THE STANDARD OF VALUE MACMILLAN AND CO., LIMITED LONDON . BOMBAY . CALCUTTA MELBOURNE THE MACMILLAN COMPANY NEW YORK . BOSTON . CHICAGO DALLAS . SAN FRANCISCO THE MACMILLAN CO. OF CANADA, LTD. TORONTO THE ISTANDARD OF VALUE BY SIR DAVID BARBOUR K.C.S.I., K.C.M.G. Financial Member of the Council of the Governor-General of India from 1888 to 1893 ; Member of the Royal Commission on Gold and Silver Member of the Indian Currency Committee (1898); Chairman of the Committee on the Currency of the Straits Settle- ments; Author of" The Theory of Bimetallism" UNIV, OP CALIFORNIA MACMILLAN AND CO., LIMITED ST. MARTIN'S STREET, LONDON 1912 COPYRIGHT RICHARD CLAY AND SONS, LIMITED BRUNSWICK ST., STAMFORD ST., S.E., AND BUNGAY, SUFFOLK. AIMflOllJAD TO THE MEMORY OF DAVID RICARDO 259770 "GOLD AND SILVER HAVING BEEN CHOSEN FOR THE GENERAL MEDIUM OF CIRCULATION, THEY ARE, BY THE COM- PETITION OF COMMERCE, DISTRIBUTED IN SUCH PROPOR- TIONS AMONGST THE DIFFERENT COUNTRIES OF THE WORLD, AS TO ACCOMMODATE THEMSELVES TO THE NATURAL TRAFFIC WHICH WOULD TAKE PLACE IF NO SUCH METALS EXISTED, AND THE TRADE BETWEEN COUNTRIES WERE PURELY A TRADE OF BARTER."" Ricardo. vii PREFACE THE Indian Mints were closed to the unlimited coinage of silver on 26th June, 1893, with the object of establishing Gold as the Standard of Value in that country, and this measure practically closed the Bimetallic Controversy. The Government of India have been so far suc- cessful in their policy that the Gold Standard has been effectively maintained in India since 1898, the par of exchange being Is. 4*d. per rupee. Questions connected with the Standard of Value and the Currency have but little attrac- tion for the general public, and to many persons the Bimetallic Controversy must have seemed little more than a war of words. In reality a very important issue was involved in it, namely, whether the Standard of Value of the world should in the future be Gold alone, or whether it should be formed of a combination of Silver and Gold as it had been in the past. x PREFACE I was employed in the Financial Department of the Government of India when the divergence in the relative value of Gold and Silver began to declare itself and, as the fall in the Indian Exchange had a serious effect on the finances of the Government of India, the subject forced itself on my attention. In 1886 I published a work called the " Theory of Bimetallism," and I was a Member of the Royal Commission on Gold and Silver which sat from 1886 to 1888. I was subsequently Finance Member of the Council of the Governor-General of India, and took part in the measures for the introduction of the Gold Standard into India. I was afterwards a Member of the Committee which recommended that the gold value of the Indian rupee should be fixed at Is. 4j 1 International Bi-metallism, by F. A. Walker. xiv FALL IN GOLD PRICES 149 would cause the prices of these com- modities to fall and would produce changes in relative prices, but would have no effect on the general price level unless the quantities produced were increased. 2. There was a great reduction in the cost of transport. This also would produce no effect on the general price level, unless it led to an increase in the quantities of commodities produced, or to an increase in the number of exchanges. 3. The reduced cost of production and the reduction of cost of transport would prob- ably, and did in fact, cause changes in the relative advantages of different countries in the International Trade of the world which would have the effect of altering the internal scale of prices and wages in the countries affected. 4. There was an increase in the quantities of commodities produced and an increase in the number of exchanges, both causes tending to bring about a fall in the general price level. 5. There were additional demands for gold due to the substitution of the gold for the silver standard in certain countries. 6. There were additional demands for gold due to changes from inconvertible paper to a metallic (gold) standard. 150 THE STANDARD OF VALUE CH. 7. There were special demands for gold due to the great development of the United States of America. This cause is, to some extent, identical with that stated in 3. 8. There was some reduction in the yearly production of gold. It would be of little practical value to specu- late as to what would have happened if Bimetallism had been maintained. It has been the habit of Mono-metallists to ascribe all the economic gains since 1870 to the maintenance of the single gold standard of England and other countries. The Bimetallists, with as little reason, used to ascribe all economic disadvantages to the same cause. In reality all the great economic changes that \ have been experienced since 1870 would have] occurred in practically the same way whether the standard of value was Monometallic on Bimetallic. If Bimetallism had been maintained!- a par of exchange between the gold countries am the silver countries would have continued to exist. Gold prices would not have fallen so much as they did, and gold wages would have risen. Silver prices would have fallen somewhat and I do not think silver countries would have gained thereby. Opinion will differ as to the extent to which the people of the gold standard countries mighl xiv FALL IN GOLD PRICES 151 have profited if, while still retaining the benefit of all the Economic changes that have taken place they had escaped the heavy fall in prices. I believe their gain from this cause would have been substantial. The fall in gold prices that took place after the rupture of the Bimetallic tie was alarming, as there was reason to fear that prices might continue to fall, and if the Purchasing Power of Gold had increased so far as to cause a material fall in gold wages, a very serious state of things would have arisen. It seemed to me at the time that this result was not improbable, and I was not alone in holding this view. There was every probability that there would be a general adoption of the gold standard which would lead to additional demands for that metal, while the annual supply was falling off. Sir Robert Giffen was strongly opposed to the extension of the single gold standard to India and other countries on the ground of the additional demand for gold that would in this way be created, and he recorded his opinion that it would be disastrous if new and considerable demands for gold were suddenly to arise. All such apprehensions have been dissipated by the great increase in the production of gold that has since occurred. Notwithstanding the great extension of the gold standard we are now 152 THE STANDARD OF VALUE CH. xiv experiencing, we have to fear in the immediate future " Depreciation " of gold instead of " Appreciation." The world drifted into Bimetallism and drifted out of Bimetallism without foreseeing the prob- able consequences of either change. We are now drifting into a universal gold standard, and have gone a long way in that direction ; so far, indeed, that there can be no turning back, but the great increase in the yearly production of gold has removed all ground for apprehension as to a possible fall in prices in the immediate future. The following figures give, approximately, the world's production of gold in recent years : Year. 1886 21,000,000 1887 21,000,000 1888 22.000,000 1889 25,000,000 1890 24,000,000 1891 26,000,000 1892 29,000,000 1893 31,000,000 1894 36,000,000 1895 40,000,000 1896 40,000,000 1897 47,000,000 Year. 1899 61,000,000 1900 51,000,000 1901 52,000,000 1902 59,000,000 1903 66,000,000 1904 69,000,000 1905 75,000,000 1906 80,000,000 1907 81,000,000 1908 88,000,000 1909 91,000,000 1910 91,000,000 1898 57,000,000 1911 93,000,000 CHAPTER XV SOME FALLACIES IN the ordinary business of life everybody treats the Standard of Value which he uses, whatever it may be, as fixed and invariable in value, and looks on all changes in price as being due to economic causes affecting commodities. No other course is possible, and this method of dealing with changes in prices and wages is, for practical purposes, perfectly sound and only leads to wrong results if we apply it to investiga- tions into the general purchasing power of gold and its exchange relations with the material of other Standards of Value. We are so accustomed to deal with the Standard of Value on these lines that even those persons who have given attention to the subject and are quite prepared to admit in so many words that there cannot exist a monetary standard which is invariable in value and can measure values as a yard-stick measures length, are unable to divest themselves completely of the prepossession and 153 154 THE STANDARD OF VALUE CH. sometimes relapse into the ordinary method of regarding the Standard of Value on occasions when the adoption of this view must lead to incorrect conclusions. When silver began to fall relatively to gold a Select Committee of the House of Commons was appointed to " consider and report upon the Causes of the Depreciation of the Price of Silver and the Effects of such Deprecia- tion upon the Exchange between India and England." The terms of the reference to the Committee suggested that the change was in silver and assumed that it was the fall in the gold price of silver that caused the fall in the Exchange with India. As I have shown, it was the fall in the gold price of commodities that caused the fall in the Indian Exchange, and it was the fall in the Indian Exchange and the fall in the Exchange with other silver-using countries that caused the fall in the gold price of silver. The Committee made a very careful enquiry into the facts regarding the supply of, and demand for, silver, but, having been started on wrong lines, they failed to take any notice of the all important question of the supply of, and demand for, gold, and of possible changes in the level of gold prices. The approximate figures of the supply of, and XV SOME FALLACIES 155 demand for, silver which the Committee put forward are as follows : 1872-5. Value of total production 54,700,000 Sold by Germany and Scandinavian Kingdom, about 8,000,000 Surplus Exports from Italy 8,000,000 ,, Austria 4,000,000 74,700,000 Taken by India 9,100,000 France 33,500,000 Russia 4,000,000 Spain and Portugal 4,000,000 England 5,000,000 United States 7,600,000 Japan and the East 7,500,000 The East (other than India, China and Japan) 3,000,000 73,700,000 Out of the total market supply of 74,700,000 worth of silver in the years 1872-5 France took 33,500,000 and it seems incredible that a supply of silver amounting to 41,200,000 in four years, of which about one-third was taken by countries that had not a silver standard, could have de- preciated the Standard of Value of India, China, Japan, and the other silver-using countries by 20 per cent. Mr. Bagehot an- ticipated that the fall in the price of silver would cause a fall in the Indian Exchange and the Exchange with other silver-using countries, which, in its turn, would give rise to a balance of trade in their favour that would absorb all 156 THE STANDARD OF VALUE CH. the surplus silver. His forecast was not realised because, as I have shown, it was the fall in the Exchange with silver-standard countries that caused the fall in the price of silver, and the fall in gold prices was of itself more than sufficient to account for the total fall in the Exchange even on the assumption that no other cause had been at work. The Majority of the Members of the Royal Commission on Gold and Silver also appear to me not to have treated gold and silver in the same way, and to have been unable to free themselves from the prepossession which all persons