The Problem of the Rupee

THE SILVER STANDARD AND THE DISLOCATION OF ITS PARITY

Nonetheless, it is certain that the divergence between the mint ratio and the market ratio under a bimetallic system must be smaller than may be the case where there is no bimetallic systgem. Whenever the market ratio diverges from the mint ratio the compensatory action under the bimetallic law tends to restore the equilibrium, and even where it fails in restoring it, it does succeed in abridging the gulf between the two ratios. That being the case, it is safe to argue that had there been no demonetization of silver after 1873 the ratio between gold and silver would have probably been preserved as it was during the monetary disturbances of the earlier period. At any rate, this much is certain, that the market ratio between the two metals could not have diverged from the mint ratio to the extent it actually did.* It is therefore a sad commentary on the monetary legislation of the seventies that if it did not actually help to create, for no purpose, a problem unknown before, it certainly helped to make worse a bad situation. Prior to 1870, not all countries had a common currency. There were India and countries of Western Europe which were exclusively on a silver basis, and others, like England and Portugal, which were exclusively on a gold basis, and yet none of them felt the want of a common standard of value in their mutual dealings. So long as there existed the fixed-ratio system in France and the Latin Union the problem was really provided for, for under it the two metals behaved as one and thereby furnished a common standard, although all countries did not use the same metal as their standard money. It was therefore a matter of comparative indifference to most countries which metal they used so long as there was some one country which used either at a certain defined ratio. With the destruction of this fixed ratio what was thus a matter of comparative indifference became a matter of supreme concern. Every country which had before enjoyed the benefits of a common international standard without having a common currency was faced with a crisis in which the choice lay between

* Fisher, Purchasing Power of Money, 1911, pp. 134-35.

sacrificing its currency to securing a common standard or hugging its currency and foregoing the benefits of a common standard. That exigencies of a common standard ultimately led to its accomplishment was as it should have been, but it was not a fact before a great deal of harm and some heavy burdens had brought home to people what the want of it really meant to them.

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CHAPTER III THE SILVER STANDARD AND THE EVILS OF ITS INSTABILITY

The economic consequences of this rupture of the par of exchange were of the most far-reaching character. It divided the commercial world into two sharply defined groups, one using gold and the other using silver as their standard money. When so much gold was always equal to so much silver, as was the case previous to 1873, it mattered very little, for the purposes of international transactions, whether a country was on a gold or on a silver standard ; nor did it make any difference in which of the two currencies its obligations were stipulated and realized. But when, owing to the dislocation of the fixed par, it was not possible to define how much silver was equal to how much gold from year to year or even from month to month, this precision of value, the very soul of pecuniary exchange, gave place to the uncertainties of gambling. Of course, all countries were not drawn into this vortex of perplexities in the same degree and to the same extent, yet it was impossible for any country which participated in international commerce to escape from being dragged into it. This was true of India as it was of no other country. She was a silver-standard country intimately bound to a gold-standard country, so that her economic and financial life was at the mercy of blind forces operating upon the relative values of gold and silver which governed the rupee-sterling exchange.

The fall increased the burden of those who were under an obligation to make gold payments. Amongst such, the most heavily charged was the Government of India. Owing to the exigencies of its political constitution, that Government has been under the necessity of making certain payments in England to meet: (1) interest on debt and on the stock of the guaranteed railway companies ; (2) expenses on account of the European troops maintained in India; (3) pensions and noneffective allowances payable in England; (4) cost of the home

administration*; and (5) stores purchased in England for use or consumption in India. England being a gold-standard country, these payments were necessarily gold payments. But the revenues of the Government of India out of which these payments were met were received in silver, which was the sole legal-tender money of the country. It is evident that even if the gold payments were a fixed quantity their burden must increase pari passu with the fall in the gold value of silver. But the gold payments were not a fixed quantity. They have ever been on the increase, so that the rupee cost of the gold payments grew both by reason of the growth in their magnitude, and also by reason of the contraction of the medium, i.e. the appreciation of gold, in which they were payable. How greatly this double levy diminished the revenues of India, the figures in Table XI give a convincing testimony.

TABLE XI INCREASE IN THE RUPEE COST OF GOLD PAYMENTS†

Financial Year Average Rate of Exchange for the Year Total Excess of Rupees needed to provide for the net Sterling Payments of the Year over those required to meet the Sterling Payments of 1874-75 Amount of this Excess due to (1)

Fall in the Rate of Exchange over that of 1874-75 (2)

Increase in gold payments over those of the Year 1874-75 s. d. R R R 1875-76 1 9.626 86,97,980 41,13,723 45,84,257 1876-77 1 8.508 3,15,06,824 1,44,68,234 1,70,38,590 1877-78 1 8.791 1,30,05,481 1,14,58,670 1,15,46,811 1878-79 1 7.794 1,85,23,170 1,04,16,718 81,06,452 1879-80 1 7.961 39,23,570 1,65,37,394 -1,26,13,824 1880-81 1 7.956 3,12,11,981 1,92,82,582 1,19,29,399 1881-82 1 7.895 3,18,19,685 1.98,76,786 -1,19,42,899 1882-83 1 7.525 62,50,518 1,86,35,246 2,48,85,764 1883-84 1 7.536 3,44,16,685 2,33,46,040 1,10,70,645 1884-85 1 7.308 1,96,25,981 2,48,03,423 51,77,442 1885-86 1 6.254 1,82,11,346 2,54,95,337 -4,37,06,683 1886-87 1 5.441 4,69,16,788 4,46,68,299 22,48,489 1887-88 1 4.898 4,63,13,161 4,96,60,537 - 33,47,376 1888-89 1 4.379 9,00,38,166 6,59,71,998 2,40,66,168 1889-90 1 4.566 7,75,96,889 6,06,98,370 1,68,98,519 1890-91 1 6.090 9,06,11,857 4,65,48,302 4,40,63,555 1891-92 1 4.733 10,44,44,529 6,54,52,999 3,89,91,530

* Since the Reform Act of 1920 that part of this cost which was “political” has been placed upon the British Estimates.

