The following points highlight the five well-defined periods in history of Indian currency. The periods are: 1. 1835-1897-The Silver Standard 2. 1898-1917-The Gold Exchange Standard 3. 1917-1927 —The period of Managed Exchange 4. 1927-1931-The Gold Bullion Standard 5. Sep. 1931-1947-The Sterling Exchange Standard.

1. Period of 1835-1879 —The Silver Standard:

Before India came under the sway of the British, its currency consisted of both gold and silver. Under the Hindu emperors, the emphasis was laid on gold, while under the Muslims, silver formed a large part of the circulating medium.

Since the time of Akbar, the units of currency had been the gold Mohur and the silver rupee, both being equal in weight, the common measure of value which circulated without any fixed ratio of exchange between them.

In south India, Pagoda, the coin of ancient Hindu kings, was the standard of value and also the medium of exchange and it continued to be so till the time of East India Company. These coins, issued from various mints, situated even in the most distant parts of the country, did not materially deviate from the standard i.e. 175 grams troy.


But with the disruption of the Mughal Empire into separate kingdoms, branches of the Imperial Mint became independent factories for purposes of coinage. The result was that the country was soon flooded with a bewildering variety of coins.

According to D.K. Malhotra, there were as many as 994 kinds of coins of both gold and silver, different in weight and fineness, circulating side by side. The evils consequent upon such a situation may well be imagined. It caused great inconvenience to the trading community and the government; provided an opportunity to defraud the poor and the ignorant but brought handsome profits to money-changers.

The task of evolving good money out of bad fell upon the shoulders of the East India Company who had succeeded to the Empire of the Mughals. The East India Company, having soon realised the need “for the adoption of one general system for the formation of the coins” endorsed the principle that “the money or coin which is to be the principal measure of property ought to be of one metal only.”

Accordingly, under the Act of 1818, the silver rupee of 180 grains, 11/12 fine, was made unlimited legal tender for South India where previously gold coins circulated.


The reform initiated in 1818 was completed in 1835 when, under the Gold and Silver Coinage Act, the silver rupee was made unlimited legal tender and the gold coins lost their legal tender character in the whole of British India. Bimetallism, thus, gave place to monometallism.

It is difficult to understand why the gold coins were deprived of their legal tender status although the Act of 1835 permitted the coinage of gold Mohurs of the value of rupees 5, 10, 15, 30 if required by the public.

A proclamation, issued in 1841 further authorised receipt of gold coins at the rate of 15: 1 at public treasuries in payment of public dues at their face value unless they had passed a certain limit of lightness when they were bought as bullion by weight.

Some encouragement was, thus, given to gold currency but it was slight and very brief. Gold discoveries in California and Australia, from 1848-1851, made it cheaper for people to pay in gold rather than in silver. Gold, therefore, began to flow into Govt. treasuries while the Govt. lost by accepting it at a rate higher than the market rate.


A notification was accordingly issued in 1852, that “no gold coins will be received on account of payments due or in any way to be made to the Govt. in any public treasury within the territories of the East India Company.” Gold, thus, demonetized, however, continued to be received into the mint for coinage.

A question may well be asked whether or not the Govt. should have adopted gold monometallism in 1835 instead of silver monometallism and also whether, instead of completely demonetizing gold in 1852, they should not have adopted gold standard with silver as a subsidiary coin.

The arguments that Indian people were used to silver coinage from times immemorial and that India could not afford a gold currency are untenable. There is ample evidence to prove that people were accustomed to gold currency.

In fact, gold was the standard in South India right up to 1818 and both gold and silver circulated in the north. Further, India had no silver mines although it produced some gold.

The fear that the world supply of gold might not be sufficient to meet India’s large monetary demand was laid at rest by the large discoveries of gold in Australia and California. In view of this, the Govt. could have adopted gold standard but it chose, instead, silver standard.

Just about this time, great changes were taking place in the Indian economy. One was the change from kind economy to cash economy. Another was the enormous increase of trade. The effect of both was to increase the demand for cash. But cash was the most difficult to obtain because, while gold had been demonetized, the world supply of silver, especially after. 1850, was less than the demand for it.

There were no credit media to relieve the monetary stringency as banking was yet in an undeveloped condition. The insufficiency of silver and lack of credit currency caused such an embarrassment to trade that there soon grew a demand for the introduction of a gold currency in the country. Various chambers of commerce submitted memorials to the Govt. in this regard.

Different proposals, made in this connection, were examined by James Wilson who came to the conclusion that if “Govt. had to begin denovo, convenience would point to a gold standard with silver tokens as the best” Wilson’s proposal was ably supported by Charles Trevelyan who argued that Indian people were well acquainted with the Sovereign and that it would be well received by the public.

The Govt. however, did not think it advisable to make the gold sovereign legal tender and appointed, in 1866, the Mansfield Commission to report on the best way to meet the currency demands of the country.


The Commission recom­mended:

(a) The introduction of a universal note, and

(b) The introduction of a gold currency.

Nothing came out of these recommendations.


From 1874, the gold price of silver began to fall thereby entirely charging the Indian currency situation. In twenty years between 1873-1893, the fall amounted to 40%. Two causes were responsible for this phenomenon.

First, production of silver had increased owing to the discovery of new mines as well as new methods of production while its demand had fallen because of the cessation of free coinage of silver in Germany, Holland, France etc. and the increased sale of council Bills in India.

Secondly, the value of gold began to rise due to decreased production and increased demand for industrial and monetary purposes mainly because of its introduction as the only standard in Europe and the united states as well as the general expansion of trade.

As the silver rupee was a freely minted coin, the value of silver in the rupee in terms of gold also began to fall and the rate of exchange between the rupee and the pound declined from IS. 11 ½d in 1871-72 to IS. 3d. in 1892-93.


Whatever the causes of fall in the gold price of silver and consequently falling exchange rates, its effect on India was most serious. Firstly, the falling exchange rates discouraged the flow of British capital into India, and thus hampered the urgently needed railway extension in the country. Further, foreign firms found it difficult to procure the services of European employees required for conducting their business in India.

Secondly, it imposed an undue loss on British Civil and military officers who had to remit a larger number of rupees to get the same number of sovereigns required for maintaining their families in England. They, therefore, claimed compensation for the loss suffered by them. Thirdly, the un­certainty of exchange rate imparted to foreign trade the character of gambling and speculation.

Fourthly, it resulted in a great deal of financial uncertainty and harassment to the Govt. by making all financial calculations and arrangements impossible. The fall in the gold value of the rupee became a “nightmare of Indian financiers” who desperately searched for ways and means to balance the budget which had become “a gamble in exchange.”

Fifthly, every fall in the gold value of the rupee meant an addition to the burden of Home charges which then amounted to £15 million a year.

According to C.N. Vakil, the burden on the Indian treasury on this account totaled Rs. 162 crores during 1875-1898. This shows the extent to which the Govt. was either forced to economise or increase taxation through such unpopular measures as Salt Tax, Income Tax, and the enhancement of the land revenue.

Sixthly, the large flow of depreciated silver into India and its conversion into coins set up a tendency towards a rise in prices which became very marked after 1900.


The continuous fall in the gold price of silver and the rate of exchange and the resulting uncertainties in trade and commerce led to the demand for the closing of the Indian mints to the free coinage of silver and for the adoption of a gold standard.

A warning was issued that the then prevailing rate of exchange was a death blow to commerce and if immediate steps were not taken to raise the value of silver, the day was not far off when we should see a total collapse of business and the winding up of many a respectable firm in Calcutta.

These warnings were, however, ignored by the Govt. who was veering round to the idea of introducing gold standard in India.

In 1878, the Govt. of India put forward certain proposals with a view to creating a ‘self-acting’ system but the Secretary of State felt that it was better “to sit still than to have recourse, under the influence of panic, to cured legislation the result of which could not be fore-told and the effect of which could not be measured.”

This attempt having failed, the Govt. of India tried to seek relief in the only other remedy available, namely, international bimetallism. Unfortunately, even this relief was not avail­able. The International Monetary Conference of 1881 failed, as it had in 1878, to fix a ratio between gold and silver for the purpose of bimetallism chiefly due to the opposition of England.

Another international conference met at Brussels in 1892 and once again, England did not show any inclination to change her mono-metallic gold standard and, once again, the conference failed to achieve the desired result.


It was after this hopeless struggle when the Govt. of India found that they had allowed themselves to fall deeper and deeper into the “Yawning gulf” of their sterling payments that the Hersehell Committee on Indian currency was appointed in 1892 to consider if it was expedient to close the mints to the free coinage of silver with a view to introducing gold standard.

The object of closing mints to the free coinage of silver was to secure control over the supply of rupees, and, thus, prevent a fall in the exchange.

The Committee recommended that:

(a) Mints should be closed to the free coinage of both silver and gold but the Govt. should retain the liberty to coin rupees, if required by the public, in exchange for gold received in Govt. treasuries at the rate of I.S 4d: 1 rupee.

(b) The rupee must remain full legal tender.

Acting on the recommendations of this Committee, the govt. passed Act VIII of 1893 under which mints were closed to the free coinage of silver.


