Book III, Chapter 12: Famines

CHAPTER XII

INDIAN CURRENCY COMMITTEE

THE continuous fall in the value of silver after 1870 was a matter of concern to the Indian Government. The fall was no loss to the people of India. The prices of the produce of the country, estimated in rupees, rose as the value of the rupee fell; and the export trade of India rather benefited than suffered by the depreciation of silver. The revenues of the Government also increased automatically in rupees as the rupee fell in value. The Settlement Officer raised the Land Revenue demand when he found rice and wheat selling at a higher price, estimated in rupees; the Local Cesses, assessed on the Rental or the Land Revenue, rose with the rise of rents and the revenue; and the Income Tax Assessor increased his assessments when he estimated the incomes of traders and merchants at a larger number of rupees. Officials could demand some increase in their salaries in rupees as the rupee fell; European Officials in India did eventually obtain a compensation in an invidious and objectionable shape; Indian Officials failed to get an adequate increase to their humble salaries. So far as the financial administration and the monetary transactions of India were concerned, the fall in the value of silver, as compared with gold, created no difficulties, and caused no inconvenience.

But the Government of India had to remit large sums of money annually to England in gold for the Home Charges, and this remittance in gold meant an increasing amount in silver as the silver fell in value. This the Government of India considered an additional tax on India. And instead of suggesting a reduction of the Home Charges, they proposed to artificially raise the value of the rupee, which meant a real and universal increase of taxation in India.

The fall of the rupee during the first eight years after 1870 came to be 3½d., as shown in the following figures :—

Value of the Rupee.

In 1876, the Calcutta Chamber of Commerce strongly urged the Government of India to suspend the coinage of silver in order to stop the fall in the rupee ; but the Government of India declared that the circumstances did not justify any action in relation to the Indian currency.¹

In November 1878, when Lord Lytton was on the eve of a war with Afghanistan, he addressed the Secretary of State again on the subject, and proposed some steps for raising the value of the rupee by limiting its coinage.² He submitted a Draft Bill, and proposed that the Coinage Act should be modified.

The Despatch was forwarded by Lord Cranbrook, Secretary of State for India, to Sir Stafford Northcote, Chancellor of the Exchequer. And it was ultimately referred to a Committee consisting of Sir Louis Mallet, Mr. Stanhope, M.P., Sir Thomas Seccombe, Mr. Farrer, Mr. Welby, Mr. Griffin, and Mr. Arthur Balfour, M.P. These gentlemen reported on April 30, 1879, that, ‘‘having examined the proposals contained in the Despatch, they are unanimously of opinion that they could not recommend them for the sanction of her Majesty’s Government."

Subsequently, on November 24, 1879, the Lords of the Treasury replied in detail to the proposals of Lord Lytton. Some portions of this able and exhaustive reply should be quoted:—

“It has not yet been established whether the variation in the relation between gold and silver may not have been caused by appreciation of the former metal as well as by depreciation of the latter, or by a combination of both.”

“It appears to my Lords that the Government of India, in making the present proposal, lay themselves open to the same criticisms as are made upon Governments which have depreciated their currencies. In general, the object of such Governments has been to diminish the amount they have to pay their creditors. In the present case the object of the Indian Government appears to be to increase the amount they have to receive from their taxpayers. My Lords fail to see any real difference in the character of the two transactions.”

“If, on the other hand, it is the case that the value of the rupee has fallen in India, and that it will be raised in India by the operation of the proposed plan, that plan is open to the objection that it alters every contract and every fixed payment in India.”

“If the present state of exchange be due to the depreciation of silver, the Government scheme, if it succeeds, may relieve:—

“(1) The Indian Government from the inconvenience of a nominal readjustment of taxation in order to meet the loss by exchange on the home remittances;

“(2) Civil servants and other Englishmen who are serving or working in India, and who desire to remit money to England;

“(3) Englishmen who have money placed or invested in India, which they wish to remit to England.”

“But this relief will be given at the expense of the Indian taxpayer, and with the effect of increasing every debt or fixed payment in India, including debts due by Ryots to money-lenders; while its effect will be materially qualified, so far as the Government are concerned, by the enhancement of the public obligations in India, which have been contracted on a silver basis.”³

This letter from the Treasury, in reply to the Indian Government’s proposals, settled the question for the time, and it was not raised again for six years. The fall of the rupee during these six years was very slight, and is shown in the following figures:—

Value of the Rupee.

