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CHAPTER II
THE SILVER STANDARD AND THE DISLOCATION OF ITS PARITY
The metallic part of it was
regulated by Act XXIII of 1870. The coins authorised and legalised thereunder were as
shown on p. 379. (Table VIII)
The Act made no innovations
either in regard to the number of coins issued by the Mints or their legal-tender powers.
Identical though it was with the earlier enactment’s in the matter of coins,[f1] its juridical provisions were designed to
perfect the monetary law of the country as had never been done before. The former Acts
which it repealed were very sparing in their recognition of the principle of mint " remedy " or " toleration," as it is called. The point has been
largely deemed to be one of mere mint technique. That is so ;
but it is not without its monetary significance. When the precious metals were current by weight the question of a mint toleration
could not possibly have arisen, for it was open to every one to ascertain the same by
weighing the value of his return. But since the invention of coinage, when currency came
to be by tale, every one has trusted that the coins contained the value they were
certified to contain.
TABLE VIII
Denomination
of Coins issued by the Mint. |
Remedy
in Weight. |
Fineness.
Troy Grs. |
Remedy
in Fineness. |
Legal-tender
Power. |
|
|
|
|
|
|
|
180 |
2/1000
ths |
165 |
2/1000
ths |
|
|
(ii)
Third of a Mohur . (iii) Two-thirds of a Mohur |
60
120 |
,, ,, |
65
110 |
,, ,, |
Not
Legal Tender at all. |
(iv)
Double Mohur |
360 |
,, |
330 |
,, |
|
|
|
|
|
|
|
(i)
Rupee
(ii)
Half-rupee |
180
90 |
5/1000
ths |
165
82.5 |
2/1000
ths |
Unlimited
Legal Tender. |
(iii)
Quarter-rupee |
45 |
7/1000
ths |
41.25 |
3/1000ths
. |
Legal
Tender for Fractions of |
(iv)
Eighth of a Rupee |
22.5 |
10/1000
ths |
20.625 |
|
a
Rupee only. |
III.
Copper Coins (c) |
|
|
|
|
|
(i)
Pice |
100 |
1/40
th |
— |
— |
Legal
Tender for 1/64th part of a Rupee |
(ii)
Double Pice |
200 |
,, |
— |
— |
Legal
Tender for 1/32nd part of a Rupee |
(iii)
Half-pice |
50 |
,, |
— |
— |
Legal
Tender for 1/128th part of a Rupee |
(iv)
Pie |
33.3 |
,, |
— |
— |
Legal
Tender for 1/192nd part of a Rupee |
The actual value of the coin
cannot, however, always be in exact agreement with its certified value. Such differences
are bound to exist, and even with all the improvements in the art of coinage it would be
difficult to avoid them. What matters is the extent of the deviation from the true mint
standard. The mint laws of all countries, therefore contain provisions which declare that
coins shall not be legal tender at their certified value if they err from their legal
standard beyond a certain margin. Indeed to make coins legal
tender without prescribing a limit to their toleration is to open a way to fraud. In so
far as the Act laid down a limit of toleration to the coins it authorised to be issued
from the Mint, it was a salutary measure. It is to be regretted, however, that the Act
instituted no machinery with which to ascertain that the coinage conformed to the law.[f2] Another important improvement made by the Act
was the recognition of the principle of free coinage. The principle, though it has not
received the attention it deserves, is the very basis of a sound currency in that it has
an important bearing on the cardinal question of the quantity of currency necessary for
the transactions of the community. Two ways may be said to be open by which this quantity
can be regulated. One way is to close the Mint and to leave it to the discretion of the
Government to manipulate the currency to suit the needs. The other is to keep the Mint
open and to leave it to the self-interest of individuals to determine the amount of
currency they require. In the absence of unfailing tests to guide the exercise of
discretion necessary in the case of closed Mints, the principle of open Mints has been
agreed upon as the superior of the two plans. When every individual can obtain coin for
bullion and convert coin into bullion, as would be the case under open Mints, the quantity
is automatically regulated. If the increasing demands of commerce require a large amount
of circulating medium, it is for the interest of the community to divert a larger quantity
of its capital for this purpose; if, on the contrary, the
state of trade is such as to require less, a portion of the coin is withdrawn, and applied
as any other commodity for purposes other than those of currency. Because the Act of 1870
expressly recognised the principle of open Mint, it is not to be supposed that the Mints
were closed before that date. As a matter of fact they were open to the free coinage of
both gold and silver, although the latter alone was legal tender. But, strange as it may
seem, none of the earlier Acts contained a word as to the obligation of the Mint Master to
coin all the metal presented to him—a
condition which is of the essence of the open mint system. The provisions of the Act on
this point are unmistakable. It required:—
"Section 19. Subject to
the Mint-rules for the time being in force, the Mint Master shall receive all gold and
silver bullion and coin brought to the Mint: "
Provided that such bullion and coin be fit for coinage: "
Provided also that the quantity so bought at one time by one person is not less, in case
of gold, than fifty tolas, and, in the case of silver, than one thousand tolas.