have in favour of the Standard of Value which they are accustomed to use. They defined " Appreciation of Gold " as meaning a fall in prices due to causes affecting gold, and expressly excluded a fall in the prices of commodities due to an increase in their supply or a diminution in the cost of their production or transit. This definition must necessarily lead to con- fusion of thought and incorrect conclusions, both because a reduction in cost of production of commodities has, of itself, no effect on the general level of prices, and because an increase in the quantity of commodities has, other things being equal, the same effect on the Purchasing Power of Gold as a proportionate reduction in the quantity of gold available xv SOME FALLACIES 157 as money. They, then, pointed out that there had been in many cases both re- ductions in the cost of production and in the cost of transport, and increases in the total quantity of money, and they drew the con- clusion that the whole, or nearly the whole, of the reduction in prices was due to causes affecting commodities, and not to " Appreciation of Gold." As regards the possible effect of the increased demand for gold they urged that there had been great increases of economy in the use of gold owing to the extension of Banking, and they threw doubts on the theory that the quantity ot gold has any serious effect on the general level of prices. They urged that the movements in the rate of discount during the period in question were not consistent with any con- siderable "Appreciation of Gold." They did not deny that there might have been some slight " Appreciation of Gold," as they defined "Appreciation," but they held that the change in the relative value of gold and silver was tainly due to the " Depreciation " of silver. As gold had increased in value relatively to silver and silver had fallen in value relatively to gold, and, as there had been little (if any) 44 Appreciation " of gold (as they defined " Appre- ciation "), they were driven to the conclusion that silver had " Depreciated," and in attempting to \ 158 THE STANDARD OF VALUE CH. account for this "Depreciation" of silver they found themselves in difficulties. We have seen that the Select Committee of 1876 could not discover any such surplus of silver as would account for the depreciation of the Standard of Value of more than half the population of the world by 20 per cent., and the Majority of the Royal Commissioners were in the same position. According to the figures laid before the Commission, there had not been any very important increase in the supply of silver to countries outside the United States. The following are the figures of this supply : Annual Average Supply of Silver to all Countries Outside the United States. Years. Kilograms. 1866-70 1,368,000 1871-75 1,924,000 1876-80 1,691,000 1881-85 1,972,000 If extra demands for gold to the extent of 200,000,000 sterling, together with a reduction of at least 20 per cent, in the annual production of gold, had practically no effect on the value of gold, as they held, it was difficult to suppose that the increased supply of silver above indicated could have depreciated silver by 25 per cent. This difficulty they attempted to get rid of by reasoning which, with all deference to those who put it forward, seems to me wholly unsound. xv SOME FALLACIES 159 They estimated the total amount of silver used as money in Europe and America at 352,000,000, of which a large portion was circu- lating at an artificial value as subsidiary coinage, leaving less than 100,000,000 circulating at its value as silver. The increased production of silver being 10,000,000 yearly, and as, in their opinion, sentimental considerations play a great part in determining price, the increase of 10,000,000 in the yearly production of silver when compared with the quantity of silver money circulating at its value as metal in Europe and America was sufficient to cause a great fall in the price of silver ; this fall in price would ordinarily have led to a large export of silver to the East, but as commodities had fallen in price they took the place of silver as an export to the East and consequently silver did not go there. The objections to this reasoning are : (1) Sentimental considerations have nothing to do with fixing the price of the great articles of trade, including silver, beyond causing temporary fluctuations which are very speedily followed by a reaction, if the fall is not justified by the statistical position. (2) The increase of 10,000,000 a year in the production of silver takes no account of the large amount of silver taken off the 160 THE STANDARD OF VALUE CH. market by the purchases of the United States of America. (3) If there had been a large surplus of silver on the market, nothing could have pre- vented it from going to India arid the other silver standard countries, because there was no other place to which it could go, and no other use to which it could be put. (4) It is impossible that silver which did not go to India could have operated to main- tain Indian prices at a higher level. The real explanation of what happened is, as I have already shown, that the fall in gold prices caused the fall in the gold price of silver. That fall in the gold prices of commodities, which was accompanied in many cases by a reduction in the real cost of production, explains the whole of the phenomena, and a recognition of it as the real cause of the fall in the price of silver clears away all difficulties. The reasoning adopted by the Majority of the Royal Commissioners was merely an attempt, as ingenious as it was unsound, to explain a phenomenon of which the real cause was not understood. The criticisms which I have offered on it are directed, it will be observed, against the arguments by which they supported their main conclusion not to recommend any change xv SOME FALLACIES 161 in the gold standard of England rather than against that conclusion itself. To those persons who believed, as the Majority of the Royal Commissioners appear to have done, that gold practically never altered in value, and that the prices of silver and other commodities moved up and down in accordance with the laws of demand and supply, or even from sentimental causes, the mode of working of which is beyond my comprehension, the natural remedy for the fall in the price of silver appeared to be measures which would cause an increased demand for that metal. To this end they recommended the repeal of the duty on silver plate and the issue of small notes based on silver in Great Britain, and suggested that negotiations might be entered into with other nations with a view to the more extended use of silver as money. As it happened, an Act providing for the more extended use of silver had been in force in the United States from February 1878, under which 2,000,000 dollars' worth of silver was purchased every month, or, in round figures, 4,800,000 sterling worth every year. To those who have followed what I have said as to the cause of the fall in the gold price of silver it will be obvious that to restore silver to its old value in this way must prove an enterprise of extreme difficulty. The fall in the gold price of M 162 THE STANDARD OF VALUE CH silver was due to the fall in the gold prices of commodities, and to restore silver to its old gold value by increasing the demand for that metal necessitated the purchase of enough silver to cause a fall in silver prices in India and elsewhere of quite 30 per cent. This would have required the purchase not merely of the whole yearly production of silver, but probably of a certain amount of silver that would have been exported from the silver-standard countries. As there is always a large yearly consumption of silver in these countries for hoarding and for use as ornaments, I do not think the latter quantity would have been large, but it might have been of some magnitude for a time. The Bimetallic tie had been broken at a very unfortunate time, namely, at a time when the production of gold was falling off and special demands for that metal were about to be experienced while the production of silver was about to increase. As a consequence the purchases of silver by the United States of America had less effect than they otherwise would have had. In 1890 an Act was passed in the United States under which 4,500,000 ounces of silver were purchased every month and put into circulation at a ratio of sixteen to one as compared with gold. On 1st January, 1894, the amount of money put into circulation in this way in the form of Silver Certificates and Treasury xv SOME FALLACIES 163 Notes amounted to $461,627,165. These pur- chases of silver by the United States had a two- fold effect. They tended to raise the value of silver and to lower the value of gold by substituting overvalued silver as currency in place of gold. But the increase in the production of silver which was taking place more than kept pace with the increase in the demand by the United States, and though the economy in the employment of gold, due to the increased use of overvalued silver as currency, may have helped to stay the fall in gold prices, it did not cause them to rise. The Indian Exchange and the price of silver continued to fall and the United States found that the coinage of silver, if continued, would, before long, destroy their gold standard and leave them with nothing but overvalued silver. They had been exporting gold every year after 1887 and they were ultimately forced to stop purchasing silver. The total export of gold in the two years 1894 and 1895 exceeded thirty millions sterling. As the fall in the gold price of silver was due to the fall in the gold price of com- modities any attempt to restore the old par of exchange between the two metals by pur- chasing limited quantities of silver was bound to prove too great a burden for any nation that undertook it. So far as the interests of Bi- metallism were concerned, the purchase of silver M 2 ! 