† Compiled from figures in Appendix II, p. 270, of the Indian Currency Committee of 1843.

THE SILVER STANDARD AND THE EVILS OF ITS INSTABILITY

The effect of such a growing burden on the finance of the Government may well be imagined ; the condition of the Government, embarrasing at first, later became quite desperate under this continuously increasing burden. It enforced a policy of high taxation and rigid economy in the finances of the Government. Analysing the resource side of the Indian Budgets from the year 1872-73, we find that there was hardly any year which did not expire without making an addition to the existing imposts of the country. In 1872-73, there commenced the levy of what were called Provincial Rates. The fiscal year 1875-76 witnessed the addition of R. 1 per gallon in the excise duty on spirits. In 1877-78 the Pass Duty on Malwa opium was raised from Rs. 600 to Rs. 650 per chest. An addition of a Licence Tax and Local Rates was made in the year 1878-79, and an increase of Rs. 50 per chest took place in the Malwa Opium Duty in the following year. With the help of these imposts the Government expected to place its finances on an adequate basis. By the end of 1882, it felt quite secure and even went so far as to remit some of the taxes, which it did by lowering the customs duties and the Patwari Cess in the North-Western Provinces. But the rapid pace in the fall of the exchange soon showed that a resort to further taxation was necessary to make up for the increased cost of the sterling payments. To the existing burdens, therefore, was added in 1886 an Income Tax, a duty of 5 per cent. on imported and also on non-illuminating petroleum. The Salt Duty was raised in 1888 in India from Rs. 2 to Rs. 2½ and in Burma from 3 annas to R. 1 per maund. The Patwari Cess of the NorthWestern Provinces, repealed in 1882, was re-imposed in 1888. The rates of duty on imported spirit and the excise duties on spirits were not only raised in 1890, but were afterwards added to in every province. An excise duty on malt liquor was levied in 1893, and another on salted fish at the rate of 6 annas per maund. The yield of the taxes and duties levied from 1882-83 was* as follows:— Sources 1882-83 1892-93 Rs. Rs.

Salt ... ... 5,67,50,000 8,14,90,000 Excise ... ... 3,47,50,000 4,97,90,000 Customs ... ... 1,08,90,000 1,41,80,000 Assessed Taxes ... ... 48,40,000 1,63,60,000

* Report of the Indian Currency Committee, 1893, App. II, p. 263.

All this additional burden was due to the enhanced cost of meeting the gold payments, and “would not have been necessary but for the fall in the exchange.”* Along with this increase of resources the Government of India also exercised the virtue of economy in the cost of administration. For the first time in its history, the Government turned to the alternative of employing the comparatively cheaper agency of the natives of the country in place of the imported Englishmen. Prior to 1870, the scope of effecting economy along this line was very limited. By the Civil Service Reforms of 1853† the way was cleared for the appointment of Indians to the posts reserved by the Statute of 1793† for the members of the covenanted Civil Service. But this reform did not conduce to any economy in the cost of the administration, because the Indian members carried the same high scale of salaries as did the English members of the Civil Service. It was when the Statute of 1870 (33 Vic. c. 3) was passed permitting the appointment by nomination of non-covenanted Indians to places reserved for the covenanted Civil Service on a lower scale of salary, that a real scope for economy presented itself to the Government of India. Hard pressed, the Government of India availed itself of the possibilities for economy held out by this statute. So great was the need for economy and so powerful was the interest of the Government in reducing its expenditure that it proceeded, notwithstanding increased demands for efficient administration, to substitute the less expensive agency of non-covenanted civilians in place of the more expensive agency of the convenanted civilians. The scale on which this substitution was effected was by no means small, for we find that between 1874 and 1889 the strength of the convenanted service recruited in England was reduced by more than 22 per cent., and was further expected to be reduced by about 12 per cent., by the employment of unconvenanted Indians to the posts usually reserved for covenanted civilians.§ Besides substituting a cheap for a dear agency in the administration, the Government also sought to obtain relief by applying the pruning knife to the rank growth in departmental

* J.E.O’Conor, Report of the Indian Currency Committee, 1898, App. II, p. 182.

† Cf. Report of the Public Service Commission, C 5327 of 1887. ‡ This provision of the Act has been re-enacted by the Act of 1861. § Cf. evidence of Mr. Jenkins, Q. 12. Mil. of Evid. of the Select Committee on East India (Civil Servants), H. of C. 327 of 1890.

THE SILVER STANDARD AND THE EVILS OF ITS INSTABILITY

extravagences.* Even with such heroic efforts to increase the revenue and reduce the expenditure the finances of the Government throughout the period of the falling exchange were never in a flourishing state, as is shown in Table XII. Much more regrettable was the inability of the Government, owing to its financial difficulties, to find money for useful public works. The welfare of the Indian people depends upon turning to best account the resources which the country possesses. But the people have had very little of the necessary spirit of enterprise in them. The task, therefore, has fallen upon the Government of India to provide the country with the two prime requisites of a sustained economic life, namely a system of transport and a network of irrigation. With this object in view the Government had inaugurated a policy of developing what were called “Extraordinary Public Works,” financed by capital borrowings. For such borrowings India, as was to be expected, hardly offered any market, the people being too poor and their savings too scanty to furnish a modicum of the required capital outlay. Like all governments of poor peoples, the Government of India had therefore to turn to wealthier countries that had surplus capital to lend. All these countries unfortunately happened to be on the gold standard. As long as it was possible to say that so much gold was equal to so much silver, the English investor was indifferent whether the securities of the Government of India were rupee securities or sterling securities. But the fall in the gold value of silver was also a fall in the gold value of the rupee securities, and what was once a secure investment ceased to be so any more. This placed the Government in a difficult position in the matter of financing its extraordinary public works. Figures in Table XIII are worth study.

