Vol. 6 · pages 566–570

551 STABILITY OF THE EXCHANGE STANDARD was just the opposite of what the Commission recommended. Whenever their gold tended to disappear they reduced their currencies not only relatively but absolutely. It was by limitation of their currencies that they protected the value of the currencies and also their gold reserves. The existence of a reserve, therefore cannot lend any strength to the gold-exchange standard. On the other hand, if we inquire into the genesis of the reserve, its existence is an enormous source of weakness to that standard. For how does the Government obtain its gold-standard reserve ? Does it increase its reserve in the same way as the banks do, by reducing their issues ? Quite the contrary. So peculiar is the constitution of the Indian gold-standard reserve that in it the assets, i.e., the reserve, and the liabilities, i.e., the rupee, are dangerously concomitant. In other words, the reserve cannot increase without an increase in the rupee currency. This ominous situation arises from the fact that the reserve is built out of the profits of rupee coinage. That being its origin, it is obvious that the fund can grow only as a consequence of increased rupee coinage. What profit the rupee coinage yields depends upon how great is the difference between the cost price of the rupee and its exchange value. Barring the minting charges, which are more or less fixed, the most important factor in the situation is the price of silver. Whether there shall be any profit to be credited to the reserve depends upon the price paid for the silver to be manufactured into rupees.* Not only is the reserve an evil by the nature of its origin, but having regard to its documentary character the reserve cannot be said to be absolutely dependable in a time of crisis. There is no doubt that the intention of the Government in investing the reserve is to promote its increase by adding to it the interest accruing from the securities in which it is invested. The critics of the Government want a large and at the same time a metallic reserve. But they do not realize that having regard to the origin of the reserve the two demands are incompatible. If the reserve needs to be large then it must be invested. Indeed, if the reserve had not been invested it would have remained distressingly meagre.‡ But is there no danger in a reserve of this kind ? * See footnote † page 552. ‡ From 1900-1 to 1920-21 the profits on coinage credited to the gold-standard reserve amounted to £ 28,573,606 only ; while during the same period Interest and Discount gave £ 13,306,847 or nearly one-half the profits on coinage, Cf. East India: Accounts and Estimates, 1921-22, Cmd, 1517 of 1921, p. 20.

552 DR. BABASAHEB AMBEDKAR : WRITINGS AND SPEECHES † In answer to Mr. M. L Reddi Garu, the following statement was laid on the table :— * Statement showing the average cost of silver purchased by the— Year. Royal Mint Average Cost for Standard Ounce. India Office Average Cost for Standard Ounce. Financial Year. d. d. 1893 ... 36 5/16 No purchase 1893-94 94 ... 29¼ ” 1894-95 95 ... 30 3/8 ” 1895-96 96 ... 30 5/16 ” 18S6-97 97 ... 27 7/8 ” 1897-98 98 ... 27¼ ” 1898-99 99 ... 27½ 28 1899-1900 1900 ... 28¼ 29 1900-01 01 ... 27 15/16 No purchase 1901-02 02 ... 24 5/16 22.80 1902-03 03 ... 23 11/16 27.19 1903-04 04 ... 26 ½ 27.14 1904-05 05 ... 27 7/16 29.74 1905-06 06 ... 31 1/16 31.59 1906-07 07 ... 30 9/16 31.27 1907-08 08 ... 24 7/16 No purchase 1908-09 09 ... 23 11/16 ” 1909-10 10 ... 24 7/8 ” 1910-11 11 ... 24 13/16 ” 1911-12 12 ... 27 15/16 28.71 1912-1,3 13 ... 28 1/16 28.71 1913-14 14 ... 24 5/8 No purchase 1914-15 15 ... 24¼ 33.96 1915-16 16 ... 30 5/8 33.96 1916-17 17 ... 39 15/16 42.78 1917-18 18 ... 47 15/16 48.20 1918-19 19 ... 49 5/8 52.04 1919-20 20 ... 50 7/8 Silver purchased at special rates from the Baldwin mines and the Perth mint. 920-21 * Legislative Assembly Debates, Vol. II, No. 3. September, 10, 1921, p. 181. In the absence of information whether the price is F.O.B. or C.I.F. it is difficult to say that the Secretary of State has had to pay higher prices for silver than were paid by the Master of the Royal Mint.

553 STABILITY OF THE EXCHANGE STANDARD The source of a danger in a reserve such as this was well pointed out by Jevons when he said*: “...... good government funds and good bills can always be sold at some price so that a banking firm with a strong reserve of this kind might always maintain their solvency. But the remedy might be worse for the community than the disease, and the forced sale of the reserve might create such a disturbance in the money market as would do more harm than the suspension of payment......” In the same manner, who can say that all the increase of reserve from interest will not be wiped out by a slump in the value of the securities if put upon the market for conversion into gold at a time when there takes place an exchange crisis ? Supposing, however, the full value of the securities, is realized, the number of rupees the reserve will “sink” when occasion for redemption arrives depends upon what is the price at which the rupees are bought back. If the fall of the rupee is small, it may help to retire a large volume of currency and thus restore its value. On the other hand, if the fall is great, it will suffice to retire only a small part of the currency and may fail to restore its value as it did in 1920, so that what may appear to be a big reserve may turn out to be very inadequate. But, apart from considerations of the relative magnitude of the reserve that can be built up, the point that seems to have been entirely overlooked is that the process of building up the reserves directly involves the process of augmenting the currency. The Chamberlain Commission was cognizant of the fact that the gold-standard reserve could not be built up except by coining rupees. Indeed, it cautioned those desirous of a gold currency to remember that if gold took the place of “new rupees which it would be necessary otherwise to mint, the effect is to diminish the strength of the gold-standard reserve by the amount of the profit which would have been made from new coinage.”† Rather than recommend a policy which “would bring to an end the natural growth of the gold-standard reserve,” the Committee permitted the Government to coin rupees. But is there no danger involved in such a reserve ? What is the use of a reserve which creates the very evil which it is supposed afterwards to mitigate ? Indeed, those who have been agitating for an increase in the Indian gold-standard reserve cannot be said to have been alive to the dangers involved in the existence of such a reserve. * Money, p. 227. † Report, par. 63.