164 THE STANDARD OF VALUE CH. by the United States was probably mischievous as it relieved the strain on gold and prevented a further increase in the purchasing power of that metal, such increase of purchasing power, or Appreciation of gold, if carried to a certain point, being the only cause that would have induced such countries as England and Germany seriously to take in hand the task of restoring the old system under which gold and silver were in joint use as the money of the world. It has been argued that there could have been no Appreciation of Gold between 1873 and 1887, because the rate of discount was low during these years. It was said that a scarcity of gold must act on prices by reducing the supply of credit, and that consequently an era of falling prices should be accompanied by a high rate of discount. This argument, though plausible at first sight, possesses no force. The first effect of an increased supply of gold is to lower the rate of discount. The consequent expansion of credit causes prices to rise, and this raises the general rate of profit. The higher rate of profit leads to an increase in the demand for credit, and makes borrowers willing to pay a higher price for it. The secondary effect of an increase in the supply of gold is, therefore, to raise the rate of discount, and it will be found that at a time xv SOME FALLACIES 165 of rising prices the rate of discount is higher than at a time of falling prices. The average rate of discount depends upon the general rate of profit ; the increase or diminution in the supply of gold produces only a temporary fluctuation, the general rate of profit being higher with rising prices than with falling prices. The matter is discussed by Professor R. A. Lehfeldt in an article in the Economic Journal for March, 1912, in which he shows that the great discoveries of gold in California and Australia were followed by a period of rising prices and a higher rate of discount ; that the great demand for gold after 1873 was followed by falling prices and a lower rate of discount ; and that when prices began to rise again, after the great production of gold in South Africa and elsewhere, the rate of discount also increased. An attempt was made by some Bimetallists to explain both the fall in the gold price of commodities and the fall in the gold price of silver by means of a different theory from that adopted by the majority of the Members of the Royal Commission on Gold and Silver. It was said that when the Bimetallic tie was broken, silver fell in gold price from causes affecting silver. This fall necessitated a corre- sponding adjustment in the gold and silver prices 166 THE STANDARD OF VALUE CH. of articles exchanged between the gold and silver standard countries. Silver prices, from some cause, proved the more difficult to move, and consequently gold prices had to fall. This explanation seems to me quite fanciful and to stand on no solid foundation. Why did silver fall in price, from causes affecting silver, when the Bimetallic tie was broken ? It could only have been from increased supply or reduced demand. That there was a reduction of potential demand is obvious, but India and other countries still maintained the silver standard and there was no unusual flow of silver to them, nor could any great stock of silver be found in the European market. Assuming, for the moment, that silver fell in price from the cause just stated, why should gold prices have fallen rather than silver prices have risen ? If silver is in such comparative abundance that everybody will give more silver than formerly for the same quantity of gold, why should that fact, taken by itself, cause everybody to give less gold for the same quantity of other commodities ? It was sometimes assumed that there was an extraordinary degree of stability in Indian prices, but for this there was no foundation. Prices in India move up and down in obedience to the laws of demand and supply in exactly the same way as they do in other countries. Neither the Indian trader, nor the xv SOME FALLACIES 167 Indian peasant, nor any other Indian that I ever met, is at all likely to accept an unduly low price for anything he has to sell. Nor is he more likely than a European or American to give more than he need do for anything he has to buy. India was not a manufacturing country at the time, and is not in the present day, and great economic or industrial revolutions involving serious permanent changes in the prices of important commodities were not to be expected, but when Indian or foreign commodities come into an Indian bazaar, prices go up and down in precisely the same way as they do in London or New York and from exactly the same causes. It may be said that a country which makes use of a large metallic currency, which hoards the standard metal, and which either withdraws coin from circulation in order to hoard it or pours coin into the circulation as circumstances may require, is not so likely as gold- standard countries to suffer from fluctuations due to causes affecting the Standard of Value. This is true, but acceptance of the proposition implies that if there had been a great supply of silver, tending to cause a fall in the value of that metal, India could have absorbed an unusual quantity without any material change in silver prices. We know, however, that no such ex- cessive quantity of silver went to India. 168 THE STANDARD OF VALUE CH. It is a purely arbitrary assumption to say that a fall in the value of silver caused a general fall in gold prices. A very large supply of silver, which was exported to silver countries, might cause a fall in the gold price of commodities exported from such countries, because they would have to be exported in increased quan- tities to pay for the increased import of silver, but such a change could neither cause a fall in general gold prices nor produce that long con- tinued trade depression which was experienced between 1873 and 1886. The theory just stated, like the theory put forward by the Majority of the Members of the Gold and Silver Commission to account for the two facts of the fall in gold prices and the absence of fall or smaller amount of fall in the case of silver prices, was defective because it failed to notice that the fall in the gold price of silver was due to the fall in Exchange, and that the fall in Exchange was due to the fall in the gold prices of articles exported to silver-using countries. I shall now notice an argument which was employed by some Bimetallists, and by other persons also, which affords the best instance of which I am aware of the delusions to which even intelligent men are liable when they deal with the currency question. It was said that when silver and gold .. SOME FALLACIES 169 began to change in value the countries using the silver standard thereby acquired a great advantage in International Trade over countries which adhered to the gold standard. The argu- ment was perfectly general in its nature, and was used with the object of proving that the country with the depreciating Standard of Value always gained this advantage. It is quite true that if two countries have different Standards of Value the one that has the better Standard will, so far as the Standard of Value is concerned, enjoy the greater degree of prosperity because production will be facilitated and the rewards of industry will be more equitably distributed. But the argument was stretched beyond this point and was held to prove that the one country would permanently drive the products of the other out of the international market. It was used in England by Bimetallists to show that the fall in the Indian Exchange unduly stimulated the manufacture of cotton goods in India arid also the production of wheat in that country to the detriment of the English manufacturer and agriculturist. It was also used in India by persons who were opposed to Bimetallism as well as to the establishment of a gold standard in that country, because they dreaded the effect on the Indian export trade of a rising exchange or even of an exchange that ceased to fall. It is beyond doubt that a fall in exchange 170 THE STANDARD OF VALUE CH. does, for a time at any rate, stimulate exports and check imports, and I shall give the explana- tion of this fact at a later period. In the first instance, however, I shall deal with the theory that a depreciating standard gives to a country a real advantage in the International Trade. This theory may be met by a number of argu- ments, any one of which is conclusive. (1) If we consider the case of those countries that have used inconvertible paper to such an extent as to depreciate their Standard of Value, we find that they never derived any permanent benefit from the depreciation of the Standard either in their internal trade or in their foreign trade, and they were always glad to go back to a metallic standard. (2) If, as we know to be the case, all trade is conducted as if under a system of barter, and if the rise and fall of prices and the alteration in the exchange are merely examples of the way in which the mechanism of the currency works in order to ensure that trade shall be so con- ducted, it is impossible that a rise or fall in exchange, can give any country an advantage over any other. (3) If the effect of a fall in the exchange is to increase exports and decrease imports, it SOME FALLACIES 171 would appear to involve a loss rather than a gain, for it cannot be to the advantage of a country to have to give more of its products in exchange for a reduced quantity of the products of other countries. (4) There is no better established principle in Political Economy than that which asserts that International Trade is dependent on the relative cost of producing com- modities in one country as compared with the relative cost of producing the same commodities in another country. In other words, the exchange of two com- modities (say A and B) between two countries depends on the relative cost of producing A and B in one country as compared with the relative cost of pro- ducing them in the other country. As the relative cost of producing A and B in any country cannot be affected either by a fall in the exchange, or by a Depreciation or Appreciation of the Standard of Value in that country, it is obvious that neither of these changes can really affect the trade between the two countries. The Committee to which was submitted in 1893 the proposal of the Government of India to introduce a gold standard into India, and of 172 THE STANDARD OF VALUE CH. which Lord Herschell was Chairman, dealt with the question in a different way. They observed that if the fall in the Indian exchange had the effect of stimulating exports and checking imports, it would follow that the exports would be unusually high when the exchange fell largely and vice versa, but they found the opposite to be the case. I quote the passage in which they dealt with this question. "It is said that the tendency of a falling exchange is to stimulate exports ; that, inasmuch as more silver, i.e., a higher silver price, is received in respect of the same gold price, whilst wages and the other factors in the cost of production do not increase in the same propor- tion, production becomes more profitable and is therefore stimulated. Assuming this to be true, the effect of each successive fall must be transitory, and can continue only until circum- stances have brought about the inevitable adjustment. Although one may be inclined, regarding the matter theoretically, to accept the proposition that the suggested stimulus would be the result of a falling exchange, an examina- tion of the statistics of exported produce does not appear to afford any substantial foundation for the view that in practice this stimulus, assuming it to have existed, has any prevailing effect on the course of trade ; on the contrary, the progress of the export trade has been less with a rapidly falling than with a steady exchange. xv SOME FALLACIES 173 For example, from 1871-2 to 1876-7 the gold value of the rupee fell constantly from 23*1266?. to 20*508d or about 11^ per cent. ; the exports of merchandise were actually less in the latter year than in the former, although in 1876-7 their rupee value exceeded by about 10 per cent, that of the exports of either 1870-1 or 1872-3. From 1878-9 to 1884-5, exchange was fairly steady, the average rates varying only between 19-9616? and 19'308^. per rupee or about 3^ per cent ; and during those six years the exports rose by no less than 36J per cent. Again between 1884-5 and 1888-9 the fall of the rupee was very rapid, from 19*308^. to 16 '3796?. or over 15 per cent., and the exports increased during those four years by 16J per cent; but in the single year 1889-90, when there was a slight improve- ment in the exchange, the exports increased by more than 6j per cent. It is said, too, that, whilst a falling exchange tends to stimulate exports there is a corresponding tendency to check imports. Here again statistics do not seem to show that diminished exports have been coincident with a lower exchange. Taking the same periods as before, from 1871-2 to 1876-7 when exchange fell 11^ per cent., imports of merchandise into India increased by 17 per cent ; from 1878-9 to 1884-5, when exchange was