Indian Currency and Finance - John Maynard Keynes - ebook

When all but the last of the following chapters were already in type, I was offered a seat onthe Royal Commission (1913) on Indian Finance and Currency. If my book had been less far advanced, I should, of course, have delayed publication until the Commission had reported, and my opinions had been more fully formed by the discussions of the Commission and by the evidence placed before it. In the circumstances, however, I have decided to publish immediately what I had already written, without the addition of certain other chapters which had been projected. The book, as it now stands, is wholly priorin date to the labours of the Commission.J. M. KEYNES.King’s College, Cambridge,12th May 1913.

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When all but the last of the following chapters were already in type, I was offered a seat onthe Royal Commission (1913) on Indian Finance and Currency. If my book had been less far advanced, I should, of course, have delayed publication until the Commission had reported, and my opinions had been more fully formed by the discussions of the Commission and by the evidence placed before it. In the circumstances, however, I have decided to publish immediately what I had already written, without the addition of certain other chapters which had been projected. The book, as it now stands, is wholly priorin date to the labours of the Commission.


King’s College, Cambridge,12th May 1913.



1. On the broad historical facts relating to Indian currency, I do not intend to spendtime. It is sufficiently well known that until 1893 the currency of India was on the basis of silver freely minted, the gold value of the rupee fluctuating with the gold value of silver bullion. By the depreciation in the gold value of silver, extending over a long period of years, trade was inconvenienced, and Public Finance, by reason of the large payments which the Government must make in sterling, gravely disturbed; until in 1893, after the breakdown of negotiations for bimetallism, the Indian Mints were closed to the free mintage of silver, and the value of the rupee divorced from the value of the metal contained in it. By withholding new issues of currency, the Government had succeeded by 1899 in raising the gold value of the rupee to 1s. 4d., at whichfigure it has remained without sensible variation ever since.

2. There can be no doubt that at first the Government of India did not fully understand the nature of the new system; and that several minor mistakes were made at its inception. But few are nowfound who dispute on broad general grounds the wisdom of the change from a silver to a gold standard.

Time has muffled the outcries of the silver interests, and time has also dealt satisfactorily with what were originally the principal grounds of criticism, namely,—

(1) that the new system was unstable,

(2) that a depreciating currency is advantageous to a country’s foreign trade.

3. The second of these complaints was urged with great persistency in 1893. The depreciating rupee acted, it was said, as abounty to exporters; and the introduction of a gold standard, so it was argued, would greatly injure the export trade in tea, corn, and manufactured cotton. It was plainly pointed out by theorists at the time (a) that the advantage to exporters was largelyat the expense of other members of the community and could not profit the country as a whole, and (b) that it could only be temporary.

The recent spell of rising prices in India has shown clearly in how many ways a depreciating currency damages large sections of the community, although it may temporarily benefit other sections. In fact, some recent complaints against the existing currency policy have been occasioned by the tendency of prices to rise; whereas it is plain that the great change of 1893 must have tended to make them fall, and that rupee prices would, in all probability, be higher than they now are, if the change had not been effected.

With regard to the temporary nature of the effect on exporters, experience has decisively supported theory. Thenature of this experience was admirably summed up by Mr. J. B. Brunyate in the Legislative Council (February 25, 1910), speaking in reply to thesimilar line of argument brought forward by the Bombay mill–owning interests in connexion with the impositionin 1910 of a duty on silver.[1]

4. The criticisms of 1893, therefore, are no longer heard, and the Currency Problems with which we are now confronted are new. The evolution of the Indian currency system since 1899 has been rapid, though silent. There havebeen few public pronouncements of policy on the part of Government, and the legislative changes have been inconsiderable. Yet a system has been developed, which was contemplated neither by those who effected nor by those who opposed the closing of the Mints in 1893, and which was not favoured either by the Government or by the Fowler Committee in 1899, although something like it was suggested at that time. It is not possible to point to any one date at which the currency policy now in force was deliberately adopted.

