Vol. 6 · pages 571–575

556 DR. BABASAHEB AMBEDKAR : WRITINGS AND SPEECHES an author of a new system, he was profoundly ignorant of the true doctrine regarding the value of a currency. Neither he nor the hosts of currency-mongers who during the nineties exercised their ingenuity to devise plans for remedying Indian exchange troubles,* understood that to stabilize the exchange was essentially a problem of stabilizing the purchasing power of currency by controlling its volume.† The gold-exchange standard ignores the fact that in the long run it is the general purchasing power of a currency that will ultimately govern its exchange value. Its aim is to stabilize exchange and allow the problem of purchasing power to go hang. The true policy should be to stabilize the purchasing power of the currency and let exchange take care of itself. Had the Chamberlain Commission considered the exchange standard from this point of view it could not have called it a sound standard when in its fundamentals it was the very reverse of it. Now any one who remains unconvinced of this weakness of the exchange standard may say that in examining its stability we have taken only those occasions on which the standard has broken down. Thinking such a treatment to be unfair, he might say: How about the years during which stability was maintained ? Is there nothing to be said in favour of a system that maintained the gold value of the rupee from 1901 to 1907, or from 1909 to 1914 ? The question is a pertinent one, and the position that underlies it is supposed to be so strong that those who hold it have asked the opponents of the exchange standard either to admit that it is a stable standard or to show that under that standard the rupee has invariably failed to maintain its gold value.‡ The validity of this position depends upon assumptions so plausible and so widespread that the argument urged so far against the exchange standard will not be of full effect until their futility is fully demonstrated. The first assumption is that there cannot be a depreciation of a currency unless it has depreciated in terms of gold. In other words, if the excess has not produced * See Chap. IV. † Cf. evidence of Mr. Lindsay before the Fowler Committee, Q. 4,190-95, where he asserted that exchange had nothing to do with the quantity of money in circulation. ‡ Dodwell, “A Gold Currency for India,” Economic Journal, 1911; Report on the Enquiry into the Rise of Prices in India, 1914, p. 94.

557 STABILITY OF THE EXCHANGE STANDARD a fall in the value of a currency in terms of a particular commodity such as gold, then there has been no excess at all in terms of commodities in general. Now there was a time, particularly during the discussion on the Bullion Report, when the conception of a change in the value of the currency in relation to things in general was not quite clear even to the most informed minds,* and was even pronounced invalid by high authorities.† In view of the absence of the system of index numbers, this simple faith in the summary method of ascertaining depreciation by some one typical article, gold for instance, as a measure of value, was excusable. But the same view is without any foundation to-day. No one now requires to be shown that the price of each commodity has varied to the same extent and in the same direction as prices of commodities in general before admitting that there has been a change in the value of a currency. Why assume a single commodity like gold as a measure of depreciation ? It would be allowable, although it is short-sighted to do so, if the depreciation of gold was an accurate measure of the depreciation of a currency in terms of all other commodities. But such is not the case. Commenting upon the experience of the United States with the greenbacks during the Civil War, Prof. W. C. Mitchell observes‡ : “The fluctuations in the price of gold which attracted so much attention were much more moderate than the extreme fluctuations in the prices of commodities. The gold quotations lay all the time well within the outer limits of the field covered by the variations of commodity prices....... During the war gold moved up or down in price more quickly than the mass of commodities...... When gold was rising in price the majority of the commodities followed, but more slowly...... When gold was falling in price the majority of commodities stood still or followed more slowly...... This more sluggish movement of commodity prices appears still more clearly after the war. Rapid as was the fall of prices it was not so rapid as the fall in gold. A more curious fact is that the price-level for * Canning’s castigation of Lord Castlereagh’s definition of standard as “a sense of value” during the Bullion debates must be attributed to his ignorance on this matter. † Ricardo, in his Proposals for an Economical and Secure Currency says :“It has indeed been said that we might judge of the value of a currency by its relation not to one but to the mass of the commodities...... Such a test would be of no use whatever...... To determine the value of a currency by the test proposed...... is evidently impossible.” ‡ Gold Prices and Wages under the Greenback Standard, 1908, pp. 39-41.

558 DR. BABASAHEB AMBEDKAR : WRITINGS AND SPEECHES commodities continued for ten years to be higher than the price-level for gold.” This shows that the test sought to be applied by the adherents of the exchange standard is a false one and gives an inaccurate reading of the value of a currency. There can be no doubt that people who have urged its application to that standard would not have pressed for it so much as they have done if they had taken proper care to distinguish between specific depreciation of a currency in terms of gold and its general depreciation in terms of commodities.* The experience of the Bank of England during the suspension period is a capital instance of the phenomenon where a currency is generally depreciated, although it showed no sign of specific depreciation :— TABLE L DEPRECIATION OF THE NOTES OF THE BANK OF ENGLAND† Percentage Values of Bank Notes in Terms of (1) Gold (2) Commodities 1797 ... ... ... 100.0 110 1798 ... ... ... 100.0 118 1799 ... ... ... ... 130 1800 ... ... ... 107.0 141 1801 ... ... ... 109.0 153 1802 ... ... ... ... 119 1803 ... ... ... ... 128 1804 ... ... ... 103.0 122 1805 ... ... ... 103.0 136 1806 ... ... ... ... 133 1807 ... ... ... ... 132 1808 ... ... ... ... 149 1809 ... ... ... ... 161 1810 ... ... ... ... 164 1811 ... ... ... 123.9 147 1812 ... ... ... 130.2 148 1813 ... ... ... 136.4 149 1814 ... ... ... 124.4 153 1815 ... ... ... 118.7 132 1816 ... ... ... 102.9 109 1817 ... ... ... 102.2 120 1818 ... ... ... 104.6 135 * Cf, Prof. Nicholson’s Principles of Political Economy (1897), Vol. II, Chap. XV, §4 ; and Walker, F. A., Money, 1878, pp. 387-91. † From Hawtrey’s Credit and Currency, p. 269. On the values of the notes in terms of gold Prof. Foxwell says :” It is admitted by the severest critics of the bank that there is no substantial ground for complaint as to its conduct during the restriction until 1808-9. There does not seem, indeed, to have been any real depreciation of its paper until that date. The price of £ 4 per ounce, which figures monotonously for the years 1803-9, was really an arbitrary price, fixed by the bank itself as one at which it would purchase foreign gold.” Preface to Andreades, p. xvi. Some people seem to doubt that there was no specific depreciation of the inconvertible notes of the Bank of England till 1810. Unfortunately data are not available to give direct evidence of the fact. But circumstantial evidence there is. It is to be remembered that the premium on gold was the only method then known of measuring depreciation and that Horner, Ricardo and others were open enemies of the Bank of England. That being the case, it does not seem probable that Horner would have waited to introduce his Resolution in the House of Commons till 1810 if the bank notes had shown signs of specific depreciation before that time.