steady, the increase of imports exceeded 47 per cent. ; between 1884-5 and 1888-99, when the rupee fell about 15 per cent., the imports were augmented by nearly 25 per cent. ; while in 1889-90, when exchange slightly rose, the 174 THE STANDARD OF VALUE CH. imports were rather less than in the previous year. Upon the whole we cannot see any evidence that the effect of a falling exchange on the country at large, in influencing either exports or imports, has over a series of years been very considerable. " Some trains of a priori reasoning would seem to lead to the same conclusions, and also to the further conclusion that, even if a fall in the gold value of the rupee does stimulate exports, the result is not necessarily to the benefit of India as a whole, though it may temporarily benefit the employer at the expense of the wage earner, because wages rise more slowly than prices." The real, and, I think I may say, the obvious explanation is that the fall in Exchange was not the primary cause of the stimulus to exports, that the Exchange did not fall and could not fall until the balance of indebtedness turned against India, and that this balance of indebtedness caused the fall in Exchange and thereby produced the necessary adjustment by stimulating exports and checking imports. In this view of the case it is easy to understand why a falling Exchange should be accompanied by reduced exports and increased imports, and a rising Exchange by the opposite. If the two countries had had the same Standard of Value, the fall in Exchange would have stimulated exports and checked imports in ,. SOME FALLACIES 175 exactly the same way ; and if the fall had con- tinued until specie point was reached, the material of the standard would have been exported and the permanent adjustment of the trade between the two countries would have been secured by some rise of prices in one country and some fall in prices in the other. As India and England had different Standards at that time, the adjustment was effected not by action on prices, but by a permanent alteration in the Exchange ; in other words by a fall in the value of silver relatively to gold. The argument as to the advantage of a fall in Exchange and a low Exchange was strongly pressed when the proposal to introduce a gold standard into India was under consideration, and I was told that the attempt to do so could only end in ruined factories and uncultivated fields. The proposal to introduce a gold standard into India was one which might make the boldest hesitate, but I never had the slightest apprehension that it would permanently injure the foreign trade of India, or that if successful it would, in the long run, be other than bene- ficial to that trade. If the transfer had -been made from silver to gold, at or about the exchange of two shillings for the rupee, I do not doubt that there would have been a great fall in Indian prices and a long continued 176 THE STANDARD OF VALUE CH. depression of trade, with consequences similar to those which had been experienced in England and other gold-standard countries, but probably more severe. The precise form which the argument for a gain in the foreign trade of India from a fall in the Indian exchange used to take is worthy of notice. It was assumed, and even laid down in so many words at the commencement of the argument, that the Indian Exchange fell while everything else remained the same. On this assumption, it was easy to show that the fall in Exchange stimulated Indian exports, and that the manufacturers or other producers in a gold standard country were placed at a disadvantage as compared with their competitors in a silver standard country. But the hypothesis on which the assumption was based was an impossible one. If everything else remained the same the Indian Exchange did not fall, and could not fall. It could only fall if the balance of indebtedness turned against India, and in that case the balance could only be redressed by an increase in Indian exports and a check to Indian imports, and the adjustment required to redress the balance would equally take place whether the Indian standard was silver or was gold. In the former case, it would be redressed by a fall in the Indian Exchange, either temporary or xv SOME FALLACIES 177 permanent as the case might require. In the latter case it would be redressed by a temporary fall in Exchange which, if it reached specie point, would lead to an export of gold, and permanent adjustment of the balance of in- debtedness would be secured by a permanent fall in Indian prices or a permanent rise in prices in gold-standard countries, or partly by the one result and partly by the other. N CHAPTER XVI THE CLOSING OF THE INDIAN MINTS TO SILVER THE Report of the Royal Commission on Gold and Silver was as favourable to Bimetallism as could have been expected, but it was not followed by results of any practical value. The re-establishment of Bimetallism was impossible except by universal or almost universal Inter- national Agreement, and such agreement could not be obtained. No country had any objection to the re-establishment of a Bimetallic system by other countries, and every country would pro- bably have been willing to assist to a limited extent, but England would not change her Standard of Value and Germany took the same view. I had been a Member of the Royal Com- mission on Gold and Silver and in the end of 1888 became Finance Member of the Council of the Governor General of India. In that capacity I took the earliest opportunity (March, 1888) of formally stating my views as to the 178 CH, xvi INDIAN MINTS CLOSED 179 future relations of gold and silver. I called attention to the extent to which the fall in the gold price of silver coincided with the fall in the gold prices of commodities and said that another fall in gold prices would probably be accompanied by a further fall in the Indian Exchange. I also pointed out that the situation existing at that time was not one of permanent equilibrium, and that there would either be continuous progress in the direction of demonetising silver and sub- stituting gold, or that the world would revert to the old system of double legal tender. In the former case Indian financial difficulties would probably be greater in the future than they had been in the past ; in the latter case we might have to pass through a severe financial and com- mercial convulsion caused by other nations attempting to restore the old ratio between silver and gold of 15|- to one. In the interests of India, a sudden reversion to the old ratio of 15 J to one, as well as a con- tinuous and progressive demonetisation of silver, accompanied by a fall in the gold value of the rupee to an unknown and unlimited extent, were alike to be deprecated. If there should be an International Agreement at some future time India ought to be a party to it in order to safe- guard her own interests as far as possible. If there was to be no International Agree- ment and the world was gradually to drift 180 THE STANDARD OF VALUE CH. towards the universal gold standard, India must either accept the consequences, whatever they might be, or choose the heroic and hazardous remedy of changing her Standard of Value from silver to gold. In the financial years ending March 31st, 1887, 1888, 1889, 1890, and 1891, gold prices were fairly steady and so was the Indian Exchange. In 1890 there was a material rise in the Exchange which was largely of a speculative nature, and due to the United States of America having passed a law providing for the purchase of 4,500,000 ounces of silver every month. As I have previously shown, gold and silver could not have been brought back to the old ratio of exchange by purchasing silver unless the oper- ation was carried so far as to reduce prices in silver- standard countries by about 30 per cent. an almost hopeless task. And what made the purchase of silver by the United States quite ineffective was the great increase which was taking place at the same time in the production of that metal. Notwithstanding the fall in the gold price of silver the yearly production was in- creasing rapidly, as the following figures show : Average Yearly Years. Production of Silver. Ounces. 1861-70 39,000,000 1871-80 66,000,000 1881-1890 98,000,000 1891-93 161,000,000 xvi INDIAN MINTS CLOSED 181 The rise in the price of silver and in the Indian Exchange in 1890 which followed the increased purchases of silver by the United States, was mainly due to speculation and lasted for a very short time. The highest rate ob- tained by the India Office for bills in 1890-91 was Is. 8*94^. ; the lowest was Is. 5d. The results of this remarkable rise and fall in the value of the Indian Standard of Value are worthy of record. For a time trade between India and England was little more than gambling. The fluctuation in exchange deter- mined the question of profit or loss. The rise in the gold price of silver and the subsequent fall were not accompanied by a simultaneous fall and rise in all prices and wages measured in silver. The wholesale prices of the articles of export felt the influence of the rise in silver at once. The fall in prices of these articles caused great trade depression. The appre- ciation of silver did not cause a high rate of discount and was not accompanied by a scarcity of silver in the centres of trade. On the contrary, the accumulation of silver in the Indian Banks was unprecedented and the rate of discount was the lowest that had ever been known. The experience gained in 1890 threw light on arguments that had been used in the Bimetallic Controversy. 182 THE STANDARD OF VALUE CH. " It was shown that Appreciation of the Standard of Value is not necessarily attended by a positive and manifest scarcity of money ; that it does not affect retail prices sooner than wholesale prices ; that all prices and wages do not fall simultaneously ; that it does not necess- arily lead to a scarcity of coin in the Banks and is not invariably accompanied by a high rate of discount. The circumstances of the year 1890 were, however, quite exceptional and it would not be fair to argue that like consequences must always attend Appreciation of the Standard of Value." It became evident from what happened in the year 1890-91 that the Bimetallic Controversy / must soon be closed, and that it would prob- * ably end by the abandonment of silver as a Standard of Value and the universal adoption, sooner or later, of the single gold standard. The responsibility for any measures that might ultimately be adopted in India to meet this change in the Standard of Value of the world would rest on the Government of India and on the Secretary of State for India, but owing to my position as Finance Member of the Council of the Governor General, it was my duty to lay the facts of the case before the Government of India and to give them the best advice I could. When the Indian Exchange and the gold price of silver began to fall, the closing of the , vi INDIAN MINTS CLOSED 183 Indian Mints to silver, and the establishment of a Gold Standard in India, were advocated by more than one person. The authorities responsible for the welfare of India naturally shrank from the adoption of a policy of which the results were so uncertain and which might after all prove to have been unnecessary. In 1876 the Govern- ment of India rejected a proposal to close the Indian Mints to the unlimited coinage of silver. But in 1878 they recommended this measure to the Secretary of State for India. They proposed to introduce a gold standard at the Exchange of two shillings for the rupee. The proposal met with no support in England from the