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 III Continued---


TABLE XVIII

 

development oF jute industry aND trade



Growth

Average Annual of each Quinquennium

 

1870-71 to 1874-75

1875-76 to 1879-80

1880-81 to 1884-85

1885-86 to 1889-90

1890-91 to 1894-95

Exports—

 

 

 

 

 

Raw, million cwt.

5.72

5.58

7.81

9.31

10.54

Gunny bags, millions

6.44

35.96

60.32

79.98

120.74

Cloth, million yds.

 

4.71

6.44

19.79

54.20

Growth of Industry

 

 

 

 

 

Number of—

 

 

 

 

 

Mills

 

21

21

24

26

Looms, 000 omitted

 

5.5

5.5

7

8.3

Spindles, 000 omitted

 

88

88

138.4

172.4

Persons employed, in thousands

 

38.8

38.8

52.7

64.3

 

The chief cause was said to be the inability of the English manufacturers to hold out in international competition. This inability to compete with the European rivals was attributed to the prevalence of protective tariffs and subsidies which formed an essential part of the industrial and commercial code of the European countries.

 

TABLE XIX



growth oF agricultural exports oF india

 

1868-69

1873-74

1877-78

1882-83

1887-88

1891-92

Wheat

100

637.41

2,313.47

5,152.36

4,914.37

11,001.44

Opium

100

118.38

123.83

122.47

120.20

116.82

Seeds

100

111.26

305.87

239.97

403.60

480.99

Rice

100

131.66

119.84

203.28

185.55

220.36

Indigo

100

116.91

121.57

142.17

140.76

126.33

Tea

100

169.35

293.17

507.25

775.09

1,075.75

Coffee

100

86.04

69.98

85.31

64.59

74.11

 

Nothing of the kind then existed in India, where trade was as free and industry as unprotected as any could have been, and yet the Lancashire cotton-spinner, the Dundee jute manufacturer and the English wheat-grower complained that they could not compete with their rivals in India. The cause, in this case, was supposed to be the falling exchange.[f1] So much were some people impressed by this view that even the extension of the Indian trade to the Far East was attributed to this cause. Already, it was alleged, the dislocation of the par of exchange between gold and silver had produced a kind of segregation of gold-using countries and silver-using countries to the exclusion of each other. In a transaction between two countries using the same metal as standard it was said the element of uncertainty arising from the use of two metals varying in terms of each other was eliminated. Trade between two such countries could be carried on with less risk and less inconvenience than between two countries using different standards, as in the latter case the uncertainty entered into every transaction and added to the expense of the machinery by which trade was carried on. That the Indian trade should have been deflected to other quarters[f2]where, owing to the existence of a common standard the situation trade had to deal with was immune from uncertainties, was readily admitted. But it was contended that there was no reason why, as a part of the segregation of commerce, it should have been possible for the Indian manufacturer to oust his English rival from the Eastern markets to the extent he was able to do (see Table XX, p. 432).

The causes which effected such trade disturbances formed the subject of a heated controversy. [f3] The point in dispute was whether the changes in international trade, such as they were, were attributable to the monetary disturbances of the time. Those who held to the affirmative explained their position by arguing that the falling exchange gave a bounty to the Indian producer and imposed a penalty on the English producer.

 

TABLE XX



exports of cotton goods to eastern markets

Years

Yarn, Ibs., 000 omitted

Piece-goods, yds., 000 omitted

 

From India

From U. K.

From India

From U. K.

1877

7,927

33,086

15,544

394,489

1878

15,600

36,467

17,545

382,330

1879

21,332

38,951

22,517

523,921

1880

25,862

46,426

25,800

509,099

1881

26,901

47,479

30,424

587,177

1882

30,786

34,370

29,911

454,948

1883

45,378

33,499

41,534

415,956

1884

49,877

38,856

55,565

439,937

1885

65,897

33,061

47,909

562,339

1886

78,242

26,924

51,578

490,451

1887

91,804

35,354

53,406

618,146

1888

113,451

44,643

69,486

652,404

1889

128,907

35,720

70,265

557,004

1890

141,950

37,869

59,496

633,606

1891

169,253

27,971

67,666

595,258

 

 

distribution oF INDIAN trade

Annual Average for each Quinquennium in Millions of rupees

 

1875-76 to 1879-80

1880-81 to 1884-85

Countries

 

 

 

 

 

 

 