Further, three notifications were issued; the first providing for the issue of rupees in exchange for gold at the rate of 16d. to the rupee; the second authorising the receipt of Sovereigns and half sovereigns by the government in payment of taxes and other government dues at 16d. to the rupee; and the third providing for the issue of currency notes in exchange for British gold coin or gold bullion at the same rate.

The aim of the Act and the notifications was to raise the gold value of the rupee to 16d. so as to encourage the import of foreign capital and to discourage the import of silver. The overall idea was to take the first steps towards the eventual introduction of the gold standard and to link India with the gold standard countries immediately.

The Act of 1893 received unanimous condemnation at the hands of Indian leaders. D.E. Wacha censured the Act, as “a huge and inexcusable blunder” while Dadabhai Naroji denounced the closure of mints as “illegal, dishonorable, and a despotic Act.”

R.C. Dutt, criticising the Govt’s attempt at artificially raising the value of the rupee as “unnatural, desperate, and dangerous” warned against the introduction of a gold standard for two reasons.

First, the savings of the people were mostly to be found in the form of silver ornaments and deprecia­tion of silver as a commodity would lessen the value of their savings. Secondly, increase in the value of the rupee would increase the burden of the poor man’s debt.

Naroji felt that the increase in the value of the rupee amounted to “covert exaction of about 45% more taxation” as it meant that the farmer had to sell a larger quantity of his produce to procure the same number of rupees as before in-order to meet his fixed assessment.


Low exchange, on the other hand, was looked upon as the only remedy available to counteract the twin evils of Home charges and the absence of any tariff protection to Indian industries. The Government characteristically ignored the criticism and went ahead with the implementation of the scheme. Before the scheme could be completed, there came a move for the undoing of it.

In August 1897, when the exchange value of the rupee nearly reached 16d, the Govt. of India were asked by the Secretary of State whether they were in favour of reopening the Indian mints to silver if France and the U.S.A. opened theirs to silver as well as gold.

The Indian Govern­ment, however, felt that the return to monometallism would intensely disturb trade and, in case the experiment failed, the whole cost of failure would have to be borne by India alone.

Further, international bimetallism could not succeed without the co-operation of England and England was not prepared to change her monetary standard. The Government, therefore, declined to give the un­dertaking desired by U.S.A. and France.

To sum up. The period 1874-1879, was one of great anxiety and embarrassment to the Government of India. A significant point is that the crisis was aggravated by causes for which England was, to some extent, responsible. If only England could accept lowering the home charges or retrenchment of expenditure. But the interests of England were too strong to mind the difficulties of India.

From year to year, the Indian tax payer groaned under the pressure of increasing burdens. From time to time, the government suggested and begged for remedies, only to receive a rebuff from England which was neither willing to allow gold to go to India nor to reach international agreement for the sake of India.

This is the reason why India suffered from financial confusion for 20 years before a doubtful remedy could be found for her difficulties.

2. Period of 1898-1917, The Gold Exchange Standard:

In March 1893, the Government of India, in a communication to the Secretary of State, urged him to take “active steps to secure the early establishment of a gold standard and a stable exchange.” This led to the appointment of a committee under Sir Henry Fowler for recommending measures calculated to make effective the declared policy of establishing a gold standard in India.

The Committee had to answer three main questions:

(a) Should there be a reversion to the silver standard with free coinage of silver?

(b) Or if it was desirable to adopt a gold standard, should it be backed up by a gold currency in actual circulation or by gold in reserve?

(c) Should existing arrangements continue?

The Committee rejected the suggestion for return to the silver standard be­cause, in their opinion, it meant drilling back to the risks and uncertainties of 1874-1897. Further, it was likely to hamper international trade and revive the difficulties in meeting the home charges.

They were also against allowing the status quo to continue because that would have raised doubts regarding the success of the gold standard in India. The Committee, therefore, came to the conclusion that the government should proceed with measures for the effective establishment of a gold standard in India. In this connection, the Committee recommended.

(1) That the British Sovereign should be made a legal tender and a current coin in India. The Indian mints should be thrown open to the coinage of gold sovereigns and half sovereigns.

(2) That the rate of exchange should be made stable at IS. 4d.: rupee.

(3) That the rupee should remain unlimited legal tender.

(4) That the Govt. should continue to give rupees for gold but fresh rupees should not be coined “until the proportion of the gold in the currency was found to exceed the requirements of the public.”

(5) That the profits on any future silver coinage undertaken by the Govt. should be credited to a gold fund to be kept “as a special Reserve, entirely apart from the Paper Currency Reserve and the ordinary treasury balances.”

(6) That the Govt. should be under no legal obligation to give gold for rupees for this would make her liable to find gold at a moment’s notice in undefined terms.

(7) That the Govt. should make gold available for export if exchange showed a tendency to fall below the specie point.

These recommendations were almost entirely accepted by the Govt. and the Act XXII of 1899 made the Sovereign and half-Sovereign legal tender throughout India at Rs. 15: £. A reserve, called the Gold Reserve, was created to set apart the profits on the coinage of rupees. At the same time, active steps were taken to encourage the use of gold as currency.

Unexpectedly, the results proved un­satisfactory when a large number of gold coins were returned to the Govt. treasuries. There was almost a run on silver which nearly exhausted the currency reserves. Both notes and Sovereigns went at discount. The Govt. was, thus, forced to resume the coinage of rupees on a considerable scale in 1900. Apparently, it was concluded that the people did not want gold coins.

In reality, the scheme failed because both the time and mariner of putting gold coins into circulation were ill chosen. The country was in the grip of a famine about this time and rupees were needed for small payments. Also, the method of forcing Sovereign simultaneously from several sides was also not correct.

With the resumption of rupee coinage, the currency system steadily drifted away from the aim of an effective gold standard. In 1900, the experiment of introducing gold coins failed. In 1902, the scheme to establish a gold mint was dropped. In the same year the arrangement, initiated in 1893, of issuing currency notes against gold received in London was made permanent.

In 1904, the Secretary of State notified his willingness to sell rupees for Sterling at IS. 4d. without limit. The G old Reserve, constituted out of profits on the coinage of rupees, was remitted to London and invested in Sterling Securities. A rupee-branch of the Gold Reserve was also created to ensure ready supply of rupees in exchange for gold tendered in India at 1S. as to prevent a rise in the exchange rate.

The name of the Reserve, after the creation of this branch, was changed to Gold Standard Reserve which now consisted of a Rupee portion and Sterling securities, portion.

These steps, although in the nature of experiments to maintain the value of the rupee at 1S. 4d., led to the establishment of a new kind of currency system — the Gold Exchange Standard in India. This new system was the result of a series of administrative acts. It had therefore, no basis in law. It was never adopted as a consistent whole for it was never consciously designed.

The main charac­teristics of the system were:

(a) The rupee was unlimited legal tender but inconvertible into Gold.

(b) Currency notes of the denomination of Rs. 5, 10, 50, 100, 500, 1000 and 10,000 were unlimited legal tender and convertible into rupees.

(c) Sovereigns and half sovereigns were unlimited legal tender in India at the rate of Rs. 15 per sovereign.

(d) As a matter of administrative practice, the Govt. was willing to give sovereigns for rupees at that rate but the practice was some times suspended.

(e) As a matter of administrative practice, the Govt. was willing to sell rupees or rupee currency payable in Calcutta or Bombay in exchange for gold or Sovereigns or Sterling tendered in London at the maximum rate of 1S. 4 1/8d. per rupee. This was known as the sale of council bills.

(f) As a matter of administrative practice, the Govt. was also willing to sell gold or Sovereigns or Sterling, payable in London, in exchange for rupees tendered in Calcutta or Bombay, at the minimum rate of 1S.3 29/32d. per rupee. This was called the sale of Sterling Drafts or Reverse Councils.

Mechanism of Gold Exchange Standard:

The system was worked by the sale of council drafts and Reverse Council Drafts. Council Drafts were orders by the Secretary of State to the Govt. of India to pay rupees. These orders could be sent by sent by post when they were called ‘Council Bills’ or in a telegraphic form when they were called ‘Telegraphic Transfers.’

These orders were sold to British Banks, firms, and importers in exchange for sterling received from them. The net result of the sale of Council Bills was that the Secretary of State received Sterling and the Govt. of India released an equivalent amount of rupees. By the sale of these, the rate of exchange could be prevented from rising beyond IS. 41/8d: 1 rupee.

The sale of Council Drafts was one aspect of the Gold Exchange Standard, the other being the sale of Reverse Councils Drafts. The Reverse Councils were orders by the Govt. of India to the Secretary of State to pay Sterling in return for rupees received by them. The result of the sale of Reverse Council Drafts was that the Govt. of India received rupees while the Secretary of State released, from his funds, Sterling.

Reverse Councils were not sold below the rate of 1S. 329/32d : 1 rupee. By the sale of council Drafts and Reverse Councils, the rate of exchange was prevented from deviating very much from a fixed rate of 1S. 4d a rupee. It could only fluctuate between 1S. 329/32d and IS 41/8d to the rupee.

Crisis of 1907-1908:

The mechanism of the Gold Exchange Standard was completed when a partial failure of monsoons in 1907 led to a decline in Indian exports. At the same time, there was a heavy arrival of imports in response to earlier contracts.

