The problem of the rupee: its origin and its solution



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TABLE XXX

 

Cost of the Fall of the Rupee



 

Loss on

Loss by

Loss by

 

Total on all Counts for

Years

Council Bills

Exchange

Increase of

Total on each

three Years

 

being sold

Compensation

Pay of

Account in

 

 

 

below par

Allowance

British

each Year

In Rupees

In Sterling

 

 

 

Troops

 

 

at 1s. 4d.

 

 

 

 

 

Rs.

£

1894-95

3,74,15,000

78,02,000

37,84,000

4,90,01,000

 

 

1895-96

3,05,91,000

87,18,000

49,38,000

4,42,47,000

11,91,86,000

7,945,733

1896-97

1,66,48,000

48,95,000

44,25,000

2,59,38,000

 

 

In the midst of such a situation it is no wonder if the faith of the Government in the ultimate stability of the rupee had given way, for we find that in October, 1896, the Financial Member of the Council had personally come to the conclusion that it would be better in the interest of stability to substitute 15d. for 16d. as the par of exchange between the rupee and gold. [f9] But the suggestion was dropped as the rupee showed signs of reaching the gold par, which it did in January, 1898, after a period of full five years of depreciation from the established par.

Between January, 1898, and January, 1917, twice did the rupee fall below its gold par. The year 1907-8 records the second occasion when the parity of the rupee under the exchange standard broke down. The actual rates of exchange prevailing in the market were as follows:—

TABLE XXXI

rates oF exchange, london oN india (FROM "the times")

 

Par R. = 1s. 4d.



Date

On Calcutta

On Bombay

 

Highest

Lowest

Highest

Lowest

1907. September

1 4 1/32

1 3 31/32

1 4 1/32

1 3 31/32

October

1 4 1/32

1 3 31/32

1 4 1/32

1 3 31/32

November

1 4

1 3 23/32

1 3 31/32

1 3 23/32

December

1 3 15/16

1 3 27/32

1 3 15/16

1 3 27/32

1908. January

1 3 15/16

1 3 29/32

1 3 15/16

1 3 7/8

February

1 3 31/32

1 3 7/8

1 3 31/32

1 3 7/8

March

1 3 29/32

1 3 27/32

1 3 29/32

1 3 27/32

April

1 3 7/8

1 3 27/32

1 3 27/32

1 3 27/32

May

1 3 7/8

1 3 27/32

1 3 15/16

1 3 27/32

June

1 3 29/32

1 3 27/32

1 3 7/8

1 3 27/32

July

1 3 7/8

1 3 27/32

1 3 7/8.

1 3 27/32

August

1 3 29/32

1 3 27/32

1 3 29/32

1 3 27/32

September

1 3 31/32

1 3 29/32

1 3 31/32

1 3 7/8

October

1 3 15/16

1 3 7/8

1 3 29/32

1 3 13/16

November

1 3 29/32

1 3 7/8

1 3 7/8

1 3 7/8

December

1 3 15/16

1 3 29/32

1 3 31/32

1 3 1/8

After a crisis lasting over a year the rupee recovered to its old gold par and remained fixed at it, though by no means firmly, for another seven years, only to suffer another fall from its parity during the year 1914-15 (see table, p. XXXII).

After 1916 the stability of the exchange standard was threatened by a danger arising from quite unsuspected quarters. The Indian exchange standard was based upon the view that the gold value of silver was bound to fall or at least not likely to rise to a level at which the intrinsic value of the rupee became higher than its nominal value. The price of silver at which the intrinsic value of the rupee equalled its nominal value was 43d. per ounce.