554 DR. BABASAHEB AMBEDKAR : WRITINGS AND SPEECHES The smaller the gold-standard reserve the better it would be, for there would be no inflation, no fall in the purchasing power of the rupee, and no necessity for its retirement. Having regard to its origin, the gold-standard reserve, instead of acting as a brake upon reckless issue of rupee currency, is the direct cause of it and tends to aggravate the effects of an inconvertible currency rather than counteract them. Perversity cannot go further. If the fact that a mechanism like that of the gold-standard reserve, set up for the purpose of limiting the currency, cannot be made to function without adding to the currency, does not render the system an unsound currency, one begins to wonder what would. Great names have been invoked in support of the exchange standard. After trying hard to find authoritative precedents for his plan,* Mr. Lindsay claimed before the Fowler Committee that it was founded upon the Report of the Parliamentary Committee on Irish Exchange.† There he was on firm ground. Among other things, the Committee did recommend that for stabilizing the exchange between England and Ireland the Bank of Ireland should open credit at the Bank of England and sell drafts on London at a fixed price. In so far as the exchange standard rests on gold reserve in London, Lindsay must be said to have faithfully copied the plan of the Irish Committee on exchange. But he totally * In 1876, when Mr. Lindsay first set out his scheme in the pages of his Calcutta Review, he mentions no parallel at all. in 1892, in his Ricardo’s Exchange Remedy, he uttered the name of Ricardo as an authority for his plan, but in 1898 he shifted his ground, so much so that he blamed ( Economic journal, supra) Probyn for taking Ricardo’s gold bar plan as a basis. The reason why he disavowed Ricardo as his authority most probably lies in the fact that Ricardo’s general views of currency were rather damaging to his position. In view of the fact that there are so many people who assert, no doubt, from the title of his Proposals for an Economical and Secure Currency, that Ricardo wrote against a metallic standard, it is worth while recording the following passage from his Proposals, in which he says : “During the late discussion on the bullion questions, it was almost justly contended that a currency, to be perfect, should be absolutely invariable in value. But it was said, too, that ours had become such a currency, by the Bank Restriction Bill; for by that bill we had wisely discarded gold and silver as the standard of our money...... Those who supported this opinion did not see that such a currency, instead of being variable, was subject to the greatest variations— that the only use of a standard is to regulate the quantity, and by the quantity the value of the currency—and that without a standard it would be exposed to all the fluctuations to which the ignorance or the interests of the issuers might subject it.” † The Report, which is a masterly document, was eclipsed by the Bullion Report, though both contain the same doctrine, by reason of its not being printed till 1826. See Lords Paper 48 of 1826.

555 STABILITY OF THE EXCHANGE STANDARD neglected to give prominence to another and the most vital re commendation of the Committee, in which it is observed :* “But all the benefits proposed by this Mode of Remedies would be of little Avail and very limited Duration if it (i.e. Bank of Ireland) did not promise at the same time to cure the Depreciation of Paper in Ireland by diminishing its over issue.” Indeed, so great was the stress laid on the limitation of issue that when Parnell, in his resolution in the House of Commons on the reform of the Irish currency, regretted the non-adoption of the recommendations of the Committee,† Thornton in his reply pointed out that nothing would help to stabilize Irish exchange so long as the vital condition laid down by the Committee was disregarded. The recent experience in pegging the exchanges well illustrates the importance of that vital condition. Pegging the exchange is primarily a device to prevent the external value of the currency falling along with its internal value. The way in which pegging effects this divorce is important to note.‡ The primary effect of the peg is to permit the purchases of foreign goods by procuring foreign currency for home currency at a fixed price, which is higher than would be the case if it were determined by the general purchasing power parity of the two currencies. By enabling people to buy foreign goods with foreign currency obtained at a cheaper price the peg virtually raises foreign prices more to the level of the home prices, so that if the exchange is stable it is not because there is a peg, but because the price-levels in the two countries have reached a new equilibrium. Essentially the exchange is stable because it is an artificial purchasingpower parity. Whether it will continue to be so depends upon the movements in the home prices. If the home prices rise more than the rise brought about by the peg in the foreign prices the mechanism must break. It is from this point of view that the condition laid down by the Irish Committee on exchange regarding the limitation on issue must be held as one of vital character. In omiting to advert to that condition the Indian currency contradicts what is best in that Report of the Irish Committee. The reason why Mr. Lindsay paid no attention to the question of limitation in setting up his exchange standard is largely that, notwithstanding the great reputation he has achieved as * Report, p. 16. Italics not in the original. † See Hansard Parliamentary Debates, Vol. XIV, pp. 75-91. ‡ Cf. the succinct statement by T. E. Gregory, Foreign Exchanges, p. 85.