The fact that the Government of India have drifted into a system and have never set it forth plainly is partly responsible for a widespread misunderstanding of its true character. But this economy of explanation, from which the system has suffered in the past, does not make it any the worse intrinsically. The prophecy made before the Committee of 1898 by Mr. A. M. Lindsay, in proposing a scheme closely similar in principle to that which was eventually adopted, has been largely fulfilled. “This change,” he said, “will pass unnoticed, except by the intelligent few, and it is satisfactory to find that by this almost imperceptible process the Indian currency will be placed on a footing which Ricardo and other great authorities have advocated as the best of all currency systems, viz., one in which the currency media used in the internal circulation are confined to notes and cheap token coins, which are made to act precisely as if they were bits of gold by being made convertible into gold for foreign payment purposes.”

5. In 1893 four possible bases of currency seemed to hold the field: debased and depreciating currencies usually of paper; silver; bimetallism; and gold. It was not to be supposed that the Government of India intended to adopt the first; the second they were avowedly upsetting; the third they had attempted, and had failed, to obtain by negotiation. It seemed to follow that their ultimate objective must be the last—namely, a currency of gold. The Committee of 1892 did not commit themselves; but the system which their recommendations established was generally supposed to be transitional and a first step towards the introduction of gold. The Committee of 1898 explicitly declared themselves to be in favour of the eventual establishment of a goldcurrency.

This goal, if it was their goal, the Government of India have never attained. The rupee is still the principal medium of exchange and is of unlimited legal tender. There is no legal enactment compelling any authority to redeem rupees with gold. The fact that since 1899 the gold value of the rupee has only fluctuated within narrow limits is solely due to administrative measures which the Government are under no compulsion to undertake. What, then, is the present position of the rupee?

6. The main features of the Indian system as now established are as follows:—

(1) The rupee is unlimited legal tender and, so far as the law provides, inconvertible.

(2) The sovereign is unlimited legal tender at £1 to 15 rupees, and is convertible at this rate, so long as a Notification issued in 1893 is not withdrawn,i.e., the Government can be required to give 15 rupees in exchange for £1.

(3) As a matter of administrative practice, the Government is, as a rule, willing to give sovereigns for rupees at this rate; but the practice is sometimes suspended and large quantities of gold cannot always be obtained in India by tendering rupees.

(4) As a matter of administrative practice, the Government will sell in Calcutta, in return for rupees tendered there, bills payablein London in sterling at a rate not more unfavourable than 1s. 329/32d. per rupee.

The fourth of these provisions is the vital one for supporting the sterling value of the rupee; and, although the Government have given no binding undertaking to maintain it, a failure to do so might fairly be held to involve an utter breakdown of their system.

Thus the second provision prevents the sterling value of the rupee from rising above 1s. 4d. by more than the cost of remitting sovereigns to India, and the fourth provision prevents it from falling below 1s. 329/32d. This means in practice that the extreme limits of variation of the sterling value of the rupee are 1s. 4⅛d. and 1s. 329/32.

7. The important characteristics of the Indian system are so much a matter ofnotification and administrative practice that it is impossible to point to single Acts which have made the system what it is. But the following list of dates may be useful for purposes of reference:—

1892. Herschell Committee on Indian Currency.

1893. Actclosing the Indian mints to the coinage of silver on private account. Notifications by Government fixing the rate, at which rupees or notes would be supplied in exchange for the tender of gold, at the equivalent of 1s. 4d. the rupee.

1898. Fowler Committeeon Indian Currency. Exchange value of rupee touched 1s. 4d.

1899. Act declaring the British sovereign legal tender at 1s. 4d. to the rupee.

1899–1903. Negotiations for coinage of sovereigns in India (dropt indefinitely Feb. 6, 1903).