TABLE XXXII

rates of exchange, londn on calcutta (FROM THE national bank of india)



Month

1914

1915

 

Highest

Lowest

Highest

Lowest

January

 

 

1 3 15/16

1 3 15/16

February

 

 

1 4 1/32

1 3 29/32

March

 

 

1 4

1 3 15/16

April

 

 

1 3 15/16

1 3 29/32

May

1 4 1/4

1 3 15/16

1 3 15/16

1 3 7/8

June

1 3 31/32

1 3 15/16

1 3 7/8

1 3 27/32

July

1 3 31/32

1 3 13/16

1 3 22/32

1 3 23/32

August

1 3 7/8

1 3 13/16

1 3 15/16

1 3 27/32

September

1 3 15/16

1 3 13/16

1 4

1 3 15/16

October

1 3 15/16

1 3 15/16

 

 

November

1 3 15/16

1 3 15/16

 

 

December

1 3 15/16

1 3 15/16

 

 

 

So long as the intrinsic value of the rupee remained below its nominal value, i.e. the price of silver did not rise above 43d., there was no danger of the rupee circulating as currency. Once the price of silver rose above that point the danger of the rupee passing from currency to the melting-pot was imminent. Now, with the exception of a brief period from September, 1904, to December, 1907, the gold price of silver had since 1872 showed a marked tendency to fall. The decline in its price was so continuous and so steady as to create the general impression that the low price had come to stay. Indeed, so firm was the impression that the framers of the exchange standard had never taken into account the contingency of a rise in the price of silver above 43d. So little was it anticipated, that the system was not criticised on this ground by any of the witnesses who deposed before the successive Committees and Commission on Indian currency. But the unexpected may happen, and unfortunately did happen after 1916, and happened suddenly. On February 10, 1914, the cash price in London of silver per ounce of standard fineness was 26 5/8d. It fell to 22 11/16d. on February 10, 1915, and though it jumped to 27d. on the same date in 1916, yet it was below the rupee melting-point. After the last-mentioned date its rise was meteoric. On February 9, 1917, it rose to 37 5/8 d.; on February 8, 1918, to 43d.; and on the same date in 1919 to 48 7/16d., thereby quite overshooting the rupee melting-point. But the price of silver broke all record when on February 11, 1920, it reached the colossal figure of 89 1/2d. per standard ounce.

The rise in the intrinsic value of the rupee above the nominal value at once raised a problem as to how the rupee could be preserved in circulation. Two ways seemed open for the solution of the problem. One was to scale down the fineness of the rupee, and the other to raise its gold parity. All other countries which had been confronted by a similar problem adopted the former method of dealing with their silver coinage—a method which was successfully tried in the Philippines and the Straits Settlements and Mexico in 1904-7, when a rise in those years in the price of silver had created a similar problem in those countries. [f10] The Secretary of State for India adopted the second course of action and kept on altering the rupee par with every rise in the price of silver. The alterations of the rupee par following upon the variations in the price of silver are given below:—

TABLE XXXIII



Date of Alteration of the Rupee Par.

Pitch of the Par.

 

January 3, 1917

August 28, 1917

April 12, 1918

May 13, 1919

August 12, 1919

September 15, 1919

November 22, 1919

December 12, 1919


s. d.

1 4 1/4


1 5

1 6


1 8

1 10


2 0

2 2


2 4

After having played with the rupee par, for two years, in this manner, as though such alterations involved no social consequences, the Secretary of State, on May 30, 1919, appointed a new Currency Committee under the chairmanship of Babington Smith, to recommend measures " to ensure a stable gold exchange standard." The majority of the Committee, after half a year of cogitation, reported to the effect [f11]that

" (i) The object should be to restore stability to the rupee, and to re-establish the automatic working of the currency system at as early a date as practicable.

" (ii) The stable relation to be established should be with gold and not with sterling.

"(iii) The gold equivalent of the rupee should be sufficiently high to give assurance, so far as is practicable, that the rupee, while retaining its present weight and fineness, will remain a token coin, or in other words, that the bullion value of the silver it contains will not exceed its exchange value.

"After most careful consideration" (the Committee said) "we are unanimous (with the exception of one of our members who signs a separate report) in recommending that the stable relation to be established between the rupee and gold should be at the rate of one rupee to 11.30016 grs. of fine gold both for foreign exchange and internal circulation." i.e. the rupee to be equal to 2s. (gold).

The minority report, which harped on the old cry of a stimulus of low exchange and penalty of high exchange, stood out for the maintenance of the old rate of 15 rupees to the gold sovereign or 1 13.0016 grs. troy of pure gold, and recommended the issue of a two-rupee silver coin of reduced fineness compared with the old rupee, so long as the price of silver in New York was over 92 cents.[f12]

By the announcements of February 2, 1920, the recommendations of the majority of the Committee were accepted by the Secretary of State and also by the Government of India, which abandoned the old parity of 7.53344 grs. per rupee for the new parity of 11.30016 grs. troy. Now, has the rupee maintained its new parity with gold ?

