BEFORE THE ROYAL COMMISSION ON
INDIAN CURRENCY AND FINANCE ON 15TH DECEMBER 1925
Dr. B. R. Ambedkar, Barrister-at-Law, called and examined.
6047. (Chairman.) Dr. Ambedkar, you are a Barrister-at-law,
and you have been kind enough to furnish the Commission with a memorandum
in which your recommendations as regards the Indian currency system are set
forth in detail. I think you have also been nominated as one of the
representatives of the Institute of Social and Political Science ?—Yes.
6048. Whose opinions have been set
forth in another memorandum?—Yes, that is so.
6049. I understand that you are a
close student of these questions?—1 was 2 years before, but since I have been
practising of course I have not been able to give sufficient attention to the
very recent developments in currency and so probably my facts and figures might
sometimes be rather out of date, but I should be able to tackle any point from
the theoretical side of the subject, I presume.
6050. You have been a student of
political science?—1 was a Professor at the Sydenham
College of Science for two years and I have written a book on the Problem of
the Rupee.
6051. I should like to ask you a few
questions to elucidate a few individual
contributions which you make to the subject in the course of your memorandum.
In sub-paragraph (i) of paragraph 2 you commence
with the statement : "
A pure gold standard is stable because the value of gold in circulation is so
large " and so on. What are you referring to
as "a pure gold standard " in that
connection?—A pure gold standard means a gold currency as the standard of
value.
6052. A currency consisting of
gold?—Largely.
6053. Supplemented by some form of
token currency ?—
By some form of token currency, yes.
6054. In so far as your opinion is
based upon experience, can you refer to any instance in which a country has had
a gold standard system with a large proportion of the circulation consisting of
gold coins ?—I may refer for instance to a country
like Germany, and barring for instance the deposit of currency in England I
should also cite the case of England.
6055. In both those cases we must
recognise that the actual proportion of the circulating medium which consisted
of gold was comparatively small ?—May I say just
one thing ? What I want to emphasis there is that
the new additions to the supply are so small in comparison with the existing
volume in circulation that the new supply does not make much difference to the
price level. That is what I really want to say
there in that paragraph: but when you have a currency which is merely regulated
by the will of the issuer, the issuer may add a new supply to the existing
stock of such an amount that he may disturb the price level once established.
6056. The new conditions there
referred to are, I take it, the increment of currency rendered necessary by the
regular expansion?—No; I simply say productions of the mines when I talk of new
additions to the gold supply.
6057. Then you are dwelling there upon
the feature that the annual additions to the quantity of gold in the world are
so small ?—That it does not cause any upheaval in
the price level to any appreciable extent.
6058. In what respect does that serve
to distinguish between any form of currency where the internal unit is related
in stability to gold ?—I do not quite follow.
6059. In what respect does the
circumstance as to the small proportionate annual addition to the world's gold
supply to which you refer serve to distinguish, as regards this matter of
stability, between a currency based upon gold in circulation, and a currency
based upon the gold exchange standard ? That is the
second part of your paragraph ?—There I say that
when you start with a certain given price level and if your issue of new
currency is entirely dependent upon the will of the issuer, then he may add
such a volume of currency to the existing stock that he may disturb the price
level materially. There is nothing to prevent him from doing that. May I give,
for instance, an illustration : suppose a
government was bankrupt government and it wanted to finance certain of its
departments, then it can very easily issue for instance, a token currency of
any sort and add to the existing volume of currency as almost all the
belligerent countries have done.
6060. Now let us assume a country with
a currency of a certain amount of gold in circulation, supplemented by notes in
circulation; that is one proposal, I understand, in regard to the point to
which you are leading up ?—Yes, in a certain way.
6061. And,
on the other hand, a currency based upon a gold exchange standard. Will you
expand your recommendation by helping the Commission on this point: why this possibility of what is really inflation is
more impossible when you have gold in circulation than when you have a pure
exchange standard ?— It is this : the fact that you have the liability of converting
your paper currency into gold under a gold currency with paper in circulation
is a means whereby the paper currency is kept within limits. You cannot add
more paper currency to your circulation than what your reserves for
convertibility would permit. But where under the gold exchange standard, as we
have had in India, there is no liability upon you to convert your circulating
media into gold you are free to issue as much as you like.
6062. Supposing (I start with a
supposition) that you were to accept an obligation to convert your internal
currency under an exchange standard into gold or the equivalent of gold in a
foreign currency, would that, in your opinion, put the two systems in the same
position as regards their capacity for resisting inflation?—It depends upon
what kind of convertibility you adopt.
6063. I am supposing the acceptance by
the currency authority, whatever it was, of a legal obligation to convert the
internal currency on presentation into gold or the means of obtaining gold in a
foreign currency in a gold standard country ?—If your
obligation is to accept to pay gold on tender
without question then I think that would be sufficient. If I may say so,
I mean that convertibility is like conscience and it might be of various
degrees; and its efficacy to control the volume of currency would depend upon
what kind of convertibility you have. If your convertibility is only for the
purpose of foreign exchange then my submission is that that would not be a
sufficient limitation on the issue of currency.
6064. If the obligation is such as that
to which you have just referred, an obligation to convert the internal currency
into a means of international payment, either gold or foreign currencies based
on gold, why, in your opinion is that not an adequate means of preventing this
danger of the inflation of currency with which we are dealing ?—Because a foreign exchange is not necessarily an
indication of internal inflation. For instance, in our own experience in India
it has been found out, and it has been found out I think by Professor Keynes, that although the rupee remained at the ratio
of 1s. 4d. for a long time, the level of prices in India and the level of
prices in England were very different. Exchange cannot be said to be in
complete harmony with the whole of the price level of a country. Exchange
affects only such things as enter into international trade, and everything
would really depend upon what is the volume and what is the ratio of the goods
that enter into international trade and goods that did not enter. If the
country is so situated that its internal trade is much larger than its external
trade, in fact, if its external trade is insignificant.........
6065. What do you mean by the internal
trade being larger than its external trade ?—I mean
that all the goods or all the transactions of a country are not meant for the
purpose of foreign trade. In fact a country may have very little foreign trade
and consequently the valuation of goods that do enter into foreign trade may
not affect the valuation of goods that do not enter; the relations between them
may not be very close.
6066. Let me generalise the question
somewhat and put it in this way : whether you have
a gold standard with notes and gold in circulation, or whether you have an
exchange standard by which the internal currency is converted into external, is
not the volume of internal currency in both cases controlled by the
preservation of a certain 'ratio between the
reserves and the internal token currency outstanding, and is it any easier to
ensure the maintenance of that due relation in the one case than in the other ?—I have been thinking more of prices rather than of
exchange ratios. I quite admit that the exchange ratio between two currencies
might remain the same and yet the internal price levels in the two countries
may differ.
6067. Which two countries ?—Any two countries; take for instance England and
India; the ratio between gold and the rupee or sterling and the rupee taking
the sterling as equivalent to gold, may remain the same; in fact it did remain
the same for a long time; but taking into consideration the price level in the
two countries, they did differ; although I admit that after some time the
internal price level will assert itself and bring the foreign
exchange ratio in line with itself.
