THE RISE IN SILVER AND THE INDIAN EXCHANGE.

Otago Daily Times, Issue 18026, 28 August 1920, Page 6

THE RISE IN SILVER AND THE INDIAN EXCHANGE.

[A melancholy interest attaches itscli to w this article, in that it was tho last produc- A tion of tho pen oi the late Mr Donald Heid sc prior to his tragically sudden death. Ull- f r fortunately it has not had the advantage of revision at his hand, bat it is a correct ■' oopy oi his original draft.—Editor O.D.T.] s 1 In The Weekly Times of Ceylon, of 19th P< May last, thore appeared an interesting article written by Mr H. J. Temple, a well-known tea planter of Ambawela, Coy- 111 lon. The article is headed "Rupee Sterling Exchange," and is in great part do- r£ voted to an explanation of the highly arti-, ficial system adopted by the Indian Govern- 0 ment to manage the exchanges between Tt India and Great Britain since 1893, when n ! tile Indian mints were closed to the un- Prestricted coinage of rupees. c< . We cannot afford spaco to give this article m full, but wish to afford our readers tho ti information given by it, so far as it ex- 5. plains the rise in silver sinco tho war began, n: and tho circumstances which led to tliis e | rise. After explaining the settlement of trade balances in favour of India by the use f® of India council drafts (generally known as ti "councils"), sold in London against a cor- ir responding rupee balance in India to meet ai these drafts in India when presented, and the settlement of trade balances in favour t! of Great Britain by the sale of "reverse P councils" by the Government of India at a " fixed rate against) a gold reserve of ti £38,000,000 in gold accumulated by the 1c Indian Government in London, Mr Temple tl deals at some length with the value of the ° trade exports of India for the five years s< prior to the war and for the five years after Cl the war began. In the former period the ti average annual exports were £149,000,000, tl and the imports £97,000,000, showing a > r favourable trade balance of about £52,000,000 » annually. _ With this preliminary explana- ti tion (which is only given to economise space), we prefer to give the further explanation in his own words:— 1 "In this period (pre-war period) council drafts totalling £140,000,000 were sold, which is tantamount to remittance to India, and f. gold and silver to the extent of £120,000,000 C were also sent to India from Great Britain. £ Thus the balance of trade was liquidated. Now, in the five war years, the balance of a trade is curiously the same as in the five v pre-war years . In the first year India suf- a fered, as her balance shrank to £29,000,000, v io-i? io th S? steaclil y rose to £61,000,000 in F ™ Jo J-} 10 exports work out at ? £148,000,000 and imports at £98,000,000, giving an average annual balance of about r , £50,000 000, or a total of, say, £250,000,000 J to be paid to India for the five war years. £ It. will thus be seen that India had to re- 1 ceive in ihe quinquennium of war almost a exactly th-j same balance as in, the previous \ quinquennium of peace, when she was paid f easily and with no dislocation of exchange : or currency. In this war period she re- 11 ceived remittances by councils to the extent c of about £100,000,000, and she received in c gold and silver £36,000,000, or together c £136,000,000 out of the £250,000,000 owing 0 to' her. It had proved difficult enough to * pay her as nruch as £136,000,000—0r, per- f haps I should put it, for her to succeed in' getting as much as £136,000,000 remitted to f her, —and the balance due had to be de- I feired, ad it was impossible to send gold s out, or get enough. silver, or to sell further J councils in London owing to the scarcity of 1 rupees to meet these council drafts when presented for payment in India. But it did 4 not end at this. India had a small extra t account of £240,000,000 against England for 1 expenses incurred on the latter's behalf for ' the war. The expenditure was in rupees. ' and England readily paid the sterling equi- 1 valent in London; but the money could not 1 be transferred to India for the reasons already stated—yiz., the impossibility of send- ' ing gold or silver and the impossibility of remitting to the full extent by council drafts. It was exactly the same with us, foi we could not transfer the sterling balances accjirulated in London on the sale of our tea and rubber. THE CRISIS. 