authorities who were consulted and was rejected by the Secretary of State for India. When it was recognised that the fall in the gold price of silver had been accompanied by a fall in the gold prices of commodities, and not by a rise in silver prices, as had been generally anticipated, the objections to any change in the Indian Standard were greatly increased, and the question of a return to Bimetallism under an International Agreement held the field for a number of years. My early study of the question made me a strong op- ponent of any attempt to introduce a Gold Standard into India, especially at so high a rate of Exchange as two shillings for the rupee. I 184 THE STANDARD OF VALUE CH. was convinced that Bimetallism afforded the best solution in the interests of India, and I believed that its re-establishment by general International Agreement would be best for the whole world. As time went on the chances of a return to Bimetallism grew worse instead of better. The depression of trade and the other effects which attend any increase in the Purchasing Power of the Standard of Value wear off in time, and the gold-standard countries were accommodating themselves to the new conditions. They, in common with the rest of the world, had gained largely by the reduction in cost of transport and the lower- ing of the real cost of production which had taken place in many cases, and the opponents of Bimetallism pointed to this gain and used it as an argument in favour of the maintenance of the single gold standard, though, of course, gains of this nature would have been obtained under any Standard of Value. The great divergence in the relative value of gold and silver which had taken place was a serious obstacle to a return to Bimetallism. Some countries insisted on the adoption of the old ratio of 15^ to one and though I believe it would have been possible to go back to that ratio, its adoption would have involved very great disturbance of trade and finance for a time. It was obvious to me that the United States xvi INDIAN MINTS CLOSED 185 would soon have to choose between abandoning the purchase of silver and drifting into a silver standard, and I had little doubt that when the time came to make a final decision they would give up the attempt to bring silver to its old position and would adhere to the gold standard. India had suffered in the first instance from the great increase in the Purchasing Power of Gold. Notwithstanding the fall in the gold price of silver, the production of that metal was now rapidly increasing and notwithstanding the fall in the Indian Exchange the import of silver into India was increasing. There had been a distinct tendency in recent years towards a rise in Indian prices and complaints were heard from persons on fixed incomes. Especially injurious would be the rush of silver and the fall and fluctuation in the Indian Exchange w r hen America ceased to purchase the 4,500,000 ounces of silver which she was then taking off the market every month. It was of great importance that India, which was so closely connected with England, should have the same Standard of Value, and it was every day becoming less likely that this result could be attained in any other way than by India establishing a gold standard. In the circumstances I have just explained, I was bound to reconsider the question of the introduction of a Gold Standard into India, and I 186 THE STANDARD OF VALUE CH. came to the conclusion that it was, in theory at least, a possible operation, that further discussion would throw no new light on the subject, that if the United States finally abandoned silver it was desirable to make the attempt, and that in any case the time had come when a final decision must be arrived at. I was firmly convinced of the soundness of the Quantity Theory of Money and knew that if the unlimited coinage of silver was stopped, it was quite possible to reduce the amount of the rupee circulation to such extent as to bring the Indian Exchange to a par with gold at a rate of Exchange which could be permanently main- tained. How great the necessary amount of reduction might be I could not tell. There was a very large amount of rupees hoarded in India and when the rupee was given an artificial value these hoards might be thrown into circulation and render the process of the necessary reduction of the currency slow and difficult. I thought at one time that this would be the case, but fuller consideration brought me to the conclusion that as the Indian looked upon the rupee as the London Banker looks on a sovereign namely, a thing invariable in value in itself and would perceive no change in it when the coinage of silver was stopped, he would simply come to the conclusion that silver had become xvi INDIAN MINTS CLOSED 187 cheaper arid would as a rule retain the rupees which he had previously hoarded. For the same reason I was satisfied that the Indian would not think less of the rupee because it was over- valued in regard to silver and was convinced that he would receive it in payment as willingly and as freely as before. There was, however, a considerable number of rupees in circulation beyond the limits of British India, and there would probably be a tendency to return them to the country of origin when they became of higher value than was the silver of which they were made. But the number of such rupees was not large and their existence did not constitute a serious difficulty. Nor did I fear that there would be illicit coinage of rupees of full weight and purity to any serious extent. Other countries possessed over- valued silver coins and had not suffered in this way. To make the illicit coinage of rupees of full weight and standard profitable, a large number must be coined and any such under- taking would require a considerable expenditure on machinery and involve risk of loss of capital, since such operations could not be concealed for any length of time. Persons who have capital to lose do not engage in business of that nature. The rupee in India would certainly not be over- valued under the new conditions so much as 188 THE STANDARD OF VALUE CH. silver coins were overvalued in France, the United States, and elsewhere, and the illicit coiner, if there were such a person, would confine his operations to those countries where the largest profit could be made. The question of the ratio at which the change from silver to gold should be made was one of extreme difficulty. To any attempt to make the change at the old ratio of 15 J to one, I was absolutely opposed. I doubted if the change could be made at all at that ratio and if the attempt to do so were made it would involve the most serious disturbance for a time of the foreign trade of India, and, if successful, would lead to a general fall in prices which would produce great distress and might prove so disastrous as to lead either to a change of ratio or even an abandonment of the attempt to establish a Gold Standard. A change to a Gold Standard at the ratio of 15 J to one would also involve so large a reduction of the rupee currency that the measure might prove impracticable and would certainly require a long time before it became effective. The closer the ratio between the rupee and gold, chosen for the substitution of the gold for the silver standard, was to the market rate of the day, the less would be the disturbance to trade and to prices, the easier it would be to make the change, and the more quickly could it be carried out. The procedure xvi INDIAN MINTS CLOSED 189 which seemed to me to be the safest and best was to take measures to stop the coinage of silver, to watch the result, and to be guided by circumstances in choosing the ratio of exchange from the silver to the gold standard. Some persons advocated the immediate purchase of a large stock of gold, the declaration of the rate at which the exchange to the gold standard would be made, and an undertaking by the Government of India to give gold coins for rupees at that rate. This method seemed to me to involve too much risk and to be too uncertain in its results. It made it necessary to declare at once the ratio of exchange from the silver to the gold standard ; the providing of a large stock of gold would have been both difficult and expensive ; and there was no guarantee that it might not have to be all paid away in exchange for rupees without securing j the establishment of the Gold Standard. Such a j failure would have discredited the attempt to J introduce a Gold Standard and might have iled to the abandonment of the scheme. The I final decision in the matter rested with the | Home Authorities and they were more likely to accept the cautious measure of closing the Indian mints and being guided by experience afterwards than that of determining at once the future rate Ijof exchange between the rupee and gold and borrowing in London an amount of gold which 190 THE STANDARD OF VALUE CH. would be sufficient to carry out the reduction of the rupee currency to an extent that would effectively establish the new rate of exchange. The amount which it might be necessary to borrow for this purpose could not be told be- forehand. The chief danger to the project for establish- ing a gold standard which I foresaw was the possibility that gold prices might continue to decline. I believed that the fall in gold prices had been the primary cause of the fall in the Indian Exchange, and I was convinced that if gold prices continued to fall, or again fell largely, the Indian Exchange would tend to fall still more, even though the unlimited coinage of silver was stopped, and that in such case it would be extremely difficult to establish a gold standard in India. It was true that gold prices were still falling but the production of gold had begun to increase, and there was every prospect that it would increase very largely. The production of silver had been largely increasing for some time, and notwithstanding the heavy purchases by the United States, the import of silver into India had increased and Indian prices at length shewed a tendency to rise. If the United States gave up the purchase of silver the imports of that metal into India would largely increase, the Indian Exchange would fall still more, and there xvi INDIAN MINTS CLOSED 191 would at last be a clear Depreciation of the Indian Standard of Value in the form of a general and excessive rise in prices. It was obvious that if an attempt were ever to be made to introduce a Gold Standard into India the time to do so had arrived. By stopping the unlimited coinage of silver, India would escape some portion of the depreci- ation which had already begun to show itself, and if the Indian Mints were to be closed it was very desirable to do so before, or at any rate simultaneously with, the stopping of the purchase of silver by the United States. If it so happened that gold prices still continued to fall, it seems to me that the establishment of a Gold Standard in India might be practically impossible and probably would not in that case be even desirable. But if gold prices continued to fall, I did not believe that the Gold Standard could, or would, be maintained everywhere or any- where and in that case the world would return to Bimetallism, which, for India at any rate, would be the best solution. If India stopped the coinage of silver, she would escape the great and sudden depreciation of silver which was about to occur, and if, subsequently, a gold standard was established she would make the change at probably Is. 6d. or Is. 4>d. per rupee, or even at a lower rate, and in this way would escape the greater portion of that Appreciation of the 