[1] Mr. Brunyate spoke as follows:—“Many here will remember the arguments used on behalf of the tea–planting industry. At that time India and China had been competing together for years on the same footing as regards currency. It was argued that the disturbance of the exchange, the appreciation of the rupee and the depreciation of silver, might not only result in India’s ascendancy in regard to tea being wrested from her, but in the entire and irretrievable ruin of the tea industry. I am quoting the words actually used by the Darjeeling Planters’ Association in 1892. In the year before the closing of the Mints India exported 115 million pounds of tea to foreign countries, and by 1909 had a little more than doubled that amount. Almost exactly the same arguments were used in regard to the cotton industry, and here I must enter into more detail. What the mill–owners feared, and had excellent reason for fearing, was an enormous depreciation in silver. This actually took place. In 1892–93, the year before the Mints were closed, the average value of silver per ounce was nearly 40d. The next year it fell to 33?d.; the year after to about 29d.; and it stayed at or below 30d. for some years. Surely here were the conditions in which a disastrous stimulus to production in China might have been expected. The so–called bounty in this case was not 2 per cent but 25 per cent. It was not a temporary decline which might be counterbalanced by other causes in the course of a single month. It continued for years, and as we all know silver has not since returned to a price anything like 40d. an ounce. In addition, just before the closing of the Mints occurred there had been considerable overtrading, and the mills had actually been working short time for some months before to enable the Chinese markets to dispose of their accumulated stocks. There was, as a matter of fact, a fall in exports in 1893–94 partly due to the dislocation arising from the changes in our currency system and partly to the existing glut of the Chinese market. The exports picked up, however, in 1894–95, and it would appear that the adjustment of prices and wages in China to the extraordinary new conditions began very quickly, for I find it stated that by the first month of 1894 the mills were again working steadily and profitably. I may perhaps give the actual figures. In 1891–92 the exports of yarn had been 161 million pounds. In 1892–93 the inflated year just preceding the closing of the Mints, they rose to 189 million pounds. In 1893–94 they fell (as I have said) to 134 millions, but went up again the following year to 159 millions. In 1902–3 and 1903–4, though by this time the value of silver had now fallen to 24d., the exports were about 250,000,000 pounds, and in 1905–6 they reached the record figure of 298 millions. In the last two or three years there has been a falling off, owing to various causes, but the amount exported in 1908–9 was as much as 235 millions, and in the exports to China in particular there was a marked improvement.”

[2] There had been temporary Acts to the same effect in 1898 and 1900.

[3] Notes of Rs. 100 were universalised in 1911 by Notification under this Act.

[4] The Hon. Mr. Dadabhoy, speaking in the Legislative Council in 1910, argued that “the harmful effects of a further fall in silver (i.e. in its bullion value) can be neutralised by Government by creating a further contraction in the volume of the currency, and thus producing a greater scarcity of the rupee, by maintaining the Gold Standard Reserve at a higher figure, and, further, by more frequent withdrawal of Council Bills from the market.” A contraction of the currency would not, of course, have the effect supposed, but the Government could not, in fact, bring about a contraction in the manner described.

[5] This question of the power of Government over the volume of circulation is discussed in much greater detail in § 8 of Chapter V.

[6] For example, in November 1912, “no gold was handed across the counter at the Bank of France except on the most urgent demand, and then the highest sum paid in gold was 300 francs per head. The other banks followed this example, and the most generous released 200 francs in gold. All special wishes for payment in money were charged 1 per cent premium. At the same time, deposits in gold were credited with 1 per cent premium” (see Bankers’ Magazine, December 1912, p. 794). At the beginning of the month cashiers were charging a premium or commission of 6 f. per 1000 f. for payments in gold instead of silver (see Economist, November 9, 1912, p. 961).

[7] Although the Bank of France only holds an important quantity of foreign bills (generally sterling), on exceptional occasions, e.g. at the beginning and end of 1907 and at the end of 1909, foreign paper enters very largely, through the agency of the great CrÉdit Banks, into the transactions of the French Money Market. These institutions take foreign bills into their own portfolios, and obtain the necessary funds by rediscounting inland bills at the Bank of France. Thus the French mechanism is much more closely analogous to the British than appears outwardly, and the influence of the Bank of France, like that of the Bank of England, is mainly indirect. The possibility of this is no doubt due to the fact that France, like Great Britain, is a creditor nation in the international short–loan market.

