The problem of the rupee: its origin and its solution



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THE PROBLEM OF THE RUPEE:

ITS ORIGIN AND ITS SOLUTION

(HISTORY OF INDIAN CURRENCY & BANKING)


________________________________________________________________________________________

 

CHAPTER VI



STABILITY OF THE EXCHANGE STANDARD

It will be recalled that at the time the Indian Mints were closed to the free coinage of silver there were two parties in the country, one in favour of and the other opposed to the closure. Being placed in an embarrassing position by the fall of the rupee, the Government of the day was anxious to close the Mints and raise its value with a view to obtaining relief from the burden of its gold payments. On the other hand it was urged, on behalf of the producing interest of the country, that a rise in the exchange value of the rupee would cause a disaster to Indian trade and industry. One of the reasons, it was argued, why Indian industry had advanced by such leaps and bounds as it did during the period of 1873-1893 was to be found in the bounty given to the Indian export trade by the falling exchange. If the fall of the rupee was arrested by the Mint closure, it was feared that such an event was bound to cut Indian trade both ways. It would give the silver-using countries a bounty as over against India, and would deprive India of the bounty which it obtained from the falling exchange as over against gold-using countries.

Theory had already scoffed at these fears. It is therefore interesting to see that later history has also confirmed the verdict of theory. Indian trade with a gold-standard country like England or a silver-standard country like China did not suffer a setback, notwithstanding an arrest in the fall of the rupee. The following figures furnish sufficient evidence to support the contrary:—

 

TABLE XXV



trade of india with united kingdom (BEFORE AND AFTER THE mint closure)

 

Exports to U.K.

Imports from U.K.

Annual Average

Merchandise.

Bullion and Specie

Total.

Merchandise.

Bullion and Specie

Total.

 

£

£

£

£

£

£

I1889-93

31,569,891

1,180,646

32,750,537

31,837,482

7,694,149

39,531,631

II1894-98

26,329,764

2,215,049

24,544,813

28,963,180

6,750,736

35,713,916

III 1899-1903

28,709,819

2,089,656

30,799,475

33,498,480

7,301,172

40,799,652

IV 1903-8

36,784,628

2,232,857

39,017,485

47,294,311

9,586,706

56,881,017

Percentage of Increase (+)

 

 

 

 

 

 

or Decrease (—) in—

 

 

 

 

 

 

Period II in comparison with Period I

-16.598

+87.613

-25,055

- 9.28

-12.261

- 9.657

Period III in comparison with Period 11

+ 9.039

- 5.661

+25.483

+15.659

+ 8.154

+14.240

Period IV in comparison with Period III

+28.126

+ 6.853

+26.682

+41.183

+31.304

+39.415

Period IV in comparison with Period 1

+16.518

+89.122

+19.135

+48.549

+24.597

+43.887

 

TABLE XXVI



trade of india with china

 

Exports to China.

Imports from China.

Annual Average.

 

 

 

 

 

 

 

 

 

 

Merchandise.

Treasure

Total.

Merchandise.

Treasure.

Total.

 

£

£

£

£

£

£

I1889-93

9,454,014

20,223

9,474,238

1,666,840

1,992,914

3,659,754

II1893-98

8,509,284

112,105

8,621,389

1,713,529

503,357

2,216,886

III 1898-1903

9,679,830

183,647

9,863,477

1,309,975

798',053

2,108,028

IV 1903-8.

12,461,535

160,879

12,622,414

1,248,822

919,402

2,168,224

Percentage of Increase (+)

 

 

 

 

 

 

or Decrease (—) in—

 

 

 

 

 

 

Period II in comparison with Period I

- 9.993

+454.333

- 9.002

+ 2.801

-74.743

-39.425

Period III in comparison with Period 11

+13.756

+ 63.817

+14.407

-23.551

+58.546

- 4.910

Period IV in comparison with Period III

+28.737

- 12.398

+27.971

- 4.668

+15.206

+ 2.856

Period IV in comparison with Period 1

+31.812

+695.508

+33.229

-25.078

-53.866

-40.755

 

That the arrest in the fall of the rupee should have lifted the burden from Indian finances was just as was expected to follow from the closure of the Mints. Notwithstanding important reductions in taxation and large expenditure of social utility, the annual budgets since the mint closure have shown few deficits (see p. 506).