In the matter of ascertaining this fact the exchange quotation on London is no guide, for the value of the rupee was 2s. gold and not 2s. sterling. Had gold and sterling been identical the case would have been otherwise. But during the war, owing to the issue of virtually inconvertible money, the pound sterling had depreciated in terms of gold. We must therefore take as our standard a currency which had kept its par with gold. Such a currency was the American dollar, and the exchange quotation on New York is therefore more directly helpful in measuring the gold value of the rupee than is the sterling quotation on London. We can also employ the actual rupee-sterling quotation as a measure by comparing it with the amount of sterling the rupee should have purchased, as an equivalent of 11.30016 grs. of fine gold, when corrected by the prevailing cross-rate between New York and London[f13]

Compared with the par of exchange, the actual exchange, either on New York or on London, indicates a fall of the rupee which is simply staggering (See table XXXIV).

Consider, along with the external gold value of the rupee, its internal value in terms of sovereigns and bar gold (see table XXXV).

The tables need no comment. The rupee is not only far away from 2s. (gold), but is not even 1s. 4d. (sterling).

Do not the facts furnish an incontrovertible proof of the futility of the exchange standard ? How can a system which fails to maintain its value in terms of gold, which it is supposed to do, be regarded as a sound system of currency ? There must be somewhere some weakness in the mechanism of a system which is liable to such occasional breakdowns. The rupee fell or rather was below par in 1893, and did not reach its parity to any real degree of firmness until 1900. After an interval of seven years the rupee again falls below par in 1907. The year 1914 witnesses another fall of the rupee. A meteoric rise since 1917, and again a fall after 1920. This curious phenomenon naturally raises the question : Why did the rupee fail to maintain its gold parity on these occasions ? A proper reply to this question will reveal wherein lies the weakness of the exchange standard.



 

TABLE XXXIV



actual gold value oF THE rupee aND THE NEW parity IN terms oF foreign exchanges

 

New York on Bombay in cents.

Bombay on London in s. d.

As in the Middle of

1920.

1921.

1922.

1920.

1921.

1922.

 

 

 

 

 

 

 

 

 

Par

Actual

Par

Actual

Par

Actual

Par

Actual

Par

Actual

Par

Actual

 

Rate.

Rate.

Rate.

Rate.

Rate.

Rate.

Rate.

Rate.

Rate.

Rate.

Rate.

Rate.

January

0.4866

0-4400

0-4866

0-2925

0-4866

0-2800

2 7 1/2

2 3 5/8

2 7 5/16

1 5 5/8

2 3 5/8

1 3 13/16

February

0.866

0-4850

0-4866

0-2800

0-4866

0-2845

2 10 1/3 1/2

2 9 1/8

2 5 13/16

1 4 1/8

2 2 7/32

1 3 9/16

March

0-4866

0-4850

0-4866

0-2625

0-4866

0-2787

2 7 2/3 9/2

2 5 3/4

2 5 31/32

1 3 1/4

2 2 29/32

1 3 5/16

April

0-4866

0-4775

0-4866

0-2625

0-4866

0-2785

2 5 7/16

2 31

2 5 13/16

1 3 5/8

2 2 1/2

1 3 1/8

May.

0-4866

0-4325

0-4866

0-2675

0-4866

0-2930

2 6 1/3 9/2

2 2 1/8

2 5 7/32

1 3 1/2

2 2 1/4

1 3 9/16

June

0-4866

0-4125

0-4866

0-2525

0-4866

0-2900

2 5 3/3 1/2

1 10 13/16

2 6 29/32

1 3 3/8

2 2 1/8

1 3 19/32

July.

