Vol. 6 · pages 396–400

381 THE SILVER STANDARD AND THE DISLOCATION OF ITS PARITY withdrawn, and applied as any other commodity for purposes other than those of currency. Because the Act of 1870 expressly recognised the principle of open Mint, it is not to be supposed that the Mints were closed before that date. As a matter of fact they were open to the free coinage of both gold and silver, although the latter alone was legal tender. But, strange as it may seem, none of the earlier Acts contained a word as to the obligation of the Mint Master to coin all the metal presented to him—a condition which is of the essence of the open mint system. The provisions of the Act on this point are unmistakable. It required :— “Section 19. Subject to the Mint-rules for the time being in force, the Mint Master shall receive all gold and silver bullion and coin brought to the Mint: “ Provided that such bullion and coin be fit for coinage. “Provided also that the quantity so bought at one time by one person is not less, in case of gold, than fifty tolas, and, in the case of silver, than one thousand tolas. “ Section 20. A duty shall be levied at the rate of one rupee per cent, at the Mint on the produce of all gold bullion and on all gold coin brought for coinage to the mint in accordance with the said Mint-rules. “Section 21. All silver bullion or coin brought for coinage to the Mint, in accordance with the said Mint-rules, shall be subject to a duty at the rate of 2 per cent, on the produce of such from the return to be made to the proprietor. “Section 22. A charge of one-fourth per mille on gold bullion and coin, and of one per mille on silver bullion and coin, shall also be levied for melting or cutting such bullion and coin so as to render the same fit for receipt into the Mint. Section 23. All gold and silver bullion and coin brought to the Mint for coinage, and which is inferior to the standard fineness prescribed by this Act, or which, from brittleness or other cause, is unfit for coinage, shall, in case it is refined, be subject, in addition to the duty and charge aforesaid, to such charge on account of the loss and expense of refining as the Governor-General in Council prescribes in this behalf. “Section 24. The Mint Master, on the delivery of gold or silver bullion or coin into the Mint for coinage, shall grant to the proprietor a receipt which shall entitle him to a certificate from the Assay Master for the net produce of such bullion or coin payable at the General Treasury.

382 DR. BABASAHEB AMBEDKAR : WRITINGS AND SPEECHES “Section 25. For all gold bullion and coin, in respect of which the Assay Master has granted a certificate, payment shall be made, as nearly as may be, in gold coins coined under this Act or Act No. XVII of 1835 ; and the balance (if any) due to the proprietor shall be paid in silver, or in silver and copper, coins, in British India.” In the matter of paper currency the Government, it is to be noted, did not proceed upon the principle of freedom of issue, which then obtained in the country. There prevails the erroneous view that before the introduction of the Government paper currency the right of note issue was confined to the three Presidency banks of India. As a matter of fact there existed in India what is called the free banking system, in which every bank was at liberty to issue its notes. It is true that notes of the Presidency banks enjoyed a status slightly superior to that enjoyed by the notes of other banks in that they were received by the Government to some extent in payment of revenue*— a privilege for which the Presidency banks had to submit to a stringent legislative control on their business,† from which other banks whose issues were not so priviliged were immune. But this disadvantage was not sufficient to discourage other banks from indulging in the right of issue which was left open to them by law. However, this freedom of issue does not seem to have * Cf. F. C. Harrison, Economic Journal, 1891, Vol. I, p. 726. †The reaosns for such control are to be found in the peculiar relationship that subsisted between the Government and the Presidency banks. Prior to 1862, as a safeguard against their insolvency, “the Presidency Bank Charters restricted the kind of business in which they were to engage themselves. Put very briefly the principal restrictions imposed prohibited the banks from conducting foreignexchange business, from borrowing or receiving deposits payable out of India, and from lending for a longer period than six months, or upon mortgage, or on the security of immovable property, or upon promissory notes bearing less than two independent names, or upon goods unless the goods or title to them were deposited with the banks as security. The Government held shares in the banks and appointed a part of the Directorate. In 1862, when the right of note issue was withdrawn, these statutory limitations on the business of the banks were greatly relaxed, though the Government power of control remained unchanged. But, the banks having in some cases abused their liberty, nearly all the old restrictions of the earlier period were reimposed in 1876 by the Presidency Banks Act, Government, however, abandoning direct interference in the management, ceasing to appoint official directors, and disposing of its shares in the banks. Some of these limitations have been incorporated in Act XLVII of 1920, which amalgamated the three Presidency banks into the Imperial Bank of India. Banks other than Presidency banks have been entirely immune from any legislative control whatsoever, except in so far as they are made amenable to the provisions of the Indian Companies Act. Cf. in this connection Minutes by Sir Henry Maine, No. 47, and the accompanying note by W. Stokes. The control of these banks is one of the important problems of banking legislation in India.