6068. I think you are going a little
in advance of the actual point with which I was dealing in my question,
although no doubt you are referring to matters which are very relevant. Now let
me put it from another point of view. As a matter of fact, if we consider
countries in which there has been a currency system more approximate to that
which you recommended than India has ever seen, have those countries under the
stress of necessity ever felt the slightest difficulty in inflating when they
felt the need to do so ? Let me instance what
occurred in gold standard countries in the war? No; as I say, gold itself may
be subject to inflation. It was as we found in America itself, subjected to
inflation on account of the enormous quantity of gold in circulation then.
Might I put it in this way ? That convertibility for the purposes of foreign
exchange is insufficient; that is the point I am driving at. Convertibility, if
it is to be an effective convertibility, must be convertibility without
question; it must be convertibility for all purposes, although if I may just
say so I am not in favour of a convertible currency, as you will see from my
memorandum.
6069. Possibly a certain confusion may
be introduced by the analysis of convertibility into internal and external
convertibility. What is essential, is it not, in a sound system of currency,
now that gold is to be once more apparently accepted as the world's
international payment, is that the unit of internal currency should be stable
related to a definite gold value ?—I do not quite
accept that; it may be stable for international
purposes ; it might not be stable for internal
purposes.
6070. I do not think I managed to make
my question quite clear. I understand what is desired by you in your
recommendations is that the unit of currency which is used internally should be
stable related to a gold value ?—I am really more
for the use of gold. I am opposed to any kind of system which will economise
gold under the present circumstances. Because. I think that economy of gold is
incompatible with security of price. My standpoint is very different from the standpoint of other people. I may be a
little barbarous in my view.
6071. Not
at all. Let us examine what your real idea is. What is your ideal to be
attained in the organisation of the currency of a country ? It is not that the internal unit should be stable in relation to gold ?—Oh yes, it should be stable—not in relation to gold
but stable in terms of commodities.
6072. By what methods do you recommend
that India's internal currency should be stabilised, that is, in relation to
what, and, secondly, by what methods?—It should be
stabilised more in relation to commodities rather than to gold, which is used
only for purposes of internal trade. And I say it should be done by stopping
the coinage of rupees altogether, and prescribing the use of gold.
6073. If we reject gold as a standard
of reference for the internal currency, what other standard of reference are we
to adopt ?—That I have given here. That we should
either go to the Compensating Standard of Professor Fisher or to the Tabular
Standard of Professor Jevons. If you do not want to
use gold and economise gold, then my submission is that you should go to one or
other of those two.
6074. I am not sure that I am very
intimately acquainted with Professor Fisher's standard, but are these both the
same sort of proposals ?—They are very much the
same except that Professor Fisher's Compensating Standard—they are really what
I should say, I mean, the two sides of the same medal, so to say. Professor
Fisher would, for instance, alter the metal in the gold unit according to a
certain index number, and Professor Jevons would
allow more units to be given or less units to be
given according to a certain index number. But I think those two are too
complicated. I personally believe that a gold standard for all practical
purposes is sufficient.
6075. Returning to what is practically
possible, you are of opinion that the value of India's currency unit should be
determined in reference to a certain quantity of gold ?—No,
my submission is that India should have gold in currency. Gold should not only
act as a unit of reference.
6076. Let me pass from that and ask
you another question. Let me now deal with the view which you advance, which I
understand is best expressed in paragraph 4 of your memorandum, sub-paragraph
(2), where you say : "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." If I understand the precise force of that
opinion, it is that the gold exchange standard tends to economise the use of
gold, and that what is prudent and advisable is not that the use of gold should
be economised and therefore that the gold exchange standard is bad ?—Yes.
6077. And that is based upon the view
which you take as to the future relation between the demand and the supply of
gold in the world ?—Yes.
6078. You are of opinion that the
future supply of gold is likely to grow in relation to the demand ?—No, not grow ; it will
remain large because other people are not using gold, they are using paper,
they are not in a position to use gold, so gold, even if it is not used, will
remain large in quantity.
6079. First of all, a preliminary
question in regard to that. Are you considering here the interests of India, or
are you considering the service which India might render to the rest of the
world?—1 have both in view. 6080. You think that, by doing that, India will be serving her own interests and the
interests of the rest of the world at the same time. Do you agree with the not
uncommonly held opinion that a gold currency is an expensive system ?—Yes, it is.
6081. So that we have to consider, in
the first place, the possible disadvantage to India of the expense involved.
What are the advantages to India to set against that expense ?—It is that you get a more stable standard, which as
Professor Cannan says is knave-proof and
fool-proof.
6082. Now, as regards the prospect.
The force of this contention would depend, would it not, upon the realisation
of your anticipations as regards the supply of gold in the world at large ?—Yes.
6083. Would you agree that, supposing
on the other hand there was to be a relative decrease in the world's gold
supply such as might tend to a general rise in world prices, that then it would
be to the advantage of India, as of other countries, to economise in the use of
gold ?—Well, my reply is that we need not be afraid
of an indefinite contraction. We have always got methods for increasing
currency. We must guard against indefinite expansion which is always possible.
6084. If you have pegged the Indian
currency definitely to gold through the gold standard and there is a relative
diminution in the world's gold supplies, then any general fall in prices which
must result would make itself felt in India also ?—Yes,
but that could be guarded against by increasing our paper currency or otherwise
by manipulating the paper currency.
6085. Is not that sacrifice very
characteristic of the gold currency system, for which you yourself have
selected that system ?—No, I am making gold the
currency simply because I want to avoid the possibilities of indefinite
expansion. As I say, you can always guard against an indefinite contraction.
Falling prices can always be prevented.
6086. Now let me ask you a question as
to the opinion you have formed that anything that would tend to appreciate gold
would be to the good. Have you been able to arrive at any statistical estimates
as to what the future of the relation between the supply and the demand of gold
will be in the course of years to come ?—Well, in
my investigations I did some of them in 1923, when I was writing the book I had
occasion to read some articles which appeared in the Harvard Business Barometer
Series and I rather get the impression that there was no likelihood of any fall
in the production of gold. And besides, my point is this, that the countries of
the world are using so much paper that whatever gold supply we have is really
very large. Those countries therefore that can avoid economising gold might as
well do it to their own benefit and to the benefit of the rest of the world.
6087. I am not quite sure that I
follow the latter part of your reply ?—What I say
is that although the production of gold may not be increased physically from
the mines, yet the use of substitutes for gold in modern days is on such a vast
scale that the quantity of gold in the present circulation might appear to be
large enough for a long period for the transactions of the world even without
new additions from the mines.
6088. You have no more statistical
calculations which you would care to put before the Commission as to your
estimate of the future supply of gold ?—No, I have
made no estimates.
