TEXT FLY WITHIN THE BOOK ONLY Damage Book Tight Binding Book ro <OU_1 66025 >ES ^ CO THE MONETARY PROBLEMS OF INDIA MACMILLAN AND CO., LIMITED LONDON BOMBAY CALCUTTA MADRAS MELBOURNE THE MACMILLAN COMPANY NEW YORK BOSTON CHICAGO DALLAS ATLANTA SAN FRANCISCO THE MACMILLAN COMPANY OF CANADA, LIMITED TORONTO THE MONETARY PROBLEMS OF INDIA BY L. C. JAIN M.A., LL.B. Pii.DrWC^N. (LONDON) READER IN ECONOMICS IN THE UNIVERSITY OK THE PUNJAB ; SHCRKTARY OF THK UNITED PROVINCES BANKING INQUIRY COMMITTEE, 1929-30; LECTURER IN CURRENCY AND BANKING AT THE UNIVERSITY OF ALLAHABAD; AUTHOR OP- "INDIGENOUS BANKING IN INDIA*' MACMILLAN AND CO., LIMITED ST. MARTIN'S STREET, LONDON COPYRIGHT PRINTED IN GREAT BRITAIN TO THE MEMORY OF MY MOTHER PREFACE THE aim of this book is to deal with the monetary problems of India as they have arisen in recent years, particularly during 1926-32. While literature on the subject is in plenty, books on the recent phases of Indian currency and credit are not many. Happily, a mass of new material has been made available by the recent Banking Inquiry in every province in India. The very length of the material (20,000 pages in print), however, makes the task of its analysis rather difficult. Moreover, since the Banking Inquiry itself new changes in fact, crises have overtaken the money markets of the world, including India. Thus the subject of Indian monetary problems is today of unusual importance and difficulty. As in my work on Indigenous Banking in India, of the imperfections of my present venture I am fully sensible. My only justification for its presentation is that it is the first attempt to survey the monetary problems of the country in their recent phases made by one who has had unusual opportunities to study them from various angles during the last decade, and that it may form the basis of abler and more elaborate studies. For the opportunities to which I refer in the preceding paragraph I feel specially indebted to Sir Basil P. Blackett, Sir Purshotamdas Thakurdas, the Honourable Mr. E. A. H. Blunt and Mr. Manohar Lai. To Professor T. E. Gregory, ir Bhupendra Nath Mitra, Dr. (Mrs.) Vera Anstey, Dr. irilbert Slater, Mr. R. A. Gray and Mrs. A. Henderson I lust express my great obligation for reading the whole or >art of the manuscript and for many helpful suggestions. vii viii PREFACE My thanks are also due to the obliging Librarians of the Punjab University and Public Libraries, Lahore, the London School of Economics Library, the Library of the Office of the High Commissioner for India and of the British Museum Reading Room for the readiness with which they met all my demands, and to Messrs. Sumer Chand Jain and Shadi Lai Bhalla for their assistance in the construction of graphs. L. C. JAIN. UNIVERSITY OF THE PUNJAB, LAHORE, January, 1933. CONTENTS PAGE PREFACE -~vii CHAPTER I. INTRODUCTORY 1. The Constituents and Nature of the Indian Money Market ------ x 2. The Currency System before 1916 - - 2 - 3. The Currency System during 1916-25 10 4. Paper Currency, 1861-1925 16 II. THE CURRENCY COMMISSION OF 1925-26 AND AFTER 1. The Main Defects of the Currency System- - 22 2. Recommendations: (A) A Central Bank 24 (B) The Gold Bullion Standard 25 3. Attempts at Reform: (A) The Reserve Bank Bills, 1927 and 1928 - 30 - - - - (B) The Currency Act, 1927 33 4. The Currency Controversy of 1926-31 36 - - - 5. The Currency Crisis of 1931 39 III. THE MONEY MARKET (A), 1926-32 1. Indigenous Bankers ----- 55 2. Loan Offices, Nidhis and Chit Funds 68 - - - 3. Co-operative Credit Societies 71 4. State Loans -------85 IV. THE MONEY MARKET (B), 1926-32 1. Joint-stock Banks - - ----- 88 2. Exchange Banks -.-.-._. 104 - - - - 3. The Imperial Bank of India no V. THE MONEY MARKET (C), 1926-32 1. Post Offices 127 2. Government Loan Operations - 134 - 3. The Stock Exchange 143, x CONTENTS CHAPTER PAGE VI. THE BANKING INQUIRY, 1929-31 - 1. Origin, Constitution and Scope of the Inquiry 155 2. Nature of the Problems 159 3. Suggested Solutions 167 VII. THE FUTURE OUTLOOK 1. Monetary Reform - 187 2. Banking Reform - 191 - 3. International Co-operation 200 APPENDIX I. THE CURRENCY ACT OF 1927 - 203 APPENDIX II. THE GOLD AND STERLING SALES REGULA- TION ORDINANCE OF 1931 - 206 BIBLIOGRAPHY --------- 209 INDEX 215 DIAGRAMS I. WEEKLY PRICE OF 100 DOLLARS IN RUPEES, SEP- TEMBER 1931 TO DECEMBER 1932 48 II. DEPOSITS OF THE JOINT-STOCK BANKS (1913-25) - 93 III. DEPOSITS OF THE JOINT-STOCK BANKS (1926-30) - 97 IN IV . JOINT-STOCK BANKING GREAT BRITAIN AND IRELAND AND IN INDIA, 1929-30 125 CHAPTER I INTRODUCTORY i. THE CONSTITUENTS AND NATURE OF THE INDIAN MONEY MARKET. Meaning of 'Money Market.' A study of