Vol. 6 · pages 536–540

521 STABILITY OF THE EXCHANGE STANDARD TABLE XL Date Rupee Prices in India. 1913=100 Sterling Price in England (Statist). 1913=100 Average Rate of Exchange London on Calcutta RupeeSterling Purchasing Power Parity . 2Col. 3Col. x16d (1) (2) (3) (4) (5) d. d. 1920. January ... 202 289 27.81 22.89 February ... 203 306 32.05 24.12 March ... 194 301 29.66 25.40 April ... 193 300 27.88 25.95 May ... 190 298 25.91 25.77 June ... 192 293 23.63 25.08 July ... 196 282 22.63 24.49 August ... 193 263 22.75 24.70 September ... 188 244 22.31 24.94 October ... 188 232 19.88 24.00 November ... 186 215 19.69 22.62 December ... 179 209 17.44 21.81 1921. January ... 169 200 17.66 21.96 February ... 164 191 16.31 20.98 March ... 162 183 15.53 20.40 April ... 163 186 15.75 19.63 May ... 170 182 15.44 17.98 June ... 172 176 15.53 17.14 July ... 171 163 15.38 17.40 August ... 178 161 16.25 16.36 September ... 178 157 17.22 15.82 October ... 178 156 17.02 14.65 November ... 173 161 16.25 14.89 December ... 169 157 15.94 14.86 1922. January ... 162 156 15.88 15.41 February ... 159 156 15.59 16.70 March ... 160 157 15.34 15.70 April ... 160 159 15.19 15.90 May ... 162 159 15.59 15.70 June ... 169 160 15.63 15.14 July ... 170 158 15.69 14.87 August ... 166 153 15.66 14.74

522 DR. BABASAHEB AMBEDKAR : WRITINGS AND SPEECHES Given this fact, any question of raising the gold value of the rupee to 2s. gold when the rupee had scarcely the power to purchase 1s. 4d. sterling was out of the question. The Committee indulged in loose talk about stabilizing the Indian exchange. But even from this standpoint the Committee’s insistence on linking the rupee to gold must be regarded as little grotesque. Stable exchange, to use Prof. Marshall’s language, is something like bringing the railway gauges of the world in unison with the main line. If that is what is expected from a stable exchange, then what was the use of linking the rupee to gold which had ceased to be the “main line” ? What people wanted was a stable exchange in terms of the standard in which prices were measured. Linking to gold involved unlinking to sterling, and it is sterling which mattered and not gold. Given this importance of sterling over gold, was any policy of exchange stabilization called for ? First of all it should have been grasped that such a policy could succeed only if it was possible to make sterling and rupee prices move in unison, for then alone could the ratio of interchange between them be the same. What control had the Government of India over the sterling ? They might have so controlled the rupee as to produce the effect desired, but all that might have been frustrated by an adverse move in the sterling. The success of the policy of linking to sterling would have been highly problematical although highly desirable. But was it called for ? Now the problem of stabilization is primarily a problem of controlling abnormal deviations from the purchasing-power parity between two currencies. In the case of India there were no abnormal deviations from the rupee-sterling purchasingpower parity. On the other hand, the Indian exchange was moving in a more or less close correspondence with it. There was therefore no ground for originating any policy of exchange stabilization. But, supposing there were abnormal deviations and that, owing to some reasons known to it, the Committee believed that the exchange value of the rupee was not likely to return to the point justified by its general purchasing power, in that case the Committee should have fixed the exchange value well within the range of the purchasing power of the rupee. As it was, the value of the rupee fixed by the Committee the rupee never had. In giving a value to the rupee so much above

523 STABILITY OF THE EXCHANGE STANDARD its purchasing-power parity, it is obvious the Committee originated a solution for the simple problem of stabilizing the rupee which involved the much bigger and quite a different problem of deflation or raising the absolute value of the rupee. How was the object to be attained ? The Committee never considered that problem. And why ? Was it because the price of silver had gone up ? May be. But it is doubtful whether the Committee could have believed firmly that the value of silver was going to be permanently so high as to require a modification of the gold par. Anyone who cared to scrutinize the rise in the price of silver could have found that the rise was largely speculative and could not have been permanent. TABLE XLI PRICE OF SILVER IN STERLING (PENCE)* Year Highest Lowest Average Range of Variation 1913 293/8 25 15/16 27 9/16 3 7/16 1914 273/4 22 1/8 25 5/16 5 5/8 1915 27¼ 22 5/16 23 11/16 4 15/16 1916 371/8 26 11/16 31 5/16 10 7/16 1917 55 35 11/16 40 7/8 19 11/16 1918 49½ 42 ½ 47 9/16 7 1919 791/8 47 3/4 57 1/16 31 3/8 1920 89½ 38 7/8 61 7/16 50 5/8 1921 433/8 30 5/8 37 12 3/4 But supposing that the rise in the price of silver was not speculative, did it follow that the rupee was appreciated ? The diagnosis of the Committee was an egregious blunder. With the facts laid before the Committee it is difficult to understand how anyone with a mere smattering of the knowledge of price movements could have concluded that because silver had appreciated the rupee had therefore appreciated. On the other hand, what had happened was that the rupee had depreciated in terms of general commodities, including gold and silver. Indeed, the appreciation of silver was a depreciation of the rupee. The following (Table XLII) is conclusive evidence of that fact :— * From Kirkaldy’s British War Finance, 1921, p. 35. Figures for 1921 are added from the Indian Paper Currency Report.