The English investor would not invest in the rupee securities. An important customer for the Indian rupee securities was thus lost. The response of the Indian money market was inadequate. To issue sterling securities was the only alternative to enable the Government to tap a bigger and a more constant reservoir for the drawing of capital to India; but as it was bound to increase the burden of the gold payments, which it was the

* Cf. Calcutta Civil Finance Committee’s Report, 1886 ; also The Report of the Civil Finance Commissioner (1887), who completed the work of the Committee after it was dissolved.

TABLE XII REVENUE AND EXPENDITURE OF THE GOVERNMENT OF INDIA

Year.

Average Rate of Exchange.

In India. In England. Final Result.

Net Revenue.

Net Expenditure excluding Exchange.

Surplus Revenue.

Net Sterling Revenue. Exchange. Surplus (+) or Deficit (-)

d. R. R. R. £ R. R.

1874-75 22.156 39,564,216 25,897,098 13,667,118 12,562,101 1,045,239 59,778 1875-76 21.626 40,053,419 24,541,923 15,511,496 12,544,813 1,377,428. 1,589,255 1876-77 20.508 38,253,366 25,355,285 12,898,081 13,229,646 2,252,611 —2,584,176 1877-78 20.791 39,275,489 27,658,021 11,617,468 13,756,478 2,123,030 —4,262,040 1878-79 19.794 44,415,139 25,778,928 18,636,211 13,610,211 2,891,902 2,134,098 1879-80 19.961 45,258,197 29,384,030 15,874,167 14,223,891 2,878,169 —1,227,893 1880-81 19.956 44,691,119 34,880,434 9,810,085 11,177,231 2,264,848 —3,031,394 1881-82 19.895 45,471,887 27,717,249 17,754,638 11,737,688 2,421,499 3,595,451 1882-83 19.525 42,526,173 25,500,437 17,025,736 13,299,976 3,050,923 674,837 1883-84 19.536 43,591,273 23,566,381 20,024,892 14,770,257 3,375,158 1,879,477 1884-85 19.308 41,585,347 24,763,779 16,821,568 13,844,028 3,363,986 — 386,446 1885-86 18.254 42,635,953 27,352,132 15,283,821 13,755,659 4,329,888 —2,801,726 1886-87 17.441 44,804,774 25,124,335 19,680,439 14,172,298 5,329,714 178,427 1887-88 16,898 45,424,150 25,968,025 19,456,125 15,128,018 6,356,939 —2,028,832 1888-89 16.379 46,558,354 25,051,147 21,507,207 14,652,590 6,817,599 37,018 1889-90 16.566 50,005,810 26,367,855 23,637,955 14,513,155 6,512,767 2,612,033 1890-91 18.090 49,403,819 25,579,727 23,824,092 15,176,866 4,959055 3,688,171 1891-92 16.733 50,023,142 27,013,618 23,009,524 15,716,780 6,825,909 467,535

THE SILVER STANDARD AND THE EVILS OF ITS INSTABILITY

strongest interest of the Government to reduce, the resort to the London money market, unavoidable as it became, was somewhat restrained,* with the result that the expansion of extraordinary public works did not proceed at a pace demanded by the needs of the country. The effects of this financial derangement, consequent on the fall of the exchange, were not confined to the Government of India. They were immediately felt by the municipalities and other local bodies who were dependent upon the Government for financial aid. So long as the cash balances were overflowing in the treasury of the Government, “one of the most useful ways” to employ them was found in lending a portion of them to these local institutions. As they had just then been inaugurated under the local self-government policy of Lord Ripon’s regime, and were looked upon only as an experiment, their taxing and borrowing powers were rigidly limited. Consequently, this financial aid from the Central Government by way of temporary advances was a resource of inestimable value to them. When, however, the cash balances of the Central Government began to diminish owing to the continued losses by exchange, these facilities were severely curtailed,† so that the very vitality of these institutions was threatened just at the moment when they needed all help to foster their growth and strengthen their foundations.

Addressing the Secretary of State, the Government of India, in a despatch of February 2, 1886, observed‡:— “10. We do not hesitate to repeat that the facts set forth in the preceding paragraphs are, from the point of Indian interests, intolerable ; and the evils which we have enumerated do not exhaust the catalogue. Uncertainty regarding the future of silver discourages the investment of capital in India, and we find it impossible to borrow in silver except at an excessive cost.

“On the other hand, the Frontier and Famine Railways which we propose to construct, and the Coast and Frontier

* During the period of falling exchange the distribution of the debt of India was as follows:— Sterling Debt Rupee Debt End of 1873-74 ... 41,117,617 66,41,72,900 End of 1898-99 ... 124,268,605 1,12,65,04,340 Indian Currency Committee (1898), Appendix II p. 179

† Cf. Financial Statement, 1876-77, p. 94.

‡ See C. 4868 of 1886, p. 8.

TABLE XIII PRICE MOVEMENTS OF RUPEE AND STERLING SECURITIES OF THE GOVERNMENT OF INDIA *

Year.

Rates of Exchange.

Price of 4 per cent. Rupee Paper. Price of Sterling India Stock. In Calcutta. In London. 4 per cent. 3½ per cent. 3 per cent. Highest. Lowest. Highest. Lowest. Highest. Lowest. Highest. Lowest. Highest. Lowest. Highest. Lowest. d. d.

