Vol. 6 · pages 556–560

541 STABILITY OF THE EXCHANGE STANDARD Not only did the Government sell reverse councils on a large scale, but it also sold gold for rupees for internal circulation a thing which it seldom did before. III. R EDEMPTION IN 1920 TABLE XLVIII SALE OF GOLD No. of Sale Date of Sale Minimum Rate of accepted Tenders Average Rate of accepted Tenders Quantity sold (in Tolas) Price of Country Bar Gold in the Bombay Bazaar Rs. A. p. Rs. A. P. Rs. A. P. 1 1919. September 3 25 8 0 26 12 1 3,29,130 28 10 0 2 ” 17 24 8 0 24 10 0 3,96,640 26 1 0 3 October 6 25 8 0 25 9 8 3,26,000 27 0 0 4 ” 20 26 15 3 27 0 2 3,34,000 28 0 0 5 November 3 27 14 6 27 15 6 3,25,000 28 5 0 6 ” 17 26 15 0 27 0 11 5,18,500 28 2 0 7 December 8 26 0 6 26 4 6 10,00,650 27 10 0 8 1920. January 5 26 4 3 26 7 9 7,63,300 27 3 0 g ” 19 26 13 3 26 14 7 8,00,000 27 5 0 10 February 5 25 2 3 25 9 7 7,56,450 25 6 0 11 ” 19 16 2 3 21 9 1 9,60,590 23 4 0 12 March 3 18 8 0 18 12 4 12,96,125 21 7 0 13 ” 17 21 6 0 21 7 7 12,53,325 22 13 0 14 April 7 22 7 3 22 9 4 12,46,200 24 0 0 15 ” 21 23 7 4 23 8 6 10,68,175 24 4 0 16 May 5 20 13 3 21 3 2 11,96,750 21 8 0 17 ” 19 21 0 3 21 1 7 12,46,050 21 12 0 18 June 9 21 8 9 21 9 8 11,32,350 22 2 6 19 ” 23 20 14 10 21 0 5 12,25,250 21 8 0 20 July 7 21 1 4 22 2 2 12,81,500 21 6 0 21 ” 21 22 0 1 22 0 11 12,42,000 22 5 0 22 August 4 22 5 6 22 6 3 12,78,950 22 7 0 23 ” 19 23 9 4 23 10 2 5,54,500 23 7 0 24 September 1 22 8 3 22 10 8 8,27,700 23 1 6 25 ” 14 23 9 4 23 12 11 2,30,500 23 8 0 Total 2,15,89,635 During 1920 no council bills were drawn by the Secretary of State on the Government of India.

542 DR. BABASAHEB AMBEDKAR : WRITINGS AND SPEECHES The success of this mechanism on the two previous occasions had strengthened the belief that it had the virtue of restoring the value of the rupee. But the failure of this mechanism in the crisis of 1920 compels one to adopt an attitude of reserve towards its general efficacy. It cannot be said that exchange gave way because this mechanism was not brought into operation. On the other hand, the view of the Government regarding the sale of reverse councils in 1920 had undergone a profound modification as compared with the view it held during the crisis of 1907-8. In that crisis the Government behaved like a miser, sitting tight on its gold reserve and refusing to use it for the very purpose which it was designed to serve. An Accountant-General had “to go on his knees” to persuade the Government of India to, release its gold.* It was probably because it was rebuked by the Chamberlain Commission for failing to make use of its gold reserve in 1907 that in the crisis of 1920 the policy of selling reverse councils was so boldly conceived. There was a great deal of ignorant criticism of that policy from the general public that it was an “organized loot.” But the Finance Minister was undaunted, and argued†:— “It is an essential feature of our exchange policy... that we should not only provide for remittances from London to India through council bills at approximately gold point, but from India to London in time of exchange weakness also at gold point, through the sale of sterling remittance known as reverse councils. It is simply an alternative to the export of gold. This is no new matter—we have been selling reverse councils for years...... and unless we do so the exchange policy does not become effective...... This is the reason, and the only reason, why we have sold reverse councils...... It is an effort in fact to maintain exchange as near as posssible to the gold point.... What would be the consequence if we yielded to the pressure placed on us and ceased to sell reverse councils at all ? I can understand a demand that reverse councils should be sold by some different method, or at rates different from those at present in force, but I must confess that I cannot understand the demand that the facilities * Evidence of Mr. F. C Harrison before the Chamberlain Commission, Q. 10,209. † Speech on the resolution re “Reverse Councils,” March 10, 1920. S.L.C.P. Vol. LVIII p. 1291.

