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 [pg vi] 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 extend 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 [pg vii] 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 vital 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 naÏve 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. [pg viii]

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 [pg ix] 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. [pg x]

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