383 THE SILVER STANDARD AND THE DISLOCATION OF ITS PARITY been exercised by any of the banks on any very large scale, not even by the Presidency Banks,* and was taken away from all in 1861,† when there was established a national issue for the whole of India entrusted to the management of a Government Department called the Department of Paper Currency. But if private interest was not allowed to play the same part in determining the quantity of paper currency as was the case with regard to metallic currency, neither was any discretion left to the Government Department in the regulation of the paper currency. The Department of Paper Currency had no more discretion in the matter of paper currency than the Mint Master had in the matter of metallic currency. The Department’s duty was confined by law‡ to the issue of notes in exchange for the amount thereof: (1) in current silver coin of the Government of India; (2) in standard silver bullion or foreign silver coin computed according to standard at the rate of 979 rupees per 1,000 tolas of standard silver fit for coinage ; (3) in other notes of the Government of India, payable to bearer on demand of other amounts issued within the same circle ; and (4) in gold coin of the Government of India, or for foreign gold coin or bullion, computed at such ratio and according to such rules and conditions as may be fixed by the Governor-General, provided that the notes issued against gold did not exceed onefourth of the total amount of issues represented by coin and bullion. The whole of this amount was required by law to be retained as reserve for the payment of notes issued with the exception of a fixed amount which was invested in Government securities, the interest thereon being the only source of profit to the Government. The limit to the sum to be so invested was governed “by the lowest amount to be estimated to which * It should however, be noted that in 1860 the circulation of notes of the three Presidency banks was larger than their current accounts, as is evident from the following :— Name of the Bank Accounts current Notes in circulation Bank of Bengal £ 1,254,875 £ 1,283,946 Bank of Bombay 438,459 765,234 Bank of Madras 161,959 192,291 (Bankers’ Magazine, April, 1893, p. 547) † For a summary of the controversy re.Bank issue v. Government issue, see Report of the Bombay Chamber of Commerce for 1859-60, Appendix L, pp. 284-318. ‡ Sect. IV of Act XIX of 1861.