To this was added a serious financial crisis in America which resulted in monetary stringency all over the world. This caused the Indian exchange to become very weak although the danger of this happening was regarded as ‘illusory’ only a little earlier.

To meet the situation, the Govt. started selling Reverse Councils on London at the rate of 1S. 329/32d: 1 rupee. The Secretary of State, firstly, released gold from the paper currency Reserve in London and, Secondly, sold the Sterling Securities in the Gold Standard Reserve to finance the Reverse Coun­cils. These steps, as also the revival in 1908 of India’s export trade, brought the rupee Exchange back to 1S. 4d.

The rupee was established by this mechanism but, in the process, a severe strain was imposed on the gold resources of the country. This may be seen from the fact that the total gold resources used in India and London together during this one year of crisis amounted to nearly £ 18 million.

In India, practically the entire stock of gold was exhausted. This was bound to arouse strong public criticism. It was pointed out that the sale of Council Bills by the Secretary of State in excess of his needs on account of Home charges prevented the export of gold from England that was really needed in India. Criticism was also directed against the location and use of the Gold Standard Reserve.

It was said that the location of the reserve in London deprived India of a large accumulation of resources which might have been utilised for the economic and social advancement of the country or for the reduction of taxes.

This criticism of the currency system was brought to a head when the India office purchased a large quantity of silver for coinage purposes in India office from a private firm and not from the “recognised and constituted agents”; namely, the Bank of England.

The whole proceedings assumed a sinister look. The agitation, which followed, resulted in the appointment of the Royal Commission on Indian currency and finance under the chairmanship of Mr. Austen Chamberlain.


The Gold Exchange Standard was an accidental find for India. It had received the approval and praise of J.M.Keynes and the Chamberlain Commission. India, Keynes said, had discovered a wonderful standard which lay in the ‘mainstream of currency evolution.’ The system, it was laimed, had the merit of economy.

Since gold coins did not circulate, monetary authorities did not have to buy gold for coinage purpose. This meant a great economy in the use of gold. Further, the same gold reserves, kept in London, served as the basis of the monetary systems both in Great Britain and India thereby reducing the pressure on the gold supply of the world.

Another achievement with which the system was credited was that it gave the country a long period of exchange stability. These advantages seemed illusory after the system, which Keynes once hailed as wonderful, collapsed. It was found to possess many shortcomings.


Firstly, the Gold Exchange standard in India had resulted from a series of administrative notifications, not consistently informed by a deliberately adopted ideal. The system was never clearly defined and this had a general unsettling effect. Secondly, the system was far from simple and not easily intelligible.

Third­ly, it involved a cumbrous duplication of reserves, namely, the Gold Standard and Paper currency and Banking reserves with a dangerous division of responsibility for the control of currency and credit policy. Fourthly, the utilisation of the reserves and balances was never governed by a consistent policy.

They were sometimes treated separately and, at others, mixed up thereby causing confusion. Fifthly, the system was not automatic but wholly dependent on the will of the Govt. Sixthly, the system lacked elasticity, particularly contractability.

The inevitable result was an inflation of currency and an excessive upward movement of prices. Seventhly, under this system unnecessarily large amounts were trans­ferred from India to London through the sale of Council Bills. This encouraged the policy of surplus budgets in India thereby curtailing development expenditure. Eighthly, the system involved locating the Gold Standard Reserve in London.

Not only that, the system worked in such a manner as to divert the flow of gold from India and saving London the inconvenience and cost of finding it for herself. Ninthly, the system failed to destroy the hoarding habit of the people. Lastly, there were defects of the system which arose primarily due to the absence of a Central Bank in India.

The management of the Standard was in the hands of the officials who did not always possess the necessary training nor were they in touch with the trade and market conditions. Understandably, their management of the Standard was often miscalculated.

The Gold Exchange Standard was often commended for its cheapness. But, in view of the disadvantages mentioned above, there is little doubt that the cheapness of the system was indeed very dearly bought.

3. 1917-27 – The Period of Managed Exchange:

The rise in the price of silver and fluctuations in the exchange value of the rupee upset trade and commercial calculations besides introducing an unhealthy element of speculation. Therefore, a Committee under Sir Henry Babington Smith was appointed in 1919 to inquire into the currency system with the special object of re-establishing stability of the exchange and the automatic working of the system.

The Committee recommended that the rupee should remain un­limited legal lender; that it should have a fixed exchange value which should be expressed in terms of gold at the rate of 1 rupee for 11.30016 grains of fine gold i.e. 2S : 1 rupee; that the sovereign previously rated at rupees 15 should be made legal tender in India at the revised ratio of ten rupees to a Sovereign; that the import/export of gold should be freed from Govt. control and that a gold mint at Bombay should be opened for the coinage of gold, tendered by the public, into sovereign; that the metallic backing behind paper currency in the paper currency Reserve should be fixed by law at a minimum of 40% of the gross circulation and further, that the silver and gold in the paper currency Reserve should be held in India.

A point, which deserves special notice, is the high rate of exchange at 2S. gold = 1 rupee recommended by the Committee. The Com­mittee held that a high rate would keep the rupee a token coin so that the Gold Exchange Standard could be made to function as before.

Besides, it would shorten the period of uncertainty and prevent economic dislocation and social discontent, secure import of goods at lower prices, and also ensure economy in the Home charges because a given amount would be remitted with a lesser number of rupees.

Mr. D.M. Dalai, a member of the Committee, however, favoured maintaining the old ratio of 1S. 4d: rupee as he felt that the rise in the price of silver was artificial and hence temporary. He further pointed out that a rise in the exchange ratio would cause set back to several industries, and bring losses to Indian exporters.

He also drew attention to the enormous loss which a high exchange would involve on account of revaluation, in terms of rupees, of reserves invested in Sterling securities and of gold held as part of the metallic reserve against the note-issue.

The recommendations of the Committee were accepted by the Govt. and various notifications were issued to give effect to them. War time restrictions on the import of silver bullion, melting of silver coins, and import and export of gold bullion were removed.

It was notified that Council Drafts would be offered for sale at no feed minimum rate and that Reverse Council Drafts would be offered, in future if required, at a rate based on 2S gold.

By the Indian Coinage (Amendment) Act of 1920, the sovereign was made legal tender in India. In formulating a ‘permanent policy’ the Committee unfortunately over looked the temporary and transitory nature of the prevailing circumstances.

Its recom­mendations were based on two assumptions:

(1) A strongly favourable balance of trade, and

(2) Price of silver remaining high.

Neither of the assumptions was subsequently substantiated. The nature of India’s balance of trade changed; price of silver fell down and there was an appreciation in the gold value of the sterling after England adopted the Conliff Report of 1919. A system which could be upset by events of this order could not have been sound.

Within three days of the announcement of the 2S. gold ratio, the rupee-sterling rate rose from 2S. 8½d. to 2S. 10½d. Along with a rise in the rate of exchange, there arose a keen demand for remittances to England since it was very cheap to do so.

The demand came from genuine Indian importers for Reverse Councils. Foreign businessmen and firms in India found this the most profitable time for remitting their profits to England, The companies which had placed orders in England for machinery, now remitted advance payment for the same.

Lastly, there were those speculators who remitted their money to England in the hope of bringing it back after exchange fell sufficiently. But the most important cause, which aggravated the demand for the Reverse Councils, was the adverse balance of trade.

In June 1920, there was an excess of imports over exports mainly due to the powerful stimulus given by the high exchange which encouraged imports, particularly of textiles. Exports, on the other hand, declined due to failure of rains in India, lack of European demand for Indian goods, and the commercial crisis in Japan which reduced her demand for Indian cotton.

The result of this adverse balance of trade was a heavy fall in the rate of exchange from 2S. 11/4 d. on 1 June, 1920 to 1S. 8¼d. at the end of the month. In order to prevent the exchange from falling, the govt. sold Reverse Councils of the value of £ 55 million” up to the end of September, 1920 at rates, which were “absurdly cheap compared with the market value.”

In addition, a large quantity of gold was also sold but the exchange could not be held at 2S. gold. Therefore, from June 1920, the govt. tried to maintain the rupee at 2S. Sterling instead of 2S. gold. This attempt, also having failed, was abandoned in September, 1920 and by July 1921, the rate of exchange had fallen to 1S. 3 13/32d. sterling.

The result was disastrous. The govt. suffered a direct loss of revenue; Indian reserves of sterling and sterling securities were dissipated; trade was dislocated. The unexpected fall in exchange caused heavy losses to Indian importers many of whom tried to back out of their contracts while others cancelled the purchases they had already made.

Understandably, the policy brought what Anstey calls “vials of wrath upon the Govt.” The main charge against the Govt. was that, having seen the utter futility of its efforts to make the 2S. gold rate effective, it still persisted in the sale of Reverse Councils.

By the end of June 1920, it was fairly clear that the task, which the govt. had taken upon itself, was an impossible one, and it would have been a courageous step to have acknowledged defeat at an early stage. However, it persisted in its ill-advised attempt to boost up the exchange, dissipating huge gold reserves in the process and causing tremendous disturbance in the industrial and commercial world.

For two years, after its failure to maintain 2S. gold, Govt. tried to prevent a fall below 1S. 4d. Sterling. For this purpose, the budget was balanced by retrench­ment and economy on one side and increased taxation on the other. At the same time, currency was contracted. Circumstances became favourable in 1923 and 1924.

