Vol. 6 · pages 401–405

386 DR. BABASAHEB AMBEDKAR : WRITINGS AND SPEECHES from which they originated. Notes issued from any agency of issue situated in the territory comprised within a circle of issue were not legal tender in the territory of any other currency circle, nor were they encashable outside their own circle. Nay more, the notes issued from sub-circles subject to the same chief circle were legal tender in one another’s territory, but were not encashable except at their office of issue or at the issue office of their chief circle. The sub-circle notes could thus be cashed at two places, but the notes of the issue office of the chief circle, though legal tender in the entire territory covered by it, were encashable nowhere except at its own counter, not even at any of its own sub-circles.* This want of universal encashability, though it saved the Government from the possibility of embarrassment, proved so great a hindrance to the popularity of the notes that it may be doubted whether the paper currency could have made a progress greater than it did even if the lowest denomination of the notes had been lower than it actually was. It must, however, be borne in mind that it was not the intention of the Indian Legislature to make the Indian currency as economical† as was desired by the Executive Government. The Legislature was no doubt appealed to by the original author of the paper currency to turn India into a new Peru, where as much currency could be had with as little cost‡ but the Legislature showed a rather prudent reserve on the matter of aiding the consummation of such a policy. As the centres of encashment were so few, and the area included within each so large as to separate the furthest point in a circle by a distance of about 700 miles from the centre of encashment of the circle, it viewed with dread the authorizing of notes of smaller denomination * For the inconveniences of the “circle” system and the various measures contemplated by Government to facilitate the encashment of notes, see Report of the Bombay Chamber of Commerce for 1868-69, Appendix, pp. 309-16. † Cf. the whole speech of the Hon. Mr. Sconce dated September 22, 1860, S.L.C.P., Vol. p. 1143 et seq. ‡Cf. the speech of Mr. Wilson, the originator of paper currency in India, dated March 3, 1860, where he says : “ In short, to abstract so much coin from the mere mechanical purpose of the circulation, supplying its place with convertible paper, would be exactly the same in effect as if suddenly, in the centre of the Maidan, a rich silver mine had been discovered which produced silver at little or no cost.” Supreme Legislative Council Proceedings, Vol. VI, p. 250.

387 THE SILVER STANDARD AND THE DISLOCATION OF ITS PARITY which the poor could not refuse and yet could not cash.* Besides the hardship involved in the want of encashability in the notes, the Legislature feared they would prove a “ fugitive treasure” in the hands of the Indian peasant. Not being able to preserve them from rain and ants, he might have had to pay a heavy discount to be rid of the notes he could have been forced to accept †. So opposed was the Legislature to the economizing clauses of the Paper Currency Bill as contrived to drive out metallic currency that it gave the Government an option to choose between legal-tender notes but of higher denomination and lower-denomination notes but of no legal-tender power. ‡ And as the Government chose to have legal-tender notes, the Legislature in its turn insisted on their being of higher denomination. At first it adhered to notes of Rs. 20 as the lowest denomination, though it later on yielded to bring it down to 10, which was the lowest limit it could tolerate in 1861. Not till ten years after that, did the legislature consent to the issue of Rs. 5 notes, and that, too, only when the Government had promised to give extra legal facilities for their encashment.§ On the whole, the desire of the Indian Legislature was to make the Indian currency safer, rather than economical, and such it undoubtedly was. How did the currency system thus constituted work ? Stability of value is one of the prime requisites of a good currency system. But if we judge the Indian currency from this point of view, we find that there existed such variations in its value that it is difficult to escape the conclusion that the system was a failure. Taking the rate of discount as an evidence of the adequacy of currency for internal commerce, it was the opinion of such a high financial authority as Mr. Van Den Berg that the unexpected contortions and sudden transitions in the Indian money market were unparalleled in the annals of any other money market in any other part of the world¶. India is *Cf. the speeches of the Hon. Mr. Forbes, dated July 13, 1861, S.LC.P. 1154. † Cf. the speech of the Hon. Mr. Forbes, dated July 13, 1861. Supreme Legislative Council Proceedings, Vol. VII, p. 768. ‡ Cf. speech of the Hon. Mr. Scone, September 22, 1880, S.L.C.P., Vol. VI, p. 1151. § For such extra facilities, and measures adopted to materialize them, Cf. the interesting speech of the Hon. Sir Richard Temple on the Paper Currency Bill dated January 13,1871, S.LC.P., Vol. X, pp. 22-25. ¶ The Money Market and Paper Currency of British India, Batavia, 1884, p. 3.