Now there is a tendency among some writers to interpret these facts as unmistakable proofs of the soundness of the currency system. It is argued that if the trade of the country has not received a setback,[f1] and if the finances of the country have improved,[f2] then the implication is that the currency of which such results can be predicated must be good. It is not necessary to warn students of currency that such easy views on the soundness of the currency system, however plausible, are devoid of the logic necessary to carry conviction. Trade no doubt is dependent on good money, but the growth of trade is not a conclusive proof that the money is good. It should be noted that during the periods of debased coinages so common at one time the social misery and nuisance arising therefrom were intolerable, yet during the same periods it was possible for countries to make great advance in trade. Speaking of seventeenth-century England, when that country was afflicted with debased and constantly changing coinage and when there was, besides, a long period of civil war and confusion, Lord Liverpool, who was above all statement of his day most alive to the evils of a bad currency, remarks:—

" It is certain, however, that during the whole of this period, when our coins were in so great a state of confusion, the commerce of the kingdom was progressively improving and the balance of trade almost always in favour of this country."[f3] That commerce can increase even when currency is bad is easily supported from the experience of India herself. In no period did Indian trade make such strides as it did between 1873 and 1893. Was the Indian currency of that period good ? On the other hand, it is possible to hold that if trade is good it may be because the currency is bad. The trade of India between 1873 and 1893 flourished because it received a bounty. But the bounty was a mulcting of the Indian labourer, whose wages did not rise as fast as prices, so that the Indian prosperity of that period was founded not upon production, but upon depredation made possible by the inflation of currency.



 

TABLE XXVII



finances of THE government

Years.

Surplus + Deficit —

Years.

Surplus + Deficit—

Years.

Surplus + Deficit —

Years.

Surplus + Deficit—

Years.

Surplus + Deficit—

 

Rs

 

£

 

£

 

£

 

£

1893-94

-1,546,998

1898-9

+2,640,873

1903-4

+2,996,400

1908-9

-3,737,710

1913-14

+2,312,423

1894-95

+ 693,110

1899-1900

+2,774,623

1904-5

+3,456,066

1909-10

+ 606,641

1914-15

-1,785,270

1895-96

+1,533,998

1900-1

+1,670,204

1905-6

+2,091,854

1910-11

+3,936,287

1915-16

-1,188,661

1896-97

-1,705,022

1901-2

+4,950,243

1906-7

+1,589,340

1911-12

+3,940,334

1916-17

+7,478,170

1897-98

-5,359,211

1902-3

+3,069,549

1907-8

+ 300,615

1912-13

+3,107,634





 

Similarly it cannot be granted without reserve that the new currency system must be good because it has obviated the burden of the gold payments and given relief to the Indian taxpayer. Such a view involves a misconception of the precise source of the burden of India's gold payments during the period of falling exchange. It has been widely held that the burden of gold payments was caused by the fall in the gold value of silver, a view which carried with it the necessary implication that if India had been a gold-standard country she would have escaped that heavy burden. That it is an erroneous view hardly needs demonstration. [f4] It is not to be denied that India bore an extra burden arising from the increased value of the gold payments. But what is not sufficiently realised is that it was a burden which weighed on all gold debtors irrespective of the question whether their standard was gold or silver. In this respect the position of a gold-standard country like Australia was not different from a silver-standard country like India. In so far as they were gold debtors they suffered each in the same way from the same cause, namely the appreciation of the standard in which their debts were measured. The fact that one discharged her debts in gold and the other in Silver made no difference in their condition, except that the use of silver by India to discharge her debts served as a refractory medium through which it was possible to see the magnitude of the burden she bore. The fall of silver measured and not caused the burden of India's gold payments. The arrest in the fall of the rupee cannot be accepted as a prima fade proof of a relief to the taxpayer and therefore an evidence of the soundness of the currency system. It is possible that the benefit may have been too dearly paid for.

Although favourably impressed by the increase of trade and the buoyancy of Government finances under the exchange standard, the Chamberlain Commission did not care to found its case for it on the basis of such arguments. The chief ground on which it rested was that the currency system was capable of maintaining the exchange value of the rupee at a fixed par with gold. [f5]We must therefore proceed to examine this claim made by the Commission on behalf of the exchange standard. The table No. XXVIII presents the requisite data for an elucidation of the question.

TABLE XXVIII

gold

value oF THE rupee



As expressed in Terms of Foreign Exchange Rates on London. Par R.= ls.4d.

As expressed In Terms of Gold.

 

Years. ;

(1) Rupee Price of Sovereigns. Par Rs. 15 = l Sovereign.

(2) Rupee Price of Bar Gold. Par Tola = Rs. 23-14-4.

Years.

Highest.

Lowest.

 

Highest.

Lowest.

Highest.

Lowest.

 

s. d.

8. d.

 

Rs. A. P.

Rs. A. P.

Rs. A. P.

Rs. A. P.