192 THE STANDARD OF VALUE CH. Gold Standard which had already occurred. If Appreciation of gold should continue the coun- tries which already had the gold standard would have to bear the full amount of Appreciation, while India would have escaped to the extent of from 6d. to 8d. out of two shillings, and, in these circumstances, if it came to be a question of what countries could stand Appreciation for the longest time it seemed to me that India, with so much in her favour, would be likely to win. A further question which I had to consider was the position of the poorer classes who had hoarded silver in the form of ornaments. In times of famine or distress persons who were in want of money sometimes sold their silver and I disliked the idea of doing anything that might weaken their position. I had had practical experience in 1866 of what famine in India meant, and though the famine in that part of India where I was serving was not what w r ould be described as very severe the impression made upon me could not be effaced. On the other side were the considerations that the very poorest classes, who would suffer most in time of famine, did not usually possess silver ; if their silver exchanged for fewer rupees when the mints were closed to silver those rupees would possess a greater purchasing power and so would any rupees they might have hoarded. The extension of Railways and the organisation xvi INDIAN MINTS CLOSED 193 beforehand of plans for affording relief had greatly reduced the risks of famine. For in- stance, the districts where I had seen the effects of famine in the year 1866 had since been penetrated by railways, and in case of need food could be poured into them from other parts. Indian Railways and Irrigation Works were chiefly constructed with English capital, and construction would go on much more rapidly if India and England had the same Standard of Value. It seemed to me that the risk involved in unsettling the relation between silver and the rupee was one that might, under the circum- stances, be taken, and I am glad to say that I have never seen any trustworthy evidence that the change made any serious or even appreciable difference in case of famine. If the worst came to the worst and India could not establish a Gold Standard, and other nations did not adopt Bimetallism, the Indian Mints would have to be opened to silver again ; but India would then be no worse off than if she had never closed them. No doubt there would have been a large amount of temporary disturbance, but it would not have been greater than she would have experienced if she had kept them open when the United States ceased to purchase 4,500,000 ozs. of silver every month. And when India opened her Mints o 194 THE STANDARD OF VALUE CH. again to silver, she could have done so on such conditions as suited her best. The closing of the Indian Mints appeared a very rash measure to many persons, but from what I have just said it will be seen that I did not make up my mind that the Mints should be closed without considering all sides of the question. The matter had engaged my attention for many years, and the arguments stated above, viewed in the light of after events, show that the closing of the Mints was a measure that in the long run might produce quite satisfactory results, would not be disastrous in any case, and was fully justified by the circumstances of the case. Sound as the arguments for the closing of the Indian Mints now appear, and satisfactory as they appeared to me at the time, I could not forget the uncertainty that hangs over all attempts to forecast the future in regard to measures affecting the Currency and the Standard of Value, and my anxiety as to the possible results of that measure was extreme. I had tried to take into account and to attach due weight to every contingency, but it was always possible that something might occur which I had not foreseen. 1 1 Many persons who spoke with authority on questions connected with the Currency and the Standard of Value were opposed to the xvi INDIAN MINTS CLOSED 195 Having once made up my mind as to the course which ought to be followed, it seemed to me only fair that I should let the Indian public and all persons interested in the question know svhat my views were. I had publicly advocated Bimetallism for many years and still believed in it, and if I were to accept, and even recommend, the adoption of a measure such as the closing of the Indian mints to silver, it was better that I should do so openly. For this reason, in March, 1891, when bring- closing of the Indian Mints, and prophesied nothing but disaster as the result of that measure. Five years after the closing of the Mints and when the measure was on the point of proving a success, a long letter on the subject from Sir Robert Giffen appeared in the Times of May 18th, 1898, which ended with the following words : " I submit, then, that what is really in question is not, as the Indian Government supposes, a question of the best method of establishing a gold standard in India, but whether the establishment of such a standard is practicable at all, or practicable at any cost which India can afford. If this is impossible, then, the only alternative is to return to silver money. No greater evil than an artificial and managed currency can be inflicted on a country. It is not unreasonable to say that sooner or later the error committed in 1893 may have to be acknowledged and reversed. "The highest political issues are also involved. One of the most dangerous things for a Government to do is to tamper with the people's money. Is it certain that the Indian Government can go on long with its present ideas about money without producing complications in the government of India itself ? . . . ." The same issue of the Times contained a letter from the Secretary of the "Ceylon Association" endorsing Sir Robert Giffen's views, while Mr. William Fowler lamented the disturb- ance which must be caused on the London Money Market by the closing of the Indian Mints to silver, and described that measure as " Money Murder ! " o 2 196 THE STANDARD OF VALUE CH. ing forward the Indian Budget for the year 1891-2, I made the following remarks : " The recent action of the United States has, no doubt, to some extent, raised the price of silver and caused a rise in the rate of Exchange, but what India requires is not a high rate of Exchange rather than a low rate, but some system under which fluctuations in Exchange shall be neither great nor frequent, and shall oscillate round a fixed point. In this respect, we have, so far, lost rather than gained. "It is held by some that a low rate of exchange, or at any rate a falling rate, stimu- lates exports from India, and is beneficial to the country, and, for proof of the correctness of their opinions, they point to the course of trade as it ebbs and flows daily before our eyes. With all deference to my friends who hold this opinion, I believe that it is one of the greatest delusions that ever gained possession of the human mind. . . . . Trade between different countries is essentially a barter of goods for goods, and its extent and nature are determined, in the long run, not by the Standard of Value in use in either country, but by the com- parative cost of production of commodities in these countries. . . . The truth is that the apparent stimulus to, or apparent check on, exports which accompanies a fall, or a rise, in Exchange is followed in each case by a reaction of precisely equivalent magnitude, xvi INDIAN MINTS CLOSED 197 or is itself the reaction which naturally follows a previous check or stimulus. It will probably be a surprise to most persons to learn that the total fluctuations downwards of Exchange since 1873 very slightly exceed the total fluctuations upwards, the difference being, I believe, not more than three per cent. While repudiating the theory that trade between England and India is benefited by the absence of a common monetary standard, I do not deny that there is such a thing as a good standard of value and a bad standard of value, or hold that the question as to what is the best standard is of no practical importance. What I contend for is that the theory of a beneficial stimulus to trade owing to fluctuations in Exchange between countries having different standards of value is an untenable and mis- chievous delusion. A sudden rise in Exchange such as we had this year will unquestionably check business for a time and cause a depression of longer or shorter duration. But trade must adjust itself in time to the new scale of prices and will then proceed as before. The existence of the Indian tea gardens depends not on the relative value of Gold and Silver, but on the fact that the people of England want tea and are willing to give iron, coal or piece goods in exchange for it. An alteration in the relative value of gold and silver neither weakens their desire for tea nor reduces the amount of goods which they are willing to give in exchange for it, and 198 THE STANDARD OF VALUE CH. cannot, therefore, in the long run, either stimulate or check the production of that article in India. "The task which the United States has undertaken, of raising the price of silver by purchasing yearly a fixed, though large, quantity of that metal, is one which, if undertaken by any other nation, would, I feel convinced, result in disaster ; but so great is the wealth of that country, and so rapid its growth, that it would not be safe to say that its efforts must fail. We cannot blame the United States for adopting the course which seems best for its own interests, but I venture to think it would have been better to have at once adopted the unlimited coinage of silver .... " If the United States should adopt free coinage of silver, it is possible that, in time, the other nations of the American Continent would follow its example, but, whether they did so or not, I should expect that the adoption of free coinage by the United States would lead to much greater stability in the relative value of gold and silver than we have experienced in recent years, though I am unable to say what the relative value of the two metals might prove to be under such a system. In that case it would probably be best for India to maintain the free coinage of silver for an indefinite period in the hope that one day a final solution would be obtained." " On the other hand, if the United States should abandon its attempts to maintain silver as a xvi INDIAN MINTS CLOSED 199 monetary standard, and should put a stop to its purchases of that metal, a position of serious danger would be created for India. So long as any reasonable hope of a satisfactory settlement of the currency question remains, I think it would be unwise for India to adopt a gold standard, but the circumstances would be entirely changed if the United States altogether abandoned silver, and the question whether India should not in that case simultaneously close her mints to silver is one that deserves serious consideration. I have no right to commit the Government of India to any opinion on the subject, but it is my belief that in case of necessity the gold standard could be introduced into this country, and that, if America altogether abandons silver, it would probably be best that India should change her Standard of Value. The risks would be considerable and the sacrifices heavy, but almost anything would be better than to accept violent and continual fluctuations in Exchange as our inevitable lot for all time, with the prospect of a fall in the value of silver of quite indefinite amount. I mention the matter, not because there is any