NOTE
The Royal Commission on Indian Currency and
Finance visited India in 1924-25 to examine the financial system and to suggest the Reform
of the Indian currency. The commission was comprised of the following members.
NORCOT WARREN
R. A. MANT
HENRY STRAKOSCH
PURSHOTAMDAS THAKURDAS
W. E. PRESTON
G. H. BAXTER } Secretaries
A.
AYANGAR }
Dr. Ambedkar explained his views in the statement submitted in reply to the questionnaire issued by the Commission. The statement and his evidence before the Commission are reproduced here along with the questionnaire.
______________________________________________________________________________________
Statement of Evidence to the Royal Commission on Indian Currency
Copy of the Memorandum Circulated to Witness in India by the Commission
Submitted by Dr. B.
R. Ambedkar, Bar-at-Law to the Royal Commission on Indian Currency
1. In reply to
the questionnaire issued by the Commission I beg to submit the following statement of my
views. In dealing with the questionnaire issued by the Commission I will begin with
question No. 4 because I believe that is the principal issue
on which the Commission is asked to give a definite finding.
2. I am emphatic in my opinion that the Gold
Exchange Standard cannot be continued with any advantage to India and for the following
reasons:—
(1 ) It has not the native stability of the Gold
Standard.— A pure Gold Standard is stable because the value of gold in
circulation is so large and the new additions to the supply are so small that the
stability of the standard is not thereby appreciably affected. But in the case of the
Exchange Standard the new additions are dependent upon the will of the issuer and can be
augmented to such an extent that the stability of the standard can be appreciably affected
thereby.
(2) It is discretionary in issue without there being anything in it
to regulate the discretion.—It is sometimes said that the Gold Standard is a hard
standard which keeps the changing affairs of mankind tied to the wheel of nature over which human agency can
exercise no control and that the Exchange Standard affords an escape from this frigidity.
In reply to this it must be said that though a discretionary currency, it is so only when
the currency is provided with some means which enables this discretion to be properly
exercised. There must be some regulator by which the discretion left to the issuer is
regulated. From this point of view an Exchange Standard is inferior to a Convertible
Standard. A Convertible Standard and an Exchange Standard are alike in this that they both
allow the use of discretion in the issue of currency. But a Convertible Standard is
superior to the Exchange standard because the discretion of the issuer in the former is regulated while the discretion of the
issuer in the latter is unregulated. It is true that in the Exchange Standard there is
what is called regulation by foreign Exchanges. But such a regulation, though it is better
than no regulation at all, is only a loose and indirect way of reaching the end and cannot
be depended upon in all circumstances of reaching it.
(3) It
is economical. But for that very reason it is insecure.— There are many writers
who are enamoured of the Exchange Standard, because it effects a certain degree of economy
in the use of gold. But is the plan secure? Any plan of currency to be sound must be both
economical and secure. It will do if it is not economical; but it will certainly not do if
it is not secure. Now I submit that the proposition that to economise gold as a currency is to impair its utility
as a standard of value is as simple and self-evident as the proposition that to use
paper or rupee as a medium is more economical than to use gold. For
what does this discarding of gold from currency use mean? It
simply means this : that by economising the use of gold you
thereby directly increase its supply and by increasing its supply you lower its value, i.e. gold by reason of this economy in its use becomes a
depreciating commodity and, therefore, unfit to that extent to function as a standard of
value. You cannot therefore both economise gold
and also use it as a standard. If you want to economise gold, then you must abandon
gold as a standard of value, in other words the economy of the Exchange Standard is incompatible with
its security.
3. The choice therefore can never be between a Gold Standard and an Exchange Standard. If we do not want a Gold
Standard we must either go over to a Compensating Standard of Prof. Fisher or to a Tabular
Standard of Prof. Jevons. The choice is really between
either of them and the Gold Standard. There is no doubt that the Compensating Standard or
the Tabular Standard would be better than a Gold Standard. But mankind must become more
philosophical than it is before they can be made workable, and
until that happens I think the Gold Standard
must be accepted as the only system of currency which is "
knave proof " and "fool proof."
