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Sometime Professor of Political Economy at the Sydenham

College of Commerce and Economics, Bombay.








Printed in Great Britain by Butler & Tanner Ltd., Frome and London


Preface To The Second Impression

Author’s Preface

Foreword By Professor Edwin Cannan

Chapter I – From A Double Standard To A Sliver Standard

Chapter II- The Silver Standard And The Dislocation Of Its Parity

Chapter III- The Silver Standard And The Evils Of Its Instability

Chapter IV -Towards A Gold Standard

Chapter V – From A Gold Standard To A Gold Exchange Standard

Chapter VI – Stability Of The Exchange Standard

Chapter VII- A Return To The Gold Standard



THE PROBLEM OF THE RUPEE was first published in 1923. Ever since its publication it has had a great demand : so great that within a year or two the book went out of print. The demand for the book has continued, but unfortunately I could not bring out a second edition of the book for the reason that my change-over from economics to law and politics left me no time to undertake such a task. I have, therefore, devised another plan : it is to bring out an up-to-date edition of the History of Indian Currency and Banking in two volumes, of which The Problem of the Rupee forms volume one. Volume two will contain the History of Indian Currency and Banking from 1923 onwards. What is therefore issued to the public now is a mere reprint of The Problem of the Rupee under a different name. I am glad to say that some of my friends who are engaged in the field of teaching economics have assured me that nothing has been said or written since 1923 in the field of Indian Currency which calls for any alteration in the text of The Problem of the Rupee as it stood in 1923. I hope this reprint will satisfy the public partially if not wholly. I can give them an assurance that they will not have to wait long for volume two. I am determined to bring it out with the least possible delay.






In the following pages I have attempted an exposition of the events leading to the establishment of the exchange standard and an examination of its theoretical basis.

In endeavouring to treat the historical side of the matter, I have carefully avoided repeating what has already been said by others. For instance, in treating of the actual working of the exchange standard, I have contented myself with a general treatment just sufficiently detailed to enable the reader to follow the criticism I have offered. If more details are desired they are given in all their amplitude in other treatises. To have reproduced them would have been a work of supererogation; besides it would have only obscured the general trend of my argument. But in other respects, I have been obliged to take a wider historical sweep than has been done by other writers. The existing treatises on Indian currency do not give any idea, at least an adequate idea, of the circumstances which led to the reforms of 1893. I think that a treatment of the early history is quite essential to furnish the reader with a perspective in order to enable him to judge for himself the issues involved in the currency crisis and also of the solutions offered. In view of this, I have gone into that most neglected period of Indian currency extending from 1800 to 1893. Not only have other writers begun abruptly the story of the exchange standard, but they have popularised the notion that the exchange standard is the standard originally contemplated by the Government of India. I find that this is a gross error. Indeed, the most interesting point about Indian currency is the way in which the gold standard came to be transformed into a gold exchange standard. Some old, but by now forgotten, facts had therefore, to be recounted to expose this error.

On the theoretical side, there is no book but that of Professor Keynes which makes any attempt to examine its scientific basis.

But the conclusions he has arrived at are in sharp conflict with those of mine. Our differences extended to almost every proposition he has advanced in favour of the exchange standard. This difference proceeds from the fundamental fact, which seems to be quite overlooked by Professor Keynes, that nothing will stabilise the rupee unless we stabilise its general purchasing power. That the exchange standard does not do. That standard concerns itself only with symptoms and does not go to the disease : indeed, on my showing, if anything, it aggravates the disease.

When I come to the remedy, I again find myself in conflict with the majority of those who like myself are opposed to the exchange standard. It is said that the best way to stabilise the rupee is to provide for effective convertibility into gold. I do not deny that this is one way of doing it. But, I think, a far better way would be to have an inconvertible rupee with a fixed limit of issue. Indeed, if I had any say in the matter, I would propose that the Government of India should melt the rupees, sell them as bullion and use the proceeds for revenue purposes and fill the void by an inconvertible paper. But that may be too radical a proposal, and I do not therefore press for it, although I regard it as essentially sound. in any case, the vita! point is to close the Mints, not merely to the public, as they have been, but to the Government as well. Once that is done, I venture to say that the Indian currency, based on gold as legal tender with a rupee currency fixed in issue, will conform to the principles embodied in the English currency system.

It will be noticed that I do not propose to go back to the recommendations of the Fowler Committee. All those, who have regretted the transformation of the Indian currency from a gold standard to a gold exchange standard, have held that everything would have been all right if the Government had carried out in toto the recommendations of that Committee. I do not share that view. On the other hand, I find that the Indian currency underwent that transformation because the Government carried out those recommendations. While some people regard that Report as classical for its wisdom, I regard it as classical for its nonsense. For I find that it was this Committee which, while recommending a gold standard, also recommended and thereby perpetuated the folly of the Herschell Committee, that Government should coin rupees on its own account according to that most naive of currency principles, the requirements of the public, without realising that the latter recommendation was destructive of the former. Indeed, as I argue, the principles of the Fowler Committee must be given up, if we are to place the Indian currency on a stable basis.

I am conscious of the somewhat lengthy discussions on currency principles into which I have entered in treating the subject. My justification of this procedure is two-fold. First of all, as I have differed so widely from other writers on Indian currency, I have deemed it necessary to substantiate my view-point, even at the cost of being charged with over-elaboration. But it is my second justification, which affords me a greater excuse. It consists in the fact that I have written primarily for the benefit of the Indian public, and as their grasp of currency principles does not seem to be as good as one would wish it to be, an over-statement, it will be agreed, is better than an understatement of the argument on which I have based my conclusions.

Up to 1913, the Gold Exchange Standard was not the avowed goal of the Government of India in the matter of Indian Currency, and although the Chamberlain Commission appointed in that year had reported in favour of its continuance, the Government of India had promised not to carry its recommendations into practice till the war was over and an opportunity had been given to the public to criticize them. When, however, the Exchange Standard was shaken to its foundations during the late war, the Government of India went back on its word and restricted, notwithstanding repeated protests, the terms of reference to the Smith Committee to recommending such measures as were calculated to ensure the stability of the Exchange Standard, as though that standard had been accepted as the last word in the matter of Indian Currency. Now that the measures of the Smith Committee have not ensured the stability of the Exchange Standard, it is given to understand that the Government, as well as the public, desire to place the Indian Currency System on a sounder footing. My object in publishing this study at this juncture is to suggest a basis for the consummation of this purpose.

I cannot conclude this preface without acknowledging my deep sense of gratitude to my teacher, Prof. Edwin Cannan, of the University of London (School of Economics). His sympathy towards me and his keen interest in my undertaking have placed me under obligations which I can never repay. I feel happy to be able to say that this work has undergone close supervision at his hands, and although he is in no way responsible for the views I have expressed. I can say that his severe examination of my theoretic discussions has saved me from many an error. To Professor Wadia, of Wilson College, I am thankful for   cheerfully undertaking the dry task of correcting the proofs.



I am glad that Mr. Ambedkar has given me the opportunity of saying a few words about his book.

As he is aware, I disagree with a good deal of his criticism. In 1893, I was one of the few economists, who believed that the rupee could be kept at a fixed ratio with gold by the method then proposed, and I did not fall away from the faith when some years elapsed without the desired fruit appearing (see Economic Review, July 1898, pp. 400—403). I do not share Mr. Ambedkar’s hostility to the system, nor accept most of his arguments against it and its advocates. But he hits some nails very squarely on the head, and even when I have thought him quite wrong, I have found a stimulating freshness in his views and reasons. An old teacher like myself learns to tolerate the vagaries of originality, even when they resist “severe examination ” such as that of which Mr. Ambedkar speaks.

In his practical conclusion, I am inclined to think, he is right. The single advantage, offered to a country by the adoption of the gold-exchange system instead of the simple gold standard, is that it is cheaper, in the sense of requiring a little less value in the shape of metallic currency than the gold standard. But all that can be saved in this way is a trifling amount, almost infinitesimal, beside the advantage of having a currency more difficult for administrators and legislators to tamper with. The recent experience both of belligerents and neutrals certainly shows that the simple gold standard, as we understood it before the war, is not fool-proof, but it is far nearer being fool-proof and knave-proof than the gold-exchange standard. The percentage of administrators and legislators who understand the gold  standard is painfully small, but it is and is likely to remain ten or twenty times as great as the percentage which understands the gold-exchange system. The possibility of a gold-exchange system being perverted to suit some corrupt purpose is very considerably greater than the possibility of the simple gold standard being so perverted.

The plan for the adoption of which Mr. Ambedkar pleads, namely that all further enlargement of the rupee issue should be permanently prohibited, and that the mints should be open at a fixed price to importers or other sellers of gold, so that in course of time India would have, in addition to the fixed stock of rupees, a currency of meltable and exportable gold coins, follows European precedents. In eighteenth-century England the gold standard introduced itself because the legislature allowed the ratio to remain unfavourable to the coinage of silver: in nineteenth-century France and other countries it came in because the legislatures definitely closed the mints to silver, when the ratio was favourable to the coinage of silver. The continuance of a mass of full legal tender silver coins beside the gold would be nothing novel in principle, as the same thing, though on a somewhat smaller scale, took place in France, Germany, and the United States.

It is alleged sometimes that India does not want gold coins. I feel considerable difficulty in believing that gold coins of suitable size would not be convenient in a country with the climate and other circumstances of India. The allegation is suspiciously like the old allegation that the ” Englishman prefers gold coins to paper,” which had no other foundation than the fact that the law prohibited the issue of notes for less than £ 5 in England and Wales, while in Scotland, Ireland, and almost all other English-speaking countries, notes for £ 1 or Less were allowed and circulated freely. It seems much more likely that silver owes its position in India to the decision, which the Company made before the system of standard gold and token silver was accidentally evolved in 1816 in England, and long before it was understood, and that the position has been maintained, not because Indians dislike gold, but because Europeans like it so well that they cannot bear to part with any of it.

This reluctance to allow gold to go to the East is not only despicable from an ethical point of view. It is also contrary to the economic interest not only of the world at large, but even of the countries, which had a gold standard before the war and have it still or expect soon to restore it. In the immediate future, gold is not a commodity, the use of which it is desirable for these countries either to restrict or to economize. From the closing years of last century it has been produced in quantities much too large to enable it to retain its purchasing power and thus be a stable standard of value, unless it can constantly be finding existing holders willing to hold larger stocks, or fresh holders to hold new stocks of it. Before the war, the accumulation of hoards by various central banks in Europe took off a large part of the new supplies and prevented the actual rise of general prices being anything like what it would otherwise have been, though it was serious enough. Since the war, the Federal Reserve Board, supported by all Americans who do not wish to see a rise of prices, has taken on the new ” White Man’s Burden ” of absorbing the products of the gold mines, but just as the United States failed to keep up the value of silver by purchasing it, so she will eventually fail to keep up the value of gold. in spite of the opinion of some high authorities, it is not at all likely that a renewed demand for gold reserves by the central banks of Europe will come to her assistance. Experience must gradually be teaching even the densest of financiers that the value of paper currencies is not kept up by stories of ” cover ” or ” backing ” locked up in cellars, but by due limitation of the supply of the paper. With proper limitation, enforced by absolute convertibility into gold coin which may be freely melted or exported, it has been proved by theory and experience that small holdings of gold are perfectly sufficient to meet all internal and international demands. There is really more chance of a great demand from individuals than from the banks. It is conceivable that the people of some of the countries, which have reduced their paper currency to a laughing stock, may refuse all paper and insist on having gold coins. But it seems more probable that they will be pleased enough to get better paper than they have recently been accustomed to, and will not ask for hard coin with sufficient insistence to get it. On the whole, it seems fairly certain that the demand of Europe and European-colonised lands for gold will be less rather than greater than before the war, and that it will increase very slowly or not at all.

Thus, on the whole, there is reason to fear a fall in the value of gold and a rise of general prices rather than the contrary.

One obvious remedy would be to restrict the production of gold by international agreement, thus conserving the world’s resources in mineral for future generations. Another is to set up an international commission to issue an international paper currency so regulated in amount as to preserve an approximately stable value. Excellent suggestions for the professor’s classroom, but not, at present at any rate nor probably for some considerable period of time, practical politics.

A much more practical way out of the difficulty is to be found in the introduction of gold currency into the East. If the East will take a large part of the production of gold in the coming years it will tide us over the period which must elapse before the most prolific of the existing sources are worked out. After that we may be able to carry on without change or we may have reached the possibility of some better arrangement.

This argument will not appeal to those who can think of nothing but the extra profits which can be acquired during a rise of prices, but I hope it will to those who have some feeling for the great majority of the population, who suffer from these extra and wholly unearned profits being extracted from them. Stability is best in the long run for the community.




Trade is an important apparatus in a society, based on private property and pursuit of individual gain ; without it, it would be difficult for its members to distribute the specialised products of their labour. Surely a lottery or an administrative device would be incompatible with its nature. Indeed, if it is to preserve its character, the only mode for the necessary distribution of the products of separate industry is that of private trading. But a trading society is unavoidably a pecuniary society, a society which of necessity carries on its transactions in terms of money. In fact, the distribution is not primarily an exchange of products against products, but products against money. In such a society, money therefore necessarily becomes the pivot on which everything revolves. With money as the focusing-point of all human efforts, interests, desires and ambitions, a trading society is bound to function in a regime of price, where successes and failures are results of nice calculations of price-outlay as against price-product.

Economists have no doubt insisted that “there cannot… be intrinsically a more significant thing than money,” which at best is only ” a great wheel by means of which every individual in society has his subsistence, conveniences and amusements regularly distributed to him in their proper proportions.” Whether or not money values are the definitive terms of economic endeavour may well be open to discussion. But this much is certain, that without the use of money this “distribution of subsistence, conveniences and amusements,” far from being a matter of course, will be distressingly hampered, if not altogether suspended. How can this trading of products take place without money ? The difficulties of barter have ever formed an unfailing theme with all economists, including those who have insisted that money is only a cloak. Money is not only necessary to facilitate trade by obviating the difficulties of barter, but is also necessary to sustain production by permitting specialisation. For, who would care to specialise if he could not trade his products for those of others which he wanted ? Trade is the handmaid of production, and where the former cannot flourish the latter must languish. It is therefore evident that if a trading society is not to be out of gear and is not to forego the measureless advantages of its automatic adjustments in the great give-and-take of specialised industry, it must provide itself with a sound system of money.

At the close of the Moghul Empire, India, judged by the standards of the time, was economically an advanced country. Her trade was large, her banking institutions were well developed, and credit played an appreciable part in her transactions. But a medium of exchange and a common standard of value were among others the most supreme desiderata in the economy of the Indian people when they came, in the middle of the eighteenth century, under the sway of the British. Before the occurrence of this event, the money of India consisted of both gold and silver. Under the Hindu emperors the emphasis was laid on gold, while under the Mussalmans silver formed a large part of the circulating medium. Since the time of Akbar, the founder of the economic system of the Moghul Empire in India, the units of currency had been the gold mohur and the silver rupee. Both coins, the mohur and the rupee, were identical in weight, i.e., 175 grs. Troy and were “supposed to have been coined without any alloy, or at least intended to be so.”§ But whether they constituted a single standard of value or not is a matter of some doubt. It is believed that the mohur and the rupee, which at the time were the common measure of value, circulated without any fixed ratio of exchange between them. The standard, therefore, was more of the nature of what Jevons called a parallel standard than a double standard That this want of ratio could not have worked without some detriment in practice is obvious. But it must be noted that there existed an alleviating circumstance in the curious contrivance by which the mohur and the rupee, though unrelated to each other, bore a fixed ratio to the dam, the copper coin of the Empire. So that it is permissible to hold that, as a consequence of being fixed to the same thing, the two, the mohur and the rupee, circulated at a fixed ratio.

In Southern India, to which part the influence of the Moghuls had not extended, silver as a part of the currency system was quite unknown. The pagoda, the gold coin of the ancient Hindu kings, was the standard of value and also the medium of exchange, and continued to be so till the time of the East India Company.

The right of coinage, which the Moghuls always held as Inter jura Majestatis be it said to their credit, was exercised with due sense of responsibility. Never did the Moghul Emperors stoop to debase their coinage. Making allowance for the imperfect technology of coinage, the coins issued from the various Mints, situated even in the most distant parts of their Empire, did not materially deviate from the standard. The table below of the assays of the Moghul rupees shows how the coinage throughout the period of the Empire adhered to the standard weight of 175 grs. pure.*

Name of the Rupee

Weight in pure Grs.

