Vol. 6 · pages 561–565

546 DR. BABASAHEB AMBEDKAR : WRITINGS AND SPEECHES and other public works, as though the spending of rupees by itself producedd an effect different to what would have been produced had they been spent by the public. Similarly irresponsible conduct marked the sale of reverse councils in 1920. To meet these reverse councils the Secretary of State took the gold from the paper-currency reserve. But instead of cancelling notes to the extent of the gold that was taken out of the reserve, the Government took powers under an Act XXI of 1920 to fill the gap by manufacturing securities ad hoc, so that although there was redemption there was no retirement, and so much gold was merely wasted, for it produced no effect on prices or the exchange. This Act, passed in March, 1920, was of temporary duration, and would have obliged the Government to retire the currency by October, 1920, when it was to expire. Rather than do this the Government altered the paper-currency law, not temporarily but permanently (Act XLV of 1920), changing the provisions in such a manner as to require the Government to cancel the currency to the smallest degree possible by retiring their “created securities.” Even this was not done, owing to deficits in the Government Budget. But even if such indiscretions were not repeated the fact remains that Government cannot effect a greater retirement than is permitted by the gold-standard reserve. If that reserve fails Government has only two resources left: (1) to melt down the rupees and sell them as bullion for gold and to go on further contracting the currency, in this way till its value is restored : or (2) to borrow gold. Both these are evidently costly methods. To sell rupees as bullion is bound to result in loss unless the bullion in the rupee fetched more at the time of sale than what it cost when it was purchased for manufacturing it into bullion. The second process, that of borrowing, cannot be lightly resorted to for the purpose of creating a reserve fund to retire the currency. Indeed, so costly are such methods, and so complete would be the proof they would afford of the instability of the exchange standard if they were resorted to, that Government has never contemplated them as possible lines of defence in an exchange crisis. It seems certain, however, that Government does recognise that the gold-standard reserve by itself cannot suffice for the imaintenance of exchange. For we find that from the year 1907-8 dates a complete change in the distribution of Government balances between London and India. Up to that period it was the policy of the Secretary of State to

547 STABILITY OF THE EXCHANGE STANDARD draw only as much as necessary to finance his Home Treasury. After that date the practice was originated of drawing as much as the Government of India could provide, and as the Government of India has been supreme in financial matters it provided large sums for council drawings by increased taxation and budgeting for surpluses. The effect of this was to swell the cash balances of the Secretary of State.* No official explanation of a satisfactory character has ever been given for this novel way of financing the Home Treasury† but we shall not be very) far wrong if we say that the object in accumulating these balances is to provide a second gold reserve to supplement the true gold-standard reserve. Whatever strength the Government may derive for the time being from this adventitious resource, it is obvious that it cannot be permanent. Under a more popular control of Government finances the cash balances will have to be kept down to a minimum necessary to work the Treasury, and the gold-standard reserve will be the only reserve on which the Government will have to depend. The gold-standard reserve is to the rupee what the papercurrency reserve is to the notes. The purport of both is to prevent the respective currencies they support from falling or going to discount. But the treatment accorded by the Government to the rupee and the paper in respect of reserve shows a remarkable degree of contrast. In the case of the paper, as has been previously noted, the reserve is a statutory reserve, and even when the whole basis of Indian paper currency has been changed the provisions as to reserve are none the less strict and cannot be disregarded by the Government without infringing the law. Now, the rupee is nothing but a note printed on silver.‡ As such, the provisions as to reserve should be analogous to those governing the paper currency. Strange as it may seem, any regulation is conspicuous by its absence in regard to the gold-standard reserve.§ Not only is it not obligatory on the * For figures, see Chap. VII. † Cf. Memorandum on India Office Balances, Cd. 6619 of 1913. ‡ “We have virtually relegated our rupee currency to the position of a token currency, and we are now practically in the position of bankers who have issued a certain amount of fiduciary currency (whether paper or metal is immaterial), and to maintain the value of this fiduciary currency we are bound to be in a position to exchange it for gold when presented to meet legitimate trade requirements,” said the Financial Statement for 1903-4, p. 14. §The Chamberlain Commission said: “There are disadvantages in restricting the freedom of the Government in a crisis, and it is undersirable that the disposition and amount of the reserve should be stereotyped...... We therefore do not regard that the gold-standard reserve should be regulated by statute.”—Report, Sec. 101.

548 DR. BABASAHEB AMBEDKAR : WRITINGS AND SPEECHES Government to redeem the rupee, but it does not seem that the Government is even bound to maintain the reserve. And that it has maintained such a reserve is no guarantee that it will replace it supposing that the reserve was dissipated.* Such differences apart, is the gold-standard reserve an adequate reserve ? Figures of the magnitude of the gold-standard reserve, as usually given in official publications, are a meaningless array. What is the use of displaying assets without at the same time exhibiting the liabilities ? To be able to judge of the adequacy of that reserve we must know what is the total circulation of rupees. When, however, we compare the circulation of the rupees with the reserve, the proportion between the two is not sufficiently large so as to inspire confidence in the stability of the system (see Table XLIX). How can a reserve so small as this carry through the process of retirement to any sufficient extent ? That it will not always do it the crisis of 1920 gives abundant proof. But the supporters of the exchange standard maintain that the smallness of the reserve is a matter of no consequence, for the reserve is kept only for the purpose of foreign remittances. That being the case, it is said the reserve need not be large. Granting that it is so, what must govern the magnitude of the reserve in order that it may prove adequate in any and every case ? The only attempt made to enunciate a rule of guidance is that by Prof. Keynes. That rule he finds† in the possible variations in the balance of trade of India.. Now, does this make the problem of regulating the reserve more definite ? As has been explained previously, the adverse balance of trade would be due to the depreciation of the currency, so that Mr. Keynes’s statement amounts to this, that the reserve should vary with the depth of the depreciation. But how is a Government to do this ? Only by adverting to the movement of the price level. But in all its currency management the Government of India never pays any attention to the price * In the course of his speech on the Indian Paper Currency (Temporary Amendment) Bill, dated March 17, 1920, the Finance Minister observed :”...... from a practical point of view, it is desirable to leave the gold-standard reserve until the paper-currency reserve has been re-transferred, in case... the Secretary of State finds it impossible to keep himself in funds by Councils for his heavy home liabilities. He will then be able to use the gold-standard reserve, and we can credit the gold-standard reserve out here. There is a third point, and I think a conclusive one. When you operate against the paper-currency reserve you have to operate within the paper-currency reserve ; when you operate against the gold-standard reserve it disappears ; it melts, and we are under no obligation to replace it; whereas we are under a statutory obligation to replace the papercurrency reserve.”—S.LC.P. Vol. LVIII, p. 1416. † Op. cit., pp. 166-7.

