John Maynard Keynes

“ It is not the business of the Government to hold any of the reserves which the bankers ought to hold. But if the Government does, in fact, for another purpose hold large reserves in its hands, and if it is believed that it will in case of extreme necessity come to the market’s rescue, the bankers may tend to keep somewhat lower reserves than they ought, and than they otherwise would. We have over again the situation which has long existed, to its detriment, in the United States. There, as in India, the Government, with immense currency reserves of gold, is normally aloof from the money market. ”

“ For obvious reasons of convenience and of economy the greater part of the Indian circulation must continue in any case to consist of rupees. It is vain to suppose that the advantages of a true gold currency can be obtained by the compromise of somewhat increasing the gold element. If the Government dissipates some part of its sterling resources [93] over the country—and any proposal for a greater infusion of gold into the currency amounts to this—it must plainly stand in a weaker position to meet a crisis than if they are concentrated in its own chests. ”

“ Thus the financial officers of Government spend five years or so in mastering a difficult subject and have then reached a seniority which warrants promotion to duties of some other kind. So far as the Government of India is concerned, questions of finance and currency are in the hands of intelligent amateurs who begin with the timidity of ignorance and leave off just when they are becoming properly secure of their ground. It is not astonishing that the centre of power in these matters has tended to gravitate to the India Office and the India Council in London. ”

“ Every one knows Jevons’s description of India as [100] the sink of the precious metals, always ready to absorb the redundant bullion of the West and to save Europe from the more violent disturbances to her price level. In very recent years, while the South African mines have been reaching the zenith of their production, she has been fulfilling to perfection her rôle of sink. Prices have been rising, as it is, much faster than is healthy and in a way very disadvantageous to such a creditor nation as Great Britain, to whom large sums fixed in terms of gold are annually due. ”

“ If gold were to supplant rupees only and not notes, and were to supplant them to so great an extent that sovereigns would tend to flow out of the currency at times of depression, there might be something to be said for it. It is certainly the case that it is a disadvantageous thing for India to have so large a part of her currency in the form of expensive tokens,—the issue of rupees strengthens the reserves by less than a half of their nominal value. ”

“ I do not advocate the lending out in India of any part of this reserve, or of the Cash Balances, at the expense of the stability of the Gold Standard, or until adequate measures can be taken in other ways to ensure this. ”

“ If we pass from France, whose position as a creditor country is not altogether unlike Great Britain’s, and from Germany, which is at any rate able to do a good deal towards righting the balance of immediate indebtedness by the sale of securities having an international market, to other countries of less financial strength, we find the dependence of their Central Banks on holdings of foreign bills and on foreign credits, their willingness to permit a premium on gold, and the inadequacy of their bank rates taken by themselves, to be increasingly marked. ”

“ If the Government’s Reserve is held purely to support the currency, then the maximum volume of rupees and notes, which could, so far as one can anticipate, be spared from the circulation and tendered to the Government for exchange, sets an upper limit to the necessary amount of this Reserve. If, on the other hand, it is intended to act as a banking reserve and to ensure India’s ability to meet her international obligations at all times, then its upper limit is set by the probable maximum amount of the adverse balance which could arise against India for immediate payment. ”

“ The expectation that the Government will bring some of its gold to the rescue in extreme circumstances, has always been said to exert an enervating influence on the banks themselves in the matter of the precautions they take for times of crisis. The ultimate solution probably lies in the establishment of a Central Bank for India which shall be the Government Bank and shall hold the banking and currency reserves at the same time. ”

“ If all bankers and merchants keep adequate reserves in rupees and notes, then it will be sufficient [148] if the Government are always able to turn these rupees and notes into sterling. But if in a financial crisis the Indian Money Market as a whole is in fact unable to meet its international obligations without Government assistance, is it the Government’s intention to stand calmly aside and permit (for example) a suspension of cash payments by the three Presidency Banks, or will they, if necessary, use their sterling reserves to give some support to the Indian Money Market in extremis? ”

“ 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. The contrary view was distrusted by practical financiers, and only of late years has it become powerful enough to dictate policies. ”

“ The policy pursued during 1912 of holding large cash balances in London and of lending them out in the London Market provoked widespread criticism both in India and at home. The line of thought underlying this criticism appears to me to be entirely reasonable. If the Government of India hold in London a penny more than is required to establish the stability of their financial system, they are certainly diverting resources from India, where they are greatly required, to the detriment of India’s own trade. ”