Name of the Rupee

Weight in pure Grs.

Akbari of Lahore


Delhi Sonat


Akbari of Agra


Delhi Alamgir


Jehangiri of Agra


Old Surat


Jehangiri of Allahabad




Jehangiri of Kandhar


Persian Rupee of 1745


Shehajehani of Agra


Old Dacca


Shehajehani of Ahmedabad




Shehajehani of Delhi




Shehajehani of Delhi


Shaha Alam (1772)


Shehajehani of Lahore




So long as the Empire retained unabated sway, there was advantage rather than danger in the plurality of Mints, for they were so many branches of a single department governed by a single authority. But with the disruption of the Moghul Empire into separate kingdoms these branches of the Imperial Mint located at different centres became independent factories for purposes of coinage. In the general scramble for independence which followed the fall of the Empire, the right to coinage, as one of the most unmistakable insignia of sovereignty, became the right most cherished by the political adventurers of the time. It was also the last privilege to which the falling dynasties clung, and was also the first to which the adventurers rising to power aspired. The result was that the right, which was at one time so religiously exercised, came to be most wantonly abused. Everywhere the Mints were kept in full swing, and soon the country was filled with diverse coins which, while they proclaimed the incessant rise and fall of dynasties, also presented bewildering media of exchange. If these money-mongering sovereigns had kept up their issues to the original standard of the Moghul Emperors, the multiplicity of coins of the same denomination would not have been a matter of much concern. But they seemed to have held that as the money used by their subjects was made by them, they could do what they liked with their own, and proceeded to debase their coinage to the extent each chose without altering the denominations. Given the different degrees of debasement, the currency necessarily lost its primary quality of general and ready acceptability.

The evils consequent upon such a situation may well be imagined. When the contents of the coins belied the value indicated by their denomination they became mere merchandise, and there was no more a currency by tale to act as a ready means of exchange. The bullion value of each coin had to be ascertained before it could be accepted as a final discharge of obligations. The opportunity for defrauding the poor and the ignorant thus provided could not have been less than that known to have obtained in England before the great re-coinage of 1696. This constant weighing, valuing, and assaying the bullion contents of coins was, however, only one aspect in which the evils of the situation made themselves felt. They also presented another formidable aspect. With the vanishing of the Empire there ceased to be such a thing as an Imperial legal tender current all through India. In its place there grew up local tenders current only within the different principalities into which the Empire was broken up. Under such circumstances exchange was not liquidated by obtaining in return for wares the requisite bullion value from the coins tendered in payment. Traders had to be certain that the coins were also legal tender of their domicile. The Preamble to the Bengal Currency Regulation XXXV, of 1793, is illuminating on this point. It says :—

“The principal districts in Bengal, Bihar and Orissa, have each a distinct silver currency……………… which are the standard measure of value in all transactions in the districts in which they respectively circulate.

” In consequence of the Ryots being required to pay their rent in a particular sort of rupee they of course demanded it from manufacturers in payment of their grain, or raw materials, whilst the manufacturers, actuated by similar principles with the Ryots, required the same species of rupee from the traders who came to purchase their cloth or their commodities.

” The various sorts of old rupees, accordingly, soon became the established currency of particular districts, and as a necessary consequence the value of each rupee was enhanced in the district in which it was current, for being in demand for all transactions. As a further consequence, every sort of rupee brought into the district was rejected from being a different measure of value from that by which the inhabitants had become accustomed to estimate their property, or, if it was received, a discount was exacted upon it, equal to what the receiver would have been obliged to pay upon exchanging it at the house of a shroff for the rupee current in the district, or to allow discount upon passing it in payment to any other individual.

” From this rejection of the coin current in one district when tendered in payment in another, the merchants and traders and the proprietors and cultivators of land in different parts of the country, are subjected in their commercial dealings with each other to the same losses by exchange, and all other inconveniences that would necessarily result were the several districts under separate and independent governments, each having a different coin.”

Here was a situation where trade was reduced to barter, whether one looks upon barter as characterised by the absence of a common medium of exchange or by the presence of a plurality of the media of exchange ; for in any case, it is obvious that the want of a “double coincidence ” must have been felt by people engaged in trade. One is likely to think that such could not have been the case as the medium was composed of metallic counters. But it is to be remembered that the circulating coins on India, by reason of the circumstance attendant upon the diversity in their fineness and legal tender, formed so many different species that an exchange against a particular species did not necessarily close the transaction; the coin must, in certain circumstances, have been only an intermediate to be further bartered against another, and so on till the one of the requisite species was obtained. This is sufficient indication that society had sunk into a state of barter. If this alone was the flaw in the situation, it would have been only as bad as that of international trade under diversity of coinages. But it was further complicated by the fact that although the denomination of the coins was the same, their metallic contents differed considerably. Owing to this, one coin bore a discount or a premium in relation to another of the same name. In the absence of knowledge as to the amount of premium or discount, every one cared to receive a coin of the species known to him and current in his territory. On the whole, the obstacles to commerce arising from such a situation could not have been less than those emanating from the mandate of Lycurgus, who compelled the Lacedaemonians to use iron money in order that its weight might prevent them from overmuch trading. The situation, besides being irritating, was aggravated by the presence of an element of gall in it. Capital invested in providing a currency is a tax upon the productive resources of the community. Nevertheless, wrote James Wilson no one would question “that the time and labour which are saved by the interposition of coin, as compared with a system of barter, form an ample remuneration for the portion of capital withdrawn from productive sources, to act as a single circulator of commodities, by rendering the remainder of the capital of the country so much the more productive.” What is, then, to be said of a monetary system which did not obviate the evil consequences of barter, although enormous capital was withdrawn from productive sources, to act as a single circulator of commodities ? Diseased money is worse than want of money. The latter at least saves the cost. But society must have money, and it must be good money, too. The task, therefore, of evolving good money out of bad money fell upon the shoulders, of the English East India Company, who had in the meanwhile succeeded to the Empire of the Moghuls  in India.

The lines of reform were first laid down by the Directors of the Company in their famous Dispatch, dated April 25, 1806, to the authorities administering their territories in India. In this historic document they observed :—

“17. It is an opinion supported by the best authorities, and proved by experience, that coins of gold and silver cannot circulate as legal tenders of payment at fixed relative values…… without loss; this loss is occasioned by the fluctuating value of the metals of which the coins are formed. A proportion between the gold and silver coin is fixed by law, according to the value of the metals, and it may be on the justest principles, but owing to the change of circumstances gold may become of greater value in relation to silver than at the time the proportion was fixed, it therefore becomes profitable to exchange silver or gold, so the coin of that metal is withdrawn from circulation; and if silver should increase in its value in relation to gold, the same circumstances would tend to reduce the quantity of silver coin in circulation. As it is impossible to prevent the fluctuation in the value of the metals, so it is also equally impracticable to prevent the consequences thereof on the coins made from these metals……. To adjust the relative values of gold and silver coin according to the fluctuations in the values of the metals would create continual difficulties, and the establishment of such a principle would of itself tend to perpetuate inconvenience and loss.”

They therefore declared themselves in favour of monometalism as the ideal for the Indian currency of the future, and prescribed:—

“21. ……… that silver should be the universal money of account (in India), and that all …… accounts should be kept in the same denominations of rupees, annas and pice…….

The rupee was not, however, to be the same as that of the Moghul Emperors in weight and fineness The proposal that

“9. ……the new rupee …… be of the gross weight of—

Troy grains                     …           180

Deduct one-twelfth alloy         …               15

And contain of fine silver troy grs.          165″

Such were the proposals put forth by the Court of Directors for the reform of Indian currency.

The choice of a rupee weighing 180 grs. troy and containing 165 grs. pure silver as the unit for the future currency system of India was a well-reasoned choice.

The primary reason for selecting this particular weight for the rupee seems to have been the desire to make it as little of a departure as possible from the existing practice. In their attempts to reduce to some kind of order the disorderly currencies bequeathed to them by the Moghuls by placing them on a bimetallic basis, the Governments of the three Presidencies had already made a great advance by selecting out of the innumerable coins then circulating in the country a species of gold and silver coin as the exclusive media of exchange for their respective territories. The weights and fineness of the coins selected as the principal units of currency, with other particulars, may be noted from the summary table 1. (Page 344)

To reduce these principal units of the different Presidencies to a single principal unit, the nearest and the least inconvenient magnitude of weight which would at the same time be an integral number was obviously 180 grs., for in no case did it differ from the weights of any of the prevailing units in any marked degree. Besides, it was believed that 180, or rather 179.5511, grs. was the standard weight of the rupee coin originally issued from the Moghul Mints, so that the adoption of it was really a restoration of the old unit and not the introduction of a new one. Another advantage claimed in favour of a unit of 180 grs. was that such a unit of currency would again become what it had ceased to be, the unit of weight also. It was agreed that the unit of weight in India had at all times previously been linked up with that of the principal coin, so that the seer and the manual weights were simply multiples of the rupee, which originally weighed 179.6 grs. troy. Now, if the weight of the principal coin to be established was to be different from 180 grs. troy, it was believed there would be an unhappy deviation from the ancient practice which made the weight of the coin the basis of other weights and measures.





Silver Coins.

Gold Coins.

Issued by the Government of

Territory in which it circulated.

Date and Authority of Issue.


Gross Weight Troy Grs.

Pure Contents Troy Grs.


Gross Weight Troy Grs.

Pure Contents Troy Grs.




Surat Rupee









Arcot „



Star Pagoda




Bengal, Bihar and Orissa Cuttock

Regulations XXXV of 1793 XII of 1805

Sicca Rupee (19th Sun)
















Ceded Provinces Conquered Prov-

XLV of 1803

Rupee (Lucknow









Sicca of the









45th Sun)







Benares Provin-

III of 1806

Benares Rupee















Besides, a unit of 180 grs. weight was not only suitable from this point of view, but had also in its favour the added convenience of assimilating the Indian with the English units of weight#.

#Ibid. para. 28. How the English and the Indian systems of weights were made to correspond to each other may be seen from the following:—








8 ruttees

= 1 massas

= 15 troy grs.

12 massas

= 1 tola (or sicca)

= 180 troy grs.

80 tolas

= 1 seer

= 2.5 troy ponds

40 seers

= 1 mound (mun)

= 100 troy pounds.

While these were the reasons in favour of fixing the weight of the principal unit of currency at 180 grs. troy, the project of making it 165 grs. fine was not without its justification. The ruling consideration in selecting 165 grs. as the standard of fineness was, as in the matter of selecting the standard weight, to cause the least possible disturbance in existing arrangements. That this standard of fineness was not very different from those of the silver coins, recognised by the different Governments in India as the principal units of their currency, may be seen from the following comparative statement.


deviations of THE proposed standard of fineness FROM THAT OF THE principal recognised rupees

Silver Coins recognised as Principal Units and their Fineness

Standard Fineness of the propose Silver Rupee Troy Grs.

More valuable than the proposed Rupee

Less valuable proposed Rupee

Name of the Coin

Its Pure Contents Troy Grs.

In Grs.

By p.c.

In Grs.

By p.c.

Surat Rupee







Arcot Rupee







Sicca Rupee







Farrukabad R.







Benares Rupee








It will thus be seen that, with the exception of the Sicca and the Benares rupees, the proposed standard of fineness agreed so closely with those of the other rupees that the interest of obtaining a complete uniformity without considerable dislocation overruled all possible objections to its adoption. Another consideration that seemed to have prevailed upon the Court of Directors in selecting 165 grs. as the standard of fineness was that, in conjunction with 180 grs. as the standard weight, the arrangement was calculated to make the rupee eleven-twelfths fine. To determine upon a particular fineness was too technical a matter for the Court of Directors. It was, however, the opinion of the British Committee on Mint and Coinage, appointed in 1803, that “one-twelfth alloy and eleven-twelfths fine is by a variety of extensive experiments proved to be the best proportion, or at least as good as any which could have been chosen.” This standard, so authoritatively upheld, the Court desired to incorporate in their new scheme of Indian currency. They therefore desired to make the rupee eleven-twelfths fine. But to do so was also to make the rupee 165 grs. pure-a content which they desired, from the point of view stated above, the rupee to possess.

Reviewing the preference of the Court of Directors for monometallism from the vantage-ground of latter-day events, one might be inclined to look upon it as a little too short-sighted. At the time, however, the preference was well founded. One of the first measures, the three Presidencies, into which the country was divided for purposes of administration, had adopted on their assuming the government of the country, was to change the parallel standard of the Moghuls into a double standard by establishing a legal ratio of exchange between the mohur, the pagoda, and the rupee. But in none of the Presidencies was the experiment a complete success.

In Bengal the Government, on June 2, 1766, determined upon the issue of a gold mohur weighing 179.66 grs. troy, and containing 149.92 grs., troy of pure metal, as legal tender at 14 Sicca rupees, to relieve the currency stringency caused largely by its own act of locking up the revenue collections in its treasuries, to the disadvantage of commerce. This was a legal ratio of 16.45 to 1, and as it widely deviated from the market ratio of 14.81 to 1, this attempt to secure a concurrent circulation of the two coins was foredoomed to failure. Owing to the drain of silver on Bengal from China, Madras, and Bombay, the currency stringency grew worse, so much so that another gold mohur was issued by the Government on March 20, 1769, weighing 190.773 grs. troy and containing 190.086 grs. pure gold with a value fixed at 16 Sicca rupees. This was a legal ratio of 14.81 to 1. But, as it was higher than the market ratio of the time both in India (14 to 1) and in Europe (14.61 to 1), this second effort to bring about a concurrent circulation fared no better than the first. So perplexing seemed to be the task of accurate rating that the Government reverted to monometallism by stopping the coinage of gold on December 3, 1788, and when the monetary stringency again compelled it to resume in 1790 the coinage of gold, it preferred to let the mohur and the rupee circulate at their market value without making any attempt to link them by a fixed ratio. It was not until 1793 that a third attempt was made to forge a double standard in Bengal. A new mohur was issued in that year, weighing 190.895 grs. troy and containing 189.4037 grs. of pure gold, and made legal tender at 16 Sicca rupees. This was a ratio of 14.86 to 1, but, as it did not conform to the ratio then prevalent in the market this third attempt to establish bimetallism in Bengal failed as did those made in 1766 and 1769.

The like endeavors of the Government of Madrasproved more futile than those of Bengal. The first attempt at bimetalism under the British in that Presidency was made in the year 1749, when 350 Arcot rupees were legally rated at 100 Star pagodas. As compared with the then market ratio this rating involved an under-valuation of the pagoda, the gold coin of the Presidency. The disappearance of the pagoda caused a monetary stringency, and the Government in December, 1750, was obliged to restore it to currency. This it did by adopting the twofold plan of causing an import of gold on Government account, so as to equalise the mint ratio to the market ratio, and of compelling the receipts and payments of Government treasuries to be exclusively in pagodas. The latter device proved of small value ; but the former by its magnitude was efficacious enough to ease the situation. Unluckily, the case was only temporary. Between 1756 and 1771 the market ratio of the rupee and the pagoda again underwent a considerable change. In 1756 it was 364 to 100, and in 1768 it was 370 to 100. It was not till after 1768 that the market ratio became equal to the legal ratio fixed in 1749 and remained steady for about twelve years. But the increased imports of silver, rendered necessary for the prosecution of the second Mysore war, once more disturbed the ratio, which at the close of the war stood at 400 Arcot rupees to 100 Star pagodas. After the end of the war, the Government of Madras made another attempt to bring about a concurrent circulation between the rupee and the pagoda. But instead of making the market ratio of 400 to 100 the legal ratio, it was led by the then increasing imports of gold into the Presidency to hope that the market ratio would in time rise to that legally established in 1749. In an expectant mood so induced it decided, in 1790, to anticipate the event by fixing the ratio first at 365 to 100. The result was bound to be different from that desired, for it was an under-valuation of the pagoda. But instead of rectifying the error, the Government proceeded to aggravate it by raising the ratio still further to 350 to 100 in 1797, with the effect that the pagoda entirely went out of circulation, and the final attempt at bimetallism thus ended in a miserable failure.

