John Maynard Keynes

“ In years of normals activity, therefore, there may be considerable stores of rupees lying idle in the reserves beyond what is required for the safety of the currency. Indian bankers and merchants can only get at these rupees, so as to obtain a net addition to the currency, by buying sovereigns or Council Bills in London. If the use of the additional currency is only temporary, the cost of transport or remittance is great enough to make it not worth their while to get this addition until the Indian rate of discount has been forced up to a high level. ”

“ To discount bills is one of the functions of banks. Where there are Central Banks with the right of note issue, there are usually able, subject to various restrictions, to increase their note issue at certain seasons of the year in order to discount more bills.
In the second place, as there is no Central Bank in India, there is no Government Banker. it is true that the Government keep some funds (rather more than £2,000,000, as a rule) at the three Presidency Banks. But the bulk of their floating resources is held either in London or in cash in their own Treasuries in India. ”

“ In contrast to what happens in the case of most note systems, the gross circulation in India diminishes instead of increasing during the busy seasons of autumn and spring. This is due to the fact that Government Treasuries, the Presidency Banks, and possibly other banks and large merchants, use the notes as a convenient method of avoiding the custody of large quantities of silver during the slack season when rupees are not wanted. [12] That is to say, they deposit their surplus rupees during the summer in the Currency Reserve, holding their own reserves in the form of notes ”

“ On the other hand, the objections to a policy, which divided the country up for the purposes of paper currency, are also plain. The limitation of the areas of legal tender and of the offices where the notes were encashable on demand greatly restricted the popularity of the notes. It might well have seemed worth while to popularise them, even at the expense of temporary loss. As soon as the public had become satisfied that the notes could be turned into coin readily and without question, their desire to cash them would probably have been greatly diminished. ”

“ For large payments, therefore, it is important to encourage the use of notes to the utmost extent possible,-from the point of view of economy, because by these means the Government may obtain a large part of the reserves necessary for the support of a Gold-Exchange Standard, and also because only thus will it be possible to introduce a proper degree of elasticity in the seasonal supply of currency. ”

“ The fact that a temporary increase in the media of exchange can only be obtained by bringing in funds from abroad partly explains the high rate of discount in India during the busy season. This question will be more fully dealt with in Chapter VIII. But the main point can be put briefly thus:-If funds are to be attracted from abroad for a short period (say three months) , the rate of interest must be high enough to repay the cost of remittance both ways, which in the case of places so remote from one another as India as London is considerable. ”

“ A good deal of opinion has been expressed in India lately in favour of loans being made there from the Government's Cash Balances. In so far as this opinion demands some new machinery by which on suitable occasions the Government can lend out funds in India herself, the evil which it seeks to remedy is a real one. ”

“ A provision of the above kind for introducing some degree of elasticity into the Indian currency system would not be very useful in a season such as that of the autumn and winter of 1905-6 or of the autumn of 1912-13, when there was a demand for rupees on so great a scale that it could only be met from the Mint. Additions to the currency of this kind can only be made by importing funds from abroad. But these are permanent not temporary additions. Every such addition makes a similar demand for new coinage in succeeding seasons less likely. ”

“ But there is a considerable weight of opinion in favour of the view that the time for the establishment of a Central Indian Bank is not yet ripe. In the meantime is any partial remedy possible for the evils dealt with above? ”

“ In ordinary circumstances every Government treasury, of which there are about 250, has cashed or exchanged notes if it could do so without inconvenience; and when this could not be done conveniently for large sums, small sums have generally been exchanged for travellers.
6. It is easy to understand the reasons for these restrictions. India is an enormously large country, over which the conditions of trade lean coins to ebb and flow within each year. At the beginning of the busy season when the autumn crops are harvested, rupees flow in great volume from the Presidency towns up country ”

“ If the Government were free on such occasions to lend out some part of the rupees, against high-class security, at 5 or even 6 per cent, this would be profitable to the Government, and would prevent the discount rate from reaching a level which is caused, not by anxiety, but merely by the expense arising out of the distance between London and Calcutta. ”

“ There is no method whatever by which the volume of currency can be temporarily expanded by some credit device within the country to meet the regularly recurrent seasonal demands of trade. Cheque-using countries meet the difficulty by increasing the volume of credit created by the banks ”

“ When, therefore, we are considering what proportion of liquid reserves out to be maintained, or what part of the note issue plays in supplying the much needed element of elasticity in the busy season, it is of the active rather than of the gross circulation that we must take account. The figures are given below in lakhs of rupees ”