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Answer: C
Diff: 2

2
Copyright © 2013 Pearson Education, Inc.
6) Economists have suggested that the relatively higher unemployment in Europe has been
caused by which of the following?
A) relatively high unemployment benefits
B) relatively high level of worker protection
C) inadequate macroeconomic policies
D) increased labor costs
E) all of the above
Answer: E
Diff: 2

7) Which of the following countries had the lowest level of output per capita in 2010?
A) Spain
B) France
C) Italy
D) German
Answer: A
Diff: 2

8) At what point could the Euro be used as currency?

A) January 1, 1998
B) January 1, 1999
C) January 1, 2000
D) January 1, 2002
Answer: D
Diff: 2

9) In 2010, output per capita in China was approximately equal to

A) $2,100.
B) $4,300.
C) $22,100.
D) $32,100.
Answer: B
Diff: 2

10) Inflation represents

A) an increase in output.
B) an increase in the aggregate price level.
C) an increase in the unemployment rate.
D) a recession.
Answer: B
Diff: 1

3
Copyright © 2013 Pearson Education, Inc.
11) Between 2000 and 2010, the annual rate of output growth in China was approximately equal
to
A) 2%.
B) 5%.
C) 10%.
D) 20%.
Answer: C
Diff: 2

12) Which of the following explains the relatively high growth rate of output in China since
1980?
A) accumulation of capital
B) technological progress
C) a transition from central planning to a market economy
D) all of the above
Answer: C
Diff: 2

13) How many countries are in the European Union?

A) 27
B) 6
C) 21
D) 17
Answer: A
Diff: 2

14) How many countries are in the Euro area?

A) 17
B) 27
C) 21
D) 11
Answer: A
Diff: 2

15) Most economists believe that the source of European high unemployment in the past two
decades is
A) labor market institutions.
B) tight monetary policy.
C) tight fiscal policy.
D) financial crisis.
Answer: A
Diff: 2

4
Copyright © 2013 Pearson Education, Inc.
1.2 Essay Questions

1) Briefly explain the disagreement among economists about how and when to reduce U.S.
budget deficit.
Answer: Some economists argue that deficit reduction should start now and proceed rapidly.
Other economists argue that too fast a reduction in deficit would be dangerous. The disagreement
on how deficit reduction should be achieved is along political lines. Republicans believe that it
should be done primarily through decreases in spending. Democrats are more inclined to do the
adjustment through an increase in taxes.

2) Briefly explain why the decline in housing prices led to a major financial crisis.
Answer: Many of the mortgage loans that had been given out during earlier expansion were of
poor quality. Many of the borrowers had taken too large a loan and were increasingly unable to
make mortgage payments. mortgage backed securities were so complex that their value was
nearly impossible to assess. Not knowing the quality of the assets that other banks had on their
balance sheet, banks became very reluctant to lend to each other for fear that the bank to which
they lent might not be able to repay. The credit market froze up. Unable to borrow, and with
assets if uncertain value, many banks found them in trouble. The bankruptcy of Lehman Brothers
put other banks at risk of going bankrupt as well. The whole financial system was in trouble.

3) Explain how the financial crisis turned into a major economic crisis.
Answer: Hit by the decrease in housing prices and the collapse in stock prices, and worried that
this might be the beginning of another Great Depression, people sharply cut back consumption.
Worried about sales and uncertain about the future, firms sharply cut back investment..
Decreases in consumption and investment led to decrease in demand, which in turn, led to
decrease in output.

4) Discuss the types of policies that could be implemented to reduce European unemployment.
Answer: There are basically two sets of policies. First, policy makers could reduce labor market
rigidities that some economists believe have contributed to the high unemployment. Some
examples of labor market rigidities are high unemployment benefits, high minimum wages, and
excessive job protection regulations. The second set of policies includes bad labor relations and
inadequate macroeconomic policies.

5) Discuss what is meant by labor market rigidities and explain how they might cause the
relatively high unemployment in Europe.
Answer: Examples of labor market rigidities are: relatively high minimum wage, relatively high
unemployment benefits, and relatively high level of worker protection. All three of these are
hypothesized to cause a reduction in employment and, therefore, an increase in the
unemployment rate.

5
Copyright © 2013 Pearson Education, Inc.
6) Discuss some of the potential benefits and costs of the adoption of the Euro.
Answer: One of the benefits of the Euro is largely symbolic. Countries that have in the past
century been in wars against each other are now using the same currency. There are economic
benefits as well. The use of the same currency will eliminate the need to convert currencies
when, for example, buying foreign goods from a country that has also adopted the Euro. One of
the possible costs of the Euro is that it will force countries to pursue the same monetary policy.
No longer will policy makers in these countries pursue independent monetary policy.

7) What are the two primary sources of economic growth in China since 1980?
Answer: The relatively high output growth in China has occurred as a result of capital
accumulation and technological progress.

8) In addition to capital accumulation and technological progress, what are some of the other
possible explanations for recent output growth in China?
Answer: There are several additional potential causes of economic growth in China. These are:
(1) the transition from central planning to a market economy; (2) the encouragement of joint
ventures with foreign firms; and (3) protection of property rights.

9) Explain why the U.S. crisis became a world crisis.

Answer: Other countries were affected through two channels. The first channel was trade. As
U.S. consumers and firms cut spending, part of the de crease fell on imports f foreign goods. The
second channel was financial. U.S. banks, badly needing funds in the United States, repatriated
from other countries, creating problems for banks in those countries. The result was not just a
U.S., but a world recession.

10) What problems remain in advanced countries after the crisis?

Answer: Both in the United States and the Euro area, unemployment remains very high. What is
behind this persistently high unemployment is low output growth, and behind this low growth
are many factors like declining housing prices and low housing investment. Banks are still not in
good shape, and bank lending is still tight. Consumers are cutting consumption. And the crisis
has led to a large increase in budget deficits, which have in turn led to a large increase in public
debt over time. Countries must now reduce their deficits, and this is proving difficult. In some
European countries, governments may not be able to adjust and may default on their debt.