1 "There have been two ways of settling India's balance of trade in the past—by 1 shipping the' precious metals or by council 1 dratts. In the five pre-war years India took 1 £96,000,000 of gold and £24,000,(XX) of silver, ' totalling £120,000,000 of treasure. In the five war years she would normally have taken at least as much gold and silver, but instead all she could get was £26,000,000 ot gold and £10,000,000 of silver, totalling ' £36,000,000. It will therefore be seen that she would requiro a greater amount of councils to square her balance. But you cannot Bell councils in London without rupees to meet them in India, and as India could not get the silver to coin rupees she- could not sell councils to the desired extent, and so here was an impasse. One further remark to show how the difficulty grew. India had been accustomed before the war to consume £20 millions gold annually Except for one year in the war she only got an average of £3 millions of gold, and in the last war year she got a beggarly £15,000 only. Gold and silver are essentials in the social and religious life of the 300,000,0W of people in India, and as gold could not be got, all the belligerent countries holding tightly to it, greater work fell on silver; but as silver, too, could not be imported, the rupee coin, itself was used, and the melting and withholding (hoarding) of it by people reduced tho circulation. SHRINKAGE OP CURRENCY. "Now in 1914-15 exports were £121 millions and imports £92 millions. Two hundred millions of people out of the 3CO millions in India work on the cultivation of the soLL Rupees go up country from the cities to buy the crops. There are very few Danking facilities out of the cities of India, and, taking the middle of the war, 1916, the note circulation was only 53 crores against 212 crores. of silver rupees, the cultivator not yet being educated up to a note issue. He receives very largely rupees for his crop! He then pays his taxes, buys clothes, etc., and so much of the money he has received returns to the cities, and, therefore, circulates, but a certain amount remains with the cultivator and always silv.er, —and is lost or absorbed from circulation. In 1916-17 and 1017-18 exports were £161 millions and imports £100 millions, and, therefore, much more currency was wanted to move tho crops and meet the expansion of trade. Taking tho price of imports as 100 in 1914, it rose to 170 in 1917. 211 in 1918, and 268 in 1919, but the volume did not increase. For instance, the import of piece ■ goods in 1919 was only 43' per cent, of prewar imports. The ryot could not get, as he could not afford to buy, imported things, and so he did not spend the money ho received for his crop, and the money (silver) remained with him, and, therefore, did not circulate, but was lost or absorbed from circulating currency. In pre-war years the rupees (silver) absorbed amounted to eight crores; in 1916-17 the figure grew to 33 crores. in 1918-19 to 45 crores. [Wc may hero explain that a crore of rupees at 2s per rupee represents £1,000,000. or 10,000,000 rupees.] It will thus be seen how rupees wero disappearing, and naturally the thing to do was to make good the shortage, which necessitated the buying of silver on a larger scale than hitherto. Unfortunately the world's production of silver fell from an averago of 228 million ounces before the war to 178 million ounces during the war, while in addition to India other countries became strong buyers. The con- ; sequence was tho price of silver rose from „ 27 pence in 1915 to 36 in 1916, 50 in 1917, 78 in 1919, and oven higher this year. INDIAN GOA'EIINJIENT'S DIFFICULTIES. " Now arose the difficulties of Government in regard to exchange. The note issue of India is convertible, that is to say, at the principal treasuries any holder can demand silver rupees in exchange for a note. To maintain convertibility, on which the credit of Government and the structure of currency rested, the Government were compelled to buy silver to coin into rupees to replace absorbed ranees. The more Government bought, tho more it put the price of silver up against itself. The price rose to 43 pence. Up to this point tho value of the silver content of a rupeo was less than the exchange or token value of tho coin, and there-was no danger. But with silver at 43 pence per ounce, the silver content of a rupeo melted down was equal to tho token value of the coin—viz.. Is 4d —and any rise in the price of silver above 43d made it profitable to melt rupees. I have explained that silver is an essential for social and religious purposes. No one was allowed to import rupees, and it would have paid people to buy rupees at Is 4d, melt "them and dispose of the silver. It would have paid people to convert note s into rupees, the rupees would then have disappeared, and the reduced reserves of rupees would have jeopardised