The decline in world prices had been temporarily interrupted, the budgetary position was satisfactory, the monsoons were good, and the balance of trade was once again in favour of India. In October 1924, the rate had improved to 1S. 6d. sterling.

To sum up. The period 1917-27 was one of managed exchange rates. To begin with, the Govt. tried to maintain 2S. gold. The attempt having failed, from October 1920, the Govt. did not leave the exchange to look after itself but directed its efforts to prevent a fall below 1S. 4d. Standard.

4. Period of 1927-1931 – The Gold Bullion Standard:

Although the exchange had improved, yet criticism of Govt’s, currency policy continued. In response to persistent public demand, the Govt. of India appointed, in 1925, a Royal Commission on Indian Finance and Currency under the chair­manship of Mr. Hilton Young “to examine and report on the Indian exchange and currency system and practice, to consider whether any modifications were desirable in the interests of India, and to make recommendations.” The Com­mission submitted an ‘epoch-making’ report in 1926.

Its three main recommen­dations related to:

(a) The selection of a currency standard.

(b) The establishment of an authority to control currency.

(c) The rate at which the rupee should be established.

(a) In regard to the selection of a currency standard, the Commission had four alternatives before it.

The commission could recommend the perfections of the Sterling Exchange Standard but it found “undoubted disadvantage for India in dependence upon the currency of another country, however stable and firmly linked to gold.”

The Gold Exchange Standard was condemned for its lack of elasticity and automatic working. In fact, the Commission was bold enough to admit that “the automatic working of the Exchange Standard is not adequately provided for in India and had never been.”

The third alternative before the Commission was the gold standard with gold currency. Indian commercial opinion had been demanding it since the middle of the last century. It had been recom­mended by the Fowler Committee.

The Chamberlain Commission, although not in favour of introducing gold currency, however, conceeded that it was “preeminent­ly a question in which Indian sentiment should prevail.” And Indian public opinion was over-whelmingly in favour of gold currency.

In fact, before the I World War, the Sovereign had certainly displaced silver to some extent in Bombay and the U.P., and probably, in a lesser degree, in Madras and Burma also.

And yet, the Commission rejected the Gold Currency Standard on the ground that the increased demand for gold on the part of India would make it more difficult for those countries of Europe which were “trying to climb back gradually to Gold standard or the Gold Exchange Standard. ” Having rejected the three alter­natives, the commission recommended the fourth and last, the Gold Bullion Standard for India.

The Commission proposed that:

(a) The currency should consist of silver rupees and notes which should be convertible into gold;

(b) That the sovereigns and half Sovereigns should cease to be legal tender and gold should not circulate as money;

(c) That the Govt. should buy and sell gold bars at fixed rates but the minimum amount should be 400 oz.

(b) Regarding the establishment of the authority to control currency, the commission regarded as unsatisfactory the existing system of monetary control under which the Govt. controlled the currency and the credit was controlled by the Imperial Bank.

In its place, the Commission recommended the establishment of a private shareholder’s central bank, to be called the Reserve Bank of India, to function as the monetary authority to work the Gold Bullion Standard.

(c) As for the rate of exchange, the Commission recommended that the rupee should be stabilized in relation to gold at a rate corresponding to an exchange rate of 1S. 6d. for the rupee. In support of this rate, the commission advanced three arguments. First, at this rate, prices in India had attained a “substantial measure of adjustment with those in the world at large.”

Secondly, wages had also adjusted themselves to the prices at the existing exchange rate of 1S. 6d. Thirdly, the Commission held that the stabilisation of 1S. 6d. rate would cause the least injury to contracts.

Sir Purushottam Das Thakur Das, in a Minute of Dissent, however, argued that the 1S. 6d. rate was not a ‘natural rate’; that there had been no adjustment of Indian prices; that even wages had not adjusted to 1s. 6d. ratio and that such adjustment, if enforced, would, entail a long and bitter struggle between labour and capital with consequent disturbance in the economic organisation of the country”; that this rate would impose an additional burden on the debtor class in India which was already overburdened.

Sir Purshottam Dass sounded a note of warning that if 1S. 6d. rate was accepted, “India will be faced, during the next few years, with a disturbance in her economic organisation the magnitude of which it is difficult to estimate but the organisation the magnitude of which it is difficult to estimate but the consequences of which may prove disastrous.”

He, therefore, strongly pleaded for reversion to lS.4d rate on the ground that it had already been in force for 20 years; that it would not in any way adversely affect Indian finances nor cause any harm to those Indian agriculturists whose contracts were entered into before 1917. Besides, he further pointed out that no other country had adopted an exchange rate higher than the pre-war rate.

Critique of the Gold Bullion Standard:

The Commission did a valuable service to India by recommending that the Gold Exchange Standard, which had been the cause of so much discontent, should be scrapped, and that the official control over currency and exchange should disappear utterly and for ever.

The Gold Bullion Standard, which they proposed as a remedy for all the evils of the Exchange Standard, also had the merit of securing exchange-stability by ensuring convertibility of currency into gold at a fixed fate.

It was claimed to be simple and certain and, therefore, capable of inspiring public confidence. Besides, it was cheap as it did not involve the circulation of gold coins in the country. Lastly, it was automatic in the sense that currency could be contracted or expanded. Despite advantages, the system did not excite any enthusiasm in the minds of the Indian people.

The Commission’s scheme of the Gold Bullion Standard was obviously inspired by the analogy of the English system. However, under the conditions then prevailing in India, a gold currency was not an ‘unnecessary luxury’ or a matter of ‘traditional etiquette’.

That is why many witnesses including Dr. Cannan and Dr. Gregory, urged the adoption of Gold Currency Standard. The Commission, however, held otherwise. The proposed system was neither simple nor intelligible.

In order to provide a backing which was ‘tangible’, visible’ and ‘intelligible’ to the masses, the greatest requirement was to make token money convertible into gold bars for internal use. In practice, the token money was made convertible into gold for export only. Further, currency could be converted into gold bars weighing not less than 400 ounces at a time.

Such a facility was good enough for banks and bankers but for the masses, the limit of 400 ounces was much so high as to be unreal. Further, the new notes were convertible only at a discount. As the rate for conversion was always fluctuating, a gold note always did not entitle the holder to receive a fixed quantity of gold in return.

The demonetization of Sovereign and half Sovereign was definitely a retrograde step since a considerable number of Sovereigns (estimated at £ 6 million) were in the hands of the public. Even England, under the new currency arrangements of 1925, did not demonetize the Sovereign.

The buying and selling rates of gold proposed by the Commission were such as to encourage the delivery of Gold in London and thus perpetuate one of evils of the Gold Exchange Standard.

Further, the large holding of Gold Securities recommended by the Commission, meant that the Indian reserves would be invested abroad. This aroused the same suspicion and distrust which the practice of holding reserves in London had engendered.

The most serious objection was with regard to the ratio of 1s. 6d. Subsequent events such as the contraction of currency, issue of Treasury Bills, control of credit, and the difficulty govt. experienced in securing the necessary sterling funds for remittance to India showed that the conditions had not become adjusted to this ratio.

Government Action on the Report:

Soon after the publication of the Report of the Commission in 1926, steps were taken to give effect to all three main recommendations of the Commission. In January 1927, the Govt. introduced the “Gold Standard and Reserve Bank of India Bill” in order to give effect to the recommendation relating to the adoption of Gold Bullion Standard and the establishment of the Reserve Bank of India.

The Bill was referred to a Select Committee where the majority strongly opposed the Bank being a share-holders’ bank and the exclusion of legislators from its directorate. The majority also demanded the appointment of an Indian as Gover­nor or Deputy Governor of the Bank.

Owing to differences between the govt. and the opposition, the Bill was finally dropped in February, 1928. So, neither the Reserve Bank could be established nor Gold Bullion Standard adopted. With a view to giving effect to the Commission’s recommendation relating to the stabilisation of 1s. 6d. ratio, the currency Act of 1927 was passed.

The Act established 1S. 6d. (gold) ratio by imposing statutory obligation on the govt. to:

(a) Purchase gold at Rs. 21.23 per tola in the form of bars containing not less than 40 tolas of gold, and

(b) To sell gold for delivery at Bombay or Sterling for delivery in London in amounts of not less than 400 ounces of fine gold at the rate of Rs. 21.23 per tola.

By the same Act, Sovereigns and half-Sovereigns ceased to be legal tender in India but could be received at any Govt. currency office and at any Govt. Treasury as Bullion at the rate of 8.47512 grains fine gold per rupee.

Since Govt. had the option of giving sterling and not gold in exchange for rupees an option which they actually exercised-the monetary standard of India, as created by the Currency Act of 1927, was a Sterling Exchange Standard.

But so long as Sterling was convertible into gold, the standard was actually Gold Exchange Standard, Sterling till then being at par with gold. However, as L.C. Jain points out, “if the Govt. chose to exercise the other option open to them of offering gold in exchange for rupees, India would have had, in point of fact if not in law, a Gold Standard.”

Thus, the standard of 1927, though a sterling exchange standard, was capable of becoming a gold standard. In practice, how­ever, Gold Exchange Standard, criticised and discarded by the Commission, was resumed.