6
Copyright © 2013 Pearson Education, Inc.
Random documents with unrelated
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depreciated in terms of gold. In other words, if the excess has not produced a fall in the value of a
currency in terms of a particular commodity such as gold, then there has been no excess at all in terms
of commodities in general. Now there was a time, particularly during the discussion on the Bullion
Report, when the conception of a change in the value of the currency in relation to things in general
was not quite clear even to the most informed minds,370 and was even pronounced invalid by high
authorities.371 In view of the absence of the system of index numbers, this simple [pg 242] faith in the
summary method of ascertaining depreciation by some one typical article, gold for instance, as a
measure of value, was excusable. But the same view is without any foundation to-day. No one now
requires to be shown that the price of each commodity has varied to the same extent and in the same
direction as prices of commodities in general before admitting that there has been a change in the value
of a currency. Why assume a single commodity like gold as a measure of depreciation? It would be
allowable, although it is short-sighted to do so, if the depreciation of gold was an accurate measure of
the depreciation of a currency in terms of all other commodities. But such is not the case. Commenting
upon the experience of the United States with the greenbacks during the Civil War, Prof. W. C. Mitchell
observes372:—

“The fluctuations in the price of gold which attracted so much attention were much
more moderate than the extreme fluctuations in the prices of commodities. The
gold quotations lay all the time well within the outer limits of the field covered by
the variations of commodity prices. … During the war gold moved up or down in
price more quickly than the mass of commodities. … When gold was rising in price
the majority of the commodities followed, but more slowly. … When gold was
falling in price the majority of commodities stood still or followed more slowly. …
This more sluggish movement of commodity prices appears still more clearly after
the war. Rapid as was the fall of prices it was not so rapid as the falling gold. A
more curious fact is that the price-level for commodities continued for ten years to
be higher than the price-level for gold.”

This shows that the test sought to be applied by the adherents of the exchange standard is a false one
and gives an inaccurate reading of the value of a currency. There can be no doubt that people who have
urged its application to that standard would not have pressed for it so much as they have done if they
had taken proper care to distinguish between specific depreciation of a currency and its general [pg
243] depreciation.373 The experience of the Bank of England during the suspension period is a capital
instance of the phenomenon where a currency is generally depreciated, although it showed no sign of
specific depreciation:—
 TABLE L

Depreciation of the Notes of the Bank of England374

Percentage Values of Bank Notes in Terms of

(1) Gold. (2) Commodities.

1797 100·0 110

1798 100·0 118

1799 — 130

1800 107·0 141

1801 109·0 153

1802 — 119

1803 — 128

1804 103·0 122

1805 103·0 136

1806 — 133
 Percentage Values of Bank Notes in Terms of

(1) Gold. (2) Commodities.

1807 — 132

1808 — 149

1809 — 161

1810 — 164

1811 123·9 147

1812 130·2 148

1813 136·4 149

1814 124·4 153

1815 118·7 132

1816 102·9 109

1817 102·2 120

1818 104·6 135

[pg 244] Which kind of depreciation is the greater evil we will

discuss in the next chapter. Dealing for the present with this
experience of the Bank of England, we have the fact that there can
be a general depreciation without a specific depreciation. In view of
this, the upholders of the exchange standard have no reason to be
proud of the fact that the rupee has not shown signs of specific
depreciation over periods of long duration. That a bank note
absolutely inconvertible and unregulated as to issue should have
maintained its par for very nearly thirteen years may speak far more
in favour of the suspension system than the experience of the rupee
can in favour of the exchange standard. There is a greater wonder in
the former than there is in the latter, for the value of the rupee is
sustained, apart from the fact that gold in terms of which it was
measured was itself undergoing a depreciation, as is evident from
the foregoing figures of general prices in England, and by a hope in
some kind of convertibility, however slight or however remote but
which had no place in the case of the Bank of England notes. Yet no
one is known to have admired or justified the currency system of the
suspension period, although it had not given rise to a specific
depreciation for a long time.
This mode of measuring depreciation in terms of gold would be,
relatively speaking, a harmless idea if it was not made the basis of
another assumption on which the exchange standard is made to
rest, that the general and specific depreciations of a currency are
unrelated phenomena. As against this it is necessary to urge that the
chief lesson to be drawn from this experience of the Bank of England
for the benefit of the upholders of the exchange standard consists in
demonstrating that although their movements are [pg 245] not
perfectly harmonious, yet they are essentially interrelated. That
lesson may be summed up in the statement that when the general
depreciation of currency has taken place the occurrence of a specific
depreciation, other things being equal, is only a matter of time, if
the general depreciation proceeds beyond a certain limit. What will
be the interval before specific depreciation will supervene upon
general depreciation depends upon a variety of circumstances. Like
the surface of a rising lake, general depreciation touches different
commodities at different times according as they are located in the
general scheme of things as determined by the relative strength of
demand for them. If there is no demand for gold for currency
purposes or for industrial purposes, the depreciation of the currency
in terms of gold may be delayed. It is only to make foreign
remittances that the demand for gold first makes itself felt, and it is
there that specific depreciation primarily arises. But there again it
need not, for everything depends upon whether other commodities
equally good, which the foreigner would take as readily as gold, are
forthcoming or not. Now, in the case of India all these three factors
tending to postpone specific depreciation are more or less operative.
The rupee is a full legal-tender currency and can effectively
discharge debts without compelling resort to gold. The industrial
demand for gold in a poor country like India cannot be very great.375
Consequently, the [pg 246] generally depreciated rupee does not
show immediate signs of depreciation in the internal trade of the
country. As for foreign payments, the position of India is equally
strong, not because, as is absurdly supposed, she has a favourable
balance of trade, but because she has certain essential commodities
which a foreigner is obliged to accept377 in place of gold. Specific
depreciation of the rupee will occur chiefly when the general
depreciation has overtaken the commodities that enter into India's
foreign trade. That the depreciation should extend to them is
inevitable, for, as is well said,

“in a modern community the prices of different goods

constitute a completely organized system, in which the
various parts are continually being adjusted to each
other by intricate business process. Any marked
change in the price of important goods disturbs the
equilibrium of this system, and business processes at
once set going a series of readjustments in the prices
of other goods to restore it.”378

It is true that in the case of India the interconnection between

production for internal trade and production for external trade is not
so closely knit as in the case of other countries. The only difference
that this can make in the situation is to moderate the pace of
general depreciation [pg 247] so that it does not affect foreign trade
commodities too soon. But it cannot prevent its effect from
ultimately raising their price. And once their price is risen the
foreigner will not accept them, however essential. A demand for gold
must arise, resulting in the specific depreciation of the currency.
This statement of the case agrees closely with the experience of
the Bank of England and that of India as well. In the case of the
Bank of England the “great evil,” i.e. the specific depreciation of the
bank notes, of which Horner complained so much, made its
appearance in 1809, some thirteen years after the suspension was
declared. Similarly, we find in the case of India specific depreciation
tends to appear at different intervals, thereby completely
demonstrating that, even for the purpose of avoiding specific
depreciation, it is necessary to pay attention to the general
depreciation of a currency.
Having regard to these facts, supported as they are by theory
as well as history, the incident that the rupee has maintained its gold
value over periods of some duration need not frighten anyone into
an admission that the exchange standard is therefore a stable
standard. Indeed, a recognition of that fact cannot in the least
discredit what has been said above. For our position is that in the
long run general depreciation of a currency will bring about its
specific depreciation in terms of gold. That being our position, even
if we are confronted with the absence of specific depreciation of the
rupee, we are not driven to retract from the opinion that the best
currency system is one which provides a brake on the general
depreciation of the unit of account. The exchange standard provides
no such controlling influence; indeed, its gold reserve, the
instrument which controls the depreciation, is the direct cause of
such depreciation. The absence of specific depreciation for the time
being is not more than a noteworthy and an interesting incident. To
read into it an evidence of the security of the exchange standard is
to expose oneself, sooner or later, to the consequences that befall all
those who choose to live in a fool's paradise. [pg 248]
 CHAPTER VII