4. The next important question is that of the
Gold Reserve. Before discussing matters such as location, composition, etc., of the
reserve, it is necessary to determine whether we want it. That question in its turn
depends upon another question pertaining to the mode in which the Gold Standard is to be
introduced. In this connection I do want to say that there are many people who are under
the impression that the introduction of a Gold Standard means merely the starting of a
mint and the issuing of a gold coin. Nothing can be more erroneous than this. Gold
Standard means not the starting of a gold mint but making provision whereby gold will become current For currency is the standard. Now in order that gold may be current,
it is necessary that other forms of currency must be limited in their volume. There are
two ways by which currency may be limited. One way is to make it convertible and the other
is to fix a positive limit on its issue. If you choose to adopt convertibility as a method
of limitation then there is reason for maintaining a gold reserve. If you choose fixity of
issue as a method of limitation then there is no reason for maintaining a gold reserve. As
between the two systems I prefer the fixity of issue system. My reasons are two :—
(1) One of the evils of the Exchange Standard
is that it is subject to management. Now a convertible system is also a managed system.
Therefore by adopting the convertible system we do not get rid of the evil of management
which is really the bane of the present system. Besides a managed currency is to be
altogether avoided when the management is to be in the hands of the Government. When the
management is by a bank there is less chance of mismanagement. For the penalty for
imprudent issue, or mismanagement is visited by disaster directly upon the property of the
issuer. But the chance of mismanagement is greater when it is issued by Government because
the issue of government money is authorised and conducted by men who are never under any
present responsibility for private loss in case of bad judgement or mismanagement.
(2)
A fixed issue system besides eliminating management will make provision for a larger use
of gold in currency. The use of gold is an important matter. The whole world is suffering
from a continuous rise of prices owing to the depreciation of gold. Anything therefore
that will tend to appreciate gold will be to the good; and
if gold is to appreciate there must be a larger use of gold as currency. Besides at the
present time there is no necessity to economise gold, because there is all over the world
such a great plethora of money that the less we economise gold the better. From this point
of view the Exchange Standard once a boon, is now a curse. It served a useful purpose for
some time. From 1873 the production of gold had fallen off and the economy effected by the
Exchange Standard was indeed very welcome because it helped in a period of contraction to
expand the money of the countries of the world and thereby maintain the stability of the
international price system by preventing the rapid fall in prices, which would have been
inevitable if all the countries which based themselves on gold had also adopted gold as a
currency. But after 1910 conditions changed and the production of gold increased, with the
result that the continuance of the Exchange Standard thereafter not only did not help the
countries to check the rise of prices but became a direct cause of the rise of prices. For
the economy in the use of gold rendered gold which was
already overproduced redundant. During the war the use of paper money on an unprecedented
scale led to a still greater depreciation in the value of gold all of which was
practically due to the economy of gold in its
use as currency. Consequently as observed by Prof. Cannan " in the immediate future gold is not a commodity the use
of which it is desirable
either to restrict or to economise. From the closing years of last century it has been
produced in quantities much too large to enable it to retain its purchasing power and thus
be a stable standard of value unless it can constantly be finding existing holders willing
to hold larger stocks or fresh holders to hold new stocks of it. Before the war the
various central banks in Europe took off a large part of the new supplies and prevented
the actual rise of general prices being anything like what it should otherwise have been,
though it was serious enough." In the absence of that demand the next best thing
would be the introduction of gold currency in India and the East. This introduction of a
gold currency can be better accomplished by adopting the fixed issue system rather than
the convertible system. For the former will leave a larger margin for the use of gold in
actual currency than will the latter.
5. That being my view of the solution of the
problem I am necessarily in favour of the abolition of the Gold Standard Reserve as being
of no practical use for maintaining the stability of the currency. There is also another
reason why I think the Gold Standard Reserve ought to be abolished. The Gold Standard
Reserve is peculiar in one respect, namely this; the assets, i.e., the reserve and the
liabilities, i.e., the rupees are dangerously correlated by reason of the fact that the
reserve cannot increase without an increase in the rupee currency. This ominous situation
arises from the fact that the reserve is built out of the profits of rupee coinage. That
being its origin, it is obvious that the fund can grow only as a consequence of an increase in the volume of rupee coinage. Now as
Prof. Cannan remarks "
the percentage of administrators and legislators who understand the Gold Standard is
painfully small, but it is and is likely to remain ten or twenty times as great as the
percentage which understands the Gold Exchange System. The possibility of a Gold Exchange
System being perverted by ignorance or corruption is very considerably greater than the
possibility of the simple standard being so perverted. Unfortunately there is abundant
proof of such perversion in the history of the currency system in India. Already we have
had foolish administrators who had been obsessed with the idea that a reserve was a very
essential thing and who had therefore gone in issuing currency without any other
consideration but that of augmenting the reserve. Nor has the country been wanting in
innumerable foolish business men who have condemned the Exchange Standard without ever
knowing anything of currency on the sole ground that Government is not allowing them to
use the reserve as though to boom up business was the proper function of a currency
reserve. Similarly we have amongst us equally foolish politicians desiring to advertise
themselves as friends of the people who want the reserve to be utilised for educating the
masses. Any of these three may easily bring about a calamity in the guise of a blessing,
and all this in sheer ignorance of the principles of currency. It is therefore much better
to introduce a currency system which will do away with the Exchange Standard and also the
Gold Standard Reserve the maintenance of which may any day be a source of mischief.
