Vol. 6 · pages 511–515

496 DR. BABASAHEB AMBEDKAR : WRITINGS AND SPEECHES a very crucial question. We must keep clear in our mind what it is that essentially marks off a convertible from an incovertible currency. The distinction commonly drawn, that the one is an automatic and the other is a managed currency, must be discarded as a gross error. For, if by a managed currency we mean a currency the issue of which depends upon the discretion of the issuer, then a convertible currency is as much a managed currency as an inconvertible currency is. The only point of contrast lies in the fact that in the management of a convertible currency the discretion as to issue is regulated, while in an inconvertible currency it is unregulated. But even if regulated the issue remains discretionary and to that extent a convertible currency is not so safe as to mark it off from an inconvertible currency. The enlargement of its issue being discretionary and the effect of such issues being to drive specie out of circulation, a convertible currency may easily become inconvertible. The difference between a convertible and an inconvertible currency is therefore ultimately a distinction between a prudent and an imprudent management of the right to issue currency. In other words, convertibility is a brake on the power of issue. Bearing this in mind, and also the fact that a convertible currency by reason of mismanagement has the tendency to become inconvertible, it is possible for us to imagine how severe must be the obligations as to convertibility in order to prevent prudent management of currency from degenerating into an imprudent management resulting in over-issue. If, therefore, it is true that in countries having a convertible currency the affairs were so prudently managed that when specie left the country the paper money not only did not increase to take its place, but actually diminished, and that usually by a greater absolute amount than the gold currency, it was because the obligations as to convertibility were those of “effective absolute immediate convertibility.”* We can now appreciate why Prof. Sumner said† that “convertibility in the currency is like conscientiousness in a man : it has many grades and is valuable in proportion as it is strict and pure.” * “No single word can convey the full meaning,” says Prof. Nicholson, War Finance, 2nd ed., 1918, p. 36. † A History of American Currency, New York, 1874, p. 116.

497 FROM A GOLD STANDARD TO A GOLD EXCHANGE STANDARD That being so, it would be foolish to assume that we are immune from the consequences of an inconvertible currency until we know what is the grade of the convertibility that is provided. Now, what is the character of the convertibility of the rupee in India ? It is a deferred, delegalized, delocalized, and therefore a devitalized kind of convertibility. Indeed, really speaking it is not a convertibility, but rather it is a moratorium which is a negation of convertibility, for what does the provision for convertibility for foreign remittances mean in practice ? It simply means that until a fall of exchange takes place there is a moratorium or inconvertibility in respect of the rupee. Not only is there a moratorium as long as exchange does not fall, but there is no guarantee that the moratorium will be lifted when a fall does occur. It may not be lifted, for it is a matter of conscience and not of law.* Is such a grade of convertibility, if one has a predilection for that term, very far removed from the inconvertibility of the bank notes during the suspension period ? Let those who will say so. For a person not endowed with high and subtle imagination the distinction between such a convertibility and absolute inconvertibility is too thin to persuade him that the two systems are radically different; indeed, when we come to analyse the problem of prices in India and outside India we shall find another piece of evidence to show that they are not different, and that the analogy between the two is perfect enough for all practical purposes. * The Finance Member of the Viceroy’s Council, in his Financial Statement for 1908-09 (p. 23, italics not in the original), observed :— “Had we complied with the demand for issues [of gold] without limit, the whole available supply might have been drawn off in a few weeks …… For these reasons we decided to stand by our legal rights. ...We are not bound to give sovereigns in exchange for rupees except at our own convenience. The currency offices were accordingly instructed not to issue gold in larger quantities than £ 10,000 to any individual on any one day.” These words were used to explain the attitude of the Government regarding its sense of obligation as to convertibility of the rupee in the exchange crisis of 1907 ! The degree of convertibility being a matter of administrative discretion it is difficult to define the extent to which it is given effect to in practice. Official evidence is inclined to impress upon the public that practically the rupee is convertible. If that is so, why not make it legally convertible. For, if convertibility is complete in practice a legal convertibility cannot impose upon the Government greater obligations than what the official evidence suggests the Government to be actually assuming. It is said that Government does not do so because it is afraid that exchange speculators will take advantage of it. But why should they not ? Are they not holders of rupees ? It does not, however, appear to have been adequately realized that this defence implies that the currency is issued so much beyond the point of the “saturation” that its value is always, on the margin of being affected by an element of speculation.

498 DR. BABASAHEB AMBEDKAR : WRITINGS AND SPEECHES It may, however, he said that an inconvertible currency may be so well managed as not to give rise to a premium on gold, so that there may be little to choose between it and a perfectly convertible currency. But whether an inconvertible currency will be so well managed is a question of practical working. Again, whether the absence of premium on gold suffices to place an inconvertible currency on par with a convertible currency, so far as the price problem is concerned, is also a matter depending on circumstances. All these questions will be considered in their proper places.* What we are considering at this stage are the inherent potentialities of an inconvertible currency. Suffice it to say here that the name Gold Exchange Standard cannot conceal the true nature of the Indian Monetary Standard. Its essence consists in the fact that although gold is unlimited legal tender there is alongside an unlimited issue of another form of fiduciary currency well-nigh inconvertible, and also possessing the quality of unlimited legal tender. It needs no acute power of penetration to see that, so interpreted, the existing currency system in India is the opposite of the system outlined by the Government in 1898 and passed by the Fowler Committee. The two are opposites of each other for the same reason for which the Bank Charter Act was the opposite of the Bank Suspension Act in England. Under both the Acts the currency in England was a mixed currency, partly gold and partly paper. The difference was that by the Bank Suspension Act the issue of gold became limited and that of paper unlimited, while under the Bank Charter Act the process was reversed, so that the issue of paper became limited and that of gold unlimited. In the same manner, under the original scheme of the Government of India, the issue of rupees was to be limited and that of gold unlimited. Under the existing system the issue of gold has become limited while that of rupee has become unlimited. Was this an improvement on the plan originally contemplated by the Government of India ? The only objection to that plan was that it made the rupee an inconvertible rupee.† But is * For reasons giving rise to a premium on gold in terms of the rupee, see Chap. VI. For reasons explaining how there can be a general depreciation of the rupee without there being a specific depreciation of it in terms of gold, see end of Chap. VI and beginning of Chap. VII. † Both Lindsay and Probyn had attacked the plan of the Government of India on this score, and had claimed that their plans were superior because they had at least provided some sort of convertibility.