It may, however, be said that the new standard was superior to the Gold Exchange Standard of 1898-1916 in so far as it established a statutory gold parity for the rupee and imposed a statutory obligation on the Govt. to buy and sell gold or sterling at fixed rates. In all other respects, it had all those deficiencies for which the previous standard was condemned.

Unfortunately, the monetary standard established by the Act of 1927 did not have a fair chance of being converted into a genuine Gold Bullion Standard on account of dramatic developments which the world currency and exchange situation underwent in consequence of the break-down of the Gold Standard in Great Britain and several other countries.

On 21 September, 1931, when England went off the Gold Standard, the Governor-General promulgated an ordinance suspend­ing the operation of the obligation to sell gold or Sterling which was, however, followed by a declaration announcing Govts’, decision to maintain the rupee at 1S. 6d. sterling.

The Ordinance was amended three days later, which technically restored the provisions of the Act of 1927, but which, in practice, sought to exercise an effective control over the sale of Sterling, thereby introducing the controlled Sterling Exchange Standard. Thus, the hotchpotch of Gold Bullion-cum- Sterling Exchange Standard ended and was replaced by the Sterling Exchange Standard.

5. The Sterling Exchange Standard, 1931-47:

England went off the Gold Standard on 21 September, 1931. Sterling, no longer convertible into gold, began to depreciate steadily in relation to it. The rupee was linked to sterling by the Currency Act of 1927 at the rate of 1s. 6d. but as long as sterling was convertible into gold, the rupee was virtually on a gold basis.

Now that sterling no longer had a fixed relation to gold, the Govt. of India had to decide afresh about the basis and the rate of the rupee.

In order to meet the situation, the Governor-General in Council issued an Ordinance removing the obligation placed on the Govt. to sell gold or Sterling. Three bank holidays were also declared with a view to preventing a run on the banks. The same day, 21 September 1931, the Secretary of State made the state­ment that the Govt. had decided “to maintain the present standard on Sterling basis.”

Three days later, the previous Ordinance was repealed and another. The Gold and Sterling Sales Regulation Ordinance, was issued restricting sales of gold or sterling to genuine trade purposes and reasonable personal requirements.

It laid down £ 25,000 as the maximum amount of gold or sterling to be sold to any recognised bank and empowered the Managing-Governor of the Imperial Bank to allocate foreign exchange for certain definite purposes and to refuse the sale of exchange for certain other purposes.

The object underlying all these restrictions was to maintain the Rupee-Sterling ratio at Is. fid. In the absence of such restrictions, it was feared that the rupee would be converted into foreign currencies thereby causing weakness in exchange.

The action of the Government, in linking the rupee to sterling was probably the best under the circumstances although it invited a good deal of adverse comment, partly because it was taken without consulting Indian public opinion but largely because the old ratio was maintained.

There were only two other alternatives open to the Govt., namely, to link the rupee with gold or to maintain a ‘free rupee’. Linking the rupee with gold required large gold reserves such as America possessed.

Unfortunately, India’s gold stocks at that time were low and, like France and other Gold block countries, she would have been forced to give it up. Again, as a debtor country with large foreign obligations, with her export trade exposed to many trade barriers and with no central bank, it would have been impossible for India to maintain a ‘free-rupee’ or an independent exchange.

There was, therefore, no choice but to tie the rupee to the chariot wheel of the sterling. The rupee was, thus, linked to sterling in September, 1931 and monetary system came to be once again worked as a Sterling Exchange Standard with the rupee- sterling ratio fixed at 1s. 6d.

The whole question of a suitable monetary standard and ratio once again became the subject of acute controversy. The Govt. held that the only sound course for India was to remain on the Sterling Standard. Many advantages were claimed for this course. Firstly, so long as India remained a debtor country, the risk of leaving the rupee ‘free’ was much greater than in the case of creditor countries.

Secondly, India’s trade with England and other sterling bloc countries formed a considerable proportion of her total international trade. It was, there­fore, advisable to secure a stable basis at least for this trade.

Thirdly, it was expected to provide a welcome, though temporary, stimulus to Indian exports to Gold Standard countries on account of the depreciation of the rupee in relation to gold. Fourthly, without a stable Sterling Rupee ratio, the Indian budget would have become a gamble in exchange as India had large sterling obligations.

Indian Public opinion, as voiced by several commercial bodies, was against the policy of linking the rupee to sterling. Indians were naturally indignant that a momentous change in the Indian monetary system had been made by the Govt. without consulting the legislature. Critics pointed out that, by linking the rupee to sterling, India was deprived of her freedom to adopt an exchange rate suitable to her requirements.

For precisely this reason, the Royal Commission on Indian currency had declared themselves against a sterling Exchange Standard for they feared that if ever sterling left the gold basis and began to depreciate, “Indian prices would have to follow sterling prices ….”

Secondly, India’s import trade with countries, which continued on the gold basis, was placed at a disadvantage as compared with those which had departed from gold.

With a rupee equal to 1s. 6d., it became less profitable for an Indian importer to import goods from America or France, which were still on gold standard, than from England which had departed from it.

The Rupee-Sterling link, thus, constituted a kind of preference granted to England. Thirdly, it was pointed out, that the Govt’s, attempt to stabilise the rupee at 1s. 6d. involved the dissipation of the gold reserves of the country.

The Fourth point of criticism was that, while the rupee continued to appreciate in term of sterling, Japanese Yen and other currencies were devalued in terms of sterling. India was, thus, placed at a disadvantage. Yet another point of criticism was that the rupee, having been once tied to the apron-strings of the sterling would have to follow the fortunes of sterling.

If England ever returned to the gold standard, India had to follow suit irrespective of her economic condition and the intrinsic value of the rupee. Such a course, as Shanmukham Chetty pointed out, could have far-reaching and dreadful consequences.

The Government was not unduly discouraged by mounting public criticism. In fact, she was determined to maintain the sterling link of the rupee and that too at 1s. 6d. This was made clear beyond doubt in 1934 when the Reserve Bank of India Act was passed.

This Act legalized the 1s. 6d. ratio and established in India a Sterling Exchange Standard of an improved type in so far as there was a definite statutory parity prescribed for the rupee and an obligation was imposed on the Reserve Bunk to maintain this parity.

Also, the two separate currency reserves were abolished and the Reserve Bank was appointed as the new currency authority to issue notes, hold the currency reserve, and work the currency system.

The above arrangement failed to give satisfaction to the currency critics. The controversy flared up again in October, 1936 on account of the reactions caused in India by the devaluation of Franc and other gold bloc currencies. Ad­vocates of devaluation raised the issue on the floor of the Assembly.

The weaken­ing of the exchange value of the rupee, following a decline in gold and merchandise exports, served as an added plea for the revival of the devaluation movement. The Indian National Congress, demanded “immediate steps to lower the rate to Is. 6d. to the rupee.” The Govt., however, refused to be a party to any ‘monkeying’ with the ratio and persisted with the new currency arrangements.


The linking of the rupee to sterling meant linking the rupee to a depreciating currency. Consequently, along with sterling, the rupee depreciated in relation to gold and all other currencies based on gold. The depreciation of the rupee raised Indian prices and tended to stimulate exports to and discourage imports from countries having currencies based on gold.

The stabilisation of the rupee- sterling ratio also enabled the Govt. to meet its sterling obligations without em­barrassment or uncertainty and led to improvement in India’s credit.

At the same time, there was some diversion of trade in favour of the British Empire and against foreign countries. However, the most serious and probably the most far-reaching consequence of linking the rupee to the sterling was the unusual export of gold from India in large quantities.

The Govt. was not willing to impose an embargo or a high import duty on gold exports nor was it willing to buy it herself. The Govt., having adopted the typical Laissez-Faire stance, the export of gold went on unchecked. Whatever the other important issues raised by them, these gold exports strengthened the exchange rate.

Besides, at a time when merchandise exports had fallen and the balance of trade in merchandise had greatly shrunk, gold exports created a large balance in India’s favour and this helped her to meet her foreign obligations.

The demand for revision of the 1s. 6d. ratio had not died. As late as September, 1938, some non-official members of the Legislative Assembly tried to secure the appointment of a committee to report on the whole question of the ratio. But the Govt. would not agree. Fortunately, following an improvement in the balance of trade, the ratio remained, on the whole, steady until the close of 1938.

In December, 1938, forward exchange rates weakened, the fall being further ag­gravated by speculation. The Govt. issued another communique, on 16 Decem­ber, 1938 repeating their decision to maintain the ratio at 1s. 6d.

However, with the revival of the seasonal activity in the export markets and the firmness in the money rates, the ratio not only became steady but improved to 1s.5 31/32d. in March, 1939. Except for a brief declining tendency in May 1939, the ratio remained steady until the end of the Second World War.

Before the outbreak of the War, the controversy regarding the Rupee-Sterling ratio and the Gold exports was raging in all its fury. With the onset of the war, the entire picture changed. The large Indian exports created problems opposite to those of a year ago. The rupee, which was said to be overvalued in 1938, was found under-valued after the declaration of the War.

The War, however, thorough­ly exposed the hollowness of the official claim that the Sterling Exchange Standard was in the best interests of India. In practice, the Rupee-Sterling link was utilised by the British Govt. to pay for its war expenses in India by handing over Sterling Securities to the Reserve Bank which issued paper currency in India.