Imports

Exports

Total

Imports

Exports

Total

United Kingdom

323.68

278.15

601.83

434.45

344.22

778.67

China

14.05

132.27

146.32

19.23

134.94

154.17

Japan

.02

.33

.35

.19

2.09

2.28

Ceylon

5.74

22.97

28.71

5.35

16.37

21.72

Straits Settlement

10.83

26.11

36.94

15.88

33.65

49.53

 

Annual Average for each Quinquennium in Millions of rupees



 

1885-86 to 1989-90

1890-91 to 1894-95

Countries

 

 

 

 

 

 

 

Imports

Exports

Total

Imports

Exports

Total

United Kingdom

510.47

360.59

871.06

526.24

338.40

864.64

China

21.64

134.54

156.18

28.69

133.30

161.90

Japan

.25

7.27

7.52

1.51

14.44

15.95

Ceylon

5.86

20.56

26.42

6.42

31.18

37.60

Straits Settlement

20.09

42.54

62.63

23.32

52.56

75.88

 

The existence of this bounty, which was said to be responsible for the shifting of the position of established competitors in the field of international commerce, was based on a simple calculation. It was said that if the gold value of silver fell the Indian exporter got more rupees for his produce and was therefore better off, while by reason of the same fact the English producer got fewer sovereigns and was therefore worse off. Put in this naive form, the argument that the falling exchange gave a bounty to the Indian exporters and imposed a penalty on the English exporters had all the finality of a rule of arithmetic. Indeed, so axiomatic was the formula regarded by its authors that some important inferences as to its bearing on the trade and industrial situation of the time were drawn from it. One such inference was that it stimulated exports from and hindered imports into the silver-using countries. The second inference was that the fall of exchange exposed some English producers more than others to competition from their rivals in silver-using countries. Now, can such results be said to follow from the fall of exchange ? If we go behind the bald statement of a fall of exchange and inquire as to what determined the gold price of silver the above inferences appear quite untenable. That the ratio between gold and silver was simply the inverse of the ratio between gold prices and silver prices must be taken to be an unquestionable proposition. If therefore the gold price of silver was falling it was a counterpart of the more general phenomenon of the fall of the English prices which were measured in gold, and the rise of the Indian prices which were measured in silver. Given such an interpretation of the event of the falling exchange, it is difficult to understand how it can help to increase exports and diminish imports. International trade is governed by the relative advantages which one country has over another, and the terms on which it is carried on are regulated by the comparative cost of articles that enter into it. It is, therefore, obvious that there cannot be a change in the real terms of trade between countries except as a result of changes in the comparative cost of these goods. Given a fall in gold prices all round, accompanied by a rise in silver prices all round, there was hardly anything in the monetary disturbance that could be said to have enabled India to increase her exportation of anything except by diminishing her exportation or increasing her importation of something else. From the same view of the question of the falling exchange it follows that such a monetary disturbance could not depress one trade more than another. If the falling or rising exchange was simply an expression of the level of general prices, then the producers of all articles were equally affected. There was no reason why the cotton trade or the wheat trade should have been more affected by the fall of exchange than the cutlery trade.

Not only was there nothing in the exchange disturbance to disestablish existing trade relations in general or in respect of particular commodities, but there was nothing in it to cause benefit to the Indian producer and injury to the English producer. Given the fact that the exchange was a ratio of the two price-levels, it is difficult to see in what sense the English producer, who got fewer sovereigns but of high purchasing power, was worse off than the Indian producer, who got more rupees but of low purchasing power. The analogy of Prof. Marshall was very apt. To suppose that a fall of exchange resulted in a loss to the former and a gain to the latter was to suppose that, if a man was in the cabin of a ship only ten feet high, his head would be broken if the ship sank down twelve feet into a trough. The fallacy consisted in isolating the man from the ship when, as a matter of fact, the same force, acting upon the ship and the passenger at one and the same time, produced like movements in both. In like manner, the same force acted upon the Indian producer and the English producer together, for the change in the exchange was itself a part of the more sweeping change in the general price-levels of the two countries. Thus stated, the position of the English and Indian producer was equally good or equally bad, and the only difference was that the former used fewer counters and the latter a larger number in their respective dealings.

A bounty to the Indian producer and a penalty to the English producer, it is obvious, could have arisen only if the fall of silver in England in terms of gold was greater than the fall of silver in terms of commodities in India. In that case the Indian producer would have obtained a clear benefit by exchanging his wares for silver in England and thus securing a medium which had a greater command over goods and services in India. But a priori there could be no justification for such an assumption. There was no reason why gold price of silver should have fallen at a different rate from the gold price of commodities in general, or that there should have been a great difference between the silver prices in England and in India. Statistics show that such a priori assumptions were not groundless. (See Table XXI).