6089. This is a matter, of course,
which is of great importance for the consideration of the Commission, so let me
put to you one or two estimates that I have been supplied with from other
sources. These are estimates as to the effect upon general gold prices of the
movement of the relation between the demand for gold and the supply of gold for
a period of years. They are forecasts made at various dates by authorities, and
they are referred to the year 1930. What is done is to measure the effect of
the gold supply upon prices by trying to forecast the general level of prices
in 1930 by reference to 1913 as the 100 standard, and thus to see what the
future of the world in this regard is. I have here an estimate of Sir James Wilson, made in 1921, who estimates that the result of
these factors will be that the general price level
in 1930 will be stable at 115. That is a substantial fall, you see from the
present figure which is round about 158. Then there is that estimate to which
you have already referred, the Harvard Business Barometer, in 1922, which
estimates that in 1930 the general price level should stand about 150, and
should be stable at that figure. Then there is Professor Gregory, who makes an
estimate in the near past. May, 1925, who estimates
that the general price level will stand about 162 in 1930 and should be rising
at that figure. So he is the one who is most of your opinion. And, finally,
there is Mr. Joseph Kitchen, an eminent authority, who in July, 1925, made a
forecast that in 1930 the general price level should be expressed by a figure
of 120 and should be falling at that figure. Of these four attempts to forecast
the position, three anticipate that the prices will have fallen at that time ; two believe that they will be stable at that lower
level ; one, Mr. Kitchen, believes that they will
be falling at that lower level, and only one believes that they will be higher
than they are now and rising. I will put it in this way. In view of these very
careful attempts to estimate the situation does it not teach us the necessity
of exercising great caution in making the assumption that it is unnecessary, in
order to maintain prices stable, to economise the
use of gold ?—1 am rather in favour of falling
prices rather than rising prices, and I am glad if they do fall and fall
rapidly too. I think it is good for the nation that there should be a fall in
prices rather than a rise in prices. So these estimates do not really deter me
from making my proposal.
6090. Nevertheless, there is some
different basis for your opinion ?—I take those
opinions for what they are worth. I am not in a position to contradict them
because I have never made any estimates. But somehow this is my belief that
already the existing amount of gold is so large and the capacity of the
countries of the world to use that currency, any currency, is so small that the
supply of gold is likely to remain larger for a long period, and there is, in
my opinion, not much chance of prices falling.
6091. Then there is a further
question. I should preface it by saying that you are dealing here with the
abolition of the exchange standard ?—Yes.
6092. In paragraph 5 you say, " 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." I am going to ask you to expand that a
little, and in order to show you what I think needs expansion, I would put
these possible questions by a critic. Might not a critic say : you say that the reserve cannot increase without an
increase in the rupee currency, and this critic might say, why should it ? He would say, if the rupee currency cannot increase
without an increase in the reserve, would that not be a most desirable state of
affairs ? Have you followed my point ?—I will explain in this way:
for instance, there are the bank issues and the reserves of a bank. If you
compare, for instance, the bank reserves with the bank issues and the currency
and the gold standard reserves of the Government of India with the rupee
issues, you will see this: that when the bank
issues are limited, the reserves increase, and vice versa. But here you cannot, for instance, reduce the rupee
currency without also reducing your reserve.
6093. My point is this. I say, all
right, but look at it from the other point of view. However that may be, what
appeals to me is that you cannot reduce your reserves without reducing your
rupee currency, and that is what I desire to effect?—Quite
true, I admit that. But my submission is this. What is the use of a reserve,
really ? Suppose you have an enormous reserve and
you have also an enormous rupee circulation. Does the fact that you have a
large reserve in store in some safe in any way affect the value of the rupee ? It does not. The value of the rupee will be affected simply by its quantity and the volume of
circulation. Its value has nothing to do with the reserve at all. Backing
absolutely has no effect on the value of currency except, of course, in times
in which it is disorganised. It may lead to some confidence in that currency,
but I submit that when currency has come to such a pass that people have to
have some confidence, I say that currency has been absolutely inflated.
6094. Accepting no doubt, the
proposition that the value of the currency will be ultimately decided by its
total volume in relation to the business ?—What I
say is this, that this relation is so dangerously correlated, and I am sure you
cannot indefinitely go on coining rupees simply because there is a gold
reserve. If you go historically into this matter, my submission is that such
has really been the case. In the history of India people who have had to deal
with currency were so much infatuated by the idea that they must have some
reserve that the coinage of rupees was really initiated for that purpose. The
coinage of rupees in India in 1893 and 1898 when the Fowler Committee's Report
was brought into operation and reforms were introduced is a point, Sir Edward
Law was so much obsessed by the volume of rupees in circulation that he felt
that there must be some reserve, and it was on this ground that he proposed to
the Secretary of State that the Government should be allowed to coin rupees. If he knew properly that the value of
rupees would maintain themselves if they were limited in volume, then he would
certainly not have gone on increasing the currency. I am recommending simply
what the Government of India recommended to the Secretary of State in 1893.
6095. To turn to the immediate point: the function of a reserve under these conditions is
to maintain stability, is it not ?— I think a
reserve ought not to be there. A currency is something like any commodity which
maintains its value simply because of the law of supply and demand.
6096. Do you reject the proposition
that the function of a reserve is to maintain stability ?—Yes, I do. I do not think a reserve has anything to
do; in fact, a reserve maintains itself when the
currency is limited ; it does not maintain the
currency.
6097. Let us now consider your
practical proposals for the reform of the currency. You say :—" 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) Rupees 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." A question
which does suggest itself to a practical man there is, under those
circumstances, how are you to maintain the ratio between the gold coin and the
rupee, and how are you to prevent one going to a discount or a premium in
comparison with the fall in accordance with the balance of the country's trade ?—Well, the rupee will maintain its value by reason of
the fact that it will be limited in volume ; no
more issues of rupees are to be issued.
6098. What is to prevent it going to a
premium ?—It cannot at once go to a premium because
it has a substitute in gold. Rupees are not to be convertible in gold. The
rupee cannot go to a discount because it is limited in volume. No more rupees
are to be coined. The rupee cannot go to a premium because there is the
alternative of a gold coin functioning as currency.
6099. Then you say :—" 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.' How would that operation take place ?—You simply call in rupees and not issue them
again—by the process of calling in rupees up to a certain limit.
6100. So that the rupees would not, to
that extent, be convertible into gold ?—It will
never be convertible into gold, until the limit is reached, so that it will
never be in excess even in times of depression—the rupee will not be
convertible into gold and gold will not be convertible into rupees. Even as it
is, I am not very much afraid that the rupee will go to a discount, but there
is just this chance that it might and I therefore propose that safeguard.
6101. Coming then to the question of
the ratio, you say: " 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 1s. 6d. gold to 1s 4d. gold means this and
nothing else. Should the currency be inflated to reach back the pre-war parity ?" Then you point out that the restoration of the
pre-war parity is not a restoration of the pre-war price level because there is
a change in gold prices ?—Yes.
6102. Further, you point out that : " Two things must
be borne in mind in this connection. Existing contracts include those made at
every stage of preceding depreciation’s 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." I understand that the opinion
which you emphasise there is that we have been passing through a period of
violent fluctuations in the value of the rupee, that at every stage contracts
have been entered into, and that it is impossible, as it were, to fix upon any,
definite ratio which will do justice as between all these contracts made at the
varying levels ?—Yes.