It will thus be seen that between 1878–79 and 1884–85, covering the last two years of Lord Lytton’s and the whole of Lord Ripon’s administration, the rupee fell only from 19¾ to 19⅟₁₆. But early in 1886 there was a fall in the price of silver; and Lord Dufferin, then Viceroy of India, sent an alarming telegram to the Secretary of State. “Our financial arrangements for meeting interest on loans for frontier railways, defences, and increased military expenditure have been based on the assumption that the rupee would not fall below eighteenpence. Recent fall in the price of silver, and the uncertainty regarding policy of United States of America, cause us grave anxiety. . . . We earnestly commend the question to the early consideration of her Majesty’s Government. Experience seems incontestably to have shown that delay seriously aggravates the difficulties of settlement.”⁴

This was followed by a letter,⁵ in which Lord Dufferin and the members of his Council stated that the fall in the price of the rupee was due to speculation regarding the repeal or modification of the Bland Act in America; that an attempt should be made to secure a stable relation between the rupee and gold; and that “the present time would appear to be a favourable one for reopening the whole question.” The Indian Government did not inquire how far the additional military expenditure referred to in their telegram, and the consequent increase in India’s remittances to England, had helped to affect the exchange against India. Nor did they venture to suggest that the plainest remedy for the growing evil was a bold and determined reduction of the Home Charges, which had to be paid in gold.

Lord Randolph Churchill, then Secretary of State for India, forwarded both the telegram and the letter to the Treasury; and, once more, the Lords of the Treasury rejected the proposal of the Indian Government. They referred to the declaration recorded by Mr. Goschen, Mr. Gibbs, and Sir Thomas Seccombe, as the representatives of her Majesty’s Government at the International Monetary Conference of 1878, that “the establishment of a fixed ratio between gold and silver was utterly impracticable.” And they declared that the proposals of the Indian Government would be a benefit to English officers in India at the cost of the Indian taxpayer, as had been pointed out by Sir Stafford Northcote more than six years before.

“The Treasury find no reason stated in the despatch of the Government of India in the present year which induces them to dissent from the conclusions thus sent for on the authority of Sir Stafford Northcote as to the results of any attempt artificially to enhance the gold value of silver.”

“Whilst it is admitted that some benefit might be derived by the European officers of our Government from the proposed measures, it is shown how injurious would be their effect upon the Indian taxpayer. Since that time the great stimulus which the fall in the value of silver is believed to have given to the export trade of Hindustan, and the great addition which has accrued to the commercial wealth and the industries of the people, reinforce the warning then given against rashly meddling with a condition of things which may well have brought to the people of India more of advantage than of loss. It is impossible to regard this question from the point of view either of the Indian exchequer or of the Anglo-Indian official without a corresponding regard to the general effect of the fall in the gold price of silver upon the trade and prosperity of the great mass of the population.” ⁶

No further action was taken by the Indian Government for some years after receipt of this reply from the Treasury. But the rupee rapidly fell in value, and it was never inquired how far this fall was caused by the continuous increase in the military expenditure and consequently in the annual drain from India, under the administration of Lord Lansdowne and Lord Elgin. The fall of the rupee during eight years from 1885-86 to 1893-94 is shown in the following figures:—

The continuous fall of the rupee induced the British Government to depart from the policy it had so long and so justly maintained on behalf of the Indian taxpayer and the Indian industries. The International Conference of Brussels in 1892 produced no change in the situation. It was considered likely that the United States would repeal the clauses of the Sherman Act, which provided for the annual purchase of fifty-four million ounces of silver. The question of the Indian currency was therefore referred to a Committee under the presidency of Lord Herschell, then Lord Chancellor. Lord Herschell’s Committee reported in May 1893 in favour of closing the Indian mints, with a proviso that the Indian Government should undertake to issue rupees in exchange for gold at the rate of 16d. per rupee, and should receive British sovereigns in payment of Government dues.

An Act was accordingly passed in India in June 1893, and a notification was issued. A rise in the value of the rupee followed in the succeeding years, as the following figures will show:—

Value of the Rupee.

When the rupee had been brought up nearly to the value suggested by the Herschell Committee, the Government of India asked the Secretary of State, Lord George Hamilton, for measures to fix the rupee at that value.