The Government of Bombay seemed better instructed in the mechanics of bimetallism, although that did not help it to overcome the practical difficulties of the system. On the first occasion when bimetallism was introduced in the Presidency,  the mohur and the rupee were rated ‘at the ratio of 15.70 to 1. But at this ratio the mohur was found to be over-rated, and accordingly, in August, 1774, the Mint Master was directed to coin gold mohur of the fineness of a Venetian and of the weight of the silver rupee. This change brought down the legal ratio to 14.83 to 1, very nearly, though not exactly, to the then prevailing market ratio of 15 to 1, and had nothing untoward happened, bimetallism would have had a greater success in Bombay than it actually had in the other two Presidencies. But this was not to be, for the situation was completely altered by the dishonesty of the Nawab of Surat, who allowed his rupees,       which were of the same weight and fineness as the Bombay rupees, to be debased to the extent of 10, 12, and even 15 per cent. This act of debasement could not have had any disturbing effect on the bimetallic system prevalent in the Bombay Presidency, had it not been for the fact that the Nawab’s (or Surat) rupees were by agreement admitted to circulation in the Company’s territories at par with the Bombay rupees. As a result of their being legal tender the Surat rupees, once they were debased, not only drove out the Bombay rupees from circulation, but also the mohur, for as rated to the debased Surat rupees the ratio became unfavourable to gold, and the one chance for a successful bimetallic system vanished away. The question of fixing up a bimetallic ratio between the mohur and the rupee again cropped up when the Government of Bombay permitted the coinage of Surat rupees at its Mint. To have continued the coinage of the gold mohur according to the Regulation of 1774 was out of the question. One Bombay mohur contained 177.38 grs. of pure gold, and 15 Surat rupees of the standard of 1800 contained 247.11 grs. of silver. By this Regulation the proportion of silver to gold would have been 247.11 / 177.38 i.e. 13.9 to 1 Here the mohur would have under-valued. It was therefore resolved to alter the standard of the mohur to that of the Surat rupee, so as to give a ratio of 14.9 to 1. But as the market ratio was inclined towards 15.5 to 1, the experiment was not altogether a success.

In the light of this experience before them, the Court of Directors of the East India Company did well in fixing upon a monometallic standard as the basis of the future currency system of India. The principal object of all currency regulations is that the different units of money should bear a fixed relation of value to one another. Without this fixity of value, the currency would be in a state of confusion, and no precaution would be too great against even a temporary disturbance of that fixity. Fixity of value between the various components of the currency is so essential a requisite in a well-regulated monetary system that we need hardly be surprised if the Court of Directors attached special importance to it, as they may well have done, particularly when they were engaged in the task of placing the currency on a sound and permanent footing. Nor can it be said that their choice of monometallism was ill-advised, for it must be admitted that a single standard better guarantees this fixity than does the double standard. Under   the former it is spontaneous, under the latter it is forced.

These recommendations of the Court of Directors were left to the different Governments in India to be carried into effect at their discretion as to the time and manner of doing it. But it was some time before steps were taken in consonance with these orders, and even then, it was on the realisation of those parts of the program of the Court which pertained to the establishment of a uniform currency that the efforts of the different Governments were first concentrated.

The task of reducing the existing units of currency to that proposed by the Court was first accomplished in Madras. On January 7, 1818, the Government issued a Proclamation by which its old units of currency—the Arcot rupee and the Star pagoda—were superseded by new units, a gold rupee and a silver rupee, each weighing 180 grs. troy and containing 165 grs. of fine metal. Madras was followed by Bombay six years later by a Proclamation of October 6, 1824, which declared a gold rupee and a silver rupee of the new Madras standard to be the only units of currency in that Presidency. The Government of Bengal had a much bigger problem to handle. It had three different principal units of silver currency to be reduced to the standard proposed by the Court. It commenced its work of reorganisation by a system of elimination and alteration. In 1819, it discontinued the coinage of the Benares rupee and substituted in its place the Furrukabad rupee, the weight and fineness of which were altered to 180.234 and 135.215 grs. troy respectively. Apparently this was a step away from the right direction. But even here, the purpose of uniformity, so far as fineness was concerned, was discernible, for it made the Furrukabad rupee, like the new Madras and Bombay rupees, eleven-twelfth fine. Having got rid of the Benares rupee, the next step was to assimilate the standard of the Furrukabad rupee to that of Madras and Bombay, as may be seen from the following table.

Thus, without abrogating the bimetallic system, substantial steps were taken in realising the ideal unit proposed by the Court, as may be seen from the following table.




Issued the Government of

Silver Coins

Gold Coins

Legal Ratio


















Sicca Rupee


Furrukabad Rupee




176 or 11/12 165 or 11/12




1 to 15


Silver Rupee


165 or 11/12

Gold Rupee


165 or 11/12

1 to 15


Silver Rupee


165 or 11/12



165 or 11/12

1 to 15

Taking stock of the position as it was at the end of 1833, we find that with the exception of the Sicca rupee and the gold mohur of Bengal, that part of the scheme of the Directors which pertained to the uniformity of coinage was an accomplished fact. Nothing more remained to carry it to completion than to discontinue the Sicca rupee and to demonetise gold. At this point, however, arose a conflict between the Court of Directors and the three Governments in India. Considerable reluctance was shown to the demagnetisation of gold. The Government of Madras, which was the first to undertake the reform of its currency according to the plan of the Court, not only insisted upon continuing the coinage of gold along with that of the rupee, but stoutly refused to deviate from the system of double legal tender at a fixed ratio prevalent in its territories,

notwithstanding the repeated remonstrance’s addressed by the Court. The Government of Bengal clung to the bimetallic standard with equal tenacity. Rather than demonetise the gold mohur, it took steps to alter its standard by reducing its pure contents from 189.4037 to 187.651 troy grs., so as to re-establish a bimetallic system on the basis of the ratio adopted by Madras in 1818. So great was its adherence to the bimetallic standard that in 1833 it undertook to alter the weight and fineness of the Sicca rupee to 196 grs. troy and 176 grs. fine, probably to rectify a likely divergence between the legal and the market ratios of the mohur to the rupee

But in another direction the Government in India wanted to go further than the Court desired. The Court thought a uniform currency (i.e. a currency composed of like but independent units) was all that India needed. Indeed, they had given the Governments to understand that they did not wish for more in the matter of simplification of currency and were perfectly willing to allow the Sicca and the mohur to remain as they were, unassimilated. A uniform currency was no doubt a great advance on the order of things such as was left by the successors of the Moghuls. But that was not enough, and the needs of the situation demanded a common currency based on a single unit in place of a uniform currency. Under the system of uniform currency each Presidency coined its own money, and the money coined at the Mints of the other Presidencies was not legal tender in its territories except at the Mint. This monetary independence would not have been very harmful if there had existed also financial independence between the three Presidencies. As a matter of fact, although each Presidency had its own fiscal system, yet they depended upon one another for the finance of their deficits. There was a regular system of ” supply ” between them, and the surplus in one was being constantly drawn upon to meet the deficits in others. In the absence of a common currency this resource operation was considerably hampered. The difficulties caused by the absence of a common currency in the way of the ” supply ” operation made themselves felt in two different ways. Not being able to use as legal tender the money of other Presidencies, each was obliged to lock up, to the disadvantage of commerce, large working balances in order to be self-sufficient. The very system which imposed the necessity of large balances also rendered relief from other Presidencies less efficacious. For the supply was of necessity in the form of the currency of the Presidency which granted, it, and before it could be utilised it had to be re-coined into the currency of the needy Presidency. Besides the loss on recoinage, such a system obviously involved inconvenience to merchants and embarrassment to the Government.

At the end of 1833, therefore, the position was that the Court desired to have a uniform currency with a single standard of silver, while the authorities in India wished for a common currency with a bimetallic standard. Notwithstanding these divergent views, the actual state of the currency might have continued as it was without any substantial alteration either way. But the year 1833 saw an important constitutional change in the administrative relations between the three Presidential Governments in India. In that year by an Act of Parliamentthere was set up an Imperial system of administration with a centralisation of all legislative and executive authority over the whole of India. This change in the administrative system, perforce, called forth a change in the prevailing monetary systems. It required local coinages to be replaced by Imperial coinage. In other words, it favoured the cause of a common currency as against that of a mere uniform currency. The authorities in India were not slow. to realise the force of events. The Imperial Government set up by Parliament was not content to act the part of the Dewans or agents of the Moghuls, as the British had theretofore done, and did not like that coins should be issued in the name of the defunct Moghul emperors who had ceased to govern. It was anxious to throw off the false garb and issue an Imperial coinage in its own name, which being common to the whole of India would convey its common sway. Accordingly, an early opportunity was taken to give effect to this policy. By an Act of the Imperial Government (XVII of 1835) a common currency was introduced for the whole of India, as the sole legal tender. But the Imperial Government went beyond and, as if by way of concession to the Court—for the Court did most vehemently protest against this common currency in so far as it superseded the Sicca rupee—legislated ” that no gold coin shall henceforward be a legal tender of payment in any of the territories of the East India Company.

That an Imperial Administration should have been by force of necessity led to the establishment of a common currency for the whole of India is quite conceivable. But it is not clear why it should have abrogated the bimetallic system after having maintained it for so long. Indeed, when it is recalled how the authorities had previously set their faces against the destruction of the bimetallic system, and how careful they were not to allow their coinage reforms to disturb it any more violently than they could help, the provision of the Act demonetising gold was a grim surprise. However, for the sudden volte-face displayed therein, the Currency Act (XVII of 1835) will ever remain memorable in the annals of the Indian history. It marked the culminating-point of a long and arduous process of monetary reform and placed India on a silver monometallic basis, with a rupee weighing 180 grs. troy and containing 165 grs. fine as the common currency and sole legal tender throughout the country.

No piece of British India legislation has led to a greater discontent in later years than this Act XVII of 1835. In so far as the Act abrogated the bimetallic system, it has been viewed with a surprising degree of equanimity. Not all its critics, however, are aware that what the Act primarily decreed was a substitution of bimetallism by monometallism. The commonly entertained view of the Act seems to be that it replaced a gold standard by a silver standard. But even if the truth were more generally known, it would not justify any hostile attitude towards the measure on that score. For, what would have been the consequences to India of the gold discoveries of California and Australia in the middle of the nineteenth century, if she had preserved her bimetallic system ? It is well known how this increase in the production of gold relatively to that of silver led to a divergence in the mint and the market ratios of the two metals after the year 1850. The under-valuation of silver, though not very great, was great enough to confront the bimetallic countries with a serious situation in which the silver currency, including the small change, was rapidly passing out of circulation. The United Stateswas obliged by the law of 1853 to reduce the standard of its small silver coins sufficiently to keep them, dollar for dollar, below their gold value in order to keep them in circulation. France, Belgium, Switzerland, and Italy, which had a uniform currency based on the bimetallic model of the French with reciprocal legal tender*,  were faced with similar difficulties.

*The cultural influence of France had led the other countries of Latin origin to adopt the French monetary system. The political independence acquired by Belgium in 1831 was followed by a change in her monetary system. By the law of 1832, Belgium from a monetary point of view, became a satellite of France. By that law she adopted in its entirety the monetary system of France, and even went so far as to give the French gold pieces of 20 and 40 francs and to the French silver 5-franc pieces the power of legal tender in Belgium. In Switzerland, Art. 36 of the Constitution of 1848 had vested in the Federal Government the authority to coin money. The law of May 7, 1850, adopted the French monetary system for Switzerland : Art. 8 declared ” that such foreign silver coins as were minted in sufficiently close proximity with the French system might be granted a legal status as regular media for the payment of debts in Switzerland.” The various Italian States, prior to unification, had, like the Swiss Cantons, each its own currency. But with the desire for uniformity of coinage consequent upon unification, there arose a problem either of selecting one of the old systems or of adopting a new one which would be common to the whole country. Some form of a grateful memorial to France was uppermost in the minds of the Italians for the help the French gave in the matter of their independence, and the adoption of the French monetary system for Italy was deemed to serve the purpose. Fortunately, Sardinia already possessed the French system, and the law of August 24, 1862, extended it to the whole of Italy, with the lire as the unit, and also conferred legal-tender power on the coins of France, Belgium, and Switzerland, Cf. H.-P. Willis, History of the Latin monetary Union, Chicago, 1910, pp. 15, 27, 36, 37.

Lest a separatist policy on the part of each nation,  to protect their silver currency and particularly the small change, should disrupt the monetary harmony prevailing among them all, they were compelled to meet in a convention, dated November 20, 1865, which required the parties, since collectively called the Latin Union, to lower, in the order to maintain them in circulation, the silver pieces of 2 francs, 1 franc, 50 centimes and 20 centimes from a standard of 900 / 1000 fine to 835 / 1000 and to make them subsidiary coins.  It is true that the Government of India also came in for trouble as a result of this disturbance in the relative value of gold and silver, but that trouble was due to its own silly act. The currency law of 1835 had not closed the Mints to the free coinage of gold, probably because the seignorage on the coinage of gold was a source of revenue which the Government did not like to forego. But as gold was not legal tender, no gold was brought to the Mint for coinage, and the Government revenue from seignorage fell off. To avoid this loss of revenue, the Government began to take steps to encourage the coinage of gold. In the first place, it reduced the seignorage in 1837 from 2 per cent. to 1 per cent. But even this measure was not sufficient to induce people to bring gold to the Mint, and consequently the revenue from seignorage failed to increase. As a further step in the same direction, the Government issued a Proclamation on January 13, 1841, authorising the officers in charge of public treasuries to receive the gold coins at the rate of 1 gold mohur equal to 15 silver rupees. For some time no gold was received, as at the rate prescribed by the Proclamation gold was undervalued But the Australian and Californian gold discoveries altered the situation entirely. The gold mohur, which was undervalued at Rs. 15, became overvalued, and the Government which was at one time eager to receive gold, was alarmed at its influx. By adopting the course it did of declaring gold no longer legal tender, and yet undertaking to receive it in liquidation of Government demands, it laid itself under the disadvantage of being open to be embarrassed with a coin which was of no use and must ordinarily have been paid for above its value. Realising its position, it left aside all considerations of augmenting revenue by increased coinage, and promptly issued on December 25, 1852, another Proclamation withdrawing that of 1841. Whether it would not have been better to have escaped the embarrassment by making gold general legal tender than depriving it of its partial legal-tender power is another matter. But, in so far as India was saved the trials and tribulations undergone by the bimetallic countries to preserve the silver part of their currency, the abrogation of bimetallism was by no means a small advantage. For, the measure had the virtue of fore-arming the country against changes which, though not seen at the time, soon made themselves felt.

The abrogation of bimetallism in India, accomplished by the Act of 1835, cannot therefore be made a ground for censure. But it is open to argument that a condemnation of bimetallism is not per se a justification of silver monometallism. If it was to be monometallism it might well have been gold monomentallism. In fact, the preference for silver monometallism is not a little odd when it is recalled that Lord Liverpool, the advocate of monometallism, whose doctrines the Court had sought to apply to India, had prescribed gold monometallism for similar currency evils then prevalent in England. That the Court should have deviated from their guide in this particular has naturally excited a great deal of hostile comment as to the propriety of this grave departure. At the outset any appeal to ulterior motives must be baseless, for Lord Liverpool was not a ” gold bug,” nor was the Court composed of ” silver men.” As a matter of fact, neither of them at all considered the question from the standpoint as to which was a better standard of value, gold or silver. Indeed, in so far as that was at all a consideration worth attending to, the choice of the Court, according to the opinion of the time, was undoubtedly a better one than that of Lord Liverpool. Not only were all the theorists, such as Locke, Harris, and Petty, in favour of silver as the standard of value, but the practice of the whole world was also in favour of silver. No doubt, England had placed herself on a gold basis in 1816. But that Act, far from closing the English Mint to the free coinage of silver, left it to be opened by a Royal ProclamationThe Proclamation, it is true, was never issued, but it is not to be supposed that therefore Englishmen of the time had regarded the question of the standard as a settled issue. The crisis of 1825 showed that the gold standard furnished too narrow a basis for the English currency system to work smoothly, and, in the expert opinion of the time. the gold standard, far from being the cause of England’s commercial superiority, was rather a hindrance to her prosperity, as it cut her off from the rest of the world, which was mostly on a silver basis. Even the British statesmen of the time had no decided preference for the gold standard. In 1826, Huskisson actually proposed that Government should issue silver certificates of full legal tender. Even as late as 1844 the question of the standard was far from being settled, for we find Peel, in his Memorandum to the Cabinet, discussing the possibility of abandoning the gold standard in favour of the silver or a bimetallic standard without any compunction or predilection one way or the other. The difficulties of fiscal isolation were evidently not so insuperable as to compel a change of the standard, but they were great enough to force Peel to introduce his famous proviso embodying the Huskisson plan in part in the Bank Charter Act of 1844, permitting the issue of notes against silver to the extent of one-fourth of the total issues . Indeed, so great was the universal faith in the stability of silver that Holland changed in 1847 from what was practically a gold monometallism to silver monometallism because her statesmen believed that

” it had proved disastrous to the commercial and industrial interests of Holland to have a monetary system identical with that of England, whose financial revulsion’s, after its adoption of the gold standard, had been more frequent and more severe than in any other country, and whose injurious effects were felt in Holland scarcely less than in England. They maintained that the adoption of the silver standard would prevent England from disturbing the internal trade of Holland by draining off its money during such revulsion’s, and would secure immunity from evils which did not originate in and for which Holland was not responsible.”