6103. Then you say that the great bulk
of the contracts have been of recent date ?—Well,
my information is really based upon a small note made by Professor Cannan in one of his articles in the "Statistical
Journal."
6104. Are there any statistics
available which would give us a correct estimate of the number of contracts ?—1 think it is a guess for what it is worth; a question of common-sense.
6105. Then you say, " It may be said that the centre of gravity of
the total contractual obligations is always near the present." Those
premises lead you to the following conclusion, that, given these two facts, the
best solution would be to strike an average between 1s. 4d. and 1s. 6d. and say
that it is nearer 1s. 6d. than 1s. 4d. I am not sure that I quite follow that.
Your trend of reasoning would rather have led me to suppose that you would
finally turn out to be a supporter of the 1s. 6d. rate ?—1
say it may be nearer 1s. 6d. and away
from 1s. 4d.
6106. What ratio would you suggest?—It
is difficult. Of course, I think 1s. 6d. would be just as good. It could not
inflict any very great hardship.
6107. Then, finally, as regards the
question of a rising and falling rupee ratio, your opinion is summarised in
paragraph 9. You say : "
Now if it is realised that a low exchange means high internal price, it will at
once become clear that this gain is not a gain from one class at the cost of
another class in the country. " Which class
gains and which class loses ?—The business class
gains; the labouring class does not. The price of
all factors of production does not change. Wages do not change as rapidly as
price and these are the classes who suffer.
6108. Have you any suggestion to make,
either from the theoretical or practical point of view, as regards the
important provisions as to the currency arrangements to provide elasticity to
meet seasonal demands ?—As I hinted, of course,
very briefly, if we want to make our currency elastic for seasonal proposes, we
must some how see that the commercial paper which has given rise for trade
transactions is converted to currency. So that commercial paper should be made
more a basis for the issue of the currency than Government bonds. I think it
would be to the good of India if we adopt the proposals in the German Imperial
Bank. They adopted, of course, more or less the English Banking Act of 1894
with variations so as to suit the seasonal demands.
6109. That is a provision for the
extension?—For the extension for the time being of paper issues under certain
regulations.
6110. That is a provision, is it not,
for the extension of the fiduciary issue ?—Exactly.
6111. . In return for the payment of a proportional tax ?—Yes, I
think it is a sufficient safeguard for both.
6112. (Professor Coyajee.) The chief merit of the gold
standard is, according to you, that it places certain definite limitations
against possible fluctuations ?—Exactly.
6113. But, of course, there are
certain things, for example, the provision from the mines is not based on how
much currency is required by a country ?—Yes ; I may say that I am in favour of a gold standard
simply because compensating systems are not workable. If they are workable, I
would at once reject the gold standard. I am not in love with it at all.
6114. Nor does the gold standard
ameliorate the consequences of a trade cycle ?—No.
6115. Then there is only one point. In
paragraph 5 you observe " 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." By analogy why not
abolish the paper currency reserve also because the value of the paper depends
upon its limitations ?—Quite.
6116. Would you abolish that?—No, for this reason. Be cause we are not placing a fixed limit on the issue of paper.
Under the scheme where I say we should abolish gold standard I am placing a definite limit on the issue of the rupees. In
the case of paper currency, we have allowed the Government the discretion.
6117. Do you think that possible ? I will tell you why. Because with limited incomes
and things like that, there is more scope as population increases for the use
of rupee. Could you say for ever and for ever, we shall be coining gold and no
rupees until possibility the quantity of gold in circulation will be ten times
that of the rupee ? Would that be convenient to the
country ?— I should think it would be. I would
rather say that instead of using gold we use notes backed by gold. I do not
mean that we should use gold from hand to hand.
6118. (Sir Norcot Warren.) Am I to understand
from the latter part of paragraph 8 of your memorandum that you are inclined to
the rate of 1s. 6d. rather than 1s. 4d. ?—I confess
predilection in favour of 1s. 6d.
6119. (Sir Alexander Murray.) There is one point, Dr. Ambedkar, which you referred to in answer to some
questions put to you by the Chairman; you seem to
suggest that the Government of India were somehow or other prepared to go on
coining rupees simply in order that they may make profit between the bullion
value and token value of the rupee. I want to know what you are referring to
actually ?—I am referring to this : It is a historical bit of thing. When the Government
of India, for instance, introduced reforms suggested by the Fowler Committee,
they felt that for a large circulation of the rupee they had not any reserve
and the Fowler Committee in paragraph 60 of their Report suggested that if the
Government coined rupees and keep profit to itself, that profit should be
utilised as a reserve. Sir Edward Law who came on the scene in 1901, the period
from which the coinage of rupees commenced, also felt that the volume of rupees
was so large that some amount of reserve was necessary ;
and I think he went on coining rupees sheerly
because he felt that the reserve was wanted and the reserve could not be had in
any other way except by coining rupees.
6120. You only think that?—No, my point is this: I
have read the dispatch very closely and
I feel that if Sir Edward Law had disclosed there that the rupee was coined to
a premium because people did not want gold or any other thing to use in
currency, then I could have understood that the rupee was coined in answer to
the demand of the people. But there is not a single thing to that effect to be
found in the dispatch. He simply says that when we introduced reforms we did
not take into account paragraph 60 of the Fowler Committee's Report.
6121. But he also, I think, in that
dispatch to which you refer laid down that there ought to be a gold reserve
which estimated at 7 millions or something like that. Against this you say that
he was issuing rupees ?—Quite so. Gold standard
reserve is kept in gold. I say no reserve was wanted.
6122. You make a general statement
here, Dr. Ambedkar, " 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 on
issuing currency without any other consideration but that of augmenting the
reserve" and you are now repeating it to the Chairman ?—I have used a much milder expression than that used
by Professor Cannan himself in his book.
6123. But is it not the case that in
1895 that was actually suggested by a well-known Bombay financier and turned
down by the Finance Member at the time?—I find that
in the dispatch.
6124. One moment. In your book you
actually give the name of the Bombay financier who suggested it and you give
the name of the Finance Minister of the Government of India who turned it down ?—Yes.
6125. Then in your book you also give
the name of a well-known politician who as recently as 1907-08 suggested the
same thing and again it was turned down by the Government of India and as
recently as 1919, you give a reference to another well-known economist. Then
why do you repeat the statement to the Chairman that the administrators of the
Government of India have not thrown overboard or turned down the suggestion
when as a matter of fact you know that the administrators of the Government of
India have turned it down repeatedly when it has been put forward by well-known
Indian financiers ?—My reply to that is this: that somehow if you read the speeches in the budget
delivered by every Finance Minister, for instance, I forget the names now,
gentlemen who preceded Sir Edward Law; I think I
can cite instances.
6126. Sir James Westland and Sir Clinton Dawkins
?-But they never agreed with that.
6127. No; it was suggested by an
Indian to Westland who turned it down and again to Dawkins who turned it down ?— With due respect to your interpretation, Sir Edward
Law did say that there should be gold standard sufficient to back all the
rupees and the notes. I do not deny that. But I simply say this ; that other financiers stated that no reserve was
wanted and the rupee would maintain itself and Sir Edward Law stated that the
reserve was wanted and he coined rupees because he wanted the reserve. In fact,
I have paid sufficient compliments to the training and the notions of Westland
and Dawkins for turning down the proposals. I say they were right and Sir
Edward Law was certainly wrong.