1873 22 7/8 215/8 105 101 7/8 97 94½ 106 1/3 101¼ 1874 23 1/8 213/4 104½ 99½ 98 94½ 103 3/4 101 1875 22 3/16 21¼ 102 7/8 1013/4 94 91 106¼ 103¼ 1876 22 3/8 18½ 101 7/8 983/4 893/4 78 105 7/8 1017/8 1877 22¼ 20 9/16 987/8 93¼ 88½ 81 104 5/8 102¼ 1878 21 18 3/4 967/8 93½ 82½ 75 3/8 1045/8 99 1879 20 5/8 185/8 947/8 91¼ 80 77¼ 105 3/8 1007/8 1880 20 3/8 193/4 100 92 15/16 813/8 773/4 1055/8 1021/8 1881 20 1/16 19½ 104 5/8 100 86 81¼ 106 3/8 1037/8 1037/8 1003/4 1882 20 6/16 191/16 1021/10 955/8 85 81 105 1/8 1027/8 1017/8 993/4 1883 19 9/16 193/16 1011/8 979/16 82 79 3/4 1045/8 1027/16 1031/8 1013/8 1884 19 3/4 1815/16 1005/8 955/16 813/4 78¼ 104 3/8 1015/8 1071/8 1013/4 96¼ 91 3/4 1885 19 3/16 173/3 ½ 98 7/16 92¼ 77½ 73¼ 103 1/16 983/4 1023/4 97½ 91½ 85 3/4 1886 18 16 1/8 973/4 973/16 73 66¼ 103½ 101¼ 102 3/4 993/4 901/8 865/8 1887 18 3/16 155/8 993/16 955/16 7111/16 677/8 1023/4 100½ 103¼ 100¼ 92 3/4 953/8 1888 17 1/8 16 100 3/16 973/4 693/8 66¼ 102 7/8 100½ 107¼ 104 5/8 98 95 1889 16 15/16 16 100 3/8 971/16 691/8 663/8 109½ 106 7/8 1011/8 99 1890 20 2/3 9/2 167/8 1037/8 9613/16 87¼ 68 3/4 108½ 105¼ 100 3/4 95¼ 1891 18¼ 16 5/8 10713/16 1041/16 803/4 74¼ 109½ 105 99 94½ 1892 16 11/16 145/8 10815/16 10311/16 74½ 62 109½ 106 1/8 98½ 94 7/8

* Appendix II to the Report of the Indian Currency Committee of 1893, p. 272. These prices differ slightly from those given in Appendix IV to the First Report of the Gold and Silver Commission, 1886, and also from those in the Statistics of British India (First I ssue) for 1906-07, Part IV, (a) Finance Tables 7 and 8 of the division called Prices.

THE SILVER STANDARD AND THE EVILS OF ITS INSTABILITY

defences which we have planned, are imperatively required and cannot be postponed indefinitely.

“We are forced, therefore, either to increase our sterling liabilities, to which course there are so many objections, or to do without the railways required for the commercial development of the country, and its protection against invasion and the effects of famine.

***** “11. Nor can the difficulties which local bodies experience in borrowing in India be overlooked. The Municipalities of Bombay and Calcutta require large sums for sanitary improvements, but the high rate of interest which they must pay for silver loans operates to deter them from undertaking expensive works, and we need hardly remind your Lordship that it has quite recently been found necessary for Government to undertake to lend the money required for the construction of docks at Calcutta and Bombay, and that when the Port Commissioners of Calcutta attempted to raise a loan of 75 lakhs of rupees in September, 1885, guaranteed by the Government of India, the total amount of tenders was only Rs. 40,200, and no portion of this insignificant amount was offered at par.........”

The importation of capital on private account was hampered for similar reasons, to the great detriment of the country. It was urged on all hands, and was even recommended by a Royal Commission,* that one avenue of escape from the ravages of recurring famines, to which India so pitifully succumbed at such frequent intervals, was the diversification of her industries. To be of any permanent benefit, such diversified industrial life could be based on a capitalistic basis alone. But that depended upon the flow of capital into the country as freely as the needs of the country required. As matters then stood, the English investor, the largest purveyor of capital, looked upon the investment of capital in India as a risky proposition. It was feared that once the capital was spread out in a silver country every fall in the price of silver would not only make the return uncertain when drawn in gold, but would also reduce the capital value of his investment in terms of gold, which was naturally the unit

*Cf. The Report of the Famine Commission of 1880, Part II, C 2735 of 1880, pp. 175-76.

in which he measured all his returns and his outlays. This check to the free inflow of capital was undoubtedly the most serious evil arising out of the rupture of the par of exchange. Another group of people, who suffered from the fall of exchange because of their obligation to make gold payments, was composed of the European members of the Civil Service in India. Like the Government to which they belonged, they received their salaries in silver, but had to make gold remittances in support of their families, who were often left behind in England. Before 1873, when the price of silver in terms of gold was fixed, this circumstance was of no moment to them. But as the rupee began to fall the face of the situation was completely altered. With every fall in the value of silver they had to pay more rupees out of their fixed salaries to obtain the same amount of gold. Some relief was no doubt given to them in the matter of their remittances. The Civil Servants were permitted, at a sacrifice to the Government, to make their remittances at what was called the Official Rate of Exchange.* It is true the difference between the market rate and the official rate was not very considerable. None the less, it was appreciable enough for the Civil Servants to have gained by 2½ per cent. on the average of the years 1862-90† at the cost of the Government. The Military Servants obtained a similar relief to a greater degree, but in a different way. Their salary was fixed in sterling, though payable in rupees. It is true the Royal Warrant which fixed their salary also fixed the rate of exchange between the sterling and the rupee for that purpose. But as it invariably happened that the rate of exchange fixed by the Warrant was higher than the market rate, the Military Servants were compensated to the extent of the difference at

* As was explained by Mr. Waterfield before the Select Committee on East India (Civil Servants), H. C. Return 327 of 1890, Q. 1905-17, it was first instituted in 1824 and was arrived at as follows : In December of each year a calculation was made at the India Office of the cost of sending a rupee to India, based on the market price of silver in London, and of the cost of bringing a rupee from India, based on the price of bills on London in Calcutta. A mean between the two was struck and taken as the adjusting rate for the coming official year between the India Office and the British Treasury in regard to such transactions or payments undertaken by one Government as the agent of the other. It was fixed anew for each and formed a fair average rate, although it was sometimes above and sometimes below the market rate of exchange.

† Ibid, Q. 1925-26.

