The below mentioned article provides a note on the Chamberlain Commission in regard to currency and exchange.
The Chamberlain Commission was appointed in 1913 to consider, among other matters, “the measures taken by the Indian Govt. and the Secretary of State for India to maintain the exchange value of the rupee in pursuance of or supplementary to the recommendations of the Indian currency committee of 1898, more particularly with regard to the location, disposition, and employment of the Gold Standard and the Paper Currency Reserves”.
The Commission gave unstinted approval to the non-descript currency system which they felt was “not only workable but, in the absence of any developed banking system, was admirably adapted to the country on account of its cheapness.”
The Commission approved the measures adopted by the Govt. in order to maintain the exchange value of the rupee although, in the opinion of the commission, these measures were “less in pursuance of the recommendations of the committee of 1898 than supplementary to them”.
The commission did not favour the introduction of gold circulation in India for it felt that “India neither demands nor requires gold coins to any appreciable extent for purposes of circulation.” The Commission did not fix any limit up to which the Gold standard Reserve could be accumulated but opined that the proper place for the location of the Reserve was London.
However, the Rupee Branch of the Reserve was regarded as “responsible for much confusion and doubt as to the efficiency of the Reserve” and the Commission recommended its abolition.
The Commission did not consider it necessary to regulate the use of the Reserve by statute but advised the Govt. “to make a public notification of their intention to sell bills in India on London at the rate of 1S. 3 29/32d —to the full extent of their resources.”
The recommendations of the Chamberlain Commission were still under the consideration of the Govt. when the I World War broke out. The outbreak of the war brought about a revolutionary change in the monetary situation all over the world.
In India, its immediate impact was:
(1) A great demand for sterling remittances; The First World war.
(2) Withdrawal of savings bank deposits;
(3) Lack of confidence in the note issue, and a demand for gold.
All these events were anticipated and dealt with satisfactorily. What was not expected, however, was the complication which arose towards the end of 1916 when balance of trade turned embarrassingly in favour of India.
This was due to two factors:
(a) Increase in exports due to demand at high prices for raw-materials and food stuffs required for the use of the Allied powers, and
(b) Contraction of imports from United Kingdom and her allies and complete stoppage of imports from Germany and Austria.
On account of this favourable balance of trade, a tendency was set up towards a rise in the rate of exchange and there was a heavy demand on the Govt. for rupees and currency notes. This demand was further intensified by other payments that had to be made on behalf of British Govt., British Dominions, and America for expenses of War in Mesopotamia, Persia, and East Africa and for purchases made in India.
The Govt. of India would not have been called upon to meet this heavy demand all by themselves if gold and silver had freely flowed into India as in the pre war years. Restrictions had, however, been imposed on the export of gold and silver by the belligerents. Not only was there difficulty in transferring gold but there was great difficulty in procuring gold.
This led to a strong demand for silver of which there was great shortage owing to disturbances in Mexico and a great increase in its cost of production. With all countries practising a ‘jealous economy’ of their metal resources, the burden of liquidating the favourable balance of trade was thus thrown wholly on the Govt. of India and took the form of additional demands for currency.
The Govt. tried to meet it by imports of silver which rose from 180 million standard ounces in March 1904-March 1907 to 500 million standard ounces in April 1916-March 1919. Large purchases by the Govt. of India, decrease in the supplies of silver, and increased demand from other quarters led to a rise in the price of silver from 27¼d. per standard ounce in 1915 to 55d. per ounce in September 1917.
This put an end to the Gold Exchange Standard. The rupee ceased to be a token coin-there was profit in melting and exporting it. It became impossible for the Secretary of State to sell Council Bills at 1S. 4d : 1 rupee without loss once the silver price exceeded 43d. per ounce. To avoid this loss, the rate of Council Bills was raised from time to time.
Thus, the Gold Exchange Standard, which depended for its satisfactory working on the sale of Council Bills without limit and on the rupee remaining a token coin, broke down. And the exchange value of the rupee, now that it could no longer be maintained at its old ratio of 1S. 4d., began to move in step with its intrinsic value as it had done from 1873-1893.