[8] For example, in November 1912 there was a premium of nearly ¾ per cent on gold for export.

[9] This premium was made possible by the Austro–Hungarian Bank’s exercising its right to refuse to exchange its bank notes for gold freely.

[10] In the abnormal conditions of recent times (1912–13), however, the Bank has not found it possible to maintain this part of its reserves at a high level.

[11] This does not include the funds held abroad on account of the Russian Treasury. Speaking in March 1913, in the Budget Committee of the Duma, the Minister of Finance stated that the total amount of Russian State funds placed abroad was £60,000,000.

[12] I have throughout deliberately ignored the current practice of the United States in these matters. Her development and present position are anomalous, and have claimed no imitators. Her arrangements would need a discussion to themselves, and would, I think, convey few lessons of value to students of Indian affairs. In dealing with her dependencies, she has herself imitated, almost slavishly, India.

[13] I may seem to speak as if Japan had in name a Gold–Exchange Standard, which is not the case. There is not much publicity in regard to her monetary arrangements. But I believe that they are, in fact, such that it is as a Gold–Exchange Standard hers ought impartially to be classified. The Finance Minister stated in the Diet in 1912 that the gold funds held by the Government and the Bank of Japan in Europe and the United States were about £37,000,000. The amount of gold circulating in Japan herself is, I believe, inconsiderable.

[14] Unless it be Egypt.

[15] In the course of the last twenty years, however, the Bank of Holland, having got rid of the greater part of her redundant stock of silver coins, has gradually come to rely more on her holding of gold and less on her holding of foreign bills than formerly. In 1892–93 foreign bills at £1,801,409 were about 16 per cent of her resources (excluding silver coin); in 1911–12 they had fallen to £1,389,139 or about 5·5 per cent of her resources (excluding silver coin). But the media of exchange are still notes and silver, and not less than formerly does the Bank pursue the policy of keeping her gold for purposes of export only and of withholding it from circulation. Almost the whole of her stock of gold is in the form of bars and foreign coin. (It should be added, however, that at the end of 1912 there were proposals, in order to avoid fresh coinage of silver, for the introduction of a 5 fl. gold piece.)

[16] The rupee contains ? oz. of silver of eleven–twelfths fineness. When standard silver is at 24d. per oz. the cost of a rupee to the Government is about 9·181d.; at 32d. per oz. it is about 12·241d. The average rate of profit on coinage of rupees from 1910 to May 1912 was about 42% of the nominal value.

[17] See also pp. 199, 200.

[18] For this and other historical details see J. B. Brunyate, An Account of the Presidency Banks.

[19] Mr. Wilson had proposed to invest a high proportion of the reserve (perhaps two–thirds) in Government securities.

[20] I quote this from the Secretary of State’s despatch (Sir Charles Wood, March 26, 1860) criticising Mr. Wilson’s original scheme.

[21] A rearrangement was made in 1910; previous to that date there were four circles and four sub–circles. It is no longer worth while to explain the relations which used to exist between the circles and sub–circles.

[22] For the legal provisions outlined in the following paragraphs see Statistics of British India, part iv. (a).

[23] For some further details see p. 9.

[24] Report of Comptroller of Paper Currency, 1910.

[25] Before 1893 these terms were used with a different significance. The statistics are still a little ambiguous as to whether for the net circulation the notes in Government reserve treasuries or the notes in all Government treasuries are to be deducted. I use the term in the latter sense.

[26] For an account of this see p. 73.

[27] At all times the vast bulk of the funds held by the Presidency Banks at their Head Offices are kept in notes, chiefly of high denominations (Rs. 1000 and Rs. 10,000); e.g. on December 31, 1911, £4,200,000 out of £4,800,000 was thus held.

[28] The part played by gold is discussed in Chapter IV.

[29] I estimate that at this date the total volume of the active rupee circulation was between five and six times the total volume of the active note circulation.

[30] The proper proportion would partly depend upon the policy pursued in regard to the Gold Standard Reserve.