THE SILVER STANDARD AND THE EVILS OF ITS INSTABILITY

the cost of the Indian Exchequer.* This relief was, comparatively speaking, no relief to them. The official or the warrant rates of exchange, though better than the market rates of exchange, were much lower than the rate at which they were used to make their remittances before 1873. Their burden, like that of the Government, grew with the fall of silver, and as their burden increased their attitude became alarmist. Many were the memorialists who demanded from the Government adequate compensation for their losses on exchange.† The Government was warned‡ that “the ignorant folk who think India would be benefited by lowering present salaries are seemingly unable to comprehend that such a step would render existence on this reduced pay simply impossible, and that recourse would of necessity be had to other methods of raising money.” Such, no doubt, was the case in the earlier days of the East India Company, when the Civil Servants fattened on pickings because their pay was small,§ and it was to put a stop to their extortions that their salaries were raised to what appears an extra-ordinary level. That such former instances of extortions should have been held out as monitions showed too well how discontented the Civil Service was owing to its losses through exchange.

Quite a different effect the fall had on the trade and industry of the country. It was in a flourishing state as compared with the affairs of the Government or with the trade and industry of a gold-standard country like England. Throughout the period of falling silver there was said to be a progressive decline relatively to population in the employment afforded by various trades and industries in England. The textile manufactures and the iron and coal trade were depressed as well as the other important trades,

* Cf. F. S. 1887-8, pp. 39-40. This cost was as follows :— 1847-75 ... Rs. 6,40,000 1885-86 Rs. 4,00,000 1884-85 ... Rs. 18,43,000 1886-87 Rs. 5,15,000

† Cf. Report of the Indian Currency Committee, 1893, App. I, pp. 185-90 and p. 202, for memorials of the European Civil Servants. ‡ Cf. Col. Hughes-Hallett, M.P., The Depreciation of the Rupee : its Effect on the Anglo-Indian Official —the Wrong and the Remedy, London, 1887, p. 14. § The connection between the rapacious conduct of the early European Civil Servants and the smallness of their salaries was well brought out by Clive in his speech dated March 30, 1772, during the course of the debate in the House of Commons on the East India Judicature Bill, Hansard, Vol. XVII, pp. 334-39.

including the hardware manufactures of Birmingham and Sheffield, the sugar-refining of Greenock, Liverpool, and London, the manufactures of earthenware, glass, leather, paper, and a multitude of minor industries.* The depression in English agriculture was so widespread that the Commissioners of 1892 were “ unable to point to any part of the country in which [the effects of the depression] can be said to be entirely absent,” and this notwithstanding the fact that the seasons since 1882 “were on the whole satisfactory from an agricultural point of view.”† Just the reverse was the case with Indian trade and industry. The foreign trade of the country, which had bounced up during the American Civil War, showed greater buoyancy after 1870, and continued to grow throughout the period of the falling exchange at a rapid pace. During the short space of twenty years the total imports and exports of the country more than doubled in their magnitude, as is shown by Table XIV. TABLE XIV IMPORTS AND EXPORTS (BOTH MERCHANDIZE AND TREASURE)§ Year Exports R.

Imports Year Exports R.

Imports 1870-71 57,556,951 39,913,942 1881-82 83,068,198 60,436,155 1871-72 64,685,376 43,665,663 1882-83 84,527,182 65,548,868 1872-73 56,548,842 36,431,210 1883-84 89,186,397 68,157,311 1873-74 56,910,081 39,612,362 1884-85 85,225,922 69,591,269 1874-75 57,984,549 44,363,160 1885-86 84,989,502 71,133,666 1875-76 60,291,731 44,192,378 1886-87 90,190,633 72,830,670 1876-87 65,043,789 48,876,751 1887-88 92,148,279 78,830,468 1877-78 67,433,324 58,819,644 1888-89 98,833,879 83,285,427 1878-79 64,919,741 44,857,343 1889-90 105,366,720 86,656,990 1879-80 69,247,511 52,821,398 1890-91 102,350,526 93,909,856 1880-81 76,021,043 62,104,984 1891-92 111,460,278 84,155,045 § From Appendix II (Nos. 1 and 2) to the Report of the Indian Currency Committee of 1898.

* Report by Dunraven, Farrer, Muntz, and Lubbock in the Final Report of the Royal Commission on Depression of Trade and Industry, par., 54, C. 4893.

† Final Report of the Royal Commission on Agricultural Depression in England, C 8540 of 1897, par. 28.

THE SILVER STANDARD AND THE EVILS OF ITS INSTABILITY TABLE XV. N ATURE OF INDUSTRIAL PURSUITS IN ENGLAND AND INDIA *

Distribution of Indian Exports exclusive of Treasure. Distribution of English Exports exclusive of Treasure. Manufactured Articles.

Raw Materials.

Food Articles.

Unclassified Articles.

Total.

Manufactured Articles.

Raw Materials.

Food Articles.

Unclassified Articles.

Total.

1857 11 34 22 23 100 90.9 4 4.9 .2 100 1858 6 35 26 33 100 91.4 3.4 5.1 .1 100 1859 6.5 40 15.5 38 100 91.5 3.8 4.6 .1 100 1860 5.7 43.6 17.7 33 100 91.9 3.6 4.4 .3 100 1861 5.8 46.5 15.3 32.4 100 90.4 4.8 4.8 — 100 1862 5 52 16 27 100 90.3 4 4.8 .9 100 1863 3.7 58.7 10.6 27 100 91.0 4 4 1.0 100 1864 4 69.2 9.3 17.5 100 92.5 3.7 3.7 .1 100 1865 3.5 68 12 16.6 100 92.1 3.6 3.6 .7 100 1866 4.2 67.2 10.3 18.3 100 92 3.7 3.7 .4 100 1867 4 58 11 27 100 92.2 3.8 3.7 .3 100 1868 4 58.5 11.5 26 100 92 4.4 3.4 .2 100 1869 4.8 60.5 14 20.7 100 92 4.2 31 .7 100 1870 4.4 63.6 9 23 100 91 4 4 1.0 100 1871 3.7 65.3 11 20 100 90 4.4 4.9 .7 100 1872 3.3 61.4 13.5 21.8 100 91.2 5.4 3.5 .9 100

* The figures for India are calculated from the Statistical Abstract for British India, Second Number (1857-866), Table No. 34, and the Eighth Number (1864-1873), Table No. 24. Figures for England are taken from Appendix C (Statement 6) to the First Report of the Royal Commission of the Depression of Trade and Industry, 1885, with this alteration—that the separate figures in the original under “Manufactured” and “Partially Manufactured” are here grouped under “Manufactured.” The “Unclassified Articles” under Indian Exp orts are for the most part “Jewellery.”