the convertibility of tho note issue. There was, therefore, no alternative but to raise exchange which was then put up to Is sd, and the foregoing will explain also every subsequent rise in exchange. Tho Government of India was, J however, onlv at the beginning of its _ troubles. Tile stoppage of the (low of gold and silver to India, owinp to war restrictions, meant that the maintenance of the financing of trade was entirelv thrown on the shoulders of Government, for there was no other way of settling the differences between exports and imports under the circumstances. We here remember the banks sa.ying thev could not get cover to give us rupees. Cover then 1 consisted .very largely .of councils, but Go?-

ernment could not soli anything like sufficient councils because rupees were running out to a dangerous extent. Exchamre was raised to i s 5d on August 28, 1917, but silver steadily rose. Three-quarters of the world's production of silver coines from America, and the assistance of America was sought and in September the U.S.A. eontrolled her silver, prohibiting export except under license. This checked the rise in silver, and till April in the following year, 1918, silver fluctuated between 41 and 49 pence. But the position in India stoadily got worse. On March 31. 1914, India had 79 per cent, of her note circulation in metallic reserves (that is, gold and silver) to maintain the convertibility of notes. Tho ratio stoadily fell to 70 per cent, in 1916, 44 per cent, in 1917, 38 per cent, in 1918. On March 31, 1918, the silver in the metallic reserve had fallen to 10| crores of rupees against a note issue of 99J crores, and the position was a very anxious one as the convertibility of the note was threatened. What was India doing to meet tho position! 1 In tho three years ending March .1918, she had bought no less than 2IX) million ounces of silver which had been coined, and yet, as I have shown, the alver in reserves was less than ever. In fact, the position grew desperate. The tremendous final effort of Germany early in 1918, when she drove back the British and French armies with huge captures of Allied men _ and material, and for some three or foiir months maintained a triumphant, though dying, effort,' had its effect in India. The conversion of notes continued, and tho silver stock, which was so low at the end of March, suffered a further heavy withdrawal in the first fortnight of April, so much so that the silver reserve sunk to only 64 crorcs or about 6 per !l °te issue. It seemed inevitable that Government would have to announce the inconvertibility of notes. Notes had in fact reached a discount of 19 per cent, m tho Indian bazaars, and the whole structure of currency seemed in peril. f lIELV FBOII AMERICA. tt a ll ller ? xtr emity India turned to tho U.S.A., which had a huge store of silver dollars from the old days of bimetallism. America readily appreciated India's danger, and rapid legislation was passed through Congress making 200 million ounces of silver available for India at a dollar an ounce. Ibis was shipped as rapidly as possible, and at the fame time another 120 million ounces were bought in the open market, though at tremendous prices. Tho Bombay Mint was kept working night and day, and the position was only just saved and India's credit maintained. Confidence gradually returned, and in 1919 the highest discount reported on the note was 3 per oent. In April, 1919, the silver reserve was only 6-4 crores, and by November 39 had risen to 77£, which, with 32J crores of gold, gave a metallic reserve of 80 crores—or. taking the rupee at its then exchange' value, £83,000,000. The anxieties of Government to maintain convertibility are thus clear. It is wonderful how the position, was overcome and trouble averted. In spite of tlw demands of China for silver, and the increased demands of Eur one, India secured altogether 538 million ounces of silver, or the equivalent of three years of the world's production." .We regret tliat space will not permit us giving further explanation by such a competent observer. The article, however, shows how simply tho whole artificial system, which had answered its purpose since 1893, failed under war conditions. A recent cablegram from Delhi showed the steps taken by the Indian Government to meet the difficulties caused by the rise in silver. On this subject we have already written in our issues of July 6 and 17 last. But it is quite evident that the remedy is only a temporary one pending a return to gold payments in England—that is, until the Bank of England commences to pay to the public sovereigns for one-pound notes.