Vol. 6 · pages 406–410

391 THE SILVER STANDARD AND THE DISLOCATION OF ITS PARITY On the other hand, it was the considered opinion of Jevons* that “the Bank of England and bankers generally have just the same latitude in increasing or diminishing their advances now (i.e. under the Act of 1884) as they would have under a [n un] restricted system”; for, as he elsewhere argued, if the limitation on fiduciary issue is arbitrary, and if people want more money, “ it is always open to them to use metallic money instead. The limitation is imposed not upon money itself, but upon the representative part.”† What, then, is the reason that the Indian Paper Currency Act should produce the evils which its English prototype did not ? A priori there need be no such convulsions in a money market subject to such law. The Act, by limiting the isue of notes, did seem to leave no choice but to use metallic money even for seasonal demand. This would be true if notes were the only form in which credit could be used. As a matter of fact, this is not so. Credit could take the form of a promise to pay, issued by a bank, as well as it could take the form of an order on the bank to pay, without making any difference to the social economy of the people who used them. Consequently, if under the provisions of the Act banks are restricted from issuing promises to pay, it does not follow that the only way open to them is a resort “to use metallic money instead,” for they are equally free to consent to honour as many orders to pay as they like. Indeed, the success or failure of the Act depends upon which of the two alternatives the banks adopt. It is obvious that those who will submit to the ruling of the Act and resort to metallic money will have to bear the “convulsions,” and those who will circumvent the Act by utilizing other forms of credit will escape them. The chief reason, then, why the Act has worked so well in England and so badly in India, is due to the fact that, whereas English banks have succeeded in implanting the order or cheque system of using credit in place of the note system, Indian banks have unfortunately failed. That they should have failed was however, inevitable. A cheque system presupposes a literate population, and a banking system which conducts its business in the vernacular of the people. Neither of these two conditions obtains in India. The *Cf. his Essay on the “Frequent Autumnal Pressure in the Money Market and the Action of the Bank of England,” Investigations in Currency and Finance (ed. Foxwell), 1884, p. 179. Italics by Jevons. There is, however, an apparent misprint in the original, which at the close of the quotation reads “ as they would have under a restricted system.” † Money and the Mechanism of Exchange, Kegan Paul, London, 1890, p. 225.

392 DR. BABASAHEB AMBEDKAR : WRITINGS AND SPEECHES population is mostly illiterate, and even were it otherwise it could not have availed itself of the cheque system, because Indian banks refuse to conduct their business in any other medium but English. Besides, the growth of the cheque system presupposes a widespread network of banks, a condition which is far from being fulfilled in India. In the absence of banking, a cheque is the worst instrument that could be handled. If not presented within a certain time, a cheque may become stale and valuless, and is therefore inferior to a note as a store of wealth. In such circumstances as these, it is no wonder that in India cheques did not come into being on a sufficiently large scale to amend the inelasticity of the notes. But even if Indian banks had succeeded in making use of credit in a form other than that of notes, they could not have eased the money market to the same extent as the English banks have been able to do. One of the incidents of banking consists in the liability of banks to pay cash on demand. If all their deposits were received in cash this liability would involve no risk. As a matter of fact, a larger part of their deposits consists of bills which they make it their business to undertake to pay in cash. One of the first things, therefore, that a banker has to look to is the proportion which his cash deposits bear to his credit deposits. Now, this proportion may be adversely affected either by an increase in his credit deposits or by diminution in his cash deposits. In either case his ability to pay cash is pro tanto weakened by lowering the ratio of his total cash to his total liabilities. Against an undue expansion of credit a banker may effectually guard himself. But, notwithstanding the development of the cheque system, there is always lurking the possibility of withdrawal of some cash at some time or other. A banker must, therefore, provide by keeping on hand a certain minimum reserve. How large should be the reserve depends upon what the possibilities for the withdrawal of cash are. The point is that to the extent of the reserve the power of the bank to grant credit is curtailed. If the reserve of the bank is already at the minimum it must stop discounting or must strengthen its position by recovering the cash withdrawn from its coffers. Now, it is obvious that if the amount of money withdrawn is kept in the current of business where the banks can get at it, they of course can strengthen their position again immediately, and not only always keep themselves well away from the danger line of minimum reserve, but be always prepared to meet the needs