6. The following then are the requirements of
my plan for the reform of the Indian currency :—
(1) Stop the coinage of rupees by absolutely closing the mints
to the Government as they are to the public.
(2) Open a gold mint for the coinage of a
suitable gold coin.
(3) Fix a ratio between the gold coin and the rupee.
(4) Rupee not to be convertible in gold and gold not to be convertible in rupees, but both to
circulate as unlimited legal tender at the ratio fixed by law.
7. What is to become of the existing amount of
reserve if it is not wanted for currency purposes? I myself would like it to be utilised
by Government as ordinary revenue surplus for any public purpose that may seem to be
urgent. But there will remain sources of weakness in the reformed currency which it is
wise to recognise. Unlike the Fowler Committee, I am firm in my belief that the rupee
currency once effectively limited will maintain its value without the necessity of any
reserve. But there is just this chance that the existing volume of the rupee currency is
so large that when there is a trade depression it may become redundant and may by reason
of its excess lose its value. As a safeguard against such a contingency I propose that the
Government should use part of the Gold Standard Reserve for reducing the rupee currency by
a substantial margin so that even in times of severe depression it may remain limited to
the needs of the occasion. The second source of weakness in the currency arises from the
peculiar composition of the Paper Currency Reserve. That weakness lies in the existence of
what are called " Created Securities." I should
like this portion of the Paper Currency Reserve extinguished as early as possible. For
unless this is done the paper currency cannot with safety be made as elastic as it should
be. I would therefore recommend that the remainder of the Gold Standard Reserve be
utilised in the cancellation of the " Created
Securities " in the Paper Currency Reserve.
8. Having given my views on the nature and form
of the change I will now discuss the question next in importance, namely, " the ratio between gold and rupee." As a result of
war operations there is not a single country with a Gold Standard which was able to keep
its pre-war gold parity. Some of them have erred from it by such a large margin that it is
now beyond the capacity of many to approach it with any degree of certainty. But howsoever
impossible and impolitic the task, the hankering for a return to the pre-war parity seems
to be universal. There is but this difference between India and the other countries. The
other countries have yet to reach the pre-war parity. India, on the other hand, has in
fact overreached the pre-war parity. As a result of the difference the problems before
India and the other countries are different. In European countries the problem is one of
deflating the currency, i.e., appreciating it; in other words of bringing about a fall in prices. In India the problem
becomes one of inflating the currency, i.e., depreciating it; in other words of bringing
about a rise in prices. For a change from 1 s 6d. gold to 1 s. 4d. gold means this and nothing else. Should the currency be
inflated to reach back the pre-war parity ? There are some
people who are under the impression that the restoration of pre-war parity would give
justice and would also give us the old price level to which we were so long accustomed.
Both these views are fallacious. First : the restoration of
pre-war parity is not a restoration of the pre-war price level. For it is to be remembered
that 1 s. 4d. gold
in 1925 is not the same thing as 1 s. 4d. gold in 1914 if measured in terms of purchasing power.
The same ratio of exchange does not necessarily mean the same level of purchasing power.
The ratio between two currencies may remain the same though their respective volumes have
undergone enormous changes, provided the variations in volumes are equal and in the same
sense. This is exactly the result of a mere nominal restoration of the pre-war parity. If
by restoring pre-war parity is meant the restoration of the pre-war level of prices then
the ratio instead of being lowered from 1 s.6d. in the direction of 1s. 4d. must be raised in the direction of 2s. gold. In other
words instead of an inflation there must be a further deflation of the currency. Second : the restoration of pre-war parity even nominally would be
unjust. As a standard of deferred payment a currency should not disturb monetary
contracts. If all debts now existing had been contracted in 1914 before the war, ideal
justice would clearly require the restoration of the pre-war ratio. On the other hand if
all existing contracts had been entered into in 1925 justice would require us to keep to
the ratio of 1925. Two things must be borne in mind in this connection. Existing contracts
include those made at every stage of preceding deprecations and appreciation’s and to
deal fairly with all would demand that each one should be treated separately—a task
impossible by reason of its complexity and enormity. Existing contracts are no doubt of
various ages. But the great bulk of them are of very recent date and probably not more
than one year old; so that it may be said that the centre of gravity of the total
contractual obligations is always near the present. Given these two facts the best
solution would be to strike an average between 1s. 4d. and 1s. 6d., and to see that it is
nearer 1 s. 6d.