intention of taking steps in this direction at the present time, but because it is right that the Government of India and the Indian public should clearly understand what they may have to face in the future, and that they should make up their minds as to the course to be followed under certain conditions. If the United States abandons silver as a monetary 200 THE STANDARD OF VALUE CH. standard, the disease will have run too far to be stayed by mere palliatives and the patient may any day be called on to choose between a difficult operation and lifelong disease. If such a change is ever made it will be found easiest and safest to adopt a gold standard at or about the exchange of the day rather than to attempt to establish a higher rate. The great mass of the currency in ordinary use in India would continue to be silver as at present. " The question of the future of silver possesses not merely a speculative, but an emin- ently practical interest in India. I have long held the opinion that however distasteful to the majority of men currency questions may be, and however unwilling we may be to undertake reforms which affect the Standard of Value, the perpetually recurring evils flowing from a difference of monetary standard between India and the other countries with which her financial and commercial transactions are so important, cannot and should not be endured for ever, and that sooner or later a final solution of the problem must be found, and I am unable to discover any permanent remedy for the evils which, day by day, and year by year, press themselves upon our attention in India, except either the general adoption of the system of double legal tender or the extension of the single gold standard." l 1 Lord Cross, who was at that time Secretary of State for India, officially disapproved of what I had said on the ground that a xvi INDIAN MINTS CLOSED 201 These remarks and the serious condition of things to which they called attention led to a determined effort on the part of those members of the Indian public who took an interest in the question to have the matter finally settled in one way or another, and in June, 1892, the Govern- ment of India unanimously recommended to the Secretary of State for India that, if arrange- ments could not be made by International Agreement or otherwise for protecting the interests of India, the Indian Mints should be closed and measures adopted having for their object the introduction of a Gold Standard into India. The proposal was not received favourably by the Home Authorities, and some corre- spondence took place between the India Office and the Government of India, but the time Member of the Government of India ought not to advocate measures that were opposed to the views entertained by the majority of his colleagues, but he made the mistake of pronouncing judgment before he had ascertained the facts of the case. The Members of the Government of India in 1886 had been opposed to the establishment of a gold standard, but not a single Member of the Government of India of 1886 continued to hold office in 1892, and the Government of India was no longer opposed to the attempt to introduce a gold standard into India. A year later when the Government of India formally expressed its opinion on the question, it was discovered that every other Member of the Government was in favour of more prompt measures for the establishment of the gold standard than I was. The Viceroy always sees the Financial Statement before it is delivered, so that nothing can appear in it to which he objects. 202 THE STANDARD OF VALUE CH. for discussion had passed and the Government of India pressed for a final decision of the question. In October, 1892, the Secretary of State for India referred the proposals of the Government of India to a Committee of which the Chairman was the late Lord Herschell. The proposals recommended by the Govern- ment of India had been drawn up by me and were to the effect that the Indian Mints should be closed to the unlimited coinage of silver and no further steps taken until the effect of closing the mints had been ascertained. The ratio at which the change from the silver to the gold standard should be made was subse- quently to be settled, and it was said that a ratio based on the average price of silver during a limited period before the Mints had been closed would probably be the safest and most equitable. When this ratio had been settled, the Mints were to be opened to the coinage of gold at that ratio and gold coins were to be made legal tender to any amount. If the closing of the Mints to silver did not of itself prove sufficient in time to establish the desired rate of exchange, steps would have to be taken to reduce the amount of the rupee currency. xvi INDIAN MINTS CLOSED 203 Fears had been expressed in India that the closing of the Mints to silver might be followed by a sudden and injurious rise in exchange. In order to allay apprehension on this point, the Government of India proposed to take power to make English gold sovereigns legal tender, if necessary, to an unlimited extent at a rate not exceeding Is. 6d. for the rupee. In this way the exchange would be prevented from rising above a par of Is. 6d. for the rupee. The Report of Lord Herschell's Committee is dated 31st May, 1893, and its recommendation was as follows : " While conscious of the gravity of the sug- gestion, we cannot, in view of the serious evils with which the Government of India may at any time be confronted if matters are left as they are, advise your Lordship to overrule the proposals for the closing of the mints and the adoption of a gold standard, which that Govern- ment, with their responsibility and deep interest in the success of the measures suggested, have submitted to you. " But we consider that the following modifica- tions of these proposals are advisable. The closing of the Mints against the free coinage of silver should be accompanied by an announce- ment that, though closed to the public, they will be used by the Government for the coinage of rupees in exchange for gold at a ratio to be 204 THE STANDARD OF VALUE CH. then fixed, say Is. 4d. per rupee. In order 1 These figures represent the amounts actually received by the Secretary of State in each year. xvn G( GOLD STANDARD IN INDIA 209 to accelerate this progress, the Government of India proposed to the Secretary of State, in March, 1898, that money should be borrowed to form a gold reserve and that, if found necessary, special steps should be taken to reduce the relative redundancy of the currency by calling in and melting down silver rupees. The pro- posals of the Government of India were referred, in April, 1898, to a Committee of which Sir Henry Fowler (Lord Wolverhampton) was Chairman. This Committee made its report on 7th July, 1899. While the Committee was sitting the Indian Exchange had been rising, and had at last reached Is. 4d., while 2,230,000 in gold had been paid into the Indian Treasury in exchange for silver rupees, though the drawings of the Secretary of State for India amounted to 18,692,000 in 1898-9. The proposals of the Government of India had not been very happily framed, and proved to be unnecessary, as the mere closing of the Mints for five years had made the Gold Standard effective at an exchange of Is. 4?d. for the rupee. In view of this alteration in the situation, the Committee recommended: That the permanent rate of exchange should be fixed at Is. 4>d. for the rupee, and that gold should be made legal tender. The Committee also recommended that the 210 THE STANDARD OF VALUE CH. profit made by the coinage of new rupees at the rate of fifteen rupees for one sovereign should be used to form a gold fund to secure the converti- bility of rupees into sovereigns at the same rate, and that the Indian Mints should be opened for the coinage of gold. Up to the present date the Indian Mints have not been opened to the coinage of gold. It was found that gold coins did not circulate freely, and it was more economical to allow rupees to circu- late and to accumulate a gold reserve out of the profit obtained by the issue of silver rupees in exchange for gold at the rate of Is. 4>d. for each rupee. This reserve could be used to support the value of the rupee currency. The profit on the coinage of silver rupees was credited to a Gold Reserve Fund, with effect from 1st April, 1900. On 15th September, 1899, the sovereign and half-sovereign were made legal tender to any amount. As the closing of the Indian Mints to silver for five years had proved of itself sufficient to i establish a gold standard in India at the rate of \\ 1*. 4id. for the rupee, there was nothing left for ^x the Government of India to do except to make \ the necessary arrangements to meet the various difficulties of minor importance that were experienced from time to time. xvii GOLD STANDARD IN INDIA 211 After the exchange had risen to Is. 4>d. per rupee progress was rapid. It had always been contemplated that when gold was received by the Government of India in exchange for rupees, it should, if not taken out by the public, be held as a portion of the Paper Currency Reserve. Under this arrangement, rupees could be given at once from that Reserve when gold was tendered, and the Government of India would escape the cost of either holding gold which the public would not receive or of shipping it to England. Progress however was so rapid, and so much gold was tendered, that there arose a serious danger that the stock of rupees might run short. By working the Mints at high pressure this difficulty was successfully met, and, as a precaution, it was decided to hold in the form of silver rupees 4,000,000 of the profit on the issue of silver rupees in exchange for gold as a special reserve to meet sudden demands. This gave a reserve of sixty millions of silver rupees without causing additional expenditure, but of course it reduced the available Gold Reserve by an equivalent amount. The designation of the Gold Reserve Fund was consequently altered to Gold Standard Reserve. As gold did not circulate freely in India it would have been wasteful to force the public to send gold to India to be exchanged for rupees, p 2 212 THE STANDARD OF VALUE CH. when the gold could only be made useful by being transmitted to London. On this account it was decided to receive gold in London from time to time as well as in India and to pay for it by drafts on the Indian Treasury, the drafts being issued at the exchange of Is. 4>d. or Is. 4f^d. per rupee, according to the date of pay- ment. Power was also taken to hold a portion of the Indian Paper Currency Reserve in London, either in the form of gold or of gold securities. By so doing, it became possible, in case of need, to use the gold and gold securities in the English portion of the Paper Currency Reserve to meet the current requirements of the Secretary of State for India, an equivalent amount in rupees being simultaneously transferred to the Paper Currency Reserve in India. The Indian Paper Currency Reserve has always been much more than sufficient to secure the con- vertibility of the Paper Currency under any con- tingency that was likely to arise, and there is no objection to holding the gold securities of the Paper Currency Reserve in London, as it is in the London Market that they would, in case of need, be exchanged for gold. The holding of Gold belonging to the Paper Currency Reserve in London instead of in India is open to objec- tion, but the objection is rather theoretical than xvn GOLD STANDARD IN INDIA 213 practical. The Government of India is bound to cash the Currency Notes even if the Reserve proved insufficient. In 1907, it was decided on the advice of the Indian Railway Finance Committee to devote every year half the profit on the coinage of rupees to capital expenditure on the construction of Railways, and a sum of 1,123,000 was actually transferred in this way. Subsequent events led to this proposal being held in abeyance. 