559 STABILITY OF THE EXCHANGE STANDARD Which kind of depreciation is the greater evil we will discuss in the next chapter. Dealing for the present with this experience of the Bank of England, we have the fact that there can be a general depreciation without a specific depreciation. In view of this, the upholders of the exchange standard have no reason to be proud of the fact that the rupee has not shown signs of specific depreciation over periods of long duration. That a bank note absolutely inconvertible and unregulated as to issue should have maintained its par for very nearly thirteen years may speak far more in favour of the suspension system than the experience of the rupee can in favour of the exchange standard. There is a greater wonder in the former than there is in the latter, for the value of the rupee is sustained, apart from the fact that gold in terms of which it was measured was itself undergoing a depreciation, as is evident from the foregoing figures of general prices in England, and by a hope in some kind of convertibility, however slight or however remote but which had no place in the case of the Bank of England notes. Yet no one is known to have admired or justified the currency system of the suspension period, although it had not given rise to a specific depreciation for a long time. This mode of measuring depreciation in terms of gold would be, relatively speaking, a harmless idea if it was not made the basis of another assumption on which the exchange standard is made to rest, that the general and specific depreciations of a currency are unrelated phenomena. As against this it is necessary to urge that the chief lesson to be drawn from this experience of the Bank of England for the benefit of the upholders of the exchange standard consists in demonstrating that although their movements are not perfectly harmonious, yet they are essentially interrelated. That lesson may be summed up in the statement that when the general depreciation of currency has taken place the occurrence of a specific depreciation, other things being equal, is only a matter of time, if the general depreciation proceeds beyond a certain limit. What will be the interval before specific depreciation will supervene upon general depreciation depends upon a variety of circumstances. Like the surface of a rising lake, general depreciation touches different commodities at different times according as they are located in the general scheme of things as determined by the relative strength of demand for them. If there is no demand for gold for currency purposes or for industrial purposes, the

560 DR. BABASAHEB AMBEDKAR : WRITINGS AND SPEECHES depreciation of the currency in terms of gold may be delayed. It is only to make foreign remittances that the demand for gold first makes itself felt, and it is there that specific depreciation primarily arises. But there again it need not, for everything depends upon whether other commodities equally good, which the foreigner would take as readily as gold, are forthcoming or not. Now, in the case of India all these three factors tending to postpone specific depreciation are more or less operative. The rupee is a full legal-tender currency and can effectively discharge debts without compelling resort to gold. The industrial demand for gold in a poor country like India cannot be very great.* Consequently, the generally depreciated rupee does not show immediate signs of depreciation in the internal trade of the country. As for foreign payments, the position of India is equally strong, not because, as is absurdly supposed, she has a favourable balance of trade, but because she has certain essential commodities which a foreigner is obliged to * The following table regarding the consumption of gold in different countries is interesting:— § CONSUMPTION OF GOLD (MILLIONS OF POUNDS STERLING AT 85 S. PER FINE OUNCE) 1915 1916 1917 1918 1919 1920 Industrial Arts (Europe and America). 17.0 18.0 16.0 17.0 22.0 22.0 India (year to March 31 following. 1.4 5.1 19.6 —3.3 27.7 5.1 China ... —1.7 2.6 2.6 0.04 11.5 —3.7 Egypt ... —0.8 —0.2 —0.1 —0.0 —0.0 ? Balance available as money (difference). 80.5 68.0 48.2 64.9 13.8 46.6 World ... 96.4 93.5 86.3 79.0 75.0 70.0 § The figures are those of Mr. Joseph Kitchin in The Review of Economic Statistics, Preliminary volume 3, No. 8 for August, 1921, p. 257. If figures previous to 1914 are desired, see table ibid., p. 258). Omitting the abnormal years of 1917 and 1919 and reducing the figures to per capita basis the consumption of gold by India must be said to be remarkably small. Besides, it is to be noted that figures for India include industrial as well as monetary consumption. Further, in making comparison account must be taken of the difference in the period taken as unit in the case of India and other countries. Of course in these days when gold is so very greatly depreciated in terms of commodities in general, neither is there any necessity to shed tears if its production were to fall off, nor can it be anything but a welcome event if its use were to be extended. It would therefore be unwise to resent an increase, if it were to take place, in the importation and use of gold by India. The greater the use of gold and the less the production of it, the better for the world as it is circumstanced to-day. Cf. in this connection the remarks of Prof. Cannan on Mr. Shirras’s Paper in the J.R.S.S. for July, 1920, pp. 623-24.