Indian Currency and Finance: CHAPTER II - The Gold-Exchange Standard

Indian Currency and Finance by John Maynard Keynes is part of HackerNoon’s Book Blog Post series. You can jump to any chapter in this book here. Chapter I: The gold-exchange Standard

CHAPTER II. THE GOLD–EXCHANGE STANDARD

1. If we are to see the Indian system in its proper perspective, it is necessary to digress for a space to a discussion of currency evolution in general.

My purpose is, first, to show that the British system is peculiar and is not suited to other conditions; second, that the conventional idea of “sound” currency is chiefly derived from certain superficial aspects of the British system; third, that a somewhat different type of system has been developed in most other countries; and fourth, that in essentials the system which has been evolved in India conforms to this foreign type. I shall be concerned throughout this chapter with the general characteristics of currency systems, not with the details of their working.

2. The history of currency, so far as it is relevant to our present purpose, virtually begins with the nineteenth century. During the second quarter of this century England was alone in possessing an orthodox “sound” currency on a gold basis. Gold was the sole standard of value; it circulated freely Her bank rate is not fixed primarily with a view to foreign conditions, and a change in it is usually intended to affect home affairs (though these may of course depend and react on foreign affairs).

Germany is in a state of transition, and her present position is avowedly unsatisfactory. The theory of her arrangements seems to be that she depends on her bank rate after the British model; but in practice her bank rate is not easily rendered effective, and must usually be reinforced by much unseen pressure by the Reichsbank on the other elements of the money market. Her gold reserve is not large enough for the first expedient to be used lightly. Free payment in gold is sometimes, in effect, partially suspended, though covertly and withand Belgium. So high a premium as this is as effective in retaining gold as a very considerable addition to the bank rate. It was supposed that in the third quarter of 1911 the Bank placed not less than £4,000,000 worth of gold bills at the disposal of the Austro–Hungarian market in order to support exchange. Amongst European countries, Russia now keeps the largest aggregate of funds in foreign bills and in balances abroad—amounting in November 1912 to £26,630,000. Account being taken of their total resources, however, the banks of the three Scandinavian countries, Sweden, Norway, and Denmark, hold the it is an easy step. The Gold–Exchange Standard is simply a more regularised form of the same system as theirs. In their essential characteristics and in the monetary logic which underlies them the currencies of India and Austria–Hungary (to take these as our examples) are not really different. In India we know the extreme limits of fluctuation in the exchange value of the rupee; we know the precise volume of reserves which the Government holds in gold and in credits abroad; and we know at what moment the Government will step in and utilise these resources for the support of the rupee. In Austria–Hungary the system is less automatic, and the Bank is allowed a wide discretion. In detail, of course, there are a number of differences. India keeps a somewhat higher proportion of her reserves in foreign credits, and keeps some part of these credits in a less liquid form. She also keeps a portion of her gold reserve in London—a practice made possible by the fact that for India London is not strictly a foreign centre. On the other hand, India is probably more willing than the Bank of Austria–Hungary to supply gold on demand. If we are to judge from the experience of Gold is an international, but not a local currency. The currency problem of each country is to ensure that they shall run no risk of being During the long period for which this policy has been pursued, it has been severely tried more than once, but has stood the test successfully.

It must be noticed, however, that although Holland has kept gold and foreign bills as a means of obtaining a credit abroad at any moment, she has not kept a standing credit in any foreign financial centre. The method of keeping a token currency at a fixed par with gold by means of credit abroad was first adopted by Count Witte for Russia in the transitional period from inconvertible paper to a gold standard;—in the autumn of 1892 the Department of Finance offered to buy exchange on Berlin at 2·18 marks and to sell at 2·20. In the same year (1892) the Austro–Hungarian system, referred to above, was established. As in India their exchange policy was evolved gradually. The present arrangements, which date

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