 

TABLE XXI. movements oF prices, wages aND silver BETWEEN india aND england [f4]



Net Imports of Silver into India.

Index No. for Gold Price of Silver.

Years.

Index No. for Silver Prices of Commodities in India.

Index No. for Wages In India.

Index No. for Gold Prices of Commodities in England.

Index No. for Wages In England.

Years.

Amount. Rs.

 

 

 

 

 

 

(1)

(2)

(3)

(4)

(5)

(6)

(7)

(8)

1871-72

6,587,296

99.7

1871

100

 

100

100

1872-73

739,244

99.2

1872

105



109

105.8

1873-74

2,530,824

97.4

1873

107

100

III

112

1874-75

4,674,791

95.8

1874

116

101

102

113

1875-76

1,640,445

93.3

1875

103

97

96

111.6

1876-77

7,286,188

86.4

1876

107

98

95

110

1877-78

14,732,194

90.2

1877

138

97

94

109.8

1878-79

4,057,377

86.4

1878

148

99

87

107

1879-80

7,976,063

84.2

1879

135

100

83

105.8

1880-81

3,923,612

85.9

1880

117

99

88

106.5

1881-82

5,381,410

85.0

1881

106

99

85

106.5

1882-83

7,541,427

84.9

1882

105

100

84

106.5

1883-84

6,433,886

83.1

1883

106

102

82

108

1884-85

7,319,581

83.3

1884

114

101

76

109

1885-86

11,627,028

79.9

1885

113

106

72

108

1886-87

7,191,743

74.6

1886

110

105

69

107

1887-88

9,319,421

73.3

1887

III

114

68

108

1888-89

9,327,529

70.4

1888

119

112

70

109.8

1889-90

11,002,078

70.2

1889

125

112

72

113

1890-91

14,211,408

78.4

1890

125

113

72

118

1891-92

9,165,684

74.3

1891

128

118

72

118

1892-93

12,893,499

65.5

1892

141

110

68

117.4

1893-94

13.759,273

58.5

1893

138

119

68

117.4

 

It is obvious that if silver was falling faster than commodities, and if silver prices in India were lower than silver prices in England, we should have found it evidenced by an inflow of silver from England to India. What were the facts ? Not only was there no extraordinary flow of silver to India, but the imports of silver during 1871-93 were much smaller than in the twenty years previous to that period. [f5] This is as complete a demonstration as could be had of the fact that the silver prices in India were the same as they were outside, and consequently the Indian producer had very little chance of a bounty on his trade.

Although such must be said to be the a priori view of the question, the Indian producer was convinced that his prosperity was due to the bounty he received. Holding such a position he was naturally opposed to any reform of the Indian currency, for the falling exchange which the Government regarded a curse he considered a boon. But however plausible was the view of the Indian producer, much sympathy would not have been felt for it had it not been coupled with a notion, most commonly held, that the bounty arose from the export trade, so that it became an article of popular faith that the fall of exchange was a source of gain to the nation as a whole. Now was it true that the bounty arose from the export trade ? If it were so, then every fall of exchange ought to give a bounty. But supposing that the depreciation of silver had taken place in India before it had taken place in Europe could the fall of exchange thus brought about have given a bounty to the Indian exporter ? As was explained above, the Indian exporter stood a chance of getting a bounty only if with the silver he obtained for his produce he was able to buy more goods and services in India. To put the same in simpler language, his bounty was the difference between the price of his product and the price of his outlay. Bearing this in mind, we can confidently assert that in the supposed case of depreciation of silver having taken place in India first, such a fall in the Indian exchange would have been accompanied by a penalty instead of a bounty on his trade. In that case, the exporter from India would have found that though the Indian exchange, i.e. the gold price of silver, had fallen, yet the ratio which gold prices in England bore to silver prices in India had fallen more, i.e. the price he received for his product was smaller than the outlay he had incurred. It is not quite established whether silver had fallen in Europe before it had fallen in India.*[f6] But even if that were so the possibility of a penalty through the fall of exchange proves that the bounty, it there was any, was not a bounty on the export trade as such, but was an outcome of the disharmony between the general level of prices and the prices of particular goods and services within the country, and would have existed even if the country had no export trade.