1900. Gold StandardReserve instituted out of profits of coinage.

1904. Secretary of State’s notification of his willingness to sell Council Bills on India at 1s. 4⅛d. the rupee without limit.

1905. Act authorising the establishment of the Currency Chest of “earmarked” gold at the Bank of England as part of the Currency Reserve against notes,[2]and the investment of a stated part of the Currency Reserve in sterling securities.

1906. The Notification withdrawn which had directed the issue of rupees against the tender of gold (as distinguished from British gold coin).

1907. Rupee branch of the Gold Standard Reserve instituted.

1908. Sterling drafts sold in Calcutta on London at 1s. 329/32d. the rupee, and cashed out of funds from the Gold Standard Reserve.

1910. Act renderingCurrency notes of Rs. 10 and 50 universal legal tender,[3]and directing the issue of notes in exchange for British gold coins.

1913. Royal Commission on Indian Finance and Currency.

8. In § 6 I have stated the practical effect of these successive measures. But the legal position is so complicated and peculiar, that it will be worth while to state it quite precisely. Previous to 1893 the Government were bound by the Coinage Act of 1870 to issue rupees, weight for weight, in exchange for silver bullion. There was also in force a Notification of the Governor–General in Council, dating from 1868, by which sovereigns were received at Government Treasuries as the equivalent of ten rupees and four annas. This Notification, which had superseded a Notification of 1864 fixing the exchange at ten rupees, had long been inoperative (as the gold exchange value of ten rupees four annas had fallen much below a sovereign). The Act of 1893 was merely a repealing Act, necessary in order to do away with those provisions of theAct of 1870 which provided for the free mintage of silver into rupees. At the same time (1893) the Notification of 1868 was superseded by a new Notification fixing fifteen rupees as the rate at which sovereigns would be accepted at Government Treasuries; and a Notification was issued under the Paper Currency Act of 1882, directing the issue of currency notes in exchange for gold at the Rs. 15 to £1 ratio. The direct issue of rupees against the tender of gold also has been regulated by a series of Notifications, of which the first was published in 1893, up to 1906 rupees being issued against either gold coin or gold bullion; and since 1906 against sovereigns and half–sovereigns only. Apart from Notifications, an Act of 1899 declared British sovereigns legal tender at the Rs. 15 to £1 ratio, an indirect effect of which was to make it possible for Government, so far as Acts are concerned, to redeem notes in gold coin and refuse silver. And lastly, the Paper Currency Act of 1910 bound the Government to issue notes against the tender of British gold coin.

The convertibility of the sovereign into rupees at the Rs. 15 to £1 ratio is not laid down, therefore, in any Act whatever. It depends on Notifications withdrawable by the Executive at will. Further, the management of the Gold Standard Reserve is governed neither by Act nor by Notification, but by administrative practice solely; and the sale of Council Bills on India and of sterling drafts on London is regulated by announcements changeable at administrative discretion from time to time.

All this emphasises the gradual nature of the system’s growth, and the transitional character of existing legislation. As matters now are, there is something to be said for a new Act, which, while leaving administrative discretion free where there is still good ground for this, might consolidate and clarify the position.

9. As a result of these various measures, the rupee remains the local currency in India, but the Government take precautions for ensuring its convertibility into international currency at an approximately stable rate. The stability of the Indian system depends upon their keeping sufficient reserves of coined rupees to enable them at all times to exchange international currency for local currency; and sufficient liquidresources in sterling toenable them to change back the local currency into international currency, whenever they are required to do so. The special features of the system, although, as we shall see later, these features are not in fact by any means peculiar to India, are: first, that the actual medium of exchange is a local currency distinct from the international currency; second, that the Government is more ready to redeem the local currency (rupees) in bills payable in international currency (gold) ata foreign centre (London) than to redeem it outright locally; and third, that the Government, having taken on itself the responsibility for providing local currency in exchange for international currency and for changing back local currency into international currency when required, must keep two kinds of reserves, one for each of these purposes.