TABLE XVI CHANGES IN INDUSTRIAL PURSUITS OF INDIA*

Years Imports Exports Manufactured Raw Manufactured Raw Rs. Rs. Rs. Rs.

1879 25,98,65,827 13,75,55,837 5,27,80,340 59,67,27,991 1892 36,22,31,872 26,38,18,431 16,42,47,566 85,52,09,499 Percentage of increase 39 91 211 43 Total Annual 2.8 6.5 15 3 Not only had the trade of India been increasing, but the nature of her industries was also at the same time undergoing a profound change. Prior to 1870, India and England were, so to say, non-competing groups. Owing to the protectionist policy of the Navigation Laws, and owing also to the substitution of man by machinery in the field of production, India had become exclusively an agricultural and a raw-materialproducing country, while England had transformed herself into a country which devoted all her energy and her resources to the manufacturing of raw materials imported from abroad into finished goods. How marked was the contrast in the industrial pursuits in the two countries is well revealed by the analysis of their respective exports in Table XV.

After 1870, the distribution of their industrial pursuits was greatly altered, and India once again began to assume the role of a manufacturing country. Analysing the figures for Indian imports and exports for the twenty years succeeding 1870, (see Table XVI) we find that the progress in the direction of manufactures formed one of the most significant features of the period.

This change in the industrial evolution was marked by the growth of two principal manufactures. One of them was the

* From Ranade’s Essays on Indian Economics, p. 104.

THE SILVER STANDARD AND THE EVILS OF ITS INSTABILITY

manufacture of cotton. The cotton industry was one of the oldest industries of India, but during 100 years between 1750 and 1850 it had failed into a complete state of decrepitude. Attempts were made to resuscitate the industry on a capitalistic basis in the sixties of the ninetenth century and soon showed signs of rapid advance. The story of its progress is graphically illustrated in the following summary in Table XVII:— TABLE XVII THE DEVELOPMENT OF INDIAN COTTON TRADE AND INDUSTRY Growth of Trade (Average Annual Quantities in each Quinquennium)

1870-71 to 1874-75 1875-76 to 1879-80 1880-81 to 1884-85 1885-86 to 1889-90 1890-91 to 1894-95 Imports of raw cotton— thousands or cwts.

23 52 51 74 89 Exports of raw cotton— thousands of cwts.

5,236 3,988 5,477 5,330 4,660 Imports of twist and yarn 33.55 33.55 44.34 49.09 44.79 Growth of Industry (at end of each fifth year) Number of mills 48 58 81 114 143 Number of spindles—000— omitted 1,000 1,471 2,037 2,935 3,712 Number of looms—000— omitted 10 13 16 22 34 Number of persons employed ... 39,537 61,836 99,224 ... Another industry which figured largely in this expansion of Indian manufactures was jute. Unlike the cotton industry of India, the jute industry was of a comparatively recent origin. Its growth, different from that of the cotton industry, was fostered by the application of European capital, European management, and European skill, and it soon took as deep roots as the cotton industry and flourished as well as the latter did, if not better. Its history was one of continued progress as will be seen from Table XVIII.

This increasing trend towards manufactures was not without its indirect effects on the course of Indian agriculture. Prior to 1870 the Indian farmer, it may be said, had no commercial outlook. He cultivated not so much for profit as for individual self-sufficiency. After 1870 farming tended to become a business and crops came more and more to be determined by the course of market prices than by the household needs of the farmer. This is well illustrated by figures in Table XIX.

Such was the contrast in the economic conditions prevalent in the two countries. This peculiar phenomenon of a silverstandard country steadily progressing, and a gold-standard country tending to a standstill, exercised the minds of many of TABLE XVIII DEVELOPMENT OF JUTE INDUSTRY AND TRADE Average Annual of each Quinquennium Growth 1870-71 to 1874-75 1875-76 to 1879-80 1880-81 to 1884-85 1885-86 to 1889-90 1890-91 to 1894-95 ExportsRaw, million cwt. 5.72 5.58 7.81 9.31 10.54 Gunny bags, millions 6.44 35.96 60.32 79.98 120.74 Cloth, million yds. ... 4.71 6.44 19.79 54.20 Growth of Industry Number of— Mills ... 21 21 24 26 Looms, 000 omitted ... 5.5 5.5 7 8.3 Spindles, 000 omitted ... 88 88 138.4 172.4 Persons employed, in thousands ... 38.8 38.8 52.7 64.3 its observers. The chief cause was said to be the inability of the English manufacturers to hold out in international competition. This inability to compete with the European rivals was attributed to the prevalence of protective tariffs and subsidies which formed an essential part of the industrial and commercial code of the European countries. Nothing of the kind then existed TABLE XIX GROWTH OF AGRICULTURAL EXPORTS OF INDIA 1868-69 1873-74 1877-78 1882-83 1887-88 1891-92 Wheat 100 637.41 2,313.47 5,152.36 4,914.37 11,001.44 Opium 100 118.38 123.83 122.47 120.20 116.82 Seeds 100 111.26 305.87 239.97 403.60 480.99 Rice 100 131.66 119.84 203.28 185.55 220.36 Indigo 100 116.91 121.57 142.17 140.76 126.33 Tea 100 169.35 293.17 507.25 775.09 1,075.75 Cofee 100 86.04 69.98 85.31 64.59 74.11

