Vol. 6 · pages 526–530

511 STABILITY OF THE EXCHANGE STANDARD Between January, 1898, and January, 1917, twice did the rupee fall below its gold par. The year 1907-8 records the second occasion when the parity of the rupee under the exchange standard broke down. The actual rates of exchange prevailing in the market were as follows:— TABLE XXXI RATES OF EXCHANGE, LONDON ON INDIA (FROM “THE TIMES”) Par R. = 1s. 4d. Date On Calcutta On Bombay Highest Lowest Highest Lowest 1907. September ... 1 4 1/32 13 31/32 14 1/32 13 31/32 October ... 1 4 1/32 13 31/32 14 1/32 13 31/32 November ... 1 4 1 3 25/32 13 31/32 13 23/32 December ... 1 3 15/16 13 27/32 13 15/16 13 27/32 1908. January ... 1 3 15/16 13 29/32 13 15/16 13 7/8 February ... 1 3 31/32 13 7/8 13 31/32 13 7/8 March ... 1 3 29/32 13 27/32 13 29/32 13 27/32 April ... 1 3 7/8 13 27/32 13 27/32 13 27/32 May ... 1 3 7/8 13 27/32 13 15/16 13 27/32 June ... 1 3 29/32 13 27/32 13 7/8 13 27/32 July ... 1 3 7/8 13 27/32 13 7/8 13 27/32 August ... 1 3 29/32 13 27/32 13 29/32 13 27/32 September ... 1 3 31/32 13 29/32 13 31/32 13 7/8 October ... 1 3 15/16 13 7/8 13 29/32 13 15/16 November ... 1 3 29/32 13 7/8 13 7/8 13 7/8 December ... 1 3 15/16 13 29/32 13 31/32 13 7/8 After a crisis lasting over a year the rupee recovered to its old gold par and remained fixed at it, though by no means firmly, for another seven years, only to suffer another fall from its parity during the year 1914-15 (see table, p. XXXII). After 1916 the stability of the exchange standard was threatened by a danger arising from quite unsuspected quarters. The Indian exchange standard was based upon the view that the gold value of silver was bound to fall or at least not likely to rise to a level at which the intrinsic value of the rupee became , higher than its nominal value. The price of silver at which the intrinsic value of the rupee equalled its nominal value was 43d. per ounce. So long as the intrinsic value of the rupee remained

512 DR. BABASAHEB AMBEDKAR : WRITINGS AND SPEECHES TABLE XXXII RATES OF EXCHANBE, LONDON ON CALCUTTA (FROM THE NATIONAL BANK OF INDIA) Month 1914 1915 Highest Lowest Highest Lowest January ... ... ... 1 3 15/16 13 15/16 February ... ... ... 1 4 1/32 13 39/32 March ... ... ... 1 4 1 3 15/16 April ... ... ... 1 3 15/16 13 29/32 May ... 1 4¼ 1 3 15/16 13 15/16 13 7/8 June ... 1 3 31/32 13 15/16 13 7/8 13 27/32 July ... 1 3 31/32 13 13/16 13 22/32 13 23/32 August ... 1 3 7/8 13 13/16 13 15/16 13 27/32 September ... 1 3 15/16 13 13/16 1 4 13 15/16 October ... 1 3 15/16 13 15/16 ... ... November ... 1 3 15/16 13 15/16 ... ... December ... 1 3 15/16 13 15/16 ... ... below its nominal value, i.e. the price of silver did not rise above 43d., there was no danger of the rupee circulating as currency. Once the price of silver rose above that point the danger of the rupee passing from currency to the meltingpot was imminent. Now, with the exception of a brief period from September, 1904, to December, 1907, the gold price of silver had since 1872 showed a marked tendency to fall. The decline in its price was so continuous and so steady as to create the general impression that the low price had come to stay. Indeed, so firm was the impression that the framers of the exchange standard had never taken into account the contingency of a rise in the price of silver above 43d. So little was it anticipated, that the system was not criticized on this ground by any of the witnesses who deposed before the successive Committees and Commission on Indian currency. But the unexpected may happen, and unfortunately did happen after 1916, and happened suddently. On February 10, 1914, the cash price in London of silver per ounce of standard fineness was 26 5/8d. It fell to 22 11/16d. on February 10, 1915, and though it jumped to 27d. on the same date in 1916, yet it was below the rupee melting-point. After the lastmentioned date its rise was meteoric. On February 9, 1917, it