I will deal with these characteristics in successive chapters. It is convenient to begin with the second of them and at the outset to discuss in a general way thesystem of currency, of which the Indian is the most salient example, known to students as theGold–Exchange Standard. Then we will take the first of them in Chapters III. and IV. onPaper Currencyand on thePresent Position of Gold in India and Proposalsfor a Gold Currency; and the third in Chapter VI. on theSecretary of State’s Reserves.

10. But before we pass to these several features of the Indian system, it will be worth while to emphasise two respects in which this system isnotpeculiar. In the first place a system, in which the rupee is maintained at 1s. 4d. by regulation, does not affect the level of prices differently from the way in which it would be affected by a system in which the rupee was a gold coin worth 1s. 4d., except in a very indirectand unimportant way to be explained in a moment. So long as the rupee is worth 1s. 4d. in gold, no merchant or manufacturer considers of what material it is made when he fixes the price of his product. Theindirecteffect on prices, due to the rupee’s being silver, is similar to the effect of the use of any medium of exchange, such as cheques or notes, which economises the use of gold. If the use of gold is economised in any country, gold throughout the world is less valuable—gold prices, that is to say, are higher. But as this effect is shared by the whole world, the effect on prices in any country of economies in the use of gold made by that country is likely to be relatively slight. In short, a policy which led to a greater use of gold in India would tend, by increasing the demand for gold in the world’s markets, somewhat to lower the level of world prices as measured in gold; but it would not cause any alteration worth considering in therelativerates of exchange of Indian and non–Indian commodities.

Inthe second place, although it is true that the maintenance of the rupee at or near 1s. 4d. is due to regulation, it is not true, when once 1s. 4d. rather than some other gold value has been determined, that the volume of currency in circulation depends inthe least upon the policy of the Government or the caprice of an official.[4]This part of the system is as perfectly automatic as in any other country. The Government has put itself under an obligation to supply rupees whenever sovereigns are tendered, and it often permits or encourages the tender of sovereigns in London as well as in India; but it has no power or opportunity of forcing rupees into circulation otherwise. In two matters only does the Government use a discretionary power. First, in order that it may always be possible to fulfil this obligation, it is necessary to keep a certain reserve of coined rupees, just as some authority in this country—in point of fact the Bank of England—must keep some reserve of token silver and coined sovereigns andnot hold in its vaults too large a proportion ofuncoined or foreign gold. The magnitude of this reserve is within the discretion of the Indian Government. To a certain extent they must anticipate probable demands on the output of the Mint. But if they miscalculate and mint more than they need, the new rupees must lie in the Government’s own chests until they are wanted, and the date at which they emerge into circulation it is beyond the power of the Government to determine. In the second place, the Government can postpone for a short time a demand for rupees by refusing to supply them in return for sovereigns tendered in London and by insisting upon the sovereigns being sent to Calcutta. Sometimes they do this, but very often it is worth their while, for reasons to be explained in detail later on, to accept the tender of sovereigns in London. In either of these cases the permanent effect of their action one way or the other on the volume of circulation is inconsiderable. The kind of difference it makes is comparable to the difference which would be made if it lay within the discretion of a government to charge or not, as it saw fit, a smallbrassagenot much greater than the cost of coining.[5]



1. If we are to see theIndian system in its proper perspective, it is necessary to digress for a space to a discussion of currency evolution in general.

My purpose is, first, to show that the British system is peculiar and is not suited to other conditions; second, that the conventional idea of “sound” currency is chiefly derived from certain superficial aspects of the British system; third, that a somewhat different type of system has been developed in most other countries; and fourth, that in essentials the system which has been evolved in India conforms to this foreign type. I shall be concerned throughout this chapter with the general characteristics of currency systems, not with the details of their working.