393 THE SILVER STANDARD AND THE DISLOCATION OF ITS PARITY of the money market. What was the position of the Indian banks from this point of view ? Owing to the absence of a cheque system the possibilities for the withdrawal of cash are great, and the reserve was required to be large in consequence thereof. A large part of their funds being thus held for a reserve, their resources for discounting were small. But there was a further weakening of their position as lenders by reason of the fact that the cash withdrawn did not speedily return to them. The result was that the Indian banks were obliged to curtail their discounts to a far greater extent than were the English banks, in order to preserve a due proportion between their cash and their credits. The absence of branch banking was an important desideratum in this regard. But, even if there were branch banks, the money withdrawn could not have returned, for it was not left in the current channels of business. It was locked up in Government treasuries, whose operations were independent of the banking transactions of the country. Of course, there could be nothing inherently wrong in the maintenance by a Government of an Independent Treasury, and if its operations were to have a resultant connection with the operations of the business community no harm need arise. But the operations of the Indian Treasury ran counter to the needs of business. It locked up when it should have released its hoards, and released its hoards when it should have locked them up. The causes that “convulsed” the Indian money market had therefore been the inelasticity of the credit media and the working of the Independent Treasury System in so far as they were the prime factors affecting the money supply of the country (see Chart I). The evil effects of such convulsions of the discount rate can hardly be exaggerated.* In an economy in which almost every business man must rely, at certain seasons, if not all the year round, on borrowed capital, the margin of profit may be wiped out by a sudden rise or augmented by a sudden fall in the rate of discount leading to under-trading or over-trading. Such fluctuations increase business risks, lead to higher business expenses and a greater cost to the consumer. They bring about swings in prices, promote speculation, and prepare *For American experience, cf. E. W. Kemmerer, “Seasonal Variations in the New York Money Market,” in The American Economic Review, March 1911.

395 THE SILVER STANDARD AND THE DISLOCATION OF ITS PARITY for panics. Evils such as these would have in any other country compelled the authorities to take proper steps to deal with them. But it is a curious fact that in India no serious attempts were made to alleviate the sufferings they inflicted upon the trading community. A reform of the paper currency or the abolition of the Independent Treasury System would have eased the situation, though a reform of both would have been better. The general community, however, was not desirous for a change of the paper currency,* but was anxious for the abolition of the Independent Treasury. The Government, on the other hand, refused to do away with its Independent Treasury System,† and repudiated even its moral obligation to help the business * Cf. India in 1880, by Sir Richard Temple, p. 469 ; Sir Charles Wood’s Administration of Indian Affairs, p. 89 ; also The Indian Statesman, January 15 (1884). †It should, however, be noted that between 1862 and 1876, at some centres comprising the head offices and branch offices of the Presidency banks, the Independent Treasury System was suspended. By way of compensation for the loss of their right of note issue, the Presidency banks were given certain concession by the Government under agreements entered into in accordance with Act XXIV of 1861. Among the concessions one was the use by the banks of Government balances. The first agreement, that of 1862, conceded to the banks the following privileges in regard to the Government balances : (1) The unrestricted use for banking purposes “ of all moneys and balances which but for the agreement would have been received or held at the General Treasury “ up to the limit of 70 lakhs in the case of the Bank of Bengal, 40 lakhs in the case of the Bank of Bombay, and 15 lakhs in the case of the Bank of Madras. (2) The option of setting aside the excess over these sums in a separate strong room for production when demanded, or of investing it in Government paper or other authorized securities, the power of investment being subject to the condition that the banks should be “at all times answerable and accountable to Government for the surplus cash balance for the time being.” (3) The right to interest from Government on the difference between the actual balance and 50 lakhs in the case of the Bank of Bengal, 30 lakhs in the case of the Bank of Bombay, and 10 lakhs in the case of the Bank of Madras, whenever the balances at these banks fell below these minima. (4) Permission to the banks to use the Government balances at their branches on similar terms, suitable limits being fixed in each case, as in the head office agreements. A year after the agreements were executed, difficulties arose with the Bank of Bengal, which had locked up the funds to such an extent that it was unable to meet the demands of the Government on the public balances it held. Negotiations were therefore opened in 1863 for the revision of the agreements, and the revised agreements came into force on January 2,1866. They contained the following provisions regarding the public balances : (1) Undertaking by Government to maintain in the hands of the banks at their head offices an “average cash balance” of 70 lakhs at the Bank of Bengal, 40 lakhs at the Bank of Bombay, and 25 lakhs at the Bank of Madras, “so far as the same may conveniently be done.” (2) Permission to the banks to use the whole balances for the time being deposited with them for banking purposes. (3) The right to interest from Government when the Government balance at the head offices of the Bank of Bengal, Bank of Bombay, and Bank of Madras fell below the minima of 45 lakhs, 25 lakhs, and 20 lakhs respectively. (4) Permission to employ” the whole of the balances (at branches) however large for the time being “for banking purposes, subject to the condition that each branch should” at all times be ready to meet the drafts of the Government” to the extent of the Government balances at the branch.