513 STABILITY OF THE EXCHANGE STANDARD rose to 37 5/8 d.; on February 8, 1918, to 43d.; and on the same date in 1919 to 48 7/16d., thereby quite overshooting the rupee melting-point. But the price of silver broke all record when on February 11, 1920, it reached the colossal figure of 89 ½d. per standard ounce. The rise in the intrinsic value of the rupee above the nominal value at once raised a problem as to how the rupee could be preserved in circulation. Two ways seemed open for the solution of the problem. One was to scale down the fineness of the rupee, and the other to raise its gold parity. All other countries which had been confronted by a similar problem adopted the former method of dealing with their silver coinage—a method which was successfully tried in the Philippines and the Straits Settlements and Mexico in 1904-7, when a rise in those years in the price of silver had created a similar problem in those countries.* The Secretary of State for India adopted the second course of action and kept on altering the rupee par with every rise in the price of silver. The alterations of the rupee par following upon the variations in the price of silver are given below:— TABLE XXXIII Date of Alteration of the Rupee Par. Pitch of the Par. s. d. January 3, 1917 ... ... ... ... 1 4¼ August 28, 1917 ... ... ... ... 1 5 April 12, 1918 ... ... ... ... 1 6 May 13, 1919 ... ... ... ... 1 8 August 12, 1919 ... ... ... ... 1 10 September 15, 1919 ... ... ... ... 2 0 November 22, 1919 ... ... ... ... 2 2 December 12, 1919 ... ... ... ... 2 4 After having played with the rupee par, for two years, in this manner, as though such alterations involved no social consequences, the Secretary of State, on May 30, 1919, appointed a new Currency Committee under the chairmanship of Babing-ton Smith, to recommend measures “to ensure a stable gold exchange standard.” The majority of the Committee, after half a year of cogitation, reported to the effect† that * Cf. E. W. Kemmerer, Modem Currency Reforms, 1916, pp. 349-354, 445-49, and 535-47. † See Report, P.P.Cd. 527 of 1920, par. 59.

514 DR. BABASAHEB AMBEDKAR : WRITINGS AND SPEECHES “(i) The object should be to restore stability to the rupee, and to re-establish the automatic working of the currency system at as early a date as practicable. “(ii) The stable relation to be established should be with gold and not with sterling. “(iii) The gold equivalent of the rupee should be sufficiently high to give assurance, so far as is practicable, that the rupee, while retaining its present weight and fineness, will remain a token coin, or in other words, that the bullion value of the silver it contains will not exceed its exchange value. “After most careful consideration” (the Committee said) “we are unanimous (with the exception of one of our members who signs a separate report) in recommending that the stable relation to be established between the rupee and gold should be at the rate of one rupee to 11.30016 grs. of fine gold both for foreign exchange and internal circulation.” i.e. the rupee to be equal to 2s. (gold). The minority report, which harped on the old cry of a stimulus of low exchange and penalty of high exchange, stood out for the maintenance of the old rate of 15 rupees to the gold sovereign or 113.0016 grs. troy of pure gold, and recommended the issue of a two-rupee silver coin of reduced fineness compared with the old rupee, so long as the price of silver in New York was over 92 cents.* By the announcements of February 2, 1920, the recommendations of the majority of the Committee were accepted by the Secretary of State and also by the Government of India, which abandoned the old parity of 7.53344 grs. per rupee for the new parity of 11.30016 grs. troy. Now, has the rupee maintained its new parity with gold ? In the matter of ascertaining this fact the exchange quotation on London is no guide, for the value of the rupee was 2s. gold and not 2s. sterling. Had gold and sterling been identical the case would have been otherwise. But during the war, owing to the issue of virtually inconvertible money, the pound sterling had depreciated in terms of gold. We must therefore take as our standard a currency which had kept its par with gold. Such a currency was the American dollar, and the exchange quotation * Report, p. 41.

515 STABILITY OF THE EXCHANGE STANDARD on New York is therefore more directly helpful in measuring the gold value of the rupee than is the sterling quotation on London. We can also employ the actual rupee-sterling quotation as a measure by comparing it with the amount of sterling the rupee should have purchased, as an equivalent of 11.30016 grs. of fine gold, when corrected by the prevailing cross-rate between New York and London.* Compared with the par of exchange, the actual exchange, either on New York or on London, indicates a fall of the rupee which is simply staggering ( See table XXXIV). Consider, along with the external gold value of the rupee, its internal value in terms of sovereigns and bar gold ( see table XXXV). The tables need no comment. The rupee is not only far away from 2s. (gold), but is not even 1s. 4d. (sterling). Do not the facts furnish an incontrovertible proof of the futility of the exchange standard ? How can a system which fails to maintain its value in terms of gold, which it is supposed to do, be regarded as a sound system of currency ? There must be somewhere some weakness in the mechanism of a system which is liable to such occasional breakdowns. The rupee fell or rather was below par in 1893, and did not reach its parity to any real degree of firmness until 1900. After an interval of seven years the rupee again falls below par in 1907. The year 1914 witnesses another fall of the rupee. A meteoric rise since 1917, and again a fall after 1920. This curious phenomenon naturally raises the question : Why did the rupee fail to maintain its gold parity on these occasions ? A proper reply to this question will reveal wherein lies the weakness of the exchange standard. * The formula for this computation is as follwos :— if x pence = 1 rupee = 11.30016 grs. fine gold, 2:3.22 grs. fine gold = 1 dollar D dollars = 1 pound sterling = 240 pence. Then x 11.30016 × 240 = 11,680 pence.23.22 × D D Cf. Rushforth, F. V., The Indian Exchange Problem, 1921, p. 9.