524 DR. BABASAHEB AMBEDKAR : WRITINGS AND SPEECHES TABLE XLII DEPRECIATION OF THE RUPEE Date Price of Bar Gold in India (Bombay) per Tola of 180 grs. Price of Silver in India (Bombay) per 100 Tolas Index Number for Prices in India 1913=100 Rs. A. Rs. A. 1914 ... 24 10 65 11 ... 1915 ... 24 14 61 2 112 1916 ... 27 2 78 10 125 1917 ... 27 11 94 10 142 1918 August ... (July) 34 0 (May 16) 117 2 178 ” ... (Nov. 28) 82 10 ... ” ... 30 0 ... ... ” Sept. ... 32 4 ... ... 1919 March ... 32 0 113 0 200 Thus, the rise in the price of silver was a part of the general rise of prices of the depreciation of the rupee. The Committee desired to raise the gold value of the rupee to 10 rupees per sovereign when it cost twice that number of rupees to purchase a sovereign in the market. So marked was the depreciation of the rupee in terms of gold that a few months before the Committee submitted its report the Statesman (a Calcutta paper) wrote:— “If you land in the country with a sovereign the Government will take it away from you and give you eleven rupees three annas in return. If you are in the country and happen to have a sovereign and take it to the currency office you will get firfteen rupees for it. On the other hand, if you take it to the bazar you will find purchasers at twenty-one rupees.” These facts were admitted by the Finance Department of the Government of India to be substantially correct,* and yet in the face of them the Committee recommended the 2s. gold parity for the rupee. The Committee confused the rupee with the silver, and thus failed to distinguish the problem of retaining the rupee in circulation and raising its exchange value in terms of gold. The latter solution was applicable only if the rupee had appreciated. But as it was silver that had appreciated in terms * Cf. the reply of the Hon. Mr. Howard to the question of the Hon. Mr. Sinha on September 23, 1919. S.L.C.P., Vol. LVII, p. 417.

525 STABILITY OF THE EXCHANGE STANDARD of the rupee, the only feasible solution was to have proposed the reduction of the fineness of the rupee. Had the Committee regarded silver as a commodity distinct from the rupee like any other commodity to be measured in terms of the rupee as a unit of account, probably it might have avoided committing the blunder which it did. But what is more than probable is that the Committee did not think that the general purchasing power of the rupee was a factor of any moment in the consideration of the matter it was asked to report upon. What was of prime importance in its eyes for the maintenance of the exchange value of the rupee was a favourable balance of trade, and that India had at the time the Committee drafted its Report. For the Committee, in the course of its general observations on the exchange standard, remarked : “that the system had proved effectual in preventing the fall in the value of the rupee below 1s. 4d., and unless there should have been profound modifications in India’s position as an exporting country with a favourable trade balance, there was no reason to apprehend any breakdown in this respect.”* Proceeding on this view of the question it was quite natural for the Committee to have argued that if a favourable balance of trade sustained 1s. gold exchange, why should a similar balance of trade not sustain 2s. gold exchange ? Again, it is only on some such hypothesis that one can explain why the recommendations of the Committee were adopted at all when the necessity for their adoption had passed away. Even if the intrinsic value of the rupee exceeded its nominal value, there was no danger of a wholesale disappearance of the rupee from circulation in view of the enormous volume of rupees in India.† What would have taken place was not a wholesale melting of rupees, but a constant dribble of an irregular and illegal character leading to the contravention of the orders then issued by the Government of India against the melting or exportation of the rupee coin. At the time when the Committee reported (December, 1919) the price of silver was no doubt high, but it was certainly falling during 1920 when the Government * Report, par. 33. † Cf. evidence of Mr. Keynes before the Committee of 1919. Q. 2,665-68.