2. The history of currency, so far as it is relevant to our presentpurpose, virtually begins with the nineteenth century. During the second quarter of this century England was alone in possessing an orthodox “sound” currency on a gold basis. Gold was the sole standard of value; it circulated freely from hand to hand; andit was freely available for export. Up to 1844 bank notes showed a tendency to become a formidable rival to gold as the actual medium of exchange. But the Bank Act of that year set itself to hamper this tendency and to encourage the use of gold as the medium of exchange as well as the standard of value. This Act was completely successful in stopping attempts to economise gold by the use of notes. But the Bank Act did nothing to hinder the use of cheques, and the very remarkable development of this medium ofexchange during the next fifty years led in this country, without any important development in the use of notes or tokens, to a monetary organisation more perfectly adapted for the economy of gold than any which exists elsewhere. In this matter of the useof cheques Great Britain has been followed by the rest of the English–speaking world—Canada, Australia, South Africa, and the United States of America. But in other countries currency evolution has been, chiefly, along different lines.

3. In the early days of banking of the modern type in England, gold was not infrequently required to meet runs on banks by their depositors, who were always liable in difficult times to fall into a state of panic lest they should be unable to withdraw their deposits in caseof real need. With the growth of the stability of banking, and especially with the growth of confidence in this stability amongst depositors, these occasions have become more and more infrequent, and many years have now passed since there has been any runof dangerous proportions on English banks. Gold reserves, therefore, in Great Britain are no longer held primarily with a view to emergencies of this kind. The uses of gold coin in Great Britain are now three—as the medium of exchange for certain kinds ofout–of–pocketexpenditure, such as that on railway travelling, for which custom requires cash payment; for the payment of wages; and to meet a drain of specie abroad.

Fluctuations in the demand for gold in the first two uses are of secondary importance, and can usually be predicted with a good deal of accuracy,—at holiday seasons, at the turn of the quarter, at the end of the week, at harvest. Fluctuations in the demand in the third use are of greater magnitude and, apart from the regular autumn drain, notso easily foreseen. Our gold reserve policy is mainly dictated, therefore, by considerations arising out of the possible demand for export.

To guard against a possible drain of gold abroad, a complicated mechanism has been developed which in the details ofits working is peculiar to this country. A drain of gold can only come about if foreigners choose to turn into gold claims, which they have against us for immediate payment, and we have no counterbalancing claims against them for equally immediate payment. The drain can only be stopped if we can rapidly bring to bear our counterbalancing claims. When we come to consider how this can best be done, it is to be noticed that the position of a country which is preponderantly a creditor in the international short–loan market is quite different from that of a country which is preponderantly a debtor. In the former case, which is that of Great Britain, it is a question of reducing the amount lent; in the latter case it is a question of increasing the amount borrowed. A machinery which is adapted for action of the first kind may be ill suited for action of the second. Partly as a consequence of this, partly as a consequence of the peculiar organisation of the London Money Market, the “bank rate” policy for regulatingthe outflow of gold has been admirably successful in this country, and yet cannot stand elsewhere unaided by other devices. It is not necessary for the purposes of this survey to consider precisely how changes in the bank rate affect the balance of immediate indebtedness. It will be sufficient to say that it tends to hamper the brokers, who act as middlemen between the British short–loan fund and the foreign demand for accommodation (chiefly materialised in the offer of bills for discount), and to cause them to enter into a less volume of new business than that of the short loans formerly contracted and now falling due, thus bringing to bear the necessary counterbalancing claims against foreign countries.

4. The essential characteristics of the British monetary system are, therefore, the use of cheques as the principal medium of exchange, and the use of the bank rate for regulating the balance of immediate foreign indebtedness (and hence the flow, by import and export, of gold).