But stability was not the ground on which either the Court or Lord Liverpool made their choice of a standard metal to rest. If that had been the case, both probably would have selected silver. As it was, the difference in the choice of the two parties was only superficial. Indeed, the Court differed from Lord Liverpool, not because of any ulterior motives, but because they were both agreed on a fundamental proposition that not stability but popular preference should be the deciding factor in the choice of a standard metal. Their differences proceeded logically from the agreement. For, on analysing the composition of the currency it was found that in England it was largely composed of gold and in India it was largely composed of silver. Granting their common premise, it is easy to account why gold was selected for England by Lord Liverpool and silver for India by the Court. Whether the actual composition of the currency is an evidence of popular preference cannot, of course, be so dogmatically asserted as was done by the Court and Lord Liverpool. So far as England is concerned, the interpretation of Lord Liverpool has been questioned by the great economist David Ricardo. In his High Price of Bullion, Ricardo wrote:—

” For many reasons given by Lord Liverpool, it appears proved beyond dispute that gold coin has been for near a century the principal measure of value; but this is, I think, to be attributed to the inaccurate determination of the mint proportions. Gold has been valued too high; no silver can therefore remain in circulation which is of its standard weight. If a new regulation were to take place, and silver be valued too high…… gold would then disappear, and silver become the standard money.”

And it is possible that mint proportions rather than popular preference could have equally well accounted for the preponderance of silver in India.

Whether any other criterion besides popular; preference could have led the Court to adopt gold monometallism is a moot question. Suffice it to say that the adoption of  silver monometallism, though well supported at the time when the Act was passed, soon after proved to be a measure quite inadequate to the needs of the country. It is noteworthy that just about this time great changes were taking place in the economy of the Indian people. Such a one was a change from kind economy to cash economy. Among the chief causes contributory to this transformation the first place must be given to the British system of revenue and finance. Its effects in shifting Indian society on to a cash nexus have not been sufficiently realised, although they have been very real. Under the native rulers most payments were in kind. The standing military force kept and regularly paid by the Government was small. The bulk of the troops consisted of a kind of militia furnished by Jageerdars and other landlords, and the troops or retainers of these feudatories were in great measure maintained on the grain, forage, and other supplies furnished by the districts in which they were located. The hereditary revenue and police officers were generally paid by grants of land on tenure of service. Wages of farm servants and labourers were in their turn distributed in grain. Most of its officers being paid in kind, the State collected very little of its taxes in cash. The innnovations made by the British in this rude revenue and fiscal system were of the most sweeping character. As territory after territory passed under the sway of the British, the first step taken was to substitute in place of the rural militia of the feudatories a regularly constituted and a well-disciplined standing army located at different military stations, paid in cash ; in civil employ, as in military, the former revenue and police officers with their followers, who paid themselves by perquisites and other indirect gains received in kind, were replaced by a host of revenue collectors and magistrates with their extensive staff, all paid in current coin. The payments to the army, police, and other officials were not the only payments which the British Government had placed on a money basis. Besides these charges, there were others which were quite unknown to the native Governments, such as the ” Home Charges ” and ” Interest on Public Debt,” all on a cash basis. The State, having undertaken to pay in cash, was compelled to realise all its taxes in cash, and as each citisen was bound to pay in cash, he in his turn stipulated to receive nothing but cash, so that the entire structure of the society underwent a complete transformation.

Another important change that took place in the economy of the Indian people about this time was the enormous increase of trade. For a considerable period, the British tariff policy and the navigation laws had put a virtual check on the expansion of Indian trade. England compelled India to receive her cotton and other manufactures at nearly nominal .(2 1/2 per cent.) duties, while at the same time she prohibited the entry of such Indian goods as competed with hers within her territories by prohibitory duties ranging from 50 to 500 per cent. Not only was no reciprocity shown by England to India, but she made a discrimination in favour of her colonies in the case of such goods as competed with theirs. A great agitation was carried on against this unfair treatment, and finally Sir Robert Peel admitted Indian produce to the low duties levied by the reformed tariff of 1842. The repeal of the navigation laws gave further impetus to the expansion of Indian commerce. Along with this, the demand for Indian produce had also been growing. The Crimean War of 1854 cut off the Russian supplies, the place of which was taken by Indian produce, and the failure of the silk crop in 1853 throughout Europe led to the demand for Asiatic, including Indian, silks.

The effect of these two changes on the currency situation is obvious. Both called forth an increased demand for cash. But cash was the one thing most difficult to obtain. India does not produce precious metals in any considerable quantity. She has had to depend upon her trade for obtaining them. Since the advent of the European Powers, however, the country was not able to draw enough for the precious metals. Owing to the prohibitions on the export of precious metals then prevalent in Europe, one avenue for obtaining them was closed. But there was little chance of obtaining precious metals from Europe, even in the absence of such prohibition ; indeed, precious metals did not flow to India when such prohibitions were withdrawn. The reason of the check to the inflow of precious metals was well pointed out by Mr. Petrie in his Minute of November, 1799, to the Madras Committee of Reform. According to Mr. Petrie, the Europeans before they acquired their territorial possessions

” purchased the manufactures of India with the metals of Europe: but they were henceforward to make these purchases with gold and silver of India, the revenues supplied the place of foreign bullion and paid the native the price of his industry with his own money. At first this revolution in the principles of commerce was but little felt, but when opulent and extensive dominions were acquired by the English, when the success of war and commercial rivalship had given them so decided a superiority over the other European nations as to engross the whole of the commerce of the East, when a revenue amounting to millions per annum was to be remitted to Europe in the manufactures of the East, then were the effects of this revolution severely felt in every part of India. Deprived of so copious a stream, the river rapidly retired from its banks and ceased to fertilise the adjacent fields with overflowing water. “

The only way open, when the prohibitions were withdrawn to obtain precious metals, was to send more goods than this amount of tribute, so that the balance might bring them in. This became possible when Peel admitted Indian goods to low tariff, and the country was for the first time able to draw in a sufficient quantity of precious metals to sustain her growing needs. But this ease in the supply of precious metals to serve as currency was short-lived. The difficulties after 1850, however, were not due to any hindrance in the way of India’s obtaining the precious metals. Far from being hindered, the export and import of precious metals was entirely free, and India’s ability to procure them was equally great. Neither were the difficulties due to any want of precious metals ; for, as a matter of fact, the increase in the precious metals after 1850 was far from being small. The difficulty was of India’s own making, and was due to her not having based her currency on that precious metal, which it was easy to obtain. The Act of 1835 had placed India on an exclusive silver basis. But, unfortunately, it so happened that after 1850, though the total production of the precious metals had increased that of silver had not kept pace with the needs of the world, a greater part of which was then on a silver basis, so that as a result of her currency law India found herself in an embarrassing position of an expanding trade with a contracting currency, as is shown in the Table IV on page 364.

On the face of it, it seems that there need have been no monetary stringency. The import of silver was large, and so was the coinage of it. Why then should there have been any stringency at all ? The answer to this question is not far to seek. If the amount of silver coined had been retained in circulation it is possible that the stringency could not have arisen. India has long been notoriously the sink of the precious metals. But in interpreting this phenomenon, it is necessary to bear in mind the caution given by Mr. Cassels that

“its silver coinage has not only had to satisfy the requirements of commerce as the medium of exchange, but it has to supply a sufficiency of material to the silversmith and the jeweller. The Mint has been pitted against the smelting-pot, and the coin produced by so much patience and skill by the one has been rapidly reduced into bangles by the other.”






Treasure. Net Imports of

Total Coinage of

Excess ( + ) or Defect

(-) of Coinage on Net Imports of

Annual Production

(in £, 00,000 omitted) of


Imports. £

Exports. £

Silver. £

Gold. £

Silver. £

Gold. £

Silver. £

Gold. £












































– 915,764











– 728,814










+ 871,504











+ 146,767











+ 436,360






















– 394,495




TNow it will be seen from the figures given that all the import of silver was coined and used up for currency purposes. Very little or nothing was left over for the industrial and social consumption of the people. That being the case, it is obvious that a large part of the coined silver must have been abstracted from monetary to non-monetary purposes. The hidden source of this monetary stringency thus becomes evident. To men of the time it was as clear as daylight that it was the rate of absorption of currency from monetary to non-monetary purposes that was responsible as to why (to quote from the same authority)

“notwithstanding such large importation’s the demand for money has so far exceeded…… that serious embarrassment has ensured and business has almost come to a stand from the scarcity of circulating medium. As fast as rupees have been coined they have been taken into the interior and have there disappeared from circulation, either in the Indian substitute for stocking-foot or in the smelting-pot into bangles.”

The one way open was to have caused such additional imports of silver as would have sufficed both for the monetary as well as the non-monetary needs of the country. But the imports of silver were probably already at their highest. For, as was argued by Mr. Cassels,

“the annual production of silver of the whole world does not exceed ten million sterling. During the last few years, therefore, India alone has annually taken, and to a great extent absorbed, more of the metal than has been produced by the whole world. It is clear that this cannot long continue without producing serious embarrassment. Either the European markets will be unable or unwilling to supply us, or the value of silver will rise to an extravagant extent. Under such circumstances it is not difficult to foresee that the present crisis must continually recur, and the commerce in this country must be periodically, if not permanently, crippled by the scarcity of the circulating medium.”

Had there been any credit media the contraction of currency might not have been felt as severely as it was. But there was no credit money worth the name. The Government issued interest-bearing Treasury notes, which formed a part of the circulating medium of the country. But, apart from being insignificant in amount, these Treasury notes had

“proved a failure, owing, firstly, to the condition that they would not be received in payment of revenue for twelve months; secondly, they would be paid off or received only where issued, so that as the issues were confined to Calcutta, Madras and Bombay, their use and employment for purposes of circulation were limited to those cities…… and lastly, because their amounts were too large and their period of running at interest too short.”

Nor was banking so widely developed as to satisfy the currency needs of commerce. The chief hindrance to its growth was the attitude of the Court. Being itself a commercial body largely dealing in exchange, the Court was averse to the development of banking institutions lest they should prove rivals. As this traditional policy of hostility continued even after the Court had ceased to be a body of merchant princes, banks did not grow with the growth of trade. Indeed, as late as 1856 banks in India numbered few and their issues were small, as shown in the table on page 367. (Table V).

The insufficiency of silver and the want of credit currency caused such an embarrassment to trade that there grew up a change in the attitude toward the Currency Act of 1835, and people for once, began to ask whether, although it was well to have changed from bimetallism to monometallism, it would not have been better to have preferred gold monometallism to silver monometallism. As more and more of gold was imported and coined, the stronger grew the demand for giving it a legal status in the existing system of Indian currency.


banks IN india 

Name of the Bank.

Year of Estab lishment.

Head Offices.

Branches and Agencies.


Notes in Circulation. £

Specie in Coffers. £

Bills under Discount. £





Subscribed. £

Paid up. £




Bank of Bengal









Bank of Madras









Bank of Bombay









Oriental Bank .









Agra and U.P. .



Agra, Madras, Lahore,   Canton, and London







Bombay, Simla, Mus-






N.W. Bank .



sowri and Agra Ag-   encies in Delhi and












London & East-  ern Bank









Agents in London,






Commercial Bank



Calcutta, Canton, &















Agents in London,






Delhi Bank .



Calcutta, Bombay,





and Madras






Simla Bank





Dacca Bank








London, Calcutta, Col-






Mercantile Bank



ombo, Kandy, Can-









ton, and Shanghai






India, China and Australian Bank




had not Commenced Business

All were agreed on the principle of a gold currency: whatever difference there was, was confined to the method of its adoption. The introduction of gold on a bimetallic basis was out of the question, for the Government refused to make what it deemed to be the “hopeless attempt” to fix the value of gold and silver and compel their acceptance at that value. The projects which the Government was willing to considerwere : (1) to introduce the ” sovereign ” or some other gold coin and to let it circulate at its market price from day to day as measured in silver; (2) to issue a new gold coin, bearing the exact value of a given number of rupees, and make it a legal tender for a limited period, when it might be readjusted and again valued, and made a legal tender for a similar period at the new rate ; (3) to introduce the English sovereign as a legal tender for Rs. 10, but limited in legal tender to the amount of Rs. 20 or two sovereigns ; or (4) to substitute a gold standard for the silver standard.

Of these projects, the first three were evidently unsafe as currency expedients. Fixity of value between the various components of the currency is an essential requisite in a well-regulated monetary system. Each coin must define a fixed value, in terms of the others realisable by the most untutored intellect. When it ceases to do so, it becomes a mere commodity, the value of which fluctuates with the fluctuations of the market. This criterion ruled out the first two projects. To have introduced a coin as money, the value of which could not be vouched for— as would have been the case under the first project—from one day to another, apart from the trouble of computing and ascertaining the fluctuations, would have been a source of such embarrassment that the Government, it must be said, acted wisely in not adopting it. There was no saving grace in the second project to recommend its adoption in preference to the first. If it had been adopted the result would have been that during the period when a rate remained fixed, gold would have been forced into circulation supposing that its market value was lower, and at the end of the year, if it was known that the rate would be revised and the value of the coin be reduced in conformity with the fall of gold, a general struggle to get rid of the overrated gold coin and shift the inevitable loss to the shoulders of others would have certainly ensued. The third was a somewhat strange proposal. It is possible with a low-priced metal to strike coins of less than full value for the purposes of small payments and limit their tender. But this is not possible with a high-priced metal, the raison d’etre of which is to facilitate large transactions. The objections to the plan could hardly be concealed. So long as gold was undervalued, it would not circulate at all. But once it became overvalued owing to changes in the market ratio, the rupee would go out of circulation, and shopkeepers and traders would remain possessed of a coin which would be of no use in liquidating large transactions.

The only project free from these faults was the adoption of a gold standard, with silver as a subsidiary currency. The strongest argument, the Government could advance against this demand was that ” in a country where all obligations have been contracted to be paid in silver, to make a law by which they could forcibly be paid in anything else would simply be to defraud the creditor for the advantage of the debtor, and to break public faith.” However sound the argument might have been, it was hopelessly inadequate to meet the growing demand to place the Indian currency on an expanding basis. Indeed, it cannot be said that the Government was really serious in its opposition to a gold currency. For the strength of its position, it relied not so much on the soundness of its arguments against gold, but on its discovery that a better solution than a gold currency existed at hand. If what was wanted was a supplement to the existing currency, then the remedy proposed by the Government was unassailable. Gold would have been uneconomical and inconvenient. Silver backed by paper would make the currency economical, convenient, and expansive. Indeed, the advantages were so much in favour of the official alternative that this first attempt against the silver standard resulted not in the establishment of a gold standard, but in the introduction of a Government paper currency to supplement the existing silver standard.