384 DR. BABASAHEB AMBEDKAR : WRITINGS AND SPEECHES according to all reasonable experience, the paper currency might be expected to fall.”* Estimating on this basis, the limit to the investment portion was fixed at 4 crores in 1861,† at 6 crores in 1871‡ and at 8 crores in 1890.§ But notwithstanding the growing increase in the investment portion, never was the fiduciary issue based thereon so great¶ as to abrogate the essential principle of the Indian Paper Currency Law, the object of which was to so regulate the volume of paper currency that it should always preseve its value by contracting and expanding in the same manner and to the same extent as its metallic counterpart. Such was the organisation of the mixed currency that existed in India before it underwent a profound change during the closing years of the nineteenth century. Though of a mixed character, the paper portion formed a comparatively small part of the total. The principal reasons why the paper currency did not assume a large proportion are to be found in the organization of the paper currency itself.§§ One such reason was that the lowest denomination of the notes was too large to displace the metallic currency. By the law of 1861 the denomination of notes ranged upwards from Rs. 10 as the lowest to Rs. 20, 50, 100, 500, and 1,000. In a country where the average range of * Cf. Sir Richard Temple’s speech introducing the Paper Currency Bill, dated March 25, 1870. Supreme Legislative Council proceedings, Vol. IX, pp. 151-52. † Act XIX, Sec. X. ‡Act III, Sec. 16. § Act XV, Sec. I. ¶The following table shows the distribution of the paper currency reserve at three different periods : Period Note Circulation Composition of the Reserve Percentage of each Component of the Reserve to the Total Circulation Silver Gold Secu-rities Total Silver Gold Secu-rities 1862-1871 7.63 4.80 0.03 2.80 7.63 63 … 37 1872-1881 11.82 5.98 … 5.84 11.82 51 … 49 1882-1891 15.74 9.64 … 6.10 15.74 61 … 39 §§ For a clear and concise sketch of the organization of the paper currency in India, see the Note of the Government of India in the Report of the U.S. Director, of the Mint, Washington, 1894, pp. 231-33.

385 THE SILVER STANDARD AND THE DISLOCATION OF ITS PARITY transactions did not exceed R. 1 and were as low as 1 anna or even lower, it is impossible to expect that paper currency could, to any great extent, figure in the dealings of the people. Even Rs. 5 notes, the issue of which was first sanctioned in the year 1871,* were not low enough to penetrate into the economic life of the people. The other impediment to the increase of paper currency was the difficulty of encashing notes. One of the infelicitous incidents of the paper currency in India consisted in the fact that they were made legal tender everywhere within a circle, but encashable only at the office of issue. For such a peculiar organization of the paper currency in India, what was largely responsible was the prevalence of internal exchange† in the country. It raised a serious problem for the Government to cope with. If notes were to be made universally encashable it was feared that merchants, instead of using notes as currency, might use them as remittance on different centres to avoid internal exchange, and the Government be obliged to move funds between different centres to and fro, lest it should have to suspend cash payments. To undertake resource operations on such a vast scale between such distant centres when facilities for quick transport were so few, was obviously impossible,‡ and the Government therefore decided to curtail the encashment facilities of notes it issued. For the purposes of the paper currency, the Government divided the country into a number of circles of issue, and each currency circle was further subdivided into sub-circles,§ and the notes issued bore on their face the name of the circle or sub-circle *See. 3 of Act III. † It may be pointed out that although the Presidency banks had ceased to issue notes, yet under the agreements made with the Government in virtue of Act XXIV of 1861 the banks were employed by the Government “for superintending, managing and becoming agents for the issue, payment and exchange of promissory notes of the Government of India, and for carrying on the business of an agency of issue” on a renumeration of 3¾ per cent, per annum “on the daily average amount of Government currency notes outstanding and in circulation through the agency of the bank.” In the conflict that ensued between the Government of India and the Secretary of State because it believed that it would help the extension and popularization of the notes as to the propriety of thus employing the banks, the former was in favour of the plan, while the latter disliked the arrangement because it seemed to him to compromise the principle of complete separation between the business of issue and the business of banking. Neither of the two, however, grasped the fact that the profit on remittances on different centres owing to the prevalence of internal exchange was so great that the commission allowed to the banks was an insufficient inducement to cause them to promote the circulation of notes by providing facilities at their branches for the free encashment of them. So high was the internal exchange, and so reluctant seemed the banks to popularize the notes, that Government finally discharged them from being their agents for paper currency from January 2, 1866. See House of Commons Return, East Indian (Paper Money) 215 of 1862.’ ‡ Cf. the speech of the Hon. Mr. Laing on the Paper Currency Bill dated February 16, 1861, S.L.C.P., Vol. VII, pp. 73-74. § Each sub-circle had within it a number of agencies of issue ; but the agencies were centres not of encashment but only of issue.