[31] H. of C. 495 of 1913.

[32] This quotation is from a letter addressed by the Government of India to the Secretary of State, nine years later (May 16, 1912).

[33] The value of the token coins (silver, nickel, and bronze) circulating in Egypt and the Sudan is estimated at no more than £E3,600,000, and the notes of the National Bank of Egypt (chiefly current in the large towns) at £E2,400,000. The whole of the rest of the currency consists of gold coins (chiefly British sovereigns). The existing position in Egypt is, therefore, the ideal at which many Indian currency reformers seem to aim.

[34] See Lindsay’s evidence before Indian Currency Committee (1898), Q. 3404.

[35] The above account is summarised from the Reports of the Comptroller of Paper Currency for 1900 and 1901.

[36] This is probably very considerable. India must be the main source of supply of gold for the whole of Central Asia. The following extract from a report sent in to the Comptroller of Currency (1911–12) is instructive:—“From Peshawar a considerable absorption of gold in connection with the trans–border trade is reported; this trade is said to have amounted during 1911–12 to the value of Rs. 30 lakhs. Gold so taken seldom or never returns. The Amir’s subsidy is also largely paid in gold.” It is also reported that gold is preferred by those who go on pilgrimage to Mecca.

[37] Throughout 1911–12 the Bank of Bengal quoted them at a premium of 4d.

[38] Report on Paper Currency, 1911–12.

[39] See pp. 97–99.

[40] See Report for 1909.

[41] In the calendar year 1912 India increased her stock of gold by £29,500,000, of which about £21,500,000 was in sovereigns.

[42] The fluctuations in the proportions for different years of the figures in columns (4) and (5) of the table on p. 76 must certainly be explained in part by the state of the exchanges, and not wholly by the degree of deliberate preference for sovereigns.

[43] The Accountant–General, Bombay, has suggested (see Paper Currency Report, 1911–1912) that “the principal cause” of the heavy importation of sovereigns has been a reduction in the rate of charge (from ¹/₁₆ per cent to ¹/₃₂ per cent) for Telegraphic Transfers issued upon Madras and Calcutta against gold imported into Bombay. No doubt, this favours gold to a slightly greater extent than before, as against Council Transfers, as a means of remittance from London to Madras and Calcutta, but the difference seems too small in relation to the other factors which determine the cheapest form of remittance, for the change to have exerted any appreciable influence.

[44] This corresponds to the Bank of England’s normal price for gold bullion.

[45] At present notes can be issued by currency offices, but only to treasuries on the requisition of the Comptroller–General, in exchange for gold bullion at the rate of 1 rupee for 7·53344 grains troy of fine gold. Since April 1, 1907, the receipt at the Indian Mints of gold bullion and gold coins other than sovereigns and half–sovereigns has, in fact, been stopped by Government of India Notification.

[46] I have, however, seen no evidence which suggests that half–sovereigns are specially popular on account of their lower denomination.

[47] The Manager of the National Bank in the Punjab reported in 1911–1912:—“The fact of currency notes having always been unpopular throughout the Punjab and, excepting in Lahore, being cashed only at a considerable discount, has no doubt conduced to the popularity of the sovereign. A portable medium commanding its full face value was urgently required and the sovereign has for the present met the want.”

[48] £6000 in rupees weighs more than a ton.

[49] The Government should probably instruct its officers to receive and change notes with freedom on every possible occasion, in order to dissipate this idea.

[50] See pp. 113–118 for an account of the cost of transporting bullion to India.

[51] It was operative, however, in the middle of March 1913, when the whole amount offered was not allotted, tenders below 1s. 4d. being rejected; later in the month tenders below 1s. 4d. were accepted.

[52] The rule is supposed to be that the extra charge for transfers is 1–32d. per rupee when the Indian bank rate is below 9 per cent, and ¹/₁₆d. when it is 9 per cent or above. The last occasions, on which the difference of ¹/₁₆d. was in force, occurred between December 1906 and March 1907. In 1904 and formerly the ¹/₁₆d. difference came into force when the Indian bank rate exceeded 6 per cent.

