September 1926 SEPTEMBER, 1926 FEDEKAL, EESERVB BULLETIN 657 REPORT OF THE ROYAL COMMISSION ON INDIAN CURRENCY AND FINANCE1 The Royal Commission on Indian Currency erence to the Secretary of State, their readiness and Finance, appointed ilugust 25, 1925, pub- to sell weekly a stated amount of reverse lished its report on August 4, 1926. Following councils. is a summary of the more important parts of These recommendations were accepted, and the report: steps were taken to maintain the new exchange rate of 2s. gold recommended by the com- I. INDIAN CURRENCY SYSTEM mittee. These attempts were not successful, and the Government thereupon tried to main- Historical retrospect.—Before 1893 India had tain it at 2s. sterling. This attempt also failed. a monometallic system with silver as the The Government of India was at this time standard of value. In 1893 the mints were unable to contract currency in India as rap- closed to the free coinage of silver, and five idly as world prices were falling. All it years later the Fowler Committee was ap- could do was to avoid further inflation and pointed to consider how the establishment of a tjo effect some measure of contraction. This gold standard for India could best be secured. was insufficient to arrest the falling tide of ex- This committee recommended making the change, which early in 1921 fell below the low British sovereign a legal tender and a current level of Is. 3d. sterling and Is. gold. The 2s. coin in India, and opening the Indian mints ratio, adopted in 19^0, remained on the stat- to the unrestricted coinage of gold. Gold, ute book, but was ineffective for purposes of however, never became a substantial part of tender of gold to the currency office. By the circulation; and the standard which January, 1923, the tide had definitely turned; evolved, commonly known as a gold exchange exchange recovered to Is. 4d. sterling, and standard, was, so far as it amounted to a defi- showed a tendency to move upward. It nite standard at all, a standard of sterling ex- reached the level of Is. 6d. sterling in October, change. It was in operation at the beginning 1924, at which time this was equivalent to of the war in 1914. about Is. 4d. gold. From that time till March, The Chamberlain Commission, appointed in 1926, the upward tendency of exchange con- 1913, abandoned the ideal of a gold standard tinued, but it was prevented from rising above based on a gold currency, and accepted in its Is. 6d. by free purchases of sterling on the place an exchange standard with an excrescent part of the Government. Meanwhile sterling currency of sovereigns not essential to the was restored to parity with gold about the working of the system. Owing to the outbreak middle of 1925, and during the 12 months which of the war, no action was taken on these recom- have since elapsed the value of the rupee has mendations. been in the neighborhood of Is. 6d. gold. The war put the currency system of India The existing system.—At the present time to a severe test. The rise in the price of silver, Indian currency consists of two kinds of tokens, the keen demand/for Indian exports, the excep- paper notes and silver rupees, which are mu- tional disbursements to be made on behalf of tually convertible. The paper note is in form the British Government, caused the value of the a promise by the Government of India to pay rupee, so long anchored at Is. 4&, to rise in to the bearer on demand a specified number of December, 1919, to 2s. 4d. sterling. The rupees. In addition to these two kinds of to- Babington-Smith Committee, appointed in kens, the sovereign is by statute legal tender for 1919, directed its attention to the reestablish- 10 rupees, and the Government is under an obli- ment of stability under the then existing ex- gation to pay 10 rupees, when sovereigns are change standard, a stability which had sud- presented for encashment. As, however, the . denly been overthrown by the unprecedented price of gold is considerably above this parity, rise in the price of silver and by the divorce the sovereign has disappeared from circulation of sterling from gold. They further recom- and is not issued by or tendered to the Gov- mended that during periods of exchange weak- ernment. ness the Government of India should be The value of both forms of token currency authorized to announce, without previous ref- in relation to sterling is at present being main- i Currency conditions and currency reform in India have been dis- taiiied between the gold points corresponding cussed in the FEDERAL RESERVE BULLETIN, October, 1919, pages 945-950; wherein is given the substance of the report of the Chamberlain Com- to a gold parity of Is. 6d. No obligation has mission of 1913; March, 1920, pages 253-258, the report of the Babington- been assumed, but the Government has Smith Committee of 1919; January, 1921, pages 29-32, further monetary and exchange developments; March, 1921, pages 299-300, the history of the freely purchased sterling when the rate has establishment of the Imperial Bank of India, and the regulations gov- stood at Is. 6x6 d., and recently, in April, erning it; August, 1921, pages 937-938, and September, 1923, page 1014, later discussions regarding the silver situation as it affects India. 1926, authorized the Imperial Bank to make Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis September 1926 658 FEDEBAL KESERVE BULLETIN SEPTEMBER, 1926T an offer on its behalf to sell sterling at Is. concentrate the controls in one hand. In 5%d. The stability of the gold value of the other countries the single controlling hand is rupee is thus based upon nothing more sub- that of a central bank. stantial than a policy of the Government, Summary.—The commission summarizes the and at present that policy can be found defined present state of affairs and its defects as in no notification or undertaking by the follows: Government. (1) The system is far from simple, and the Reserves and functions of reserves.—For basis of the stability of the rupee is not readily the purpose of maintaining the value of the intelligible to the uninstructed public. The token currency, the Government of India holds currency consists of two tokens in circulation, two reserves—the paper currency reserve and with the unnecessary excrescence of a third the gold standard reserve. The former is full-value coin which does not circulate at all. composed of the proceeds of the note issue and One form of token currency (into which there is held as a backing against the notes in cir- is an unlimited obligation to convert the culation; the latter has been accumulated other) is highly expensive and is liable to from the profits of the coinage of silver rupees vanish if the price of silver rises above a cer- and is designed primarily to maintain the tain level. external value of those coins. The gold (2) There is a cumbrous duplication of re- standard reserve at present amounts to £40,- serves, with an antiquated and dangerous di- 000,000. It is invested in British treasury vision of responsibility for the control of credit bills and other sterling securities. and currency policy. The automatic working of the exchange (3) The system does not secure the auto- standard is not adequately provided for in matic expansion and contraction of currency. India and never has been. Under the Indian Such movements are too wholly dependent on system, contraction is not and never has been the will of the currency authority. automatic. On occasions, the obligation to (4) The system is inelastic. The utility of buy sterling exchange has been discharged by the provision for elasticity made on the recom- the Government without any corresponding mendation of the Babington-Smith Committee expansion of domestic currency; the purchases is affected by the methods of financing Indian have in the first instance been made against trade. treasury balances and the currency expansion Alternative proposals for reform.—After ex- has been left to be effected subsequently at haustive inquiry the commission has found that the discretion of the Government. More the possible methods by which the defects in serious has been the absence of contraction on the present system might be remedied may occasions when the currency authority has be reduced to three. These are (1) the per- had to sell sterling exchange. fection of the sterling exchange standard, (2) Control of. currency and credit,—India is the adoption of a gold exchange standard, and perhaps the only country among the great (3) the adoption of a gold standard proper, trading countries of the world in which the with or without a gold currency. Government exercises direct control over cur- Sterling exchange standard.—Although it rency in general and over the note issues in would be possible to amalgamate the two particular. The banking and currency re- reserves and to provide elasticity, the system serves of the country are thus separated, which would still have grave defects. The silver diminishes their capacity to effect their specific currency would still be subject to the threat purpose of stabilization in the most economical implied in a rise in the price of silver. Were and efficient manner. In other countries this sterling once more to be divorced from gold, is effected by concentrating these reserves at the rupee, being linked to sterling, would suffer, a central bank. Moreover, Government con- a similar divorce.