549 STABILITY OF THE EXCHANGE STANDARD TABLE XLIX DISTRIBUTION OF THE GOLD-STANDARD RESERVE AND ITS PROPORTION TO RUPEE CIRCULATION (IN THOUSANDS OF POUNDS STERLING) March 31 in each Year. In England. In India Total Reserve, England and India. Volume of Rs. in Circulation in Crores. Percentage of Reserve to Ra. in Circulation (£ = Rs. 15)* Purchase Value of Sterling Securities. Cash at Short Notice. Temporary Loan to the Home Treasury. Gold deposited at the Bank of England. Total. Coined Rupees in India. Outstanding Debt Treasury balances. Temporary Loan to Treasury Balances. Gold. Total. (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) 1901 — — — — — — 1,831 — 1,200 3,031 3,031 143 3.1 02 3,454 — — — 3,454 — — — — — 3,454 138 3.7 03 3,810 — — — 3,810 — 1 — — 1 3,811 136 3.4 04 6,377 — — — 6,377 — 167 — — 167 6,544 144 6.8 05 8,377 — — — 8,377 — 152 — — 152 8,529 152 8.4 06 12,165 — — — 12,165 — 287 — — 287 12,452 164 10.7 07 12,519 — — — 12,519 4,000 301 — 22 4,323 16,842 178 10.6 08 13,187 — 1,131 — 14,318 4,000 — — — 4,000 18,318 191 11.2 09 7,414 — 470 — 7,884 10,587 — — — 10,587 18,471 187 7.1 10 13,219 3,011 — — 16,230 2,534 — — — 2,534 18,764 186 13.8 11 15,849 1,477 — — 17,326 1,934 — — — 1,934 19,260 184 14.8 12 16,748 1,074 — — 17,822 1,934 — — — 1,934 19,956 182 14.9 13 15,946 1,006 — 1,620 18,572 4,000 35 — — 4,035 22,607 191 14.8 14 17,165 25 — 4,320 21,510 4,000 22 — — 4,022 25,532 187 17.2 15 12,149 8 — 1,250 13,407 — 70 7,000 5,238 13,308 25,715 204 18.9 16 16,219 5,792 — — 22,011 — 1 4,000 239 4,240 26,251 212 15.7 17 25,406 6,001 — — 31,407 — — — 103 103 31,510 227 20.8 18 28,453 6,000 — — 34,453 — — — — — 34,453 219 23.5 19 29,729 6,016 — — 35,745 — — — — — 35,745 228 23.5 * In striking the proportion the rupee portion of the reserve has been omitted.

550 DR. BABASAHEB AMBEDKAR : WRITINGS AND SPEECHES problem. Indeed, as was pointed out above, its conception of the underlying causes of the fall of exchange is totally at variance with the only true conception, nothing but a firm grasp of which can enable it to avert a crisis. Being ignorant of the true conception it blindly goes on issuing currency until there occurs what is called an adverse balance of trade. All it aims at is to maintain a gold reserve, and so long as it has that reserve it does not stop to think how much currency it issues. The proportion of the issues and the reserve not being correlated the stability of the exchange standard, in so far as it depends upon the reserve, must always remain in the region of vagueness, far too problematical to inspire confidence of the system. Nay, the liability of redemption for foreign remittances, small as it appears, may become so indefinite as entirely to jeopardize the restoration of stability to the exchange standard. But is a gold reserve such an important thing for the maintenance of the value of a currency ? All supporters of the exchange standard must be said to be believers in that theory. But the view cannot stand a moment’s criticism. To look upon a gold reserve as an efficient cause why all kinds of money remain at par with gold is a gross fallacy.* To take such a view is to invert the casual order. It is not the gold reserve which maintains the value of the circulating medium, but it is the limitation on its volume which not only suffices to maintain its own value, but also makes possible the accumulation and retention of whatever gold reserve there is in the country. Remove the limit on the volume of currency, and not only will it fail to maintain its value, but will prevent the accumulation of any gold reserve whatever. So little indeed is the importance of a gold reserve to the cause of the preservation of the value of currency that provided there is a rigid limit on its issue the gold reserve may be entirely done away with without impairing in the least the value of the currency. The Chamberlain Commission recommended that the Government of India should accumulate a reserve to maintain the value of the rupee because it was by means of their reserves that European banks maintained the value of their currencies. Nothing can be a greater perversion of the truth. What the European banks did * Cf. in this connection the brilliant paper by F. A. Fetter, “The Gold Reserve: its Function and its Maintenance,” in the Political Science Quarterly, 1896, Vol. XI, No. 2.