6128. Sir Edward Law did not say that
he coined rupees in order to provide the reserve. He said that he should hold
it as a backing against the issue. It is you that put in the interpretation
that he did coin rupees for the other purpose ?— He
says that in the dispatch. Before the Fowler Committee there were sufficient
proposals of having a gold reserve and the Committee found that they were very
costly, but slightly hinted that if a reserve was wanted, it might be had by
coining rupees. The two gentlemen who preceded Sir Edward Law did not think it
was necessary. But Sir Edward Law said it was necessary and coined rupees. I am
not making a general charge. I have given praise where it is due. I can give
you also the reference.
6129. I can verify all your
references. What do you want to find there ?—That
although the recommendation of the Fowler Committee was there that the
Government of India could provide itself with gold reserve by coining rupees, Westland and Dawkins refused to pay any
heed to that proposition, because they firmly believed that gold reserve was
not necessary and that the rupee being limited in quantity it could maintain
itself. But Sir Edward Law when he became Finance Minister felt that a reserve
was necessary.
6130. Westland was the Finance Member
before ever the Fowler Committee reported. I think he was away when the
recommendations were brought into operation and Dawkins was the member in
office when the Fowler Committee reported. But both of them turned down the
suggestion which came from Indian politicians ?—There
is no difference of opinion on that point.
6131. The only difference is that you
are imputing to Sir Edward Law that he coined rupees in order to create a
reserve. I say that he did not; that in the actual
dispatch he said that there was a gold reserve, I think, of 7 millions ?—If so, there is a difference between us.
6132. (Chairman.) I cannot see what conceivable advantage it can be to
anybody to increase a reserve for the fun of the thing ?—Exactly,
and people are under very big notions that a reserve is wanted and without a
reserve a currency cannot work. I think it a very common superstition. It is
there.
6133. (Sir Alexnder Murray.) I will give you
the reference, pages 276 to 278 of your book, "
The Problem of the Rupee? "— Yes, Westland was there when the reforms
were brought into being, page 276.
6135. What date was that ?—It is the Budget speech of 1898-99 after the reforms
were introduced.
6136. It was in 1894-95.—No ; Dawkins comes on the
next page. My reference is to the Financial Statement for 1898-99 at page 276.
Then the passage from Sir Edward Law occurs on page 278.
6137. Will you excuse me for
correcting you. You said your reference was to the Budget speech of 1898-99. As
a matter of fact the reference you have made is from the speech of 1894-95 ?— He was also Finance Minister in 1899.
6138. He turned it down in 1894-95 ?—1 mean there was no material difference between the Herschell Committee and the Fowler Committee and I am
sorry if you think I have made any vile allegation against the gentleman.
6139. (Sir Alexander Murray.)—All I am doing is quoting what you say in
paragraph 5 of your statement. All I say is there is danger of anybody falling
into that trap.
6140. (Chairman.) And you maintain that in your book you have vindicated
these eminent statesmen ?—Yes.
6141. (Sir Purshotamdas Thakurdas.) In paragraph 8 you refer to
various countries of the world as " hankering
for a return to the pre-war parity " and you
say it seems to be universal. Then you go on "
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 over-reached the pre-war parity. " Those
other countries to which you refer have had their currency very severely
depreciated during the war ?—Absolutely.
6142. Not the solvent countries?—1
think these countries also which are very near their old parity find it
difficult to go back.
6143. For instance, which countries
have you in your mind ?—Well, I am talking of the
proceedings of the Genoa Conference, which I do not carry in my mind, but I
think for instance a country like Italy. France was at one time within
measurable distance of pre-war parity.
6144. France now is perhaps worst off
of all ; therefore you are there remarking a difference between India
and other countries whose currency was severely dislocated during the war
period and who have not yet been able to bring it round ?—My point is, even if we were in a position to go back
within a measurable distance it would not be always wise or advisable to go
back supposing we could.
6145. I will come to that later on ; I am only trying to point out to you that it may be
said the comparison you are stating here between India and the other countries
is one which cannot stand as far as currency problems and conditions are
concerned. So far as the "could" is concerned, I mean the difference
between whether we should and whether we could even if they (those countries
with depreciated currencies) wanted to they could not go back ?—Very good; you have put
it much better than I could have.
6146. Therefore if you compare India
with the countries which got back to pre-war parity you find that those who
could did go back to the pre-war parity ?—Yes, for
instance England ; but there was also a strong
current of opinion even in England that they should not.
6147. I mean in spite of the strong
current of opinion you refer to they have reconciled themselves to the pre-war
parity and you do not hear much complaint now about having gone back ?—I could not tell.
6148. You do not know, I see ; unless it can be said that those who went back made
a mistake, there won't be anything particularly objectionable against those in India who want to return to the
pre-war parity ?—No, I don't say that. I am really
raising the question whether it is desirable.
6149. Now regarding the desirability
of it, lower down you say the view is wrong; you
say both these views are fallacious. You say the restoration of pre-war parity
is not a restoration of the pre-war price level. Now do you think that exchange
should be used as a lever for attaining price levels ?—No.
6150. Then, it does not appear to me
very fallacious ?—No, I say this, although you
cannot always say exchange and price level move together, yet............
6151. Excuse me, my question was, do
you suggest that exchange should be used as a lever for adjusting price levels ?—No, I do not say that.
6152. Therefore a change of ratio from
that point of view was not desirable, as a lever for the adjustment of prices ?—Yes, it was not.
6153. No country has done it unless
you can show that it was particularly desirable in the case of India as an
exception ?—But it has happened in all countries.
6154. Which countries ?—All countries.
6155. If I may make my question
clearer...... ?—I do not think your question was put very clearly.
6156. I sometimes do put my questions
not very clearly, I admit. Which countries which could attain to pre-war parity
did voluntarily go past it in order to adjust their internal price levels ?— No, of course they did not do that.
6157. Therefore where is the fallacy ?—Fallacy in this sense ; some
people in doing this imagine they are going back to the old price level. That
is a fallacy, because 1s. 4d. in 1914 is not the same as 1s. 4d. in 1925.
6158. But I mean those who do not base
the demand for 1 s. 4d. on the question of prices
at all, they would not be making that fallacy ?—No.
6159. Then lower down you mention
another point, I think. " 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 1s. 6d. in the direction of 1s. 4d. must be raised in the direction
of 2s. gold." Then you say "the restoration of pre-war parity even
nominally would be unjust." What have you in your mind by the words " even nominally "
?—Without looking to the price level.
6160. I thought you yourself agreed......?—Supposing now, in 1925,1s. 4d. is the ratio as
compared to 1914, that would be only a nominal change because prices have
certainly changed.
6161..
Where is the nominalness in regard to those who ask for 1s. 4d. as being the
pre-war rate?—You are asking for a definite change from 1s. 6d. to 1s. 4d. I
take my starting point, as I have stated at the end of the statement from what
we find actually there. I say, " In short, in
matters of currency the real is the normal." I therefore start from 1s.