None the less, the desire for a gold standard on the part of the people was too great to be altogether ignored, though the demand for it was supposed to have been met by the alternative measure. The paper currency, as originally conceived by Mr. Wilson, was a complete counterblast to the gold agitation. But his successor, Mr. Laing, differed from him in what he regarded as the ” barbarous ” exclusion of gold from Indian currency. He therefore introduced two important provisos in the original Bill, when the task of carrying it through fell upon him, owing to the untimely death of Mr. Wilson. One was to raise the lowest denomination of notes from Rs. 5 to Rs. 20. The other was

“to authorise the governor-general in Council from time to time to direct by order to be published in the Gazettes of Calcutta, Madras and Bombay, that notes to an extent not exceeding one-fourth of the total amount of issues represented by coin and bullion…… be issued in exchange for gold coin…… or bullion computed at rates to be fixed by such order………”

The Act, which afterwards embodied the Bill, adopted the second proviso in toto, and the first after being modified so as to fix Rs. 10 as the lowest denomination of notes to be issued. Although its general tenor is clear, the immediate aim of the second proviso does not become quite clear from a perusal of the official papers. The Select Committee on the Paper Currency Bill seem to have held that the proviso was innocuous, if not good. It thought

“that on special occasions and in particular transactions it might be a great advantage to the mercantile community to know that gold could be made available as money at a fixed rate. If, on the other hand, at the rate fixed gold did not enter into circulation it would prove that silver, with a secure and convertible paper currency, gave perfect confidence and answered all the wants of the trade and of the community, and the enactment would remain a dead letter and be perfectly harmless.”

But there is no doubt that Mr. Laing looked upon it as an easy means of making a transition to the gold standard. In his Minute on Currency and Banking, dated May 7, 1862, he wrote :

“The object of this proviso was simply to leave the door open for cautious and tentative experiments with regard to the future use of gold. The importation of gold already exists and is increasing, and the metal is much appreciated by the native population as generally to command a premium……… Thus, after a time, if the use of gold becomes more general, and its value more fixed, some further step might be taken.” And such seems to have been the impression of the Secretary of State at the time, for he understood the force of the recommendation in favour of issuing notes against gold was that it would “effectively contribute to the introduction of a gold currency in India.”

But whether conceived as a relief to the mercantile community or as an avenue for introducing a gold currency the proviso was not put into effect. The Secretary of State objected to any action being taken with regard thereto. In the meantime the paper currency did not prove the panacea, it was avowed to be. The extent it reached and the economy it effected were comparatively insignificant.


\As was pointed out by Mr. Casselsthe currency notes, after three years, had been taken only to the extent of about 6 per cent. of the whole metallic currency, which was then estimated by Mr. Wilson to be £100,000,000 in sterling, and that they had actually fulfilled their primary object of releasing the reproductive capital of the country only to the extent of a million sterling or 1 per cent. of the whole. Owing to the demand for Indian cotton in the Liverpool market to take the place of American cotton, the export of which was stopped during the Civil War, the growing foreign trade assumed enormous proportions. And as the paper currency gave no relief, the entire stress fell upon silver. The production of silver, however, was not increasing much faster than it did previously, and its absorption by India had not slackened. The inadequacy of a currency medium therefore continued to be felt as acutely as before, notwithstanding the introduction of a paper currency. Not only was gold imported in large quantities, but was employed for monetary purposes, although it was not legal tender. The fact was brought to the notice of the government of India by the Bombay Chamber of Commerce in a memorial praying for the introduction of a gold currency in India, in which it was pointed out

” that there is an increasing tendency to the creation of a gold ingot currency, but the natives of this country, as a rude remedy for the defects of the existing silver one, “


” that gold bars, stamped with the mark of Bombay banks, are for this purpose circulated in several parts of the country.” This led to an agitation for requiring the Government to give effect to the proviso in the Paper Currency Act, and the movement assumed such dimensions that it forced the hands of the Government. On this occasion, the plan for effecting the change was boldly conceived. Sir Charles Trevelyan saw through the weak point of the proviso on which the Government was called upon to act. He argued that the currency notes were payable only in the current coin of the country, which in India was the silver rupee, and to hold a portion of the reserve gold which could not be tendered in payment of the notes was seriously to endanger their convertibility in times of political distrust or commercial panic.


extent aND economy oF paper currency




Government Securities

Value of Notes in Circulation

Calcutta on Oct. 31, 1863




Madras on Oct. 31, 1863



Bombay on Jan. 4, 1864









He therefore ventured beyond the scope of the agitation, and pronounced that instead of allowing gold a backdoor entry into the currency system it ought to be made the standard of value in India. He did not agree with Mr. Wilson that the substitution of gold for the silver standard would be ” to break faith with the creditor.” Nor was he much deterred by the fact that before the silver currency could be reduced to a subsidiary position, the introduction of gold in India would give rise to a double standard for the time being ; for he argued that ” all nations must pass through a transition stage of a double standard before they arrive at a single standard.” Accordingly he proposed that (1) sovereigns and half-sovereigns of British or Australian standard should be legal tender in India, at the rate of one sovereign for Rs. 10, and that (2) Government currency notes should be exchangeable either for rupees or sovereigns at the rate of one sovereign for Rs. 10, but that they should not be exchangeable for bullion.

His proposals were accepted by the Government of India and were communicated to the Secretary of State for his sanction. But the Secretary of State, impatient and intolerant of any deviation from a monometallic system, whittled down the whole project with scant courtesy. His reply is a grotesque piece of reasoning and terribly shallow. He was unwilling to allow the measure, because he felt satisfied that the rate of Rs. 10 to a sovereign underrated the sovereign too much to permit its circulation. Here he was on solid ground. The cost of producing a sovereign at a Mint in India was estimated at the time to be Rs. 10-4-8; while the cost of importing it to Calcutta from England was estimated at Rs. 10-4-10, and from Australia at Rs. 10-2-9. Whichever was the proper rate, it was certain that sovereigns could not circulate at the rate of Rs. 10 to 1. It was a pity that Sir Charles Trevelyan did not propose a higher ratio so as to make the circulation of the sovereign an assured event. But the Secretary of State would have been averse to the measure just the same, even if the ratio had been favourable to the sovereign. To the Secretary of State, the measure, based as it was on an unfavourable ratio, was useless. But if based on a favourable ratio it was none the less pernicious, for, it portended the possibility of what he considered as the most vicious system of double standard, however temporary it might have been. The mere contingency of giving rise to a bimetallic system was enough to frighten the Secretary of State into opposition to the whole measure, for he refused to admit that ” it may be for the public advantage to pass through a period of double standard in order to change the basis of the currency from silver to gold.”

The only concession that the Secretary of State was willing to make was to permit ” that gold coin should be received into public treasuries at a rate to be fixed by Government and publicly announced by Proclamation ” without making it a general legal tender in India. It will be recalled that this was a revival of that foolish measure which was abandoned in 1852 for having embarrassed the Government. To offer to receive coin which you cannot pay back is to court trouble, and it was to obviate the too-well-known danger inherent in the project that this more complete measure was proposed. But the currency stringency was so great that the Government of India, rather than obstinately cling to their view, consented to avail themselves of the suggestion of the Secretary of State, and issued a Government Notification in November, 1864, which proclaimed that

“sovereign and half-sovereigns coined at any authorised Royal Mint in England or Australia of current weight, shall until further notice be received in all the Treasuries of British India and its dependencies in payment of sums due to Government, as the equivalent of 10 and 5 Rs. respectively ; and that such sovereigns and half-sovereigns shall, whenever available at any Government Treasury, be paid at the same rates to any person willing to receive them in payment of claims against the Government.”

The real par, however, was somewhat above Rs. 10 to the sovereign, and the notification was therefore inoperative. The currency situation, on the other hand, continued to be as acute as ever, and the Government of India was again moved in 1866 by the Bengal Chamber of Commerce to take steps to make the circulation of gold effective. This time the Chamber insisted on the institution of a Commission of Inquiry ” as to the expediency of introducing gold into the monetary system of India.” But the Government of India held that ” instead of a gold a paper currency has been introduced, in the expectation that it would prove a more convenient and acceptable circulating medium than either of the precious metals,” and consequently ” it must be shown that paper has not proved and is not likely to prove a circulating medium adequate to the wants and suitable to the habits of the country, before an endeavour is made to introduce gold in suppression of, or in addition to, paper.” A commission was therefore appointed to inquire into the ” operation of the existing currency arrangements which were established under Act XIX of 1861, ” and to report as to “what may be the advantage, as based on expediency, of the introduction of the legal tender of gold into India, in addition to that of silver.” After an exhaustive investigation, the Commission came to the conclusion that owing to several causes the paper currency had failed to establish itself among the circulating media of the country, but that gold was finding a larger place in the transactions of the people. The Commission ended by urging upon the Government ” to cause a legal tender of gold to be a part of the currency arrangements of India.” Now it was the turn of the Government to give effect to the recommendation. But, curiously enough, it did not go to the extent of adopting the recommendation of the Commission which it had itself appointed. Instead of making gold legal tender, as advised by the Commission, the only action the Government took was to issue another Notification on October 28, 1868, which simply altered the rate of the sovereign to Rs. 10-8, without doing anything further to avoid the evil consequence attendant upon that one-sided measure. Fortunately for the Government, even this correction of the rate did not induce any flow of gold into the circulation of the country. The currency troubles had by then subsided, and as no new pressure was exerted upon the Government, this proved the last of two abortive attempts the Government made to introduce gold into India.

For the time being, the problem was solved by the natural course of events. But, as subsequent events showed, the change to a gold standard would have been better for India.and would have been welcomed in the interests of Europe, which was then suffering from high prices due to the superfluity of gold. At this particular juncture, the Government of India was really at the crossing of ways, and could have averted the misfortunes that were to befall it and its people if it had sided with the forces of change and replaced the silver standard by a gold standard, as it could most easily have done. That those in charge of Indian affairs should have thrown the weight of their authority against the change was no dishonest act deserving of reproach, but it does furnish one more illustration of those disastrous human ways, which often lead people to regard the situation in which they live as most secure, just when it is most precarious. So secure did they feel about the currency situation that in 1870, when the Mint Law came to be revised and consolidated, they were content, as though nothing had happened or was likely to happen, to allow the silver standard of 1835 to continue pure and unsullied by any admixture of gold. *

Alas ! those, who then said  that they were not called upon to take more than a “juridical” view of the Indian currency question, knew very little what was in store for them.





It is clear how the evolutionary process with respect to the Indian currency culminated in the establishment of a silver standard and how the agitation for a gold currency ended in the silver standard being supplemented by a paper currency. Before proceeding to inquire into the working of such a mixed system, it would be useful to review briefly the nature of its framework.


The metallic part of it was regulated by Act XXIII of 1870. The coins authorised and legalised thereunder were as shown on p. 379. (Table VIII)


The Act made no innovations either in regard to the number of coins issued by the Mints or their legal-tender powers. Identical though it was with the earlier enactment’s in the matter of coins, [f1]  its juridical provisions were designed to perfect the monetary law of the country as had never been done before. The former Acts which it repealed were very sparing in their recognition of the principle of mint ” remedy ” or ” toleration,” as it is called. The point has been largely deemed to be one of mere mint technique. That is so ; but it is not without its monetary significance. When the precious metals were current by weight the question of a mint toleration could not possibly have arisen, for it was open to every one to ascertain the same by weighing the value of his return. But since the invention of coinage, when currency came to be by tale, every one has trusted that the coins contained the value they were certified to contain.




Legal Tender for 1/192nd part of a Rupee




The actual value of the coin cannot, however, always be in exact agreement with its certified value. Such differences are bound to exist, and even with all the improvements in the art of coinage it would be difficult to avoid them. What matters is the extent of the deviation from the true mint standard. The mint laws of all countries, therefore contain provisions which declare that coins shall not be legal tender at their certified value if they err from their legal standard beyond a certain margin. Indeed to make coins legal tender without prescribing a limit to their toleration is to open a way to fraud. In so far as the Act laid down a limit of toleration to the coins it authorised to be issued from the Mint, it was a salutary measure. It is to be regretted, however, that the Act instituted no machinery with which to ascertain that the coinage conformed to the law. [f2]  Another important improvement made by the Act was the recognition of the principle of free coinage. The principle, though it has not received the attention it deserves, is the very basis of a sound currency in that it has an important bearing on the cardinal question of the quantity of currency necessary for the transactions of the community. Two ways may be said to be open by which this quantity can be regulated. One way is to close the Mint and to leave it to the discretion of the Government to manipulate the currency to suit the needs. The other is to keep the Mint open and to leave it to the self-interest of individuals to determine the amount of currency they require. In the absence of unfailing tests to guide the exercise of discretion necessary in the case of closed Mints, the principle of open Mints has been agreed upon as the superior of the two plans. When every individual can obtain coin for bullion and convert coin into bullion, as would be the case under open Mints, the quantity is automatically regulated. If the increasing demands of commerce require a large amount of circulating medium, it is for the interest of the community to divert a larger quantity of its capital for this purpose; if, on the contrary, the state of trade is such as to require less, a portion of the coin is withdrawn, and applied as any other commodity for purposes other than those of currency. Because the Act of 1870 expressly recognised the principle of open Mint, it is not to be supposed that the Mints were closed before that date. As a matter of fact they were open to the free coinage of both gold and silver, although the latter alone was legal tender. But, strange as it may seem, none of the earlier Acts contained a word as to the obligation of the Mint Master to coin all the metal presented to him—a condition which is of the essence of the open mint system. The provisions of the Act on this point are unmistakable. It required:—


“Section 19. Subject to the Mint-rules for the time being in force, the Mint Master shall receive all gold and silver bullion and coin brought to the Mint: ” Provided that such bullion and coin be fit for coinage: ” Provided also that the quantity so bought at one time by one person is not less, in case of gold, than fifty tolas, and, in the case of silver, than one thousand tolas.


” Section 20. A duty shall be levied at the rate of one rupee per cent. at the Mint on the produce of all gold bullion and on all gold coin brought for coinage to the mint in accordance with the said Mint-rules.


“Section 21. All silver bullion or coin brought for coinage to the Mint, in accordance with the said Mint-rules, shall be subject to a duty at the rate of 2 per cent. on the produce of such from the return to be made to the proprietor.


“Section 22. A charge of one-fourth per mile on gold bullion and coin, and of one per mile on silver bullion and coin, shall also be levied for melting or cutting such bullion and coin so as to render the same fit for receipt into the Mint.


Section 23. All gold and silver bullion and coin brought to the Mint for coinage, and which is inferior to the standard fineness prescribed by this Act, or which, from brittleness or other cause, is unfit for coinage, shall, in case it is refined, be subject, in addition to the duty and charge aforesaid, to such charge on account of the loss and expense of refining as the Governor-General in Council prescribes in this behalf.


” Section 24. The Mint Master, on the delivery of gold or silver bullion or coin into the Mint for coinage, shall grant to the proprietor a receipt which shall entitle him to a certificate from the Assay Master for the net produce of such bullion or coin payable at the General Treasury.


“Section 25. For all gold bullion and coin, in respect of which the Assay Master has granted a certificate, payment shall be made, as nearly as may be, in gold coins coined under this Act or Act No. XVII of 1835; and the balance (if any) due to the proprietor shall be paid in silver, or in silver and copper, coins, in British India.”


In the matter of paper currency the Government, it is to be noted, did not proceed upon the principle of freedom of issue, which then obtained in the country. There prevails the erroneous view that before the introduction of the Government paper currency the right of note issue was confined to the three Presidency banks of India. As a matter of fact there existed in India what is called the free banking system, in which every bank was at liberty to issue its notes. It is true that notes of the Presidency banks enjoyed a status slightly superior to that enjoyed by the notes of other banks in that they were received by the Government to some extent in payment of revenue[f3] — a privilege for which the Presidency banks had to submit to a stringent legislative control on their business#, from which other banks whose issues were not so privileged were immune.


#The reasons for such control are to be found in the peculiar relationship that subsisted between the Government and the Presidency banks. Prior to 1862, as a safeguard against their insolvency, ” the Presidency Bank Charters restricted the kind of business in which they wore to engage themselves. Put very briefly the principal restrictions imposed prohibited the banks from conducting foreign-exchange business, from borrowing or receiving deposits payable out of India, and from lending for a longer period than six months, or upon mortgage, or on the security of immovable property, or upon promissory notes bearing less than two independent names, or upon goods unless the goods or title to them wore deposited with the banks as security. The Government held shares in the banks and appointed a part of the Directorate. In 1862, when the right of note issue was withdrawn, these statutory limitations on the business of the banks were greatly relaxed, though the Government power of control remained unchanged. But, the banks having in some cases abused their liberty, nearly all the old restrictions of the earlier period were reimposed in 1876 by the Presidency Banks Act, Government, however, abandoning direct interference in the management, ceasing to appoint official directors, and disposing of its shares in the banks. Some of these limitations have been incorporated in Act XLVII of 1920, which amalgamated the three Presidency banks into the Imperial Bank of India. Banks other than Presidency banks have been entirely immune from any legislative control whatsoever, except in so far as they are made amenable to the provisions of the Indian Companies Act. Cf. in this connection Minutes by Sir Henry Maine, No. 47, and the accompanying note by W. Stokes. The control of these banks is one of the important problems of banking legislation in India.




