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FOREWORD OF
THE PROBLEM OF THE RUPEE: IT’S ORIGIN AND ITS SOLUTION
BY PROFESSOR EDWIN CANNAN
I am glad
that Mr. Ambedkar has given me the opportunity of saying a few words about his book.
As he is aware, I disagree with a good deal of his criticism. In 1893, I was
one of the few economists, who believed that the rupee could be kept at a fixed
ratio with gold by the method then proposed, and I did not fall away from the
faith when some years elapsed without the desired fruit appearing (see Economic
Review, July 1898, pp. 400—403). I do not share Mr. Ambedkar hostility to the
system, nor accept most of his arguments against it and its advocates. But he
hits some nails very squarely on the head, and even when I have thought him
quite wrong, I have found a stimulating freshness in his views and reasons. An
old teacher like myself learns to tolerate the vagaries of originality, even
when they resist severe examination such as that of which Mr. Ambedkar speaks.
In his
practical conclusion, I am inclined to think, he is right. The single
advantage, offered to a country by the adoption of the gold exchange system
instead of the simple gold standard, is that it is cheaper, in the sense of
requiring a little less value in the shape of metallic currency than the gold
standard. But all that can be saved in this way is a trifling amount, almost
infinitesimal, beside the advantage of having a currency more difficult for
administrators and legislators to tamper with. The recent experience both of
belligerents and neutrals certainly shows that the simple gold standard, as we
understood it before the war, is not fool-proof, but it is far nearer being
fool-proof and knave-proof than the gold-exchange standard. The percentage of
administrators and legislators who understand the gold standard is painfully
small, but it is and is likely to remain ten or twenty times as great as the
percentage which understands the gold-exchange system.
The
possibility of a gold-exchange system being perverted to suit some corrupt
purpose is very considerably greater than the possibility of the simple gold
standard being so perverted. The plan for the adoption of which Mr. Ambedkar
pleads, namely that all further enlargement of the rupee issue should be
permanently prohibited, and that the mints should be open at a fixed price to
importers or other sellers of gold, so that in course of time India would have,
in addition to the fixed stock of rupees, a currency of meltable and exportable
gold coins, follows European precedents. In eighteenth century England the gold
standard introduced itself because the legislature allowed the ratio to remain
unfavorable to the coinage of silver: in nineteenth-century France and other
countries it came in because the legislatures definitely closed the mints to
silver, when the ratio was favorable to the coinage of silver. The continuance
of a mass of full legal tender silver coins beside the gold would be nothing
novel in principle, as the same thing, though on a somewhat smaller scale, took
place in France, Germany, and the United States. It is alleged sometimes that
India does not want gold coins. I feel considerable difficulty in believing
that gold coins of suitable size would not be convenient in a country with the
climate and other circumstances of India.
The allegation
is suspiciously like the old allegation that the Englishman prefers gold coins
to paper, which had no other foundation than the fact that the law prohibited
the issue of notes for less than £ 5 in England and Wales, while in Scotland,
Ireland, and almost all other English-speaking countries, notes for £ 1 or Less
were allowed and circulated freely. It seems much more likely that silver owes
its position in India to the decision, which the Company made before the system
of standard gold and token silver was accidentally evolved in 1816 in England,
and long before it was understood, and that the position has been maintained,
not because Indians dislike gold, but because Europeans like it so well that
they cannot bear to part with any of it.
This reluctance to allow gold to go
to the East is not only despicable from an ethical point of view. It is also
contrary to the economic interest not only of the world at large, but even of
the countries, which had a gold standard before the war and have it still or
expect soon to restore it. In the immediate future, gold is not a commodity,
the use of which it is desirable for these countries either to restrict or to
economize. From the closing years of last century it has been produced in
quantities much too large to enable it to retain its purchasing power and thus
be a stable standard of value, unless it can constantly be finding existing
holders willing to hold larger stocks, or fresh holders to hold new stocks of
it. Before the war, the accumulation of hoards by various central banks in
Europe took off a large part of the new supplies and prevented the actual rise
of general prices being anything like what it would otherwise have been, though
it was serious enough. Since the war, the Federal Reserve Board, supported by
all Americans who do not wish to see a rise of prices, has taken on the new
White Man's Burden of absorbing the products of the gold mines, but just as the
United States failed to keep up the value of silver by purchasing it, so she
will eventually fail to keep up the value of gold. In spite of the opinion of
some high authorities, it is not at all likely that a renewed demand for gold
reserves by the central banks of Europe will come to her assistance. Experience
must gradually be teaching even the densest of financiers that the value of
paper currencies is not kept up by stories of cover or backing locked up in
cellars, but by due limitation of the supply of the paper. With proper
limitation, enforced by absolute convertibility into gold coin which may be
freely melted or exported, it has been proved by theory and experiences those
small holdings of gold are perfectly sufficient to meet all internal and
international demands.
There is really more chance of a great demand
from individuals than from the banks. It is conceivable that the people of some
of the countries, which have reduced their paper currency to a laughing stock, may
refuse all paper and insist on having gold coins. But it seems more probable
that they will be pleased enough to get better paper than they have recently
been accustomed to, and will not ask for hard coin with sufficient insistence
to get it. On the whole, it seems fairly certain that the demand of Europe and
European-colonised lands for gold will be less rather than greater than before
the war, and that it will increase very slowly or not at all.
Thus, on the
whole, there is reason to fear a fall in the value of gold and a rise of
general prices rather than the contrary.
One obvious remedy would be to restrict the production of gold by international
agreement, thus conserving the world's resources in mineral for future
generations. Another is to set up an international commission to issue an
international paper currency so regulated in amount as to preserve an
approximately stable value. Excellent suggestions for the professor's
classroom, but not, at present at any rate nor probably for some considerable
period of time, practical politics.
A much more
practical way out of the difficulty is to be found in the introduction of gold
currency into the East. If the East will take a large part of the production of
gold in the coming years it will tide us over the period which must elapse
before the most prolific of the existing sources are worked out. After that we
may be able to carry on without change or we may have reached the possibility
of some better arrangement.
This
argument will not appeal to those who can think of nothing but the extra
profits which can be acquired during a rise of prices, but I hope it will to
those who have some feeling for the great majority of the population, who
suffer from these extra and wholly unearned profits being extracted from them.
Stability is best in the long run for the community.
EDWIN CANNAN
THE PROBLEM OF THE RUPEE: IT’S ORIGIN AND ITS SOLUTION
(HISTORY OF INDIAN CURRENCY & BANKING)