5. The development of foreignmonetary systems into their present shapes began in the last quarter of the nineteenth century. At that time London was at the height of her financial supremacy, and her monetary arrangements had stood the test of time and experience. Foreign systems, therefore, were greatly influenced at their inception by what were regarded as the fundamental tenets of the British system. But foreign observers seem to have been more impressed by the fact that the Englishman had sovereigns in his pocket than by the fact that he had a cheque–book in his desk; and took more notice of the “efficacy” of the bank rate and of the deliberations of the Court of Directors on Thursdays, than of the peculiar organisation of the brokers and the London Money Market, and of Great Britain’s position as a creditor nation. They were thus led to imitate the form rather than the substance. When they introduced the gold standard, they set up gold currencies aswell; and in several cases an official bank rate was established on the British model. Germany led the way in 1871–73. Even now apologists of the Reichsbank will sometimes speak as if its bank rate were efficacious by itself in the same manner as the Bank of England’s. But, in fact, the German system, though ostensibly modelled in part upon the British system, has become, by force of circumstances, essentially different.

It is not necessary for this survey to consider individual systems in any detail. But, confining ourselves to European countries, whether we consider, for example, France,Austria–Hungary, Russia, Italy, Sweden, or Holland, while most of these countries have a gold currency and an official Bank Rate, in none of them is gold the principal medium of exchange, and in none of them is the bank rate their only habitual support against an outward drain of gold.

6. With the use of substitutes for gold I will deal in Chapter IV. in treating of the proper position of gold in the Indian system. But what props are commonly brought to the support of an “ineffective” Bank Rate incountries other than Great Britain? Roughly speaking, there are three. A very large gold reserve may be maintained, so that a substantial drain on it may be faced with equanimity; free payments in gold may be partially suspended; or foreign credits and bills may be kept which can be drawn upon when necessary. The Central Banks of most European countries depend (in varying degrees) upon all three.

The Bank of France uses the first two,[6]and her holdings of foreign bills are not, at normal times, important.[7]Her bank rate is not fixed primarily with a view to foreign conditions, and a change in it is usually intended to affect home affairs (though these may of course depend and react on foreign affairs).

Germany is in a state of transition, and her presentposition is avowedly unsatisfactory. The theory of her arrangements seems to be that she depends on her bank rate after the British model; but in practice her bank rate is not easily rendered effective, and must usually be reinforced by much unseen pressure by the Reichsbank on the other elements of the money market. Her gold reserve is not large enough for the first expedient to be used lightly. Free payment in gold is sometimes, in effect, partially suspended,[8]though covertly and with shame. To an increasing extent the Reichsbank depends on variations in her holding of foreign bills and credits. A few years ago such holdings were of small importance. The table given below shows with what rapidity the part taken by foreign bills and credits in the finance of the Reichsbank has been growing. The authorities of the Reichsbank have now learnt that their position in the international short loan market is not one which permits them to fix the bank rate and then idly to await the course of events.

7. If we pass from France, whose position as a creditor country is not altogether unlike Great Britain’s, and from Germany, which is at any rate able to do a good deal towards rightingthe balance of immediate indebtedness by the sale of securities having an international market, to other countries of less financial strength, we find the dependence of their Central Banks on holdings of foreign bills and on foreign credits, their willingness to permit a premium on gold, and the inadequacy of their bank rates taken by themselves, to be increasingly marked. I will first mention very briefly one or two salient facts, and will then consider their underlying meaning, always with an ultimate view to their bearing on the affairs of India.

8. To illustrate how rare a thing in Europe a perfect and automatic gold standard is, let us take the most recent occasion of stringency—November 1912. The Balkan War was at this time at an acute stage, but theEuropean situation was only moderately anxious. Compared with the crisis at the end of 1907, the financial position was one of comparative calm. Yet in the course of that month there was a premium on gold of about ¾ per cent in France, Germany, Russia, Austria–Hungary,[9]and Belgium. So high a premium as this is as effective in retaining gold as a very considerable addition to the bank rate. If, for example, the premium did not last more than three months, it would add to the profits of a temporary depositof funds for that period as much as an addition of 3 per cent to the discount rate; or, to put it the other way round, there would need to be an additional profit of 3 per cent elsewhere if it were to be worth while to send funds abroad.