As a result, while India reeled under war-inflation, the British economy was safe from its ravages. The Sterling Balances, which accrued to India, remained blocked and, even after the war, were released in instalments so as not to disturb the British balance of payment.

It was only after the war, when India became a full- fledged member of the International Monetary Fund and the Reserve Bank Act was suitably amended that the rupee was freed from the clutches of the sterling.

Indian Currency During the Second World War:

The initial impact of the Second World War on Indian economy was, on the whole, favourable. Production, prices, and foreign trade received a stimulus and the prospects of the agriculturist generally improved.

The exchange-rate, which had begun to show signs of weakness since June, 1938 became steady on finding solid support from a very favourable balance of trade as well as from intensive measures of trade and exchange control.

The outbreak of the war did not cause any immediate panic or loss of confidence in the paper currency such as was witnessed in the early months of the First World War. In fact, immediate reaction was a large and unprecedented absorption of currency notes. After the first four months of the war, however, a demand for rupee coins for purposes of hoarding arose and this soon degenerated into a scramble.

To meet the situation, a notification was issued making it an offence for any person to acquire rupee coins in excess of his personal or business re­quirements. This reduced the demand for conversion of notes but demand for smaller coins was intensified.

The situation was eased by introducing one rupee notes in July 1940; by reducing the silver half-rupee and the rupee coin from 11/12 to 1/2 in July and December 1940; by recalling Victoria rupee and half- rupee-coins from circulation in October 1940 and King Edward VII rupees and half rupees in November 1941.

Finally, Queen Victoria and King Edward VII standard rupees and half-rupees ceased to be legal tender from 1 May, 1943 and those of George V and VI from 1 November, 1943. Thus, practically, the whole of the silver rupee and half-rupee coins, with the exception of the new quarternary silver coin, were demonetized.

Efforts were also made to meet the increased demand for small coin. A new half-anna coin was issued in January 1942, the new one anna and two anna pieces in March, 1942 and the new price in January, 1943.

The Rupee-Sterling Ratio:

The demand for a revision of the rupee sterling ratio lost all force after the out-break of the War. Since September, 1939 it was, on the whole, very steady finding support from a very favourable balance of trade as well as from intensive measures of trade and exchange control.

However, this fixed ratio of 1s. 6d., with a very favourable balance of trade, was responsible for the very large price rise in India as the balance of exports over imports was paid off by the issue of fresh rupees against sterling accumulated in England. An exchange rate, left free to rise in response to a favourable balance of trade, would have automatically checked the rise in prices by discouraging exports.

One of the most important war-time developments in the Indian currency system was the institution of the system of exchange control.

With a view to conserving foreign exchange, it was laid down that all dealings in foreign currency, including Sterling, were to be made through authorised dealers; all receipts in foreign currencies had to be utilised in a manner approved by the Reserve Bank while the sale of hard currency was restricted to payment for licensed imports and a few private remittances.

Dollar balances held in U.S.A. by the residents in India as also their holdings of certain American securities were acquired by the Reserve Bank after paying rupee equivalents. The export of notes, coins, and gold from India was first restricted and later prohibited.

The balances of all Japanese companies and firms, resident in India, were frozen while restrictions were placed on the remittance of profits and royalties by companies operating in India to any person resident outside the Sterling Area without license from the Reserve Bank.

Travel to place, outside the Sterling area, without the per­mission of the Reserve Bank was prohibited. All these measures were designed to ensure fullest economic mobilisation of the country.

The most striking feature of the Indian currency during the war was its enormous expansion. In 1939, total not-issue stood at Rs. 179 crores; by March 1945, it had increased to Rs. 1085 crores i.e. by over Rs. 905 crores or 506%.

In addition, there was considerable absorption of rupees as well as small coins. As a result, despite low velocity of circulation of currency and credit, the price index rose to 247.8 in March, 1945 (19 August 1939 =100).

Another development of far-reaching possibilities for the future was the large accumulation of sterling balances as a credit item in India’s balance of payment. These balances accumulated largely as a result of a favourable balance of trade and the war purchases made by the British Government in the Indian market, both being paid for in Sterling in England.

India, thus, came to possess sterling holdings to the tune of nearly Rs. 1700 crores equivalent against which rupees were issued in India. This was clearly a violation of the spirit of the law if not its form. The Reserve Bank Act required that at least 40% of the paper currency reserve should be in the form of gold coin, bullion and sterling securities.

On 1 September 1939, the reserve was so composed as to have 35% of Silver coin, 20% of Gold, 28% of sterling securities and 17% rupee securities. However, on 31 December, 1943 the reserve consisted of 1.5% silver coin, 5.2% gold, 6.8% rupee securities and 86.5% sterling securities.

Such a change in the relative position of the various constituents of the Reserve was never contemplated. What, in fact, was required was the strengthening of the gold portion of the reserve.

If this had been done, India would have gained not only by the rise in the value of gold but she would have possessed the best form of currency reserve. As it was, there was no safeguard against depreciation in the value of sterling securities. There was also the difficulty of their conversion. This raised a fresh hurdle in the way of India’s monetary freedom.

Thus, the Second World War solved some of India’s old currency problems such as the ones relating to the rupee-sterling ratio and gold exports. But, in the process, it raised new ones such as that of inflation and repatriation of sterling balances.

Currency Developments after Independence:

One of the urgent tasks in the post-war era was to prevent currency chaos by placing the international monetary system on a sound basis.

With this aim in view, the United Nations Monetary and Financial Conference, held at Bretton Woods in July 1944, put forward proposals for promoting international monetary cooperation and exchange stability, facilitating the expansion and balanced growth of international trade and assisting in the establishment of a multilateral system of payments.

As a result of these deliberations, a new organisation, called the International Monetary Fund, came into existence in May, 1945.

The question whether or not India should join the Fund was decided by the Central Legislative Assembly when it passed a resolution approving of India’s membership of both the Fund as well as the International Bank for Reconstruction and Development.

India became a full-fledged member on 1 March, 1947 and with this, she entered the framework of an international system. To that extent the tics, which bound India to the sterling area, were loosened.

In conformity with membership of the I.M.F., Sections 40 and 41 of the Reserve Bank Act, which required the Bank to convert sterling into rupees and vice versa at specified rates, were repealed. In their place, a new section authorised the Reserve Bank to buy and sell foreign exchange at such rates and on such terms and conditions as the Govt. might determine from time to time.

A further amendment related to the composition of the currency reserve. In the past, the Reserve Bank was called upon to include gold bullion, gold coins and sterling securities in its 40% currency reserve. Now, the Bank was authorised to as well hold securities other than the sterling in its reserve.

These amendments broke the rupee’s link with sterling only in theory; in practice, the link continued on account of India’s decision to stay in the British Commonwealth. Thus, India continued her association with Great Britain even after Independence due to her balance of payments difficulties.

The rupee-sterling link, under the circumstances, was not merely a matter of ‘political expediency but became virtual economic necessity’. Surprisingly, India adhered to the 1Is. 6d. ratio. Even those interests which, before the war, were clamoring for a change in the ratio, now insisted on no change being made.

The Gold Parity Standard, which replaced the Sterling Exchange Standard, ensured exchange stability and imparted a degree of flexibility to the Indian currency system. It also eliminated some of the disadvantages of the gold standard, particularly those relating to costly transport of funds from country to country as well as their locking up in the official ‘hoarding’.

The Partition:

India had not as yet overcome her post-war currency problems when the partition raised a fresh crop for her monetary authorities. Till 1 July 1948, the Reserve Bank of India continued to serve as banker to the Govt. of Pakistan and also enjoyed the sole right of note-issue in that country.

The State Bank of Pakistan came into existence on 1 July, 1948 and from this date, the Reserve Bank ceased to be the currency authority in Pakistan.

The Reserve Bank’s offices at Karachi, Lahore, and Dacca were taken over by the State Bank of Pakistan which also took over all outstanding liabilities in respect of inscribed Pakistani notes. Accordingly, assets of the Reserve Bank in the Issue Department of the value of Rs. 51.57 crores were handed over to the State Bank of Pakistan.

Meanwhile, Indian notes circulating in Pakistan were gradually withdrawn and handed over to the Reserve Bank against the transfer of assets of equal value to Pakistan. With effect from 1 September, 1950 all Indian notes and coins ceased to be legal tender in Pakistan.

At the time of Partition and for sometime thereafter, there was parity between the Indian and Pakistan rupees. However, when India devalued the rupee in September 1949, Pakistan, refused to devalue.

Therefore, while the Pakistan rupee remained at the old level of 33.23 cents, the value of the Indian rupee was reduced to 21.00 cents. Since new exchange rate between the two countries could not be agreed upon, currency and trade relationship between India and Pakistan came to a standstill.

Devaluation, 1949:

A disquieting post-war development was the existence of a large deficit in India’s balance of payments, especially with the hard currency areas. This is evident from the fact that while the export index (Base 1938-39 = 100) declined from 69-9 in 1947-48 to 54 in April-June 1040, the index of imports rose from 111 to 151.5 during the same period.