499 FROM A GOLD STANDARD TO A GOLD EXCHANGE STANDARD convertibility such a necessary condition, and, if so, when ? The idea that convertibility is necessary to maintain the value of a currency is, on the face of it, a preposterous idea. No one wants the conversion of bananas into apples to maintain the value of bananas. Bananas maintain their value by reason of the fact that there is a demand for them and their supply is limited. There is no reason to suppose that currency forms an exception to this rule. Only we are more concerned to maintain the value of currency at a stable level than we are of bananas because currency forms a common measure of value. What is wanted to maintain the value of currency, or of any other thing for the matter of that, is an effective limit on its supply. Convertibility is useful, not because it directly maintains the value of a currency, which is nonsense, but because it has the effect of putting a limit on the supply of currency. But convertibility is not the only way of achieving that object. A plan which lays down an absolute limit on issue has the same effect—indeed, a far more powerful effect—on the supply of currency. Now, had the Mints remained entirely closed to the coinage of rupees there would have been placed an absolute limit on the issue of currency, and all the purposes of convertibility would have been served by such an inconvertible rupee. Nay, more ; such an inconvertible rupee currency would have been infinitely superior* to the kind of pseudo-convertible rupee which we have in India to-day.* With an absolute limit there could have been no danger of a fall in the value of the rupee. If anything there would have been a danger of an indefinite appreciation of the rupee, but that was efectually guarded against by gold having been made general legal tender. A second effect of an absolute limit on the currency would have been to free it from management by reason of the fact that all question regarding the volume of issues had been settled once for all. In these respects, therefore, the gold-exchange standard is an impairment of the original plan of an inconvertible rupee with fixed limit of issue supplemented by gold. Again, from the standpoint of controlling the price-level, the exchange standard cannot be said to have been an improvement on the original plan. Of course, it is possible to say that such a perversion of the original system is no matter for regret. Whether gold is a standard of value, or whether fiduciary money is a standard of * In his comparison of the Limping Standard with the Exchange Standard, Prof. Fisher seems entirely to overlook these considerations. Cf. his Purchasing Power, etc., 1911, pp. 131-32.

500 DR. BABASAHEB AMBEDKAR : WRITINGS AND SPEECHES value, is a matter of infifference, for neither can be said to have furnished a stable standard of value. A gold standard has proved to be as unstable as a paper standard, because both are susceptible of contraction as well as expansion. All this, no doubt, is true. Nevertheless it is to be noted that in any monetary system there is no danger of indefinite contraction.* What is to be guarded against is the possibility of indefinite expansion. The possibility of indefinite expansion, however, varies with the nature of money. When the standard of value is standard metallic money the expansion cannot be very great, for the cost of production acts as a sufficient limiting influence. When a standard of value is a convertible paper money the provisions as to reserve act as a check on its expansion. But when a standard of value consists of a money the value of which is greater than its cost and is inconvertible, the currency must be said to be fraught with the fatal facility of indefinite expansion, which is another name for depreciation or rise of prices. It cannot, therefore, be said that the Bank Charter Act made no improvement on the Bank Restriction Act. Indeed, it was a great improvement, for it substituted a currency less liable to expansion in place of a currency far more liable to expansion. Now the rupee is a debased coin.† inconvertible, and is unlimited legal tender. As such, it belongs to that order of money which has inherent in it the potentiality of idenfinite expansion, i.e. depreciation and rise of prices. As a safeguard against this the better plan was no doubt the one originally designed, namely of putting a limit on the issue of rupees, so as to make the Indian currency system analogous to the English system governed by the Bank Charter Act of 1844. * Cf. Hawtrey, R. G., op. cit., Chap. I. † It is difficult to understand why some writers on Indian currency do not like to admit this fact. Cf. the discussion on Mr. Madan’s paper at the annual meeting of the Indian Economic Association ( Indian Journal of Economics, Vol. III, Part 4, Serial No. 12, p. 560). It is true the debasement of the rupee is not so obvious as it would have been had it taken the form of continuing the weight and making it baser, or of preserving the same fineness and making it lighter. But, as Harris points out in his Essay upon Money and Coins (Part II, Chap. I, par. 8), the “altering the denominations of the coins, without making any alteration at the Mint or in the coins themselves,” “as supposing ninepence, or as much silver as there is in ninepence, should be called a shilling,” is a mode of debasement not different from that of the rupee, and is virtually the same as the other two modes of debasement. So viewed it is difficult to avoid the conclusion that the rupee is a debased coin.