Vol. 6 · pages 501–505

486 DR. BABASAHEB AMBEDKAR : WRITINGS AND SPEECHES nothing but two different illustrations of the “currency principle” in so far as a fixed limit of issue on a fiduciary currency is a cardinal feature of that principle. Not only is the French monetary system identical with the English in its organization, but the design in both cases was identical. In the controversy which raged over the Bank Charter Act of 1844, the motives of Lord Overstone were not quite clearly grasped by his opponents of the banking school of thought. Lord Overstone was not very much interested in providing a method for preventing the depreciation of the note issue, as his opponents thought him to be. His supreme concern was to prevent gold disappearing from circulation. Starting from a chain of reasoning the solidity of which can hardly be said to be open to question, he came to the conclusion that gold would be driven out of circulation by an increase in the issue of notes. To keep gold in circulation the only remedy was to put a limit on the issue of notes, and this was the purpose of the Bank Charter Act of 1844. Now, precisely the same was the object of France in suspending the coinage of silver. As has already been pointed out, owing to the fall in the value of silver after 1873, gold was being rapidly driven out of circulation by the substitution of this depreciated metal. To prevent this result from assuming a vast proportion, the French adopted the same remedy as that of Lord Overstone, and through their suspension of silver coinage protected their gold from going out of circulation, which would have certainly been the case if no limit had been put on silver issues. It would not, therefore, be amiss to argue that the plan contemplated by the Government of India, and approved of by the Fowler Committee in being similar to the French system, was based on the same principles as governed the English currency system, which, according to Jevons, were a “monument of sound financial legislation.” zz

CHAPTER V FROM A GOLD STANDARD TO A GOLD EXCHANGE STANDARD For once it seemed that the problem of a depreciating rupee was satisfactorily solved. The anxieties and difficulties that extended over a long period of a quarter of a century could not but have been fully compensated by the adoption of a remedy like the one described in the last chapter. But by an unkind turn of events, the system originally contemplated failed to come into being. In its place there grew up a system of currency in india which was in every way the very reverse of it. Some thirteen years after legislative sanction had been given to the recommendations of the Fowler Committee, the Chamberlain Commission on Indian Finance and Currency reported that “in spite of the fact the Government adopted and intended to carry out the recommendations of the Committee of 1898, the Indian currency sysem to-day differs considerably from that contemplated by the Committee, whilst the mechanism for maintaining the exchange has some important features in common with the suggestions made to the Committee by Mr. A. M. Lindsay.”* It will be recalled† that in Mr. Lindsay’s scheme Indian currency was to be entirely a rupee currency; the Government was to give rupees in every case in return for gold, and gold for rupees only in case of foreign remittances. The scheme was to be worked through the instrumentality of two offices, one located in London and the other located in India, the former to sell drafts on the latter when rupees were wanted and the latter to sell drafts on the former when gold was wanted. Surprisingly similar is the system prevailing in India to-day-. Corresponding to Mr. Lindsay’s proposals, which, be it noted, were rejected in 1898, the Government of India has built up two reserves, one of gold and the other of rupees, out of the cash balances, the paper currency, and the gold-standard reserve. Each of these is, by the nature of the currency system, composite. The cash * Report, P. P. Cd. 7068 of 1913, p. 13. † See Chap. IV, supra.

488 DR. BABASAHEB AMBEDKAR : WRITINGS AND SPEECHES balances, which are fed from revenue receipts, gather in their net rupees as well as sovereigns, both being legal tender. Notes being issuable against both, the paper-currency reserve always contains sovereigns and rupees. Up to August, 1915, the gold-standard reserve was also held partly in gold and partly in rupees.* By a system of sorting, technically called “transfers,” the Government secures the command over rupees and sovereigns necessary for discharging the obligations it has undertaken.† The location of these funds is also very much as designed by Mr. Lindsay. The cash balances, being the till-money of the Government, are necessarily distributed between the Government of India in India and the Secretary of State in London, the portion held by the latter being entirely in gold and that held by the former being in silver. The gold-standard reserve, like the cash balances, is not a statutory reserve. Consequently its location is perfectly within the competence of the Executive. That being so, it has been so arranged that the gold portion of the fund shall be held by the Secretary of State in London, and the rupee portion, so long as it was maintained, by the Government of India in India. The only reserve which did not easily lend itself to currency manipulation was the paper-currency reserve, for the reason that its disposition and location were governed by law. In that behalf, legal power has been taken to alter the location of the gold part of that reserve by making permanent the provision of the temporary Act II of 1898, which authorized the issue of notes in India against gold tendered to the Secretary of State in London. Thus the Secretary of State and the Government of india, under the new system of currency, hold two reserves, one of gold, mainly in the possession of the former and located in London, and the other of rupees, entirely in the possession of the latter and held in India. But the similarity of the existing system to that of Mr. Lindsay is not confined to the maintenance of these funds and their location. It extends even to the modes of operating these two funds. For, as suggested by Mr. Lindsay, when rupees are wanted in India the Secretary of State sells what are called * The rupee branch has been discontinued since that date, on the recommendation of the Chamberlain Commission. † Besides, if the Government falls short of rupees, it has the legal power to convert the gold in the paper-currency reserve into rupees to replenish the stock.