6d. as the normal.
6162. Now supposing the exchange
to-day, when we are discussing the thing, was 1 s.
8d., I take it you would urge the same ground for
1s. 8d. being confirmed as you have for 1s. 6d. being confirmed ?—Yes.
6163. So whether exchange had gone up
to 1s. 6d. or not the ground would prevail irrespective of what other countries
have done ; and irrespective further of how that
point was reached ?— May I just explain it in my
own way ?
6164. If you please.—The way in which
I look upon this problem is this. To-day we have 1 s. 6d. That to my mind means
a certain price level. If you want us to go back to 1 s. 4d., it seems to me we have to raise our prices. Without
increasing the volume of currency we certainly cannot reach 1 s. 4d., it seems to me we have to raise our prices. Without
increasing the volume of currency we certainly cannot reach 1s. 4d. gold.
Therefore the complete question to my mind. is, shall we raise our prices from
what they are today, so that we can go back to 1 s. 4d.?
Now I being a member of the labouring community, feel that failing prices are
better. That is my view of the matter.
6165. Let me take it the other way.
You say, as you put it, that, being a member of the labouring community, that
means from the point of view of the labouring class it is undesirable ?—Yes, and I may go further and say that from the
national point of view too falling prices are better than rising prices.
6166. Now I suppose you heard the
arguments that are being advanced that a high exchange, an exchange which is
worked up to a higher point
than where it has been 15 or 20 years at a stretch is undesirable in the
interests of the producer. What would you say to that ?—All
that it means is a depression of profits. I do want to make a distinction,—1 do
not know how far people will appreciate that,—between depression of industry
and depression of profits. I think that distinction was made by Professor
Marshal in his evidence before the Gold and Silver Commission. There might be a
depression of profits, that is to say, the enterprising class may not get all
that they would get if prices were to rise ; but it
does not necessarily follow.
6167. Excuse me ; cannot I refer to the producer ? We will come to the investor later if you don't
mind. But what about the producer : in his case the
higher the exchange the
less the number of rupees available to him ?—It
does not matter to him at all, because he suspends it. His cost of production
also falls ; therefore it makes no difference. If
he got 15 rupees, and if the 15 rupees purchased a certain amount of goods, and
if five years hence he got 10 rupees, and that 10 rupees purchased as much as
15 rupees before, the change is only a change of counters.
6168. When the adjustment is complete ? But until then there is disturbance?—Yes.
6169. Now let us look at it as far as
the present goes. You think that the average Indian cultivator rarely employs
any labour and cultivates with his own hands ?—Well,
I suppose he does employ a certain amount of labour.
6170. In the ordinary course, for the
adjustment to be complete, you would expect that the wages he pays to his
labourers also go down ?—Yes. I mean if he wants to
get the same amount of profit, I would say yes.
6171. Very well, if the wages of the
farmer's labourer have not gone down you would admit that to that extent the
farmer has a smaller profit ?—Smaller profit, yes,
I admit that.
6172. And in cases where the farmer is
just able to make both ends meet he loses ?—No. He
does not get profits, but he does not lose. Profit is something else ; it is surplus.
6173. Where a farmer or a class of
farmers in a district make just enough to make both ends meet they would be
losing, inasmuch as the labour charges have not gone down in proportion ?—I do not know how you define profit. I define profit
as surplus income.
6174. After paying all charges of
production ?—Yes.
6175. If in 1921 a farmer made both
ends meet and in 1924 when exchange was stabilised at 1s. 6d. as far as his
produce is concerned and his labour charges have not gone down, he would
certainly make less ?—He would lose part of his
profits.
6176. He will save so much less?—I
would stick to the word " profit."
6177. He will make less profit?—Yes;
there would be a depression of profit.
6178. To that extent of course the
producer will be a loser ?— If you think that he
had a legitimate right to that profit, then of course you would be right in
saying that he loses ; but not if it was a merely
differential gain.
6179. As 1s. 4d. it was merely a
differential gain ?—Yes.
6180. Lasting for a period of 25 or 23
years ?—As I say it all depends upon how you define
it.
6181. How would you define it yourself
? So long as he is able to recover all that he has
spent in production I do not think that he would be a loser.
6182. And you would apply that test to
every person ?—I would say that he has made both
ends meet.
6183. Do you think that would be the
maximum which the average citisen would like to apply in his own ease ?—I can give no opinion upon that, I am afraid.
6184. Now, you mention in paragraph 8 : " Two things must
be borne in mind in this connection," and lower down you say: " Existing contracts are no doubt of various
ages." What sort of contracts have you in mind there ?—Leases for instance :
and other contracts also, such as building contracts and so on.
6185. How would they come in with the
question of exchange ?—They are money contracts
just the same ; they are all money contracts.
6186. Every contracts, then, you mean ?—Yes.
6187. If a man was putting up a house
in a mofussil rural place for 4,000 rupees, that
also would come under this ?—Of course ; it is investment of money.
6188. You have in mind everything that
involves investment of money in the country ?—Yes ; it has purchasing
power.
6189. Then you say : " Given these two
facts, the best solution would be to strike an average between 1s. 4d. and 1s.
6d." Why did you mention an average instead of
1 s. 6d. ?—I say so
because in 1925 there may be some contracts which were made when the ratio was
1s. 4d. Some contracts may be still subsisting made at that period when the
purchasing power was at the rate of 1 s. 4d., and
therefore to give justice to all I think that is the best way it could be done.
6190. What about contracts in the
shape of debts incurred before 1914 ?—1 do not
suppose there are many existing now.
6191. You
think that all these debts payable by agriculturists to sowers are paid within
a certain period ?—My personal opinion is that no
commercial contract extends for more than five years, and the proportion of
those is very -very small. There is no statistical information on this.
Professor Fisher has made in his book certain calculations to that effect. He
writes there that the rate of interest varies sympathetically
with the prices ; so that the rate of interest
bears a certain relation to the rise or fall of prices. He then comes to the conclusion
that most contracts are very recent commercially.
6192. You mean about India ?—I mean generally ; I do
not know about India in particular; there may be something peculiar in India,
but I do not know why it should be so.
6193. Do you think things in India may
be different ?—I should not think so unless there
was some evidence forthcoming that that was so.
6194. You think that the problems in
India are the same as in the West ?—I do not see why they are not.
6195. It would surprise you if they
happened to have been admitted to be otherwise ?—It
would surprise me.
6196. Regarding the adjustment of
price levels, do you think that the adjustment is anything near complete now,
owing to the disturbance in the exchange rate from 1s. 4d. to 1s. 6d.?—There would
be some disturbance; that would be detrimental to
the wage-earners if we went back from 1s. 6d. to 1s. 4d.
6197. The disturbance from the lower
to the higher rate from 1s. 4d. to 1s. 6d.......?—Has been favourable to the
labouring classes.
6198. Is that adjustment complete, or is there still any mal—
adjustment of that ?—I could not say ; that is a matter of statistical
investigation which I have not entered into but I suppose exchange has been
stable at 1s. 6d. for a long time.