A RETURN TO THE GOLD STANDARD

We have examined the exchange standard in the light of the claim made on behalf of it, that it is
capable of maintaining the gold parity of the rupee. This was the criterion laid down by the Chamberlain
Commission as a fitting one by which to judge the merits or demerits of that standard. But is the
adequacy of that criterion beyond dispute? In other words, supposing the rupee has maintained its gold
parity, which it has only as often as not, does it follow that all the purposes of a good monetary system
are therefore subserved?
In the exchange standard, “as the system is now operated, the coinage is manipulated to keep it at
par with gold”379 as though money is only important for the amount of gold it will procure. But what
really concerns those who use money is not how much gold that money is worth, but how much of
things in general (of which gold is an infinitesimal part) that money is worth. Everywhere, therefore, the
attempt is to keep money stable in terms of commodities in general, and that is but proper, for what
ministers to the welfare of people is not so much the precious metals as commodities and services of
more direct utility. Stability of a currency in terms of gold is of importance only to the dealers in gold,
but its stability in terms of commodities in general affects all, including the bullion-dealers. Even Prof.
Keynes, in his testimony before the Indian Currency Committee of 1919, observed380:— [pg 249]

“I should aim always … at keeping Indian prices stable in relation to commodities

rather than in relation to any particular metallic or particular foreign currency. That
seems to me of far greater importance to India.”

It is, of course, a little difficult to understand how the remedy of high exchange which he supported was
calculated to achieve that object. Raising the exchange was a futile project, in so far as it was not in
keeping with the purchasing power of the rupee. As an influence governing prices it could hardly be
said to possess the virtue he attributed to it. The existing price-level it could affect in no way; nor could
a high exchange prevent a future rise of prices. It could only change the base from which to measure
prices. Future prices could vary as easily from the new high base-line as prices did in the past from the
old base-line. In other words, Mr. Keynes seems to have overlooked the fact that exchange was only an
index of the price-level, and to control it, it was necessary to control the price-level and not merely give
it another name which it cannot bear and will not endure, as was proved in 1920 when the rupee was
given in law the value of 2s. (gold) when in practice it could not fetch even 1s. 4d. sterling, with the
result that the rupee exchange sank to the level determined by its purchasing power. But, apart from
this question, we have the admission of the ablest supporter of the exchange standard that the real
merit of a currency system lies in maintaining the standard of value stable in terms of commodities in
general.
Given that this is the proper criterion by which to judge a currency system, we must ask what has
been the course of prices in India since the Mint closure in 1893? This is a fundamental question, and
yet not one among the many who have praised the virtues of the exchange standard has paid any
attention to it. In vain may one search the pages of Prof. Keynes, Prof. Kemmerer, or Mr. Shirras for
what they have to say of the exchange standard from this point of view. The Chamberlain Commission
or the Smith Committee on Indian currency never troubled about [pg 250] the problem of prices in
India,381 and yet without being satisfied on that score it is really difficult to understand how anyone can
give an opinion of any value as to the soundness or otherwise of that standard.
In proceeding to consider the exchange standard from the standpoint of prices, it is as well to
premise that one of the important reasons why the Indian Mints were closed to the free coinage of
silver was that the rupee was a depreciating currency resulting in high prices.382 The closing of the
Mints, therefore, should have been followed by a fall of prices in India; for, to adopt the phraseology of
Prof. Fisher,383 the pipe-connection between the money reservoir and the silver-bullion reservoir was
owing to the Mint closure cut off or stopped, thereby preventing the passage of silver from the bullion
reservoir to the money reservoir. In other words, the newly-mined silver could not become money after
the Mint closure and lower the purchasing power of the rupees in circulation. If this is so, then how very
disappointing has been the effect of the Mint closure! From the standpoint of prices the rupee has
become a problem as it had never been before. The rise of prices in India since the Mint closure (see
Chart VI) has been quite unprecedented in the history of the country. Indeed, the rise of prices in India
before the Mint closure, when the pipe-connection between the silver-bullion reservoir and the rupee-
currency reservoir was intact, must be regarded as very trifling compared with the rise of prices after
the Mint closure when the pipe-connection was cut off. From the standpoint of prices the Mint closure
has therefore turned out to be a curse rather than a blessing, and literally so, for, under an ever-rising
price-level, life in India is rendered quite unbearable. No people have undergone so much misery owing
to high prices as the Indian people have done. During the war period the price-level reached such a
giddy height that the reports of suicide by men and women [pg 251] who were unable to buy food and
clothing were in no way few and far between. It may, however, be argued that the rise of prices in India
would have been greater if the Mints had not been closed and India had remained a purely silver-
standard country. A good deal, no doubt, can be said in favour of this view. It is absolutely true that
silver, being universally discarded, has become unfit for functioning as a standard of value. To that
extent an exchange standard is better than a pure-silver standard. But is it as good as a gold standard?
 CHART VI: Comparative Price Levels, Indian and Foreign, 1893–1922

On the basis of the doctrine of purchasing power parities as an explanation of actual exchange
rates, one may be led to answer the question in the affirmative. For it may be argued that if the gold
value of the rupee was maintained it is because gold prices and rupee prices were equal.384 This, it may
be said, is all that the exchange standard aims at doing and can be claimed to have done, for the fact
that the gold-standard reserve was seldom depleted is a proof that the general prices inside India were
on the same level as those ruling outside India. On à priori considerations such as these, the exchange
standard may be deemed to be as good as a gold standard.
One may ask as to why Indian prices should have been kept as high, if they were no higher than
gold prices, and whether it would not have been better to have kept Indian prices on a lower level. But
we shall not raise that question. We shall be satisfied if Indian prices were only as high as gold prices.
Now did Indian prices rise only as much as gold prices? A glance at the chart reveals the surprising
phenomenon that prices in India not only rose as much as gold prices, but rose more than gold prices.
Of course in comparing Indian prices with gold prices to test the efficacy of the exchange standard we
must necessarily eliminate the war period, for the reason that gold had been abandoned as a standard
of value by most of the countries. And, even [pg 252] if we do take that period into account, it does not
materially affect the conclusion, for although India was not a belligerent country, yet prices in India
were not very much lower than prices in countries with most inflated currencies during the war, and,
barring a short period, were certainly higher than gold prices in U.S.A.
It is obvious that the facts do not agree with the à priori assumption made in favour of the
exchange standard. So noticeable must be said to be the local rise in Indian prices above the general
price level in England that even Prof. Keynes, not given to exaggerate the faults of the exchange
standard, was, as a result of his own independent investigation, convinced that385

“a comparison with Sauerbeck's index number for the United Kingdom shows that
the change in India is much greater than can be accounted for by changes
occurring elsewhere.”