This imbalance in exports and imports was a cause of serious concern to the authorities which took several remedial measures but with little success. Meanwhile, England, faced with a similar prob­lem, announced her decision to devalue the sterling by 30.5%. England’s example was followed by a large number of other countries within and outside the sterling area.

Even Canada, a Dollar area country, devalued her currency by 10%. India was, thus, forced to devalue the rupee as a ‘defensive necessity’. Major portion of India’s trade was conducted in terms of sterling. The sterling area countries, which had devalued their currencies, constituted her best customers as well as principal competitors in foreign markets.

Refusal to devalue would have put India at a disadvantage as regards her exports to both sterling and non sterling area countries. Devaluation thus, was a “Hobson’s choice” for India.

The new ratio was fixed at 0.18662 grains for fine gold per rupee or 21 cents in terms of dollar, effective from 21 September, 1949. However, the Sterling- Rupee ratio was kept unchanged at 1S. 6d. The immediate effect of devaluation was favourable.

As against a deficit of Rs. 176 crores in the first nine months of 1949, the last quarter ended with a surplus of Rs. 29.4 crores. As compared with the previous quarter, the last quarter of 1949 recorded a 38% increase in exports. Exports, particularly to the Dollar Area, rose steeply from an annual rate of Rs. 107 crores in the third quarter of 1949 to Rs. 173 crores in the last quarter of that year.

While this improvement proved short-lived, there was a net deficit in the overall trade balance during the first six months of 1950. Devaluation entailed a serious disadvantage in that India had to pay higher prices for machinery, other essential goods and food imported from America.

In addition, interest charges on loans from the World Bank and America went up. India’s balance of payment continued to be adverse throughout the first three plans. After some improvement in Deviation 1966: 1958-60, the situation again deteriorated in 1960-61 when the deficit on current account amounted to Rs. 365 crores. There was a further worsening of the situation in 1964-66.

A demand was again made for the devaluation of the rupee although a considerable body of informed opinion in the country was against such a step. However, the Government under advice from the I.M.E and the World Bank, devalued the rupee from the morning of 6 June 1966.

The external value of the rupee was reduced by 36.5% from 0.186621 grams of gold per rupee to 0.11816 grams per rupee. In practical terms, it meant that the value of the Dollar rose from Rs. 4.76 to Rs. 7.50 and that of the Pound from 13 1/3 to 21 rupees.

The hope that the second devaluation would give a big boost to exports and rectify the disequilibrium in the balance of trade proved misplaced. What is worse, its timing deprived India even of its short-run advantages.

Nationalisation of the Reserve Bank:

Soon after Independence, the Govt. committed itself to the policy of economic planning which could not have been carried out without complete control over monetary and financial mechanism. Accordingly, the Reserve Bank was nationalized on 1 January, 1949 when it became a state-owned institution.

An important change in the system of note-issue was made by the Reserve Bank of India (Amendment) Act 1956 under which the Bank was asked to maintain in its Issue-Department Rs. 115 crores in gold bullion or gold coin and Rs. 400 crores in foreign securities as reserve. The Proportional Reserve System was thus changed to the Minimum Reserve System.

In the following year, as a result of persistent decline in foreign assets of the Bank and the possibility of a further decline, the Reserve Bank Act was further amended.

The amended provisions of Section 33 provide that the aggregate value of gold coin, gold bullion, and foreign securities, held at any time in the Issue Department of the Bank, should be of not less than Rs. 200 crores with the provision that the value of gold coin and gold bullion should at no time fall below Rs. 115 crores.

The amendment of 1956 was bad enough but that of 1957 was worse. The argument that the currency reserve was after all a ‘relic of the past’ which was being continued due to the “traditional inertia of the Government,” is superficial. Confidence in currency is, after all, a fair-weather friend and it disappears at the first sign of crisis. In lowering the minimum reserve, this eventuality was completely ignored.

Decimal Coinage:

Another significant change in the Indian currency system took place in April, 1947 when Decimal coinage system was introduced in the country. The amended Coinage Act laid down that the rupee would be divided into hundred Naya Paisa, the half rupee and quarter rupee being equal to 50 and 25 paisa respectively.

In addition, coins of 10, 5, 2, and 1 Naya Paise were also put into circulation. This reform, long over due, was most welcome in as much as it facilitated trans­actions and also saved time in calculations.

Historically, the Indian monetary experience illustrates the working of different types of monetary standards. After passing through various ups and downs, it has finally acquired a shape and content which inspires public confidence and ensures flexibility so as to enable it to meet the increasing demands of economic development.

Post-War Developments:

By joining the International Monetary Fund on 1 March, 1947, India came to adopt the Gold Parity standard. The value of Indian rupee was now fixed in terms of gold and the American Dollar thereby breaking its long link with the Sterling.

In order to carry out the obligations of the I.M.F. membership, Sections 40 and 41 of the Reserve Bank Act, 1934 were repealed and a new provision introduced which required the Reserve Bank to buy and sell foreign exchange at such rates and on such terms and conditions as were determined by the Govt. from time to time.

The Bank was also authorised to hold other than sterling Securities in its currency reserve. The exchange value of the rupee was accepted by the I.M.F. at the prevailing rate of Is. 6d. to a rupee but it was now linked to gold, a rupee being equal to 30.225 cents in terms of the American dollar and to 0.268601 grams of fine gold.

The proportional Reserve system of note —issue, operative since 1935, was highly restrictive in the sense that it put a serious constraint on the Reserve Bank’s capacity to expand currency.

With the coming of the planning era, especially during the period the second plan was being drafted, it began to be felt that the targets of development expenditure in the public as well as private sectors and magnitude of deficit-financing envisaged in the plan, would involve a substantial increase in the note issue simultaneously with a decrease in India’s foreign assets. In the circumstances, it became necessary to provide for the needed flexibility in note-issue while maintaining an adequate reserve in gold and foreign securities.

The Problem was solved by the Reserve Bank of India (Amendment) Act 1956 under which provision was made for a minimum reserve of Rs. 400 crores in foreign securities in addition to a minimum reserve of gold coin or bullion of the value of Rs. 115 crores valued at the rate of Rs. 62.50 per tola. This amending Act thus changed the proportional Reserve system to that of a Fixed Minimum.

The Amendment further provided that, in case of emergency, the minimum amount of foreign securities might be lowered, with the permission of the Govt., to Rs. 300 crores for a period of six months in the first instance and further by three months at a time.

Since the beginning of April, 1956, the balance of payment position, which had been adverse since the end of the war, began to deteriorate rapidly. This may be seen from the fact that while the deficit over the First Plan, as a whole, amounted to Rs. 318 crores, in the very first year of the Second Plan, (1956- 57) it came to Rs. 389 crores and in 1957-58, to Rs. 560 crores.

What was more, the foreign exchange requirements of the Plan indicated that this trend would continue. The provisions regarding the maintenance of assets in gold and foreign securities were further amended by the Reserve Bank of India (Amendment) Ordinance issued in November, 1957.

The Ordinance prescribed that the ag­gregate value of gold coin and gold bullion and foreign securities held in the Issue —Department should not be, at any time, less than Rs. 200 crores, of which the value of the gold coin and bullion should not be of less than Rs. 115 crores.

The net effect was that while the provision about the gold reserve remained unaltered, the effective minimum limit for foreign securities was reduced to Rs. 85 crores. The step was in line with India’s requirements at that time. Rupee had no internal convertibility and the currency reserve no longer helped to maintain the external stability of the rupee.

However, the argument that the reserve was ‘a relic of the past’ which had been continued partly for psychological reasons partly due to inertia of the govt. is superficial. Confidence in currency is, after all, a fair-weather friend and it disappears at the first sign of crisis. In lowering the minimum reserve, this possibility was completely ignored.

An important characteristic of the post-Independence period was the large- scale currency expansion undertaken to meet the needs of planned development. Total currency with the public had increased from Rs. 1152 crores in 1945 to Rs. 3034 crores in 1965-66.

A part of this supply was necessitated by the growth and commercialisation of the economy. Yet, the entire expansion was not justified from the angle of need. The inevitable result was a continuous rise in prices during the Second and Third Plans.

The Ratio-Controversy:

Controversy about the correct rupee —Sterling rate dates back to 1893 when the Herschell committee, disregarding the govt. proposal to make the English coinage legal tender in India at roughly 1s. 6d. to a rupee, recommended the then rate of 1s. 4d. In 1898, the Fowler Committee had to decide between 1s. 4d. and a lower rate and although the majority recommended 1s. 4d. ratio, the minority argued in favour of a lower rate.

The controversy flared up again when the majority of the Babington Smith Committee recommended the rate of 2s. (gold) but Mr. Dalai held that the ratio was not justified on account of the temporary and wholly artificial rise in the price of silver.

The controversy was truly joined with the publication of the Hilton Young Commission Report. The Commission, in a majority report, recommended the stabilisation of the rupee at Is. 6d. gold rate while the minority argued in favour of a 1s.4d. rate. Both the proponents and opponents bitterly persued their ar­guments and counter-arguments, hurling a spate of accusations at each other.

The Case for 1s.6d.:

The Commission based its case for 1s.6d. on the following grounds.