THE SILVER STANDARD AND THE EVILS OF ITS INSTABILITY

in India, where trade was as free and industry as unprotected as any could have been, and yet the Lancashire cotton-spinner, the Dundee jute manufacturer and the English wheat-grower complained that they could not compete with their rivals in India. The cause, in this case, was supposed to be the falling exchange.* So much were some people impressed by this view that even the extension of the Indian trade to the Far East was attributed to this cause. Already, it was alleged, the dislocation of the par of exchange between gold and silver had produced a kind of segregation of gold-using countries and silver-using countries to the exclusion of each other. In a transaction between two countries using the same metal as standard it was said the element of uncertainty arising from the use of two metals varying in terms of each other was eliminated. Trade between two such countries could be carried on with less risk and less inconvenience than between two countries using different standards, as in the latter case the uncertainty entered into every transaction and added to the expense of the machinery by which trade was carried on. That the Indian trade should have been deflected to other quarters† where, owing to the existence of a common standard the situation trade had to deal with was immune from uncertainties, was readily admitted. But it was contended that there was no reason why, as a part of the segregation of commerce, it should have been possible for the Indian manufacturer to oust his English rival from the Eastern markets to the extent he was able to do (see Table XX, p. 432).

The causes which effected such trade disturbances formed the subject of a heated controversy.‡ The point in dispute was whether the changes in international trade, such as they were, were attributable to the monetary disturbances of the time. Those who held to the affirmative explained their position by arguing that the falling exchange gave a bounty to the Indian producer and imposed a penalty on the English producer. The

* Cf. The Final Report of the Royal Commission on Gold and Silver Part I, pars. 99-101, for a summary of the argument.

† The distribution of Indian trade during this period was as shown on the page 432 footnote.

‡ See the evidence and memoranda by Profs. Marshall and Nicholson before the Royal Commission on Gold and Silver (1886); also Prof. Lexis, “ The Agio on Gold and International Trade,” in the Economic Journal, Vol. V, 1895.

TABLE XX EXPORTS OF COTTON GOODS TO EASTERN MARKETS

Years Yarn, lbs. 000 omitted Piece-goods, yds., 000 omitted From India From U. K. From India From U. K. 1877 ... 7,927 33,086 15,544 394,489 1878 ... 15,600 36,467 17,545 382,330 1879 ... 21,332 38,951 22,517 523,921 1880 ... 25,862 46,426 25,800 509,099 1881 ... 26,901 47,479 30,424 587,177 1882 ... 30,786 34,370 29,911 454,948 1883 ... 45,378 33,499 41,534 415,956 1884 ... 49,877 38,856 55,565 439,937 1885 ... 65,897 33,061 47,909 562,339 1886 ... 78,242 26,924 51,578 490,451 1887 ... 91,804 35,354 53,406 618,146 1888 ... 113,451 44,643 69,486 652,404 1889 ... 128,907 35,720 70,265 557,004 1890 ... 141,950 37,869 59,496 633,606 1891 ... 169,253 27,971 67,666 595,258

† DISTRIBUTION OF INDIAN TRADE Annual Average for each Quinquennium in Millions of rupees Countries 1875-76 to 1879-80 1880-81 to 1884-85 Imports Exports Total Imports Exports Total United Kingdom ... 323.68 278.15 601.83 434.45 344.22 778.67 China ... 14.05 132.27 146.32 19.23 134.94 154.17 Japan ... .02 .33 .35 .19 2.09 2.28 Ceylon ... 5.74 22.97 28.71 5.35 16.37 21.72 Straits Settlement 10.83 26.11 36.94 15.88 33.65 49.53 Annual Average for each Quinquennium in Millions of rupees Countries 1885-86 to 1989-90 1890-91 to 1894-95 Imports Exports Total Imports Exports Total United Kingdom ... 510.47 360.59 871.06 526.24 338.40 864.64 China ... 21.64 134.54 156.18 28.69 133.30 161.90 Japan ... .25 7.27 7.52 1.51 14.44 15.95 Ceylon ... 5.86 20.56 26.42 6.42 31.18 37.60 Straits Settlement 20.09 42.54 62.63 23.32 52.56 75.88

THE SILVER STANDARD AND THE EVILS OF ITS INSTABILITY

existence of this bounty, which was said to be responsible for the shifting of the position of established competitors in the field of international commerce, was based on a simple calculation. It was said that if the gold value of silver fell the Indian exporter got more rupees for his produce and was therefore better off, while by reason of the same fact the English producer got fewer sovereigns and was therefore worse off. Put in this naive form, the argument that the falling exchange gave a bounty to the Indian exporters and imposed a penalty on the English exporters had all the finality of a rule of arithmetic. Indeed, so axiomatic was the formula regarded by its authors that some important inferences as to its bearing on the trade and industrial situation of the time were drawn from it. One such inference was that it stimulated exports from and hindered imports into the silver-using countries. The second inference was that the fall of exchange exposed some English producers more than others to competition from their rivals in silver-using countries. Now, can such results be said to follow from the fall of exchange ? If we go behind the bald statement of a fall of exchange and inquire as to what determined the gold price of silver the above inferences appear quite untenable. That the ratio between gold and silver was simply the inverse of the ratio between gold prices and silver prices must be taken to be an unquestionable proposition. If therefore the gold price of silver was falling it was a counterpart of the more general phenomenon of the fall of the English prices which were measured in gold, and the rise of the Indian prices which were measured in silver. Given such an interpretation of the event of the falling exchange, it is difficult to understand how it can help to increase exports and diminish imports. International trade is governed by the relative advantages which one country has over another, and the terms on which it is carried on are regulated by the comparative cost of articles that enter into it. It is, therefore, obvious that there cannot be a change in the real terms of trade between countries except as a result of changes in the comparative cost of these goods. Given a fall in gold prices all round, accompanied by a rise in silver prices all round, there was hardly anything in the monetary disturbance that could be said to have enabled India to increase her exportation of anything except by diminishing her exportation or increasing her importation of something else. From the same view of the question of the falling exchange it follows that such a monetary disturbance

could not depress one trade more than another. If the falling or rising exchange was simply an expression of the level of general prices, then the producers of all articles were equally affected. There was no reason why the cotton trade or the wheat trade should have been more affected by the fall of exchange than the cutlery trade.