What is then the explanation of this discrepancy between the à priori assumption and the facts of the
case. The explanation is that the actual exchange rates correspond to the purchasing power parities of
two currencies not with regard to all commodities but with regard to some only. In this connection it is
better to re-state the doctrine of the relation of the purchasing power parities to exchange rates with
the necessary qualification. A rigorously strict formulation of the doctrine should require us to state that
Englishmen and others value Indian rupees inasmuch as and in so far as those rupees will buy such
Indian goods as Englishmen want; while Indians value English pounds inasmuch as and in so far as
those pounds will buy such English goods as the Indians want. So stated it follows that the actual
exchange rates are related to purchasing power parities of the two currencies with regard to such
commodities only as are internationally traded. To assume that the actual exchange rate is an exact
index of the purchasing power parity of the two currencies with regard to all the commodities is to
suppose that the variations in [pg 253] the purchasing power of a currency over commodities which are
traded and which are not traded are the same.386 There is certainly a tendency for movements in the
prices of these two classes of goods to influence one another in the long run; so that it becomes
possible to say that the exchange value of a currency will be determined by its internal purchasing
power. The doctrine of purchasing power parity as an explanation of exchange rates is valuable as an
instrument of practical utility for controlling the foreign exchanges and it is as such that the doctrine
was employed in an earlier portion of this study to account for the fall in the gold value of the rupee.
But to proceed, on the basis of this relationship between the purchasing power of a currency and its
exchange value, to argue that at any given time the exchange is more or less an exact measure of
general purchasing power of the two currencies, is to assume what cannot always be true, namely, that
the prices of traded and non-traded goods move in sympathy. This assumption is too large and can only
be said to be more or less true according to circumstances. Now as Prof. Kemmerer387 points out:

“While India's exports and imports in the absolute are large, still, in the main, the
people of India live on their own products, and a large part of those products run
their life history from production to consumption in a very small territory. They
have only the remotest connection with foreign trade, gold, and the gold
exchanges. In time, of course, any substantial disturbance in the equilibrium of
values in the country's import and export trade will make itself felt in these local
prices, but, allowing for exceptions [pg 254] it may be said that in a country like
India the influences of such disturbances travel very slowly and lose much of their
momentum in travelling.”

In consequence of the thinness of connection between the two it is obvious that the prices of such
Indian goods as do enter into international trade cannot always be said to move in more or less the
same proportion as those which do not. Besides this thinness of connection which permits of deviations
of the general purchasing power of a currency from the level indicated by the actual exchange rate, it is
to be noted that the prices of Indian commodities which largely enter into international trade are not
governed by local influences. Such exports of India as wheat, hides, rice and oil seeds are international
commodities, not solely amenable to influences originating from changes that may be taking place in
the prices of home commodities and services. The combined effect of these two circumstances, except
in abnormal events such as the war, is to militate against the prices of traded and non-traded goods
moving in quick sympathy.388
If this is true, then, although the maintenance of the exchange standard does imply a purchasing
power parity of the rupee with gold, it is not a purchasing power parity of the two currencies with
respect to all the commodities. All that it implies is that the purchasing power of the rupee over such
commodities as entered into international trade was on a par with gold, so that there did not often arise
the necessity of exhausting the gold reserve. The preservation of the gold reserve only meant that there
was equality of prices so far as internationally traded goods were concerned. Thus interpreted, the fact
that the rupee maintained its gold value does not preclude the possibility of Indian prices being, on the
whole, higher than gold prices, thereby vitiating the à priori view that the exchange standard is as good
as the gold standard. [pg 255]
It should be pointed out389 that all changes of prices affect more or less the welfare of the
individual. However, the general flexibility of the modern economic organization, with its mobility of
capital and labour, free competition, power of choice, inventive genius and intellectual resources of
entrepreneurs and merchants, takes care of the normal and temporary fluctuations of prices. But when
a change in the price-level is general and persistent in one direction the case is otherwise.
Arrangements based on the expectation that the price movement is only temporary, and that there will
be a return to the former normal position, constantly come to naught. Suffering endured in holding on
for the turn in the movement cannot be offset by gains in another. In short, such a persistent price
movement in one direction is bound to confound ordinary business sagacity and so vitiate all
calculations for the future as to result in unlimited dislocation or loss and subject the individual to such
powerful and at the same time incalculable influences that his economic welfare cannot but escape
entirely from his control, and prudence, forethought, and energy become of no avail in the struggle for
existence. Perfect stability of value in a monetary standard is as yet only an ideal. But the evil
consequences of instability are so great that Prof. Marshall, believing as he did that the general
prejudice against tampering with the monetary foundations of economic life was a healthy prejudice,
yet observed that much may be done towards safeguarding the economic welfare of communities by
lessening its variability.390 A depreciating standard of value, as gold has been since 1896, is an evil. But
can a standard of value, undergoing a continuous depreciation as has been the case with the exchange
standard, and that too of a greater depth than the gold standard—in other words, causing a greater rise
of prices—be regarded as a good standard of value? [pg 256]
In the light of this it is strange that Prof. Keynes, in his treatise on Indian Currency and Finance,
should have maintained that the exchange standard contained an essential element in the ideal
standard of the future391—a view subsequently endorsed by the Chamberlain Commission. If stability of
purchasing power in terms of commodities in general is the criterion for judging a system of currency,
then few students of economies will be found to agree with Prof. Keynes. Perhaps it is not too sanguine
to say that even the Prof. Keynes of 1920 will prefer a gold standard to a gold-exchange standard, for
under the former prices have varied much less than has been the case under the latter.
In this connection attention may be drawn to the prevalent misconception that India is a gold-
standard country. It will be admitted that the best practical test whether any two countries have the
same standard of value is to be found in the character of the movements in their price-levels. So sure is
the test that Prof. Mitchell, after a very careful and wide survey of the price-level of different countries
and the American price-level during the greenback period, was led to observe392 that

“when two countries have a similar monetary system and important business
relations with each other, the movements of their price-levels as represented by
index-numbers are found to agree rather closely. This agreement is so strong that
similarity of movement is usually found even when comparisons are made with
materials so crude as index-numbers compiled from unlike lists of commodities and
computed on the basis of actual prices in different years.”