1 In August, 1907, a check was experienced. Exports fell off while imports did not diminish in proportion ; a financial and commercial crisis occurred in the United States in October and led to a great demand for gold for that country. Exchange fell, and at one time went as low as Is. 3-^J-rf. for the rupee. The gold held by the Government in India was practically exhausted and the Government of India sold bills on the Gold Standard Reserve in London at Is. 3ffe?. withdrawing the par amount of the Bills from 1 I was a Member of the Committee which made this suggestion. It met with much opposition, but was quite reasonable. It makes, practically, no difference whether you reduce your borrowing by using a portion of the Gold Reserve for Capital Expenditure on Railways, or maintain your borrowing at its full amount, and invest the whole of the Gold Reserve in gold securities. In the former case you can borrow in case of need up to the amount which has been used to reduce borrowing and still be in quite as good a position as if the whole of the Gold Reserve had been invested. The reduction of the amount borrowed in London strengthened the Indian Exchange. 214 THE STANDARD OF VALUE CH. circulation and placing the rupees in the Indian Gold Standard Reserve. The total of Bills sold in this way came to 8,058,000 in the five months April to August, 1908. The placing of the par value of the Bills in the Indian portion of the Gold Standard Reserve reduced the Indian Currency by 120 millions of silver rupees. The Secretary of State was, also, unable to draw Bills to meet his requirements without lowering the exchange, and he met his wants partly by the issue of India Sterling Bills and partly by using the gold in the London portion of the Paper Currency Reserve, an equivalent amount of rupees being simultaneously with- drawn from circulation in India and placed in the Indian Paper Currency Reserve. The crisis was over by September, 1908, but the strain it imposed on the Gold Standard Reserve will be shown by the following figures which give the amount of gold and gold securities held on 1st August, 1907, and 1st September, 1908, respectively : xvii GOLD STANDARD IN INDIA 215 Sterling Assets of the Government of India, excluding Treasury Balance in England. On 1st Aug. 1907. On 1st Sept. 1908. 4,589 000 1 116 000 Gold held by Secretary of State on account of Paper Currency 6 205 000 1 705 000 Value of Gold Securities held in England for Gold Standard Re- serve (Face Value) 14,442,000 7 342 000 Gold Securities held in England on account of Paper Currency Re- 1 435,000 1 495 000 Total 26 671 000 11 658 000 The reduction in gold assets was as nearly as maybe 15,000,000 sterling, but the lowest point was not reached on 1st September, 1908. The gold assets were at their lowest point on 22nd January, 1909, when they came to 8,963,000, so that the total drain may be taken at seventeen and three-quarter millionss terling, and the untouched balance at nine millions sterling. There was at the same time, of course, a very large accumulation of silver rupees in the Indian portion of the Gold Standard Reserve, but this could only have been made available to support the Gold Standard by being sold for gold and could only be sold at its value as metal. No person who had experience of the course of Indian trade could have doubted that such a 216 THE STANDARD OF VALUE CH. crisis would occur sooner or later, and similar crises must be expected in the future. But they will be only temporary, and even though the gold in the hands of the Government should be exhausted and the exchange should fall below specie point, the fall will be only temporary, and exchange will rise again to the old figure. The soundest guarantee for the permanent maintenance of the Gold Standard in India is that the rupee currency is in ordinary times just sufficient to maintain the exchange at a level of Is. 4d. so long as the Secretary of State is prepared to sell drafts on India at a suitable rate of exchange, and the Government of India to receive gold at 1*. 4>d. for the silver rupee. A reserve is maintained in the form of gold and gold securities, and this is used to prevent the exchange falling materially below Is. 4>d. If the Government of India sell Bills on London they thereby produce a two-fold effect. The amount of the Bills counts in the International Trade as an equivalent increase of exports, and tends to maintain exchange. As the Government of India simultaneously withdraws the par amount of the Bills from circulation, they contract the currency and such contraction tends by lowering prices to increase exports and diminish imports. When the Secretary of State for India meets his requirements by withdrawing gold from the Paper Currency Reserve or from the Gold Standard Reserve, instead of by drawing Bills on the Government of India for the amount he requires, he affects the International Trade in 218 THE STANDARD OF VALUE CH. the same way. The reduction in the amount of Bills drawn is equivalent to an increase of an equal amount in the exports from India, and as the Government of India simultaneously with- draws rupees from circulation and places them in the Indian Paper Currency Reserve or in the Indian portion of the Gold Standard Reserve, there is a corresponding contraction of the currency with the usual effect on prices. The process just explained is precisely the same as that which takes place between two countries both of which have a Gold Standard and a gold currency. If the balance of indebtedness turns against one of these countries the exchange falls, and when specie point is reached gold is exported. This export of gold has in the first place the same effect on the International Trade as if it had been an export of goods ; it helps to settle the balance of indebtedness. In the second place it tends to lower prices in the country of export and to raise them in the country of import and in this way to bring about a permanent change of such nature as to make the exports and imports of each country sufficient to settle the balance of indebtedness. It is true that in so far as he holds Gold Securities in England, and not gold, the | Secretary of State for India does not, when a crisis occurs, release any gold to relieve the xvn GOLD STANDARD IN INDIA 219 London Money Market, and it is conceivable that his failure to do so might tend to prolong for a short time a condition of things having an unfavourable effect on the Indian Exchange. The responsible authorities, however, hold that the gain in interest from holding gold securities instead of gold more than counterbalances any possible or probable disadvantage, and I see no reason to doubt that from the Indian point of view their opinion is sound. The London Money Market would no doubt prefer to see a large reserve in gold. It will be obvious from what I have said that the drawings of the Government of India on the Gold Standard Reserve in London and the use by the Secretary of State of the gold in the Paper Currency Reserve to meet his ordinary liabilities, accompanied as these measures are by equivalent contraction of the Indian Currency, have precisely the same effect on the exchange as would be produced if the Indian Currency were composed of gold and a portion of that currency was exported from India to England with two exceptions of no great importance. The first is that just noted ; namely, that when the Secretary of State for India sells Gold Securities to acquire the means of meeting his ordinary liabilities, he adds no gold to the available supply in London. The second is that the total amount of the Gold Standard 220 THE STANDARD OF VALUE CH. Reserve is only the profit on the issue of a certain quantity of rupees, and that if gold coins to the face value of the same amount of rupees were circulating in India a greater amount would be available for reducing the exchange by being exported and made available in London as an addition to the gold supply. On the other hand there is the saving due to the investment of a portion of the Gold Standard Reserve and there is the certainty that the amount of the Gold Standard Reserve is always available, whereas gold supposed to be circulating in India might not be available for export unless the amount so circulating formed a large, or at least a substantial portion, of the total circulation. The plan which is at present adopted to maintain the Gold Standard by buying and selling Bills in some respects resembles that originally proposed by the late Mr. A. M. Lindsay, Deputy Secretary of the Bank of Bengal, as a means of establishing a Gold Standard in India. Before the Indian Mints were closed, but in what year I cannot now recollect, Mr. Lindsay sent me a copy of his pamphlet, which impressed me by the knowledge of the subject which he evidently possessed, and led to my entering into communication with him. When called upon to suggest a procedure for establishing the Gold Standard in India, I did not adopt his plan because, as I have already said, to vii GOLD STANDARD IN INDIA 221 have done so would have made it necessary to determine the permanent rate of exchange at once, and also to decide what amount of gold would be sufficient as a reserve to maintain that rate of exchange. In view of the great extent of the Indian rupee currency and of the amount of rupees hoarded in India, which might be thrown into the currency if the rupee was given an artificial value, it would have been unsafe to have attempted to decide these matters before experience had been obtained of the results of closing the Mints. In two articles published in the Bankers' Magazine of 1892, Mr. Lindsay expressed the opinion that a reserve of 4,000,000 in gold in London, supplemented possibly by a further 2,000,000, would be sufficient, but it is clear from what happened in 1907-8 that such a reserve would have been insufficient. As exchange fell in 1894-5 to Is. Id. per rupee the Gold Reserve that would have maintained it in the neighbourhood of Is. 4d. 1 do not think it would have been less than 20,000,000 and possibly it might have been considerably more, while it should be 222 THE STANDARD OF VALUE CH. recollected that there is, in practice, a limit to the Reserve of Gold which can be used to contract the currency. That contraction cannot be carried out to an unlimited extent without producing wide-spread distress, and I should not have liked to try the experiment of keeping the exchange at Is. 4d. in 1894-5 by means of a limited gold reserve. Mr. Lindsay, at a subsequent date, raised his estimate of the amount of gold that would be required to 10,000,000. In any case I was not prepared to run the risk of fixing the permanent rate of exchange at once and raising a gold loan to establish a gold reserve, and of finding afterwards that the reserve was not sufficient for the purpose. Any such result might have led to the final abandonment of the attempt to establish a Gold Standard in India. For the reasons I have given it seemed better, and was certainly safer, to close the Mints and be guided in all subsequent measures by the experience that would thus be gained. When it became evident that the amount of the Indian Currency had been so reduced, relatively, that it was about sufficient to give an average exchange of Is. 4