Thus the bounty was but an incident of the general depreciation of the currency. Its existence was felt because prices of all goods and services in India did not move in the same uniform manner. It is well known that at any one time prices of certain commodities will be rising, while the general price level is falling. On the other hand, certain goods will decline in price at the same time that the general price-level is rising. But such opposite movements are rare. What most often happens is that prices of some goods and services, though they move in the same direction, do not move at the same pace as the general price level. It is notorious that when general prices fall wages and other fixed incomes, which form the largest item in the total outlay of every employer, do not fall in the same proportion; and when general prices rise they do not rise as fast as general prices, but generally lag behind. And this was just what was happening in a silver-standard country like India and a gold-standard country like England during the period of 1873-93 (see Chart IV).

CHART IV

prices aND wages IN india aND england, 1873-93

 

 



Prices had fallen in England, but wages had not fallen to the same extent. Prices had risen in India, but wages had not risen to the same extent. The English manufacturer was penalised, if at all, not by any act on the part of his Indian rival, but by reason of the wages of the former's employees having remained the same, although the price of his products had fallen. The Indian producer got a bounty, if any, not because he had an English rival to feed upon, but because he did not have to pay higher wages, although the price of his product had risen.

The conclusion, therefore, is that the failing exchange could not have disturbed established trade relations or displaced the commodities that entered into international trade. The utmost that could be attributed to it is its incidence in economic incentive. But in so far as it supplied a motive force or took away the incentive, it did so by bringing about changes in the social distribution of wealth. In the case of England, where prices were falling, it was the employer who suffered ; in the case of India, where prices were rising, it was the wage-earner who suffered. In both cases there was an injustice done to a part of the community and an easy case for the reform of currency was made out. The need for a currency reform was recognised in England ; but in India many people seemed averse to it. To some the stability of the silver standard had made a powerful appeal, for they failed to find any evidence of Indian prices having risen above the level of 1873. To others the bounty of the falling exchange was too great a boon to be easily given away by stabilising the exchange. The falsity of both the views is patent. Prices in India did rise and that, too, considerably. Bounty perhaps there was, but it was a penalty on the wage-earner. Thus viewed, the need for the reform of Indian currency was far more urgent than could have been said of the English currency. From a purely psychological point of view there is probably much to choose between rising prices and falling prices. But from the point of view of their incidence on the distribution of wealth, very little can be said in favour of a standard which changes in its value and which becomes the via media of transferring wealth from the relatively poor to the relatively rich. Scope said: "Without stability of value money is a fraud." Surely, having regard to the magnitude of the interests affected, depreciated money must be regarded as a greater fraud. That being so, the prosperity of Indian trade and industry, far from being evidence of a sound currency, was sustained by reason of the fact that the currency was a diseased currency. The fall of exchange, in so far as it was a gain, registered a loss to a large section of the Indian people with fixed incomes who suffered from the instability of the silver standard equally with the Government and its European officers.

So much for the fall of silver. But the financial difficulties and social injustices it caused did not sum up the evil effects produced by it. Far more disturbing than the fall were the fluctuations which accompanied the fall (see Chart V).

CHART V


monthly fluctuations oF THE rupee-stehlinG exchange

 

 

 

 



The fluctuations greatly aggravated the embarrassment of the Government of India caused by the fall in the exchange value of the rupee. In the opinion of the Hon. Mr. Baring (afterwards Lord Cromer), [f7]

" It is not the fact that the value of the rupee is, comparatively speaking, low that causes inconvenience. It would be possible, although it might be exceedingly troublesome, to adjust the Indian fiscal system to a rupee of any value. What causes inconvenience alike to Government and to trade is that the value of the rupee is unstable. It is impossible to state accurately in Indian currency what the annual liabilities of the Government of India are. These liabilities have to be calculated afresh every year according to the variations which take place in the relative value of gold and silver, and a calculation which will hold good for even one year is exceedingly difficult to make."

Owing to such fluctuations, no rate could be assumed in the Budget which was likely to turn out to be the true market rate. As matters stood, the rate realised on an average during a particular year differed so widely from the Budget rate that the finances of the Government became, to employ the phraseology of a finance minister, a "veritable gamble." How greatly the annual Budget must have been deranged by the sudden and unprovided for changes in the rupee cost of the sterling payments Table XXII on page 442 may help to give some idea.

If Government finance was subjected to such uncertainties as a result of exchange fluctuations, private trade also became more or less a matter of speculation. Fluctuations in exchange are, of course, a common incident of international trade. But if they are not to produce discontinuity in trade and industry there must be definite limits to such fluctuations. If the limits are ascertainable, trade would be reasonably certain in its calculation, and speculation in exchange would be limited within the known limits of deviations from an established par. Where, on the other hand, the limits are unknown, all calculations of trade are frustrated and speculation in exchange takes the place of legitimate trading. Now, it is obvious that fluctuations in the exchange between two countries will be limited in extent if the two countries have the same standard of value.