“ India, as we all know, already wastes far too high a proportion of her resources in the needless accumulation of the precious metals. The Government ought not to encourage in the slightest degree this ingrained fondness for handling hard gold. By the elimination of both precious metals, to the utmost extent that public opinion will permit, from amongst the hoards and the circulation of the country, they ought to counteract an uncivilised and wasteful habit. ”

“ There is a multiple reserve system in theory, but hardly an adequate one in fact; and a danger exists that every one is reckoning, in a crisis, upon every one else.
(vi.) The absence of the advice and experience, which the officers of a State Bank would possess, is a source of weakness to Government itself. There are no high officials whose business it is to make finance the chief study of their life. The Financial Secretaryship is an incident in the career of a successful civilian. A Financial Member of Council is apt to come to the peculiar problems of his office with a fresh mind. ”

“ 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 [30] unable to put their hands on international currency when they need it, and to waste as small a proportion of their resources on holdings of actual gold as is compatible with this. The proper solution for each country must be governed by the nature of its position in the international money market and of its relations to the chief financial centres, and by those national customs in matters of currency which it may be unwise to disturb. ”

“ When we say that the Indian Bank Rate is apt to be high, we mean, not that the average effective rate over the whole year is high, but that the maximum rate in each year, effective for periods of shorter or longer duration, is generally high. ”

“ There are three kinds of crises by which the Indian Money Market might be assailed—a purely internal crisis, in which the banks have difficulty in meeting a run on them by their Indian depositors; a purely external crisis, in which India owes, and is called on to pay, large sums in the London Market, but is free from serious banking trouble at home ”

“ In years of normal 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 for 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. ”

“ In a country such as India, where all available resources are required for capital expansion, and where it is not sound or humane policy to burden the present overmuch for the sake of the future, it is nearly as important to avoid extravagance in the reserve policy as to avoid undue parsimony. As the rupee and note circulation is increased, the proportion of reserves ought to grow, of course, pari passu. But in existing circumstances to hold much more than £40,000,000 in sterling in the Gold Standard Reserve and the Paper Currency Reserve together would border on extravagance. ”

“ In countries where the Money Market is neither so highly developed nor, in relation to foreign countries, so self–supporting, the Central Bank, if it is to be secure, must take the matter [26] in hand itself and, by itself entering the international money market as a lender at short notice, place itself in funds, at foreign centres, which can be rapidly withdrawn when they are required. The only alternative would be the holding of a much larger reserve of gold, the expense of which would be nearly intolerable. The new method combines safety with economy. ”

“ Next time that the Government of India have to buy silver on a large scale, it is likely that they will do so publicly and pay such extra price as this policy involves. It is not worth a Government’s while to risk its transactions falling into suspicion in [145] order to save half a million pounds. Assuming, therefore, that in future the Government will have to buy publicly, we have to consider whether it is likely to be cheaper for them to buy when the price of silver seems low, and hold stocks in hand, or to wait until the last moment and buy at whatever price is then ruling. ”

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

“ India is normally in the position of owing London money; this debt is discharged partly by the consignment of goods, partly by the renewal at frequent intervals of short loans or credits made by the London Market to the Indian Market on bills of exchange or through the Exchange Banks, and partly by new permanent loans. If there is great stringency in the London Market and London is in urgent need of funds, the use of the last two methods can be so much restricted that India can be practically forced [177] to pay what is owing in gold. ”

“ In an intermediate position comes Germany—a creditor in relation to many of her neighbours, but apt to be a debtor in relation to France, Great Britain, and the United States. Next come such countries as Russia and Austria–Hungary—rich and powerful, with immense reserves of gold, but debtor nations, dependent in the short–loan market on their neighbours. From the currencies of these it is an easy step to those of the great trading nations of Asia—India, Japan, and the Dutch East Indies. ”

“ The broad lines of our action and our objects are clear and unmistakable, and there has been no great or fundamental sacrifice of consistency in progress towards our ideal. Since the Fowler Commission that progress has been real and unbroken. There is still one great step forward before the ideal can be reached. 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. ”

“ This part of the system is as perfectly automatic as in any other country. The Government has put itself under an obligation to supply rupees whenever sovereigns are tendered, and it often permits or encourages the tender of sovereigns in London as well as in India; but it has no power or opportunity of forcing rupees into circulation otherwise. In two matters only does the Government use a discretionary power. ”