[53] Thus a probable effect of exceptionally large sales of Council Bills is an earmarking of gold on Indian account at the Bank of England. The extent to which the Indian system can be misunderstood is well illustrated by the fact that in a money article recently published in an important newspaper in this country, an increased offering of bills by the India Council was given as a reason for expecting a postponement of the need for earmarking gold at the Bank on Indian account.

[54] On two occasions this practice has been suspended—in January 1900, when the price rose to 1s. 4?d., and in December 1906–March 1907, when it rose to 1s. 4³/₁₆d. The reason for the suspension in the second case was the operation of the rule by which the premium charged for telegraphic transfers over the rate for bills depends on the Indian bank rate (see p. 105). The statement made in answer to a question on this subject in the House of Commons (April 30, 1912) by the Parliamentary Under–Secretary was not quite correct.

[55] Old–fashioned treatises on the foreign exchanges often leave the student with the impression that the gold import point is a known and stable thing given for good in books of reference. How far this is from the truth, the example of India well illustrates.

[56] It is worth his while to do this, because the cost of sending gold from Australia to London in one transaction is less than the cost of sending it first from Australia to India and then from India to London in two separate transactions.

[57] I make this assumption, which is not exactly accurate, for purposes of illustration only.

[58] Or less, if paid at the time of shipment and in advance of the time of delivery.

[59] See p. 37 (footnote).

[60] The designation of the reserve was changed from “Gold Reserve” to “Gold Standard Reserve” in 1906, when it was decided to hold a part in silver; but the change of title has not really made the position much clearer.

[61] At the end of March 1913, £1,620,000 in gold stood to the credit of the Gold Standard Reserve in London.

[62] See also pp. 190, 191, below.

[63] Reckoning uncoined silver at its coined value.

[64] A further loan of £2,500,000 for “general purposes” was incurred in December 1908.

[65] An unfunded debt of £6,000,000, which has been wiped off lately out of the proceeds of the opium windfall, was incurred by the issue of India Bills during this period.

[66] For details of the method applied in these various investigations see Appendices to Reports of Head Commissioner of Paper Currency, 1894, 1895, 1896, 1897, and 1900. See also Mr. Harrison’s article on the “Rupee Census” in the Economic Journal for 1891.

[67] Stat. Journ. March 1897 and March 1903.

[68] This represents a per capita circulation of between Rs. 7 and Rs. 8.

[69] In 1899, the Government of India contemplated the possibility of a loan. See their despatch of August 24, 1899 (H. of C. 495 of 1913, p. 13):—“If India were afflicted with famine or other adverse circumstances in the earlier years of our new currency, and before an adequate reserve had accumulated, circumstances might arise in which borrowing to maintain the standard would become an absolute necessity. We should have preferred to have been armed against such a contingency ... not by actual borrowing but by obtaining power to borrow.... We have learnt with satisfaction ... that your lordship has stated in the House of Commons that borrowing would be resorted to if it should prove to be necessary.”

[70] See Chap. VII.

[71] See p. 215.

[72] The Government was on the point of sanctioning this advance when the urgent necessity for it came to an end, and the advance was not actually made.

[73] I will recur to this proposal in Chapter VII.

[74] For the movements of the Indian bank–rate in the autumn and spring of 1907–8, see the chart appended to Chap. VIII. Eventually, on January 16, 1908, the Bengal rate did rise to 9 per cent (the Bombay rate did not rise to this level until February 7); but this is not very abnormal in the winter, and the average rate for money in 1907–8 was lower than in the corresponding season of the two busy years 1905–6 and 1906–7.

[75] For a fuller discussion of this question in relation to the events of 1907–8, see my article on “Recent Economic Events in India” in the Economic Journal, March 1909.

[76] Aggregate exports of Indian produce and manufactures: 1906–7, £115,625,135; 1911–12, £147,813,000.

[77] The Government of India stands in a particularly strong position in this respect, because few countries have so good a market for their loans at a foreign centre as India has.

[78] In continuation of what has been said in § 4.

[79] See Brunyate, loc. cit. chap. vii., from which the greater part of what follows is summarised.

[80] All this refers to the balances at the Head Offices. “There is no limit to the Government deposits at branch offices. But the latter are held absolutely at call, and in actual practice are removed with the utmost freedom.”—Brunyate, loc. cit. p. 98.