But this disadvantage was not sufficient to discourage other banks from indulging in the right of issue which was left open to them by law. However, this freedom of issue does not seem to have been exercised by any of the banks on any very large scale, not even by the Presidency Banks**, and was taken away from ail in 1861, [f4] when there was established a national issue for the whole of India entrusted to the management of a Government Department called the Department of Paper Currency.


**It should however, be noted that in 1860 the circulation of notes of the three Presidency banks was larger than their current accounts, as is evident from the following :—




But if private interest was not allowed to play the same part in determining the quantity of paper currency as was the case with regard to metallic currency, neither was any discretion left to the Government Department in the regulation of the paper currency. The Department of Paper Currency had no more discretion in the matter of paper currency than the Mint Master had in the matter of metallic currency.


The Department’s duty was confined by law[f5]  to the issue of notes in exchange for the amount thereof : (1) in current silver coin of the Government of India; (2) in standard silver bullion or foreign silver coin computed according to standard at the rate of 979 rupees per 1,000 tolas of standard silver fit for coinage ; (3) in other notes of the Government of India, payable to bearer on demand of other amounts issued within the same circle ; and (4) in gold coin of the Government of India, or for foreign gold coin or bullion, computed at such ratio and according to such rules and conditions as may be fixed by the Governor-General, provided that the notes issued against gold did not exceed one-fourth of the total amount of issues represented by coin and bullion. The whole of this amount was required by law to be retained as reserve for the payment of notes issued with the exception of a fixed amount which was invested in Government securities, the interest thereon being the only source of profit to the Government. The limit to the sum to be so invested was governed ” by the lowest amount to be estimated to which according to all reasonable experience, the paper currency might be expected to fall.” [f6]  Estimating on this basis, the limit to the investment portion was fixed at 4 crores in 1861, [f7]  at 6 crores in 1871[f8]  and at 8 crores in 1890. [f9]  But notwithstanding the growing increase in the investment portion, never was the fiduciary issue based thereon so great as to abrogate the essential principle of the Indian Paper Currency Law, the object of which was to so regulate the volume of paper currency that it should always preserve its value by contracting and expanding in the same manner and to the same extent as its metallic counterpart.


The following table shows the distribution of the paper currency reserve at three different periods:






Such was the organisation of the mixed currency that existed in India before it underwent a profound change during the closing years of the nineteenth century. Though of a mixed character, the paper portion formed a comparatively small part of the total. The principal reasons why the paper currency did not assume a large proportion are to be found in the organisation of the paper currency itself. [f10]  One such reason was that the lowest denomination of the notes was too large to displace the metallic currency. By the law of 1861 the denomination of notes ranged upwards from Rs. 10 as the lowest to Rs. 20, 50, 100, 500, and 1,000. In a country where the average range of transactions did not exceed R. 1 and were as low as 1 anna or even lower, it is impossible to expect that paper currency could, to any great extent, figure in the dealings of the people. Even Rs. 5 notes, the issue of which was first sanctioned in the year 1871, [f11]  were not low enough to penetrate into the economic life of the people. The other impediment to the increase of paper currency was the difficulty of encashing notes. One of the infelicitous incidents of the paper currency in India consisted in the fact that they were made legal tender everywhere within a circle, but encashable only at the office of issue. For such a peculiar organisation of the paper currency in India, what was largely responsible was the prevalence of internal exchange** in the country.


**It may be pointed out that although the Presidency banks had ceased to issue notes, yet under the agreements made with the Government in virtue of Act XXIV of 1861 the banks were employed by the Government ” for superintending, managing and becoming agents for the issue, payment and exchange of promissory notes of the Government of India, and for carrying on the business of an agency of issue ” on a renumeration of 3/4, per cent. per annum “on the daily average amount of Government currency notes outstanding and in circulation through the agency of the bank.” In the conflict that ensued between the Government of India and the Secretary of State because it believed that it would help the extension and popularization of the notes as to the propriety of thus employing the banks, the former was in favour of the plan, while the latter disliked the arrangement because it seemed to him to compromise the principle of complete separation between the business of issue and the business of banking. Neither of the two, however, grasped the fact that the profit on remittances on different centres owing to the prevalence of internal exchange was so great that the commission allowed to the banks was an insufficient inducement to cause them to promote the circulation of notes by providing facilities at their branches for the free encashment of them. So high was the internal exchange, and so reluctant seemed the banks to popularise the notes, that Government finally discharged them from being their agents for paper currency from January 2, 1866. See House of Commons Return, East Indian (Paper Money) 215 of 1862.




It raised a serious problem for the Government to cope with. If notes were to be made universally encashable it was feared that merchants, instead of using notes as currency, might use them as remittance on different centres to avoid internal exchange, and the Government be obliged to move funds between different centres to and fro, lest it should have to suspend cash payments. To undertake resource operations on such a vast scale between such distant centres when facilities for quick transport were so few, was obviously impossible, [f12]  and the Government therefore decided to curtail the encashment facilities of notes it issued. For the purposes of the paper currency, the Government divided the country into a number of circles of issue, and each currency circle was further subdivided into sub-circles,§[f13]  and the notes issued bore on their face the name of the circle or sub-circle from which they originated. Notes issued from any agency of issue situated in the territory comprised within a circle of issue were not legal tender in the territory of any other currency circle, nor were they encashable outside their own circle. Nay more, the notes issued from sub-circles subject to the same chief circle were legal tender in one another’s territory, but were not encashable except at their office of issue or at the issue office of their chief circle. The sub-circle notes could thus be cashed at two places, but the notes of the issue office of the chief circle, though legal tender in the entire territory covered by it, were encashable nowhere except at its own counter, not even at any of its own sub-circles. [f14]  This want of universal encashability, though it saved the Government from the possibility of embarrassment, proved so great a hindrance to the popularity of the notes that it may be doubted whether the paper currency could have made a progress greater than it did even if the lowest denomination of the notes had been lower than it actually was.


It must, however, be borne in mind that it was not the intention of the Indian Legislature to make the Indian currency as economical[f15]  as was desired by the Executive Government. The Legislature was no doubt appealed to by the original author of the paper currency to turn India into a new Peru, where as much currency could be had with as little cost, [f16]  but the Legislature showed a rather prudent reserve on the matter of aiding the consummation of such a policy. As the centres of encashment were so few, and the area included within each so large as to separate the furthest point in a circle by a distance of about 700 miles from the centre of encashment of the circle, it viewed with dread the authorising of notes of smaller denomination which the poor could not refuse and yet could not cash. [f17]  Besides the hardship involved in the want of encashability in the notes, the Legislature feared they would prove a ” fugitive treasure ” in the hands of the Indian peasant. Not being able to preserve them from rain and ants, he might have had to pay a heavy discount to be rid of the notes he could have been forced to accept. [f18]  So opposed was the Legislature to the economising clauses of the Paper Currency Bill as contrived to drive out metallic currency that it gave the Government an option to choose between legal-tender notes but of higher denomination and lower-denomination notes but of no legal-tender power. [f19]  And as the Government chose to have legal-tender notes, the Legislature in its turn insisted on their being of higher denomination. At first it adhered to notes of Rs. 20 as the lowest denomination, though it later on yielded to bring it down to 10, which was the lowest limit it could tolerate in 1861. Not till ten years after that, did the legislature consent to the issue of Rs. 5 notes, and that, too, only when the Government had promised to give extra legal facilities for their encashment. [f20]  On the whole, the desire of the Indian Legislature was to make the Indian currency safer, rather than economical, and such it undoubtedly was.


How did the currency system thus constituted work ? Stability of value is one of the prime requisites of a good currency system. But if we judge the Indian currency from this point of view, we find that there existed such variations in its value that it is difficult to escape the conclusion that the system was a failure.


Taking the rate of discount as an evidence of the adequacy of currency for internal commerce, it was the opinion of such a high financial authority as Mr. Van Den Berg that the unexpected contortions and sudden transitions in the Indian money market were unparalleled in the annals of any other money market in any other part of the world. [f21]  India is pre-eminently a country subject to seasonal swings**.


**It should be noted that the slack and the busy seasons are not uniformly distributed over the whole surface of the country. The distribution is roughly as follows :—-







Midsummer is naturally a period of diminished activity, while autumn brings renewed vigour in all activities of social and economic life. Not production alone is affected by seasons. On the side of consumption, Indian social life is also subject to seasonal variations. There are marriage season, holiday seasons and holy seasons. Even distribution has assumed in India quite a seasonal character. The practice of paying rents, wages, dividends, and settling accounts at stated intervals has been gaining ground as a result of contact with Western economic organisation. All these generate a kind of rhythm in the social demand for money, rising at certain periods of the year and falling at others. Having regard to the seasonal character of the economic and social life, the fluctuations caused by the discount rate soaring high during busy months when it should have been low enough to liquidate the transactions, and falling low during slack months when it should have been high enough to prevent the market from being demoralised, are unavoidable. But what made the contortions of the Indian money market so obnoxious was the circumstance that the seasonal fluctuations in the discount rate were so abnormal. ##


##The rate of discount of the Bank of Bengal for private paper running thirty days and after was altered—


In 1876   16 times, with 6 1/2  percent, as minimum and 13 1/2, percent, as maximum.


In 1877   21 times, with 7 1/2 percent, as minimum and 14 ½ percent, as maximum


In 1878   10 times, with 5 1/2 percent, as minimum and 11 ½ percent, as maximum


In 1879 15 times, with 6 1/ percent, as minimum and 11 ½ percent, as maximum


In 1880   8 times, with 5 1/ percent, as minimum and  9 ½ percent, as maximum


In 1881  9 times, with 5 1/ percent, as minimum and 10 ½ percent, as maximum


In 1882   9 times, with 6 1/2 percent, as minimum and  12 ½ percent, as maximum


In 1883 times, with 7 1/2 percent, as minimum and 10 ½ percent, as maximum


( Van Den Berg, loc. cit.)




The explanation for such a market phenomenon is to be sought in the irregularity of the money supply of the country. In order that money may be had at a uniform price, its supply should be regulated according to the variations in the demand for it. It is well to recognise that the demand for money is never fixed. But it will avail nothing until it is realised that the changes in the demand for money which take place from year to year with the growth of population, trade, etc., belong essentially to a different category from the fluctuations in the demand for money which occur within the course of a year owing to seasonal influences. In any well-regulated currency it is necessary to distinguish these two categories of changes in monetary demand, the one requiring steadiness and expandability and the other elasticity. On a comparative view it seems more than plausible that a metallic money is as especially adapted to furnish this element of steadiness and stability as paper money is to furnish that of elasticity. Indeed, so appropriate seem to be their respective functions that it has been insisted[f22]  that in an ideal system, these two forms of money cannot interchange their functions without making the currency burdensome or dangerous. The proof of the soundness of this view, it may be said, is found in the fact that, excluding the small transactions which take place by direct barter, the purchasing medium of any commercially advanced country is always a compound of money and credit.


On the face of it, the Indian currency is also a compound of money and credit, and as such it may be supposed that it contained provisions for expandability as well as elasticity. But when we come to analyse it we find that it makes no provision whatever for elasticity. Far from allowing the credit part of it to expand and contract with the seasonal demands, the Paper Currency Act placed a rigid limit upon the volume of its issue regardless of any changes in the volume of the demand. Here, then, is to be found one of the causes for the ” convulsions ” in the discount rates prevalent in the Indian money market. As was pointed out by Mr. Van Den Berg —


“The paper currency established by the Indian legislator fully answers the purpose, so far as business requires an easier means of exchange than gold or silver coin ; but no connection whatever exists between the issue of the fiduciary currency and the wants of the public to have their bills or other commodities converted into a current medium of exchange…… and this is the sole cause of the unexpected convulsions and sudden transitions in the money market so utterly detrimental to business to which the British Indian trade is constantly exposed. [f23]


It may, however, be objected that such a view is only superficial. The Indian Paper Currency Act is a replica of the English Bank Act of 1844 in all its essentials. Like the English Bank Act, it ?et a definite limit to the fiduciary issue of notes. Like it, it separated the Issue Business from the Banking Business, [f24]  and if it made the banks in India mere banks of discount, it is because it copied the Bank Charter Act, which deprived banks in England, including the Bank of England, from being banks of issue. And yet, it cannot be said that the English money market is affected by such “convulsions and sudden transitions ” as has been the case with the Indian money market. On the other hand, it was the considered opinion of Jevons[f25]  that “the Bank of England and bankers generally have just the same latitude in increasing or diminishing their advances now (i.e. under the Act of 1884) as they would have under a [nun] restricted system “; for, as he elsewhere argued, if the limitation on fiduciary issue is arbitrary, and if people want more money, ” it is always open to them to use metallic money instead. The limitation is imposed not upon money itself, but upon the representative part.”[f26]  What, then, is the reason that the Indian Paper Currency Act should produce the evils which its English prototype did not ? A priori there need be no such convulsions in a money market subject to such law. The Act, by limiting the issue of notes, did seem to leave no choice but to use metallic money even for seasonal demand. This would be true if notes were the only form in which credit could be used. As a matter of fact, this is not so. Credit could take the form of a promise to pay, issued by a bank, as well as it could take the form of an order on the bank to pay, without making any difference to the social economy of the people who used them. Consequently, if under the provisions of the Act banks are restricted from issuing promises to pay, it does not follow that the only way open to them is a resort “to use metallic money instead,” for they are equally free to consent to honour as many orders to pay as they like. Indeed, the success or failure of the Act depends upon which of the two alternatives the banks adopt. It is obvious that those who will submit to the ruling of the Act and resort to metallic money will have to bear the ” convulsions,” and those who will circumvent the Act by utilising other forms of credit will escape them. The chief reason, then, why the Act has worked so well in England and so badly in India, is due to the fact that, whereas English banks have succeeded in implanting the order or cheque system of using credit in place of the note system, Indian banks have unfortunately failed. That they should have failed was however, inevitable. A cheque system presupposes a literate population, and a banking system which conducts its business in the vernacular of the people. Neither of these two conditions obtains in India. The population is mostly illiterate, and even were it otherwise it could not have availed itself of the cheque system, because Indian banks refuse to conduct their business in any other medium but English. Besides, the growth of the cheque system presupposes a widespread network of banks, a condition which is far from being fulfilled in India. In the absence of banking, a cheque is the worst instrument that could be handled. If not presented within a certain time, a cheque may become stale and valueless, and is therefore inferior to a note as a store of wealth. In such circumstances as these, it is no wonder that in India cheques did not come into being on a sufficiently large scale to amend the inelasticity of the notes.


