a gold exchange system by which, in the absence of an Indian gold currency, the exchange as between the Indian silver rupee and the British gold sovereign has to be kept at the gold point of the legally established rate of the rupee to the sovereign by delicately balanced operations directed from Whitehall. These consist in the sale of "Council bills" at gold point by the Secretary of State for India when the balance of trade is in favour of India, and in the sale of "Reverse Councils" at gold point by the Government of India when the balance of trade is against India.
The system worked fairly well until the second year of the war, when the balance of trade turned in favour of India and soon assumed unprecedented proportions. The enormous Indian exports could not be paid for in goods, as the Allied countries had neither goods nor freight available for maintaining their own export trade. Nor could they be paid for in bullion, as gold and silver were taken under rigid control. Nor could internal borrowings in India (though the success of the Indian war loans was a phenomenon hitherto undreamt of) suffice to finance the expenditure incurred in India on behalf of the Imperial Government. The Government of India made very large purchases of silver, which combined with the stimulated world-demand to drive the price of the white metal up to inordinate levels, and to keep pace with this rise and avoid an intolerable loss on the coining of rupees the rate of exchange—i.e. the rate at which the Secretary of State sells "Council bills" in London—was raised until it actually reached 2s. 5d. for the rupee. To meet the balance of Imperial expenditure in India the Government of India issued currency notes against London Treasury bills.
The result of these operations was that at the end of the war the funds standing to the credit of the Government of India in London had been swollen to the unprecedented figure of £106,000,000, a large proportion of which had to be paid back to India when, with the cessation of the abnormal conditions induced by the war, the balance of trade turned against her, and the rate of exchange had been raised from the legal standard of sixteenpence to the rupee to 2s. 5d. The very important question then arose of the future legal ratio of the rupee to the sovereign or the £1 sterling. A Committee was appointed to advise the Secretary of State as to the best means of securing fixity of exchange under the new conditions; it took evidence in London during the year 1919 and reported towards the end of the year. A majority of the Committee recommended that the rupee should be linked with the gold sovereign and not with the £1 sterling, which had become divorced from gold under the pressure of war finance, and that the legally established ratio of 1s. 4d. or fifteen rupees to the sovereign should be raised to 2s., i.e. ten rupees to the sovereign. The Secretary of State accepted the recommendations of the majority of the Committee, and in February 1920 steps were taken to establish the new ratio regardless of the fact that signs were indubitably discerned in the previous month showing that the economic current had turned against India. The rupee was to be "stabilised" at 2s. gold. The only dissentient voice in the Currency Committee had been that of the one Indian member, a Bombay bullion broker, Mr. D. Merwanji Dalal, who probably had more practical knowledge and experience of the problem than all the ten signatories of the Majority Report, and he had pleaded in vain for the retention of the old ratio of fifteen rupees to the sovereign. The event was soon to demonstrate his sagacity. The Secretary of State in order to establish the new ratio sold "Reverse Councils" at rates from 2s. 11d. downwards. The attempt failed egregiously, for the rupee fell steadily, and has now fallen to and under 1s. 4d. The money represented by the Indian balances with the Secretary of State had been put down in London at 1s. 4d. upwards, and India had to pay at the rate of 2s. 11d. downwards to get it back. The difference between the two rates represents, it is calculated, a loss to the Indian tax-payer of thirty-five crores of rupees, or £35,000,000 at the "stabilised" rate ordained by Government.
But the actual loss to India on these exchange transactions is not the worst outcome of these conjuring tricks, as they have been contemptuously called by Indian critics of Whitehall. Faith both in the omnipotence and in the honesty of Government was by no means extinct in Indian business circles, and when Government undertook to "stabilise" the rupee at 2s. gold Indian merchants assumed that Government could and would do what it said it was going to do. Their stocks of imported goods had been completely depleted during the war, and prosperity had bred, as usual, a spirit of excessive optimism. Enormous orders for cotton piece-goods and other British manufactures were placed in England on the basis of a 2s. rupee just when prices there had soared to their dizziest heights. By the time the British manufacturers had fulfilled their contracts and the goods were delivered in India, not only had the rupee fallen headlong but prices too had declined, and the Indian importer found that he had made both ways a terribly bad bargain, of which in many cases he could not possibly fulfil his share. There was £15,000,000 worth of Manchester piece-goods alone lying in India at one time last winter on board the ships that brought them out or in the docks. Of these the Indian importer simply refused to take delivery, because to do so would have meant ruin, as, what with the depreciation of the rupee and the fall in market prices, they seldom represented one-half, sometimes not a quarter, of the cost to him, if he took them up. It was useless to preach to him about the sanctity of contract, for had not Government itself, he declared, set the example of a gross breach of contract by undertaking and then failing to "stabilise" its own rupee currency? Government pleaded that it had given no undertaking that could be construed as a contract, but the Indian retorted that the Government's word had been hitherto held as good as its bond, and Indian Extremists found only too ready hearers when they imputed the exchange policy of Whitehall not so much to mere incompetence as to unholy influences behind Whitehall which robbed India in order to fill British pockets.
A wiser spirit ultimately prevailed, and merchants and buyers came together and agreed to compromise, and large stocks were gradually cleared. If this year's monsoon is followed by good harvests, and the European markets recover something of their former activity, Indian trade will be gradually restored to more normal conditions. But the ordeal which it has passed through will have taught some enduring lessons.
Remembering, too, the large profits which London firms used to make on silver purchases for the Government of India, and the enormous Indian balances kept in London in pre-war times which were supposed to be essential to the maintenance of Indian credit but were still more clearly of great convenience for London bankers who had the use of them, Indians who are by no means Extremists ask themselves not unreasonably why, instead of leaving the ordinary laws of supply and demand to work through the ordinary channels of financial and commercial enterprise, the Secretary of State should persist in carrying on big financial operations connected with the adjustment of the balance of trade or any purpose other than his official requirements in regard to what are known as "home charges," i.e. payments to be made in England on account of the Government of India.
That the effects of the present system as it has worked recently have been deplorable from a political as well as from an economic point of view is shown by the large number of recruits made by Mr. Gandhi from what one might have regarded as the most unlikely classes. Indian merchants whose interests would seem to be bound up with the maintenance of order and public tranquillity, Bombay Banias and Calcutta Marwaris, have thrown themselves into the "Non-co-operation" movement out of sheer bitterness and loss of confidence in British good faith, boycotting British imported goods and supplying a large part of the funds without which even a Mahatma cannot carry on a prolonged political agitation.