543 STABILITY OF THE EXCHANGE STANDARD for the exchange of rupees into external currency should be entirely withdrawn. I see that in Bombay it is urged that we should let exchange find its ‘natural level.’ That is a catchword which does not impress me. Used in the sense in which that phrase has been recently used, there is no such thing as a ‘natural level’ in exchange, for, when one translates the internal currency into another currency, there must be some sort of common denominator to which both currencies can be brought; it may be gold, it may be silver, it may be sterling or it may be Spanish pesetas, which we take as our basis. The rupee must be linked on to something* and if it is so linked, then it must be at some definite rate, and this necessarily involves that we must sometimes be prepared to sell reverse councils in order to maintain that rate. If reverse councils be withdrawn entirely, then we should have neither a gold standard, nor a gold-exchange standard, nor any kind of standard at all.” But that only raises the question: If the sale of reverse councils is efficacious in righting the exchange, why was its effect such a disastrous failure ? The Finance Minister answered the point tersely and cogently when he said :— “If we have failed in narrowing the gap between the market price and the theoretical gold part of the rupee...... it is not because we have sold too many reverse councils ; it is because we have sold too few. I put it to any member of the commercial community here, and I put it without fear of contradiction, that if our resources had enabled us...... to sell straight away 20, 30, or 40 millions of reverse councils, we should probably have had no gap between the market price of the rupee and the theoretical gold price of the rupee at all. One of our difficulties has been, hot that we have sold too many reverse councils, but that we have been obliged to sell too few.”† * By Ordinance III of June 21,1920, the gold coins referred to in Section 11 of the Indian Coinage Act (III of 1906) ceased to be legal tender in payment or on account, but provision was made for their acceptance by Government at the ratio of Rs. 15 during a moratorium of twenty-one days. This Ordinance continued till September 9, 1920, when by Act XXXVI of 1920 the sovereign was again made legal tender. During this period gold had no legal status in India. † Ibid., p. 1301.

544 DR. BABASAHEB AMBEDKAR : WRITINGS AND SPEECHES There would have been some force in this argument if the smount of reverse bills sold were “too few.” Not 20, 30, or 40 millions, but 55½ millions of reverse councils were sold, besides the large issue of gold internally, and the complete stoppage of council bills, and yet the rupee did not rise above 1s. 4d. sterling, let alone reaching 2s. gold. Why did not the sale of reverse councils suffice to rectify the exchange ? This leads us to examine the whole question of the efficacy of this redemption. It is necessary to premise at the outset that redemption may result in mere substitution of one form of currency by another, or it may result in the retirement of currency. In so far as it results in substitution it is of no consequence at all, for substitution of currency is not a shrinkage of currency.* To the restoration of the value of a currency what is essential is its shrinkage, i.e. its retirement, cancellation. The important question with regard to this mechanism is not to what extent the currency can be redeemed, but to what extent it can be retired. In the prevalent view of this question it seems to be accepted without question that this extent is determined by the magnitude of the gold resources of the Government of India and the Secretary of State. Let us first make it clear how these gold resources are located and distributed. It will be recalled that these gold resources are distributed between (1) the papercurrency reserve, (2) the gold-standard reserve, and (3) the cash balances of the Secretary of State. It has been the habit to speak of these resources as being three “lines of defence” on which the Government can safely rely when an exchange crisis takes place. But are they ? They can be, for the purposes of retirement, only if they were all “free” resources; in other words, if they were not appropriated resources. To what extent are they unappropriated ? Can the Secretary of State take gold from the paper-currency reserve ? He can, but then he must replace it by something else, or must cancel notes to that extent. Can the Secretary of State take gold out of his cash balances ? He can, but then he must either borrow to fill his Treasury or draw upon the Government of India if there is anyone to buy his bills, which is tantamount to issuing rupee currency. The gold in the paper-currency reserve and that in the cash balances is of no use at all, for it does not permit of the cancellation of the rupee * The most notable example is that of Americal greenbacks. Under the law of 1875 they were by 1879 retired in sufficient numbers to restore parity with gold. But by a counter-law of 1878, 347,000,000 of them have been kept in circulation. As soon as redeemed, they must be reissued ; they cannot be retired.

545 STABILITY OF THE EXCHANGE STANDARD currency, which is what is wanted in restoring its value when it suffers a fall. It is therefore sheer nonsense to speak of the effectiveness of redemption as being commensurate with the gold resources of the Secretary of State. The matter is important, and an illustration may not be out of place. Suppose A, a holder of rupees, wants to get gold for them. He can go to three counters; (1) that of the controller in charge of cash balances ; (2) that of the controller of currency in charge of the paper-currency reserve ; or (3) that of the custodian of the gold-standard reserve. If A goes to the first, what is the result ? The cash balance is pro tanto reduced. On the assumption that the cash balance is at its minimum, as it should be, the controller must reimburse himself immediately to maintain his solvency by drawing a bill on India and thereby releasing rupees received for gold again in circulation, so that in this case there is no shrinkage of currency. If A goes to the controller of currency, what happens ? The controller gives him gold, but on the assumption that the paper-currency account is a separate statutory account he must put the rupees received from A in place of the gold issued from his reserve, so that here again what happens is that the composition of the reserve undergoes a change, but the total paper currency remains the same. It must therefore be borne in mind that to the extent the gold in the paper-currency reserve and the cash balances are operated upon the result is not a retirement of currency. To speak of them as “lines of defences,” as is so often done, is to overlook the fact that these two are not free resources but are appropriated resources. What is, then, the resource left to the Government to retire the rupee currency ? Only the gold-standard reserve. That is the only reserve the amount of which is unappropriated for any particular use. It is free cash, and only to that extent is it possible for the Government to restore the rupee currency when a fall in its gold value eventuates. Of course it is important to bear in mind that this is the extent to which it can retire the currency. Not that it will, for it may not, and there is no want of cases in which it has not. Two instances will suffice. During the first period of the Mint closure, 1893-98, it will be recalled how a large number of rupees had accumulated in the hands of the Government, and in the interest of raising the value of the rupee they should have been locked away. Instead the Government of India released that money in circulation in extending railways