But even if Indian banks had succeeded in making use of credit in a form other than that of notes, they could not have eased the money market to the same extent as the English banks have been able to do. One of the incidents of banking consists in the liability of banks to pay cash on demand. If all their deposits were received in cash this liability would involve no risk. As a matter of fact, a larger part of their deposits consists of bills which they make it their business to undertake to pay in cash. One of the first things, therefore, that a banker has to look to is the proportion which his cash deposits bear to his credit deposits. Now, this proportion may be adversely affected either by an increase in his credit deposits or by diminution in his cash deposits. In either case his ability to pay cash is pro tanto weakened by lowering the ratio of his total cash to his total liabilities. Against an undue expansion of credit a banker may effectually guard himself. But, notwithstanding the development of the cheque system, there is always lurking the possibility of withdrawal of some cash at some time or other. A banker must, therefore, provide by keeping on hand a certain minimum reserve. How large should be the reserve depends upon what the possibilities for the withdrawal of cash are. The point is that to the extent of the reserve the power of the bank to grant credit is curtailed. If the reserve of the bank is already at the minimum it must stop discounting or must strengthen its position by recovering the cash withdrawn from its coffers. Now, it is obvious that if the amount of money withdrawn is kept in the current of business where the banks can get at it, they of course can strengthen their position again immediately, and not only always keep themselves well away from the danger line of minimum reserve, but be always prepared to meet the needs of the money market. What was the position of the Indian banks from this point of view ? Owing to the absence of a cheque system the possibilities for the withdrawal of cash are great, and the reserve was required to be large in consequence thereof. A large part of their funds being thus held for a reserve, their resources for discounting were small. But there was a further weakening of their position as lenders by reason of the fact that the cash withdrawn did not speedily return to them. The result was that the Indian banks were obliged to curtail their discounts to a far greater extent than were the English banks, in order to preserve a due proportion between their cash and their credits. The absence of branch banking was an important desideratum in this regard. But, even if there were branch banks, the money withdrawn could not have returned, for it was not left in the current channels of business. It was locked up in Government treasuries, whose operations were independent of the banking transactions of the country. Of course, there could be nothing inherently wrong in the maintenance by a Government of an Independent Treasury, and if its operations were to have a resultant connection with the operations of the business community no harm need arise. But the operations of the Indian Treasury ran counter to the needs of business. It locked up when it should have released its hoards, and released its hoards when it should have locked them up.


The causes that ” convulsed ” the Indian money market had therefore been the inelasticity of the credit media and the working of the Independent Treasury System in so far as they were the prime factors affecting the money supply of the country (see Chart 1). The evil effects of such convulsions of the discount rate can hardly be exaggerated. [f27]  In an economy in which almost every business man must rely, at certain seasons, if not all the year round, on borrowed capital, the margin of profit may be wiped out by a sudden rise or augmented by a sudden fall in the rate of discount leading to under-trading or over-trading. Such fluctuations increase business risks, lead to higher business expenses and a greater cost to the consumer. They bring about swings in prices, promote speculation, and prepare for panics.








Evils such as these would have in any other country compelled the authorities to take proper steps to deal with them. But it is a curious fact that in India no serious attempts were made to alleviate the sufferings they inflicted upon the trading community. A reform of the paper currency or the abolition of the Independent Treasury System would have eased the situation, though a reform of both would have been better. The general community, however, was not desirous for a change of the paper currency[f28]  but was anxious for the abolition of the Independent Treasury. The Government, on the other hand, refused to do away with its Independent Treasury System *** and repudiated even its moral obligation to help the business community on the somewhat pedantic plea that in locking up currency it did not lock up capital ###.


*** It should, however, be noted that between 1862 and 1876, at some centres comprising the head offices and branch offices of the Presidency banks, the Independent Treasury System was suspended. By way of compensation for the loss of their right of note issue, the Presidency banks were given certain concession by the Government under agreements entered into in accordance with Act XXIV of 1861. Among the concessions one was the use by the banks of Government balances. The first agreement, that of 1862, conceded to the banks the following privileges in regard to the Government balances : (1) The unrestricted use for banking purposes ” of all moneys and balances which but for the agreement would have been received or held at the General Treasury ” up to the limit of 70 lakhs in the case of the Bank of Bengal, 40 lakhs in the case of the Bank of Bombay, and 15 lakhs in the case of the Bank of Madras. (2) The option of setting aside the excess over these sums in a separate strong room for production when demanded, or of investing it in Government paper or other authorised securities, the power of investment being subject to the condition that the banks should be ” at all times answerable and accountable to Government for the surplus cash balance for the time being.” (3) The right to interest from Government on the difference between the actual balance and 50 lakhs in the case of the Bank of Bengal, 30 lakhs in the case of the Bank of Bombay, and 10 lakhs in the case of the Bank of Madras, whenever the balances at these banks fell below these minima. (4) Permission to the banks to use the Government balances at their branches on similar terms, suitable limits being fixed in each case, as in the head office agreements.


A year after the agreements were executed, difficulties arose with the Bank of Bengal, which had locked up the funds to such an extent that it was unable to meet the demands of the Government on the public balances it held. Negotiations were therefore opened in 1863 for the revision of the agreements, and the revised agreements came into force on January 2, 1866. They contained the following provisions regarding the public balances : (1) Undertaking by Government to maintain in the hands of the banks at their head offices an ” average cash balance ” of 70 lakhs at the Bank of Bengal, 40 lakhs at the Bank of Bombay, and 25 lakhs at the Bank of Madras, ” so far as the same may conveniently be done.” (2) Permission to the banks to use the whole balances for the time being deposited with them for banking purposes. (3) The right to interest from Government when the Government balance at the head offices of the Bank of Bengal, Bank of Bombay, and Bank of Madras fell below the minima of 45 lakhs, 25 lakhs, and 20 lakhs respectively. (4) Permission to employ ” the whole of the balances (at branches) however large for the time being ” for banking purposes, subject to the condition that each branch should ” at all times be ready to meet the drafts of the Government ” to the extent of the Government balances    at the branch.


These revised agreements were to remain in force till March, 1, 1874. In 1874 the question of the revision of the charters of the Presidency banks was under consideration, and it was the aim of the Government to continue to the banks the right to use the whole Government balances. Just at this time (1874) difficulties occurred with the Bank of bombay and the government could not draw upon their balances. This led to a reconsideration of the policy of merging the Government balances with the bank balances and leaving them in the custody of the banks. After a somewhat lengthy discussion the Government of India reverted to the system of Independent Treasury by instituting what were called Reserve Treasuries at the headquarters of the Presidencies which held the Government balances previously held by the Presidency banks. For a history of this episode see House of Commons Returns 109 and 505 of 1864 ; also J. B. Brunyate, An Account of the Presidency Banks, Chap. VII.




### In the dispatch of May 6, 1875, sanctioning the re-establishment of the Independent Treasury System, the banks were admonished by the Secretary of State thus : ” Capital supplied by Government, and not representing the savings of the community, is a resource on whose permanence no reliance can be placed, and which therefore tends to lead traders into dangerous commitments. It gives ease for a time, and produces prosperity which is at the mercy of an accident. A political exigency suddenly withdraws the adventitious resources, and the commerce which trusted to it finds itself pledged beyond what its own resources can make good.” Under the arrangements of 1876 leading to the establishment of the Reserve Treasuries, the Government agreed as before to pay interest to the banks when their balances at the banks fell below certain minima. The Government entered into no formal undertaking as regards maxima, and gave the banks to understand ” that the Government will ordinarily not leave with the headquarters of the banks, otherwise than temporarily, more than the following sums : Bank of Bengal 100 lakhs, Bank of Madras 30 lakhs, and Bank of Bombay 50 lakhs. But this condition will not be inserted in the contract, which will impose no obligation upon the Government to leave any balances whatever with the banks…… The Government will not undertake to give to the banks the exclusive custody of all the public balances where the Government banks with the banks.” The question of the amount of balances which the Government would have with the banks in the ordinary course being thus settled, the only way left open to give help to the banks to meet seasonal demands was to grant loans to the Presidency banks for its balances held in the Reserve Treasuries. After 1900 it agreed to make such loans of a limited amount at the bank rate. Up to 1913 only six loans were made, which shows that the terms of such loans were rather onerous. The Chamberlain Commission of 1913 recommended loans rather than the abolition of the Independent Treasury system. The war, however, hastened the course of events. It proved the necessity of co-operation between the Presidency banks and the Government, and also the need of a large and powerful Banking Institution. This was accomplished by the amalgamation of the Presidency banks into an Imperial Bank of India (Act XLVI I of 1920), with the inauguration of which the Independent Treasury system is again in the process of abolition. For a history of episodes of the Independent Treasury after 1876, see Appendices to the Interim Report of the Chamberlain Commission, Vol. I, Cd. 7070 of 1913, Nos. I and II.




Nor is it possible to say, since it was not called upon to enunciate a policy, how far it would have gone to modify the Paper Currency Act so as to relieve the situation. Before, however, this controversy could end in a satisfactory solution for imparting to the currency system that element of elasticity which it needed, there developed another and a greater evil, which affected its metallic counterpart in a degree sufficient to destroy its most vital element of steadiness and stability of value, which it was its virtue to furnish. So enormous did the evil grow, and so pervasive were its effects, that it absorbed all attention to the exclusion of everything else.


What fixity of value between the different units of its currency is to the internal transactions of a country, a par of exchange is to its internal transactions. A par of exchange between any two countries expresses the relative exchange values of their respective currencies in terms of each other. It is obvious from this that the par of exchange between any two countries will be stable if they employ the same metal functioning as their standard money, freely convertible into and exportable as bullion, for in that case they would have as a measure of value a common medium, the value of which could not differ, given freedom of commerce, in the two countries by more than the cost of its transhipment, i.e., within specie points. On the other hand, there can be no fixed par of exchange between two countries, having different metals as their currency standards of value. In that case, their exchange is governed by the relative values of gold and silver, and must necessarily fluctuate with changes in their value relation. The limit to the exchange fluctuations between them will be as wide or as narrow as the limit to fluctuations in the relative values of the two metals may happen to be. When, therefore, two countries such as England and India are separated by differences in their metallic standards, theoretically there could be no possibility for a stable par of exchange between them. But, as a matter of fact, notwithstanding the difference in their metallic standards, the rate of exchange between England  and  India  seldom deviated[f29]  from the normal[f30] rate of 1 s. l0 1/2 d. for R. 1. So steady was the rate up to 1873 that few people were conscious of the fact that the two countries had different currency standards. After 1873, however, the rupee-sterling exchange suddenly broke loose from this normal parity, and the dislocation it caused was so great and so disorderly (Chart II) that no one knew where it would stop.








The rupee-sterling exchange was in reality a reflection of the gold-silver exchange. When, therefore, it is said that the rupee-sterling before 1873 was stable at 1s. 10 1/2 d., it merely meant that the gold-silver exchange before 1873 was stable at the ratio of 1 to 15 1/2; and that the rupee-sterling exchange was dislocated after 1873 meant that the gold-silver exchange lost its old moorings. The question which therefore arises is why was the ratio of exchange between gold and silver disturbed after 1873, as it never was before that year ? Two factors have been appealed to as affording a sufficient explanation of what then appeared as a strange phenomenon. One was the demagnetisation of silver as the standard money medium by the principal countries of the world. This movement in favour of demagnetisation of silver was the outcome of an innocent agitation for uniformity of weights, measures, and coinages. In so far as the agitation was aimed at such uniformity, it was in every way beneficial. But it also exemplifies how the pursuit of good sometimes leaves behind a legacy of evils. At the Great Exhibition held in London in 1851 the great difficulty of comparing the different exhibits, owing to the differences of weights, measures, and coinages as between the countries of their origin and other countries, was amply demonstrated to the representatives of the different nations assembled at that exhibition[f31]  The question of international uniformity in weights, measures, and coins was discussed by the various scientific assemblies gathered at this exhibition, and although nothing tangible came out of it, the question was not allowed to be dropped : it was taken up at the Brussels International Statistical Congress held two years after. Opinion had so far advanced that the next Statistical Congress, held at Paris, issued a declaration, which was confirmed by the Vienna Statistical Congress of 1859, strongly urging the necessity of bringing about the desired uniformity in the weights, measures, and coinages of different countries [f32]  Encouraged by the action of England, which had made in 1862 the metric system of weights and measures optional, the 1863 International Statistical Congress of Berlin resolved to invite the different Governments ” to send to a special Congress delegates authorised to consider and report what should be the relative weights in the …… gold and silver coins, and to arrange the details by which the monetary systems of the different countries might be fixed, upon a single unit decimally subdivided.” [f33]  The significance of this Congress can hardly be overlooked. It made a departure. At the former Congresses the question debated was largely one of uniformity in weights and measures. But at this Congress ” that phase of it was subordinated to uniform coinage and was well-nigh laid aside, “[f34]  Though the resolution was a departure, it should not have been fraught with serious consequences if the reform had been confined to the question of uniformity of coinage. But there occurred a circumstance which extended its application to the question of currency. When this agitation for uniform coinage grew apace, the French quite naturally wished that their coinage system, which had already been extended over the area comprised by the Latin Union, should be taken as a model to be copied by other countries outside the Union in the interest of uniformity. With this end in view the French Government approached the British Government of the time, but was told in reply that the British Government could not consider the suggestion until France adopted the single gold standard. [f35]  Far from being taken aback, the French Government, then so anxious to cultivate the goodwill of England, proved so complacent that it felt no compunction in conceding to the British the pre-requisite it demanded, and indeed went so far out of the way, when the Conference met in Paris in 1867, that it actually manoeuvred[f36]  the Assembly into passing a resolution ” that for uniform international coinage it was necessary that gold alone should be the principal currency of the world.” So much importance was attached to the question of uniformity of coinage that those who passed the resolution seemed not to have noticed what sacrifice they were called upon to make for its achievement. Perhaps it would be more correct to say that they did not know that they were affecting by their decision the currency system of the world. All they thought they were doing at the time was to promote uniformity of coinage and nothing more. [f37]  But whatever the extenuating circumstances, the result was disastrous, for when the resolution came to be acted upon by the different countries assembled, the real end of the Conference, namely uniformity of coinage, was completely lost sight of, and the proposed means eventually became the virtual end.


The ball once set rolling, the work of demonetising silver began to grow apace. First in the field was Germany. Having vanquished France in the war of 1870, she utilised the war indemnity in the reform of her chaotic currency[f38]  by hastening to adopt a gold currency for the United Empire of Germany. The law of December 4, 1871, authorised the change, with the mark as the unit of currency. Silver was demonetised by this enactment; but the existing silver coins continued to be legal tender though their further coinage was stopped, along with the new gold coins at the legal ratio of 15 to 1/2 to 1. This full legal-tender power of the silver coins was taken away from them by the law of June, 9, 1873, which reduced them to the position of a subsidiary currency.[f39]  This policy was immediately copied by other countries of Germanic culture. [f40] In 1872 Norway, Sweden, and Denmark formed a Scandinavian Monetary Union, analogous to the Latin Monetary Union, by which they agreed to demonetise silver as was done by Germany. This treaty, which established a gold standard and reduced the existing silver currency to a subsidiary status, was ratified by Sweden and Denmark in 1873 and by Norway in 1875. Holland also followed the same course. Till 1872 she had a pure silver standard. In that year she closed her Mint to the free coinage of silver, although the old silver money continued to be legal tender to any amount. In 1875 she went a step further and opened her Mints to the free coinage of gold. Her policy differed from that of the Germanic countries in that she only suspended the free coinage of silver, while the latter had demonetised it. Even the Latin Union was unable to resist this tide against silver. As a consequence of this exclusion of silver, the Latin Union, enlarged as it was by additional members, naturally desired to take precautionary measures against being flooded by the influx of this depreciated silver. Nor was this fear unfounded, for the silver tendered for coinage at the Belgian Mint in 1873 was three times greater than what was tendered in 1871. Rather than be embarrassed, Belgium, by the law of December 8, 1873, suspended the free coinage of her silver five-franc pieces. This action of Belgium forced the hands of the other members of the Union to adopt similar measures. The delegates of the Union met in Paris in January, 1874, and


” agreed to a treaty supplementary to that originally framed in 1865, and determined on withdrawing from individuals the full power of free coinage by limiting to a moderate sum the silver five-franc pieces which should be coined by each State of the Union during the year 1874. [f41]


The respective quotas fixed for 1874 were slightly increased in 1875, but were reduced in 1876@@.




@@The quotas fixed at the conferences for the several members of the Union were-


In 1874 Italy was allotted an extra 20 million francs. Ibid., p. 155.




But the actual coinage did not even reach these small quotas. So greatly was the Union perturbed by the silver situation that during 1877 the coinage of silver five-franc pieces was, with the exception of Italy, [f42] entirely suspended. This action was, however, only a preliminary to the treaty of November 5, 1878, by which the Latin Union agreed to close its Mints to the free coinage of silver till further action. Though at first sine die, the closure proved in the end perpetual. [f43] Simultaneously with the precautionary measures of the Latin Union, Russia suspended, in 1876, the free coinage of silver except to such an amount as was necessary for the purposes of her trade with China, [f44] and the Imperial Decree of November 22, 1878, directed that all customs duties above 5 roubles and 15 copecks should be payble in gold. [f45]  Austria in like manner suspended the free coinage of silver in 1879.[f46]


On the other side of the Atlantic, an important event had taken place in the United States. In 1870 that Government resolved to consolidate the Mint laws, which had not been revised since 1837, in a comprehensive statute. Since the legislation of 1853, the silver dollar was the only coin which the United States Mints coined freely. But in the new consolidated Mint Statute of 1873, the silver dollar was deleted from the list of coins to be issued from the Mint, so that it virtually amounted to suspension of the free coinage of silver in the United States. [f47]  The silver dollars previously coined continued to circulate as full legal tender, but that power was taken away by the law of June, 1874, which declared that ” the silver coins of the United States shall be a legal tender at their nominal value for any amount not exceeding five dollars in any one payment.”


