John Maynard Keynes

“ In other countries, where actual currency is the principal medium of exchange, the attempt to introduce gold as the medium passing from hand to hand has been for the most part abandoned. A great part of the new gold has flowed, during the last ten years, into the reserves of the State Banks, and a comparatively small amount only can have found its way into circulation. In Austria-Hungary, for example, after the currency reform of 1892, attempts were made to force gold into circulation just as they were in India. ”

“ If it is a matter of importing gold from England, those who want it for bullion purposes will generally find it cheaper to buy gold bars than to buy gold coin. But if there are sovereigns on their way from Australia and ready to be diverted to India, or if there are surplus sovereigns available for export at Alexandria, it may be a good deal cheaper to buy these sovereigns than to get gold bars from London. ”

“ The authorities of the Austo-Hungarian Bank now keep all the gold they can in their central reserves, and they are no likely to make another attempt to dissipate it. The same kind of thing occurred in Russia. After establishing with difficulty a gold standard, they began with the theory, and have since abandoned it, that a gold currency was the natural corollary. Other examples could be given. A gold standard is the rules now in all parts of the world; but a gold currency is the exception. ”

“ While other countries, who have with few exceptions, found the expense of a gold medium of exchange prohibitively heavy, heave nevertheless envieed those who could afford it, and have adopted their laws, even when they could afford not afford to adapt their practice, to a currency of gold. ”

“ The chief result of mintage at Bombay, therefore (assuming that the terms for coining were substantially the same as in England) , would be a small saving of expense to sellers of gold in India. Importers of gold bars would be saved occasionally a small loss of interest due to miscalculation; owners of Indian gold mines might conceivably pay, at the expense of Government, infinitesimally higher dividends; the people turning their hoards into money would be able to save the expense of sending the gold to England. ”

“ These men remit their earnings in gold, and as there is hardly a village in the Punjab that has not sent a man to these services, it is not surprising that the value of the sovereign is understood. It is difficult to say to what extent sovereigns are being hoarded, but that they are held up by the well-to-do to a very considerable amount is undoubtedly the case; and hoarding will continue among the rural population for years to come. ”

“ There is still one great step forward before the ideal can be reach. We have linked India with the gold countries of the world, we have reached a gold-exchange standard, which we are steadily developing and improving. The next and final step is a true gold currency. ”

“ But while it is no new theory that gold in the pockets of the people is absolutely useless for the purposes for which a currency reserve is held, all but the highest authorities have believed until fairly recently that no gold standard can be really stable unless gold actually circulates in the country. ”

“ That, I have every hope, will come in time, but we cannot force it. The backwardness of our banking arrangements, the habits and suspicions of the people, the infancy of co-operation-all stand in the way. ”

“ Reports collected by the Comptroller of Currency in 1911-12 already show in a striking way the tendency of gold to take the place which is, or might be, occupied by notes. The rapidity with which gold is becoming popularised in the Punjab is probably due in very great part to the fact that notes have never become acclimatised there.1 The inconvenience of making large payments in silver is obvious;2 and facilities for obtaining gold are naturally welcomed. ”

“ My Lords cannot believe that the position of the gold standard in India will be strengthened, or public confidence in the intentions of the Government confirmed, by providing machinery for obtaining gold coins which is neither demanded nor required by the mercantile community ”

“ The gold standard is now firmly established, and the public requires no proof of the intention of the Indian Government not to go back on their policy, which is beyond controversy. Sovereigns are readily attracted to India when required under existing conditions. ”

“ Perhaps we may fairly sum this evidence up by saying that it goes to show the existence in India at the present time of an enormous demand for gold bullion, a very considerable demand for sovereigns for purposes of hoarding, and a relatively smaller demand for them, chiefly confined to the United Provinces, the Punjab, Madras, and Bombay, for purposes of currency. ”

“ You may raise your rate of interest to 6 per cent or 8 per cent, but the bulk of the people will not carry less gold in their pockets than they did before, and I doubt whether, from other quarters, you would be able to get much addition to your central store. ”

“ These consequences, whether desirable or not, have very little to do with currency questions. The last of them - the making it easier to turn hoards into money - is very likely desirable. But all of them could be brought about more cheaply without the establishment of a Bombay Mint. It would be sufficient if the Government were to publish terms on which it was ready to buy gold bars. It might be a real convenience if Government notified its readiness to purchase bars tendered in India at Rs. ”

“ A rival coin ought not to be set up in India unless some evident advantage is to be obtained from it.
14. The third policy - that of active measures on the part of Government to get more gold into circulation - is not likely to be adopted. If it were, it is difficult to say if it would be successful or not. To force a coin on people is not always the best way to popularise it; and if rupees were to be refused, there would probably be a small premium on them
1I have, however, seen no evidence which suggest that half-sovereigns are especially popular on account of their lower denomination. ”

“ They are accepted as legal tender in the bazaars, and this may be attributed to the intelligence of the people and to the fact that all over the East (in China and the Straits Settlements) , where the Punjab Sepoys serve in the army and the police, the sovereign in popular. ”