Now, we know that before the war England was a gold-standard country, and we also know that there
was no close correspondence between the contemporary movements of the price-levels of India and
England. In view of this, it is only a delusion to maintain that India has been a gold-standard country.
On the other hand, it is better to [pg 257] recognize that India has yet to become a gold-standard
country unless we are to fall into the same error that Prof. Fischer393 must be said to have committed in
attributing the extraordinary rise of prices in India to the existence of a gold standard, when, as a
matter of fact, it should have been attributed to the want of a gold standard.
How can she become a gold-standard country? The obvious answer is, by introducing a gold
currency. Prof. Keynes scoffs at the view that there cannot be a gold standard without a gold currency
as pure nonsense.394 He seems to hold that a currency and a standard of value are two different things.
Surely there he is wrong. Because a society needs a medium of exchange, a standard of value, and a
store of value to sustain its economic life, it is positively erroneous to argue that these three functions
can be performed by different instrumentalities. On the other hand, as Professor Davenport insists,395

“all the different uses of money are merely different aspects or emphasis of the
intermediate function. Deferred payments … are merely deferred payments of the
intermediate. So again of the standard aspect; whatever is the general
intermediate is by that fact the standard. The functions are not two, but one. …
Clearly, also, the intermediate may be a storehouse of purchasing power. The
second half of the barter may be deferred. The intermediate is generalized
purchasing power. Delay is one of the privileges which especially the intermediate
function carries with it.”

Thus the rupee by reason of being the currency is also the standard of value. If we wish to make gold
the standard of value in India we must introduce it into the currency of India. But it may be asked what
difference could it make to the price level in India if gold were made a part of the Indian currency? To
answer this question it is necessary to lay bare the nature of the rupee currency. Now it will be [pg 258]
granted that a standard of value which is capable of expansion as well as contraction is likely to be
more stable than one which is incapable of such a manipulation. The rupee currency is capable of easy
expansion, but is not capable of easy contraction by reason of the fact that it is neither exportable nor
meltable, nor is it convertible at will. The effects of such a currency as compared with those of an
exportable currency were well brought out by the late Hon. Mr. Gokhale in a speech in which he
observed:396

“Now, what is the difference if you have an automatic self-adjusting currency, such
as we may have with gold or we had with silver before the year 1893, and the kind
of artificial currency that we have at present? Situated as India is you will always
require, to meet the demands of trade, the coinage of a certain number of gold or
silver pieces, as the case may be, during the export season, that is for six months
in the year. When the export season is brisk money has to be sent into the interior
to purchase commodities. That is a factor common to both situations, whether you
have an artificial currency, as now, or a silver currency, as before 1893. But the
difference is this. During the remaining six months of the slack season there is
undoubtedly experienced a redundancy of currency, and under a self-adjusting
automatic system there are three outlets for this redundancy to work itself off. The
coins that are superfluous may either come back to the banks and to the coffers of
Government, or they may be exported, or they may be melted by people for
purposes of consumption for other wants. But where you have no self-adjusting
 and automatic currency, where the coin is an artificial token currency, such as our
rupee is at the present moment, two out of three of these outlets are stopped. You
cannot export the rupee without heavy loss, you cannot melt the rupee without
heavy loss, and consequently the extra coins must return to the banks and coffers
of the Government or they must be absorbed by the people. In the latter case the
situation is like that of a soil which is water-logged, which has no efficient
drainage, and the moisture from which cannot be removed. In this country the
facilities for banking are very inadequate, and therefore our money does not swiftly
return back to the banks or [pg 259] Government Treasuries. Consequently, the
extra money that is sent into the interior often gathers here and there like pools of
water turning the whole soil into a marsh. I believe the fact cannot be gainsaid
that the stopping of two outlets out of the three tends to raise prices by making
the volume of currency redundant.”

Had gold formed a part of the Indian currency it would have not only met the needs for expansion but
would have permitted contraction of currency in a degree unknown to the rupee. Gold would be
superior to the rupee as a standard of value for the reason that the former is expansible as well as
contractible, while the latter is only expansible but not contractible. This is merely to state in different
language what has already been said previously, that the Indian monetary standard, instead of being a
gold or a gold-exchange standard, is in all essentials an inconvertible rupee standard like the paper
pound of the Bank Suspension period, and the extra local rise of prices which, in itself an
incontrovertible proof of the identity of the two systems, is characteristic of both, is, to use the
language of the Bullion Report,397

“the effect of an excessive quantity of a circulating medium in a country which has

adopted a currency not exportable to other countries, or not convertible at will into
a coin which is exportable.”

