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 Continued---

TABLE XLIII

 

issue oF currency notes Acts prescribing the Fiduciary Issue of Currency Notes



1. Limits to judiciary issues

Act

Act

Act

Act

Act

Act

Act

 

V of

IX of

XI of

XIX of

VI of

11 of

XXVI

 

1915

1916

1917

1917

1918

1919

1919

 

In Lakhs of Rupees :

(a) Permanent

14,00

14,00

14,00

14,00

14,00

14,00

14,00

(b) Temporary

6,00

12,00

36,00

48,00

72,00

86,00

106,00

Total limit

20,00

26,00

50,00

62,00

86,00

100,00

120,00

11. Total issues of currency notes

61.63

67.73

86,38

99,79

153,46

179,67*[f1]

 

III. Reserve



Silver

32,34

23,57

19,22

10,79

37,39

47,44

Gold

15,29

24,16

18,67

27,52

17,49

32,70

 

 

 

 

 

 

 

Securities

14,00

20,00

48,49

61,48

98,58

99,53

 

But this facile procedure could not be carried on ad infinitum except by jeopardising the convertibility of the notes. Consequently the very increase of paper money, added to the increased demand for currency, compelled the Government to go in for the provision of metallic money for providing current means of purchase and also give a backing to the watered paper issues. The rising price of silver naturally made the Government go in for gold. An Ordinance was issued on June 29, 1917, requiring all gold imported into India to be sold to Government at a price based on the sterling exchange, and opened a gold Mint at Bombay for the coinage of it into mohurs[f2]. Frantic efforts were made to acquire gold from various quarters. The removal of the embargo on the export of gold by the U.S.A. on June 9, 1917, and the freeing of the market for South African and Australian gold, enabled the Government to obtain some supply of that metal. From July 18, 1919, immediate telegraphic transfers on India were offered against deposit at the Ottawa Mint in Canada of gold coin or bullion at a rate corresponding to the prevailing exchange rate, and at New York at competitive tenders from August 22, 1919. Arrangements were also made for the direct purchase of gold in London and U.S.A. Finally, to encourage the private import of gold, the acquisition rate was altered from September 15, 1919, so as to make allowance for the depreciation of the sterling. But the gold thus obtained was a negligible quantity. Besides, the issue of gold did not serve the purpose the Government had in mind—namely its retention in circulation. In the nature of things it was impossible. The rupee was depreciated in terms of gold to an enormous extent, and consequently at the rate of exchange gold passed out of circulation as quickly as it was issued by the Government. What the Government could do was to make the use of gold and silver coins illegal for other than currency purposes and to prevent their exportation, which it did by the Notifications of June 29 and September 3, 1917. Realising that it could not rely upon gold the Government renewed its efforts to enlarge the rupee coinage. To facilitate the purchase of that metal the import of silver on private account into India was prohibited on September 3, 1917. This measure, however, removed only a few of the smaller competitors for the world's diminished supply of silver, and the world-demand remained so heavy that the Secretary of State was unable to obtain sufficient supply notwithstanding the great conservation effected in the use of silver by substituting nickel coinage for silver coins of subsidiary order, [f3] and by the issue of notes of denominations as low as that of R. 1 [f4] and of R. 2-8. [f5] The Government of the United States was therefore approached on the subject of releasing a portion of the silver dollars held in their reserve. The American Government consented and passed the Pittman Act, under which the Government of India acquired a substantial volume at 101 1/2 cents per fine ounce. The total silver purchased during this period was as follows :—

 

TABLE XLIV



rupee coinage, 1915—20

Year

Silver purchased in Open Market, Standard Ounces.

Silver purchased from U. S. A Standard Ounces.

Total Standard Ounces.

1915-16

8,636,000

 

 

1916-17

124,535,000

 

 

1917-18

70,923,000

 

 

1918-19

106,410,000

152,518,000

 

1919-20

14,108,000

60,875,000

 

Total

324,612,000

213,393,000

538,005,000

Now, recalling the fact that from 1900 to 1914 the Government had coined about 532 million standard ounces of silver, [f6] it means that the coinage of silver by Government during these five years exceeded the amount coined in the fourteen preceding years by five million ounces.