388 DR. BABASAHEB AMBEDKAR : WRITINGS AND SPEECHES pre-eminently a country subject to seasonal swings.* Midsummer is naturally a period of diminished activity, while autumn brings renewed vigour in all activities of social and economic life. Not production alone is affected by seasons. On the side of consumption, Indian social life is also subject to seasonal variations. There are marriage season, holiday seasons and holy seasons. Even distribution has assumed in India quite a seasonal character. The practice of paying rents, wages, dividends, and settling accounts at stated intervals has been gaining ground as a result of contact with Western economic organization. All these generate a kind of rhythm in the social demand for money, rising at certain periods of the year and falling at others. Having regard to the seasonal character of the economic and social life, the fluctuations caused by the discount rate soaring high during busy months when it should have been low enough to liquidate the transactions, and falling low during * It should be noted that the slack and the busy seasons are not uniformly distributed over the whole surface of the country. The distribution is roughly as follows :— Months Eastern India Western India Bombay and Karachi Northern India Southern India MadrasRangoon Calcutta Cawnpore Lahore Busy 3 Months 4 Months 6 Months 6 Months 9 Months 6 Months Slack 9 Months 8 Months 6 Months 6 Months 3 Months 3 Months January Busy Slack Busy Slack Busy Slack February ” ” ” Busy ” Busy March ” ” ” ” ” ” April Slack ” ” ” ” ” May ” ” Slack Slack ” ” June ” ” ” ” ” ” July ” ” ” ” Slack ” August ” Busy ” ” ” Slack September ” ,, ” Busy ” ” October ” ,, ” ” Busy ” November ” ,, Busy ” ” ” December ” Slack ” Slack ” ” Busy Jan. to March Aug. to Nov. Nov. to April Feb. to April April to June Feb. to July Slack April to Dec. Dec. to July May to Oct. May to Aug. July to Sept. April to Dec. Busy … … … Sept. to Nov. Octo. to March … Slack … … … Dec. to Jan. …

389 THE SILVER STANDARD AND THE DISLOCATION OF ITS PARITY slack months when it should have been high enough to prevent the market from being demoralized, are unavoidable. But what made the contortions of the Indian money market so obnoxious was the circumstance that the seasonal fluctuations in the discount rate were so abnormal.* The explanation for such a market phenomenon is to be . sought in the irregularity of the money supply of the country. In order that money may be had at a uniform price, its supply should be regulated according to the variations in the demand for it. It is well to recognize that the demand for money is never fixed. But it will avail nothing until it is realized that the changes in the demand for money which take place from year to year with the growth of population, trade, etc., belong essentially to a different category from the fluctuations in the demand for money which occur within the course of a year owing to seasonal influences. In any well-regulated currency it is necessary to distinguish these two categories of changes in monetary demand, the one requiring steadiness and expansibility and the other elasticity. On a comparative view it seems more than plausible that a metallic money is as especially adapted to furnish this element of steadiness and stability as paper money is to furnish that of elasticity. Indeed, so appropriate seem to be their respective functions that it has been insisted† that in an ideal system, these two forms of money cannot interchange their functions without making the currency burdensome or dangerous. The proof of the soundness of this view, it may be said, is found in the fact that, excluding the small transactions which take place by direct barter, the purchasing medium of any commercially advanced country is always a compound of money and credit. *The rate of discount of the Bank of Bengal for private paper running thirty days and after was altered— In 1876 16 times, with 6½ per cent, as minimum and 13½ per cent. as maximum. ” 1877 21 ” ” 7½ ” ” ” 14½ ” ” ” 1878 10 ” ” 5½ ” ” ” 11½ ” ” ” 1879 15 ” ” 6½ ” ” ” 11½ ” ” ” 1880 8 ” ” 5½ ” ” ” 9½ ” ” ” 1881 9 ” ” 5½ ” ” ” 10½ ” ” ” 1882 9 ” ” 6½ ” ” ” 12½ ” ” ” 1883 14 ” ” 7½ ” ” ” 10½ ” ” (Van Den Berg, loc. cit. ) †Cf. Prof. R. P. Falkner in A Discussion of the Interrogatories of the Monetary Commission of the Indianapolis Convention, 1898, Publications of the University of Pennsylvania in Political Economy and Public Law, No. 13, pp. 25-26.

390 DR. BABASAHEB AMBEDKAR : WRITINGS AND SPEECHES On the face of it, the Indian currency is also a compound of money and credit, and as such it may be supposed that it contained provisions for expansibility as well as elasticity. But when we come to analyse it we find that it makes no provision whatever for elasticity. Far from allowing the credit part of it to expand and contract with the seasonal demands, the Paper Currency Act placed a rigid limit upon the volume of its issue regardless of any changes in the volume of the demand. Here, then, is to be found one of the causes for the “convulsions” in the discount rates prevalent in the Indian money market. As was pointed out by Mr. Van Den Berg :— “The paper currency established by the Indian legislator fully answers the purpose, so far as business requires an easier means of exchange than gold or silver coin ; but no connection whatever exists between the issue of the fiduciary currency and the wants of the public to have their bills or other commodities converted into a current medium of exchange........... and this is the sole cause of the unexpected convulsions and sudden transitions in the money market so utterly detrimental to business to which the British Indian trade is constantly exposed.”* It may, however, be objected that such a view is only superficial. The Indian Paper Currency Act is a replica of the English Bank Act of 1844 in all its essentials. Like the English Bank Act, it set a definite limit to the fiduciary issue of notes. Like it, it separated the Issue Business from the Banking Business,† and if it made the banks in India mere banks of discount, it is because it copied the Bank Charter Act, which deprived banks in England, including the Bank of England, from being banks of issue. And yet, it cannot be said that the English money market is affected by such “convlusions and sudden transitions” as has been the case with the Indian money market. * Op. cit., p. 7. † The Indian Paper Currency Act carried the principle of separation further than did the English Bank Charter Act. It not only prevented the Issue Department being conducted under the aegis of a Banking Department, but also disallowed the two being housed under the same roof. Such an ideal of separation was held out by Sir Charles Wood during the debate on the Bank Charter Act. Cf. Hansard Parliamentary Debates, Vol. LXXIV, p. 1363. Though he was then disappointed he did not fail to realize his ideal when he became the Secretary of State for India.