0-4866

0.3900

0-4866

0-2400

0-4866

0-2900

2 5 3/3 1/2

1 8 1/16

2 8 9/32

1 3 1/4

2 2 5/8

1 3 5/8

August

0-4866

0-3650

0-4866

0-2475

0-4866

0-2916

2 83 9/32

1 10 1/16

2 7 29/32

1 43/4

2 2 3/16

1 3 19/32

September

0-4868

0-3325

0-4866

0-2675

0-4866

0-2875

2 9 9/16

1 10 1/16

2 7 15/32

1 5 1/16

2 2 6/16

1 3 9/16

October

0-4866

0-3025

0-4866

0-2825

0.4866



2 9 21/32

1 7 3/4

2 6 1/32

1 5 7/16





November

0-4866

0-3025

0-4866

0-2695

0-4866



2 10 9/16

1 7 1/8

2 5 16/32

1 4 1/8





December

0-4866

0-2650

0-4866

0-2775

0-4866



2 9 9/16

1 5 1/4

2 4

1 3 7/8

 



 

TABLE XXXV



gold value of THE rupee and THE NEW parity IN terms OF THE price of sovereigns and gold

 

1920

1921

1922

 

 

Price o{ Bar

 

Price of

 

Price of

Months

Price of British Sovereigns Par 10 Rs. = 1 Sov.

Gold per Tola 100 touch Par Rs. 15-14-10 =1 Tola

Price of British Sovereigns Par 10 Rs. = 1 Sov.

Gold per Tola 100 touch Par Rs. 15-14-10 =1 Tola

Price of British Sovereigns Par 10 Rs. = 1 Sov.

Gold per Tola 100 touch Par Rs. 15-14-10 =1 Tola

 

Rs. A. P.

rs. a. P.

rs. a. p.

Rs. a. p.

Rs. a. p.

 

January

Nominal

28 0 0

Nominal

Official

Figures


Not

Yet


Published

17 14 0

Official

figures


not

yet


published

February

‘’

22 0 0

 

17 14 0

March

‘’

24 0 0

 

17 14 0

April

‘’

24 8 0

18 12 0

 

May

‘’

22 12 0

19 0 0

 

June

‘’

22 4 0

19 12 0

 

July

‘’

23 0 0

20 9 0

 

August

‘’

21 8 0

20 9 0

 

September

‘’

25 4 0

19 2 0

 

October

‘’

27 6 0

18 14 0

 

November

‘’

28 10 0

18 8 0

 

December

‘’

27 12 0

18 6 0

 

The only scientific explanation sufficient to account for the fall of the rupee would be to say that the rupee had lost its genera! purchasing power. It is an established proposition that a currency or unit of account will be valued in terms of another currency or unit of account for what it is worth, i.e. for the goods which it will buy. To take a concrete example, Englishmen and others value Indian rupees inasmuch and in so far as those rupees will buy Indian goods. On the other hand, Indians value English pounds (and other units of account, for that matter) inasmuch and in so far as those pounds will buy English goods. If rupees in India rise in purchasing power (i.e. if the Indian price-level fails) while pounds fall in purchasing power or remain stationery or rise less rapidly (i.e. if the English price level rises relative to the Indian price-level), fewer rupees would be worth as much as pound, i.e. the exchange value of the rupee in terms of the pound will rise. On the other hand, if rupees in India fall in purchasing power (i.e. if the Indian price-level rises) while pounds rise in purchasing power or remain stationary or fall less rapidly (i.e. if the English price-level falls relative to the Indian price-level), it will take more rupees to be worth as much as a pound, i.e. the exchange value of the rupee in terms of the pound will fall.

On the basis of this theory the real explanation for a fall in the Indian exchange should be sought for in the movement of the Indian price-level. Lest there be any doubt regarding the validity of the proposition let us take each of the occasions of the fall and find out whether or not the fall was coincident with the fall in the purchasing power of the rupee. [f14]



 

TABLE XXXVI



period 1, 1890-99

Years

Currency in Circulation Rupees + Notes

Index Number of prices in India 1890-94 = 100

Index Number of prices in England 1890-94 = 100

 

Amount in Crores of Rs.

Index Number 1890-94 = 100

 

 

(1)

(2)

(3)

(4)

(5)

1890

120

92

113

104

1891

131

100

106

105

1892

141

108

100

99

1893

132

101

96

99

1894

129

99

85

93

1895

132

101

89

90

1896

127

97

99

89

1897

125

96

120

90

1898

122

93

109

91

1899

131

100

108

94

 
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