Lord George Hamilton formed a Committee in 1898, and appointed Sir Henry Fowler as the Chairman. The object of the Committee was not to discuss the policy of raising the value of the rupee to 16d. That policy had already been accepted and acted upon. Sir Henry Fowler was himself the Secretary of State for India in 1894 and 1895, when the Indian mints remained closed, and the rupee began to rise. He was not likely to question that policy now. And the instructions of his Committee were not to reopen a discussion on the policy, but to report “whether the object the Government of India have in view can best be attained by the measures which they suggest.”⁷ Nevertheless, a great deal of evidence was recorded by Sir Henry Fowler’s Committee as to the expediency, in the interests of the people of India, of fixing the rupee at the enhanced value of 16d. Reference to some portions of the evidence recorded will be made further on. Sir Henry Fowler and his Committee submitted their report in 1899. They recommended that the British sovereign should be declared a legal tender at the rate of 1s. 4d. per rupee. And they also recommended that the Indian Government, without undertaking to give gold for rupees at that rate, should make a gold reserve, to make it available for foreign remittances when a fall of exchange made such help necessary. An Act, making British sovereigns legal tender in India, was accordingly passed in 1899. There has been a flow of gold since into the Indian treasury and currency reserves. The amount of gold so held in April 1899 was two millions sterling; by March 1900 it had risen to seven millions. The effect of these measures on the revenues and taxation of India will be discussed in the next chapter.

The evidence recorded by Sir Henry Fowler’s Committee in 1898 and 1899 fill nearly six hundred folio pages, double column. Anglo-Indian officials of high distinction and great administrative experience expressed their opinions clearly and emphatically; but one thing they did not do—they never suggested the possibility of reducing the Home Charges which had created all the difficulty. They accepted these charges as absolutely unavoidable; they were strongly against the open increase of taxation in India; and they therefore recommended that the rupee should be maintained at its enhanced value. Sir Antony Macdonnell’s evidence fairly represents this opinion; and the following extract will explain his views.

SIR ANTONY MACDONNELL’S EVIDENCE.

5778. Suppose now that the mints were reopened, and the exchange value of the rupee fell to, say, 1s., would that at all affect your revenue? Of course it would affect us in this way, that more revenue would have to be raised to meet the Home Charges.
5779. You mean by increased taxation? Yes.
5780. Will you give us your opinion as to the economic effect of attempting to increase the taxation in India? I suppose if the rupee fell to 1s. you would have, in order to make both ends meet, to raise ten or twelve crores of rupees or thereabouts. I say that it would be impossible to do that without producing such political discontent as would be an extreme cause of danger.

On the other hand, Sir Robert Giffin’s evidence fairly represents the opinion of British economists. He condemned an artificial currency for India, and considered no currency good for any country which was not automatic. And he grappled with the difficulty of the Home Charges by boldly suggesting a reduction of those charges.

SIR ROBERT GIFFIN’S EVIDENCE.

10,082. The last point I shall mention with reference to this question of finance is that there is reason for suggesting in all the circumstances that the whole question of Indian expenditure should itself be reviewed. The statements I have seen are confined almost exclusively to the question whether more taxes can be imposed in India or not; but in financial questions, the other side of the matter should be looked at also. It may be the case, and I fear it is the case, that the Imperial Government unfairly charges a great amount of expenditure to India which ought rather to be borne by the empire in general. The army in India is maintained not exclusively for the advantage of the Indian people, but also for the general benefit of the British Empire. It may then be possible to make the deficit in India more manageable than has been represented, and thus avert the supposed necessity of altering the money of India. That is perhaps trenching upon the domain of politics very much, and as we all know there has been a Royal Commission sitting for some time under the chairmanship of Lord Welby, dealing with the question of what ought to be charged to India, and what ought not to be charged in respect of military and other expenditure; but I should like to put very strongly the impression which I have formed that in this matter India substantially is not dealt with in a fair manner, and that something ought to be allowed for the advantage which the empire in general gets from the existence of the European army in India, which is not exclusively for the benefit of the Indian people. I should say that from three millions to four millions sterling is the idea that I have formed as to what ought to be deducted from the permanent charge upon India. This, then, is the main ground—i.e.. the want of proof as to deficit—upon which I take the objection to the alteration of money in India; and, of course, there remain all the objections to the nature of that alteration itself.

Only two Indian witnesses were examined, i.e. Mr. Merwanji Rustomji, representing the Exchange Brokers’ Association of Bombay, and the present writer, representing Bengal. Both these witnesses were against fixing the value of the rupee at the enhanced value of 16d. Mr. Rustomji recommended the rupee to be fixed at 14d., which had been its approximate value in 1893, before the mints were closed. And the present writer recommended that the value of the rupee should not be artificially fixed at all. Our readers will pardon our giving some extracts from the evidence of these two witnesses, representing the Indian opinion.

MR. MERWANJI RUSTOMJI’S EVIDENCE.

9746. Why do you advocate 1s. 2d. as against the 1s. 4d. rate? I advocate it on the principle that you are going for a gold standard, and I would impress upon you that it is advisable from many points of view. In the first place, take the mill industry, that is an important matter, and take the other trades in which India competes with China.

9747. Your principal reason is that you think that a 1s. 2d. rate will be better for Indian trade? I am taking the Indian mills, and trade carried on in competition with China.