and away from 1 s. 4d. This
is substantially the view of Prof. Fisher, who observes: " The problem of a just standard of money looks forward
rather than backward : it
must take its starting point from the business now current, and not from imaginary parts
before the war. One might as well talk of restoring the original silver pound or
returning to the monetary standards of Greece and Rome. "
In short, in matters of currency the real is the normal and therefore just.
9. As regards the effects of a rising and
falling rupee on trade and industry the point often sought to be made is that low exchange
confers a bounty on trade and industry. But this is not the important point. The more
important point is, supposing that there is a gain arising from low exchange, whence does
this gain arise ? It is held out by most business men that
it is a gain to the export trade and so many
people have blindly believed in it that it must be said to have become an article of faith
common to all that a low exchange is a source of gain to the nation as a whole. Now if it is realised that low
exchange means high internal prices, it will at once become clear that this gain is not a
gain to the nation coming from outside, but is a gain from one class at the cost of
another class in the country. Now the class that suffers is the poor labouring class,
which pays the bounty to the richer or the business class. Such a transference of wealth
from the poor to the rich can never be in the general interest of the country. I am
therefore strongly opposed to high prices and low exchange, and no righteous Government
should be party to such clandestine picking of the pockets of the poorer classes in the
country.
10. I now come to the question of providing for
the seasonal needs of the money markets in India. A currency system should be stable and
elastic, and it is for this reason more than any other that the currency in many countries
is a compound of metal and paper. The former is intended to give steadiness and stability
and the latter elasticity. Unfortunately in India the plan of the paper currency is not
contrived to give it elasticity. In England under a similar paper currency the
inelasticity is made good by the development of what is called deposit currency which is
issued against good commercial paper. Owing to a variety of causes deposit currency has
failed to take root in India and there has been consequently no mitigation of the
inelasticity of the paper currency of India. We should therefore make greater provision in
our paper currency reserve whereby it could be made possible to convert good commercial
paper into currency best suited to the needs of seasonal demands.
COPY
OF THE MEMORANDUM[f2]
CIRCULATED TO
WITNESSES IN INDIA BY THE COMMISSION
The following memorandum, indicating the main
questions which will come under the consideration of the Royal Commission on Indian
Currency and Finance under its terms of reference, is published in order to assist
intending witnesses in the preparation of their evidence. It is not to be regarded as
exhaustive, nor is it desired that each witness should necessarily attempt to deal with
all the questions raised :—
(1) Is the time ripe for a solution of the
problems of Indian Currency and Exchange by measures for stabilisation of the rupee or
otherwise ?
What is the comparative importance of stability
in internal prices and in foreign exchanges ?
What are the effects of a rising and a falling
rupee, and of a stable high or low rupee, on trade and industry (including agriculture) on
national finance?
(2) In relation to what
standard and what rate should the rupee be stabilised, if at all ?
When should any decision as to stabilisation
take effect ?
(3) If the rate selected differs materially
from the present rate, how should the transition be achieved ?
(4) What measures should be adopted to maintain
the rupee at the rate selected ?
Should the Gold Exchange
Standard system in force before the war be continued, and with what modifications, if any ?
What should be the composition, sise, location,
and employment of a Gold Standard Reserve ?
(5) Who should be charged with the control of the note issue, and on what principles ? Should control or management be transferred to the Imperial Banks of India, and, if so, what should be the general terms of the transfer ?
(6) What should be the policy as to the minting
of gold in India and the use of gold as currency ? Should
the obligation be undertaken to give gold for rupees ?
(7) By what method should the remittance
operations of the Government of India be conducted ? Should
they be managed by the Imperial Bank ?
(8) Are any, and, if so, what, measures
desirable to secure greater elasticity in meeting seasonal demands for currency ?
Should any, and, if so, what, conditions be prescribed with regard to the issue of currency against hundis?
(9) Should any change be made in existing
methods for the purchase of silver ?
Note.—The above questions were circulated to witnesses in India. As the result of the oral and written evidence received in India, the relative emphasis to be laid on the various matters dealt with has become clearer, and accordingly the attached memorandum and supplementary list of " Questions to be asked by the Chairman " have been prepared for the information of witnesses.