[81] See table given on p. 204.

[82] The exceptional circumstances of 1913 are dealt with in Chap. VIII.

[83] See Report of Comptroller of Currency, 1911–12: “In July the balance generally reaches its highest level. From July onwards until December the revenue collections are comparatively small and the balances steadily go down till they reach their minimum level in November or December. After December the surplus revenue receipts far exceed the demands for expenditure.”

[84] See also Lord Inchcape’s letter to the Times of November 12, 1912. I forbear to enter in detail into what is not, in reality, one of the truly vital aspects of Indian Government Finance.

[85] The payments to the Government broker, from which, no doubt, some deduction has to be made for expenses, have been as follows:—

The principles governing the amount of these payments were explained in the House of Commons on December 17, 1912, in answer to a question.

[86] See Mr. J. B. Brunyate’s Account of the Presidency Banks (1900), whence the historical details which follow have been chiefly derived. Mr. Brunyate’s Account is of the highest value to students of banking history.

[87] The first Bank of Bombay went into liquidation in 1868, although its liabilities were eventually paid up in full. A new Bank of Bombay was formed in the same year.

[88] By 1862 such issues were of negligible account, but in earlier times they had been important. “Probably the first banking institution in India, on European lines, was the Bank of Hindustan, which was established in Calcutta about 1770 by a private trading firm. The notes of this Bank, though not recognised by the Government, obtained a local circulation which occasionally reached forty or fifty lakhs and generally averaged about half that amount.” It is said that they were “received for many years at all the public offices in Calcutta scarcely excepting the Treasury itself.” On two occasions, once in 1819 and again in 1829, the occurrence of a panic led to the presentation for payment of about twenty lakhs’ worth of the notes, and the demand was promptly met. (Brunyate, loc. cit. p. 55.) This Bank and others disappeared in the commercial disasters of 1829–1832. “Out of their ruin rose the Union Bank, a Joint Stock Bank created by co–operation among all the leading Calcutta houses.” (Brunyate, loc. cit. p. 59.) In 1834 the Bank of Bengal refused to accept the notes of its formidable rival, and in 1848 the Union Bank disappeared.

[89] This was in some degree consequent on the failure of the Bank of Bombay in 1868, the Government having found itself in the awkward position of being a shareholder in a Bank, its liability for which was not clearly defined.

[90] The way in which Indian institutions have been moulded on and influenced by English is interestingly illustrated by the fact that several of the provisions in the Charters of the Presidency Banks were copied from the 1695 constitution of the Bank of England.

[91] This also was partly consequent on the failure of the Bank of Bombay in 1868.

[92] Except for the use of principals for the purpose of certain specified kinds of remittance.

[93] In 1877 the Banks pressed strongly for a relaxation of this provision. But the Secretary of State held that “the concession of a power of creating a foreign agency in England, such as would be the result of entering into loan transactions of the nature of those contemplated, would admit of the Banks locking up a large portion of their capital at so great a distance as to render it practically unavailable in the case of any emergency arising in India.” This argument is not one which would be likely to be used at the present time. The fear would rather be lest they should lock up funds in India.

[94] Up to 1907 the maximum period was three months.

[95] See §§ 36–38 of Chapter VI.

[96] The rupee has been converted at the uniform rate of 1s. 4d. throughout.

[97] This is the date of the foundation of this Bank under its present style, but it was formed out of the old Chartered Mercantile Bank of India, London and China, which dates much further back.

[98] The Chartered Bank, in spite of its name, has never done business in Australia.

[99] But not exclusively. The National Bank, for example, has a large interest in East Africa; this coast has considerable trade connexions with India, and the rupee has a fairly wide circulation there (see figures of rupees exported given on p. 154).

[100] The New Oriental Bank, established in 1885 (the great Oriental Bank Corporation had failed in 1884), went into liquidation in 1893.

[101] I fancy that it has more the character of an Indian Joint Stock Bank and less of the character of an Exchange Bank than the others.

[102] The Eastern Bank was established under the auspices of Messrs. E. D. Sassoon, while two important French Banks and Messrs. Brown, Shipley, and Co. are represented on the board of directors.