9748. Do you think that the 1s. 2d. rate will materially lessen the competition with China, if China really begins to make railways, and so on? What I say is, we shall be able to lay down our yarn cheaper than now.

9749. Permanently, or for a time only? In comparison with the 1s. 4d. rupee, we shall lay down always cheaper.

MR. ROMESH C. DUTT’S EVIDENCE.

10,643. Did the proposals of the Government of India to arrest the fall of the rupee have the effect of raising its value?

Yes, I think it was 1s. 2d., if I remember rightly, in 1893, and it is now nearly 1s. 4d., so that within these last five years the value of the rupee has been enhanced by 2d. as compared with gold. With regard to the fall from 1871 to 1893 I may be allowed to explain that the Indian Government and Provincial Governments got a natural increase in their revenue in consequence of the fall. The Land Revenue and other revenues went up in this way. The price in rupees rose all round; the price of food grains rose; and as the Government in its recurring Settlements made that a ground of enhancement—because the Government as [superior] landlord is entitled to an increase if the price of the produce rises—there was a natural increase in Land Revenue. Then, also, with regard to the Income Tax; as the incomes, estimated in rupees, went up, the Government got an increase of the Income Tax. So that while there was a fall in the value of the rupee from 1871 to 1893, the Government was directly, and in a natural way, getting an increase in the revenues as estimated by the rupee.

10,661. Your first objection [to the artificial raising of the rupee] is that practically this means a general increase in taxation.

Yes, over and above the natural increase.

10,674. Then you say there is another and a still graver objection to the proposal. Will you explain that?

Millions of agriculturists and labourers in India are indebted to money-lenders and Mahajans; and the debt is, in many cases, reckoned in rupees and not in grain. To artificially enhance the value of the rupee, or to fix the value at the rate to which it has been already artificially raised, is to increase the indebtedness of the cultivators and labourers of India to money-lenders and Mahajans. The measure serves to add to the profits of the prosperous classes who feed on the distresses of the poor, and to add to the weight of the millstone which the poor and indebted classes carry round their necks. Throughout the bazaars and money-markets of India, the effect of raising the value of the rupee is to add to the profits of the rich money-lender, and to enhance the liabilities of the poor cultivator who has a debt.

10,692. Now, will you come to the matter of trinkets?

All that the poor people in India can possibly save in years of good harvest is saved, not in savings banks, which do not exist in India for the poor, but in silver jewellery and trinkets for their women. Practically, all the spare wealth which the cultivating and labouring classes have in India is in this form; and in years of scarcity and famine all this silver, or a great part of it, is sold in the affected districts in order to procure food grains. The proposal of the Government of India is virtually one to confiscate about a third of the poor man’s savings in India. The value of the rupee being artificially raised, the silver bangle or bracelet in which the cultivator has invested all his savings, sells for less than what it costs; and thus by a stroke of the pen the Government of India reduces what is really the national wealth of the poor in India in order to meet its own liabilities on somewhat easier terms.

10,707. Then, will you tell us how you think these proposals have an effect on the manufactures of India?

On that point I should premise that my information is second hand, because I am not personally engaged in manufacture or trade. But I have consulted men engaged in trade, and they tell me that the raising of the value of the rupee artificially dislocates trade, and has injured manufacture. I have heard from merchants engaged in Bombay in the cotton industry, that the cotton industry is in a miserable state just now, specially in competition with the produce from China and Japan, and they impute that directly or indirectly to the closing of the mints. . .

British trade is prospering with other Asiatic countries having silver currencies; why should British traders demand, in the case of India, a fixed ratio between gold and silver, which they cannot demand from other Asiatic countries? The people of India do not ask for it; the people of India will not profit by it; the people of India are likely to lose in a variety of ways, as indicated above, by the artificial raising of the value of the rupee. And the Government of India, naturally representing the people, and standing forward as the protectors of their welfare, should reject a scheme which the people do not want, and cannot profit by.

10,710. You say: “The proposal of the Government of India is not the natural or the proper remedy for that increasing drain which is annually flowing from India to England, in the shape of pay, pensions, and allowances”?

The allowances are paid in England in gold, and instead of reducing its gold obligations, which is the natural and the proper remedy, the Government seeks to adopt the unnatural and desperate and dangerous remedy of converting all its remedies in India into gold. Let us suppose the case of an Indian landlord who gets his rents from his estate in rupees, and has to pay an agent in London in gold. What would Courts of Justice and Equity think if the landlord preferred suits to realise his Indian rents in gold, on the ground that he has to pay one London agent in gold? His prudent and proper course would be to minimise his London expense.

Footnotes