"
Section 20. A duty shall be levied at the rate of one rupee per cent. at the Mint on the
produce of all gold bullion and on all gold coin brought for coinage to the mint in
accordance with the said Mint-rules.
"Section 21. All silver
bullion or coin brought for coinage to the Mint, in accordance with the said Mint-rules,
shall be subject to a duty at the rate of 2 per cent. on the produce of such from the
return to be made to the proprietor.
"Section 22. A charge of one-fourth per mile on
gold bullion and coin, and of one per mile on silver bullion and coin, shall also be
levied for melting or cutting such bullion and coin so as to render the same fit for
receipt into the Mint.
Section 23. All gold and
silver bullion and coin brought to the Mint for coinage, and which is inferior to the
standard fineness prescribed by this Act, or which, from brittleness or other cause, is
unfit for coinage, shall, in case it is refined, be subject, in addition to the duty and
charge aforesaid, to such charge on account of the loss and
expense of refining as the Governor-General in Council prescribes in this behalf.
"
Section 24. The Mint Master, on the delivery of gold or silver bullion or coin into the
Mint for coinage, shall grant to the proprietor a receipt which shall entitle him to a
certificate from the Assay Master for the net produce of such bullion or coin payable at
the General Treasury.
"Section 25. For all
gold bullion and coin, in respect of which the Assay Master has granted a certificate,
payment shall be made, as nearly as may be, in gold coins coined under this Act or Act No.
XVII of 1835; and the balance (if any) due to the
proprietor shall be paid in silver, or in silver and copper, coins, in British
India."
In the matter of paper
currency the Government, it is to be noted, did not proceed upon the principle of freedom
of issue, which then obtained in the country. There prevails the erroneous view that
before the introduction of the Government paper currency the right of note issue was
confined to the three Presidency banks of India. As a matter of fact there existed in
India what is called the free banking system, in which every bank was at liberty to issue
its notes. It is true that notes of the Presidency banks enjoyed a status slightly
superior to that enjoyed by the notes of other banks in that they were received by the
Government to some extent in payment of revenue[f3]— a privilege for which the Presidency
banks had to submit to a stringent legislative control on their business#, from which
other banks whose issues were not so privileged were immune.
#The
reasons for such control are to be found in the peculiar relationship that subsisted
between the Government and the Presidency banks. Prior to 1862, as a safeguard against
their insolvency, " the Presidency Bank Charters restricted the kind of business in
which they wore to engage themselves. Put very briefly the principal restrictions imposed
prohibited the banks from conducting foreign-exchange business, from borrowing or
receiving deposits payable out of India, and from lending for a longer period than six
months, or upon mortgage, or on the security of immovable property, or upon promissory
notes bearing less than two independent names, or upon goods unless the goods or title to
them wore deposited with the banks as security. The Government held shares in the banks
and appointed a part of the Directorate. In 1862, when the right of note issue was
withdrawn, these statutory limitations on the business of the banks were greatly relaxed,
though the Government power of control remained unchanged. But, the banks having in some
cases abused their liberty, nearly all the old restrictions of the earlier period were
reimposed in 1876 by the Presidency Banks Act, Government, however, abandoning direct
interference in the management, ceasing to appoint official directors, and disposing of
its shares in the banks. Some of these limitations have been incorporated in Act XLVII of
1920, which amalgamated the three Presidency banks into the Imperial Bank of India. Banks
other than Presidency banks have been entirely immune from any legislative control
whatsoever, except in so far as they are made amenable to the provisions of the Indian
Companies Act. Cf. in this connection Minutes by Sir Henry Maine, No. 47, and the
accompanying note by W. Stokes. The control of these banks is one of the important
problems of banking legislation in India.
But this disadvantage was
not sufficient to discourage other banks from indulging in the right of issue which was
left open to them by law. However, this freedom of issue does not seem to have been
exercised by any of the banks on any very large scale, not even by the Presidency Banks**, and was taken away from ail in 1861, [f4]when there was established a national issue for the whole of
India entrusted to the management of a Government Department called the Department of
Paper Currency.
**It
should however, be noted that in 1860 the circulation of notes of the three Presidency
banks was larger than their current accounts, as is evident from the following :—
|
|
|
Name of the
Bank
|
Accounts
current |
Notes in circulation |
Bank
of Bengal
|
£
1,254,875 |
£ 1,283,946 |
Bank
of Bombay
|
438,459 |
765,234
|
Bank
of Madras
|
161,959 |
192,291 |
(Bankers'
Magazine, April, 1893, p. 547)
But if private interest was
not allowed to play the same part in determining the quantity of paper currency as was the
case with regard to metallic currency, neither was any discretion left to the Government
Department in the regulation of the paper currency. The Department of Paper Currency had
no more discretion in the matter of paper currency than the Mint Master had in the matter
of metallic currency.