Thus the fall in the gold value of the rupee is an inevitable consequence of the exercise of the power to issue inconvertible currency in unlimited quantities. This is the fate of all inconvertible currencies known to history. But it is said that an exception must be made in the case of the rupee currency, for if the Government has the liberty of issuing it in unlimited quantities it has also resources to counteract the effects of a fall when it does occur. We must therefore turn to an examination of these resources.

The basis of the reasoning is that the rupee is a token currency, and that if the value of a token currency is maintained at par with gold by applying to it the principle of redemption into gold[f7] it should be possible to maintain the value of the rupee at par with gold by adopting a similar mechanism. What is wanted is an adequate gold fund, and so long as the Government has it, we are assured that we need have no anxiety on the score of a possible fall in the value of the rupee. Such a fund the Government of India has, and on all the three occasions when the gold value of the rupee fell below par that fund was operated upon. The process of redemption is carried on chiefly in three ways : (1) The sale of what are called reverse councils, by which the Government receives rupees in India in return for gold in London; (2) the release of gold internally in receipt for rupees in India ; and (3) the stoppage of the Secretary of State's council bills to prevent further rupees from going into circulation. The cumulative effect of these, it is said, is to contract the currency and raise its value to par. Although all the three may be employed, the first is by far the most important means adopted by the Government in carrying through this process of redemption. The extent of the redemption effected on the three occasions when it was employed may be seen from the three following tables :—

1.Redemption of currency, 1907-8

 

TABLE XLV



Date

By the sale of Reverse Councils

By Release of Gold-Diminution of Govt. Stock of Gold during the month.

Private Export of Gold Coin during the month

Drawings of the Secretary of State.

 

Amount

Amount

 

 

 

 

offered

sold

 

 

 

 

£

£

£

£

£

1907—

 

 

 

 

 

September

 

 

152,000

14

858,896

October

 

 

254,000

9,109

921,678

November

 

 

532,000

3

427.344

December

 

 

338,000

2,501

571,905

1908—

 

 

 

 

 

March 26

500,000

70,000

226,000

 

172,669

 

 

 

 

 

(for the whole

 

 

 

 

 

month)

April 2

500,000

449,000

 

 

 

April 9

500,000

340,000

 

 

 

April 16

500,000

441,000

461,000

 

66,834

April 23

500,000

329,000

 

 

 

April 30

500,000

205,000

 

 

 

May 7

May 14


May 21

May 28


500,000 500,000 820,000 500,000

81,000 145,000 793,000 500,000

 

645,000


 

62,764

June 4

1,000,000

755,000

 

 

 

 

June 11

1,000,000

70,000

 

334,000

 

169,810

June 18

500,000

Nil

 

 

 

 

June 25

500,000

50,000

 

 

 

 

July 2

July 9


July 16

July 23

July 30


500,000 500,000 500,000 1,000,000 1,000,000

470,000 304,000 500,000 968,000 860,000

 

 

16,000



 

186,847

August 6

1,000,000

418,000

 

 

 

August 13

500,000

310,000

354,000

 

262,217

August 20

500,000

Nil

 

 

 

August 27

500,000

Nil

 

 

 

Sept. 3

Sept.10


500,000 500,000

Nil

Nil


502,000

 

1,431,012

Total

15,320,000

8,058,000

4,394,000

249,942

 

 

II. REDEMPTION IN 1914-16



TABLE XLVI

Date

Reverse Councils (in £ 000)

Drawings of the S. of S. (in Lakhs of Rs.)

1914. April

 

Nil

270

May

 

Nil

61

June

 

Nil

68

July

 

Nil

66

August

 

2,778

72

September

 

1,515

25

October

 

1,895

41

November

 

1,044

32

December

 

1,250

30

1915. January

 

225

29

February

 

Nil

181

March 1915.

 

Nil

287

 

Total

8,707

1,162

April

 

Nil

1,53

May

 

Nil

1,03

June

 

651

17

July

 

3,377

8

August

 

815

23

September

 

50

2,17

October

 

Nil

2,25

November

 

Nil

2,02

December

 

Nil

3,28

1916 January

 

Nil

5,26

February

 

Nil

6,02

March

 

Nil

6,33

 

Total

4,893

30,37

 

III. redemption In 1920


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