6199. How long do you think it has
been stable ?—I cannot exactly say ; but certainly it shows signs of stability.
6200. How long have you any idea ?
Some witnesses have said six months, some eight months......?—I
think somewhere there.
6201. Do you think that six or eight
months is a sufficient period for judging this stability ?— say due
weight should be given to it, and therefore you should strike an average.
6202. But I think you have said in the
course of your oral examination that you would be prepared to agree to 1s. 6d. ?— Yes, because it is nationally better; it would not inflate. That is what I say. If, even
after 1 s. 6d., the
process of adjustment was not complete so as to enable us to say 1s. 6d. was
really the level needed, I say we should establish it at that.
6203. Regarding the adjustment in the
industries here, have you any idea at all ? Can you
give us any opinion ?—None whatever.
6204. (Mr. Preston) : In case there should be any misunderstanding with
regard to some of the answers which you gave to Sir Alexander
Murray, in connection with that unfortunate reserve, the gold standard reserve,
it may be well if we put on record some actual facts :
the gold standard reserve came into being in the year 1901 and it resulted from
profits earned from the previous April in 1900. The balance
in the reserve to-day is 40 millions sterling, is
it not ?—Yes ; I think
it is about that.
6204A. The Finance Minister when he
made his report on currency last year made the following
statement : " As
will be seen from the statement, the bonds and stock purchased are due for
repayment within the next few years. Of the amount now standing at the credit
of the reserve, £ 27,449,950 represents profits on coinage and the remainder
represents accumulated interest on securities held in the reserve." You
say that this reserve cannot increase unless there is more rupee coinage. How
has that increase of one-third in the last three years come about ?—By interest on investments.
6205. Then if the interest on that
reserve is kept being added to it, you are increasing that reserve for a useful
purpose without having to adopt those methods which you so very strongly deprecate ?—Yes,
undoubtedly.
6206. Just one more point as to the
usefulness of that reserve. It will be within your
knowledge that in the period of the world's depression in 1908 that had it not
been for that very reserve we could never have maintained our external parity; you admit that ?—Yes.
6207. Thank you ?—Although, of course,
something has gone in to which I ought to take exception—by saying that I am in favour of increasing the gold standard reserve
by investments. If a reserve is invested there is no reserve at all.
6208. (Sir Reginald Mant.) I understand your chief
desideratum is stability of internal prices ?—Quite.
6209. And you hold that that stability will then be linked to gold
prices, will they not ?
They will vary with the gold prices ?—Yes.
6210. Internal
prices will then be linked to gold prices, will
they not ? They will
vary with the gold prices ?—-
Yes.
6211. Now
a gold exchange standard without a gold currency has been recommended by
several people with the same object in view ; but I understand you to hold that it will not
achieve that object ?—-I think it has not, so far
as India is concerned.
6212. I was not speaking of what has
been done in the past ; it has been represented to
us that if a gold exchange standard were made automatic it could secure those
objects ?—I do not know ;
there may be some people who hold that view, but I cannot see how it could be
held.
6213. i want you to explain why a gold currency would
achieve it and the gold exchange standard would not ?—My first ground
is this : that the exchange standard depreciates
gold and makes it therefore useless as a standard of value. A gold exchange standard causes a redundancy of gold by
its economy.
6214. Ought you not to put it the
other way, and say that if we introduce a gold currency here we shall
appreciate gold ; would
not that be a more correct way of putting it ?—You
might put it that way, yes. Therefore under the present circumstances gold would behave as a better standard of value. My next
submission is this, are we really effecting economy by the exchange standard ?
6215. I was not raising the question
of economy. I was trying to get at the reason for your holding that nothing but
a gold currency would effect your object of keeping internal prices linked with
gold ?—Stable than they would be otherwise is what
I said. If we adopted a gold standard our prices would be more stable than they
would be under an exchange standard. I did not say that under a gold standard
they would be perfectly stable because gold itself is not a perfectly stable
standard of value ; but certainly it would be more
stable than under an exchange standard.
6216. Because simply we should be
using more gold ?—Yes.
6217. That is your only reason for
differentiation ?—Yes.
6218. (Sir Maneckji Dadabhoy.) Let me proceed a step further with
regard to the answers you gave to Sir Purshotamdas Thakur-das : in paragraph
8 you say " 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."
When you are referring to this matter, I understand you are speaking without
any definite statistics ?—Yes ; I simply say there has been a calculation made by
Professor Fisher.
6219. You state this as a sort of
generalisation ?—Yes. I
said I had no definite information.
6220. When you speak of a centre of
gravity of the total contractual obligations being near the present, it is not
a very definite term. Would not that centre of gravity come within the
circumference of twelve months ?—Yes, somewhere about
that ; because I have said one year old.
6221. So
that, if a certain ratio prevailed twelve months
ago, we would be, according to your reasoning, as much justified in taking that
as 1s. 6d. ?—Quite ;
yes.
6222. So you would be as much
justified in taking that ?—Yes.
6223. Then when discussing this matter
and when you expressed your election in favour of the 1s. 6d. ratio. I
understand you founded your opinion on the dictum of Professor Fisher ?— Yes.
6224. Now we have got this dictum of
Professor Fisher before us ;the words used are :—" 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." ?—Exactly.
6225. Don't you think that Professor Fisher when he laid down
that dictum had European conditions before him only
?—Yes, but that would apply almost to any country.
It is a general proposition.
6226. My question is did he not have
European conditions in view only when he said that ?—I
cannot say.
6227. (Chairman.) The witness replied that he thought it would apply to
any conditions ?—Yes, it is a general proposition.
6228. (Sir Maneckji Dadabhoy.) Is that conclusion justified by
these expressed words ?—I should think it is.
6228A. You think it is ?—He says further, he does not only refer to the
war,—he says : "
One might as well talk of restoring the original silver pound or returning the
monetary standards of Greece and Rome."
6229. Now, you know very well that
this ratio of 1s. 6d. has continued in India for the last 16 months only. Now,
if we take this period 16 months in Indian conditions, what would you say when
you think of any imaginary parts before the war ? Do you think in India a period of 16 months would
make any substantial difference in coming to a conclusion ? He is referring to the imaginary parts before the
war ; he takes a longer period ?—No, no. He is simply referring back to 1914, to the
parity which existed in 1914. I say, if according to information 1s. 6d., has been in existence for 16 months, then I say it
ought to be confirmed.
6230. Yes. But if previous to that,
with a brief interval of some years, it has ranged equally for 20 years at 1 s. 4d. you would brush
aside all those considerations ?—Yes, because there
are no contracts now existing that were made 20 years ago. And therefore we
need not be concerned about it.
6231. This
is your argument? And you would also brush aside its economic effect both on
agriculture and on the industries of the country ?—I
say they will be very good. By bringing the ratio to 1 s. 6d. I say there might
be some depression of profits, but there won't be depression of industry.
6232. Yes. So you don't attach great value to those
factors. You think on the whole it will be for the good of the country ?—Yes.
6233. I will put you another question,
a little bit imaginary. We will take 6 months to
write out our report. Within the next 6 months if the ratio becomes 1s. 8d. I suppose you would be justified in taking that
according to you as the basis of your calculation ?—
Then I would again say, you should strike an
average.