the monetary problems^. oJLJfadia is, as will appear in the following a ,the lack, India pages, study , of -x>t.aJtrufemonexjmaikgtin ' ' ^^^^^ffi^^^J^^^t^^fJLi^ Money Market in this inquiry is not to be confined, as is sometimes the case, to ' the organisation which provides credit of short duration, consisting of the banks which make advances for short periods, the discount houses which buy and sell bills of exchange, the accepting houses or merchant bankers which, with the banks, provide trade with first-class bills by putting their name to them for a small commission/ The term is used in its widest sense so as to embrace the whole financial machinery, including the Stock Exchange and the instruments of company promotion. Constituents of the Indian Money Market. The con- stituents of the Indian money market, then, if a money market it may be called, are not only the Imperial Bank of India, the Exchange Banks, the Indian joint-stock banks and the indigenous bankers, including all kinds of private moneylenders and bankers, but also the co- operative societies, the post offices, in so far as they act as credit receiving and remittance providing agencies, the central and local Governments with reference to all their currency and credit operations, and public bodies like muni- cipalities, corporations and trusts in regard to their loaiis 2 THE MONETARY PROBLEMS OF INDIA and investments, and the stock exchanges. Since currency is the basis and instrument of credit, in these pages the term ' ' Indian money market covers a wide field, and a critical survey is made of the currency as well as the complete credit organisation of India. Nature of the Indian Money Market. The money market of India, even if the term is used in the more usual and re- stricted sense of the organisation dealing in short-term credit, is by no means so highly organised as that of England or America. But in the wider though less common sense, the Indian money market, in so far as it exists, is a strange admixture of all kinds of credit institutions ancient and 1 2 modern; private, public and governmental; ordinary and extraordinary, in all stages of development. 2. THE CURRENCY SYSTEM BEFORE 1916. ' Having explained the term Money Market/ we may now proceed to an analytical examination of its recent develop- ment and characteristics in India. The currency, as apart from the credit, problems of India can well be studied in three convenient periods : (i) Before 1916, (2) 1916-25, and (3) since 1926. An elaborate discussion of the currency system before 1916 is not part of the purpose of this book, which deals with the critical period 1926 to 1932, but it will assist the process of clarification briefly to review the first and second periods as precursors of the third. Beginning of the Silver Standard in India in 1818. Taking the first period, just as the Act of 1816 gave the legislative 3 foundation to the Gold Standard in England, the Act of 1818 marked the beginning of the Silver Standard in India. At that time India was suffering not only from a political but also from a currency chaos; there were many coins of 1 There is no Central Bank, but the Imperial Bank of India is the nearest approach to it. * The Government of India plays an unusually large part in the Indian money market. See below, pp. 134 et seq. 3 The Return to Gold, by T. E. Gregory, 1925, p. 24. INTRODUCTORY 3 both silver and gold of different denominations in circula- tion side by side and the money-changers carried on a profitable trade to the loss of the general public and the harm of trade. 1 The East India Company by the Act of 1818 made the silver rupee of 180 grains u/i2ths fine un- limited legal tender for South India, where previously gold coins had circulated. The reform begun in 1818 was com- 2 pleted in 1835, when by the Gold and Silver Coinage Act the silver rupee was made unlimited legal tender and the gold coins were deprived of their legal tender character in the whole of British India. Bimetallism thus gave place 3 to monometallism and silver was preferred to gold a system which India enjoyed almost without interruption until 1893. Framework of the Silver Standard. Like the gold standard in England, the silver standard in India was, to begin with, a purely metallic standard, inasmuch as the standard currency i.e., the rupee was made of silver (165 troy grains pure). Unlike England, Indian coins of even smaller denominations viz., the half-rupee, quarter-rupee, and one-eighth of a rupee were also of the same metal as the standard coin, and they contained exactly one-half, one-fourth, and one- eighth of the weight of pure silver in a rupee.