The Department's duty was
confined by law[f5] to the issue of notes in exchange for the
amount thereof : (1) in current silver coin of the
Government of India; (2) in standard silver bullion or
foreign silver coin computed according to standard at the
rate of 979 rupees per 1,000 tolas of standard silver fit for coinage ; (3) in other notes of the Government of India, payable to
bearer on demand of other amounts issued within the same circle ;
and (4) in gold coin of the Government of India, or for foreign gold coin or bullion,
computed at such ratio and according to such rules and conditions as may be fixed by the
Governor-General, provided that the notes issued against gold did not exceed one-fourth of
the total amount of issues represented by coin and bullion.
The whole of this amount was required by law to be retained as reserve for the payment of
notes issued with the exception of a fixed amount which was invested in Government
securities, the interest thereon being the only source of profit to the Government. The
limit to the sum to be so invested was governed " by
the lowest amount to be estimated to which according to all reasonable experience, the
paper currency might be expected to fall."[f6] Estimating on this basis, the limit to the
investment portion was fixed at 4 crores in 1861,[f7] at 6 crores in
1871[f8] and at 8 crores in 1890.[f9] But notwithstanding the growing increase in
the investment portion, never was the fiduciary issue based thereon so great as to abrogate the essential principle of the Indian
Paper Currency Law, the object of which was to so regulate the volume of paper currency
that it should always preserve its value by contracting and
expanding in the same manner and to the same extent as its metallic counterpart.
|
Note |
Composition
of the Reserve |
Percentage
of each Component of the Reserve to the Total |
|||||
Period |
Circulation |
|
Circulation |
|||||
|
|
Silver |
Gold |
Securities |
Total |
Silver |
Gold |
Securities |
|
|
|
|
|
|
|
|
|
1862-1871 |
7.63 |
4.80 |
0.03 |
2.80 |
7.63 |
63 |
|
37 |
1872-1881 |
11.82 |
5.98 |
|
5.84 |
11.82 |
51 |
|
49 |
1882-1891 |
15.74 |
9.64 |
|
6.10 |
15.74 |
61 |
|
39 |
Such was the organisation of
the mixed currency that existed in India before it underwent a profound change during the
closing years of the nineteenth century. Though of a mixed character, the paper portion
formed a comparatively small part of the total. The principal reasons why the paper
currency did not assume a large proportion are to be found in the organisation of the
paper currency itself.[f10] One such reason was that the lowest
denomination of the notes was too large to displace the metallic currency. By the law of
1861 the denomination of notes ranged upwards from Rs. 10
as the lowest to Rs. 20, 50, 100, 500, and 1,000. In a
country where the average range of transactions did not exceed R.
1 and were as low as 1 anna or even lower, it is impossible to expect that paper currency
could, to any great extent, figure in the dealings of the people. Even Rs. 5 notes, the issue of which was first sanctioned in the
year 1871,[f11] were not low enough to penetrate into the
economic life of the people. The other impediment to the increase of paper currency was
the difficulty of encashing notes. One of the infelicitous incidents of the paper currency
in India consisted in the fact that they were made legal tender everywhere within a
circle, but encashable only at the office of issue. For
such a peculiar organisation of the paper currency in India, what was largely responsible
was the prevalence of internal exchange** in the country.
**It
may be pointed out that although the Presidency banks had ceased to issue notes, yet under
the agreements made with the Government in virtue of Act XXIV of 1861 the banks were
employed by the Government " for superintending, managing and becoming agents for the
issue, payment and exchange of promissory notes of the Government of India, and for
carrying on the business of an agency of issue " on a renumeration of 3/4, per cent.
per annum "on the daily average amount of Government currency notes outstanding and
in circulation through the agency of the bank." In the conflict that ensued between
the Government of India and the Secretary of State because it believed that it would help
the extension and popularization of the notes as to the propriety of thus employing the
banks, the former was in favour of the plan, while the latter disliked the arrangement
because it seemed to him to compromise the principle of complete separation between the
business of issue and the business of banking. Neither of the two, however, grasped the
fact that the profit on remittances on different centres owing to the prevalence of
internal exchange was so great that the commission allowed to the banks was an
insufficient inducement to cause them to promote the circulation of notes by providing
facilities at their branches for the free encashment of them. So high was the internal
exchange, and so reluctant seemed the banks to popularise the notes, that Government
finally discharged them from being their agents for paper currency from January 2, 1866. See House of Commons Return, East Indian (Paper
Money) 215 of 1862.