1892-93

1 3.969

1 2.625

1893

16 10 6

15 6 0

26 11 0

24 14 0

1893-94

1 4.031

1 1.500

1894

19 0 0

16 1 0

32 4 0

25 9 0

1894-95

1 1.906

1 0.000

1895

19 5 0

18 2 6

30 8 0

27 6 0

1895-96

1 2.875

1 1.000

1896

17 7 0

16 1 0

27 13 6

27 2 0

1896-97

1 3.842

1 1.781

1897

16 10 0

15 3 0

26 12 6

25 4 0

1897-98

1 4.125

1 2.250

1898

15 7 0

15 1 0

24 10 0

24 0 0

1898-99

1 4.156

1 3.094

1899

15 4 0

15 0 0

24 2 0

23 4 0

1899-1900

1 4.375

1 3.875

1900

15 1 3

15 0 0

24 2 0

23 15 6

1900-1901

1 4.156

1 3.875

1901

15 0 0

15 0 0

24 2 0

24 0 0

1901-1902

1 4.125

1 3.875

1902

15 4 6

15 2 6

24 2 6

24 0 0

1902-1903

1 4.156

1 3.875

1903

15 3 0

15 1 6

24 3 0

24 0 0

1903-1904

1 4.156

1 3.875

1904

15 5 0

15 1 3

24 2 0

24 0 3

1904-1905

1 4-156

1 3-970

1905

15 4 0

15 1 6

24 2 0

24 0 0

1905-1906

1 4-156

1 3-937

1906

15 1 0

15 2 0

24 4 6

24 0 0

1906-1907

1 4-187

1 3-937

1907

15 4 0

15 0 0

24 4 0

23 15 6

1907-1908

1 4-187

1 3-875

1908

15 1 0

15 0 0

24 10 0

24 2 0

1908-1909

1 4

1 3-875

1909

Premium between 12 and 3%

24 3 6

23 15 0

1909-1910

1 4-156

1 3-875

1910

15 5 0

15 0 0

24 4 0

23 15 0

1910-1911

1 4-156

1 3.870

1911

15 0 0

15 0 0

24 0 6

23 14 0

1911-1912

1 4-156

1 3-937

1912

15 0 0

15 0 0

24 0 0

23 14 0

1912-1913

1 4-156

1 3-970

1913

15 0 0

15 0 0

24 0 3



1913-1914

1 4.156

1 3-937

1914

15 14 0

15 2 0

26 10 0

23 15 6

1914-1915

1 4-094

1 3-937

1915

15 13 6.

15 5 0

25 14 0

24 8 0

 

Assuming, for the moment, the criterion laid down by the Commission to be correct, can it be said from the data given above that the rupee has maintained its gold value ? It would be over-confident if not rash to say that the system, even from the narrow point of view of the Commission, has been an unquestioned success.

Between June, 1893, and January, 1917, the rupee was rated to gold at the rate of 1 rupee equal to 7.53344 troy grs. of fine gold. At that rate the sovereign should be equal to 15 rupees, the mint price of gold should be Rs. 23-14-4 per tola (i.e. 180 grs.) of bar gold 100 touch, and the exchange on London should be 1s. 4d., and should have varied within 1s. 4.125 d., the import point, and 1s. 3.906 d., the export point, for gold.

Taking a general survey of the stability of the rupee with regard to its value in terms of gold, it will be noticed that from the date of the Mint closure up to 1898 the rupee was far below par. The depreciation of the rupee, measured in terms of exchange or price of gold or sovereign, ranged somewhere between 25 to 30 per cent. So great was the depreciation that it redoubled the difficulties confronting the Government when the rupee was not fixed to gold. The financing the Home Treasury by the usual means of selling Council Bills became well-nigh impossible.[f6] The Secretary of State found himself in an embarrassing position. Offering to sell below par involved the obloquy of having led the way to the defeat of the policy of stabilising exchange. Refusing to sell at market rates involved the danger of a dry Treasury. The Government of India suggested that the Secretary should lay down a minimum rate for or a maximum amount of the bills that he put upon the market. The Secretary of State agreed to neither, but consented to reduce his drawings so as not to unduly depress the exchange rate. The drawings of the secretary of State during the first fiscal year since the Mint closure have been the smallest on record:—

 

TABLE XXIX Council Drawings



Date of drawing

Amount of Drawings 1.000 omitted

Rate at which drawn (Pence per Rupee)

1893. June

2,478

15.039

July

25

15.974

August

78

15.243

September

7

15.350

October

5

15.334

November

617

15.251

December

14

15.242

1894. January

98

14.408

February

1,023

13.787

March

1,915

13.870

April

1,368

13.626

 

The curtailment of drawings to save the rate of exchange from being lowered was not an unmitigated good, for it imposed the necessity of a resort to the by no means inexpensive method of sterling borrowings to finance the Home Treasury.[f7] The remittances by drawings fell short of the net disbursements of the Home Treasury in 1893-94 by £6,588,000, which deficit was met by permanent sterling borrowings to the extent of £7,430,000, the interest on which added to the already overheavy burden of the gold payments. Rather than incur such a penalty the Secretary of State gave up the attempt to dominate the market and preferred to follow it. But this let-go policy was not without its cost. The drop in the exchange below 1s. 4d. added to the burden of remittances to the Home Treasury, and also compelled the Government to grant exchange compensation allowance to its European officers, civil and military—an aid which it had so far withheld. The cost to the Government involved by the fall of the rupee below par was quite a considerable sum. [f8]

 

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