Therefore, if some mitigation of the rise in the Indian price-level is desirable, then the most essential
thing to do is to permit some form of “exportable” currency such as gold to be a counterpart of the
Indian monetary system.
The Chamberlain Commission expended much ingenuity in making out a case against a gold
currency in India.398 The arguments it urged were: (1) Indian people will hoard gold and will not make
it available in a crisis; (2) that India is too poor a country to maintain such an expensive money material
as gold; (3) that the transactions of the Indian people are too small to permit of a gold circulation; and
(4) [pg 260] paper convertible into rupees is the best form of currency for the people of India as being
the most economical, and that the introduction of a gold currency will militate against the popularity of
notes as well as of rupees. The bogy of hoarding is an old one, and would really be an argument of
some force if hoarding was something which knew no law. But the case is quite otherwise. Money,
being the most saleable commodity and the least likely, in a well-ordered monetary system, to
deteriorate in value during short periods, is hoarded continually by all people, i.e. treated as a store of
value. But in treating it as a store of value the possessor of money is comparing the utilities he can get
for the money, by disposing of it now, with those he believes he can get for it in the future, and if the
highest present utility is not so great as the highest future utility, discounted for risk and time, he will
hoard the money. On the other hand, he will not hoard the money if the present use was greater than
the future use. That being so, it is difficult to understand why hoarding should be an objection to a gold
currency for the Indian people. If they hoard gold that means they do not care to spend it on current
purchases or that they have another form of currency which is inferior to gold and which they naturally
like to part with first. On the other hand, if they do wish to make current purchases and have no other
form of currency they cannot hoard gold. There are instances when precious metals have been exported
from India, when occasion had called for it,399 showing that the hoarding habit of the Indian peoples is
not such an unknown quantity as is often supposed, and if on some occasions400 they hoarded an
exportable currency when they should have released it, it is not the fault of the people but of the
currency system in which the component parts of the total stock of money are not equally good as a
store of value. The argument from [pg 261] hoarding, if it is an argument, can be used against any
people, and not particularly against the Indian people.
The second argument against a gold currency in India has no greater force than the first. If gold
were to disappear from circulation then the cause can be nothing else but the over-issue of another
kind of money. In the nineties, when the question of establishing a gold standard in India was being
considered, some people used to point to the vain efforts made by Italy and the Austrian Empire to
promote the circulation of gold. That their gold used to disappear is a fact, but it was not due to their
poverty. It was due to their paper issues. Any country can maintain a gold currency provided it docs not
issue a cheaper substitute.
Again, if gold will not circulate because transactions are too small the proper conclusion is not that
there should be no gold circulation but that the unit of currency should be small enough to meet the
situation. The difficulties of circulation raises a problem of coinage. But the considerations in respect of
coinage cannot be allowed to rule the question as to what should be the standard of value. If the
sovereign does not circulate it cannot follow that India should not have a gold currency. It merely
means that the sovereign is too large for circulation. The case, if at all there is one, is against the
sovereign as a unit and not against the principle of a gold currency. If the sovereign is not small enough
the conclusion is we must find some other coin to make the circulation of gold effective.
The fourth argument against a gold currency is one of fact, and can be neither proved nor
disproved except by an appeal to evidence whether or not gold currency has the tendency ascribed to
it. But we may ask, is there no danger in a system of currency composed of paper convertible into
rupees? Will the paper have no effect on the value of the rupee? The Commission, if it at all considered
that question, which is very doubtful, was perhaps persuaded by the view commonly held, that as the
paper currency was convertible it could not affect the value or the purchasing power of the rupee. In
holding this view it was wrong; for, the convertibility of paper currency to the extent it is uncovered [pg
262] does not prevent it from lowering the value of the unit of account into which it is convertible,
because by competition it reduces the demand for the unit of account and thus brings about a fall in its
value. Thus the paper, although economical as a currency, is a danger to the value of the rupee. This
danger would have been of a limited character if the rupee had been freely convertible into gold. But
the danger of a convertible paper currency to the value of a unit of account becomes as great as that of
an inconvertible paper currency if that unit is not protected against being driven below the metal of
ultimate redemption by free convertibility into that metal.401 The rupee is not protected by such
convertibility, and as the Commission did not want that it should be so protected it should have realized
that it was as seriously jeopardizing the prospects of the rupee being maintained at par with
commodities in general, and therefore with gold, by urging the extension of a paper currency, be it ever
so perfectly convertible, as it could have done by making the paper altogether inconvertible. But so
obsessed was the Commission with considerations of economy, and so reckless was it with
considerations of stability of value, that it actually proposed a change in the basis of the Indian paper
currency from a fixed-issue system to that of a fixed-proportion system.402 That, at the dictates of
considerations of economy, the Commission should have neglected to take account of this aspect of the
question, is only one more evidence of the very perfunctory manner in which it has treated the whole
question of stability of purchasing power so far as the Indian currency was concerned.
If there is any force in what has been urged above, then surely a gold currency is not a mere
matter of “sentiment” and a “costly luxury,” but a necessity dictated by the supreme interest of
steadying the Indian standard of value, and thereby to some extent, however slight, safeguarding [pg
263] the welfare of the Indian people from the untoward consequences of a rising price-level.
We now see how very wrong the Chamberlain Commission was from every point of view in
upholding the departure from the plan originally outlined by the Government of India and sanctioned by
the Fowler Committee. But that raises the question: How did that ideal come to be so ruthlessly
defeated? If the Fowler Committee had proposed that gold should be the currency of India, how is it
that gold ceased to be the currency? It cannot be said that the door is closed against the entry of gold,
for it has been declared legal tender. Speaking in the language of Prof. Fisher, the movement of gold in
the money reservoir of India is allowed a much greater freedom so far as law is concerned than can be
said of silver. Silver, in the form of rupees, is admitted by a very narrow valve which gives it an inlet into
that reservoir, but there is no outlet provided for it. On the other hand, gold is admitted into the same
reservoir by a pipe-connection which gives it an inlet as well as an outlet. Why, then, does not gold flow
into the currency reservoir of India? A proper understanding on this question is the first step towards a
return to the sound system proposed in 1898.
On an examination of the literature which attempts to deal with this aspect of the question, it will
be found that two explanations are usually advanced to account for the non-entry of gold into the
currency system of India. One of them is the sale of council bills by the Secretary of State. The effect of
the sale of council bills, it is said, is to prevent gold from going to India. Mr. Subhedar, said to be an
authority on Indian currency, in his evidence before the Smith Committee (Q. 3,502), observed:—

“Since 1905 it has been the deliberate attempt of those who control our currency
policy to prevent gold going to India and into circulation.”

The council bill has a history which goes back to the days of the East India Company.403 The peculiar
position [pg 264] of the Government of India, arising from the fact that it receives its revenues in India
and is obliged to make payments in England, imposes upon it the necessity of making remittances from
India to England. Ever since the days of the East India Company the policy has been to arrange for the
remittance in such a way as to avoid the transmission of bullion. Three modes of making the remittance
were open to the Directors of the East India Company: (1) Sending bullion from India to England; (2)
receiving money in England in return for bills on the Government of India; and (3) making advances to
merchants in India for the purchase of goods consigned to the United Kingdom and repayable in
England to the Court of Directors of the Company to whom the goods were hypothecated. Out of these
it was on the last two that greater reliance was placed by them. In time the mode of remittance through
hypothecation of goods was dropped “as introducing a vicious system of credit, and interfering with the
ordinary course of trade.” The selling of bills on India survived as the fittest of all the three
alternatives,404 and was continued by the Secretary of State in Council—hence the name, council bill—
when the Government of India was taken over by the Crown from the Company. In the hands of the
Secretary of State the council bill has undergone some modifications. The sales as now effected are
weekly sales,405 and are managed through the Bank of England, which issues an advertisement on
every Wednesday on behalf of the Secretary of State for India, inviting tenders to be submitted on the
following Wednesday for bills payable on [pg 265] demand by the Government of India either at
Bombay, Madras, or Calcutta. The minimum fraction of a penny in the price at which tenders of bills are
1
received has now406 been fixed at nd of a penny. The council bill is no longer of one species as it
32
used to be. On the other hand there are four classes of bills: (1) Ordinary bills of exchange, sold every
Wednesday, known as “Councils”; (2) telegraphic transfers, sold on Wednesdays, called shortly
“Transfers”;407 (3) ordinary bills of exchange, sold on any day in the week excepting Wednesday, called
“Intermediates”; and (4) telegraphic transfers, sold on any day excepting Wednesday, named “Specials.”
Now, in what way does the Secretary of State use his machinery of council bills to prevent gold from
going to India? It is said that the price and the magnitude of the sale are so arranged that gold does
not go to India. Before we examine to what extent this has defeated the policy of the Fowler
Committee, the following figures (Tables LI and LII, pp. 266–7) are presented for purposes of
elucidation.
From an examination of these tables two facts at once become clear. One is the enormous amount
of council bills the Secretary of State sells. Before the closing of the Mints the sales of council bills
moved closely with the magnitude of the home charges, and the actual drawings did not materially
deviate from the amount estimated in the Budget. Since the closure of the Mints the drawings of the
Secretary of State have not been governed purely by the needs of the Home Treasury. Since the
closure, the Secretary of State has endeavoured408:—

“(1) To draw from the Treasuries of the Government of India during the financial
year the amount that is laid down in the Budget as necessary to carry out the
Ways and Means programme of the year. [pg 266]

TABLE LI
 Balance of Trade, Council Drawings and Imports of Gold Before

Excess
(+) or
Net Imports of Deficiency
Balance of Amount
Treasure. (−) of
Trade of
Bills Home
Years. (Merchandise: Council
drawn as Charges.
Private Bills
compared
Account). drawn.
with
Gold. Silver. Budget
Estimate.