 

TABLE XXII



fluctuations of exchange and fluctuations IN THE rupee cost of gold payments[f8]

Financial Year.

Estimated Rate of Ex-change on which the Budget of the Year was framed.

Rate of Exchange actually realised on the Average during the Year.

Changes in the Rupee Cost of Sterling Payments consequent upon Changes between the Estimated and the Realised Rates of Exchange.

 

 

 

Increase.

Decrease.

 

s. d.

s. d.

Rs.

Rs.

1874-75

1 10.375

1 10-156

15,91,764



1875-76

1 9.875

1 9-626

19,57,917



1876-77

1 8.5

1 8-508



76,736

1877-78

1 9.23

1 8-791

38,43,050



1878-79

1 8.4

1 7-794

56,87,129



1879-80

1 7

1 7-961



84,40,737

1880-81

1 8

1 7-956

4,24,722



1881-82

1 8

1 7-895

10,17,482



1882-83

1 8

1 7-525

37,46,890



1883-84

1 7.5

1 7-536



3,62,902

1884-85

1 7.5

1 7-308

18,97,307



1885-86

1 7

1 6-254

56,82,638



1886-87

1 6

1 5-441

65,17,721



1887-88

1 5.5

1 4-898

71,90,097



1888-89

1 4.9

1 4-379

77,98,400



1889-90

1 4.38

1 4-566



27,31,892

1890-91

1 4.552

1 6-09



2,35,51,744

1891-92

1 5.25

1 4-733

80,09,366



 

Where there is no such common standard of value the limits, though they exist, are too indefinite to be of much practical use. The rupture of the fixed par of exchange, having destroyed a common standard of value between gold and silver countries, removed the limits on the exchange fluctuations between such countries. As a result of such variations in the value of the standard measure, trade advanced by " rushes and pauses," and speculation became feverishly active[f9]

That progress of trade depends on stability is a truism which seldom comes home until it is denied in fact. It is difficult to appreciate its importance to healthy enterprise when government is stable, credit is secure, and conditions are uniform. And yet so great is the handicap of instability that everywhere businessmen have been led by a variety of devices to produce stability in domains enveloped by uncertainty. Everywhere there have grown up business barometers forewarning business men of impending changes and so enabling them to forearm against them by timely changes in their operations. The whole of insurance business is aimed at giving stability to economic life. The necessity which compelled all regularly established Governments to maintain standard measures by which the true proportion between things as to their quantities might be ascertained and dealings in them regulated with certainty was motivated by the same purpose. The meticulous precision with which every civilised country defines its standard measures, and the large machinery it maintains to preserve them from deviation, are only evidences of the great importance that an economic society must continue to attach to the matter of providing precision of expression and assurance of fulfilment with regard to the contracts entered into by its members in their individual or corporate capacities.

Important as are the standard measures of a community, its measures of a community, its measure of value is by far the most important of them all. [f10] The measures of weight, extension, or volume enter only into particular transactions. If the pound, the bushel, or the yard were altered the evils would be comparatively restricted in scope. But the measure of value is all-pervading.

"There is no contract," Peel declared. [f11] "public or private, no engagement national or individual, which is unaffected by it. The enterprises of commerce, the profits of trade, the arrangements made in all domestic relations of society, the wages, of labour, pecuniary transactions of the highest amount and of the lowest, the payment of national debt, the provision for national expenditure, the command which the coin of the smallest denomination has over the necessaries of life, are all affected "

by changes in the measure of value. This is because every contract, though ultimately a contract in goods, is primarily a contract in value. It is, therefore, not enough to maintain constancy in the measures of weight, capacity, or volume. A contract as one of goods may remain exact to the measure stipulated, but may nevertheless be vitiated as a contract in values by reason of changes in the measure of values. The necessity of preserving stability in its measure of value falls on the shoulders of every Government of an orderly society. But its importance grows beyond disputes as society advances from status to contract. The conservation of the contractual basis of society then becomes tantamount to the conservation of an invariable measure of value.

The work of reconstituting a common measure of value in some form or other, which those misguided legislators of the seventies helped to destroy, it was found, could not be long delayed with impunity. The consequences that followed in the wake of that legislation, as recounted before, were too severe to allow the situation to remain unrectified. That efforts for reconstruction should have been launched before much mischief was done only shows that a world linked by ties of trade will insist, if it can, that its currency systems must be laid on a common gauge.

 

Chapter IV


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