[103] There is of course much business of a semi–banking character transacted by financial and mercantile houses, some of them of the first magnitude, with establishments both in India and London. But they are private firms and publish no information about their business of which it is possible to take account.

[104] Another method occasionally worth while employing is the purchase of Government Rupee Paper in London and its sale in India.

[105] The volume of bills, drawn in India on London and outstanding, is not, of course, a correct measure of the extent to which India is being financed abroad. A bill may be used to finance the foreign purchaser just as much as the Indian seller. For example, a dealer in cotton in India might be paid by a 3 m/s Bank credit supplied by the buyer, a Continental spinner; this spinner might get the cotton within a fortnight of the acceptance of the bill, which would, therefore, be really financing his cotton factory.

[106] The figures for 1910, for example, are in the issue which was obtainable in England early in 1913.

[107] On the one hand, these balances are even weaker than they look, because they include the Exchange Banks’ balances at the Presidency Banks. On the other hand, the Exchange Banks often have sovereigns or Council Bills in transit which they may fairly consider, perhaps, as equivalent to cash.

[108] A certain proportion of their bills, no doubt, are drawn on the London branches of Banks with a foreign domicile. These bills are not always so readily discountable as London acceptances, the Bank of England taking them unwillingly and charging ¼ per cent extra discount. But for the present purpose they can, I think, be regarded none the less as liquid London assets.

[109] I believe that the Eastern Bank offers rather better terms than the other Banks for fixed deposits.

[110] The confusing point here is this: that (ix.) is the amount advanced to Indian merchants, and (x.) the amount advanced to English merchants; yet (ix.) must be reckoned an English asset and (x.) an Indian asset. For (ix.) when it falls due is paid in England, although, of course, the Bank has advanced money, through the purchase of it, in India.

[111] It would be most useful to have a triple classification—India, London, and elsewhere. But I do not see how the Indian authorities could reasonably enforce this.

[112] The great majority (363) of these small money–lending establishments were registered in Madras. Most of them are mutual societies, and it would not be difficult to exclude them from the official statistics.

[113] There is also, on a smaller scale, the Bangalore Bank (1868).

[114] There are a few others on a very small scale, such as the Kashmir Bank (1882), and the Poona Mercantile Bank (1893).

[115] In 1901 the People’s Bank of India was founded, but it did not reach the 5 lakhs’ limit until 1908.

[116] The Bank of India has a paid–up capital of 50 lakhs and a reserve and rest of 5½ lakhs; the corresponding figures for the Indian Specie Bank are 75 lakhs and 19 lakhs. The Bank of Rangoon is on a smaller scale and has been less successful.

[117] This represents compound interest at the rate of about 8 per cent per annum.

[118] Here again it is tantalising that no later figures should be available.

[119] In the official statistics no definition is given of what precisely is meant by “cash.”

[120] The Co–operative Credit Societies are not important in this connexion, capital, reserves, loans, and deposits altogether being less than £1,000,000.

[121] At the time of writing, this Bill has not yet passed through its final stages.

[122] In the published balance sheet, which I have before me, of one of the largest of these little Banks, the cash is lumped together with the “investments,” i.e., with the Bank’s speculations.

[123] These quotations are derived from Mr. Brunyate’s Account, loc. cit.

[124] In their Despatch dealing with the Report of the Fowler Committee (August 24, 1899) the Government of India went so far as to declare that the constitution of a State Bank, by the amalgamation and absorption of the three Presidency Banks, was desirable. For the circumstances and discussions which led up to the ultimate abandonment of these ideas, see “Papers relating to the Proposed Establishment of a Central Bank in India (reprinted from the Gazette of India and Supplement, dated the 12th Oct. 1901).”

[125] I am indebted for the preparation of this chart to Mr. H. Bellingham of the India Office.

[126] The Bengal Bank Rate was at 7 or 8 per cent from November 28, 1912, to April 17, 1913, and the Bombay Bank Rate at no less than 8 per cent from December 27, 1912, to April 8, 1913.

[127] The Bank of England’s rate was 5 per cent, with the market rate well up to the Bank Rate; and the difference between the current rates for money in London and India was probably, for the time of year, not much greater than usual.