6234. Between 1 s. 8d. and 1 s. 6d. or 1 s. 4d ?—Between 1 s. 8d. and 1s. 6d.
6235.. And
you think that would be a sound financial polity ?—Well I don't know. You have
to strike some sort of average. You can't do justice to each individual contract. For instance, if you take the example of the
American War of Independence and the monetary
fluctuations that took place then, all that the Americans could do was of course
to do this kind of thing.—to strike an average and to dissolve all contracts on
that basis. They could not do justice to each individual contract. It is
impossible.
6236. (Sir Henry Strakosch.) Dr. Ambedkar,
I want to refer back to some statements which you made in regard to the
undesirability of introducing a gold exchange standard. At one period of your
evidence you stated that the convertibility into exchange would not limit the issue of the currency and would therefore
not produce stability of internal prices. That was one of the objections you
raised and then at another point you said that the gold exchange standard is
not a desirable standard because prices would be less stable under it than under a full-fledged gold standard ?—Yes.
6237. Now, you are a student of
economic affairs and you have no doubt followed the proceedings of the Genoa
Conference ?—Well, I did when I was in London.
Recently of course I have not. But I know that the gold exchange standard was proposed.
6238. Well, you will remember that the
Genoa Conference an International Conference
adopted unanimously a proposal enjoining the
countries to adopt the gold exchange standard with a view to stabilising the
purchasing power of gold and that they recommended
for that purpose the co-operation of central banks ?—
I don't suppose they did it with a view to stabilising the purchasing power of
gold ; they did it to stabilise their own currency.
6239. They stated definitely it was to
stabilise the purchasing power of gold. Anyway, you can take it from me that it
is so. Now, that is an international body and they have come to that conclusion
and they apparently do not share your view that the gold
exchange standard does not produce, as great a measure of stability internally
as the gold standard ?—Oh no. My submission is that we are comparing the
gold exchange standard to a purely inconvertible standard. The belligerent
countries had during the war an absolutely inconvertible currency and certainly
an inconvertible currency is much worse than an exchange standard because it
has some convertibility. As I have stated myself in sub-paragraph (2) to
paragraph 2. They were not comparing the gold standard to the gold exchange
standard; they were comparing the gold exchange
standard with the paper currency they had.
6240. But I submit they did not
compare at all. They made a recommendation?—But in
reference to the circumstances that existed then—1 should limit it that way.
6241.
Well, anyway, that is a fact. Now, quite apart from that, I am not quite sure
what makes you think, apart from a change in the purchasing power of gold
itself, why the gold exchange standard should not be as stable as the gold
standard. I don't quite follow that, and, before
you answer, I should like just to define what I understand by a gold exchange
standard. A gold exchange standard is a standard where there is circulating
within the country a currency which is not convertible
internally, but which is freely convertible externally, and you could make that
currency convertible into gold for export purchases. Now, taking that standard, I
should be very glad if you would tell us why such a
standard is less able to maintain stability than a gold
standard?—1 follow your question, Sir. And my reply
is this. Convertibility is a means of limiting the
volume of currency to the needs of a country. A convertibility which is
intended only for external purposes is not of sufficient efficacy to limit the
volume of that currency. Consequently you cannot have stable internal prices to
such a currency.
6242. Why do you say that it is less
efficacious than convertibility for internal
purposes ?—Because convertibility to be effective must be absolute.
6243. But it is absolute ?—It is not.
6244. But obviously it is. It is
absolute. The difference is only that in the one case you convert into
international money for international purposes, and
in the other case you convert for either international money which is used
internationally or international money which circulates within the country ?—No, no. The point is this. When your obligations to
convertibility are imperfect as in the case of the exchange standard you are
likely to issue more currency without fear.
6245. But you just said that the
obligation to convert limits the issue in both cases ?—Yes,
but converting depends upon the efficacy of the means of convertibility. If
your convertibility is absolute, that is to say, if an issuer is bound to
convert whenever he is presented with his currency, then that convertibility is
absolute.
6246. But my proposition was that the
gold exchange standard binds the issuing authority to convert the internal
token currency into gold for external purposes ?—And
not for all purposes.
6247. Now, I want to know why the
obligation to convert the token currency for internal purposes should increase
the stability of the purchasing power of that money ?—Because
the principle is that any commodity, and currency included, maintains itself by
the fact that it is limited in volume, in supply. That is the first elementary
proposition of political economy ; that any
commodity maintains itself by reason of the fact that the supply is limited. If
the commodity supplied is not limited, it is bound to depreciate.
6248. Do you then contemplate that in
your gold standard with gold currency, there should be nothing but gold coin
circulating ?—No, I say that the rupee shall
circulate.
6249. And no bank notes ?—Yes, there will be bank notes : why not ?
6250. Then, I don't see how you are
limiting more effectively the internal issue in the
one case than in the other ?—Because I am saying that the mint shall be closed.
6251. What about the issue of bank
notes?—They are covered. A covered note issued is not an addition to currency.
Supposing you deposit a certain amount of gold in the bank and you issue so
much currency to cover it, that currency is not an addition to the currency.
6252. Oh, you want to have notes
covered by 100 per cent. gold ?—Well, I don't say 100 per cent gold.
6253. Then how will you limit it ?—I mean convertibility is a method of limitation. I
will have paper currency which is fully, absolutely convertible and not merely
for the purposes of external trade. And I will have the rupee absolutely fixed
in limit. So that it will maintain its value by reason of the fact that it is
limited. The paper currency will maintain its value by reason of the fact that
it is convertible.
6254. And how will you manage the
seasonal requirements of currency ?—Well, I say you
can expand the fiduciary portion of the currency so as to allow for currency
being issued against paper during seasonal demand.
6255. Do you not put it here at the
discretion and will of the issuer ?—Yes, but there
is this convertibility which regulates the discretion. Convertibility is a
means by which the will of the issuer is regulated. There will be no danger.
Although I admit that even under the gold standard, the gold may absolutely
pass out and the country may only be inundated with paper notes.
6256. Would you say that the
obligation to convert into an international currency at two given gold points
is sufficient to ensure the stability of money, because, if you over-issue internally, your money
will depreciate in relation to gold ?—Yes, I admit
it, but it will be long after. There will be a long interval before that thing
may happen and in the case of some countries, it may not happen.
6257. How was the gold standard worked
before the war in Europe and other countries ?—It
worked on the basis of convertibility, not only convertibility for external
purposes.
6258. But was that standard not in the
main worked, by the central banks not converting into gold but holding foreign
exchange, and only in the last resort was gold flowing from one centre to
another ?—But their arrangements as to
convertibility were perfect and absolute.
6259. You also know that a great many
of the countries on the Continent of Europe who had perfectly stable currencies had practically no gold in circulation ?—Yes that was so.
6260. (Chairman.)
We are much obliged to you Doctor, for your very
full assistance today.
(The witness withdrew.)
[f1] Report of the
Royal Commission on Indian Currency and Finance, Vol. IV, Minutes of Evidence,
pp. 313-22.