Not only was there nothing in the exchange disturbance to disestablish existing trade relations in general or in respect of particular commodities, but there was nothing in it to cause benefit to the Indian producer and injury to the English producer. Given the fact that the exchange was a ratio of the two price-levels, it is difficult to see in what sense the English producer, who got fewer sovereigns but of high purchasing power, was worse off than the Indian producer, who got more rupees but of low purchasing power. The analogy of Prof. Marshall was very apt. To suppose that a fall of exchange resulted in a loss to the former and a gain to the latter was to suppose that, if a man was in the cabin of a ship only ten feet high, his head would be broken if the ship sank down twelve feet into a trough. The fallacy consisted in isolating the man from the ship when, as a matter of fact, the same force, acting upon the ship and the passenger at one and the same time, produced like movements in both. In like manner, the same force acted upon the Indian producer and the English producer together, for the change in the exchange was itself a part of the more sweeping change in the general price-levels of the two countries. Thus stated, the position of the English and Indian producer was equally good or equally bad, and the only difference was that the former used fewer counters and the latter a larger number in their respective dealings. A bounty to the Indian producer and a penalty to the English producer, it is obvious, could have arisen only if the fall of silver in England in terms of gold was greater than the fall of silver in terms of commodities in India. In that case the Indian producer would have obtained a clear benefit by exchanging his wares for silver in England and thus securing a medium which had a greater command over goods and services in India. But a priori there could be no justification for such an assumption. There was no reason why gold price of silver should have fallen at a different rate from the gold price of commodities in general, or that there should have been a great difference between the silver prices in England and in India. Statistics show that such a priori assumptions were not groundless. (See Table XXI).

THE SILVER STANDARD AND THE EVILS OF ITS INSTABILITY TABLE XXI. M OVEMENTS OF PRICES, WAGES AND SILVER BETWEEN INDIA AND ENGLAND *

Net Imports of Silver into India. Index No. for Gold Price of Silver.

Years.

Index No. for Silver Prices of Commodities in India.

Index No. for Wages in India.

Index No. for Gold Prices of Commodties in England.

Index No. for Wages in England.Years. AmountRs.

(1) (2) (3) (4) (5) (6) (7) (8)

1871-72 6,587,296 99.7 1871 100 — 100 100 1872-73 739,244 99.2 1872 105 — 109 105.8 1873-74 2,530,824 97.4 1873 107 100 111 112 1874-75 4,674,791 95.8 1874 116 101 102 113 1875-76 1,640,445 93.3 1875 103 97 96 111.6 1876-77 7,286,188 86.4 1876 107 98 95 110 1877-78 14,732,194 90.2 1877 138 97 94 109.8 1878-79 4,057,377 86.4 1878 148 99 87 107 1879-80 7,976,063 84.2 1879 135 100 83 105.8 1880-81 3,923,612 85.9 1880 117 99 88 106.5 1881-82 5,381,410 85.0 1881 106 99 85 106.5 1882-83 7,541,427 84.9 1882 105 100 84 106.5 1883-84 6,433,886 83.1 1883 106 102 82 108 1884-85 7,319,581 83.3 1884 114 101 76 109 1885-86 11,627,028 79.9 1885 113 106 72 108 1886-87 7,191,743 74.6 1886 110 105 69 107 1887-88 9,319,421 73.3 1887 111 114 68 108 1888-89 9,327,529 70.4 1888 119 112 70 109.8 1889-90 11,002,078 70.2 1889 125 112 72 113 1890-91 14,211,408 78.4 1890 125 113 72 118 1891-92 9,165,684 74.3 1891 128 118 72 118 1892-93 12,893,499 65.5 1892 141 110 68 117.4 1893-94 13.759,273 58.5 1893 138 119 68 117.4

* Col. (2) is from Appendix II, Table No. 2 of the I.C.C. of 1898. Cols. (3), (5), (6), and (7) are from Atkinson’s “Silver Pri ces in India,” in the Journal of the Statistical Society, March, 1897. Col. (8) is based on the figures given by W. T. Layton in his Introduction to the Study of Prices (1912), Table I, Col. 1, p. 150, re-scaled to 1871 as 100.

It is obvious that if silver was falling faster than commodities, and if silver prices in India were lower than silver prices in England, we should have found it evidenced by an inflow of silver from England to India. What were the facts ? Not only was there no extraordinary flow of silver to India, but the imports of silver during 1871-93 were much smaller than in the twenty years previous to that period.* This is as complete a demonstration as could be had of the fact that the silver prices in India were the same as they were outside, and consequently the Indian producer had very little chance of a bounty on his trade.

Although such must be said to be the a priori view of the question, the Indian producer was convinced that his prosperity was due to the bounty he received. Holding such a position he was naturally opposed to any reform of the Indian currency, for the falling exchange which the Government regarded a curse he considered a boon. But however plausible was the view of the Indian producer, much sympathy would not have been felt for it had it not been coupled with a notion, most commonly held, that the bounty arose from the export trade, so that it became an article of popular faith that the fall of exchange was a source of gain to the nation as a whole. Now was it true that the bounty arose from the export trade ? If it were so, then every fall of exchange ought to give a bounty. But supposing that the depreciation of silver had taken place in India before it had taken place in Europe could the fall of exchange thus brought about have given a bounty to the Indian exporter ? As was explained above, the Indian exporter stood a chance of getting a bounty only if with the silver he obtained for his produce he was able to buy more goods and services in India. To put the same in simpler language, his bounty was the difference between the price of his product and the price of his outlay. Bearing this in mind, we can confidently assert that in the supposed case of depreciation of silver having taken place in India first, such a fall in the Indian exchange would have been accompanied by a penalty instead of a bounty on his trade. In that case, the exporter from India would have found that though the Indian exchange, i.e. the gold price of silver, had fallen, yet the ratio which gold prices in England bore to silver prices in India had

* Cf. figures for imports of silver in Chap. I. It will, however, be noted how closely the flow of silver into India between 1872 and 1893 followed the fall in gold price of silver.