489 FROM A GOLD STANDARD TO A GOLD EXCHANGE STANDARD “Council Bills,” encashable into rupees at the Government Treasuries in India, thereby providing the rupee currency in India. When gold is wanted the Government of India sells what are called “Reverse Councils “on the home Treasury in London, which are encashed by the Secretary of State, thereby providing gold for foreign remittances. The result of the sale of “Council Bills” and of the “Reverse Councils” on the two funds has been to transform the Indian currency from being a gold standard with a gold currency, as desired by the Fowler Committee, into what is called a gold standard without a gold currency, as wished for by Mr. Lindsay. This system which has grown up in place of the system originally contemplated by the Government of india is called the gold-exchange standard. Whatever that designation may mean it was not the plan originally contemplated by the Government of India in 1898. How the departure came about we shall deal with in another place. Here it is enough to state—one may also say necessary, for many writers seem to have fallen into an error on this point— that the Government did not start to establish a gold-exchange standard. Rather it was contemplating the establishing of a true gold standard, which, however inadequately understood by the men who framed it, was in essential aggreement with the principles governing the English Bank Charter Act of 1844. What are we to say about the new system ? The Chamberlain Commission, while reporting that there was a departure from the ideal of a gold standard with a gold currency, observed* :— “But to state there has been this departure is by no means to condemn the action taken, or the system actually in force ……” Now why not ? Is not the system the same as that proposed by the Government in India in 1878 and condemned by the Committee of 1879 ? It is true the arguments urged against that plan by the Committee of 1879 were not of much weight.† Nonetheless the plan was essentially unsound. The material point in the introduction of a gold standard must be said to be one of limitation on the volume of rupees, and it is from this point of view that we must judge the plan. But there was nothing in the plan of 1878 that could be said to have been calculated to bring that about. Far from putting any limitation on the volume * Report, Par, 46 † See supra, Chap. IV.

490 DR. BABASAHEB AMBEDKAR : WRITINGS AND SPEECHES of rupees, the plan had deliberately left the Mints open to the free coinage of silver. A matter of some interest in the plan was the projection of a system of seignorage so arranged so to make the bullion value of the rupee equal to the gold value given to it. But as a means of limiting the coinage of rupees it was futile. The mere levy of a seignorage cannot be regarded as sufficient in all circumstances to effect a limitation of coinage. Everything would have depended upon how closely the seignorage corresponded with the difference between the mint and market price of silver in terms of gold. If the seignorage fell short of the difference it would have given a direct impetus to increased coinage of rupees until their redundancy had driven them to a discount. In this respect the plan was a reproduction in a worse form of the English Gold Standard Act of 1816. Like the Government of India’s plan of 1878, that Act, while purporting to introduce a gold standard, had authorized the opening of the Mint, which was closed, to the free coinage of silver with a seignorage charge. It is not generally recognized how stupid were the provisions of that Act,* the ideal of all orthodox gold monometallists, in so far as they contemplated the free coinage of silver. Fortunately for England the Royal Proclamation, compelling the Mint Master to coin all silver brought to the mint, was never issued. Otherwise the working of the gold standard would have been considerably jeopardized.† The Act of 1816 had at least taken one precaution, and that was a limit on the legal-tender power of silver. In the scheme of the Government of India, not only free coinage of silver was permitted, but silver was conceded the right of full legal tender. In so far, therefore, as the plan did not provide for controlling the volume of rupees it was subversive of the gold standard it had in view. The only difference between this plan of 1878 and the system now in operation in India is that under the former the Mints were open to the public, while under the latter they are open to the Government alone. In other words, in the one case rupees were coined on behalf of the public, and in the other they are being coined on behalf of the Government. It is not to be supposed that the plan of closing the Mints to the public was not thought of by the Government in 1878. On the other hand, the * Cf., however, R. G. Hawtrey, Currency and Credit, 1919, pp. 302-3. † Some witnesses before the Lords Committee on Cash payments, appointed in 1819, raised doubts whether, having regard to the silver clause of the Act of 1816, resumption of cash payments was worth while as a means of establishing a gold standard in England. Cf. particularly the evidence of Mr. Fletcher and also Mr. Mushet before the Committee.