9. The growing importance of foreign bills in the portfolios of the Reichsbank has been shown above. The importance of foreign bills and credits in the policy of the Austro–Hungarian Bank is of longer standing and is better known. They always form an important part of itsreserves, and the part first utilised in times of stringency.[10]It was supposed that in the third quarter of 1911 the Bank placed not less than £4,000,000 worth of gold bills at the disposal of the Austro–Hungarian market in order to support exchange. Amongst European countries, Russia now keeps the largest aggregate of funds in foreign bills and in balances abroad—amounting in November 1912 to £26,630,000.[11]Account being taken of their total resources, however, the banks of the three Scandinavian countries, Sweden, Norway, and Denmark, hold the highest proportion in the form of balances abroad—amounting in November 1912, for the three countries in the aggregate, to about £7,000,000. These are enough examples for my purpose.

10. What is the underlying significance of this growing tendency on the part of European State Banks to hold a part of their reserves in foreign bills or foreign credits? We saw above that the bank–rate policy of the Bank of England is successful because by indirect means it causes the Money Market to reduce its short–period loans to foreign countries, and thus to turn the balance of immediate indebtedness in our favour. This indirect policy is less feasible in countries where the Money Market is already a borrower rather than a lender in the international market. In such countries a rise in the bank–rate cannot be relied on to produce the desired effect with due rapidity. A direct policy on the part of the Central Bank, therefore, must be employed. If the Money Market is not a lenderin the international market, the Bank itself must be at pains to become to some extent one. The Bank of England lends to middlemen who, by holding bills or otherwise, lend abroad. A rise in the bank rate is equivalent to putting pressure on these middlemento diminish their commitments. In countries where the Money Market is neither so highly developed nor, in relation to foreign countries, so self–supporting, the Central Bank, if it is to be secure, must take the matter in hand itself and, by itself entering the international money market as a lender at short notice, place itself in funds, at foreign centres, which can be rapidly withdrawn when they are required. The only alternative would be the holding of a much larger reserve of gold, the expense of which would be nearly intolerable. The new method combines safety with economy. Just as individuals have learnt that it is cheaper and not less safe to keep their ultimate reserves on deposit at their bankers than to keep them at home in cash, so the second stage of monetary evolution is now entered on, and nations are learning thatsome partof the cash reserves of their banks (we cannot go further than this at present) may be properly kept on deposit in the international money market. This is not the expedient of second–rate or impoverished countries; it is the expedient of all those who have not attained a high degree of financial supremacy—of all those, in fact, who are not themselves international bankers.

11. In the forty years, therefore, during which theworld has been coming on to a gold standard (without, however, giving up for that reason its local currencies of notes or token silver), two devices—apart from the bullion reserve itself and the bank rate—have been evolved for protecting the local currencies. The first is to permit a small variation in the ratio of exchange between the local currency and gold, amounting perhaps to an occasional premium of ¾ per cent on the latter; this may help to tide over a stringency which isseasonal or of short duration without raising to a dangerous level the rate of discount on purely local transactions. The second is for the Government or Central Bank to hold resources available abroad, which can be used for maintaining the gold parity of the local currency, when there is the need for it.

12. We are now more nearly in a position to come back to the currency of India herself, and to see it in its proper relation to those of other countries. At one end of the scale we have Great Britain and France—creditor nations in the short–loan market.[12]In an intermediate position comes Germany—a creditor in relation to many of her neighbours, but apt to be a debtor in relation to France, Great Britain, and the United States. Next come such countries as Russia and Austria–Hungary—rich and powerful, with immense reserves of gold, but debtor nations, dependent in the short–loan market on their neighbours. From the currencies of these it is an easy step to those of the great trading nations of Asia—India, Japan, and the Dutch East Indies.