1. It was argued that 1s.6d. rate was the de facto rate, established and stable since October, 1924. Any lowering of the rate which had prevailed so long would have meant a difficult period of adjustment, involving wide spread economic disturbances.

2. The Commission’s main argument in favour of 1s.6d. rate was that, at this rate, prices in India had attained “a substantial measure of adjustment with those in the world at large”. In this connection, they pointed to the fall in the index of wholesale prices from 176 in December 1922 —June 1924 to 160 in July 1924-June 1925 and the relative steadiness of the price-level thereafter.

As further evidence, they cited the steadiness of the exchange and the absence of any special handicap on either imports or exports. This would not have been possible in case there was lack of equilibrium between internal and external prices.

3. Since prices and exchange had been steady over a considerable period, there was justification, in commission’s view, in assuming that wages were also in adjustment. The Commission agreed that there was depression in jute and cotton mill industries, but this, according to them, was due to causes which a lower exchange rate could not remedy.

4. The ratio of 1s.6d. was not likely to affect contracts also because the bulk of them were short-term in nature and had been entered into when the conditions were based on Is 6d. rate or, in any event, after the exchange had broken away from 1s.4d. rate.

5. A reversion to 1s.4d. rate, after 1s.6d. had come to prevail, would have raised the Indian price level by 12½% —a change which would have pressed very heavily on the consumers in general and the salaried class in particular.

6. The Commission further argued that any reversion to 1s.4d. ratio would seriously upset govt. finances as more rupees would be required to pay the “Home Charges”. This, in their view, would mean the indefinite postponement of the long and loudly called for abolition of provincial contributions.

In view of these reasons, the commission thought that the least disturbance would be caused to all interests concerned by adhering to the defacto rate of 1s.6d. They did not accept that 1s.4d. was the ‘natural rate’ for the Indian rupee.

In their view, ‘natural rate’ was the one at which prices were in adjustment with the existing volume of currency and in equilibrium with external prices. And judged from this point of view, 1s.4d. rate and not 1s.4d. rate was the ‘natural rate’ they asserted.

Case against 1s.6d. ratio:

Sir Purshottam Dass Thakur Dass, in his Minute of Dissent, refused these arguments. Firstly, he argued that the 1s.6d. rate was neither a defacto nor dejure ratio. In-fact, it was the 1s.4d. ratio which was legally established in 1893 and had prevailed for nearly 20 years.

Further, that 1s.6d. ratio was only reached in April, 1925 and was maintained at that level by contracting, or, at least, by unduly limiting currency expansion. Therefore, he contended that 1s.6d. was not ‘natural one’. Secondly, he refuted the commission’s contention that prices in India had adjusted to the ls.fid. rate.

According to him, there had been no adjustment of Indian prices since the rupee touched ls.6d. gold only in June, 1925 and that, since June, 1925, the fall in Indian prices was only in response to fall in world prices and not due to an adjustment of rupee prices to the higher 1s.6d. rate. Even this adjustment was less than half and, in his view, the greater part of it was yet to come.

Thirdly, until adjustment was complete, the 1s.6d. ratio presented the foreign manufacturer with an effective, though indirect, bounty of 12 ½% and this, Sir Thakur Dass pointed out, placed a heavy strain on Indian industries.

Fourthly, as regards the argument that India’s foreign trade had not suffered, Sir Purshottam Dass Thakur Dass pointed out that imports had slackened while the favourable position of exports was not due to the 1s.6d. rate but on account of favourable crops and low holding power of the people.

Fifthly, he argued that the 1s.6d. rate imposed an additional burden of 12 ½%on the bulk of the debtor class i.e. the agriculturists. He argued that this debt, being long standing, was mostly incurred on 1s.4d. basis.

Sixthly, in Purshottam Das’s view, the adverse effects of 1s.4d. ratio on public finance had been exaggerated by the commission. He admitted that the burden of ‘Home Charges’ would be greater at 1s.4d. but opined that it would be com­pensated by increased revenues to the govt. arising from increased production and trade induced by the lower ratio.

Seventhly, it was agreed that 1s.4d. ratio would raise prices and hit the salaried class. But, in Sir P.T.’s view, these classes should be allowed less weight than the suffering which a higher ratio of 1s.6d, inflicted on the vast majority of popula­tion.

As regards wages, he felt that they were sufficiently high to cover a possible price-rise. Further, the labour would be compensated by greater employment opportunities which expansion of trade and industry, induced by a lower ratio, was sure to bring.

Lastly, the ratio of 1s.4d., prevalent before the war of 1914-18, was disturbed as a result of the war in common with the ratios of other countries of the world. No other country had found advisable to adopt a rate of exchange higher than the pre-war rate. Sir Purshottam Das urged that India should also revert to pre-war rate and establish public confidence in the currency.

In view of these reasons, Sir Purshottam Das Thakur Das warned that if 1s.6d. ratio was accepted, “India will be faced … with a disturbance in her economic organisation the magnitude of which it is difficult to estimate but the consequences of which may prove disastrous.”

The controversy Examined:

However plausible the arguments of the commission may appear to be, it is possible to detect several Haws in them. Firstly, the steadiness of the defacto exchange rate of 1s.6d., to which the commission referred repeatedly, was not natural but a ‘managed’ one. According to the commission, the exchange value of the rupee had been fairly stable around 1s.3d. gold for a period of 18 months from December 1922 to June 1924.

Meanwhile, the govt. made strenuous efforts to contract currency so as to allow the rate to rise-the contraction being of the order of Rs. 31.58 crores in 1920-21,1,11 crores in 1921-22 and Rs. 5.69 crores in 1923-24.

Further helped by good monsoons, favourable balance of trade, and cessation of the fall in world prices in 1923-24, the rate rose to 16d. gold (1s.6d. sterling) in September, 1924, when the Legislative Assembly formally asked the Govt. to stabilise the rupee at that point.

Later, the exchange showed a sharp tendency to move upwards but this was prevented by a limited expansion of currency. Thus, the steadiness of 1s.6d. rate was not the result of market forces but was manipulated first through contraction and then through expansion of currency.

Secondly, the most important argument for recommending 1s.6d. rate was that at this rate, prices in India had attained “a substantial measure of adjustment with those in the world at large.”

This was, however, not the case. Between March, 1924 and September, 1925, the gold value of the rupee rose by 24%. And what about prices? Brij Narain found that prices of 32 articles of import and export out of fifty showed no fall at all.

“It would be absured”, he concludes, “to talk of adjustment” in their case. Only 18 articles including Turmeric, coal, sugar, and silk fell in price but it is impossible to say “how far the fall was due to the rise in exchange or to causes affecting world production and consumption.”

The price of coal fell, for example, due to “excess of produc­tion over demand.” The fall in the price of sugar and cotton, raw as well as manufactured, was due to world causes, particularly the abundant crop in the U.S.A.

Considering the special influences acting on the world prices of certain commodities like sugar, cotton, and coal which made them fall and also the fact that the prices of the larger number of commodities registered no decline at all, it is reasonable to conclude that strongest arguments in favour of 1s.6d. could be any other than that the rupee prices had adjusted themselves to the rate of exchange.

The mere fact that the indices of wholesale prices in U.K., America, and India converged to the same level (160) did not deserve the significance which the commission attached to it.

As the factors influencing price- movements in these countries were not the same, the price-indices reaching a particular figure in the course of varying fluctuations did not really mean that Indian prices had been brought into harmony with international prices.

Examining the ratio controversy in retrospect, it appears that the opponent of 1s.6d. had better judgement on their side. It is true that there can not be any ‘natural’ rate of exchange. Therefore, the argument that 1s.4d. was the ‘natural’ ratio is meaningless. However, the economic conditions prevailing in India from 1927 to 1931 furnish no evidence that 1s.6d. rate contributed to stability and progress.

The two years, 1927-28 and 1928-29, were no doubt, years of comparative stability and expansion of trade. It is probably this which led H.L. Dey to remark that “though It was a wrong policy … there was nothing to be gained and perhaps something to be lost by trying to lower the ratio of exchange to 1s.4d.”

In reality, the stability and trade expansion was secured in-spite of 1s.6d. ratio. It was part of the world stability and trade expansion. However, when the downward trend of trade and prices began, 1s.6d. rate, which itself was never firm in the saddle, not only exposed Indian economy to world depression but actually intensified some of its effects by accentuating the fall in internal prices.

As D.K. Malhotra says, “the deflationary effects of the ratio spread out like a heavy blanket over the Indian economy obstructing recovery and expansion.”

The 1s.6d. rate was never firmly established ever since its adoption in 1927. The linking of the rupee to sterling and the consequent conversion of 1s.6d. gold rate into 1s.6d. sterling rate at a time when sterling was depreciating in relation to gold, amounted to a disguised devaluation of the rupee in terms of gold. And, although for some years after 1931, the exchange became firm, its strength was mainly derived from gold exports.

When gold exports declined in volume and the balance of trade began to turn more and more unfavorable to India, the exchange once again began to show signs of weakness. Demand was once again made for a revision of the ratio.

The Indian National Congress demanded “the taking of immediate steps to lower the rate to 1s.4d. to the rupee.” The controversy was still raging when the outbreak of the Second World War, as if all at once, changed the situation. Consequently, the demand for finding a suitable exchange rate other than the 1s.6d. rate lost all its force.