(1) (2) (3) (4) (5) (6) (7)

£ £
£ £ £ £
000,000 000,000

1870–
20,863,000 2·13 ·9 — — 10,031,261
71

1871–
31,094,000 3·43 6·3 — — 9,703,235
72

1872–
23,376,000 2·41 ·7 13,939,095 +939,095 10,248,605
73

1873–
21,160,000 1·29 2·3 13,285,678 −214,322 9,310,926
74

1874–
20,137,000 1·73 4·3 10,841,615 +841,615 9,490,391
75

1875–
19,204,000 1·40 1·4 12,389,613 −1,910,387 9,155,050
76

1876–
23,573,000 ·18 6·1 12,695,800 −964,200 13,851,296
77

1877–
23,758,000 ·41 12·7 10,134,455 −2,115,545 14,048,350
78

1878– 23,167,000 ·74 3·3 13,948,565 −3,051,435 13,851,296

 Excess
(+) or
Net Imports of Deficiency
Balance of Amount
Treasure. (−) of
Trade of
Bills Home
Years. (Merchandise: Council
drawn as Charges.
Private Bills
compared
Account). drawn.
with
Gold. Silver. Budget
Estimate.

(1) (2) (3) (4) (5) (6) (7)

£ £
£ £ £ £
000,000 000,000

79

1879–
26,046,000 1·45 6·5 15,261,810 +261,810 14,547,664
80

1880–
21,464,000 3·03 3·2 15,239,677 −1,660,323 14,418,986
81

1881–
32,855,000 4·02 4·5 18,412,429 +1,212,429 14,399,083
82

1882–
31,389,000 4·01 6·1 15,120,521 −221,479 14,101,262
83

1883–
23,611,600 4·44 5·2 17,599,805 +1,229,805 15,030,195
84

1884–
20,034,100 3·76 5·8 13,758,909 −2,741,091 14,100,982
85

1885–
21,344,200 2·10 8·8 10,292,692 −3,481,008 14,014,733
86

1886–
19,844,800 1·58 5·2 12,136,279 −1,195,121 14,409,949
87

1887–
18,724,400 2·10 6·5 15,358,577 −891,423 15,389,065
88
 Excess
(+) or
Net Imports of Deficiency
Balance of Amount
Treasure. (−) of
Trade of
Bills Home
Years. (Merchandise: Council
drawn as Charges.
Private Bills
compared
Account). drawn.
with
Gold. Silver. Budget
Estimate.

(1) (2) (3) (4) (5) (6) (7)

£ £
£ £ £ £
000,000 000,000

1888–
20,271,900 1·92 6·3 14,262,859 +262,859 14,983,221
89

1889–
24,557,800 3·18 7·6 15,474,496 +784,596 14,848,923
90

1890–
20,733,800 4·25 10·7 15,969,034 +980,034 15,568,875
91

1891–
27,632,400 1·68 6·3 16,093,854 +93,854 15,874,699
92

1892–
29,287,300 1·75 8·0 16,532,215 −467,785 16,334,541
93

[pg 267]

TABLE LII
 Balance of Trade, Council Drawings and Imports of Gold After

Excess (+)
or
Net Imports of
Balance of Amount Deficiency
Treasure.
Trade of (−) of Bills
Home
Years. (Merchandise: Council drawn as
Charges
Private Bills compared
Account). drawn. with
Gold. Silver. Budget
Estimate.

(1) (2) (3) (4) (5) (6) (7)

£ £
£ £ £ £
000,000 000,000

1893–
21,660,500 − ·39 8·3 9,530,235 −9,169,765 15,826,81
94

1894–
25,765,000 −2·7 3·4 16,905,102 −94,898 15,707,36
95

1895–
29,963,800 1·5 3·7 17,664,492 +664,492 15,603,37
96

1896–
21,333,100 1·4 3·5 15,526,547 −973,453 15,795,83
97

1897–
18,847,000 3·2 5·4 9,506,077 −3,493,923 16,198,26
98

1898–
29,560,700 4·3 2·6 18,692,377 +2,692,377 16,303,19
99

1899–
25,509,600 6·3 2·4 19,067,022 +2,067,022 16,392,84
1900

1900–
20,727,400 ·5 6·3 13,300,277 −3,139,723 17,200,95
01

1901–
28,630,600 1·3 4·8 18,539,071 +2,039,071 17,368,65
02
 Excess (+)
or
Net Imports of
Balance of Amount Deficiency
Treasure.
Trade of (−) of Bills
Home
Years. (Merchandise: Council drawn as
Charges
Private Bills compared
Account). drawn. with
Gold. Silver. Budget
Estimate.

(1) (2) (3) (4) (5) (6) (7)

£ £
£ £ £ £
000,000 000,000

1902–
33,352,600 5·8 4·6 18,499,966 +1,999,946 18,361,82
03

1903–
45,424,100 6·6 9·1 23,859,303 +6,859,303 18,146,47
04

1904–
40,548,200 6·5 8·9 24,425,558 +7,925,558 19,463,75
05

1905–
39,086,700 ·3 10·5 32,166,973 +14,333,973 18,617,46
06

1906–
45,506,600 9·9 16·0 33,157,196 +15,357,196 19,208,40
07

1907–
31,640,000 11·6 13·0 16,232,062 −1,867,938 18,487,26
08

1908–
21,173,300 2·9 8·0 13,915,426 −4,584,574 18,925,15
09

1909–
47,213,000 14·5 6·3 27,096,586 +10,896,586 19,122,91
10

1910–
53,685,300 16·0 5·8 26,783,303 +11,283,303 19,581,56
11

1911–
59,512,900 25·1 3·6 27,058,550 +9,900,250 19,957,65
12
 Excess (+)
or
Net Imports of
Balance of Amount Deficiency
Treasure.
Trade of (−) of Bills
Home
Years. (Merchandise: Council drawn as
Charges
Private Bills compared
Account). drawn. with
Gold. Silver. Budget
Estimate.

(1) (2) (3) (4) (5) (6) (7)

£ £
£ £ £ £
000,000 000,000

1912–
57,020,900 22·6 11·5 25,759,706 +10,259,706 20,279,57
13

1913–
43,753,900 15·6 8·7 31,200,827 +10,000,827 20,311,67
14

1914–
29,108,500 5·1 5·9 7,748,111 −12,251,889 20,208,59
15

1915–
44,026,600 − ·7 3·2 20,354,517 +13,354,517 20,109,09
16

1916–
60,843,200 8·82 12·5 32,998,095 +29,093,095 21,145,62
17

1917–
61,420,000 16·8 12·7 34,880,682 +34,880,682 26,065,05
18

1918–
56,540,000 −3·7 45·3 20,946,314 +20,946,314 23,629,49
19

[pg 268]

“(2) To draw such further amounts as may be required to pay for purchases of
silver bought for coinage purposes.