The other factor appealed to in explanation of the dislocation of the relative values of gold and silver was the great increase in the production of silver as compared to gold.









The history of the production of the precious metals in modern times begins from the year 1493, a date which marks the discovery of the American continent. Reviewing the results of the production from 1493 to 1893, a period in all of 400 years, we find that during the first hundred years the production of gold and silver rises at a uniform rate of progression. Assuming the annual average production of each during the first century (1493-1600) in the modern history of their production to be 100, it will be seen that in the next century (1601-1700) the index number for the production of gold rises to 130 and that of silver to 176. This rate of progression is also kept up in the succeeding century (1700-1800), during which the figure for both gold and silver approximates to 270, and continues without much disturbance up to 1840, when the respective index numbers stood at 228 for gold and 293 for silver. From this point onwards, the relative production of the two metals underwent a complete revolution. During the next thirty years (1841-70) the production of gold reached unprecedented heights, while that of silver lagged behind, relatively speaking. The index number for silver production advanced only to 450, but that for gold went up to 2,124. This revolution was followed by a counter-revolution, as a result of which the position as it stood at the end of 1870 was well-nigh reversed. The production of gold received a sudden check, and though it had increased enormously between 1840-70 it remained stationary between 1870-93. On the other hand, the production of silver, which was steady between 1841-70, increased threefold between 1870-93, so that the index number for its average annual production during the latter period stood at 1,260.


In the controversy which arose over the reasons, which brought about this dislocation and decline in the value of silver in terms of gold, there were parties to whom one of these two factors was a sufficient cause. One side argued that had suspension or demonetisation of silver not taken place, its value could never have fallen. This position was vehemently challenged by the other side, which believed in the over-supply of silver as the primary cause of its depreciation. Now, was the argument from relative over-supply sufficient to account for the fall in the gold value of silver ? On the face of it, the explanation has the plausibility of a simple proposition. It is one of the elementary theorems of political economy that the value of a thing varies inversely with its supply, and if the supply of silver had largely increased, what could be more natural than that its value in terms of gold should fall ? The following were the relevant facts which formed the basis of the argument:—














The facts thus presented led to two conclusions. The first is that the supposed enormous increase in the relative production of silver was an assumption which had no foundation in reality. On the contrary, a glance at the figures for relative production discloses the curious fact that since the beginning of the eighteenth century silver, instead of rising, has been falling in proportion. With the exception of the first quarter of the nineteenth century, silver had formed, throughout the two centuries covered by the table, a diminishing proportion as compared with gold. [f49] Indeed, never was the proportion of silver so low as it was in the latter half of the nineteenth century, and even when after 1873 it began to grow it did not reach half the magnitude it had reached in the beginning of the eighteenth century. The second conclusion which these facts were claimed to sustain was that the value of silver in terms of gold did not move in sympathy with its supply relative to that of gold. According to theory, the value of silver should have been rising because the relative volume of its production had been diminishing. On the other hand, a closer examination of the figures of relative values and relative productions, as given in the foregoing table, instead of showing any close correlation (see Chart III) between them, pointed to the contrary. Instead of supply and value being inverse in proportion, it showed that as its supply was falling there was also a fall in its value. Such being the facts of history, it was contended that they gave no support to those who rested their case on over-supply rather than on demagnetisation as a sufficient explanation for the depreciation of silver.


Apart from such minor points, the issue was considerably narrowed by the peculiarity of the events of the twenty years preceding and following the year 1873 [f50]  Compare, it was said, the period commencing with 1848 and ending with the year 1870 with the period following 1870, and there emerges the arresting fact that these two periods, though they have been the opposite of each other with reference to the relative values of the two metals, were alike with reference to the changes in their relative supply. The period between 1870 and 1893 on the side of relative production was marked by the preponderance of silver. The period between 1848 and 1870 is an exact parallel to the above period with respect to changes in the relative supply of the two precious metals, only in this case it was gold that had increased in volume. Now, if it is over-supply that governed the value relations of the two metals in the second period (1870-93) the same should be true of their value relations in the first period (1848-70). Was there, then, a disturbance in the relative values of the two metals in the first period anything like what took place in the second period ? It was insisted that the disturbance in the ratios of production of the two metals in the first period was enormously greater than that which occurred in the second period. Indeed, comparatively speaking, the disturbance in the second period was nothing to speak of. And yet their relative value during the first period was well-nigh constant at the ratio of 1 to 15 1/2, while in the second it fluctuated between 16.10 and 26.75. Those, who argued that the value of silver fell after 1873 because of its over-supply, were thus faced with the problem as to why the value of gold did not fall when its supply had become so abundant before 1873. The whole controversy was therefore centred into the question as to what could have made this difference in the two situations ? If the colossal increase in the production of gold in the first period did not raise the value of silver by more than 2 per cent., how was it that a comparatively insignificant rise in the relative production of silver in the second period led to such an enormous rise in the price of gold ? What was the controlling influence present in the one case which was absent in the other ? Those who held that it was demonetisation of silver that was responsible for its depreciation argued that, though alike in every way, the two periods differed in one important particular. What distinguished them was the fact that in the former it was a common practice to define the standard money of a country as a certain quantity of gold or a certain quantity of silver. Prior to 1803 the two metals were rated differently in different countries,[f51]  but since that date the rating of 1 to 15 1/2 became more uniform, with the result that the monetary standard throughout that period was either 1 gr. of gold or 15 1/2 grs. of saver. On the other hand, during the second period, the “or” which characterised the first period was. deleted by the silver-demonetising and suspending decrees. In other words, the first period was characterised by the prevalence of bimetallism under which the two metals could be used inter-changeably at a fixed given ratio. In the second period they could not be so used owing to the fact that the fixed ratio necessary for interchange had been abrogated. Now, could the existence or non-existence of a fixed ratio be said to be such a powerful influence as to make the whole difference that set the two periods in such marked contrast ? That this was the factor which made the whole difference was the view of the bimetallists. It was said that, by virtue of the monetary system prevalent during the first period, gold and silver were rendered substitutes and were regarded as ” one commodity of two different strengths.” So related, the conditions of supply had no effect upon their ratio of exchange, as would have been the case in respect of a commodity without a substitute. In the case of commodities which are substitutes, the relative scarcity of one can give it no greater value in terms of the other than that defined by their ratio of exchange, because by reason of the freedom of substitution the scarcity can be made good by the abundance of the other. On the other hand, the relative abundance of one cannot depreciate its value in terms of the other below the ratio of exchange, because its superfluity can be absorbed by the void created in consequence of a paucity of the other. So long as they remain substitutes with a fixed ratio of substitution, nothing originating in demand or supply could disturb their ratio. The two being one commodity, whatever changes take place in the demand or supply of either system beyond the needs of commerce express themselves in the price level exactly as though one of them alone was the money medium; but their ratio of exchange will be preserved intact in any case


In support of this was cited the authority of Jevons, who said[f52] :—


” Whenever different commodities are thus applicable to the same purposes their conditions of demand and exchange are not independent. Their mutual ratio of exchange cannot vary much for it will be closely defined by the ratio of their utilities. Beef and mutton differ so slightly that people eat them almost indifferently. But the wholesale price of mutton, on an average, exceeds that of beef in the ratio of 9 to 8, and we must therefore conclude that people generally esteem mutton more than beef in this proportion, otherwise they would not buy the dear meat…… So long as the equation of utility holds true, the ratio of exchange between mutton and beef will not diverge from that of 8 to 9. If the supply of beef falls off people will not pay a higher price for it, but will eat more mutton; and if the supply of mutton falls off, they will eat more beef…… We must, in fact, treat beef and mutton as one commodity of two different strengths—just as gold at 18 carats and gold at 20 carats are hardly considered as two but rather as one commodity, of which twenty parts of one are equivalent to eighteen of the other.


” It is upon this principle that we must explain, in harmony with Cairnes’ views, the extraordinary permanence of the ratio of exchange of gold and silver, which from the commencement of the eighteenth century up to recent years never diverged much from 15 to 1. That this fixedness of ratio did not depend entirely upon the amount or cost of production is proved by the very slight effect of the Australian and Californian gold discoveries, which never raised the gold price of silver more than about 4 2/3 per cent., and failed to have more than a permanent effect of 1 1/2 per cent. This permanence of relative values may have been partially due to the fact that gold and silver can be employed for exactly the same purposes, but that the superior brilliancy of gold occasions it to be preferred, unless it be about 15 or 15 1/2 times as costly as silver. Much more probably, however, the explanation of the fact is to be found in the fixed ratio of 15 1/2 to 1, according to which these metals are exchanged in the currency Of France and some other continental countries. The French Currency Law of the year XI established an artificial## equation—


Utility of gold = 15 1/2 X utility of silver


and it is probably not without some reason that Wolowski and other recent French economists attributed to this law of replacement an important effect in preventing disturbance in the relations of gold and silver.”




##It is this artificiality of the bimetallic system which unfortunately befogs the minds of some people and prejudices those of others. Some do not understand why the price determination of two commodities used as money should be so different from the price determination of any other two commodities as to be governed by a ratio fixed by law. Others are puzzled as to why, if gold and silver are a pair of substitutes, should they require a legal ratio while other pairs of substitutes circulate without a legal ratio, merely on the basis of the ratio of their utility. These difficulties are well explained away by Prof. Fisher thus:


” …. ..two forms of money differ from a random pair of commodities in being substitutes. Two substitutes proper are regarded by the consumer as a single commodity. Thus lumping together of the two commodities reduces the number of demand conditions, but does not introduce any indeterminateness into the problem because the missing conditions are at once supplied by a fixed ratio of substitution. Thus if ten pounds of cane sugar serve the same purpose as eleven pounds of beet-root sugar, their fixed ratio of substitution is ten to eleven……… In these cases the fixed ratio is based on the relative capacities of the two commodities to fill a common need, and is quite antecedent to their prices…… The substitution ratio is fixed by nature, and in turn fixes the price ratio.


” In the single case of money, however, there is no fixed ratio of substitution…… We have here to deal not with relative sweetening power, nor relative nourishing power, nor with any other capacity to satisfy wants—no capacity inherent in the metals and independent of their prices. We have instead to deal only with relative purchasing power. We do not reckon a utility in the metal itself, but in the commodities it will buy. We assign their respective desirabilities or utilities to the sugars…… before we know their prices, but we must inquire the relative circulating value of gold and silver before we can know at what ratio we ourselves prise them. To us the ratio of substitution is incidentally the price ratio. The case of the two forms of money is unique. They are substitutes, but have no natural ratio of substitution, dependent on consumers’ preferences.


” The foregoing considerations…… are overlooked by those who imagine that a fixed legal ratio is merely superimposed upon a system of supply and demand already determinate, and who seek to prove thereby that such a ratio is foredoomed to failure…… the …… analogy …… is unsound…… Gold and silver …… are not completely analogous even to two substitutes because for two forms of money there is no consumers’ natural ratio of substitution. There seems, therefore, room for an artificial ratio……”—Purchasing Power of Money, 1911, pp. 376-77


[f52] Elementary principles of Economics, 1912, pp. 228-29. In the illustrations given by Prof. Fisher he appears, although he does not mean it, to make the success or failure of bimetallism hang upon the question whether or not the two metals are maintained in circulation. For in the illustration which he gives to show the failure of bimetallism—Fig. 14 (b)—his film /shows gold to be entirely thrown out of circulation ; while in the illustration he gives to show the success of bimetallism—Fig. 15 (b)—his film  shows gold to be only partially thrown out of circulation. But there seems to be no reason to suppose that there cannot be a third possibility, namely, that while the position of the film is is as in Fig. 14 (b)—a possibility in which bimetallism succeeds although one of the two metals is entirely pushed out of circulation. For the success of bimetallism it is not necessary that both the metals should remain in circulation. Its success depends upon whether or not the compensatory action succeeds in restoring the relative values of the two bullions to that legally established between the two coins. If it succeeds in achieving that, the ratio would be preserved even if the compensatory action drives one metal entirely out of circulation.




But granting that before 1873 the ratio was preserved owing to the compensatory action of the bimetallic law, can it be said that it would have been maintained after 1873 if the law had not been suspended ? To give an uncompromising affirmative as the bimetallists did is to suppose that bimetallism can work under all conditions. As a matter of fact, though it is workable under certain conditions it is not workable under other conditions. These conditions are well described by Prof. Fisher. [f53]  The question under bimetallism is whether the market ratio between gold and silver bullion will always be the same as the legal ratio between gold and silver coins freely minted and possessing unlimited legal-tender power. Now supposing the supply of silver bullion has increased relatively to that of gold bullion, the result will obviously be a divergence in the mint and the market ratio. Will the compensatory action of the bimetallic law restore the equilibrium ? It may succeed in doing it or it may not. If the increase in the supply of silver bullion and the decrease in that of gold bullion are such that a decrease in that of silver caused by its inflow into the currency and an increase in that of gold caused by its outflow from currency can restore them to their old levels as bullion, bimetallism would succeed ; in other words, the market ratio of the two bullion’s would tend to return to the mint ratio. But if the increase in the supply of silver bullion and the decrease in that of gold is such that the outflow of silver bullion into currency reduces the level of the silver bullion to the old level, but the outflow of gold bullion from currency does not suffice to raise the level of the gold bullion to the old level, or if the outflow of gold from currency raises the level of the gold bullion to the old level, but the inflow of silver into currency does not result in the reduction of the level of silver bullion to its old level, bimetallism must fail; in other words, the market ratio of the two bullion’s will remain diverted from the mint ratio legally established between their coins.


Under which of these two possibilities could the circumstances arising after 1873 have fallen ? That is a question about which no one can say anything definitely. Even Jevons, who admitted the success of the bimetallic law in the earlier period, was not very sanguine about its success in the latter period. It was he who observed[f54]


“that the question of bimetallism is one which does not admit of any precise and simple answer. It is essentially an indeterminate problem. It involves several variable quantities and many constant quantities, the latter being either inaccurately known or, in many cases, altogether unknown……”


Nonetheless, it is certain that the divergence between the mint ratio and the market ratio under a bimetallic system must be smaller than may be the case where there is no bimetallic system. Whenever the market ratio diverges from the mint ratio the compensatory action under the bimetallic law tends to restore the equilibrium, and even where it fails in restoring it, it does succeed in abridging the gulf between the two ratios. That being the case, it is safe to argue that had there been no demonetisation of silver after 1873 the ratio between gold and silver would have probably been preserved as it was during the monetary disturbances of the earlier period. At any rate, this much is certain, that the market ratio between the two metals could not have diverged from the mint ratio to the extent it actually did. [f55]


It is therefore a sad commentary on the monetary legislation of the seventies that if it did not actually help to create, for no purpose, a problem unknown before, it certainly helped to make worse a bad situation. Prior to 1870, not all countries had a common currency. There were India and countries of Western Europe which were exclusively on a silver basis, and others, like England and Portugal, which were exclusively on a gold basis, and yet none of them felt the want of a common standard of value in their mutual dealings. So long as there existed the fixed-ratio system in France and the Latin Union the problem was really provided for, for under it the two metals behaved as one and thereby furnished a common standard, although all countries did not use the same metal as their standard money. It was therefore a matter of comparative indifference to most countries which metal they used so long as there was some one country which used either at a certain defined ratio. With the destruction of this fixed ratio what was thus a matter of comparative indifference became a matter of supreme concern. Every country which had before enjoyed the benefits of a common international standard without having a common currency was faced with a crisis in which the choice lay between sacrificing its currency to securing a common standard or hugging its currency and foregoing the benefits of a common standard. That exigencies of a common standard ultimately led to its accomplishment was as it should have been, but it was not a fact before a great deal of harm and some heavy burdens had brought home to people what the want of it really meant to them.




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