“(3) To draw such further amounts as an unexpectedly prosperous season may

enable the Government to spare, to be used towards the reduction or avoidance of
debt in England.
 “(4) To sell additional bills and transfers to meet the convenience of trade.

“(5) To issue telegraphic transfers on India in payment for sovereigns which the
Secretary of State has purchased in transit from Australia or from Egypt to India.”

The result of such drawings is that the councils are made to play an enormous part in the adjustment of
the trade balance of India, and the swelling of balances in the Home Treasury and the locking up of
Indian funds in London.
The second point to note in comparing the preceding tables is with regard to the price at which the
Secretary of State makes his sales. Before the closure of the Mints the price of the council bills was
beyond the control of the Secretary of State, who had therefore to accept the price offered by the
highest bidder at the weekly sale of his bills. But it is objected that there is no reason why the Secretary
of State should have continued the old practice of auctioning the rupee to the highest bidder when the
closing of the Mints had given him the sole right of manufacturing it. Availing himself of his monopoly
position, it is insisted, the Secretary of State should not have sold his bills below 1s. 4⅛d. or 1s.
4 3/32d. which, under the ratio of 15 rupees to the sovereign, was for India the gold-import point. In
practice the Secretary of State has willed away the benefit of his position, and has accepted tenders at
rates below gold-import point, as may be seen from the minimum rates he has accepted for his bills.
It is said that if the council bills were sold in amounts required strictly for the purposes of the Home
Treasury, and sold at a price not below gold-import point, gold would tend to be imported into India and
would thus become part of the Indian currency media. As it is, the combined effect of the operations of
the Secretary of State is said to be to [pg 269] lock up Indian gold in London. With the use or misuse of
the Indian gold in London we are not here concerned. But those who are inclined to justify the India
Office scandals in the management of Indian funds in London, and have offered their services to place
them on a scientific footing, may be reminded that a practice on one side of Downing Street which
Bagehot said could not be carried on on the other side of it without raising a storm of criticism, would
require more ingenuity than has been displayed in their briefs. This much seems to have been admitted
on both sides, that the operations of the Secretary of State do prevent the importation of gold into
India, not altogether, but to the extent covered by their magnitude. Now, those who have held that the
ideal of the Fowler Committee has been defeated are no doubt right in their view that the narrowing of
the Secretary of State's operation would lead to the importation of gold into India. But what justification
is there for assuming that the imported gold would become a part of the currency of India? The
assumption that the abolition of the Secretary of State's financial dealings would automatically make
gold the currency of India is simply a gratuitous assumption. Whether the imported gold would become
current depends on quite a different circumstance.
The other explanation offered to explain the failure of the ideal of the Fowler Committee is the
want of a Mint in India open to the free coinage of gold. The opening of the Mints to the free coinage of
gold has been regarded as the most vital recommendation of the Fowler Committee; indeed, so much
so that the frustration of its ideal has been attributed to the omission by the Government to carry it out.
The consent given by the Government in 1900 to drop the proposal under the rather truculent attitude
of the Treasury has ever since been resented by the advocates of a gold currency. A resolution was
moved in 1911 by Sir V. Thackersay, in the Supreme Legislative Council, urging upon the Government
the desirability of opening a gold Mint for the coinage of the sovereign if the Treasury consented, and if
not for the coinage of some other gold coin. In deference to the united voice of the Council, the
Government [pg 270] of India again asked the Secretary of State to approach the Treasury for its
sanction.409 The Treasury on this occasion presented the Secretary of State410 with two alternatives: (1)
That a branch of the Royal Mint be established at Bombay solely for the purpose of coining gold into
sovereigns, and exclusively under its control; or (2) that the control of the Mint at Bombay should be
entirely transferred to it. Neither of the two alternatives was acceptable to the Government of India;
and the Secretary of State, as a concession to Indian sentiment, sanctioned the issue of a ten-rupee
gold coin from the Indian Mint. The Government of India preferred this solution to that suggested by
the Treasury, but desired that the matter be dealt with afresh by the Chamberlain Commission then
sitting. That Commission did not recommend a gold Mint,411 but saw no objection to its establishment
provided the coin issued was a sovereign, and if the coinage of it was desired by Indian sentiment and
if the Government did not mind the expense of coinage.412 This view of the Commission carried the
proposition no further than where it was in 1900, until the war compelled the Government to open the
Bombay Mint for the coinage of gold as a branch of the Royal Mint. But it was again closed in 1919. Its
reopening was recommended by the Currency Committee of 1919,413 and so enthusiastically was the
project received that an Honourable Member of the Supreme Council took the unique step of tempting
the Government into adopting that recommendation by an offer to increase the Budget Estimates under
“Mint” to enable the Government to bear the cost of it. The Government, however, declined the offer
with thanks. So we have in India the singular spectacle of a country in which there was a gold Mint
even when gold was not legal [pg 271] tender, as was the case between 1835–93, while there is no
gold Mint, when gold is legal tender, as has been the case since 1893. Just what an open Mint can do in
the matter of promoting the ideal of the Fowler Committee it is difficult to imagine; but the following
extracts from the evidence of a witness (Mr. Webb), than whom there was no greater advocate of an
open gold Mint before the Chamberlain Commission, help to indicate just what is expected from a gold
Mint.
“The principal advantage which you would expect to derive from a gold Mint is that you would
increase the amount of gold coin in circulation?—That would be one of the tendencies.
“Is there any other advantage?—The advantage is that the country would be fitted with what I
regard as an essential part of its monetary mechanism. I regard it as an essential part of its currency
mechanism that it should have a Mint at which money could be coined at the requisition of the public.
“I want to get exactly at your reason why that is essential. Am I right in thinking that you consider
it essential to a proper currency system that there should be a gold currency?—Yes.
“And essential to a gold currency that there should be a gold Mint?—Yes, on the spot in India itself.
… It would do away, in a measure, with the management by the Secretary of State of the Foreign
Exchanges, in that there would be always the Mint at which the public could convert their gold into
legal-tender coins in the event of the Secretary of State taking any action of which the public did not
approve. It is a safeguard, so to speak, an additional safeguard, that the people of India can on the
spot obtain their own money on presentation of the metal.”
Here, again, the assumption that a gold Mint is a guarantee that there will be a gold currency
seems to be one as gratuitous as the former assumption that if gold were allowed to be freely imported
it would on that account become part of the currency. On the other hand, there are cases where Mints
were open, yet there was neither gold coinage nor gold currency. Instances may be cited from the
history [pg 272] of the coinage at the Royal Mint in London. The magnitude of gold coinage during the
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